<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1997.
REGISTRATION NO. 33-628
811-4425
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 22 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 24 [X]
</TABLE>
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
ONE PARKVIEW PLAZA, OAKBROOK TERRACE, IL 60181
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(630) 684-6000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
RONALD A. NYBERG, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY
VAN KAMPEN AMERICAN CAPITAL, INC.
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
Copies to:
WAYNE W. WHALEN, ESQ.
THOMAS A. HALE, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
---------------------
Approximate Date of Proposed Public Offering: As soon as practicable following
effectiveness of this Registration Statement.
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24F-2
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE SECURITIES
ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940 AND
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION A FORM 24F-2 FOR ITS FISCAL
YEAR ENDING DECEMBER 31, 1997 ON OR ABOUT MARCH 31, 1998.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
The Van Kampen American Capital Life Investment Trust (the "Trust")
currently has nine operating series (each a "Series"). Enclosed herein are three
forms of prospectus and one form of statement of additional information. One
prospectus contains all nine Series of the Trust, the second prospectus contains
seven of the Series of the Trust and the third prospectus contains one Series of
the Trust.
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PROSPECTUS CAPTION
FORM N-1A ITEM ------------------
<C> <S> <C>
<CAPTION>
PART A
- ------------------------------------------------
<C> <S> <C>
1. Cover Page................................. Cover Page
2. Synopsis................................... Prospectus Summary
3. Condensed Financial Information............ Financial Highlights
4. General Description of Registrant.......... Investment Objectives and Policies;
Investment Practices; The Trust and Its
Management; Description of Shares of the
Trust
5. Management of the Fund..................... Investment Practices; The Trust and Its
Management; Inside Back Cover
6. Capital Stock and Other Securities......... The Trust and Its Management; Purchase of
Shares; Determination of Net Asset Value;
Redemption of Shares; Dividends,
Distributions and Taxes; Description of
Shares of the Trust; Additional
Information
7. Purchase of Securities Being Offered....... Purchase of Shares
8. Redemption or Repurchase................... Redemption of Shares
9. Pending Legal Proceedings.................. Inapplicable
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION CAPTION
PART B -------------------------------------------
<C> <S> <C>
10. Cover Page................................. Cover Page
11. Table of Contents.......................... Table of Contents
12. General Information and History............ General Information
13. Investment Objectives and Policies......... Investment Objectives and Policies;
Repurchase Agreements; Forward Commitments;
Depositary Receipts; Options, Futures
Contracts and Options on Futures
Contracts; Loans on Portfolio Securities;
Investment Restrictions; Portfolio
Turnover
14. Management of the Fund..................... General Information; Trustees and Officers;
Investment Advisory Agreements
15. Control Persons and Principal Holders of
Securities............................... General Information; Trustees and Officers;
Investment Advisory Agreements
16. Investment Advisory and Other Services..... Investment Advisory Agreements;
Distributor; Transfer Agent; Portfolio
Transactions and Brokerage; Other
Information
17. Brokerage Allocation and Other Practices... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities......... Purchase and Redemption of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Determination of Net Asset Value; Purchase
and Redemption of Shares
20. Tax Status................................. Tax Status of the Trust
21. Underwriters............................... Distributor
22. Calculation of Performance Data............ Portfolio Performance; Money Market
Portfolio Yield Information
23. Financial Statements....................... Report of Independent Accountants;
Financial Statements; Notes to Financial
Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate item in Part C of this registration statement.
<PAGE> 4
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1997
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in nine
separate Portfolios (the "Portfolios"), each of which is described herein and
offered pursuant to this Prospectus. Each Portfolio is in effect a separate
mutual 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 may invest in shares of
the Portfolios in accordance with allocation instructions received from Contract
Owners. Such allocation rights are further described in the accompanying
Prospectus for the Contracts. The investment objectives of the nine Portfolios
are as follows:
ASSET ALLOCATION PORTFOLIO (formerly known as Asset Allocation Fund) seeks
high total investment return consistent with prudent risk through a fully
managed investment policy utilizing equity securities as well as investment
grade intermediate and long-term debt securities and money market
securities.
DOMESTIC INCOME PORTFOLIO (formerly known as the Domestic Strategic Income
Fund) seeks current income as its primary investment objective. Capital
appreciation is a secondary objective, which will be sought only when
consistent with its primary investment objective. The Portfolio attempts to
achieve these objectives through investment primarily in a diversified
portfolio of fixed-income securities. The Portfolio 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 PORTFOLIO (formerly known as the 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.
ENTERPRISE PORTFOLIO (formerly known as the Common Stock Fund) seeks capital
appreciation through investments believed by the Adviser to have above
average potential for capital appreciation.
GLOBAL EQUITY PORTFOLIO (formerly 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 PORTFOLIO (formerly known as the Government Fund) seeks to
provide investors with a high current return consistent with preservation of
capital. The Portfolio 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 Portfolio may also
purchase or sell options and engage in transactions involving interest rate
futures contracts and options on such contracts.
GROWTH AND INCOME PORTFOLIO (formerly known as the Growth and Income Fund)
seeks long-term growth of capital and income. The Portfolio invests
principally in income-producing equity securities, including common stocks
and convertible securities. Investments are also made in non-convertible
preferred stocks and debt securities.
MONEY MARKET PORTFOLIO (formerly known as the Money Market Fund) seeks
protection of capital and high current income through investments in money
market instruments. INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE MONEY MARKET
PORTFOLIO 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.
REAL ESTATE SECURITIES PORTFOLIO (formerly known as the Real Estate
Securities Fund) seeks as its primary investment objective long-term growth
of capital. Current income is a secondary consideration. The Portfolio seeks
to achieve its objectives by investing principally in securities of
companies operating in the real estate industry ("Real Estate Securities").
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
Portfolio's total assets will be invested in Real Estate Securities,
primarily equity securities of real estate investment trusts.
There is no assurance that any Portfolio will achieve its investment
objectives.
- --------------------------------------------------------------------------------
This Prospectus tells Contract Owners briefly the information they should
know before allocating premiums or cash value to a Portfolio. Investors should
read and retain this Prospectus for future reference.
A Statement of Additional Information dated April 30, 1997 containing
additional information about the Trust and its Portfolios is hereby incorporated
in its entirety into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 421-2833. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials of the
Trust at the SEC's internet web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 5
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 Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Morgan Stanley Asset
SUBADVISER Management Inc.
(FOR GLOBAL 1221 Avenue of the Americas
EQUITY PORTFOLIO): New York, New York 10020
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................... 3
Financial Highlights..................... 7
Introduction............................. 16
Investment Objectives and Policies....... 16
Asset Allocation Portfolio............. 16
Domestic Income Portfolio.............. 17
Emerging Growth Portfolio.............. 20
Enterprise Portfolio................... 21
Global Equity Portfolio................ 21
Government Portfolio................... 24
Growth and Income Portfolio............ 28
Money Market Portfolio................. 28
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Real Estate Securities Portfolio....... 29
Investment Practices..................... 31
The Trust and Its Management............. 37
Purchase of Shares....................... 41
Determination of Net Asset Value......... 41
Redemption of Shares..................... 42
Dividends, Distributions and Taxes....... 42
Portfolio Performance.................... 43
Description of Shares of the Trust....... 45
Additional Information................... 46
Appendix................................. 47
</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> 6
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in nine Portfolios: the
Asset Allocation Portfolio, the Domestic Income
Portfolio, the Emerging Growth Portfolio, the Enterprise
Portfolio, the Global Equity Fund, the Government
Portfolio, the Growth and Income Portfolio, the Money
Market Portfolio and the Real Estate Securities
Portfolio.
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Asset Allocation Portfolio seeks high total
investment return consistent with prudent risk through a
fully managed investment policy utilizing equity
securities as well as investment grade intermediate and
long-term debt securities and money market securities.
The Domestic Income Portfolio seeks current income as
its primary investment objective; capital appreciation
is a secondary objective, which will be sought only when
consistent with its primary investment objective. The
Emerging Growth Portfolio seeks capital appreciation by
investing in a portfolio of securities consisting
principally of common stock of small and medium sized
companies considered by the Adviser to be emerging
growth companies. The Enterprise Portfolio seeks capital
appreciation through investments in securities believed
by the Adviser to have above average potential for
capital appreciation. The Global Equity Portfolio 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. The Government Portfolio seeks high
current return consistent with preservation of capital.
The Growth and Income Portfolio seeks long-term growth
of capital and income. The Money Market Portfolio seeks
protection of capital and high current income through
investments in money market investments. The Real Estate
Securities Portfolio seeks long-term growth of capital
as its primary investment objective; current income is a
secondary consideration. There can be no assurance that
any Portfolio will achieve its investment objective.
Investment Policies and
Risk Factors..........The Asset Allocation Portfolio 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 Portfolio
will vary based upon the Portfolio'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 Income Portfolio invests in a diversified
portfolio of fixed-income securities. The Portfolio
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, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P"), nonrated debt securities believed by the
Adviser to be of comparable quality 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
3
<PAGE> 7
the Portfolio's investment objectives may be more
dependent on the Adviser's credit analysis than would be
the case if the Portfolio 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 Portfolio's net asset value can be expected to
decrease as long-term interest rates rise and to
increase as long-term interest rates fall. The above
risks may be increased by investments in debt securities
not producing immediate cash income, such as zero-coupon
and pay-in-kind securities. See "Investment Objectives
and Policies."
The Emerging Growth Portfolio invests at least 65% of
its 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 Portfolio 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 Options on Futures
Contracts."
The Enterprise Portfolio 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
Portfolio will vary based upon the Portfolio'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 Global Equity Portfolio 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 Portfolio invests primarily in debt
securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. The Portfolio may
sell (write) and purchase call and put options. The
Portfolio 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 Portfolio 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 Portfolio's net asset
value can be expected to decrease as long-term interest
rates
4
<PAGE> 8
rise and to increase as long-term interest rates fall.
See "Investment Objectives and Policies -- Government
Portfolio -- General."
The Growth and Income Portfolio invests principally in
income-producing equity securities including common
stock and convertible securities, although investments
are also made in non-convertible preferred stocks and
debt securities. Use of options, futures contracts and
related options may include additional risks. See
"Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."
The Money Market Portfolio invests in money market
instruments.
The Real Estate Securities Portfolio 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 least 65% of the
Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate
investment trusts. The Portfolio'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 Portfolio 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 Portfolio's policy of concentrating its
investments in Real Estate Securities, the Portfolio 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 Portfolio 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 Portfolio; 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 "Investment Objectives and
Policies -- Real Estate Securities Portfolio -- Risk
Factors." The Portfolio 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 Portfolio may purchase or sell debt
securities on a forward commitment basis. See
"Investment Practices -- Forward Commitments." The
Portfolio 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
5
<PAGE> 9
and the likelihood of more volatile price fluctuation.
See "Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."
Redemption..............At the net asset value next determined after the
Portfolio receives a redemption request.
Investment Adviser......Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser for each Portfolio. Morgan Stanley Asset
Management Inc. (the "Subadviser") provides subadvisory
services to the Adviser with respect to the Global
Equity Portfolio.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes each Portfolio's shares.
Dividends and
Distributions.........Dividends from net investment income are declared each
business day for the Money Market Portfolio and the
Government Portfolio. Such dividends are distributed
monthly. The Government Portfolio may distribute any net
short-term capital gains and any net long-term capital
gains at least annually. The Asset Allocation Portfolio,
Domestic Income Portfolio, Emerging Growth Portfolio,
the Enterprise Portfolio, the Global Equity Portfolio,
the Growth and Income Portfolio and the Real Estate
Securities Portfolio declare dividends and any capital
gains distributions annually.
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 10
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charges by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
ASSET ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
------------------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.......... $ 11.64 $ 9.99 $11.80 $ 11.92 $12.08 $10.43
------- ------- ------ ------- ------ ------
Net Investment Income........................... .482 .48 .45 .29 .37 .47
Net Realized and Unrealized Gain/Loss on
Securities.................................... 1.083 2.6425 (.89) .6025 .493 2.27
------- ------- ------ ------- ------ ------
Total From Investment Operations.................. 1.565 3.1225 (.44) .8925 .863 2.74
------- ------- ------ ------- ------ ------
LESS:
Distributions from Net Investment Income........ .478 .4775 .45 .2925 .3689 .4825
Distributions from Net Realized Gain on
Securities.................................... 1.375 .995 .90 .63 .6541 .6075
Distributions in Excess of Net Realized Gain on
Securities.................................... -- -- .02 .09 -- --
------- ------- ------ ------- ------ ------
Total Distributions............................... 1.853 1.4725 1.37 1.0125 1.023 1.09
------- ------- ------ ------- ------ ------
Net Asset Value, End of the Period................ $11.352 $ 11.64 $ 9.99 $ 11.80 $11.92 $12.08
======= ======= ====== ======= ====== ======
Total Return(1)*.................................. 13.87% 31.36% (3.66%) 7.71% 7.28% 27.05%
Net Assets at End of the Period (In millions)..... $ 63.9 $ 63.0 $ 56.6 $ 64.9 $ 59.6 $ 52.2
Ratio of Expenses to Average Net Assets*.......... .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net
Assets*......................................... 3.78% 3.85% 3.70% 2.34% 3.05% 4.12%
Portfolio turnover rate........................... 118% 124% 163% 150% 126% 88%
Average Commission Paid Per Equity Share
Traded(2)....................................... $ .0561 -- -- -- -- --
*If certain expenses had not been assumed by the
Adviser, Total Return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net Assets........... .81% .74% .72% .74% .77% .80%
Ratio of Net Investment Income to Average Net
Assets.......................................... 3.57% 3.71% 3.58% 2.20% 2.88% 3.92%
<CAPTION>
JUNE 30, 1987
PERIOD ENDED DECEMBER 31 (COMMENCEMENT OF
-------------------------- INVESTMENT OPERATIONS) TO
1990 1989 1988 DECEMBER 31, 1987
------- ------- ------ -------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.......... $ 10.77 $ 9.67 $ 9.56 $10.00
------- ------- ------ -------
Net Investment Income........................... .52 .59 .61 .18
Net Realized and Unrealized Gain/Loss on
Securities.................................... (.325) 1.13 .1125 (.445)
------- ------- ------ -------
Total From Investment Operations.................. .195 1.72 .7225 (.265)
------- ------- ------ -------
LESS:
Distributions from Net Investment Income........ .535 .595 .6125 .175
Distributions from Net Realized Gain on
Securities.................................... -- .025 -- --
Distributions in Excess of Net Realized Gain on
Securities.................................... -- -- -- --
------- ------- ------ -------
Total Distributions............................... .535 .62 .6125 .175
------- ------- ------ -------
Net Asset Value, End of the Period................ $ 10.43 $ 10.77 $ 9.67 $ 9.56
======= ======= ====== =======
Total Return(1)*.................................. 1.89% 17.82% 7.56% (5.23%)
Net Assets at End of the Period (In millions)..... $ 40.3 $ 40.5 $ 31.4 $ 22.7
Ratio of Expenses to Average Net Assets*.......... .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net
Assets*......................................... 4.70% 5.93% 6.36% 6.48%
Portfolio turnover rate........................... 46% 50% 48% 27%
Average Commission Paid Per Equity Share
Traded(2)....................................... -- -- -- --
*If certain expenses had not been assumed by the
Adviser, Total Return would have been lower and
the ratios would have been as follows:
Ratio of Expenses to Average Net Assets........... .80% .86% .90% .95%
Ratio of Net Investment Income to Average Net
Assets.......................................... 4.50% 5.67% 6.06% 6.13%
</TABLE>
- ---------------------
(1) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
(2) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
7
<PAGE> 11
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
DOMESTIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
PER SHARE OPERATING PERFORMANCE ------- ------- -------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period......................... $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96 $ 10.15
------- ------- -------- ------- ------- ------- ------- ------- --------
Net Investment Income.......... .755 .71 .85 .72 .69 .685 1.035 1.725 .62
Net Realized and Unrealized
Gain/Loss on Securities...... (.212) .8525 (1.2275) .5825 .2725 .7525 (1.64) (2.31) .8975
------- ------- -------- ------- ------- ------- ------- ------- --------
Total from Investment
Operations..................... .543 1.5625 (.3775) 1.3025 .9625 1.4375 (.605) (.585) 1.5175
------- ------- -------- ------- ------- ------- ------- ------- --------
Distributions from Net
Investment Income............ .745 .7025 .8525 .7225 .7025 .6775 1.055 1.725 .61
Distributions from Net Realized
Gain on Securities........... -- -- -- -- -- -- -- .01 .0975
------- ------- -------- ------- ------- ------- ------- ------- --------
Total Distributions.............. .745 .7025 .8525 .7225 .7025 .6775 1.055 1.735 .7075
------- ------- -------- ------- ------- ------- ------- ------- --------
Net Asset Value, End of the
Period......................... $ 8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96
======= ======= ======== ======= ======= ======= ======= ======= ========
Total Return(1)*................. 6.68% 21.37% (4.33%) 16.32% 12.50% 21.23% (7.23%) (5.44%) 14.95%
Net Assets at End of the Period
(In millions).................. $ 19.8 $ 26.6 $ 21.3 $ 27.4 $ 21.1 $ 17.4 $ 6.3 $ 8.1 $ 8.1
Ratio of Expenses to Average Net
Assets*........................ .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*............ 7.97% 8.11% 8.35% 7.80% 8.89% 9.72% 11.99% 12.92% 10.88%
Portfolio Turnover Rate.......... 77% 54% 94% 130% 117% 90% 123% 56% 44%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets......................... 1.29% .93% .95% .95% .95% .95% .95% .95% .95%
Ratio of Net Investment Income to
Average Net Assets............. 7.28% 7.78% 8.00% 7.40% 8.54% 9.37% 11.64% 12.57% 10.53%
<CAPTION>
NOVEMBER 4, 1987
(COMMENCEMENT OF
INVESTMENT OPERATIONS) TO
DECEMBER 31, 1987
PER SHARE OPERATING PERFORMANCE -------------------------
<S> <C>
Net Asset Value, Beginning of the
Period......................... $10.00
-------
Net Investment Income.......... .08
Net Realized and Unrealized
Gain/Loss on Securities...... .1525
-------
Total from Investment
Operations..................... .2325
-------
Distributions from Net
Investment Income............ .0825
Distributions from Net Realized
Gain on Securities........... --
-------
Total Distributions.............. .0825
-------
Net Asset Value, End of the
Period......................... $10.15
=======
Total Return(1)*................. 1.50%
Net Assets at End of the Period
(In millions).................. $ 1.2
Ratio of Expenses to Average Net
Assets*........................ .60%
Ratio of Net Investment Income to
Average Net Assets*............ 5.58%
Portfolio Turnover Rate.......... 42%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets......................... .95%
Ratio of Net Investment Income to
Average Net Assets............. 5.23%
</TABLE>
- ---------------------
(1) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
8
<PAGE> 12
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
JULY 3, 1995
YEAR ENDED (COMMENCEMENT OF
DECEMBER 31, INVESTMENT OPERATIONS) TO
1996 DECEMBER 31, 1995
------------ -------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 11.72 $ 10.00
------- -----------
Net Investment Loss....................................... (.016) (.08)
Net Realized and Unrealized Gain on Securities............ 1.956 1.80
------- -----------
Total from Investment Operations............................ 1.940 1.72
------- -----------
Net Asset Value, End of the Period.......................... $13.660 $ 11.72
======= ===========
Total Return*............................................... 16.55% 17.20%(1)
Net Assets at End of the Period (In millions)............... $ 5.2 $ 2.3
Ratio of Expenses to Average Net Assets*.................... .85% 2.50%
Ratio of Net Investment Loss to Average Net Assets*......... (.17%) (1.45%)
Portfolio Turnover.......................................... 102% 41%(1)
Average Commission Per Equity Share Traded(2)............... $ .0470 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (2.60%) (4.35%)
</TABLE>
- -------------------------
(1) Non-Annualized
(2) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
9
<PAGE> 13
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(2)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97 $9.33
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net Investment Income............... .113 .32 .25 .21 .23 .265 .395 .40 .32 .18
Net Realized and Unrealized
Gain/Loss on Securities........... 3.417 4.22 (.7625) 1.0325 .77 3.37 (1.17) 2.57 .765 (1.1975)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total from Investment Operations...... 3.530 4.54 (.5125) 1.2425 1.00 3.635 (.775) 2.97 1.085 (1.0175)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Less:
Distributions from Net Investment
Income............................ .109 .3175 .25 .215 .23 .285 .435 .37 .30 .2575
Distributions from Net Realized Gain
on Securities..................... 1.849 1.9225 1.4175 .6675 -0- -0- -0- -0- .055 .085
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total Distributions................... 1.958 2.24 1.6675 .8825 .23 .285 .435 .37 .355 .3425
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net Asset Value, End of the Period.... $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97
======= ====== ====== ====== ====== ====== ====== ====== ====== =======
Total Return*......................... 24.80% 36.98% (3.39%) 8.98% 7.48% 36.41% (6.84%) 34.23% 13.61% (11.12%)
Net Assets at End of the Period (In
millions)........................... $84.8 $76.0 $67.5 $72.3 $65.6 $57.8 $27.2 $31.8 $24.0 $31.0
Ratios of Expenses to Average Net
Assets*............................. .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*................. .68% 2.06% 1.72% 1.41% 1.78% 2.33% 3.64% 3.74% 3.13% 1.65%
Portfolio Turnover.................... 152% 145% 153% 139% 116% 95% 122% 86% 63% 75%
Average Commission Paid per Equity
Share Traded(1)..................... $.0435 -- -- -- -- -- -- -- -- --
*If certain expenses had not been
assumed by the Adviser. Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets.............................. .75% .68% .68% .72% .74% .90% .93% .93% .95% .89%
Ratio of Net Investment Income to
Average Net Assets.................. .53% 1.98% 1.64% 1.29% 1.64% 2.03% 3.31% 3.41% 2.78% 1.36%
</TABLE>
- ---------------------
(1) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
(2) Based on average month-end shares outstanding.
10
<PAGE> 14
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
GLOBAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
YEAR JULY 3, 1995
ENDED (COMMENCEMENT OF
DECEMBER 31, INVESTMENT OPERATIONS) TO
1996 DECEMBER 31, 1995
------------ -------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 10.30 $ 10.00
------- -----------
Net Investment Income/Loss................................ .035 (.16)
Net Realized and Unrealized Gain on Securities............ 1.687 .46
------- -----------
Total from Investment Operations............................ 1.722 .30
------- -----------
Less:
Distributions from and in Excess of Net Investment
Income................................................. .188 --
Distributions from Net Realized Gain on Securities........ .176 --
------- -----------
Total Distributions......................................... .364 --
------- -----------
Net Asset Value, End of the Period.......................... $11.658 $ 10.30
======= ===========
Total Return(1)*............................................ 16.72% 3.00%**
Net Assets at End of the Period (In millions)............... $ 2.5 $ 2.4
Ratio of Expenses to Average Net Assets*.................... 1.20% 4.35%
Ratio of Net Investment Income/Loss to Average Net
Assets*................................................... .27% (2.76%)
Portfolio Turnover Rate..................................... 94% 42%**
Average Commission Rate per Equity Share Traded(2).......... $ .0245 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows.
Ratio of Expenses to Average Net Assets..................... 7.43% 8.27%
Ratio of Net Investment Loss to Average Net Assets.......... (5.96%) (6.68%)
</TABLE>
- ---------------------
** Non-Annualized.
(1) Total return for a period of less than one year is not annualized. Total
return does not consider the effect of sales loads.
(2) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
11
<PAGE> 15
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............ $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68 $ 9.91
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Investment
Income.......... .569 .60 .56 .57 .665 .74 .785 .84 .88 .76
Net Realized and
Unrealized
Gain/Loss on
Securities...... (.388) .78 (.985) .135 (.1575) .60 (.105) .325 (.215) (.97)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total from
Investment
Operations........ .481 1.38 (.425) .705 .5075 1.34 .68 1.165 .665 (.21)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Less:
Distributions from
Net Investment
Income.......... .575 .60 .555 .575 .6675 .75 .78 .845 .865 .7525
Distributions from
Net Realized
Gain on
Securities...... -- -- -- -- -- -- -- -- -- .2675
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total
Distributions..... .575 .60 .555 .575 .6675 .75 .78 .845 .865 1.02
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Asset Value, End
of the Period..... $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68
====== ====== ====== ====== ======= ====== ====== ====== ====== ======
Total Return(1)*.... 2.12% 17.17% (4.63%) 7.86% 5.73% 16.23% 8.31% 14.31% 6.74% (2.12%)
Net Assets at End of
the Period (In
millions)......... $ 57.3 $ 67.0 $ 65.5 $ 80.6 $ 74.8 $ 77.0 $ 73.2 $ 81.2 $ 90.6 $108.8
Ratio of Expenses to
Average Net
Assets*........... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net
Investment Income
to Average Net
Assets*........... 6.56% 6.89% 6.71% 6.45% 7.29% 8.37% 9.19% 9.56% 9.29% 8.37%
Portfolio Turnover
Rate.............. 143% 164% 192% 91% 36% 57% 164% 42% 88% 65%
*If certain expenses
had not been
assumed by the
Adviser, Total
Return would have
been lower and the
ratios would have
been as follows:
Ratio of Expenses to
Average Net
Assets............ .80% .72% .70% .70% .70% .70% .69% .66% .64% .64%
Ratio of Net
Investment Income
to Average Net
Assets............ 6.36% 6.77% 6.61% 6.35% 7.19% 8.27% 9.10% 9.50% 9.25% 8.33%
</TABLE>
- ---------------------
(1) Total return does not consider the effect of sales loads.
12
<PAGE> 16
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
DECEMBER 23, 1996
(COMMENCEMENT OF
INVESTMENT OPERATIONS) TO
DECEMBER 31, 1996
-------------------------
<S> <C>
Net Asset Value, Beginning of the Period.................... $10.000
--------
Net Investment Income..................................... .011
Net Realized and Unrealized
Loss on Securities..................................... (.041)
--------
Total from Investment Operations............................ (.030)
--------
Net Asset Value, End of the Period.......................... $ 9.970
========
Total Return*............................................... (.30%)(1)
Net Assets at End of the Period (In millions)............... $ 0.5
Ratio of Expenses to Average Net Assets*.................... .75%
Ratio of Net Investment Income to Average Net Assets*....... 4.47%
Portfolio Turnover.......................................... 0%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0203
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 45.97%
Ratio of Net Investment Income/Loss to Average Net Assets... (40.74%)
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
13
<PAGE> 17
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) in included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Investment Income......... .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714 .0624
Net Realized and Unrealized
Loss on Securities.......... -- -- -- -- -- -- -- -- -- (.00002)
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Total from Investment
Operations.................... .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714 .06238
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Less Distributions From Net
Investment Income............. .048 (.0533) (.0365) (.0262) (.0331) (.0546) (.076) (.0877) (.0714) (.06238)
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Asset Value, End of the
Period........................ $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ======= ======= ======= ======= ======= ====== ======= ======= ========
Total Return(1)*................ 4.89% 5.46% 3.71% 2.66% 3.36% 5.46% 7.83% 9.13% 7.38% 6.41%
Net Assets at End of the Period
(In millions)................. $19.6 $ 21.6 $ 28.5 $ 30.0 $ 32.9 $ 38.0 $ 34.3 $ 29.0 $ 24.5 $ 18.6
Ratios to Average Net Assets
(annualized)
Ratios of Expenses to Average
Net Assets*................... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratios of Net Investment Income
to Average Net Assets*........ 4.78% 5.33% 3.63% 2.63% 3.32% 5.44% 7.59% 8.76% 7.22% 6.24%
*If certain expenses had not
been assumed by the Adviser,
Total Return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets........................ 1.29% .93% .87% .95% .89% .87% .89% .95% .95% .95%
Ratio of Net Investment Income
to Average Net Assets......... 4.10% 5.00% 3.37% 2.28% 3.03% 5.17% 7.30% 8.41% 6.87% 5.89%
</TABLE>
- ---------------------
(1) Total return does not consider the effect of sales loads.
14
<PAGE> 18
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
REAL ESTATE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
JULY 3, 1995
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 10.74 $ 10.00
-------
Net Investment Income.................................. .217 .20
Net Realized and Unrealized Gain on Securities......... 4.117 .6325
-------
Total from Investment Operations............................ 4.334 .8325
-------
Less:
Distributions from Net Investment Income.................. (.199) (.0925)
-------
Distributions from Net Realized Gain on Securities........ .091
-------
Total Distributions......................................... .290
-------
Net Asset Value, End of the Period.......................... $14.784 $ 10.74
=======
Total Return*............................................... 40.53% 8.35%(1)
Net Assets at End of the Period (In Millions)............... $ 167.5 $ 8.6
Ratio of Expenses to Average Net Assets*.................... 1.10% 2.50%
Ration of Net Investment Income to Average Net Assets*...... 5.06% 3.75%
Portfolio Turnover.......................................... 84% 85%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0313 --
* If certain expenses had not been assumed by the Adviser, Total Return would have been lower and the
ratios would have been as follows:
Ratio of Expenses to Average Net Assets..................... 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets........ 4.89% 3.36%
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was not
required in fiscal periods prior to 1996.
15
<PAGE> 19
INTRODUCTION
The Trust is a duly organized Delaware business trust with nine separate
Portfolios, each of which is described herein and offered pursuant to this
Prospectus. Each Portfolio has separate assets and liabilities and a separate
net asset value per share. Shares of a Portfolio represent an interest only in
that Portfolio. Since market risks are inherent in all securities to varying
degrees, assurance cannot be given that the investment objectives of any of the
Portfolios will be met.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio 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 Portfolio, except the Real Estate Securities
Portfolio, is a fundamental policy and may not be changed without shareholder
approval. With respect to the Real Estate Securities Portfolio, the investment
objective may be changed by the Trustees. If there is a change in the objective
of such Portfolio, shareholders should consider whether the Portfolio remains an
appropriate investment in light of their then current financial position and
needs. The differences in objectives and policies among the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject.
ASSET ALLOCATION PORTFOLIO
The investment objective of the Asset Allocation Portfolio is to seek a
high total investment return consistent with prudent risk through a fully
managed investment policy utilizing equity as well as investment grade
intermediate and long-term debt securities 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 Portfolio 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 Asset Allocation Portfolio
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 Portfolio will be achieved.
The Portfolio may invest in those money market securities which are
eligible investments for the Fund's Money Market Portfolio. 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 Portfolio 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 Portfolio 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 Portfolio may invest will be primarily
stocks of large-capitalization 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 Portfolio 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."
16
<PAGE> 20
The Portfolio 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 Portfolio 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 Portfolio's practices regarding investment
companies see "Investment Practices -- Investment in Investment Companies."
Because of the fully managed approach of the Portfolio, portfolio turnover
may be greater resulting in increased brokerage charges to the Portfolio.
DOMESTIC INCOME PORTFOLIO
The primary investment objective of the Domestic Income Portfolio is to
seek current income. Capital appreciation is a secondary objective, which will
be sought only when consistent with its primary objective. The Portfolio
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 Portfolio 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
Portfolio 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 Portfolio will limit its investment in foreign
securities to 25% of its total assets at the time of investment. See "Investment
Practices -- Foreign Securities."
The Portfolio 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 Portfolio may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices -- Forward Commitments."
The Portfolio 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
Portfolio when such investments are consistent with the Portfolio's investment
objectives or are acquired as part of a unit consisting of a combination of
fixed-income or equity securities. The Portfolio 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
Portfolio will not purchase any such securities which will cause more than 20%
of its total assets to be so invested or which would cause more than 10% of its
total assets to be invested in common stocks 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 Portfolio 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 on a present
value basis expressed in years that incorporates a security's yield, coupon
interest payments, final maturity and call
17
<PAGE> 21
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
measures the length of the time interval between the present and the time when
the interest and principal payments are scheduled to be received (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. 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. With respect to
some securities, there are some situations where even a duration calculation
does not properly reflect the interest rate exposure of a security. 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. 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 Portfolio's capital.
The higher yields sought by the Portfolio 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 Portfolio may
invest are regarded as predominately speculative with respect to the issuers
continuing ability to meet principal and interest payments. The ratings of
Moody's and S&P represent their opinions of the quality of the debt securities
they undertake to rate, but not the market value risk of such securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, debt securities with the same maturity,
coupon and rating may have different yields while debt securities of the same
maturity and coupon with different ratings may have the same yield.
During the fiscal year ended December 31, 1996, the average percentage of
the Portfolio'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..................................................... -0-
AA/Aa....................................................... -0-
A/A......................................................... 11.7
BBB/Baa..................................................... 42.5
BB/Ba....................................................... 17.3
B/B......................................................... 10.5
*Nonrated................................................... 9.8
Preferred Stocks/Common Stocks/Warrants..................... 3.8
Cash and Equivalents........................................ 4.4
------
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- 9.8%.
The securities in which the Portfolio 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.
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<PAGE> 22
-- 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 Portfolio 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 Portfolio 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 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
Portfolio, the Portfolio'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 Portfolio 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 Portfolio shareholders, the
Portfolio 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 Portfolio and may also limit the ability of the Portfolio 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 Portfolio
19
<PAGE> 23
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 Portfolio owns will affect its net asset value per share.
If market quotations are not readily available for the Portfolio's lower rated
or nonrated securities, these securities will be valued by a method that the
Portfolio'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
Portfolio accrues income on these securities prior to the receipt of cash
payments. The Portfolio 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 Portfolio'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 Portfolio 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.
EMERGING GROWTH PORTFOLIO
The investment objective of the Emerging Growth Portfolio is to seek
capital appreciation by investing in a portfolio of securities consisting
principally of common stocks of small and medium sized companies considered by
the Adviser to be emerging growth companies. Any ordinary income received from
portfolio securities is entirely incidental.
As a fundamental investment policy, the Portfolio 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 Portfolio 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 Portfolio does not limit its investment to any single group or type of
security. The Portfolio 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 Portfolio's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio 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 Portfolio will vary based upon the Portfolio's
investment
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<PAGE> 24
performance. The Portfolio 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
Portfolio will be successful in achieving its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. See "Investment Practices -- Foreign Securities." Additionally,
the Portfolio may invest up to 15% 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 Portfolio may enter into repurchase agreements with
domestic banks and broker-dealers which involve certain risks. The Portfolio may
invest in either warrants so long as such investments aggregate less than 5% of
the Portfolio's total assets. The risks involved in investing in restricted
securities, warrants and repurchase agreements are described in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
The investment objective of the Enterprise Portfolio is to seek 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 Portfolio 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 Portfolio 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 Portfolio may invest in warrants and preferred
stocks, and in investment companies. See "Investment Practices -- Investment in
Investment Companies."
The Portfolio 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 Portfolio'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 Portfolio's primary approach is to seek what the Adviser believes to be
attractive growth investments on an individual company basis. The Portfolio 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 Portfolio will vary based upon the Portfolio's investment
performance. The Portfolio 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
Portfolio will be successful in achieving its objective. The Portfolio 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 Portfolio 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 Portfolio 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."
GLOBAL EQUITY PORTFOLIO
The investment objective of the Global Equity Portfolio is to seek
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 Portfolio intends to be invested in equity securities of
21
<PAGE> 25
companies of at least three countries including the United States. Under normal
market conditions, at least 65% of the Portfolio'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
Portfolio attempts to take advantage of the differences between economic trends
and the anticipated performance of securities markets in various countries.
Normally, the Portfolio 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 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
Portfolio with an overall investment program consistent with the Portfolio's
objective and policies. 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 the Subadviser of trends and
developments affecting such markets and securities. The Adviser and the
Subadviser are sometimes referred to as the "Advisers."
While the investment policy of the Portfolio 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
Portfolio'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 Portfolio 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 Portfolio
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 Portfolio 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.
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<PAGE> 26
Risk Factors. An investment in the Portfolio involves risks similar to
those of investing in foreign common stocks generally. Investment in common
stocks of foreign issuers may subject the Portfolio 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, 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 Portfolio, 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
Portfolio 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 Portfolio, including use of
options, futures contracts and related options.
Foreign Currency Transactions. The value of the Portfolio's securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Portfolio will
incur costs in connection with conversions between various currencies. The
Portfolio'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 Portfolio
purchases and sells foreign currency on a spot basis in connection with the
settlement of transactions in securities traded in such foreign currency. The
Portfolio does not purchase and sell foreign currencies as an investment.
The Portfolio 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 Portfolio 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
Portfolio purchases a foreign security traded in the hedged currency which the
Portfolio 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 Portfolio will not speculate in foreign currency forward or
futures contracts or through the purchase and sale of foreign currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign
23
<PAGE> 27
currency being hedged by a forward sale contract at a price no higher than the
forward contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
Temporary Short-Term Investments. It is the Portfolio's policy to be
substantially invested in common stocks and securities convertible into common
stocks. However, the Portfolio may hold a portion of its assets in cash to meet
redemptions and other day-to-day operating expenses. The Portfolio 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 Portfolio
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 Portfolio 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.
GOVERNMENT PORTFOLIO
GENERAL
The investment objective of the Government Portfolio is to seek to provide
investors with a high current return consistent with preservation of capital.
The Portfolio 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 Portfolio are invested in such
securities. The Portfolio 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 Portfolio 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 Portfolio may also purchase or sell U.S. Government securities on
a forward commitment basis. See "Investment Practices -- Forward Commitments."
The Portfolio is not designed for investors seeking capital appreciation. Shares
of the Portfolio 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 Portfolio's objective will be achieved.
Since the value of U.S. Government securities owned by the Portfolio will
fluctuate depending upon market factors and inversely with prevailing interest
rates, the net asset value of shares of the Portfolio 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 Portfolio 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.
24
<PAGE> 28
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 measures the length of the
time interval between the present and the time when the interest and principal
payments are scheduled to be received (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. 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. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. 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.
The Portfolio 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 Portfolio'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 Portfolio reduces its
potential for capital appreciation on debt securities if interest rates decline.
Thus if market prices of debt securities increase, the Portfolio receives less
total return from its optioned positions than it would have received if the
options had not been sold. During periods when the Portfolio has capital loss
carry forwards any capital gains generated from such transactions will be
retained in the Portfolio. 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 Portfolio's turnover rate is shown in the table of "Financial
Highlights." See "Investment Practices -- Portfolio Turnover."
The Portfolio is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code of 1986, as amended (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 Portfolio 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 Portfolio intends to invest in U.S. Treasury securities and in
securities issued by at least four U.S. Government agencies or instrumentalities
in the amounts necessary to meet these diversification requirements at the end
of each quarter of the year (or within 30 days thereafter).
In the event the Portfolio does not meet the diversification requirements
of Section 817(h) of the Code, the policies funded by shares of the Portfolio
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 Portfolio.
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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
Portfolio), 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 Portfolio's higher yielding securities might be converted to cash,
and the Portfolio 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 Portfolio buys mortgage-related securities
at a premium, mortgage foreclosures or mortgage prepayments may result in a loss
to the Portfolio of up to the amount of the premium paid since only timely
payment of principal and interest is guaranteed.
OTHER GOVERNMENT RELATED SECURITIES
The Portfolio 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 Portfolio 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
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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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio)
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.
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
Portfolio'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
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considered by the staff of the SEC to be illiquid securities and thus subject to
the Portfolio's limitation on investment in illiquid securities.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek long-term
growth of capital and income. Since investment in securities involves potential
gain or loss, there is no assurance that the Portfolio's objective will be
achieved.
In view of the investment objective, the Portfolio generally invests
principally in income-producing equity securities including common stocks and
convertible securities; although investments are also made in non-convertible
preferred stocks and debt securities rated "investment grade," i.e., within the
four highest grades assigned by S&P or by Moody's. Ratings at the time of
purchase determine which securities may be acquired, and a subsequent reduction
in rating does not require the Portfolio to dispose of a security. Securities
rated BBB by S&P or Baa by Moody's are in the lowest of the four investment
grades and are considered by the rating agencies 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
market prices of preferred stocks and debt securities generally fluctuate with
changes in interest rates so that the value of investments in such securities
can be expected to decrease as interest rates rise and increase as interest
rates fall. The Portfolio may also invest in warrants and in securities of
newly-formed companies and in investment companies. See "Investment
Practices -- Investment in Investment Companies." The Portfolio may invest up to
15% of its assets in securities of foreign issuers. See "Investment
Practices -- Foreign Securities." The Portfolio may enter into repurchase
agreements with domestic banks and broker-dealers which involves certain risks
or may lend portfolio securities on a fully collateralized basis. See
"Investment Practices -- Repurchase Agreements" and "Investment
Practices -- Loans of Portfolio Securities". When deemed appropriate for
temporary defensive purposes, the Portfolio may invest up to 100% of its total
assets in U.S. Government securities and investment grade corporate debt
securities.
The Portfolio may dispose of a security whenever, in the opinion of the
Adviser, factors indicate it is desirable to do so. Such factors include a
change in economic or market factors in general or with respect to a particular
industry, a change in the market trend of or other factors affecting an
individual security, changes in the relative market performance of or
appreciation possibilities offered by individual securities and other
circumstances bearing on the desirability of a given investment.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to seek
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 Portfolio 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 Portfolio. It is not the
intention of the Trustees, however, to change these policies without prior
notice to shareholders.
The Portfolio 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 Portfolio 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 Portfolio may be expected to fluctuate. The Portfolio
uses the amortized cost method for valuing portfolio securities purchased at a
discount.
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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 Portfolio 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 Portfolio 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 Portfolio is also authorized to invest up to
5% 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 Portfolio is insured in full by
the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER
The Portfolio 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 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 Portfolio's current policy
is to limit investments in commercial paper to obligations rated in the highest
rating category.
REPURCHASE AGREEMENTS
The Portfolio 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."
REAL ESTATE SECURITIES PORTFOLIO
General. The Real Estate Securities Portfolio's primary investment
objective is to provide shareholders with long-term growth of capital. Current
income is a secondary consideration. The Portfolio 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
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entertainment companies. Under normal market conditions, at least 65% of the
Portfolio's total assets will be invested in Real Estate Securities, primarily
equity securities of real estate investment trusts. The Portfolio'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 Portfolio 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 Portfolio may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Portfolio 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 Portfolio may invest up to 25% of its assets in securities issued by
foreign issuers. See "Investment Practices -- Foreign Securities." The Portfolio
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 Portfolio may invest up to 100% of
its total assets in short-term investments as described below. The Portfolio
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 Portfolio will achieve its investment
objectives.
Short-Term Investments. The Portfolio 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 Portfolio 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.
Risk Factors. Although the Portfolio does not invest directly in real
estate, an investment in the Portfolio 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 Portfolio has rental income or income
from the disposition of real property acquired as a result of a default on
securities the Portfolio 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
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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, as
amended (the "1940 Act"). Changes in interest rates may also affect the value of
the debt securities in the Portfolio's portfolio. Like investment companies such
as the Portfolio, real estate investment trusts are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Code. The Portfolio 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 Portfolio.
Because of the Portfolio's policy of concentrating its investments in Real
Estate Securities, the Portfolio 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 Portfolio's investment practices and the
risks associated with such practices are contained in "Investment Practices"
herein and in the Statement of Additional Information.
INVESTMENT PRACTICES
Repurchase Agreements. Each Portfolio 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., a Portfolio) 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. Repurchase
agreements involve certain risks in the event of a default by the other party.
In the event of a bankruptcy or other default of the seller of a repurchase
agreement, a Portfolio 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 a Portfolio 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 Portfolio will
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by such Portfolio,
exceeds in the case of the Emerging Growth Portfolio, the Global Equity
Portfolio, the Growth and Income Portfolio and the Real Estate Securities
Portfolio, 15% of the value of each Portfolio's net assets and, in the case of
the Asset Allocation Portfolio, the Domestic Income Portfolio, the Enterprise
Portfolio, the Government Portfolio and the Money Market Portfolio, 10% of the
value of its net assets.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested and the funds that
contributed to the joint account share pro rata in the net revenue generated.
The Adviser believes that the joint account produces efficiencies and economies
of scale that may contribute to reduced transaction costs, higher returns,
higher quality investments and greater diversity of investments for the
Portfolios than would be available to the Portfolios investing separately. The
manner in which the joint account is managed is subject to conditions set forth
in the SEC exemptive order authorizing this practice, which conditions are
designed to ensure the fair administration of the joint account and to protect
the amounts in that account.
Loans of Portfolio Securities. Each Portfolio, except the Real Estate
Securities Portfolio, 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 10% of the total value
of that Portfolio's assets and (b) any securities loan is collateralized in
accordance with applicable regulatory requirements. See Statement of Additional
Information.
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Foreign Securities. The Asset Allocation Portfolio, Domestic Income
Portfolio, the Emerging Growth Portfolio, the Enterprise Portfolio, the Growth
and Income Portfolio and the Real Estate Securities Portfolio may invest up to
25%, 25%, 20%, 10%, 15% and 25%, respectively, of the value of such Portfolios'
total assets in securities issued by foreign issuers. With respect to the Real
Estate Securities Portfolio, some of such securities may also be Real Estate
Securities. With respect to the Global Equity Portfolio, see "Investment
Objectives and Policies -- Global Equity Portfolio." 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
Portfolio 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 Portfolio's assets denominated in that currency and a Portfolio's
yield on such assets.
A Portfolio 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 Portfolio 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 Portfolio may be subject to foreign withholding taxes,
which would reduce a Portfolio's total return on such investments and the
amounts available for distributions by a Portfolio 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 periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause a Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Portfolio due to subsequent declines in value of
the portfolio security or, if a Portfolio 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 Portfolio 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.
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Foreign Currency Transactions. The value of a Portfolio'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
Portfolio will incur costs in connection with conversions between various
currencies. A Portfolio'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 Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. A Portfolio does not purchase and sell foreign currencies as
an investment.
A Portfolio 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 Portfolio 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 a Portfolio
purchases a foreign security traded in the hedged currency which a Portfolio
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
Portfolio will not speculate in foreign currency forward or futures contracts or
through the purchase and sale of foreign currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the forward
contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
Restricted Securities. The Emerging Growth Portfolio, the Global Equity
Portfolio, the Growth and Income Portfolio and the Real Estate Securities
Portfolio may invest up to 15% of their net assets in restricted securities and
other illiquid assets. The other Portfolios offered in this Prospectus may each
invest up to 5% 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 monitor a Portfolio's
investment in these
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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 a Portfolio to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities. These difficulties and delays could result in a
Portfolio'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 a Portfolio impossible. Since market
quotations are not readily available for restricted securities, such securities
will be valued by a method that a Portfolio's Trustees believe accurately
reflects fair value.
Short Sales Against the Box. The Global Equity Portfolio 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 Portfolio contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short. In a short
sale, the Portfolio does not immediately deliver the securities sold and does
not receive the proceeds from the sale. The Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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 Portfolio, because the
Portfolio 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 Portfolio will not purchase and deliver new securities to satisfy
its short order if such purchase and sale would cause such Portfolio to derive
more than 30% of its gross income from the sale of securities held for less than
three months.
Forward Commitments. The Domestic Income Portfolio, the Government
Portfolio and the Real Estate Securities Portfolio may purchase or sell U.S.
Government securities (or debt securities with respect to the Real Estate
Securities Portfolio) on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold by
the Portfolio 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 Portfolio 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 Portfolio may reinvest the proceeds in another
Forward Commitment. A Portfolio'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 Portfolio relies on the other party to
complete the transaction; should the other party fail to do so, a Portfolio
might lose a purchase or sale opportunity that could be more advantageous than
alternative opportunities at the time of the failure.
Each Portfolio maintains a segregated account (which is marked to market
daily) of cash, liquid securities or the security covered by the Forward
Commitment (in the case of a Forward Currency sale) with the Portfolio'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 Portfolio 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
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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 Asset Allocation Portfolio, Emerging Growth Portfolio, the
Enterprise Portfolio, the Global Equity Portfolio, the Government Portfolio, the
Growth and Income Portfolio or Real Estate Securities Portfolio. The annual
turnover rates of each Portfolio is shown under "Financial Highlights." The
turnover rate for the Growth and Income Portfolio may exceed 100%, which is
higher than that of many other investment companies. Higher portfolio turnover
involves correspondingly greater transaction costs, including any brokerage
commissions, which are borne directly by a Portfolio. 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
Asset Allocation Portfolio, Emerging Growth Portfolio, the Enterprise Portfolio,
the Global Equity Portfolio, the Government Portfolio, the Growth and Income
Portfolio and the Real Estate Securities Portfolio may purchase or sell options,
futures contracts or options on futures contracts. The Portfolios expect to
utilize options, futures contracts and options thereon in several different
ways, depending upon the status of a Portfolio's portfolio securities 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 Portfolio, if the Adviser, and in the case of the Global
Equity Portfolio the Subadviser, is not successful in employing such instruments
in managing a Portfolio's investments, a Portfolio's performance will be worse
than if a Portfolio did not make such investments. In addition, a Portfolio
would pay commissions and other costs in connection with such investments, which
may increase a Portfolio's expenses and reduce its return. Each Portfolio is
authorized to purchase and sell over-the-counter options ("OTC Options"). OTC
Options are purchased from or sold to securities dealers, financial institutions
of other parties ("Counterparties") through direct bilateral agreement with the
Counterparty. A Portfolio will sell only OTC Options (other than over-
the-counter currency options) that are subject to a buy-back provision
permitting a Portfolio to require to the Counterparty to sell the option back to
a Portfolio at a formula price within seven days. The staff of the SEC currently
takes the position that, in general, OTC Options on securities other than U.S.
Government securities purchased by a Portfolio, and portfolio securities
covering OTC Options sold by a Portfolio, are illiquid securities subject to a
Portfolio limitation on illiquid securities described below. A Portfolio may not
purchase or sell futures contracts or related options for which the aggregate
initial margin and premiums exceed 5% of the fair market value of the
Portfolio's assets.
In order to prevent leverage in connection with the purchase of futures
contracts thereon by a Portfolio, an amount of cash or liquid 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 Portfolio may not invest more than 10% of its net assets (or 15%
for the Emerging Growth Portfolio, the Global Equity Portfolio, the Growth and
Income Portfolio and the Real Estate Securities Portfolio) 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. The Asset Allocation Portfolio, the
Enterprise Portfolio and the Growth and Income Portfolio may invest in one or
more investment companies advised by the Adviser and its affiliates, including
Van Kampen American Capital Small Capitalization Fund ("Small Cap Fund") and Van
Kampen American Capital Foreign Securities Fund ("Foreign
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Securities Fund"). The shares of the Small Cap Fund and Foreign Securities Fund
are available for investment only by certain Van Kampen American Capital funds.
The Adviser believes that the use of the Small Cap Fund and Foreign Securities
Fund may, from time to time, provide such Portfolio with the most effective
exposure to the performance of the small capitalization sector of the stock
market and to foreign securities while at the same time minimizing costs. The
advisers charge no advisory fees for managing the Small Cap Fund or Foreign
Securities Fund, nor are there any sales load or other charges associated with
distribution of its shares. Other expenses incurred by the Small Cap Fund and
Foreign Securities Fund are borne by them, and thus indirectly by the Van Kampen
American Capital funds that invest in them. With respect to such other expenses,
the Adviser anticipates that the efficiencies resulting from use of the Small
Cap Fund or the Foreign Securities Fund will result in cost savings for the Fund
and other Van Kampen American Capital funds. In large part, these savings are
attributable to the fact that administrative actions that would have to be
performed multiple times if each Van Kampen American Capital fund held its own
portfolio of small capitalization or foreign securities will need to be
performed only once. The Adviser expects that the Small Cap Fund and Foreign
Securities Fund will experience trading costs that will be substantially less
than the trading costs that would be incurred if small capitalization or foreign
securities were purchased separately by a Portfolio and other Van Kampen
American Capital funds. A Portfolio's investment in the Small Cap Fund and the
Foreign Securities Fund are subject to the terms and conditions set forth in the
SEC exemptive orders authorizing such investments.
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 securities of foreign issuers
that the Foreign Securities Fund may invest in are subject to certain risks as
described under "Investment Practices -- Foreign Securities."
The Asset Allocation Portfolio, the Enterprise Portfolio and the Growth and
Income Portfolio will each be deemed to own a pro rata portion of each
investment of the Small Cap Fund and Foreign Securities Fund. For example, if a
Portfolio's investment in the Small Cap Fund were $10 million, and the Small Cap
Fund had 5% of its assets invested in the electronics industry, the Portfolio
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
the Subadviser, is responsible for the placement of orders for the purchase and
sale of portfolio securities for a Portfolio 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 the Subadviser, is authorized to place
portfolio transactions, to the extent permitted by law, with brokerage firms
affiliated with the Trust and with brokerage firms participating in the
distribution of shares of a Portfolio 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 the Subadviser, is
authorized to pay higher commissions to brokerage firms that provide it with
investment and research information than to firms which do not provide such
services if the Adviser, and in the case of the Global Equity Fund the
Subadviser, determines 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 the Subadviser, in managing the assets
of other advisory accounts as well as in the management of the assets of the
Portfolio.
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THE TRUST AND ITS MANAGEMENT
The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. A mutual fund provides, for those who have
similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
THE ADVISER. The Adviser is a wholly owned subsidiary of Van Kampen
American Capital, Inc. ("Van Kampen American Capital"). Van Kampen American
Capital is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $57 billion under management or supervision. Van
Kampen American Capital's more than 40 open-end and 38 closed-end funds and more
than 2,500 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 American
Capital. Van Kampen American Capital is an indirect wholly-owned subsidiary of
Morgan Stanley Group Inc. The Adviser's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover &
Co. announced that they had entered into an Agreement and Plan of Merger to form
a new company to be named Morgan Stanley, Dean Witter, Discover & Co. Subsequent
to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, Van Kampen American Capital
Asset Management, Inc. will be an indirect subsidiary of Morgan Stanley, Dean
Witter, Discover & Co.
Dean Witter, Discover & Co. is a financial services company with three
major businesses: full service brokerage, credit services and asset management
of more than $100 billion in customer accounts.
As of April 4, 1997, the Distributor owned beneficially and of record
approximately 42.40% and 34.68% of the outstanding shares of the Global Equity
Portfolio and Growth and Income Portfolio, respectively, and therefore, may be
deemed to control these Portfolios.
THE SUBADVISER. The Subadviser is a wholly-owned subsidiary of Morgan
Stanley Group Inc., and is an affiliate of the Adviser. The Subadviser provides
portfolio management and named fiduciary services to various closed-end and
open-end investment companies, taxable and nontaxable institutions,
international organizations and individuals investing in United States and
international equities and fixed income securities. At December 31, 1996, the
Subadviser had, together with its affiliated investment management companies,
assets under management (including assets under fiduciary advisory control)
totaling approximately $162 billion. The Subadviser emphasizes a global
investment strategy and benefits from research coverage of a broad spectrum of
investment opportunities worldwide and draws upon the capabilities of its asset
management specialists located in various offices throughout the world,
including New York, London, Tokyo, Singapore, Bombay, Hong Kong, Milan and
Sydney. The Subadviser also draws upon the research capabilities of Morgan
Stanley Group Inc. and its other affiliates as well as the research and
investment ideas of
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other companies whose brokerage services the Subadviser utilizes. The
Subadviser's address is 1221 Avenue of the Americas, New York, New York, 10020.
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 certain Portfolios including
the Asset Allocation Portfolio, Domestic Income Portfolio, the Enterprise
Portfolio, the Government Portfolio and the Money Market Portfolio. The Trust
and the Adviser are also parties to four additional investment advisory
agreements for its remaining Portfolios designated herein as "Emerging Growth
Advisory Agreement", "Global Equity Advisory Agreement", "Growth and Income
Advisory Agreement", "Real Estate Advisory Agreement", pursuant to which the
Trust retains the Adviser to manage the investment of assets and placement
orders for the purchase and sale of portfolio securities for the Emerging Growth
Portfolio, the Global Equity Portfolio, the Growth and Income Portfolio and the
Real Estate Securities Portfolio, respectively (such advisory agreements 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 Portfolio. 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
(other than those who are affiliated persons, as defined in the 1940 Act, of the
Adviser, the Distributor or Van Kampen American Capital), 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 Portfolios
at an annual rate of 0.50% of the first $500 million of such Portfolios'
aggregate average net assets; 0.45% of the next $500 million of such Portfolios'
aggregate average net assets, and 0.40% of such Portfolios' aggregate average
net assets in excess of $1 billion. Each Portfolio pays its pro rata share of
the fee based upon its average daily net assets. For the fiscal year ended
December 31, 1996, advisory fees plus the cost of accounting services payable by
the Trust, before expense reimbursements, equaled 0.58%, 0.70%, 0.57%, 0.59% and
0.72% for the Asset Allocation Portfolio, Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio,
respectively, of each Portfolio's average daily net assets. For the same period,
each Portfolio'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
Portfolio it will limit the ordinary business expenses of such Portfolio to
0.60% per year of the average net assets of such Portfolio by reducing the
advisory fee and/or bearing other expenses of a Portfolio 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 Portfolio 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 the Emerging Growth Advisory Agreement, 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 Portfolio at an annual rate of 0.70%. For the fiscal year ended
December 31, 1996, advisory fees plus the cost of accounting services payable by
the Trust on behalf of the Emerging Growth Portfolio was 1.72% before a
voluntary waiver.
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The Trust retains the Adviser to manage the investment of the Global Equity
Portfolio's assets and to place orders for the purchase and sale of its
portfolio securities. The Adviser has entered into a subadvisory agreement (the
"Subadvisory Agreement") with the Subadviser to assist it in performing its
investment advisory functions. The Subadviser 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 the Global Equity Advisory Agreement, 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 Portfolio at the annual rate of 1.00%. For the fiscal year
ended December 31, 1996, advisory fees plus the cost of accounting services
payable by the Trust on behalf of the Portfolio was 2.03% before expense
reimbursement. 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 Portfolio and is not necessarily higher than the fees charged by certain
mutual funds with investment objective and policies similar to those of the
Portfolio. Pursuant to the Subadvisory Agreement, the Subadviser receives on an
annual basis 50% of the compensation received by the Adviser.
Under the Growth and Income Advisory Agreement, the Trust pays 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
Growth and Income Portfolio at an annual rate of 0.60% of the first $500 million
of the Growth and Income Portfolio's average net assets; and 0.55% of the Growth
and Income Portfolio's average net assets in excess of $500 million. For the
fiscal year ended December 31, 1996, the Trust paid no advisory fees on behalf
of the Growth and Income Portfolio because the Adviser waived its fees with
respect thereto. Without the waiver of advisory fees, advisory fees plus the
cost of accounting services would have been 0.60%. There can be no assurance
that the Adviser will continue to waive its fees in the future.
Under the Real Estate Advisory Agreement, the Trust pays the Adviser a
monthly fee computed on average daily net assets of the Real Estate Securities
Portfolio at the annual rate of 1.00% of the Real Estate Securities Portfolio'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 Real Estate Securities Portfolio and is not necessarily higher than the fees
charged by certain mutual funds with investment objectives and policies similar
to those of the Real Estate Securities Portfolio. For the fiscal year ended
December 31, 1996, advisory fees plus the cost of accounting services payable by
the Trust on behalf of the Real Estate Securities Portfolio was 1.10%.
From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse any Portfolio for ordinary
business expenses in excess of an agreed upon amount.
With regard to the Money Market Portfolio, the Domestic Income Portfolio
and Government Portfolio, the Adviser may utilize at its own expense credit
analysis, research and trading support services provided by its affiliate, Van
Kampen American Capital Investment Advisory Corp.
PERSONAL INVESTING POLICIES. The 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.
PORTFOLIO MANAGEMENT. The Portfolios have different portfolio managers.
Except as described below for the Global Equity Portfolio, each portfolio
manager is an employee of the Adviser.
John Cuniff is responsible for allocating the Asset Allocation Portfolio's
assets between the equity and fixed-income categories in which the Portfolio
invests. B. Robert Baker manages the
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Asset Allocation Portfolio's equity investments and Tom Copper manages the Asset
Allocation Portfolio's fixed income investments. Mr. Cuniff has managed the
Portfolio's investment portfolio since March 1996 and Mr. Copper has managed the
Portfolio's investment portfolio since August 1995, and Mr. Baker has managed
the Portfolio's investment portfolio since May 1994. Mr. Cuniff has been Vice
President, Director of Equity Research with the Adviser since October 1995.
Prior to that he was a portfolio manager with Templeton Quantitative Advisors, a
subsidiary of the Franklin Group. Mr. Copper is Associate Portfolio Manager of
the Adviser since January 1992.
Walter W. Stabell, III is primarily responsible for the day-to-day
management of the Domestic Income Portfolio's investment portfolio. Mr. Stabell
is an Associate Portfolio Manager of the Adviser. From December, 1986 to August,
1989 Mr. Stabell was Senior Securities Analyst of the Adviser. Mr. Stabell has
been primarily responsible for managing the Portfolio's investment portfolio
since March, 1990.
Gary M. Lewis is primarily responsible for the day-to-day management of the
Emerging Growth Portfolio's investment portfolio. Mr. Lewis is Vice President of
the Adviser. Mr. Lewis has been responsible for managing the Portfolio's
investment portfolio since its inception.
Jeff New is the manager of the Enterprise Portfolio and is primarily
responsible for the day-to-day management of the Portfolio's investment
portfolio. Mr. New has been primarily responsible for managing the Portfolio's
investment portfolio since March 1996. Mr. New has been a portfolio manager with
the Adviser since 1994. Since 1991, Mr. New was an associate portfolio manager
with the Adviser.
Effective April 1, 1997, Barton M. Biggs, Madhav Dhar, Francine J. Bovich
and Ann D. Thivierge assumed the primary responsibility for the day-to-day
management of the Global Equity Portfolio. Since 1980, Mr. Biggs has been
Chairman and a director of the Subadviser, and a Managing Director of the
Subadviser and Morgan Stanley & Co. Incorporated since 1975. Mr. Biggs is a
director of Morgan Stanley Group, Inc. and a director and chairman of other
investment companies of the Subadviser. Mr. Biggs holds a B.A. from Yale
University and an M.B.A. from New York University. Mr. Dhar is Managing Director
of the Subadviser and Morgan Stanley & Co. Incorporated. He has been with the
Subadviser since 1984. Mr. Dhar is a co-head of the Subadviser's emerging
markets group, and has been involved in the launching of the Subadviser's
country funds. Mr. Dhar holds a B.S. from St. Stephens College in Delhi
University (India) and an M.B.A. from Carnegie-Mellon University. Ms. Bovich has
been with the Subadviser since 1993. She is responsible for portfolio management
and communication of the Subadviser's asset allocation strategy to institutional
investor clients. Prior to 1993, Ms. Bovich was a Principal and Executive Vice
President of Westwood Management Corp. Prior to that, Ms. Bovich was a Managing
Director of Citicorp Investment Management, Inc. where she was responsible for
the Institutional Investment Management group. Ms. Bovich holds a B.A. in
Economics from Connecticut College and an M.B.A. in Finance from New York
University. Ms. Thivierge is a Principal of the Subadviser. She is a member of
the Subadviser's asset allocation committee, primarily representing the Total
Fund Management team since its inception in 1991. Ms. Thivierge has been with
the Subadviser since 1986. Ms. Thivierge holds a B.A. in International Relations
from James Madison College, Michigan State University, and an M.B.A. in Finance
from New York University.
John R. Reynoldson is primarily responsible for the day-to-day management
of the Government Portfolio's investment portfolio. Mr. Reynoldson 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 Portfolio's investment portfolio. Mr. Troth has
been Senior Vice President of the Adviser since March, 1978. Mr. Troth has been
primarily responsible for managing the Portfolio's investment portfolio since
its inception.
James Gilligan and Bret Stanley are co-managers of the Growth and Income
Portfolio and are primarily responsible for the day-to-day management of the
Portfolio's investment portfolio.
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Messrs. Gilligan and Stanley have been primarily responsible for managing the
Portfolio's investment portfolio since its inception. Mr. Gilligan has been Vice
President -- Portfolio Manager of the Adviser since March 1990. Prior to that
time, he was a securities analyst with the Adviser. Mr. Stanley has been an
associate portfolio manager of the Adviser since January 1995. Prior to that
time, he was a securities analyst and portfolio manager with Gulf Investment
Management. Prior to that, he was an analyst at Lovett Underwood Neuhaus & Webb,
and Rotan Mosle.
Russell C. Platt and Theodore R. Bigman assumed responsibility for the
day-to-day management of the Portfolio's investment portfolio effective January
1, 1997. Mr. Platt became Executive Vice President of the Adviser on December
31, 1996. Since 1994, Mr. Platt has also been a Principal, and as of December 1,
1996, a Managing Director, of Morgan Stanley Asset Management Inc. ("MSAM")
where he has primary responsibility for managing the real estate securities
investment business for MSAM and serves as a member of the Investment Committee
of The Morgan Stanley Real Estate Fund ("MSREF"). From 1991 to 1993, Mr. Platt
was head of Morgan Stanley Realty's Transaction Development Group. From 1990 to
1991, Mr. Platt was based in Morgan Stanley Realty's London Office. Prior to
this he had extensive transaction responsibilities involving portfolio, retail,
office, hotel and apartment sales and financings. Mr. Bigman became Senior Vice
President of the Adviser on December 31, 1996. Since 1995, Mr. Bigman has also
been a Vice President, and as of December 1, 1996, a Principal, of MSAM where,
together with Mr. Platt, he is responsible for MSAM's real estate securities
research. Prior to joining MSAM, he was a Director at CS First Boston, where he
worked for eight years in the Real Estate Group.
PURCHASE OF SHARES
The Trust is offering its shares only to 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 Portfolios to the Accounts at prices
equal to the respective per share net asset value of the Portfolio. The
Distributor, located at One Parkview 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 Portfolio 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 Portfolio is determined by adding the total market value of all
portfolio securities held by the Portfolio, cash and other assets, including
accrued interest. All liabilities, including accrued expenses, of the Portfolio
are subtracted. The resulting amount is divided by the total number of
outstanding shares of the Portfolio 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
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calculated under a method approved by the Trustees. Short-term investments for
all Portfolios other than the Money Market Portfolio are valued as described in
the notes to financial statements in the Statement of Additional Information.
The Money Market Portfolio'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
Portfolio would receive if it sold the security. During such periods, the yield
to investors in the Portfolio 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 Portfolio is subject to daily
fluctuations and the net asset value of each Portfolio'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 Portfolio are
automatically reinvested by the Account in additional shares of such Portfolio.
Shares of the Money Market Portfolio and Government Portfolio 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 Portfolio. The Money Market Portfolio
declares income dividends each business day. The Portfolio'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 Portfolio.
Dividends and Distributions of the Asset Allocation Portfolio, the Domestic
Income Portfolio, the Emerging Growth Portfolio, Enterprise Portfolio, the
Global Equity Portfolio, the Growth and Income Portfolio and the Real Estate
Securities Portfolio. Dividends from stocks and interest earned from other
investments are the main source of income for these Portfolios. Substantially
all of this income, less expenses, is distributed on an annual basis. When a
Portfolio 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 Portfolio 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 Portfolios distributes any net realized capital gains to the Account no
less frequently than annually.
Dividends and Distributions of the Government Portfolio. The Government
Portfolio 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 Portfolio for the
month divided by the number of business days in the month. The Government
Portfolio 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
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realized long-term capital loss. Net realized long-term capital gains, if any,
are generally distributed at least annually.
Tax Status of the Portfolios. Each Portfolio has elected to be taxed as a
"regulated investment company" under the Code. By maintaining its qualification
as a "regulated investment company," a Portfolio 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 Portfolio 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 Portfolio 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).
Tax Treatment to Insurance Company as Shareholder. Dividends paid by each
Portfolio from its ordinary income and distributions of each Portfolio'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 Portfolio
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
Portfolio'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.
Tax Treatment of Options and Futures Transactions. Gains or losses on
certain Portfolio's 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 Portfolio 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 Portfolio 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 Portfolio 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.
PORTFOLIO PERFORMANCE
From time to time all the Portfolios, except the Money Market Portfolio,
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 Portfolio. 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 Contract Owner
level. Investors should also review total return calculations that include those
expenses.
The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio 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
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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 Portfolio 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
Portfolio.
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, certain Portfolios 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 Portfolio's net income per share for a 30-day (or one-month)
period (which period will be stated in the advertisement), and dividing by the
maximum offering price per share on the last day of the period. A "bond
equivalent" annualization method is used to reflect a semiannual compounding.
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 Portfolios may include in its sales literature
and shareholder reports a quotation of the current "distribution rate" for
shares of the Portfolio. Distribution rate is a measure of the level of income
and short-term capital gain dividends, if any, distributed for a specified
period. Distribution rate differs from yield, which is a measure of the income
actually earned by the Portfolio'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 Portfolio'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 Portfolio.
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 Portfolio 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 Portfolio's then current dividend rate.
A Portfolio'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 Portfolio, portfolio maturity and
a Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio 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 Asset Allocation Portfolio, the
Domestic Income Portfolio, the Enterprise Portfolio, the Government Portfolio
and the Money Market Portfolio.
The Adviser may, from time to time, absorb a certain amount of the future
ordinary business expenses. Absorption of a portion of the expenses will
increase the yield or total return of a Portfolio. The Adviser may stop
absorbing these expenses at any time without prior notice.
From time to time the Money Market Portfolio advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The
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"yield" of the Portfolio refers to the income generated by an investment in the
Portfolio 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 Portfolio 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 December 31, 1996, 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 Portfolio'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.
In reports or other communications to shareholders or in advertising
material, a Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, Salomon Brothers High Grade Bond Index, Standard & Poor's,
NASDAQ, other appropriate indices of investment securities, or with investment
or savings vehicles. The performance information may also include evaluations of
the Portfolio published by nationally recognized ranking services and by
nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Portfolio's
shares. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, do not reflect various charges,
the inclusion of which would reduce Portfolio performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The 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. The Trust was reorganized as a business trust under the laws of
Delaware on September 16, 1995 and adopted its current name at that time. The
authorized capitalization of the Trust consists of 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. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust if set forth in the
Statement of Additional Information.
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The Trust's Declaration of Trust provides that no Trustee, officer or
shareholder of the Portfolio 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.
The fiscal year end of the Trust is December 31. The Trust sends to its
shareholders at least semi-annually reports showing each Portfolio's portfolio
and other information. An annual report, containing financial statements audited
by the Trust's independent accountants, is sent to shareholders each year. After
the end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to the Van Kampen American Capital
Life Investment Trust, One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attn: Correspondence or by calling (800) 421-5666. For inquiries through
Telecommunications Device for the Deaf (TDD) dial (800) 421-2833.
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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.
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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.
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EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE PORTFOLIO'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 421-2833
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Investment Subadviser--
Global Equity Portfolio
MORGAN STANLEY
ASSET MANAGEMENT INC.
1221 Avenue of the Americas
New York, New York 10020
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Life Investment Trust Portfolios
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Life Investment Trust Portfolios
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana
Suite 2900
Houston, TX 77002
<PAGE> 53
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LIFE INVESTMENT TRUST
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P R O S P E C T U S
APRIL 30, 1997
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
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<PAGE> 54
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1997
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in nine
separate Portfolios (the "Portfolios"), seven of which are described herein and
offered pursuant to this Prospectus. Each Portfolio is in effect a separate
mutual 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 may invest in shares of
the Portfolios in accordance with allocation instructions received from Contract
Owners. Such allocation rights are further described in the accompanying
Prospectus for the Contracts. The investment objectives of the seven Portfolios
are as follows:
DOMESTIC INCOME PORTFOLIO (formerly known as the Domestic Strategic Income
Fund) seeks current income as its primary investment objective. Capital
appreciation is a secondary objective, which will be sought only when
consistent with its primary investment objective. The Portfolio attempts to
achieve these objectives through investment primarily in a diversified
portfolio of fixed-income securities. The Portfolio 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 PORTFOLIO (formerly known as the 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.
ENTERPRISE PORTFOLIO (formerly known as the Common Stock Fund) seeks capital
appreciation through investments believed by the Adviser to have above
average potential for capital appreciation.
GOVERNMENT PORTFOLIO (formerly known as the Government Fund) seeks to
provide investors with a high current return consistent with preservation of
capital. The Portfolio 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 Portfolio may also
purchase or sell options and engage in transactions involving interest rate
futures contracts and options on such contracts.
GROWTH AND INCOME PORTFOLIO (formerly known as the Growth and Income Fund)
seeks long-term growth of capital and income. The Portfolio invests
principally in income-producing equity securities, including common stocks
and convertible securities. Investments are also made in non-convertible
preferred stocks and debt securities.
MONEY MARKET PORTFOLIO (formerly known as the Money Market Fund) seeks
protection of capital and high current income through investments in money
market instruments. INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE MONEY MARKET
PORTFOLIO 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.
REAL ESTATE SECURITIES PORTFOLIO (formerly known as the Real Estate
Securities Fund) seeks as its primary investment objective long-term growth
of capital. Current income is a secondary consideration. The Portfolio seeks
to achieve its objectives by investing principally in securities of
companies operating in the real estate industry ("Real Estate Securities").
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
Portfolio's total assets will be invested in Real Estate Securities,
primarily equity securities of real estate investment trusts.
There is no assurance that any Portfolio will achieve its investment
objectives.
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This Prospectus tells Contract Owners briefly the information they should
know before allocating premiums or cash value to a Portfolio. Investors should
read and retain this Prospectus for future reference.
A Statement of Additional Information dated April 30, 1997 containing
additional information about the Trust and its Portfolios is hereby incorporated
in its entirety into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 421-2833. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials of the
Trust at the SEC's internet web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 55
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 Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................... 3
Financial Highlights..................... 6
Introduction............................. 13
Investment Objectives and Policies....... 13
Domestic Income Portfolio.............. 13
Emerging Growth Portfolio.............. 17
Enterprise Portfolio................... 17
Government Portfolio................... 18
Growth and Income Portfolio............ 22
Money Market Portfolio................. 22
Real Estate Securities Portfolio....... 23
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Practices..................... 25
The Trust and Its Management............. 30
Purchase of Shares....................... 33
Determination of Net Asset Value......... 34
Redemption of Shares..................... 34
Dividends, Distributions and Taxes....... 34
Portfolio Performance.................... 36
Description of Shares of the Trust....... 38
Additional Information................... 38
Appendix................................. 39
</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> 56
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in seven Portfolios: the
Domestic Income Portfolio, the Emerging Growth
Portfolio, the Enterprise Portfolio, the Government
Portfolio, the Growth and Income Portfolio, the Money
Market Portfolio and the Real Estate Securities
Portfolio.
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Domestic Income Portfolio seeks current income as
its primary investment objective; capital appreciation
is a secondary objective, which will be sought only when
consistent with its primary investment objective. The
Emerging Growth Portfolio seeks capital appreciation by
investing in a portfolio of securities consisting
principally of common stock of small and medium sized
companies considered by the Adviser to be emerging
growth companies. The Enterprise Portfolio seeks capital
appreciation through investments in securities believed
by the Adviser to have above average potential for
capital appreciation. The Government Portfolio seeks
high current return consistent with preservation of
capital. The Growth and Income Portfolio seeks long-term
growth of capital and income. The Money Market Portfolio
seeks protection of capital and high current income
through investments in money market investments. The
Real Estate Securities Portfolio seeks long-term growth
of capital as its primary investment objective; current
income is a secondary consideration. There can be no
assurance that any Portfolio will achieve its investment
objective.
Investment Policies and
Risk Factors..........The Domestic Income Portfolio invests in a diversified
portfolio of fixed-income securities. The Portfolio
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, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P"), nonrated debt securities believed by the
Adviser to be of comparable quality 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 Portfolio's investment
objectives may be more dependent on the Adviser's credit
analysis than would be the case if the Portfolio 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 Portfolio's net asset value
can be expected to decrease as long-term interest rates
rise and to increase as long-term interest rates fall.
The above risks may be increased by investments in debt
securities not producing immediate cash income, such as
zero-coupon and pay-in-kind securities. See "Investment
Objectives and Policies."
3
<PAGE> 57
The Emerging Growth Portfolio invests at least 65% of
its 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 Portfolio 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 Options on Futures
Contracts."
The Enterprise Portfolio 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
Portfolio will vary based upon the Portfolio'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 Government Portfolio invests primarily in debt
securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. The Portfolio may
sell (write) and purchase call and put options. The
Portfolio 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 Portfolio 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 Portfolio'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 Portfolio -- General."
The Growth and Income Portfolio invests principally in
income-producing equity securities including common
stock and convertible securities, although investments
are also made in non-convertible preferred stocks and
debt securities. Use of options, futures contracts and
related options may include additional risks. See
"Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."
The Money Market Portfolio invests in money market
instruments.
The Real Estate Securities Portfolio 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 least 65% of the
Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate
investment trusts. The Portfolio'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
4
<PAGE> 58
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 Portfolio 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 Portfolio's policy of concentrating its
investments in Real Estate Securities, the Portfolio 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 Portfolio 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 Portfolio; 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 "Investment Objectives and
Policies -- Real Estate Securities Portfolio -- Risk
Factors." The Portfolio 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 Portfolio may purchase or sell debt
securities on a forward commitment basis. See
"Investment Practices -- Forward Commitments." The
Portfolio 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."
Redemption..............At the net asset value next determined after the
Portfolio receives a redemption request.
Investment Adviser......Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser for each Portfolio.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes each Portfolio's shares.
Dividends and
Distributions.........Dividends from net investment income are declared each
business day for the Money Market Portfolio and the
Government Portfolio. Such dividends are distributed
monthly. The Government Portfolio may distribute any net
short-term capital gains and any net long-term capital
gains at least annually. The Domestic Income Portfolio,
Emerging Growth Portfolio, the Enterprise Portfolio, the
Growth and Income Portfolio and the Real Estate
Securities Portfolio declare dividends and any capital
gains distributions annually.
The foregoing is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this
Prospectus.
5
<PAGE> 59
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
DOMESTIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
PER SHARE OPERATING PERFORMANCE ------- ------- -------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96 $ 10.15
------- ------- -------- ------- ------- ------- ------- ------- --------
Net Investment Income........... .755 .71 .85 .72 .69 .685 1.035 1.725 .62
Net Realized and Unrealized
Gain/Loss on Securities....... (.212) .8525 (1.2275) .5825 .2725 .7525 (1.64) (2.31) .8975
------- ------- -------- ------- ------- ------- ------- ------- --------
Total from Investment
Operations...................... .543 1.5625 (.3775) 1.3025 .9625 1.4375 (.605) (.585) 1.5175
------- ------- -------- ------- ------- ------- ------- ------- --------
Distributions from Net
Investment Income........... .745 .7025 .8525 .7225 .7025 .6775 1.055 1.725 .61
Distributions from Net
Realized Gain on
Securities.................. -- -- -- -- -- -- -- .01 .0975
------- ------- -------- ------- ------- ------- ------- ------- --------
Total Distributions............... .745 .7025 .8525 .7225 .7025 .6775 1.055 1.735 .7075
------- ------- -------- ------- ------- ------- ------- ------- --------
Net Asset Value, End of the
Period.......................... $ 8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96
======= ======= ======== ======= ======= ======= ======= ======= ========
Total Return(1)*.................. 6.68% 21.37% (4.33%) 16.32% 12.50% 21.23% (7.23%) (5.44%) 14.95%
Net Assets at End of the Period
(In millions)................... $ 19.8 $ 26.6 $ 21.3 $ 27.4 $ 21.1 $ 17.4 $ 6.3 $ 8.1 $ 8.1
Ratio of Expenses to Average Net
Assets*......................... .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*............. 7.97% 8.11% 8.35% 7.80% 8.89% 9.72% 11.99% 12.92% 10.88%
Portfolio Turnover Rate........... 77% 54% 94% 130% 117% 90% 123% 56% 44%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... 1.29% .93% .95% .95% .95% .95% .95% .95% .95%
Ratio of Net Investment Income to
Average Net Assets.............. 7.28% 7.78% 8.00% 7.40% 8.54% 9.37% 11.64% 12.57% 10.53%
<CAPTION>
NOVEMBER 4, 1987
(COMMENCEMENT OF
INVESTMENT OPERATIONS) TO
DECEMBER 31, 1987
PER SHARE OPERATING PERFORMANCE -------------------------
<S> <C>
Net Asset Value, Beginning of the
Period.......................... $10.00
-------
Net Investment Income........... .08
Net Realized and Unrealized
Gain/Loss on Securities....... .1525
-------
Total from Investment
Operations...................... .2325
-------
Distributions from Net
Investment Income........... .0825
Distributions from Net
Realized Gain on
Securities.................. --
-------
Total Distributions............... .0825
-------
Net Asset Value, End of the
Period.......................... $10.15
=======
Total Return(1)*.................. 1.50%
Net Assets at End of the Period
(In millions)................... $ 1.2
Ratio of Expenses to Average Net
Assets*......................... .60%
Ratio of Net Investment Income to
Average Net Assets*............. 5.58%
Portfolio Turnover Rate........... 42%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... .95%
Ratio of Net Investment Income to
Average Net Assets.............. 5.23%
</TABLE>
- ---------------------
(1) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales loads.
6
<PAGE> 60
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
JULY 3, 1995
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS)
DECEMBER 31, THROUGH
1996 DECEMBER 31, 1995
------------ ----------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 11.72 $10.00
------- ------
Net Investment Loss....................................... (.016) (.08)
Net Realized and Unrealized
Gain on Securities..................................... 1.956 1.80
------- ------
Total from Investment Operations............................ 1.940 1.72
------- ------
Net Asset Value, End of the Period.......................... $13.660 $11.72
======= ======
Total Return*............................................... 16.55% 17.20%(1)
Net Assets at End of the Period (In millions)............... $ 5.2 $ 2.3
Ratio of Expenses to Average Net Assets*.................... .85% 2.50%
Ratio of Net Investment Loss to Average Net Assets*......... (.17%) (1.45%)
Portfolio Turnover.......................................... 102% 41%(1)
Average Commission Per Equity Share Traded(2)............... $ .0470 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (2.60%) (4.35%)
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
7
<PAGE> 61
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987(2)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97 $9.33
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net Investment Income............... .113 .32 .25 .21 .23 .265 .395 .40 .32 .18
Net Realized and Unrealized
Gain/Loss on Securities........... 3.417 4.22 (.7625) 1.0325 .77 3.37 (1.17) 2.57 .765 (1.1975)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total from Investment Operations...... 3.530 4.54 (.5125) 1.2425 1.00 3.635 (.775) 2.97 1.085 (1.0175)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Less:
Distributions from Net Investment
Income............................ .109 .3175 .25 .215 .23 .285 .435 .37 .30 .2575
Distributions from Net Realized Gain
on Securities..................... 1.849 1.9225 1.4175 .6675 -0- -0- -0- -0- .055 .085
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total Distributions................... 1.958 2.24 1.6675 .8825 .23 .285 .435 .37 .355 .3425
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net Asset Value, End of the Period.... $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97
======= ====== ====== ====== ====== ====== ====== ====== ====== =======
Total Return*......................... 24.80% 36.98% (3.39%) 8.98% 7.48% 36.41% (6.84%) 34.23% 13.61% (11.12%)
Net Assets at End of the Period (in
millions)........................... $84.8 $76.0 $67.5 $72.3 $65.6 $57.8 $27.2 $31.8 $24.0 $31.0
Ratios of Expenses to Average Net
Assets*............................. .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*................. .68% 2.06% 1.72% 1.41% 1.78% 2.33% 3.64% 3.74% 3.13% 1.65%
Portfolio Turnover.................... 152% 145% 153% 139% 116% 95% 122% 86% 63% 75%
Average Commission Paid per Equity
Share Traded(1)..................... $.0435 -- -- -- -- -- -- -- -- --
*If certain expenses had not been
assumed by the Adviser. Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets.............................. .75% .68% .68% .72% .74% .90% .93% .93% .95% .89%
Ratio of Net Investment Income to
Average Net Assets.................. .53% 1.98% 1.64% 1.29% 1.64% 2.03% 3.31% 3.41% 2.78% 1.36%
</TABLE>
- ---------------------
(1) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
(2) Based on average month-end shares outstanding.
8
<PAGE> 62
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............ $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68 $ 9.91
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Investment
Income.......... .569 .60 .56 .57 .665 .74 .785 .84 .88 .76
Net Realized and
Unrealized
Gain/Loss on
Securities...... (.388) .78 (.985) .135 (.1575) .60 (.105) .325 (.215) (.97)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total from
Investment
Operations........ .481 1.38 (.425) .705 .5075 1.34 .68 1.165 .665 (.21)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Less:
Distributions from
Net Investment
Income.......... .575 .60 .555 .575 .6675 .75 .78 .845 .865 .7525
Distributions from
Net Realized
Gain on
Securities...... -- -- -- -- -- -- -- -- -- .2675
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total
Distributions..... .575 .60 .555 .575 .6675 .75 .78 .845 .865 1.02
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Asset Value, End
of the Period..... $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68
====== ====== ====== ====== ======= ====== ====== ====== ====== ======
Total Return(1)*.... 2.12% 17.17% (4.63%) 7.86% 5.73% 16.23% 8.31% 14.31% 6.74% (2.12%)
Net Assets at End of
the Period (In
millions)......... $ 57.3 $ 67.0 $ 65.5 $ 80.6 $ 74.8 $ 77.0 $ 73.2 $ 81.2 $ 90.6 $108.8
Ratio of Expenses to
Average Net
Assets*........... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net
Investment Income
to Average Net
Assets*........... 6.56% 6.89% 6.71% 6.45% 7.29% 8.37% 9.19% 9.56% 9.29% 8.37%
Portfolio Turnover
Rate.............. 143% 164% 192% 91% 36% 57% 164% 42% 88% 65%
*If certain expenses
had not been
assumed by the
Adviser, Total
Return would have
been lower and the
ratios would have
been as follows:
Ratio of Expenses to
Average Net
Assets............ .80% .72% .70% .70% .70% .70% .69% .66% .64% .64%
Ratio of Net
Investment Income
to Average Net
Assets............ 6.36% 6.77% 6.61% 6.35% 7.19% 8.27% 9.10% 9.50% 9.25% 8.33%
</TABLE>
- ---------------------
(1) Total return does not consider the effect of sales loads.
9
<PAGE> 63
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
GROWTH AND INCOME FUND
<TABLE>
<CAPTION>
DECEMBER 23, 1996
(COMMENCEMENT
OF INVESTMENT
OPERATIONS) TO
DECEMBER 31, 1996
-----------------
<S> <C>
Net Asset Value, Beginning of the Period.................... $ 10.000
--------
Net Investment Income..................................... .011
Net Realized and Unrealized
Loss on Securities..................................... (.041)
--------
Total from Investment Operations............................ (.030)
--------
Net Asset Value, End of the Period.......................... $ 9.970
========
Total Return*............................................... (.30)%(1)
Net Assets at End of the Period (In millions)............... $ 0.5
Ratio of Expenses to Average Net Assets*.................... .75%
Ratio of Net Investment Income to Average Net Assets*....... 4.47%
Portfolio Turnover.......................................... 0%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ . 0203
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets..................... 45.97%
Ratio of Net Investment Income/Loss to Average Net Assets... ( 40.74)%
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
10
<PAGE> 64
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) in included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Investment Income......... .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714 .0624
Net Realized and Unrealized
Loss on Securities.......... -- -- -- -- -- -- -- -- -- (.00002)
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Total from Investment
Operations.................... .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714 .06238
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Less Distributions From Net
Investment Income............. .048 (.0533) (.0365) (.0262) (.0331) (.0546) (.076) (.0877) (.0714) (.06238)
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Asset Value, End of the
Period........................ $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ======= ======= ======= ======= ======= ====== ======= ======= ========
Total Return(1)*................ 4.89% 5.46% 3.71% 2.66% 3.36% 5.46% 7.83% 9.13% 7.38% 6.41%
Net Assets at End of the Period
(In millions)................. $19.6 $ 21.6 $ 28.5 $ 30.0 $ 32.9 $ 38.0 $ 34.3 $ 29.0 $ 24.5 $ 18.6
Ratios to Average Net Assets
(annualized)
Ratios of Expenses to Average
Net Assets*................... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratios of Net Investment Income
to Average Net Assets*........ 4.78% 5.33% 3.63% 2.63% 3.32% 5.44% 7.59% 8.76% 7.22% 6.24%
*If certain expenses had not
been assumed by the Adviser,
Total Return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets........................ 1.29% .93% .87% .95% .89% .87% .89% .95% .95% .95%
Ratio of Net Investment Income
to Average Net Assets......... 4.10% 5.00% 3.37% 2.28% 3.03% 5.17% 7.30% 8.41% 6.87% 5.89%
</TABLE>
- ---------------------
(1) Total return does not consider the effect of sales loads.
11
<PAGE> 65
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
REAL ESTATE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
JULY 3, 1995
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 10.74 $ 10.00
-------
Net Investment Income..................................... .217 .20
Net Realized and Unrealized Gain on Securities............ 4.117 .6325
-------
Total from Investment Operations............................ 4.334 .8325
-------
Less:
Distributions from Net Investment Income.................. (.199) (.0925)
-------
Distributions from Net Realized Gain on Securities........ .091
-------
Total Distributions......................................... .290
-------
Net Asset Value, End of the Period.......................... $14.784 $ 10.74
=======
Total Return*............................................... 40.53% 8.35%(1)
Net Assets at End of the Period (In Millions)............... $ 167.5 $ 8.6
Ratio of Expenses to Average Net Assets*.................... 1.10% 2.50%
Ratio of Net Investment Income to Average Net Assets*....... 5.06% 3.75%
Portfolio Turnover.......................................... 84% 85%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0313 --
* If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets........ 4.89% 3.36%
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was not
required in fiscal periods prior to 1996.
12
<PAGE> 66
INTRODUCTION
The Trust is a duly organized Delaware business trust with nine separate
Portfolios, seven of which are described herein and offered pursuant to this
Prospectus. Each Portfolio has separate assets and liabilities and a separate
net asset value per share. Shares of a Portfolio represent an interest only in
that Portfolio. Since market risks are inherent in all securities to varying
degrees, assurance cannot be given that the investment objectives of any of the
Portfolios will be met.
INVESTMENT OBJECTIVES AND POLICIES
Each Portfolio 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 Portfolio, except the Real Estate Securities
Portfolio, is a fundamental policy and may not be changed without shareholder
approval. With respect to the Real Estate Securities Portfolio, the investment
objective may be changed by the Trustees. If there is a change in the objective
of such Portfolio, shareholders should consider whether the Portfolio remains an
appropriate investment in light of their then current financial position and
needs. The differences in objectives and policies among the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject.
DOMESTIC INCOME PORTFOLIO
The primary investment objective of the Domestic Income Portfolio is to
seek current income. Capital appreciation is a secondary objective, which will
be sought only when consistent with its primary objective. The Portfolio
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 Portfolio 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
Portfolio 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 Portfolio will limit its investment in foreign
securities to 25% of its total assets at the time of investment. See "Investment
Practices -- Foreign Securities."
The Portfolio 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 Portfolio may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices -- Forward Commitments."
The Portfolio 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
Portfolio when such investments are consistent with the Portfolio's investment
objectives or are acquired as part of a unit consisting of a combination of
fixed-income or equity securities. The Portfolio 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
Portfolio will not purchase any such securities which will cause more than 20%
of its total assets to be so invested or which would cause more than 10% of its
total assets to be invested in common stocks 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,
13
<PAGE> 67
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 Portfolio 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 on a present
value basis expressed in years 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 measures the length of the time
interval between the present and the time when the interest and principal
payments are scheduled to be received (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. 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. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. 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. 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 Portfolio's
capital.
The higher yields sought by the Portfolio 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 Portfolio 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.
14
<PAGE> 68
During the fiscal year ended December 31, 1996, the average percentage of
the Portfolio'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..................................................... -0-
AA/Aa....................................................... -0-
A/A......................................................... 11.7
BBB/Baa..................................................... 42.5
BB/Ba....................................................... 17.3
B/B......................................................... 10.5
*Nonrated................................................... 9.8
Preferred Stocks/Common Stocks/Warrants..................... 3.8
Cash and Equivalents........................................ 4.4
------
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- 9.8%.
The securities in which the Portfolio 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 Portfolio 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 Portfolio 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 during periods of economic recession.
An economic downturn or increase in interest rates is likely to
15
<PAGE> 69
have a greater negative effect on this market, the value of lower rated debt
securities in the Portfolio, the Portfolio'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 Portfolio 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 Portfolio shareholders, the
Portfolio 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 Portfolio and may also limit the ability of the Portfolio 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 Portfolio 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 Portfolio
owns will affect its net asset value per share. If market quotations are not
readily available for the Portfolio's lower rated or nonrated securities, these
securities will be valued by a method that the Portfolio'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
Portfolio accrues income on these securities prior to the receipt of cash
payments. The Portfolio 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 Portfolio'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 Portfolio 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.
16
<PAGE> 70
EMERGING GROWTH PORTFOLIO
The investment objective of the Emerging Growth Portfolio is to seek
capital appreciation by investing in a portfolio of securities consisting
principally of common stocks of small and medium sized companies considered by
the Adviser to be emerging growth companies. Any ordinary income received from
portfolio securities is entirely incidental.
As a fundamental investment policy, the Portfolio 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 Portfolio 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 Portfolio does not limit its investment to any single group or type of
security. The Portfolio 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 Portfolio's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio 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 Portfolio will vary based upon the Portfolio's
investment performance. The Portfolio 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 Portfolio will be successful in achieving its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. See "Investment Practices -- Foreign Securities." Additionally,
the Portfolio may invest up to 15% 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 Portfolio may enter into repurchase agreements with
domestic banks and broker-dealers which involve certain risks. The Portfolio may
invest in either warrants so long as such investments aggregate less than 5% of
the Portfolio's total assets. The risks involved in investing in restricted
securities, warrants and repurchase agreements are described in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
The investment objective of the Enterprise Portfolio is to seek 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 Portfolio 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 Portfolio 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 Portfolio may invest in warrants and preferred
17
<PAGE> 71
stocks, and in investment companies. See "Investment Practices -- Investment in
Investment Companies."
The Portfolio 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 Portfolio'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 Portfolio's primary approach is to seek what the Adviser believes to be
attractive growth investments on an individual company basis. The Portfolio 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 Portfolio will vary based upon the Portfolio's investment
performance. The Portfolio 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
Portfolio will be successful in achieving its objective. The Portfolio 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 Portfolio 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 Portfolio 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."
GOVERNMENT PORTFOLIO
GENERAL
The investment objective of the Government Portfolio is to seek to provide
investors with a high current return consistent with preservation of capital.
The Portfolio 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 Portfolio are invested in such
securities. The Portfolio 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 Portfolio 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 Portfolio may also purchase or sell U.S. Government securities on
a forward commitment basis. See "Investment Practices -- Forward Commitments."
The Portfolio is not designed for investors seeking capital appreciation. Shares
of the Portfolio 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 Portfolio's objective will be achieved.
Since the value of U.S. Government securities owned by the Portfolio will
fluctuate depending upon market factors and inversely with prevailing interest
rates, the net asset value of shares of the Portfolio 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
18
<PAGE> 72
rising interest rates is referred to herein as "market risk." While the
Portfolio 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 measures the length of the
time interval between the present and the time when the interest and principal
payments are scheduled to be received (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. 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. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. 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.
The Portfolio 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 Portfolio'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 Portfolio reduces its
potential for capital appreciation on debt securities if interest rates decline.
Thus if market prices of debt securities increase, the Portfolio receives less
total return from its optioned positions than it would have received if the
options had not been sold. During periods when the Portfolio has capital loss
carry forwards any capital gains generated from such transactions will be
retained in the Portfolio. 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 Portfolio's turnover rate is shown in the table of "Financial
Highlights." See "Investment Practices -- Portfolio Turnover."
The Portfolio is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code of 1986, as amended (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 Portfolio 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 Portfolio intends to invest in U.S. Treasury securities and in
securities issued by at least four U.S. Government agencies or instrumentalities
in the amounts necessary to meet these diversification requirements at the end
of each quarter of the year (or within 30 days thereafter).
19
<PAGE> 73
In the event the Portfolio does not meet the diversification requirements
of Section 817(h) of the Code, the policies funded by shares of the Portfolio
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 Portfolio.
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
Portfolio), 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 Portfolio's higher yielding securities might be converted to cash,
and the Portfolio 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 Portfolio buys mortgage-related securities
at a premium, mortgage foreclosures or mortgage prepayments may result in a loss
to the Portfolio of up to the amount of the premium paid since only timely
payment of principal and interest is guaranteed.
OTHER GOVERNMENT RELATED SECURITIES
The Portfolio 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 Portfolio may invest are mortgage-backed securities
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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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio)
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.
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
Portfolio's limitation on investments in illiquid securities. The Trustees will
establish guidelines and standards for determining whether a particular
government-issued IO or PO
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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 Portfolio's limitation on investment in illiquid securities.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek long-term
growth of capital and income. Since investment in securities involves potential
gain or loss, there is no assurance that the Portfolio's objective will be
achieved.
In view of the investment objective, the Portfolio generally invests
principally in income-producing equity securities including common stocks and
convertible securities; although investments are also made in non-convertible
preferred stocks and debt securities rated "investment grade," i.e., within the
four highest grades assigned by S&P or by Moody's. Ratings at the time of
purchase determine which securities may be acquired, and a subsequent reduction
in rating does not require the Portfolio to dispose of a security. Securities
rated BBB by S&P or Baa by Moody's are in the lowest of the four investment
grades and are considered by the rating agencies 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
market prices of preferred stocks and debt securities generally fluctuate with
changes in interest rates so that the value of investments in such securities
can be expected to decrease as interest rates rise and increase as interest
rates fall. The Portfolio may also invest in warrants and in securities of
newly-formed companies and in investment companies. See "Investment
Practices -- Investment in Investment Companies." The Portfolio may invest up to
15% of its assets in securities of foreign issuers. See "Investment
Practices -- Foreign Securities." The Portfolio may enter into repurchase
agreements with domestic banks and broker-dealers which involves certain risks
or may lend portfolio securities on a fully collateralized basis. See
"Investment Practices -- Repurchase Agreements" and "Investment
Practices -- Loans of Portfolio Securities". When deemed appropriate for
temporary defensive purposes, the Portfolio may invest up to 100% of its total
assets in U.S. Government securities and investment grade corporate debt
securities.
The Portfolio may dispose of a security whenever, in the opinion of the
Adviser, factors indicate it is desirable to do so. Such factors include a
change in economic or market factors in general or with respect to a particular
industry, a change in the market trend of or other factors affecting an
individual security, changes in the relative market performance of or
appreciation possibilities offered by individual securities and other
circumstances bearing on the desirability of a given investment.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to seek
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 Portfolio 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 Portfolio. It is not the
intention of the Trustees, however, to change these policies without prior
notice to shareholders.
The Portfolio 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
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to the extent consistent with protection of capital. Of course, there can be no
guarantee that the Portfolio 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 Portfolio may be expected to fluctuate. The Portfolio
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 Portfolio 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 Portfolio 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 Portfolio is also authorized to invest up to
5% 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 Portfolio is insured in full by
the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER
The Portfolio 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 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 Portfolio's current policy
is to limit investments in commercial paper to obligations rated in the highest
rating category.
REPURCHASE AGREEMENTS
The Portfolio 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."
REAL ESTATE SECURITIES PORTFOLIO
General. The Real Estate Securities Portfolio's primary investment
objective is to provide shareholders with long-term growth of capital. Current
income is a secondary consideration. The Portfolio 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
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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
Portfolio's total assets will be invested in Real Estate Securities, primarily
equity securities of real estate investment trusts. The Portfolio'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 Portfolio 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 Portfolio may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Portfolio 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 Portfolio may invest up to 25% of its assets in securities issued by
foreign issuers. See "Investment Practices -- Foreign Securities." The Portfolio
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 Portfolio may invest up to 100% of
its total assets in short-term investments as described below. The Portfolio
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 Portfolio will achieve its investment
objectives.
Short-Term Investments. The Portfolio 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 Portfolio 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.
Risk Factors. Although the Portfolio does not invest directly in real
estate, an investment in the Portfolio 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 Portfolio has rental income or income
from the disposition of real property acquired as a result of a default on
securities the Portfolio owns, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
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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, as
amended (the "1940 Act"). Changes in interest rates may also affect the value of
the debt securities in the Portfolio's portfolio. Like investment companies such
as the Portfolio, real estate investment trusts are not taxed on income
distributed to shareholders provided they comply with several requirements of
the Code. The Portfolio 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 Portfolio.
Because of the Portfolio's policy of concentrating its investments in Real
Estate Securities, the Portfolio 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 Portfolio's investment practices and the
risks associated with such practices are contained in "Investment Practices"
herein and in the Statement of Additional Information.
INVESTMENT PRACTICES
Repurchase Agreements. Each Portfolio 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., a Portfolio) 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. Repurchase
agreements involve certain risks in the event of a default by the other party.
In the event of a bankruptcy or other default of the seller of a repurchase
agreement, a Portfolio 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 a Portfolio 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 Portfolio will
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by such Portfolio,
exceeds in the case of the Emerging Growth Portfolio, the Growth and Income
Portfolio and the Real Estate Securities Portfolio, 15% of the value of each
Portfolio's net assets and, in the case of the Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio,
10% of the value of its net assets.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested and the funds that
contributed to the joint account share pro rata in the net revenue generated.
The Adviser believes that the joint account produces efficiencies and economies
of scale that may contribute to reduced transaction costs, higher returns,
higher quality investments and greater diversity of investments for the
Portfolios than would be available to the Portfolios investing separately. The
manner in which the joint account is managed is subject to conditions set forth
in the SEC exemptive order authorizing this practice, which conditions are
designed to ensure the fair administration of the joint account and to protect
the amounts in that account.
Loans of Portfolio Securities. Each Portfolio, except the Real Estate
Securities Portfolio, may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that
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(a) immediately after any such loan, the value of the securities loaned does not
exceed 10% of the total value of that Portfolio's assets and (b) any securities
loan is collateralized in accordance with applicable regulatory requirements.
See Statement of Additional Information.
Foreign Securities. The Domestic Income Portfolio, the Emerging Growth
Portfolio, the Enterprise Portfolio, the Growth and Income Portfolio and the
Real Estate Securities Portfolio may invest up to 25%, 20%, 10%, 15% and 25%,
respectively, of the value of such Portfolios' total assets in securities issued
by foreign issuers. With respect to the Real Estate Securities Portfolio, 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
Portfolio 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 Portfolio's assets denominated in that currency and a Portfolio's
yield on such assets.
A Portfolio 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 Portfolio 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 Portfolio may be subject to foreign withholding taxes,
which would reduce a Portfolio's total return on such investments and the
amounts available for distributions by a Portfolio 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 periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause a Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Portfolio due to subsequent declines in value of
the portfolio security or, if a Portfolio 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 Portfolio will incur costs in
connection with conversions between various currencies. There is generally less
government supervision and
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regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States.
Foreign Currency Transactions. The value of a Portfolio'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
Portfolio will incur costs in connection with conversions between various
currencies. A Portfolio'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 Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. A Portfolio does not purchase and sell foreign currencies as
an investment.
A Portfolio 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 Portfolio 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 a Portfolio
purchases a foreign security traded in the hedged currency which a Portfolio
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
Portfolio will not speculate in foreign currency forward or futures contracts or
through the purchase and sale of foreign currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the forward
contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
Restricted Securities. The Emerging Growth Portfolio, the Growth and
Income Portfolio and the Real Estate Securities Portfolio may invest up to 15%
of their net assets in restricted securities and other illiquid assets. The
other Portfolios offered in this Prospectus may each invest up to 5% 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
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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 monitor a
Portfolio'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 a
Portfolio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. These difficulties and
delays could result in a Portfolio'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 a Portfolio impossible. Since market
quotations are not readily available for restricted securities, such securities
will be valued by a method that a Portfolio's Trustees believe accurately
reflects fair value.
Forward Commitments. The Domestic Income Portfolio, the Government
Portfolio and the Real Estate Securities Portfolio may purchase or sell U.S.
Government securities (or debt securities with respect to the Real Estate
Securities Portfolio) on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold by
the Portfolio 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 Portfolio 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 Portfolio may reinvest the proceeds in another
Forward Commitment. A Portfolio'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 Portfolio relies on the other party to
complete the transaction; should the other party fail to do so, a Portfolio
might lose a purchase or sale opportunity that could be more advantageous than
alternative opportunities at the time of the failure.
Each Portfolio maintains a segregated account (which is marked to market
daily) of cash, liquid securities or the security covered by the Forward
Commitment (in the case of a Forward Currency sale) with the Portfolio'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 Portfolio 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 Emerging Growth Portfolio, the
Enterprise Portfolio, the Government Portfolio, the Growth and Income Portfolio
or Real Estate Securities Portfolio. The annual turnover rates of each Portfolio
is shown under "Financial Highlights." The turnover rate for the Growth and
Income Portfolio may exceed 100%, which is higher than that of many other
investment companies. Higher portfolio turnover involves correspondingly greater
transaction costs, including any brokerage commissions, which are borne directly
by a Portfolio. 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
Emerging Growth Portfolio, the Enterprise Portfolio, the Government Portfolio,
the Growth and Income Portfolio and the Real Estate Securities Portfolio may
purchase or sell options, futures contracts or options on futures contracts. The
Portfolios expect to utilize options, futures contracts and options thereon in
several different ways, depending upon the status of a Portfolio's portfolio
securities and the
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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 Portfolio, if the Adviser is not successful in employing such
instruments in managing a Portfolio's investments, a Portfolio's performance
will be worse than if a Portfolio did not make such investments. In addition, a
Portfolio would pay commissions and other costs in connection with such
investments, which may increase a Portfolio's expenses and reduce its return.
Each Portfolio is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC Options are purchased from or sold to securities dealers,
financial institutions of other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. A Portfolio will sell only OTC
Options (other than over-the-counter currency options) that are subject to a
buy-back provision permitting a Portfolio to require to the Counterparty to sell
the option back to a Portfolio at a formula price within seven days. The staff
of the SEC currently takes the position that, in general, OTC Options on
securities other than U.S. Government securities purchased by a Portfolio, and
portfolio securities covering OTC Options sold by a Portfolio, are illiquid
securities subject to a Portfolio limitation on illiquid securities described
below. A Portfolio may not purchase or sell futures contracts or related options
for which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets.
In order to prevent leverage in connection with the purchase of futures
contracts thereon by a Portfolio, an amount of cash or liquid 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 Portfolio may not invest more than 10% of its net assets (or 15%
for the Emerging Growth Portfolio, the Growth and Income Portfolio and the Real
Estate Securities Portfolio) 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. The Enterprise Portfolio and the Growth
and Income Portfolio may invest in one or more investment companies advised by
the Adviser and its affiliates, including Van Kampen American Capital Small
Capitalization Fund ("Small Cap Fund") and Van Kampen American Capital Foreign
Securities Fund ("Foreign Securities Fund"). The shares of the Small Cap Fund
and Foreign Securities Fund are available for investment only by certain Van
Kampen American Capital funds. The Adviser believes that the use of the Small
Cap Fund and Foreign Securities Fund may, from time to time, provide such
Portfolios the most effective exposure to the performance of the small
capitalization sector of the stock market and to foreign securities while at the
same time minimizing costs. The advisers charge no advisory fees for managing
the Small Cap Fund or Foreign Securities Fund, nor are there any sales load or
other charges associated with distribution of its shares. Other expenses
incurred by the Small Cap Fund and Foreign Securities Fund are borne by them,
and thus indirectly by the Van Kampen American Capital funds that invest in
them. With respect to such other expenses, the Adviser anticipates that the
efficiencies resulting from use of the Small Cap Fund or the Foreign Securities
Fund will result in cost savings for the Fund and other Van Kampen American
Capital funds. In large part, these savings are attributable to the fact that
administrative actions that would have to be performed multiple times if each
Van Kampen American Capital fund held its own portfolio of small capitalization
or foreign securities will need to be performed only once. The Adviser expects
that the Small Cap Fund and Foreign Securities Fund will experience trading
costs that will be substantially less than the trading costs that would be
incurred if small capitalization or foreign securities were purchased separately
by a Portfolio and other Van Kampen American Capital funds. A Portfolio's
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investment in the Small Cap Fund and the Foreign Securities Fund are subject to
the terms and conditions set forth in the SEC exemptive orders authorizing such
investments.
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 securities of foreign issuers
that the Foreign Securities Fund may invest in are subject to certain risks as
described under "Investment Practices -- Foreign Securities."
The Enterprise Portfolio and the Growth and Income Portfolio will each be
deemed to own a pro rata portion of each investment of the Small Cap Fund and
Foreign Securities Fund. For example, if a Portfolio's investment in the Small
Cap Fund were $10 million, and the Small Cap Fund had 5% of its assets invested
in the electronics industry, the Portfolio would be considered to have an
investment of $500,000 in the electronics industry.
Brokerage Practices. The Adviser is responsible for the placement of orders
for the purchase and sale of portfolio securities for a Portfolio and the
negotiation of brokerage commissions on such transactions. Brokerage firms are
selected on the basis of their professional capability for the type of
transaction and the value and quality of execution services rendered on a
continuing basis. The Adviser is authorized to place portfolio transactions, to
the extent permitted by law, with brokerage firms affiliated with the Trust and
with brokerage firms participating in the distribution of shares of a Portfolio
and other Van Kampen American Capital mutual funds if it reasonably believes
that the quality of the execution and the commission are comparable to that
available from other qualified brokerage firms. The Adviser is authorized to pay
higher commissions to brokerage firms that provide it with investment and
research information than to firms which do not provide such services if the
Adviser determines that such commissions are reasonable in relation to the
overall services provided. The information received may be used by the Adviser
in managing the assets of other advisory accounts as well as in the management
of the assets of the Portfolio.
THE TRUST AND ITS MANAGEMENT
The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. A mutual fund provides, for those who have
similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
THE ADVISER. The Adviser is a wholly owned subsidiary of Van Kampen
American Capital, Inc. ("Van Kampen American Capital"). Van Kampen American
Capital is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $57 billion under management or supervision. Van
Kampen American Capital's more than 40 open-end and 38 closed-end funds and more
than 2,500 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 American
Capital. Van Kampen American Capital is an indirect wholly-owned subsidiary of
Morgan Stanley Group Inc. The Adviser's principal office is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other
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corporate finance advisory activities; merchant banking; stock brokerage and
research services; asset management; trading of futures, options, foreign
exchange, commodities and swaps (involving foreign exchange, commodities,
indices and interest rates); real estate advice, financing and investing; and
global custody, securities clearance services and securities lending.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover &
Co. announced that they had entered into an Agreement and Plan of Merger to form
a new company to be named Morgan Stanley, Dean Witter, Discover & Co. Subsequent
to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, Van Kampen American Capital
Asset Management, Inc. will be an indirect subsidiary of Morgan Stanley, Dean
Witter, Discover & Co.
Dean Witter, Discover & Co. is a financial services company with three
major businesses: full service brokerage, credit services and asset management
of more than $100 billion in customer accounts.
As of April 4, 1997, the Distributor owned beneficially and of record
approximately 34.68% of the outstanding shares of the Growth and Income
Portfolio and therefore, may be deemed to control this Portfolio.
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 certain Portfolios including
the Domestic Income Portfolio, the Enterprise Portfolio, the Government
Portfolio and the Money Market Portfolio. The Trust and the Adviser are also
parties to additional investment advisory agreements for its remaining
Portfolios, including three investment advisory agreements designated herein as
"Emerging Growth Advisory Agreement", "Growth and Income Advisory Agreement" and
"Real Estate Advisory Agreement", pursuant to which the Trust retains the
Adviser to manage the investment of assets and placement orders for the purchase
and sale of portfolio securities for the Emerging Growth Portfolio, the Growth
and Income Portfolio and the Real Estate Securities Portfolio, respectively
(such advisory agreements 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 Portfolio. 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
(other than those who are affiliated persons, as defined in the 1940 Act, of the
Adviser, the Distributor or Van Kampen American Capital), 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 Portfolios
at an annual rate of 0.50% of the first $500 million of such Portfolios'
aggregate average net assets; 0.45% of the next $500 million of such Portfolios'
aggregate average net assets, and 0.40% of such Portfolios' aggregate average
net assets in excess of $1 billion. Each Portfolio pays its pro rata share of
the fee based upon its average daily net assets. For the fiscal year ended
December 31, 1996, advisory fees plus the cost of accounting services payable by
the Trust, before expense reimbursements, equaled 0.70%, 0.57%, 0.59% and 0.72%
for the Domestic Income Portfolio, the Enterprise Portfolio, the Government
Portfolio and the Money Market Portfolio, respectively, of each Portfolio's
average daily net assets. For the same period, each Portfolio'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 Portfolio it will limit the
ordinary
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business expenses of such Portfolio to 0.60% per year of the average net assets
of such Portfolio by reducing the advisory fee and/or bearing other expenses of
a Portfolio 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 Portfolio 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 the Emerging Growth Advisory Agreement, 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 Portfolio at an annual rate of 0.70%. For the fiscal year ended
December 31, 1996, advisory fees plus the cost of accounting services payable by
the Trust on behalf of the Emerging Growth Portfolio was 1.72% before a
voluntary waiver.
Under the Growth and Income Advisory Agreement, the Trust pays 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
Growth and Income Portfolio at an annual rate of 0.60% of the first $500 million
of the Growth and Income Portfolio's average net assets; and 0.55% of the Growth
and Income Portfolio's average net assets in excess of $500 million. For the
fiscal year ended December 31, 1996, the Trust paid no advisory fees on behalf
of the Growth and Income Portfolio because the Adviser waived its fees with
respect thereto. Without the waiver of advisory fees, advisory fees plus the
cost of accounting services would have been 0.60%. There can be no assurance
that the Adviser will continue to waive its fees in the future.
Under the Real Estate Advisory Agreement, the Trust pays the Adviser a
monthly fee computed on average daily net assets of the Real Estate Securities
Portfolio at the annual rate of 1.00% of the Real Estate Securities Portfolio'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 Real Estate Securities Portfolio and is not necessarily higher than the fees
charged by certain mutual funds with investment objectives and policies similar
to those of the Real Estate Securities Portfolio. For the fiscal year ended
December 31, 1996, advisory fees plus the cost of accounting services payable by
the Trust on behalf of the Real Estate Securities Portfolio was 1.10%.
From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse any Portfolio for ordinary
business expenses in excess of an agreed upon amount.
With regard to the Money Market Portfolio, the Domestic Income Portfolio
and Government Portfolio, the Adviser may utilize at its own expense credit
analysis, research and trading support services provided by its affiliate, Van
Kampen American Capital Investment Advisory Corp.
PERSONAL INVESTING POLICIES. The 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.
PORTFOLIO MANAGEMENT. The Portfolios have different portfolio managers.
Each portfolio manager is an employee of the Adviser.
Walter W. Stabell, III is primarily responsible for the day-to-day
management of the Domestic Income Portfolio's investment portfolio. Mr. Stabell
is an Associate Portfolio Manager of the Adviser. From December, 1986 to August,
1989 Mr. Stabell was Senior Securities Analyst of the Adviser. Mr. Stabell has
been primarily responsible for managing the Portfolio's investment portfolio
since March, 1990.
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Gary M. Lewis is primarily responsible for the day-to-day management of the
Emerging Growth Portfolio's investment portfolio. Mr. Lewis is Vice President of
the Adviser. Mr. Lewis has been responsible for managing the Portfolio's
investment portfolio since its inception.
Jeff New is the manager of the Enterprise Portfolio and is primarily
responsible for the day-to-day management of the Portfolio's investment
portfolio. Mr. New has been primarily responsible for managing the Portfolio's
investment portfolio since March 1996. Mr. New has been a portfolio manager with
the Adviser since 1994. Since 1991, Mr. New was an associate portfolio manager
with the Adviser.
John R. Reynoldson is primarily responsible for the day-to-day management
of the Government Portfolio's investment portfolio. Mr. Reynoldson 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 Portfolio's investment portfolio. Mr. Troth has
been Senior Vice President of the Adviser since March, 1978. Mr. Troth has been
primarily responsible for managing the Portfolio's investment portfolio since
its inception.
James Gilligan and Bret Stanley are co-managers of the Growth and Income
Portfolio and are primarily responsible for the day-to-day management of the
Portfolio's investment portfolio. Messrs. Gilligan and Stanley have been
primarily responsible for managing the Portfolio's investment portfolio since
its inception. Mr. Gilligan has been Vice President -- Portfolio Manager of the
Adviser since March 1990. Prior to that time, he was a securities analyst with
the Adviser. Mr. Stanley has been an associate portfolio manager of the Adviser
since January 1995. Prior to that time, he was a securities analyst and
portfolio manager with Gulf Investment Management. Prior to that, he was an
analyst at Lovett Underwood Neuhaus & Webb, and Rotan Mosle.
Russell C. Platt and Theodore R. Bigman assumed responsibility for the
day-to-day management of the Portfolio's investment portfolio effective January
1, 1997. Mr. Platt became Executive Vice President of the Adviser on December
31, 1996. Since 1994, Mr. Platt has also been a Principal, and as of December 1,
1996, a Managing Director, of Morgan Stanley Asset Management Inc. ("MSAM")
where he has primary responsibility for managing the real estate securities
investment business for MSAM and serves as a member of the Investment Committee
of The Morgan Stanley Real Estate Fund ("MSREF"). From 1991 to 1993, Mr. Platt
was head of Morgan Stanley Realty's Transaction Development Group. From 1990 to
1991, Mr. Platt was based in Morgan Stanley Realty's London Office. Prior to
this he had extensive transaction responsibilities involving portfolio, retail,
office, hotel and apartment sales and financings. Mr. Bigman became Senior Vice
President of the Adviser on December 31, 1996. Since 1995, Mr. Bigman has also
been a Vice President, and as of December 1, 1996, a Principal, of MSAM where,
together with Mr. Platt, he is responsible for MSAM's real estate securities
research. Prior to joining MSAM, he was a Director at CS First Boston, where he
worked for eight years in the Real Estate Group.
PURCHASE OF SHARES
The Trust is offering its shares only to 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 Portfolios to the Accounts at prices
equal to the respective per share net asset value of the Portfolio. The
Distributor, located at One Parkview Plaza, Oakbrook Terrace, Illinois
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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 Portfolio 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 Portfolio is determined by adding the total market value of all
portfolio securities held by the Portfolio, cash and other assets, including
accrued interest. All liabilities, including accrued expenses, of the Portfolio
are subtracted. The resulting amount is divided by the total number of
outstanding shares of the Portfolio 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 Portfolios other than
the Money Market Portfolio are valued as described in the notes to financial
statements in the Statement of Additional Information.
The Money Market Portfolio'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
Portfolio would receive if it sold the security. During such periods, the yield
to investors in the Portfolio 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 Portfolio is subject to daily
fluctuations and the net asset value of each Portfolio'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 Portfolio are
automatically reinvested by the Account in additional shares of such Portfolio.
Shares of the Money Market Portfolio and Government Portfolio 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 Portfolio. The Money Market Portfolio
declares income dividends each business day. The Portfolio's net income for
dividend purposes is calculated daily and
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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 Portfolio.
Dividends and Distributions of the Domestic Income Portfolio, the Emerging
Growth Portfolio, Enterprise Portfolio, the Growth and Income Portfolio and the
Real Estate Securities Portfolio. Dividends from stocks and interest earned from
other investments are the main source of income for these Portfolios.
Substantially all of this income, less expenses, is distributed on an annual
basis. When a Portfolio 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 Portfolio 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 Portfolios distributes any net realized capital gains to the
Account no less frequently than annually.
Dividends and Distributions of the Government Portfolio. The Government
Portfolio 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 Portfolio for the
month divided by the number of business days in the month. The Government
Portfolio 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.
Tax Status of the Portfolios. Each Portfolio has elected to be taxed as a
"regulated investment company" under the Code. By maintaining its qualification
as a "regulated investment company," a Portfolio 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 Portfolio 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 Portfolio 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).
Tax Treatment to Insurance Company as Shareholder. Dividends paid by each
Portfolio from its ordinary income and distributions of each Portfolio'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 Portfolio
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
Portfolio'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.
Tax Treatment of Options and Futures Transactions. Gains or losses on
certain Portfolio's transactions in listed options on securities, futures and
options on futures generally are treated as
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60% long-term and 40% short-term, ("60/40"), and positions held by a Portfolio
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 Portfolio 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 Portfolio 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.
PORTFOLIO PERFORMANCE
From time to time all the Portfolios, except the Money Market Portfolio,
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 Portfolio. 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 Contract Owner
level. Investors should also review total return calculations that include those
expenses.
The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio 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 Portfolio 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
Portfolio.
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, certain Portfolios 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 Portfolio's net income per share for a 30-day (or one-month)
period (which period will be stated in the advertisement), and dividing by the
maximum offering price per share on the last day of the period. A "bond
equivalent" annualization method is used to reflect a semiannual compounding.
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 Portfolios may include in its sales literature
and shareholder reports a quotation of the current "distribution rate" for
shares of the Portfolio. Distribution rate is a measure of the level of income
and short-term capital gain dividends, if any, distributed for a specified
period. Distribution rate differs from yield, which is a measure of the income
actually earned by the Portfolio'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 Portfolio'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 Portfolio.
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 Portfolio in accordance
36
<PAGE> 90
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 Portfolio's then current dividend rate.
A Portfolio'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 Portfolio, portfolio maturity and
a Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio 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 Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio.
The Adviser may, from time to time, absorb a certain amount of the future
ordinary business expenses. Absorption of a portion of the expenses will
increase the yield or total return of a Portfolio. The Adviser may stop
absorbing these expenses at any time without prior notice.
From time to time the Money Market Portfolio 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 Portfolio refers
to the income generated by an investment in the Portfolio 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
Portfolio 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
December 31, 1996, 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 Portfolio'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.
In reports or other communications to shareholders or in advertising
material, a Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, Salomon Brothers High Grade Bond Index, Standard & Poor's,
NASDAQ, other appropriate indices of investment securities, or with investment
or savings vehicles. The performance information may also include evaluations of
the Portfolio published by nationally recognized ranking services and by
nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Portfolio's
shares. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, do not reflect various charges,
the inclusion of which would reduce Portfolio performance.
37
<PAGE> 91
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The 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. The Trust was reorganized as a business trust under the laws of
Delaware on September 16, 1995 and adopted its current name at that time. The
authorized capitalization of the Trust consists of 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. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust if set forth in the
Statement of Additional Information.
The Trust's Declaration of Trust provides that no Trustee, officer or
shareholder of the Portfolio 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.
The fiscal year end of the Trust is December 31. The Trust sends to its
shareholders at least semi-annually reports showing each Portfolio's portfolio
and other information. An annual report, containing financial statements audited
by the Trust's independent accountants, is sent to shareholders each year. After
the end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to the Van Kampen American Capital
Life Investment Trust, One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attn: Correspondence or by calling (800) 421-5666. For inquiries through
Telecommunications Device for the Deaf (TDD) dial (800) 421-2833.
38
<PAGE> 92
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.
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<PAGE> 93
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.
40
<PAGE> 94
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE PORTFOLIO'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 421-2833
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Life Investment Trust Portfolios
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Life Investment Trust Portfolios
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana
Suite 2900
Houston, TX 77002
<PAGE> 95
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1997
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 96
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1997
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in nine
separate Portfolios, one of which is described herein and offered pursuant to
this Prospectus. 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 may invest in shares of
the Portfolio in accordance with allocation instructions received from Contract
Owners. Such allocation rights are further described in the accompanying
Prospectus for the Contracts. Real Estate Securities Portfolio (the "Portfolio")
(formerly known as the Real Estate Securities Fund) seeks as its primary
investment objective long-term growth of capital. Current income is a secondary
consideration. The Portfolio seeks to achieve its objectives by investing
principally in securities of companies operating in the real estate industry
("Real Estate Securities"). 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 Portfolio's total assets will be invested in Real Estate Securities,
primarily equity securities of real estate investment trusts. There is no
assurance that the Portfolio will achieve its investment objectives.
THE SHARES OF THIS PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS
OF PRINCIPAL.
- --------------------------------------------------------------------------------
This Prospectus tells Contract Owners briefly the information they should
know before allocating premiums or cash value to the Portfolio. Investors should
read and retain this Prospectus for future reference.
A Statement of Additional Information dated April 30, 1997 containing
additional information about the Trust and the Portfolio is hereby incorporated
in its entirety into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 421-2833. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials of the
Trust at the SEC's internet web site (http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 97
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 Parkview Plaza
Oakbrook Terrace, Illinois
60181
INVESTMENT Van Kampen American Capital
ADVISER: One Parkview Plaza
Oakbrook Terrace, Illinois
60181
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary...................... 3
Financial Highlights.................... 5
Introduction............................ 6
Investment Objectives and Policies...... 6
Risk Factors............................ 9
Investment Practices.................... 9
The Trust and Its Management............ 12
Purchase of Shares...................... 14
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Determination of Net Asset Value........ 14
Redemption of Shares.................... 15
Dividends, Distributions and Taxes...... 15
Portfolio Performance................... 16
Description of Shares of the Trust...... 17
Additional Information.................. 18
Appendix................................ 19
</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> 98
PROSPECTUS SUMMARY
Shares Offered..........Shares of beneficial interest.
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Portfolio's primary investment objective is to seek
long-term growth of capital. Current income is a
secondary consideration. There can be no assurance that
the Portfolio will achieve its investment objectives.
Investment Policy and
Risks.................The Portfolio will seek to achieve its investment
objectives by investing 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 least 65% of the
Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate
investment trusts. The Portfolio's investment in debt
securities will be rated, at the time of investment, at
least Baa by Moody's Investors Service, Inc. ("Moody's")
or BBB by Standard & Poor's Corporation Ratings Group
("S&P"), a comparable rating by any other nationally
recognized statistical rating organization or if
unrated, determined by Van Kampen American Capital Asset
Management, Inc. (the "Adviser") to be of comparable
quality. Under normal market conditions, the Portfolio
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 Portfolio's policy of concentrating its
investments in Real Estate Securities, the Portfolio 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 Portfolio 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 Portfolio; 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 Portfolio 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 Objectives and Policies -- Foreign
Securities."
3
<PAGE> 99
The Portfolio may purchase or sell debt securities on a
forward commitment basis. See "Investment
Practices -- Forward Commitments." The Portfolio 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."
Redemption..............At the net asset value next determined after the
portfolio receives a redemption request.
Investment Adviser......Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the Portfolio's investment adviser.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes the Portfolio's shares.
Dividends and
Distributions.........Dividends and any capital gains are distributed at least
annually. All dividends and distributions are
automatically reinvested by the Account in shares of the
Portfolio at net asset value per share. See "Dividends,
Distributions and Taxes."
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
4
<PAGE> 100
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
JULY 3, 1995
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 10.74 $ 10.00
-------
Net Investment Income..................................... .217 .20
Net Realized and Unrealized Gain on Securities............ 4.117 .6325
-------
Total from Investment Operations............................ 4.334 .8325
-------
Less:
Distributions from Net Investment Income.................. (.199) (.0925)
-------
Distributions from Net Realized Gain on Securities........ .091
-------
Total Distributions......................................... .290
-------
Net Asset Value, End of the Period.......................... $14.784 $ 10.74
=======
Total Return*............................................... 40.53% 8.35%(1)
Net Assets at End of the Period (In Millions)............... $ 167.5 $ 8.6
Ratio of Expenses to Average Net Assets*.................... 1.10% 2.50%
Ratio of Net Investment Income to Average Net Assets*....... 5.06% 3.75%
Portfolio Turnover.......................................... 84% 85%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0313 --
* If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets........ 4.89% 3.36%
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was not
required in fiscal periods prior to 1996.
5
<PAGE> 101
INTRODUCTION
The Trust is a duly organized Delaware business trust with nine separate
Portfolios, one of which is described herein and offered pursuant to this
Prospectus. Each Portfolio has separate assets and liabilities and a separate
net asset value per share. Shares of the Portfolio represent an interest only in
that Portfolio. Since market risks are inherent in all securities to varying
degrees, assurance cannot be given that the investment objectives of the
Portfolio will be met.
INVESTMENT OBJECTIVES AND POLICIES
General. The Portfolio's primary investment objective is to provide
shareholders with long-term growth of capital. Current income is a secondary
consideration. The Portfolio 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 Portfolio's total assets will be invested
in Real Estate Securities, primarily equity securities of real estate investment
trusts. The Portfolio'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 Portfolio 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 Portfolio may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Portfolio 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 Portfolio may invest up to 25% of its assets in securities issued by
foreign issuers. See "Investment Objectives and Policies -- Foreign Securities."
The Portfolio 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 Portfolio may invest up to 100% of
its total assets in short-term investments as described below. The Portfolio
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 Portfolio will achieve its investment
objectives.
6
<PAGE> 102
The investment objectives and policies, the percentage limitations, and the
kinds of securities in which the Portfolio may invest are generally not
fundamental policies and may be changed by the Trustees, unless expressly
governed by certain limitations as described under "Investment
Practices -- Investment Restrictions" which can be changed only by action of the
shareholders. If there is a change in the objectives of the Portfolio,
shareholders should consider whether the Portfolio remains an appropriate
investment in light of their then current financial position and needs.
Short-Term Investments. The Portfolio 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 Portfolio 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.
Foreign Securities. The Portfolio may invest up to 25% of the value of its
total assets in securities issued by foreign issuers. 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 the
Portfolio 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 the Portfolio's assets denominated in that currency and the Portfolio's
yield on such assets.
The Portfolio may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. The Portfolio 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 the Portfolio may be subject to foreign withholding taxes,
which would reduce the Portfolio's total return on such investments and the
amounts available for distributions by the Portfolio 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
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temporary periods when assets of the Portfolio are not invested and no return is
earned thereon. The inability of the Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the
Portfolio due to subsequent declines in value of the portfolio security or, if
the Portfolio 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 Portfolio 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 the Portfolio'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
Portfolio will incur costs in connection with conversions between various
currencies. The Portfolio'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 Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. The Portfolio does not purchase and sell foreign currencies as
an investment.
The Portfolio 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.
The Portfolio 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
Portfolio purchases a foreign security traded in the hedged currency which the
Portfolio 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. The Portfolio will not speculate in foreign currency forward or
futures contracts or through the purchase and sale of foreign currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the forward
contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
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RISK FACTORS
Although the Portfolio does not invest directly in real estate, an
investment in the Portfolio 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 Portfolio has rental income or income
from the disposition of real property acquired as a result of a default on
securities the Portfolio 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
Internal Revenue Code of 1986, as amended (the "Code") and to maintain exemption
from the Investment Company Act of 1940 as amended (the "1940 Act"). Changes in
interest rates may also affect the value of the debt securities in the
Portfolio's portfolio. Like investment companies such as the Portfolio, real
estate investment trusts are not taxed on income distributed to shareholders
provided they comply with several requirements of the Code. The Portfolio 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
Portfolio.
Because of the Portfolio's policy of concentrating its investments in Real
Estate Securities, the Portfolio 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 Portfolio's investment practices and the
risks associated with such practices are contained in "Investment Practices"
herein and in the Statement of Additional Information.
INVESTMENT PRACTICES
Repurchase Agreements. The Portfolio 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 Portfolio) 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 the holding period. The
Portfolio will not invest more than 15% of its net assets in repurchase
agreements that do not mature within seven days and in any other illiquid
securities. Repurchase agreements involve certain risks in the event of a
default by the other party. In the event of the bankruptcy or other default of
the seller of a repurchase agreement, the Portfolio 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 Portfolio seeks to enforce its rights thereto, (b) possible lack of access
to income on the underlying security during this period, and (c) expenses of
enforcing its rights. See the Statement of Additional Information.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested and the funds
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that contributed to the joint account share pro rata in the net revenue
generated. The Adviser believes that the joint account produces efficiencies and
economies of scale that may contribute to reduced transaction costs, higher
returns, higher quality investments and greater diversity of investments for the
Portfolio than would be available to the Portfolio investing separately. The
manner in which the joint account is managed is subject to conditions set forth
in the SEC exemptive order authorizing this practice, which conditions are
designed to ensure the fair administration of the joint account and to protect
the amounts in that account.
Portfolio Transactions and Brokerage Practices. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Portfolio 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 debt securities in the Portfolio's
portfolio generally are traded in the over-the-counter market through dealers. A
dealer is a securities firm or bank which makes a market for securities by
opening a position at one price and closing the position at a slightly more
favorable price. The difference between the prices is known as a spread. Foreign
currency and forward currency exchange contracts are traded in a similar fashion
in a dealer market maintained primarily by large commercial banks. The Portfolio
will pay brokerage commissions in connection with transactions in
exchange-traded options, futures contracts and related options. Spreads or
commissions for transactions executed in foreign markets often are higher than
in the United States. The Adviser is authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the
Portfolio and other Van Kampen American Capital mutual funds if it reasonably
believes that the quality of the execution and the commission are comparable to
that available from other qualified brokerage firms. The Adviser is authorized
to pay higher commissions to brokerage firms that provide it with investment and
research information than to firms which do not provide such services if the
Adviser determines that such commissions are reasonable in relation to the
overall services provided. The Information received may be used by the Adviser
in managing the assets of other advisory accounts as well as in the management
of the assets of the Portfolio.
Portfolio Turnover. The Portfolio 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 transaction in options, futures contracts and options
on futures contracts on behalf of the Portfolio. The annual turnover rate of the
Portfolio is shown under "Financial Highlights." Higher portfolio turnover
involves correspondingly greater transaction costs, including any brokerage
commissions, which are borne directly by the Portfolio. In addition, higher
portfolio turnover may increase the recognition of short-term, rather than
long-term, capital gains. See "Dividends, Distributions and Taxes."
Restricted Securities. The Portfolio may invest up to 15% of its net
assets in restricted securities and other illiquid assets. As used herein,
restricted securities are those that have been sold in the United States without
registration under the Securities Act of 1933 ("1933 Act") 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 1933 Act 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 Portfolio'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 Portfolio to
the extent that qualified
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institutional buyers become for a time uninterested in purchasing these
restricted securities. These difficulties and delays could result in the
Portfolio'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 Portfolio impossible. Since market
quotations are not readily available for restricted securities, such securities
will be valued by a method that the Portfolio's Trustees believes accurately
reflects fair value.
Using Options, Futures Contracts and Options on Futures Contracts. The
Portfolio may purchase or sell options, futures contracts or options on futures
contracts. The Portfolio expects to utilize options, futures contracts and
options thereon in several different ways, depending upon the status of the
Portfolio'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 the Portfolio, if the Adviser is not successful in employing
such instruments in managing the Portfolio's investments, the Portfolio's
performance will be worse than if the Portfolio did not make such investments.
In addition, the Portfolio would pay commissions and other costs in connection
with such investments, which may increase the Portfolio's expenses and reduce
its return. The Portfolio is authorized to purchase and sell over-the-counter
options ("OTC Options"). OTC Options are purchased from or sold to securities
dealers, financial institutions or other parties ("Counterparty") through direct
bilateral agreement with the Counterparty. The Portfolio will sell only OTC
Options (other than over-the-counter currency options) that are subject to a
buy-back provision permitting the Portfolio to require to the Counterparty to
sell the option back to the Portfolio at a formula price within seven days. The
staff of the SEC currently takes the position that, in general, OTC Options on
securities other than U.S. Government securities purchased by the Portfolio, and
portfolio securities covering OTC Options sold by the Portfolio, are illiquid
securities subject to the Portfolio's limitation on illiquid securities
described below. The Portfolio may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceeded 5%
of the fair market value of the Portfolio's assets.
In order to prevent leverage in connection with the purchase of futures
contracts or call options thereon by the Portfolio, an amount of cash or liquid
securities equal to the market value of the obligation under the futures
contract or option (less any related margin deposits) will be maintained in a
segregated account with the Custodian. The Portfolio may not invest more than
15% of its net assets in illiquid securities and repurchase agreements which
have a maturity of longer than seven days. A more complete discussion of the
potential risks involved in transactions in options, futures contracts and
options on futures contracts is contained in the Statement of Additional
Information.
Forward Commitments. The Portfolio may purchase or sell debt securities on
a "when-issued" or "delayed delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Portfolio with
payment and delivery taking place in the future, frequently a month or more
after such transaction. This 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 take place. At the time of settlement, the
market value of the securities may be more or less than the purchase or sale
price.
The Portfolio may either settle a Forward Commitment by taking delivery of
the securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Portfolio may reinvest the
proceeds in another Forward Commitment. The Portfolio's use of Forward
Commitments may increase its overall investment exposure and thus its potential
for gain or loss. When engaging in Forward Commitments, the Portfolio relies on
the other party to complete the transaction. Should the other party fail to do
so, the Portfolio might lose a purchase or
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sale opportunity that could be more advantageous than alternative opportunities
at the time of the failure.
The Portfolio maintains a segregated account (which is marked to market
daily) of cash, liquid securities or the security covered by the Forward
Commitment (in the case of a Forward Currency sale) with the Portfolio's
custodian in an aggregate amount equal to the amount of its commitment as long
as the obligation to purchase or sell continues.
Investment Restrictions. The Portfolio has adopted a number of investment
restrictions that may not be changed without the approval of the holders of a
majority of the Portfolio's shares. See the Statement of Additional Information.
The percentage limitations need only be met at the time the investment is made
or other relevant action taken. These restrictions provide, among other things,
that the Portfolio may not:
1. 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 10% 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.
2. With respect to 75% of its total assets, invest more than 5% 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 10% of the outstanding voting securities of any one
issuer, except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
3. 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.
4. Concentrate its investment in any one industry, except that the
Portfolio 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 Portfolio but includes the Portfolio's pro rata
portion of the securities and other assets owned by such company.
The Portfolio may, notwithstanding any other fundamental investment policy
or limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Portfolio.
THE TRUST AND ITS MANAGEMENT
The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. A mutual fund provides, for those who have
similar investment goals, a practical and convenient way to invest in a more
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
The Trustees have the responsibility for overseeing the affairs of the
Portfolio. The Adviser is responsible for the provision of advisory services in
relation to the Portfolio's assets. The Adviser also provides administrative
services and manages the Portfolio's business and affairs. The Adviser, together
with its predecessors, has been in the investment advisory business since 1926
and has served as investment adviser to the Portfolio since its inception.
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THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc. ("Van Kampen American Capital"). Van Kampen American
Capital is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $57 billion under management or supervision. Van
Kampen American Capital's more than 40 open-end and 38 closed-end funds and more
than 2,500 unit investment trusts are professionally distributed by leading
financial advisers nationwide. Van Kampen American Capital Distributors, Inc.
(the "Distributor"), the distributor of the Trust's shares, is also a
wholly-owned subsidiary of Van Kampen American Capital. Van Kampen American
Capital is an indirect wholly-owned subsidiary of Morgan Stanley Group Inc. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover &
Co. announced that they had entered into an Agreement and Plan of Merger to form
a new company to be named Morgan Stanley, Dean Witter, Discover & Co. Subsequent
to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, Van Kampen American Capital
Asset Management, Inc. will be an indirect subsidiary of Morgan Stanley, Dean
Witter, Discover & Co.
Dean Witter, Discover & Co. is a financial services company with three
major businesses: full service brokerage, credit services and asset management
of more than $100 billion in customer accounts.
ADVISORY AGREEMENT. The Trust retains the Adviser to manage the investment
of its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement (the "Advisory Agreement"),
the Trust pays the Adviser a monthly fee computed on average daily net assets of
the Portfolio at the annual rate of 1.00% of the Portfolio'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 Portfolio and is
not necessarily higher than the fees charged by certain mutual funds with
investment objectives and policies similar to those of the Portfolio. Under the
Advisory Agreement, the Trust also reimburses the Adviser for the cost of the
Portfolio's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Operating expenses paid
by the Portfolio include shareholder service agency fees, custodian fees, legal
and accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons, as defined in the 1940 Act,
of the Adviser, the Distributor or Van Kampen American Capital) and all other
business expenses not specifically assumed by the Adviser. For the fiscal year
ended December 31, 1996, advisory fees plus the cost of accounting services
payable by the Trust on behalf of the Portfolio was $1.10%.
From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse the Portfolio for ordinary
business expenses in excess of an agreed upon amount.
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.
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PORTFOLIO MANAGEMENT. Russell C. Plant and Theodore R. Bigman assumed
responsibility for the day-to-day management of the Portfolio's investment
portfolio effective January 1, 1997. Mr. Platt became Executive Vice President
of the Advisor on December 31, 1996. Since 1994, Mr. Platt has also been a
Principal, and as of December 1, 1996, a Managing Director, of Morgan Stanley
Asset Management Inc. ("MSAM") where he has primary responsibility for managing
the real estate securities investment business for MSAM and serves as a member
of the Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF").
From 1991 to 1993, Mr. Platt was head of Morgan Stanley Realty's Transaction
Development Group. From 1990 to 1991, Mr. Platt was based in Morgan Stanley
Realty's London Office. Prior to this he had extensive transaction
responsibilities involving portfolio, retail, office, hotel and apartment sales
and financings. Mr. Bigman became Senior Vice President of the Adviser on
December 31, 1996. Since 1995, Mr. Bigman has also been a Vice President, and as
of December 1, 1996, a Principal, of MSAM where, together with Mr. Platt, he is
responsible for MSAM's real estate securities research. Prior to joining MSAM,
he was a Director at CS First Boston, where he worked for eight years in the
Real Estate Group.
PURCHASE OF SHARES
The Trust is offering its shares only to 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 the Portfolio to the Accounts at prices equal to
the respective per share net asset value of the Portfolio. The Distributor,
located at One Parkview 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 the Portfolio 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 per share is determined by dividing the value of the
Portfolio's securities, cash and other assets (including accrued interest)
attributable to such class less all liabilities (including accrued expenses)
attributable to such class, by the total number of shares of the class
outstanding. Such computation is made by using prices as of the close of trading
on the Exchange and (i) valuing securities listed or traded on a national
securities exchange at the last reported sale price, (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, (iii) unlisted securities and listed securities for which the last
sale price is not available are valued at the last reported bid price, (iv)
options and futures contracts are valued at the last sale price or if no sales
are reported, at the mean between the bid and asked prices, and (v) valuing any
securities for which market quotations are not readily available, and any other
assets at fair value as determined in good faith by the Trustees of the Trust.
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 using the value of the investment on the 61st day.
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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 the Portfolio is subject to daily
fluctuations and the net asset value of the Portfolio'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 the Portfolio are
automatically reinvested by the Account in additional shares of the Portfolio.
Dividends and Distributions. Dividends from stocks and interest earned
from other investments are the main source of income for the Portfolio.
Substantially all of this income, less expenses, is distributed on an annual
basis. When the Portfolio 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 Portfolio 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. The Portfolio distributes any net realized capital gains to the
Account no less frequently than annually.
The Portfolio intends to qualify as a "regulated investment company" under
the Code. By maintaining its qualification as a "regulated investment company,"
the Portfolio 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, the Portfolio is not subject to federal income
taxes to the extent it distributes its taxable net investment income and taxable
net realized capital gains. If for any taxable year the Portfolio 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).
Dividends and distributions paid by the Portfolio have the effect of
reducing net asset value per share on the record date by the amount of the
payment. Therefore, a dividend or distribution paid shortly after the purchase
of shares by an investor would represent, in substance, a return of capital to
the shareholder (to the extent it is paid on the shares so purchased) even
though subject to income taxes as discussed above.
Tax Treatment to Insurance Company as Shareholder. Dividends paid by the
Portfolio from its ordinary income and distributions of the Portfolio'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 the Portfolio
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. However, a
dividend received from a real estate investment trust does not qualify for the
dividend received deduction. 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 the
Portfolio'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.
15
<PAGE> 111
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.
Tax Treatment of Options and Futures Transactions. Gains or losses on the
Portfolio's 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 the Portfolio 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
the Portfolio 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 the
Portfolio 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.
PORTFOLIO PERFORMANCE
From time to time the Portfolio may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one, five and ten year periods or for the life of the
Portfolio. 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 Contract Owner level. Investors should also review
total return calculations that include these expenses.
The total return of the Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio 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 Portfolio 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
Portfolio.
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 Portfolio may also advertise
its current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Portfolio's net income per share for a 30-day (or one-month) period (which
period will be stated in the advertisement), and dividing by the maximum
offering price per share on the last day of the period. A "bond equivalent"
annualization method is used to reflect a semiannual compounding. 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, the Portfolio may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for shares of
the Portfolio. Distribution rate is a measure of the level of income and
short-term capital gain dividends, if any, distributed for a specified period.
Distribution rate differs from yield, which is a measure of the income actually
earned by the Portfolio'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
Portfolio'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 Portfolio.
16
<PAGE> 112
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Portfolio 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 the Portfolio's then current dividend rate.
The Portfolio's yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by the Portfolio, portfolio maturity
and the Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Portfolio's shares, the Portfolio's investment policies, and the
risks of investing in shares of the Portfolio. The investment return and
principal value of an investment in the Portfolio will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
The Adviser may, from time to time, absorb a certain amount of the future
ordinary business expenses. Absorption of a portion of the expenses will
increase the yield or total return of the Portfolio. The Adviser may stop
absorbing these expenses at any time without prior notice.
In reports or other communications to shareholders or in advertising
material, the Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, Salomon Brothers High Grade Bond Index, Standard & Poor's,
NASDAQ, other appropriate indices of investment securities, or with investment
or savings vehicles. The performance information may also include evaluations of
the Portfolio published by nationally recognized ranking services and by
nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, do not reflect various charges,
the inclusion of which would reduce Portfolio performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The 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 of 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. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
17
<PAGE> 113
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust if set forth in the
Statement of Additional Information.
The Trust's Declaration of Trust provides that no Trustee, officer or
shareholder of the Portfolio 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.
The fiscal year end of the Trust is December 31. The Trust sends to its
shareholders at least semi-annually reports showing each Portfolio's portfolio
and other information. An annual report, containing financial statements audited
by the Trust's independent accountants, is sent to shareholders each year. After
the end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to the Van Kampen American Capital
Life Investment Trust, One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attn: Correspondence or by telephoning (800) 421-5666. For inquiries through
Telecommunications Device for the Deaf (TDD) dial (800) 421-2833.
18
<PAGE> 114
APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
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 length of time. Such bonds lack outstanding investment
characteristics and in fact, have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NONRATED -- Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
19
<PAGE> 115
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 CORPORATION
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- B -- CCC -- CC -- C -- Debt rated BB, B, CCC, CC and C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR -- Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS:
Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.
20
<PAGE> 116
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE PORTFOLIO'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 421-2833
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
REAL ESTATE SECURITIES PORTFOLIO
- ------------------
One Parkview Plaza
Oakbrook Terrace, IL 60181
- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Life Investment Trust
Real Estate Securities Portfolio
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Life Investment Trust
Real Estate Securities Portfolio
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana
Suite 2900
Houston, TX 77002
<PAGE> 117
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
REAL ESTATE SECURITIES PORTFOLIO
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1997
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 118
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1997
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
Van Kampen American Capital Life Investment Trust, (the "Trust"), is a
diversified, open-end management investment company with nine Portfolios (the
"Portfolios"): Asset Allocation Portfolio (formerly Multiple Strategy Fund),
Domestic Income Portfolio (formerly Domestic Strategic Income Fund), Emerging
Growth Portfolio (formerly Emerging Growth Fund), Enterprise Portfolio (formerly
Common Stock Fund), Global Equity Portfolio (formerly Global Equity Fund),
Government Portfolio (formerly Government Fund), Growth and Income Portfolio
(formerly Growth and Income Fund), Money Market Portfolio (formerly Money Market
Fund) and Real Estate Securities Portfolio (formerly Real Estate Securities
Fund). Each Portfolio is in effect a separate mutual fund issuing its own
shares.
---------------------
This Statement of Additional Information is not a Prospectus. This
Statement of Additional Information should be read in conjunction with the
Trust's applicable prospectus (the "Prospectus") dated as of the same date as
this Statement of Additional Information. This Statement of Additional
Information does not include all the information a prospective investor should
consider before purchasing shares of the Trust. Investors should obtain and read
a Prospectus containing disclosure with respect to the Portfolio in which the
investor wishes to invest prior to purchasing shares of such Portfolio. A
Prospectus may be obtained without charge by writing or calling Van Kampen
American Capital Distributors, Inc. (the "Distributor") at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objectives and Policies.......................... B-5
Repurchase Agreements....................................... B-11
Forward Commitments......................................... B-11
Depositary Receipts......................................... B-12
Options, Futures Contracts and Options on Futures
Contracts................................................. B-12
Loans of Portfolio Securities............................... B-19
Investment Restrictions..................................... B-19
Trustees and Officers....................................... B-32
Legal Counsel............................................... B-41
Investment Advisory Agreements.............................. B-41
Distributor................................................. B-43
Transfer Agent.............................................. B-44
Portfolio Transactions and Brokerage........................ B-44
Portfolio Turnover.......................................... B-46
Determination of Net Asset Value............................ B-46
Purchase and Redemption of Shares........................... B-47
Tax Status of the Trust..................................... B-47
Portfolio Performance....................................... B-48
Money Market Portfolio Yield Information.................... B-49
Other Information........................................... B-50
Appendix.................................................... B-51
Report of Independent Accountants........................... B-53
Financial Statements........................................ B-54
Notes to Financial Statements............................... B-107
</TABLE>
This Statement of Additional Information is dated April 30, 1997.
<PAGE> 119
GENERAL INFORMATION
Van Kampen American Capital Life Investment Trust (the "Trust") was
organized under the laws of the Commonwealth of Massachusetts on June 3, 1985.
As of September 16, 1995, the Trust was reorganized as a Delaware business trust
and adopted its current name.
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 a wholly-owned subsidiary of MSAM Holdings
II, Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley Group
Inc. The principal office of the Fund, the Adviser, the Distributor and VKAC is
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover &
Co. announced that they had entered into an Agreement and Plan of Merger to form
a new company to be named Morgan Stanley, Dean Witter, Discover & Co. Subsequent
to certain conditions being met, it is currently anticipated that the
transaction will close in mid-1997. Thereafter, Van Kampen American Capital
Asset Management, Inc. will be an indirect subsidiary of Morgan Stanley, Dean
Witter, Discover & Co.
Dean Witter, Discover & Co. is a financial services company with three
major businesses: full service brokerage, credit services and asset management
of more than $100 billion in customer accounts.
As of April 4, 1997 no person was known by the Trust to own beneficially or
to hold of record 5% or more of the outstanding shares of any portfolio except
as set forth below. The Trust offers its shares 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 Contract Owners,
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.
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT APRIL 4, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
ASSET ALLOCATION FUND
Nationwide Life Insurance Co. 2,163,177 40.19%
Nationwide VL1 -- Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 2,963,445 55.06%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
</TABLE>
B-2
<PAGE> 120
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT APRIL 4, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
MONEY MARKET PORTFOLIO
American General Life Insurance Company 4,810,617 20.30%
Separate Account D
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide Life Insurance Co. 9,412,694 39.72%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 8,752,699 36.93%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
ENTERPRISE PORTFOLIO
American General Life Insurance Company 771,000 15.29%
Separate Account -- D
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide Life Insurance Co. 2,130,742 42.24%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 1,762,536 34.94%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
American General Life Insurance Company 354,084 7.02%
Separate Account D
Variety Plus
P.O. Box 31591
Houston, Texas 77251-1591
GLOBAL EQUITY FUND
Van Kampen American Capital 95,241 42.40%
Distributors, Inc.
One Chase Manhattan Plaza
37th Fl.
New York, NY 10005
Nationwide Life Insurance Co. 83,146 37.02%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
B-3
<PAGE> 121
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT APRIL 4, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
GOVERNMENT PORTFOLIO
Nationwide Life Insurance Co. 5,485,478 87.01%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 658,578 10.45%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
DOMESTIC INCOME PORTFOLIO
American General Life Insurance Company 601,973 28.15%
Separate Account D
P.O. Box 1591
Houston, Texas 77251-1591
Nationwide Life Insurance Co. 257,365 12.04%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
Nationwide Life Insurance Co. 1,169,249 54.68%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, Ohio 43218-2029
EMERGING GROWTH PORTFOLIO
Van Kampen American Capital 36,438 10.16%
Generations Variable Annuities
7501 NW Tiffany Springs Parkway
Kansas City, MO 64153-1386
Nationwide Life Insurance Co. 183,089 51.07%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 36,438 10.16%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
REAL ESTATE SECURITIES PORTFOLIO
Nationwide Life Insurance Co. 12,661,070 94.76%
Nationwide Variable Account II
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
B-4
<PAGE> 122
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO
RECORD HOLDER AT APRIL 4, 1997 PERCENT
------------------- -------------------------- -------
<S> <C> <C>
GROWTH AND INCOME PORTFOLIO
Van Kampen American Capital Distributors, Inc. 50,021 34.68%
One Chase Manhattan Plaza
37th Fl.
New York, NY 10005-1401
Van Kampen American Capital 94,206 65.32%
Generations Variable Annuities
7501 NW Tiffany Springs Parkway
Kansas City, MO 64153-1386
</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.
ASSET ALLOCATION FUND
The Fund seeks a high total investment return consistent with prudent risk
through a fully managed investment policy utilizing equity securities as well as
investment grade intermediate and long-term debt securities and money market
securities.
DOMESTIC INCOME PORTFOLIO
The primary objective of the Portfolio is to maximize current income.
Capital appreciation is a secondary objective, which is sought only when
consistent with the primary objective. There is, of course, no assurance that
the Portfolio 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 Portfolio'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 Portfolio's portfolio or a general increase in interest rates
would be expected to reduce the value of the Portfolio's investments.
The Portfolio 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 Ratings Group
("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
Portfolio'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
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value of the company's assets. In making portfolio decisions for the Portfolio,
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 Portfolio 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 Portfolio
will not cause more than 10% of its total assets to be invested in common stocks
or other equity securities. See "Investment Objectives and Policies -- Domestic
Income Portfolio," in the Prospectus.
Certain of the lower rated debt securities in which the Portfolio 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 Portfolio 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".
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 Portfolio 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 PORTFOLIO
The investment objective of the Portfolio is to seek capital appreciation
by investing in a portfolio of securities consisting principally of common
stocks of small and medium sized companies considered by the Adviser to be
emerging growth companies.
The following investment techniques, subject to the Investment Restrictions
below, may be employed by the Portfolio. 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 Portfolio may invest up to 15% of the value of
its net assets in restricted securities (i.e., securities which may not be sold
without registration 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
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determined in good faith by the Portfolio's Trustees. Ordinarily, the Portfolio
would invest in restricted securities only when it receives the issuer's
commitment to register the securities without expense to the Portfolio. 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 Portfolio.
A Portfolio position in restricted securities might adversely affect the
liquidity and marketability of such securities, and the Portfolio 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.
ENTERPRISE PORTFOLIO
The investment objective of the Portfolio is to seek capital appreciation
through investments in securities believed by the Adviser to have about average
potential for capital appreciation. Any income received on such securities is
incidental to the objective of capital appreciation. The Portfolio may enter
into repurchase agreements with banks and broker-dealers. See "Repurchase
Agreements."
In seeking to obtain capital appreciation, the Portfolio may trade to a
substantial degree in securities for the short term. To this extent, the
Portfolio would be engaged essentially in trading operations based on
expectation of short-term market movements. However, the Portfolio also seeks
investments which are expected to appreciate over a longer period of time. See
"Portfolio Transactions and Brokerage."
GLOBAL EQUITY FUND
The investment objective of the Fund is to seek 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 PORTFOLIO
The investment objective of the Portfolio is to seek to provide investors
with a high current return consistent with preservation of capital. The
Portfolio invests primarily in U.S. Government securities, related options,
futures contracts and options on futures contracts. The Portfolio 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 representing
"stripped" mortgage-related securities. Repurchase agreements will be entered
into with domestic banks or broker-dealers deemed creditworthy by the
Portfolio's Adviser solely for purposes of investing the Portfolio's cash
reserves or when the Portfolio is in a temporary defensive posture.
One type of mortgage-related securities in which the Portfolio 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 Portfolio may invest is a Federal Home Loan Mortgage
Association ("FHLMC")
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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 Portfolio seeks to obtain a high return from the following sources:
- interest paid on the Portfolio'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 Portfolio 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 Portfolio'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 Portfolio 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 Portfolio
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.
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 1% of
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the outstanding principal for providing its guarantee, and the GNMA Certificate
issuer is paid an annual servicing fee of 0.44 of 1% 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 1% more than
high grade corporate bonds and 1/2 of 1% 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 ("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
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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 of
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.
GROWTH AND INCOME PORTFOLIO
The investment objective of the Portfolio is to seek long-term growth of
capital and income. The Portfolio seeks to achieve its investment objective by
investing in income-producing equity securities, including common stocks and
convertible securities.
MONEY MARKET PORTFOLIO
The investment objective of the Portfolio is to seek protection of capital
and high current income through investments in money market instruments.
The Portfolio seeks to maintain a net asset value of $1.00 per share for
purchases and redemptions. To do so, the Portfolio uses the amortized cost
method of valuing the Portfolio'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 Portfolio is required to maintain a
dollar-weighted average portfolio maturity of 90 days or less, purchase only
instruments having remaining maturities of thirteen 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 Portfolio may
purchase are Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Fitch Investors Services, Inc., Duff and Phelps, Inc. and IBCA Limited and IBCA
Inc. See Appendix hereto. See the Prospectus for the Portfolio's maturity
requirements.
In addition, the Portfolio 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
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issuer, except that (i) the Portfolio 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 Portfolio 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 10% of the Portfolio'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 Portfolio's total assets, with the investment in any one such
issuer being limited to no more than the greater of one percent of the
Portfolio's total assets or $1,000,000. As to each security, these percentages
are measured at the time the Portfolio purchases the security. There can be no
assurance that the Portfolio will be able to maintain a stable net asset value
of $1.00 per share.
REAL ESTATE PORTFOLIO
As its primary objective, the Portfolio seeks long-term growth of capital
by investing principally in securities of companies operating in the real estate
industry. Current income is a secondary consideration. The following disclosures
supplement disclosures set forth in the Prospectus. Readers must refer also to
the Prospectus for a complete presentation.
REPURCHASE AGREEMENTS
Each Portfolio 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
Portfolio) 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 Portfolio 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 Portfolio does not bear the risk of a decline in value
of the underlying security unless the seller defaults under its repurchase
obligation. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Portfolio could experience both delays in liquidating
the underlying securities and loss including: (a) possible decline in the value
of the underlying security during the period while a Portfolio seeks to enforce
its rights thereto, (b) possible lack of access to income on the underlying
security during this period, and (c) expenses of enforcing its rights. See the
Prospectus for further information.
FORWARD COMMITMENTS
The Government Portfolio, the Domestic Income Portfolio and the Real Estate
Securities Portfolio may engage in Forward Commitment purchases and sales.
Relative to a Forward Commitment purchase, the Portfolio 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 Portfolio'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 Portfolio's net asset value.
A Forward Commitment sale is covered if the Portfolio 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 or
currency which
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the Portfolio owns or has the right to acquire. Only the Government Portfolio
and the Real Estate Securities Portfolio may engage in forward commitment
transactions for cross-hedging purposes. In either circumstance, the Portfolio
maintains 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 no longer than the term of the Forward Commitment) with the
Portfolio'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 Portfolio foregoes or reduces the
potential for both gain and loss in the security which is being hedged by the
Forward Commitment sale. See the Prospectus for further information.
DEPOSITARY RECEIPTS
Certain Portfolios 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 Portfolios except the Domestic Income Portfolio and the Money
Market Portfolio 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. See the
Prospectus for further information.
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 Portfolio'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 Portfolio writes call
options only on a covered basis and only the Government Portfolio 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 Portfolio 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 Portfolio
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 Portfolio owns or has the right to acquire. In such circumstances, the
Portfolio collateralizes the option by maintaining in a segregated account with
the Portfolio's Custodian, cash or liquid 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 Portfolio would write put options
only on a secured basis, which means that, at all times during the option
period, the Portfolio would maintain in a segregated account with its Custodian
cash or liquid 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.
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Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, a Portfolio 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 Portfolio. The
Portfolio would realize a gain (loss) if the premium plus commission paid in the
closing purchase transaction is less (greater) than the premium it received on
the sale of the option. A Portfolio would also realize a gain if an option it
has written lapses unexercised.
A Portfolio could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A
Portfolio 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 Portfolio 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 Portfolio 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 Portfolio loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Portfolio 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 Portfolio could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. In
addition, the Emerging Growth Portfolio, the Enterprise Portfolio, the Growth
and Income Portfolio and the Real Estate Securities Portfolio 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
Portfolio 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 Portfolio would bear a significant risk of losing the entire premium
if the price of the underlying security did not rise sufficiently, or if it did
not do so before the option expired.
Put options may be purchased to protect (i.e., hedge) against anticipated
declines in the market value of either specific portfolio securities or of a
Portfolio's assets generally. In addition, the Emerging Growth Portfolio, the
Enterprise Portfolio, the Growth and Income Portfolio and the Real Estate
Securities Portfolio 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 Portfolio's volatility by increasing the impact of changes in the
market price of the underlying securities on the Portfolio's net asset value.
The Government Portfolio 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 Portfolio may purchase either listed or over-the-counter options.
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RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
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
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 Portfolio 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 Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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 Portfolio closes its position or replaces such
mortgage-related security, it may realize an unanticipated loss and incur
transaction costs.
OPTIONS ON STOCK INDEXES (ASSET ALLOCATION PORTFOLIO, EMERGING GROWTH PORTFOLIO,
ENTERPRISE PORTFOLIO, GLOBAL EQUITY PORTFOLIO, GROWTH AND INCOME PORTFOLIO AND
REAL ESTATE SECURITIES PORTFOLIO 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 Portfolio 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.
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FOREIGN CURRENCY OPTIONS
Certain Portfolios 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 Portfolio'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 traded on United States and foreign
exchanges. Exchange-traded options are expected to be purchased by the Portfolio
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 investment generally. See "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts" 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 Portfolios 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
Portfolios 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.
The Portfolio also may invest in foreign stock index futures traded outside
the United States. Such 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
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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.
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 Portfolio is required to deposit with its Custodian in an
account in the broker's name an amount of cash or liquid securities equal to a
percentage (which will normally range between 2% and 10%) of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Portfolio 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 Portfolio purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Portfolio receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Portfolio purchases a futures contract
and the value of the underlying security or index declines, the position is less
valuable, and the Portfolio is required to make a variation margin payment to
the broker.
At any time prior to expiration of the futures contract, the Portfolio 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 Portfolio, and the Portfolio realizes a loss or a
gain.
Futures Strategies. When a Portfolio 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 Portfolio is
otherwise 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 Portfolio 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 Portfolio's securities
("defensive hedge"). To the extent that the Portfolio'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 Portfolio of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the Portfolio with attendant transaction costs. Relative
to the Government Portfolio, ordinarily commissions on futures transactions are
lower than transaction costs incurred in the purchase and sale of securities.
In the event of the bankruptcy of a broker through which a Portfolio
engages in transactions in options, futures or related options, the Portfolio
could experience delays or losses in liquidating open positions purchased or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by a Portfolio 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
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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 Portfolio 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 Portfolio 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 Portfolio could
decline at the same time as portfolio securities being hedged; if this occurred,
the Portfolio 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, currency 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 Portfolio 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
Portfolio 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 Portfolio 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 Portfolio hedges against a decline in the market, and market prices instead
advance, the Portfolio 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 Portfolio 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 Portfolio not enter
into futures and related options for which the aggregate initial margin and
premiums exceed 5% of the fair market value of a Portfolio's assets. In order to
prevent leverage in connection with the purchase of futures contracts by a
Portfolio, an amount of cash or liquid 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.
Additional Risks of Options and Futures Transactions. Each of the United
States exchanges has established limitations governing the maximum number of
call or put options on the same underlying security or futures contract (whether
or not covered) which may be sold by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are
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held or written on one or more accounts or through one or more brokers). Option
positions of all investment companies advised by the Adviser are combined for
purposes of these limits. An exchange may order the liquidation of positions
found to be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Portfolio may write.
Although the Portfolio intends to enter into futures contracts only if
there is an active market for such contracts, there is no assurance that an
active market will exist for the contracts at any particular time. Most U.S.
futures exchanges and boards of trade limit the amount of fluctuation permitted
in futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Portfolio would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value of
the portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract. Option on futures contracts to be sold or purchased by the
Portfolio will be traded on United States or foreign exchange or
over-the-counter.
OPTIONS ON FUTURES CONTRACTS
A Portfolio 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 Portfolio is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by a Portfolio 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 Portfolio 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 Portfolio. The purchase of call
options on futures contracts is intended to serve the same purpose as the actual
purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The 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
Portfolio 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 Portfolio 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 Portfolio 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,
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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
Portfolio 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 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
Portfolio'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.
LOANS OF PORTFOLIO SECURITIES
Each of the Portfolios, except the Real Estate Securities Portfolio, may
lend an amount up to 10% 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 Portfolio and is maintained each business day.
While such securities are on loan, the borrower is required to pay the Portfolio
any income accruing thereon. Furthermore, the Portfolio may invest the cash
collateral in portfolio securities thereby increasing the return to the
Portfolio as well as increasing the market risk to the Portfolio.
Loans would be made for short-term purposes and subject to termination by
the Portfolio 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
Portfolio and its shareholders, but any gain can be realized only if the
borrower does not default. Each Portfolio may pay reasonable finders',
administrative and custodial fees in connection with a loan.
INVESTMENT RESTRICTIONS
Each Portfolio has adopted the following restrictions which may not be
changed without approval by the vote of a majority of its outstanding voting
shares; which 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 Portfolio are present or represented by
proxy; or (ii) more than 50% of the Portfolio's
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outstanding voting securities. The percentage limitations need only be met at
the time the investment is made or after relevant action is taken. The
Portfolios are subject to the restrictions set forth below (Those restrictions
that are only applicable to certain Portfolios are noted as such).
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE ASSET ALLOCATION PORTFOLIO, THE
DOMESTIC INCOME PORTFOLIO, THE EMERGING GROWTH PORTFOLIO, THE ENTERPRISE
PORTFOLIO, THE GLOBAL EQUITY PORTFOLIO, THE GOVERNMENT PORTFOLIO, THE GROWTH AND
INCOME PORTFOLIO AND THE MONEY MARKET PORTFOLIO:
A Portfolio shall not:
1. Invest in securities of any company if any officer or trustee of the
Portfolio or of the Adviser owns more than 1/2 of 1% of the outstanding
securities of such company, and such officers and trustees own more than
5% of the outstanding securities of such issuer;
2. Invest in companies for the purpose of acquiring control or management
thereof except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
3. Underwrite securities of other companies, except insofar as a Portfolio
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Portfolio; or
4. Lend its portfolio securities in excess of 10% 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 Board
of 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 ASSET ALLOCATION
PORTFOLIO AND THE ENTERPRISE PORTFOLIO:
A Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% 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 10% of the outstanding
voting securities of any one issuer except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio 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 5%
of the Portfolio's assets would be invested in such securities except
that the Portfolio may purchase securities of other investment companies
to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations
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promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act;
6. Lend money, except that a Portfolio may invest in repurchase agreements
in accordance with applicable requirements set forth in the Prospectus
and may acquire debt securities which the Portfolio's investment
policies permit. A Portfolio 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 Portfolio, exceeds 10% 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
Portfolio but includes the Portfolio'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
Portfolio but includes the Portfolio'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
Portfolio owns or has the right to acquire an equal amount of such
securities. Notwithstanding the foregoing, the Portfolio may engage in
transactions in options, futures contracts and options on futures
contracts;
9. Purchase securities on margin, except that a Portfolio 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 Portfolio 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 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act; or
11. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% 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.
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
Portfolio indicated:
The Enterprise Portfolio may not invest more than 5% of its net assets
in warrants or rights valued at the lower of cost or market, nor more than
2% of its net assets in warrants or rights (valued on such basis) which are
not listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to the
foregoing limitation. Furthermore, the Enterprise Portfolio may not invest
in the securities of a foreign issuer if, at the time of acquisition, more
than 10% of the value of the Enterprise Portfolio'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.
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The Asset Allocation Portfolio may not invest in the securities of a
foreign issuer if, at the time of acquisition, more than 25% of the value
of the Asset Allocation Portfolio's total assets would be invested in such
securities.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE DOMESTIC INCOME
PORTFOLIO:
The Domestic Income Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% 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 10% of the outstanding
voting securities of any one issuer except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio 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 5% of the Portfolio's assets would be invested in such
securities except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
6. Lend money, except that the Portfolio may invest in repurchase
agreements in accordance with applicable requirements set forth in the
Prospectus and may acquire debt securities which the Portfolio's
investment policies permit. The Portfolio 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 Portfolio, exceeds 10% 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
Portfolio owns or has the right to acquire an equal amount of such
securities;
9. Purchase securities on margin, except that the Portfolio may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities;
10. Invest more than 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
11. Write put or call options;
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12. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% 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 Portfolio's total assets
would be invested in such securities.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE EMERGING GROWTH PORTFOLIO:
The Emerging Growth Portfolio shall not:
1. Invest directly in real estate interests of any nature, although the
Portfolio may invest indirectly through media such as real estate
investment trusts;
2. Invest in commodities or commodity contracts, except that the Portfolio
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 Portfolio 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 Portfolio's total assets.
Notwithstanding the foregoing, the Portfolio 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
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company;
6. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions 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 5% 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 10% of the outstanding
voting securities of any one issuer except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
9. Invest in warrants in excess of 5% of its net assets (including, but not
to exceed 2% 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 5% of
the Portfolio's total assets to be invested in securities of such
issuers except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations
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promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940
Act;
11. Invest more than 15% 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 except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
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 10% of the offering price of the Portfolio's shares.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE GLOBAL EQUITY PORTFOLIO:
The Global Equity Portfolio 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
Portfolio but includes the Portfolio'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 5% 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 10% of the outstanding
voting securities of any one issuer, except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions 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 10% of its net assets in connection
with permissible borrowings or purchase additional securities when money
borrowed exceeds 5% 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 Portfolio. 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;
6. Purchase securities on margin but the Portfolio 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 Portfolio 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;
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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 Portfolio
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 Portfolio 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 Portfolio 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 the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
11. Invest more than 5% of its net assets in warrants or rights valued at
the lower of cost or market, nor more than 2% of its net assets in
warrants or rights (valued on such basis) which are not listed on the
New York or American Stock Exchanges. Warrants or rights acquired in
units or attached to other securities are not subject to the foregoing
limitation;
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 Portfolio may acquire securities of public companies which
themselves are engaged in such activities;
13. Invest more than 5% of its total assets in securities of unseasoned
issuers which have been in operation directly or through predecessors
for less than three years, except that the Portfolio may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act;
14. Purchase or otherwise acquire any security if, as a result, more than
15% 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 Portfolio
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 Portfolio but includes the
Portfolio's pro rata portion of the securities and other assets owned by
any such investment company.
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THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GOVERNMENT
PORTFOLIO:
The Government Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% 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 10% of the outstanding
voting securities of any one issuer, except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio 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 5%
of the Portfolio's assets would be invested in such securities except
that the Fund may purchase securities of other investment companies to
the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act;
6. Lend money, except that the Portfolio may invest in repurchase
agreements in accordance with applicable requirements set forth in the
Prospectus and may acquire debt securities which the Portfolio's
investment policies permit. The Portfolio 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 Portfolio, 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
Portfolio owns or has the right to acquire an equal amount of such
securities. Notwithstanding the foregoing, the Portfolio may make short
sales by entering into forward commitments for hedging or cross-hedging
purposes and the Portfolio may engage in transactions in options, future
contracts and related options;
9. Purchase securities on margin, except that the Portfolio 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 Portfolio 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 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
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11. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% 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 Portfolio 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 10% of its total 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 Portfolio'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 5% of the fair market value of
the Portfolio's total assets, and provided further that the Portfolio
may not purchase futures contracts or related options if more than 30%
of the Portfolio's total assets would be so invested.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE GROWTH AND INCOME
PORTFOLIO:
The Growth and Income Portfolio shall not:
1. Borrow money, except from a bank and then only as a temporary measure
for extraordinary or emergency purposes but not for making additional
investments and not in excess of 5% of the total net assets of the
Portfolio taken at cost. In connection with any borrowing the Portfolio
may pledge up to 15% of its total assets taken at cost. Notwithstanding
the foregoing, the Portfolio may engage in transactions in options,
futures contracts and related options, segregate or deposit assets to
cover or secure options written, and make margin deposits or payments
for futures contracts and related options.
2. Purchase or sell interests in real estate, except readily marketable
securities, including securities of real estate investment trusts.
3. Purchase or sell commodities or commodities contracts, except that the
Portfolio may enter into transactions in futures contracts and related
options.
4. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Portfolio from (i)
making and collateralizing any permitted borrowings, (ii) making any
permitted loans of its portfolio securities, or (iii) entering into
repurchase agreements, utilizing options, futures contracts, options on
futures contracts and other investment strategies and instruments that
would be considered "senior securities" but for the maintenance by the
Portfolio of a segregated account with its custodian or some other form
of "cover."
5. Invest more than 25% of its total net asset value in any one industry
provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Portfolio but includes the
Portfolio's pro rata portion of the securities and other assets owned by
any such company.
6. Invest more than 5% of the market value of its total assets at the time
of purchase in the securities (except U.S. Government securities) of any
one issuer or purchase more than 10% of the outstanding voting
securities of such issuer except that the Portfolio may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
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In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Growth and Income Portfolio is subject to the
following policies which may be amended by the Trustees.
1. Purchase securities on margin, or sell securities short, but the
Portfolio may enter into transactions in options, futures contracts and
related options and may make margin deposits and payments in connection
therewith.
2. The Portfolio may not invest in interests in oil, gas, or other mineral
exploration or development programs, except that the Portfolio may
acquire securities of public companies which themselves are engaged in
such activities.
3. Purchase securities of a corporation in which a trustee of the Portfolio
owns a controlling interest.
4. Permit officers or trustees of the Portfolio to profit by selling
securities to or buying them from the Portfolio. However, companies with
which the officers and trustees of the Portfolio are connected may enter
into underwriting agreements with the Portfolio to sell its shares, sell
securities to, and purchase securities from the Portfolio when acting as
broker or dealer at the customary and usual rates and discounts, to the
extent permitted by the 1940 Act.
5. Investments in repurchase agreements and purchases by the Portfolio of a
portion of an issue of publicly distributed debt securities shall not be
considered the making of a loan.
6. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 15%
of the value of the Portfolio's net assets would be invested in such
securities except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
7. Invest more than 5% of the market value of its total assets in companies
having a record together with predecessors of less than three years
continuous operation and in securities not having readily available
market quotations except that the Portfolio may purchase securities of
other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
THE FOLLOWING ADDITIONAL RESTRICTIONS ARE APPLICABLE TO THE MONEY MARKET
PORTFOLIO:
The Money Market Portfolio shall not:
1. With respect to 75% of its assets, invest more than 5% 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 10% of the outstanding
voting securities of any one issuer except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act;;
2. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
3. Make any investment in real estate, commodities or commodities
contracts, except that the Portfolio 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;
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<PAGE> 146
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 5%
of the Portfolio's assets would be invested in such securities except
that the Fund may purchase securities of other investment companies to
the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act;
6. Lend money, except that the Portfolio may invest in repurchase
agreements in accordance with applicable requirements set forth in the
Prospectus and may acquire debt securities which the Portfolio's
investment policies permit. The Portfolio 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 Portfolio, exceeds 10% 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
Portfolio owns or has the right to acquire an equal amount of such
securities;
9. Purchase securities on margin, except that the Portfolio may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities;
10. Invest more than 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
11. Write put or call options;
12. Borrow in excess of 10% of the market or other fair value of its total
assets, or pledge its assets to an extent greater than 5% 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. Purchase any security which matures more than one year from the date of
purchase.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE REAL ESTATE SECURITIES
PORTFOLIO.
The Real Estate Securities Portfolio shall not:
1. Engage in the underwriting of securities of other issuers, except that
the Portfolio 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 5% 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 10% of the outstanding voting securities
of any one issuer, except that the Portfolio may purchase securities of
other investment companies to the extent permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act;
B-29
<PAGE> 147
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 10% of its net assets in connection
with permissible borrowings or purchase additional securities when money
borrowed exceeds 5% 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 Portfolio 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 Portfolio
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 Portfolio 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 Portfolio of a segregated
account with its custodian or some other form of "cover";
8. Concentrate its investment in any one industry, except that the
Portfolio 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 Portfolio but includes the Portfolio'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 Portfolio 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 10% of its 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 5% of the fair market value of the Portfolio's total assets;
or
10. The Portfolio 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 Real Estate Securities Portfolio is subject to
the following policies which may be amended by the Real Estate Securities
Portfolio's Trustees and which apply at the time of purchase of portfolio
securities.
1. The Portfolio may not make investments for the purpose of exercising
control or management although the Portfolio retains the right to vote
securities held by it except that the Portfolio may purchase securities
of other investment companies to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940
B-30
<PAGE> 148
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act;
2. The Portfolio may not purchase securities on margin but the Portfolio
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
Portfolio 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 Portfolio 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 that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
4. The Portfolio may not invest more than 5% of its net assets in warrants
or rights valued at the lower of cost or market, nor more than 2% of its
net assets in warrants or rights (valued on such basis) which are not
listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to the
foregoing limitation;
5. The Portfolio may not invest in securities of any company if any officer
or trustee of the Portfolio or of the Adviser owns more than 1/2 of 1%
of the outstanding securities of such company, and such officers and
trustees who own more than 1/2 of 1% own in the aggregate more than 5%
of the outstanding securities of such issuer;
6. The Portfolio 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 Portfolio may acquire securities of public
companies which themselves are engaged in such activities;
7. The Portfolio may not invest more than 5% of its total assets in
securities of unseasoned issuers which have been in operation directly
or through predecessors for less than three years, except that the
Portfolio may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act; or
8. The Portfolio may not purchase or otherwise acquire any security if, as
a result, more than 15% 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.
B-31
<PAGE> 149
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and other executive officers of the Fund's investment
adviser and their principal occupations for the last five years and their
affiliations, if any, with VK/AC Holding, Inc. ("VKAC Holding"), Van Kampen
American Capital, Inc. ("Van Kampen American Capital" or "VKAC"), Van Kampen
American Capital Investment Advisory Corp. ("Advisory Corp."), Van Kampen
American Capital Asset Management, Inc. (the "Adviser" or "Asset Management"),
Van Kampen American Capital Distributors, Inc., the distributor of the Fund's
shares (the "Distributor") and ACCESS Investors Services Inc., the Fund's
transfer agent ("ACCESS"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisory Corp. and each of the open-end investment companies advised by the
Asset Management (excluding the American Capital Exchange Fund and the Common
Sense Trust).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee of each of the funds in the
Fund Complex.
Linda Hutton Heagy........................ Partner, Ray & Berndtson, Inc. An executive recruiting
Sears Tower and management consulting firm. Formerly, Executive Vice
233 South Wacker Drive President of ABN AMRO, N.A., a Dutch bank holding
Suite 4020 company. Prior to 1992, Executive Vice President of La
Chicago, IL 60606 Salle National Bank. Trustee of each of the funds in the
Date of Birth: 06/03/48 Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the funds in the Fund Complex.
Dennis J. McDonnell*...................... President and a Director of VKAC. President, Chief
One Parkview Plaza Operating Officer and a Director of the Advisers.
Oakbrook Terrace, IL 60181 Director or officer of certain other subsidiaries of
Date of Birth: 05/20/42 VKAC. Prior to November 1996, Executive Vice President
and a Director of VKAC Holding. President and Trustee of
each of the funds in the Fund Complex. President,
Chairman of the Board and Trustee of other investment
companies advised by the Advisers or their affiliates.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee of each of the funds
in the Fund Complex.
</TABLE>
B-32
<PAGE> 150
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR
NAME ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- -------------------- --------------------------
<S> <C>
Jerome L. Robinson........................ President, Robinson Technical Products Corporation, a manufacturer and
115 River Road processor of welding alloys, supplies and equipment. Director,
Edgewater, NJ 07020 Pacesetter Software, a software programming company specializing in
Date of Birth: 10/10/22 white collar productivity. Director, Panasia Bank. Trustee of each of
the funds in the Fund Complex.
Phillip B. Rooney......................... Private investor. Director, Illinois Tool Works, Inc., a manufacturing
348 East Third Street company; Vice Chairman and Director, The Servicemaster Company, a
Hinsdale, IL 60521 business and consumer services company; Director, Urban Shopping
Date of Birth: 07/08/44 Centers Inc., a retail mall management company; Director, Stone
Container Corp., a paper manufacturing company. Trustee, University of
Notre Dame. Formerly, President and Chief Executive Officer, WMX
Technologies Inc., an environmental services company, and prior to that
President and Chief Operating Officer, WMX Technologies Inc. Trustee of
each of the funds in the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the Graduate School,
155 Hickory Lane Stevens Institute of Technology. Director, Dynalysis of Princeton, a
Closter, NJ 07624 firm engaged in engineering research. Trustee of each of the funds in
Date of Birth: 08/02/24 the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive (Illinois), legal counsel to the funds in the Fund Complex, open-end
Chicago, IL 60606 funds advised by Van Kampen American Capital Management, Inc. and
Date of Birth: 08/22/39 closed-end funds advised by Advisory Corp. Trustee of each of the funds
in the Fund Complex, open-end funds advised by Van Kampen Capital
Management, Inc. and closed-end funds advised by Advisory Corp.
</TABLE>
- ---------------
* Such trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. McDonnell is an interested person of the Advisers and
the Fund by reason of his positions with VKAC and its affiliates. Mr. Whalen
is an interested person of the Fund by reason of his firm currently acting as
legal counsel to the Fund and is an interested person of Asset Management with
respect to certain funds advised by Asset Management by reason of his firm in
the past acting as legal counsel to Asset Management.
OFFICERS
Messrs. Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin, Wetherell and Hill
are located at One Parkview Plaza, Oakbrook Terrace, IL 60181. The Fund's other
officers are located at 2800 Post Oak Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers.
Date of Birth: 06/25/56 Director of Asset Management. Officer of
certain other subsidiaries of VKAC. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-33
<PAGE> 151
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel
Date of Birth: 07/29/53 and Secretary of VKAC. Executive Vice
President, General Counsel, Assistant
Secretary and a Director of the Advisers
and the Distributor. Executive Vice
President, General Counsel and Assistant
Secretary of ACCESS. Director or officer of
certain other subsidiaries of VKAC.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute. Prior to
November 1996, Executive Vice President,
General Counsel and Secretary of VKAC
Holding. Vice President and Secretary of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
Don G. Powell............... Not applicable Chairman, President, Chief Executive
Officer and a
2800 Post Oak Blvd. Director of VKAC. Chairman, Chief Executive
Houston, TX 77056 Officer and a Director of the Advisers and
the
Date of Birth: 10/19/39 Distributor. Chairman and a Director of
ACCESS. Director or officer of certain
other subsidiaries of VKAC. Chairman of the
Board of Governors and the Executive
Committee of the Investment Company
Institute. Prior to November, 1996,
President, Chief Executive Officer and a
Director of VKAC Holding. President, Chief
Executive Officer and a Trustee/Director of
certain investment companies advised by
Asset Management and prior to July 1996,
President, Chief Executive Officer and a
Trustee of the funds in the Fund Complex
and closed-end investment companies advised
by Advisory Corp.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers.
Date of Birth: 04/20/42 Director of Asset Management. Director or
officer of certain other subsidiaries of
VKAC. Vice President of each of the funds
in the Fund Complex and certain other
investment companies advised by the
Advisers or their affiliates.
</TABLE>
B-34
<PAGE> 152
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Paul R. Wolkenberg.......... Vice President Executive Vice President of the VKAC, the
Date of Birth: 11/10/44 Advisers and the Distributor. President,
Chief Executive Officer and a Director of
ACCESS. Director or officer of certain
other subsidiaries of VKAC. Vice President
of each of the funds in the Fund Complex
and certain other investment companies
advised by the Advisers or their
affiliates.
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers. Vice
Date of Birth: 01/11/56 Financial Officer President and Chief Financial Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or the affiliates.
Nicholas Dalmaso............ Assistant Secretary Assistant Vice President and Senior
Date of Birth: 03/01/65 Attorney of VKAC. Assistant Vice President
and Assistant Secretary of the Advisers and
the Distributor. Officer of certain other
subsidiaries of VKAC. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or the affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Assistant Vice President and Senior
Date of Birth: 11/15/63 Attorney of VKAC. Assistant Vice President
and Assistant Secretary of the Advisers,
the Distributor and ACCESS. Officer of
certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC.
Senior Vice President, Deputy General
Counsel and Secretary of the Advisers, the
Distributor and ACCESS. Officer of certain
other subsidiaries of VKAC. Prior to
November 1996, Senior Vice President,
Deputy General Counsel and Assistant
Secretary of VKAC Holding. Assistant
Secretary of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or the affiliates.
</TABLE>
B-35
<PAGE> 153
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers and the Distributor. Officer of
certain other subsidiaries of VKAC.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
Steven M. Hill.............. Assistant Treasurer Assistant Vice President of the Advisers.
Date of Birth: 10/16/64 Assistant Treasurer of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
M. Robert Sullivan.......... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or the
affiliates.
</TABLE>
Each of the trustees holds the same position with each of the funds in the
Fund Complex. As of December 31, 1996, there were 51 funds in the Fund Complex.
Each trustee who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan Stanley (each a "Non-Affiliated Trustee") is
compensated by an annual retainer and meeting fees for services to the funds in
the Fund Complex. Each fund in the Fund Complex provides a deferred compensation
plan to its Non-Affiliated Trustees that allows trustees to defer receipt of
their compensation and earn a return on such deferred amounts based upon the
return of the common shares of the funds in the Fund Complex as more fully
described below. Each fund in the Fund Complex also provides a retirement plan
to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The compensation of each Non-Affiliated Trustee from each fund in the Fund
Complex advised by Advisory Corp. (each a "VK Fund" and collectively the "VK
Funds") includes an annual retainer in an amount equal to $2,500 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. Each Non-Affiliated Trustee receives a per meeting fee from
each VK Fund in the amount of $125 per regular quarterly meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee. Each Non-Affiliated Trustee receives a per meeting fee
from each VK Fund in the amount of $125 per special meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee, provided that no compensation will be paid in connection
with certain telephonic special meetings.
The compensation of each Non-Affiliated Trustee from the funds in the Fund
Complex advised by Asset Management (each an "AC Fund" or collectively the "AC
Funds") includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 per regular quarterly meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee in the amount of $125 per special meeting attended by the Non-Affiliated
Trustee, due on the date of such meeting, plus reasonable expenses incurred by
the Non-Affiliated Trustee in connection with his or her services as a trustee,
provided that no compensation will be paid in connection with certain telephonic
special meetings.
B-36
<PAGE> 154
The trustees approved an aggregate compensation cap with respect to funds
in the Fund Complex of $84,000 per Non-Affiliated Trustee per year (excluding
any retirement benefits) for the period July 22, 1995 through December 31, 1996,
subject to the net assets and the number of funds in the Fund Complex as of July
21, 1995 and certain other exceptions. For the calendar year ended December 31,
1996, certain trustees received aggregate compensation from the funds in the
Fund Complex over $84,000 due to compensation received but not subject to the
cap, including compensation from new funds added to the Fund Complex after July
22, 1995 and certain special meetings in 1996. In addition, each of Advisory
Corp. or Asset Management, as the case may be, agreed to reimburse each fund in
the Fund Complex through December 31, 1996 for any increase in the aggregate
trustee's compensation over the aggregate compensation paid by such fund in its
1994 fiscal year, provided that if a fund did not exist for the entire 1994
fiscal year appropriate adjustments will be made.
Each Non-Affiliated Trustee generally can elect to defer receipt of all or
a portion of the compensation earned by such Non-Affiliated Trustee until
retirement. Amounts deferred are retained by the Fund and earn a rate of return
determined by reference to the return on the common shares of such Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated Trustee,
with the same economic effect as if such Non-Affiliated Trustee had invested in
one or more funds in the Fund Complex. To the extent permitted by the 1940 Act,
the Fund may invest in securities of those funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The deferred
compensation plan is not funded and obligations thereunder represent general
unsecured claims against the general assets of the Fund.
Each fund in the Fund Complex has adopted a retirement plan. Under the
Fund's retirement plan, a Non-Affiliated Trustee who is receiving trustee's
compensation from the Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such trustee's retirement from the Fund. Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from the Fund. Each
trustee has served as a member of the Board of Trustees since he or she was
first appointed or elected in the year set forth below. The retirement plan
contains a Fund Complex retirement benefit cap of $60,000 per year. Asset
Management has reimbursed each AC Fund for the expenses related to the
retirement plan through December 31, 1996.
Additional information regarding compensation and benefits for trustees is
set forth below. As indicated in the notes accompanying the table, the amounts
relate to either the Trust's most recently completed fiscal year or the Fund
Complex' most recently completed calendar year ended December 31, 1996.
B-37
<PAGE> 155
1996 COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
PENSION OR ESTIMATED MAXIMUM BEFORE DEFERRAL
AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS FROM FUND
BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE TRUST UPON COMPLEX PAID
NAME(1) TRUST(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
------- ------------------------ ------------------- ------------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan* $12,034 $ 4,879 $22,500 $104,875
Philip P. Gaughan 1,290 0 0 16,875
Linda Hutton Heagy* 7,950 565 22,500 104,875
Dr. Roger Hilsman 7,950 19,128 12,500 103,750
R. Craig Kennedy* 7,950 373 22,500 104,875
Donald C. Miller 12,034 0 0 104,875
Jack E. Nelson* 12,034 2,361 22,500 97,875
David Rees 1,590 12,516 12,000 22,000
Jerome L. Robinson* 9,685 0 0 101,625
Lawrence J. Sheehan 1,590 0 0 22,000
Dr. Fernando Sisto* 7,950 9,346 19,500 104,875
Wayne W. Whalen* 12,034 1,598 22,500 104,875
William S. Woodside 7,950 19,128 12,500 104,875
</TABLE>
- ---------------
* Currently a member of the Board of Trustees. Mr. Phillip B. Rooney also is a
current member of the Board of Trustees but is not included in the
compensation table because he did not serve on the Board of Trustees or
receive any compensation from the Trust prior to April 14, 1997. Messrs.
McDonnell and Powell, also trustees of the Trust during all or a portion of
the Trust's last fiscal year, are not included in the compensation table
because they are affiliated persons of the Advisers and are not eligible for
compensation or retirement benefits from the Trust.
(1) Persons not designated by an asterisk are not currently members of the Board
of Trustees, but were members of the Board of Trustees during the Trust's
most recently completed fiscal year. Messrs. Gaughan and Rees retired from
the Board of Trustees on January 26, 1996 and January 29, 1996,
respectively. Mr. Sheehan was removed from the Board of Trustees effective
January 29, 1996. Messrs. Hilsman, Miller and Woodside retired from the
Board of Trustees on December 31, 1996.
(2) The amounts shown in this column represent the aggregate compensation before
deferral from all eight series of the Trust, including the Fund, with
respect to the Trust's fiscal year ended December 31, 1996. The detail of
aggregate compensation before deferral for each series, including the Fund,
are shown in Table A below. Certain trustees deferred compensation from the
Trust during the fiscal year ended December 31, 1996; the aggregate
compensation deferred from all eight series of the Trust, including the
Fund, is as follows: Mr. Branagan, $7,826; Mr. Gaughan, $1,290; Ms. Heagy,
$5,730; Mr. Kennedy, $3,180; Mr. Miller, $14,501; Mr. Nelson, $14,501; Mr.
Robinson, $8,950; and Mr. Whalen, $12,596. The details of amounts deferred
for each series, including the Fund, are shown in Table B below. Amounts
deferred are retained by the respective fund and earn a rate of return
determined by reference to either the return on the common shares of such
fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, each fund may invest in
securities of those funds selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The cumulative deferred
compensation (including interest) accrued with respect to each trustee from
all nine portfolios of the Trust, including the Fund, as of the Trust's
fiscal year ended December 31, 1996 is as follows: Mr. Branagan, $7,794; Mr.
Gaughan, $2,728; Ms. Heagy, $7,292; Mr. Kennedy, $5,486; Mr. Miller,
$13,288; Mr. Nelson, $13,288; Mr. Robinson, $8,743; Mr. Sisto, $30,486; and
Mr. Whalen, $13,349. The details of cumulative deferred compensation
(including interest)
B-38
<PAGE> 156
for each series, including the Fund, are shown in Table C below. The
deferred compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the retirement benefits accrued
by all eight series of the Trust, including the Fund, with respect to the
Trust's fiscal year ended December 31, 1996. The details of retirement
benefits accrued for each series, including the Fund, are shown in Table D
below. The retirement plan is described above the Compensation Table.
(4) This is the estimated maximum annual benefits payable by the Trust in each
year of the 10-year period commencing in the year of such trustee's
retirement from the Trust. The estimated maximum annual benefit, except for
trustees who have retired or are near retirement, is based upon $2,500 per
series assuming: the trustee has 10 or more years of service on the Board of
Trustees (including years of service prior to the adoption of the retirement
plan) and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for a series
of the Trust may receive reduced retirement benefits from such series. The
actual annual benefit may be less if the trustee is subject to the Fund
Complex retirement benefit cap or if the trustee is not fully vested at the
time of retirement. Each Non-Affiliated Trustee of the Board of Trustees has
served as a member of the Board of Trustees since he or she was first
appointed or elected in the year set forth in Table E below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all 51 of the investment companies in the Fund Complex as of December 31,
1996 before deferral by the trustees under the deferred compensation plan.
Certain trustees deferred all or a portion of their aggregate compensation
from the Fund Complex during the calendar year ended December 31, 1996. The
deferred compensation earns a rate of return determined by reference to the
return on the shares of the funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
trustees' Fund Complex compensation cap covered the period July 22, 1995
through December 31, 1996. For the calendar year ended December 31, 1996,
certain trustees received compensation over $84,000 in the aggregate due to
compensation received but not subject to the cap, including compensation
from new funds added to the Fund Complex after July 22, 1995 and certain
special meetings in 1996. The Advisers and their affiliates also serve as
investment adviser for other investment companies; however, with the
exception of Messrs. McDonnell, Powell and Whalen, the trustees were not
trustees of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $243,375 during the calendar year
ended December 31, 1996.
As of April 4, 1997, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-39
<PAGE> 157
TABLE A
1996 AGGREGATE COMPENSATION FROM THE TRUST AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
---------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
- -------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio.... 1,627 170 1,035 1,035 1,035 1,627 1,627 210 1,160 210
LIT Domestic Income Portfolio..... 1,577 160 995 995 995 1,577 1,577 200 1,120 200
LIT Emerging Growth Portfolio..... 1,487 150 925 925 925 1,487 1,487 180 1,150 180
LIT Enterprise Portfolio.......... 1,677 180 1,075 1,075 1,075 1,677 1,677 220 1,200 220
LIT Global Equity Portfolio*...... 925 150 925 925 925 925 925 180 925 180
LIT Government Portfolio.......... 1,637 170 1,045 1,045 1,045 1,637 1,637 210 1,170 210
LIT Growth and Income Portfolio... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio........ 1,577 160 995 995 995 1,577 1,577 200 1,120 200
LIT Real Estate Portfolio......... 1,527 150 955 955 955 1,527 1,527 190 1,840 190
Life Investment Trust Total..... 12,034 1,290 7,950 7,950 7,950 12,034 12,034 1,590 9,685 1,590
<CAPTION>
TRUSTEE
-------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
- -------------- ----- ------ --------
<S> <C> <C> <C>
LIT Asset Allocation Portfolio.... 1,035 1,627 1,035
LIT Domestic Income Portfolio..... 995 1,577 995
LIT Emerging Growth Portfolio..... 925 1,487 925
LIT Enterprise Portfolio.......... 1,075 1,677 1,075
LIT Global Equity Portfolio*...... 925 925 925
LIT Government Portfolio.......... 1,045 1,637 1,045
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 995 1,577 995
LIT Real Estate Portfolio......... 955 1,527 955
Life Investment Trust Total..... 7,950 12,034 7,950
</TABLE>
TABLE B
1996 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
---------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
- -------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio..... 997 170 750 0 420 3,532 3,532 210 1,160 0
LIT Domestic Income Portfolio...... 977 160 710 0 400 1,577 1,577 200 1,120 0
LIT Emerging Growth Portfolio...... 947 150 670 0 360 1,487 1,487 180 1,050 0
LIT Enterprise Portfolio........... 1,017 180 790 0 440 1,677 1,677 220 1,200 0
LIT Global Equity Portfolio*....... 947 150 670 0 360 1,487 1,487 180 1,050 0
LIT Government Portfolio........... 1,007 170 760 0 420 1,637 1,637 210 1,170 0
LIT Growth and Income Portfolio.... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio......... 977 160 710 0 400 1,577 1,577 200 1,120 0
LIT Real Estate Portfolio.......... 957 150 670 0 380 1,527 1,527 190 1,080 0
Life Investment Trust Total:..... 7,826 1,290 5,730 0 3,180 14,501 14,501 1,590 8,950 0
<CAPTION>
TRUSTEE
-------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
- -------------- ----- ------ --------
<S> <C> <C> <C>
LIT Asset Allocation Portfolio.... 0 1,627 0
LIT Domestic Income Portfolio..... 0 1,577 0
LIT Emerging Growth Portfolio..... 0 1,487 0
LIT Enterprise Portfolio.......... 0 1,677 0
LIT Global Equity Portfolio*...... 0 1,487 0
LIT Government Portfolio.......... 0 1,637 0
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 0 1,577 0
LIT Real Estate Portfolio......... 0 1,527 0
Life Investment Trust Total:.... 0 12,596 0
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
----------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
-------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio.... 993 354 951 0 716 1,717 1,709 4,798 1,133 0
LIT Domestic Income Portfolio..... 973 310 860 0 648 1,662 1,655 3,974 1,095 0
LIT Emerging Growth Portfolio..... 943 326 843 0 618 1,566 1,559 187 1,026 0
LIT Enterprise Portfolio.......... 1,013 409 1,050 0 802 1,773 1,765 6,032 1,169 0
LIT Global Equity Portfolio*...... 943 320 840 0 618 1,567 1,559 187 1,026 0
LIT Government Portfolio.......... 1,003 317 891 0 658 1,726 1,719 6,650 1,144 0
LIT Growth and Income Portfolio... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio........ 973 303 828 0 629 1,663 1,656 6,067 1,096 0
LIT Real Estate Portfolio......... 953 389 1,029 0 797 1,614 1,606 198 1,054 0
Life Investment Trust Total..... 7,794 2,728 7,292 0 5,486 13,288 13,228 28,093 8,743 0
<CAPTION>
TRUSTEE
--------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
-------------- ----- ------ --------
<S> <C> <C> <C>
LIT Asset Allocation Portfolio.... 6,506 1,725 0
LIT Domestic Income Portfolio..... 5,479 1,670 0
LIT Emerging Growth Portfolio..... 0 1,573 0
LIT Enterprise Portfolio.......... 7,898 1,782 0
LIT Global Equity Portfolio*...... 0 1,573 0
LIT Government Portfolio.......... 5,615 1,734 0
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 4,988 1,671 0
LIT Real Estate Portfolio......... 0 1,621 0
Life Investment Trust Total..... 30,486 13,349 0
</TABLE>
TABLE D
1996 RETIREMENT BENEFITS ACCRUED AS PART OF EXPENSES FOR THE TRUST
AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
----------------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN GAUGHAN HEAGY HILSMAN KENNEDY MILLER NELSON REES ROBINSON SHEEHAN
- -------------- -------- ------- ----- ------- ------- ------ ------ ---- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio.... 629 0 71 3,906 47 0 297 2,346 0 0
LIT Domestic Income Portfolio..... 629 0 71 3,906 47 0 297 2,346 0 0
LIT Emerging Growth Portfolio..... 578 0 70 0 46 0 292 0 0 0
LIT Enterprise Portfolio.......... 629 0 71 3,772 47 0 297 2,608 0 0
LIT Global Equity Portfolio*...... 578 0 70 0 46 0 292 0 0 0
LIT Government Portfolio.......... 629 0 71 3,772 47 0 297 2,608 0 0
LIT Growth and Income Portfolio... 0 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio........ 629 0 71 3,772 47 0 297 2,608 0 0
LIT Real Estate Portfolio......... 578 0 70 0 46 0 292 0 0 0
Life Investment Trust Total..... 4,879 0 565 19,128 373 0 2,361 12,516 0 0
<CAPTION>
TRUSTEE
-------------------------
PORTFOLIO NAME SISTO WHALEN WOODSIDE
- -------------- ----- ------ --------
<S> <C> <C> <C>
LIT Asset Allocation Portfolio.... 1,325 202 3,906
LIT Domestic Income Portfolio..... 1,325 202 3,906
LIT Emerging Growth Portfolio..... 917 197 0
LIT Enterprise Portfolio.......... 1,315 201 3,772
LIT Global Equity Portfolio*...... 917 197 0
LIT Government Portfolio.......... 1,315 201 3,772
LIT Growth and Income Portfolio... 0 0 0
LIT Money Market Portfolio........ 1,315 201 3,772
LIT Real Estate Portfolio......... 917 197 0
Life Investment Trust Total..... 9,346 1,598 19,128
</TABLE>
B-40
<PAGE> 158
TABLE E
YEAR OF ELECTION OR APPOINTMENT TO EACH PORTFOLIO OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
-------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN HEAGY KENNEDY NELSON ROONEY ROBINSON SISTO WHALEN
- -------------- -------- ----- ------- ------ ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio....................... 1991 1995 1995 1995 1997 1995 1987 1995
LIT Domestic Income Portfolio........................ 1991 1995 1995 1995 1997 1995 1987 1995
LIT Emerging Growth Portfolio........................ 1995 1995 1995 1995 1997 1995 1995 1995
LIT Enterprise Portfolio............................. 1991 1995 1995 1995 1997 1995 1986 1995
LIT Global Equity Portfolio*......................... 1995 1995 1995 1995 1997 1995 1995 1995
LIT Government Portfolio............................. 1991 1995 1995 1995 1997 1995 1986 1995
LIT Growth and Income Portfolio...................... 1995 1995 1995 1995 1997 1995 1995 1995
LIT Money Market Portfolio........................... 1991 1995 1995 1995 1997 1995 1986 1995
LIT Real Estate Portfolio............................ 1995 1995 1995 1995 1997 1995 1995 1995
</TABLE>
LEGAL COUNSEL
Skadden, Arps Slate, Meagher & Flom (Illinois).
INVESTMENT ADVISORY AGREEMENTS
The Trust and the Adviser are parties to an investment advisory agreement
("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 certain portfolios including the Asset Allocation
Portfolio, the Domestic Income Portfolio, the Enterprise Portfolio, the
Government Portfolio and the Money Market Portfolio. The Trust and the Adviser
are also parties to other investment advisory agreements pursuant to which the
Adviser manages the investment of assets and places orders for the purchase and
sale of portfolio securities for the remaining Portfolios including three
advisory agreements designated herein as "Emerging Growth Advisory Agreement,"
"Global Equity Advisory Agreement," "Growth and Income Advisory Agreement" and
"Real Estate Advisory Agreement" for the Emerging Growth Portfolio, the Global
Equity Portfolio, the Growth and Income Portfolio and Real Estate Securities
Portfolio, respectively (such advisory agreements together with Advisory
Agreement-I 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 Portfolio's investment
objectives. The Adviser also furnishes at no cost to the Portfolio (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 Portfolio 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 Portfolio. 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. A portion of these amounts were
paid to the Adviser or its parent as reimbursement of personnel, office space,
facilities and equipment costs attributable to the provision of accounting
services to the Trust. 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. The Advisory
Agreements also provide that the Adviser shall not be liable to the company for
any actions or omissions if it acted without willful misfeasance, bad faith,
negligence or reckless disregard of its obligations.
Under 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 Portfolios
at an annual rate of 0.50% of the first $500 million of such Portfolios'
aggregate average net assets; 0.45% of the next $500 million of such Portfolios'
aggregate average net assets, and 0.40% of such
B-41
<PAGE> 159
Portfolios' aggregate average net assets in excess of $1 billion. Under the
Emerging Growth Advisory Agreement, 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 at an annual
rate of 0.70% for the Emerging Growth Portfolio. Under the Global Equity
Advisory Agreement, the Trust pays 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 at an annual rate of 1.00% for the Global
Equity Portfolio. Under the Growth and Income Advisory Agreement, the Trust pays
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
at an annual rate of 0.60% of the first $500 million and 0.55% in excess of $500
million for the Growth and Income Portfolio. Under the Real Estate Advisory
Agreement, the Trust pays 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 at an annual rate of 1.00% for the Real Estate
Securities Portfolio.
The average daily net assets of a Portfolio is determined by taking the
average of all of the determinations of net assets of that Portfolio 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 Portfolio, 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 Portfolio's benefit,
and to advise the Trustees of the Portfolio 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 Portfolio's portfolio
transactions or other arrangements which may benefit the Portfolio.
Advisory Agreement - I also provides that, in the event the ordinary
business expenses of the Asset Allocation Portfolio, the Domestic Income
Portfolio, the Enterprise Portfolio, the Government Portfolio and the Money
Market Portfolio for any fiscal year exceed 0.95% of the average daily net
assets, the compensation due the Adviser will be reduced by the amount of such
excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Portfolio 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 Portfolio'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 the other Advisory Agreements.
In addition to the contractual expense limitation, the Adviser elected to
reimburse the Asset Allocation Portfolio, the Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio
for all ordinary business expenses in excess of .60% of the average daily net
assets.
B-42
<PAGE> 160
The following table shows expenses paid under the Advisory Agreements
during the periods ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
ASSET DOMESTIC EMERGING GLOBAL GROWTH MONEY
PERIOD ENDING ALLOCATION INCOME GROWTH ENTERPRISE EQUITY GOVERNMENT AND MARKET
DECEMBER 31, 1994: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO INCOME PORTFOLIO
------------------ ---------- --------- --------- ---------- --------- ---------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $307,894 $130,474 N/A $346,359 N/A $351,674 N/A $152,665
Accounting Services $ 55,826 $51,604 N/A $ 52,665 N/A $ 58,043 N/A $ 51,778
Contractual expense
reimbursement $ -- $ 302 N/A $ -- N/A $ -- N/A $ --
Voluntary expense
reimbursement $ 75,169 $91,332 N/A $ 57,464 N/A $ 68,843 N/A $ 80,915
<CAPTION>
REAL
ESTATE
PERIOD ENDING SECURITIES
DECEMBER 31, 1994: PORTFOLIO
------------------ ----------
<S> <C>
Advisory fees N/A
Accounting Services N/A
Contractual expense
reimbursement N/A
Voluntary expense
reimbursement N/A
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1995:
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $302,141 $130,064 $ 4,798 $355,715 $ 10,893 $333,447 N/A $121,552 $ 18,136
Accounting Services $ 57,576 $ 49,819 $ 3,222 $ 55,772 $ 7,200 $ 57,526 N/A $ 48,109 $ 3,153
Contractual expense
reimbursement $ -- $ -- $19,858 $ -- $ 43,031 $ -- N/A $ 19,858 $ 7,173
Voluntary expense
reimbursement $ 85,602 $ 86,887 $ -- $ 56,680 $ -- $ 77,421 N/A $ 80,637 --
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1996:
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $316,002 $110,243 $28,284 $407,693 $ 28,416 $303,695 $ 74 $104,808 $428,166
Accounting Services $ 56,837 $ 44,328 $41,089 $ 52,282 $ 29,400 $ 55,531 $ -- $ 76,975 $ 44,869
Contractual expense
reimbursement $ -- $ -- $97,987 $ -- $177,139 $ -- $ -- $ -- $ 70,941
Voluntary expense
reimbursement $113,873 $151,102 $ -- $123,582 $ -- $122,474 $5,591 $143,892 --
</TABLE>
The Advisory Agreements with respect to each subject Portfolio 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 Portfolio'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
The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to written agreements (the "Distribution and Service 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
Distribution and Service 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 Distribution and Service Agreement or
interested persons of any party, by votes cast in person at a meeting called for
that purpose. The Distribution and Service 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 certain other costs
including the cost of supplemental sales literature and advertising. 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.
B-43
<PAGE> 161
TRANSFER AGENT
For the fiscal years ended December 31, 1994, 1995, and 1996, ACCESS
received fees in the amount of $15,000 from each of the Portfolios of the Trust
for transfer agency services, excluding the Growth and Income Portfolio from
which ACCESS received no fees. These services are provided at cost plus a
profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
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 Adviser
to seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the 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 Adviser considers the
firm's reliability, the quality of its execution services on a continuing basis
and its financial condition. When more than one firm is believed to meet these
criteria, preference may be given to firms which also provide research services
to the Trust or the Adviser.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Trust and of the other Van
Kampen American Capital mutual funds as a factor in the selection of dealers to
execute portfolio transactions for the Trust.
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 Adviser to cause the Portfolio to incur brokerage
commissions in an amount higher than the lowest available rate in return for
research services provided to the Adviser. The Adviser is of the opinion that
the continued receipt of supplemental investment research services from dealers
is essential to its provision of high quality portfolio management services to
the Trust. The Adviser undertakes that such higher commissions will not be paid
by the Portfolio unless (a) the Adviser determines in good faith that the amount
is reasonable in relation to the services in terms of the particular transaction
or in terms of the Adviser's overall responsibilities with respect to the
accounts as to which it exercises investment discretion, (b) such payment is
made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Portfolio 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
Adviser's receipt of research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the 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
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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.
Prior to December 20, 1994, the Portfolios placed brokerage transactions
with brokers who were considered affiliated persons of the Adviser's former
parent, The Travelers Inc. Such affiliated persons included Smith Barney Inc.
("Smith Barney") and Robinson Humphrey, Inc. ("Robinson Humphrey"). Effective
October 31, 1996, Morgan Stanley Group Inc. became 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.
Portfolios that paid affiliated brokerage commissions during 1994 are set
forth below:
Commissions Paid:
<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON MORGAN
SHEARSON HUMPHREY STANLEY
------------ -------- -------
<S> <C> <C> <C>
Fiscal 1994
Money Market Portfolio -- -- --
Enterprise Portfolio $36,136 $1,330 --
Government Portfolio $ 2,578 -- --
Asset Allocation Portfolio $27,550 $ 42 --
Domestic Income Portfolio -- -- --
</TABLE>
No commissions were paid to affiliated brokers during the fiscal year ended
1995. Asset Allocation Portfolio and Enterprise Portfolio paid commissions to
Morgan Stanley during the fiscal year ended 1996 in the amounts of $10,732 and
18,166, respectively.
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.
<TABLE>
<CAPTION>
ASSET DOMESTIC EMERGING GLOBAL REAL ESTATE
ALLOCATION ENTERPRISE GOVERNMENT INCOME GROWTH EQUITY SECURITIES
FUND PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO FUND PORTFOLIO
----------- ----------- ---------- --------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994
- ---------------------
Total brokerage
commissions $ 212,116 $ 340,219 $15,213 $395 -- -- --
Commissions for
research
services $ 90,649 $ 144,248 -- -- -- -- --
Value of research
transactions $72,221,352 $84,974,336 -- -- -- -- --
1995
- ---------------------
Total brokerage
commissions $ 157,404 $ 305,770 $30,598 -- $ 2,474 $9,763 $ 14,076
Commissions for
research
services $ 64,689 $ 114,552 -- -- 2,143 -- 12,934
Value of research
transactions $48,252,618 $66,483,840 -- -- 2,340,642 -- 12,044,246
</TABLE>
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<PAGE> 163
<TABLE>
<CAPTION>
ASSET DOMESTIC EMERGING GLOBAL REAL ESTATE GROWTH MONEY
ALLOCATION ENTERPRISE GOVERNMENT INCOME GROWTH EQUITY SECURITIES AND MARKET
FUND FUND FUND FUND FUND FUND FUND INCOME FUND
----------- ----------- ---------- -------- ---------- ------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
- -----------------------
Total brokerage
commissions $ 160,187 $ 203,035 $49,075 $134 $ 7,373 $12,654 $ 222,173 -- --
Commissions for
research services $ 62,566 $ 118,119 -- -- $ 5,803 -- $ 163,059 $ 187 --
Value of research
transactions $28,024,814 $68,820,181 -- -- $5,170,364 -- $19,899,335 $481,917 --
</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 Portfolio'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 Portfolio's investment
portfolio turnover rate for prior years is shown under "Financial Highlights" in
the Prospectus.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Portfolio is computed by dividing
the value of all securities held by the Portfolio plus other assets, less
liabilities, by the number of shares outstanding. This computation is made for
each Portfolio as of the close of business each day the Exchange (the
"Exchange") is open (currently 4:00 p.m., New York time).
MONEY MARKET PORTFOLIO NET ASSET VALUATION
The valuation of the Portfolio'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 Portfolio would
receive if it sold the instrument.
The Portfolio'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
Portfolio must maintain a dollar-weighted average portfolio maturity of 90 days
or less, purchase only instruments having remaining maturities of thirteen
months or less and invest only in securities determined by the Adviser to be of
eligible quality with minimal credit risks.
The Portfolio has established procedures reasonably designed, taking into
account current market conditions and the Portfolio'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
Portfolio 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.
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<PAGE> 164
ASSET ALLOCATION, DOMESTIC INCOME, EMERGING GROWTH, ENTERPRISE, GLOBAL EQUITY,
GROWTH AND INCOME AND REAL ESTATE SECURITIES PORTFOLIOS NET ASSET VALUATION
The net asset value of these Portfolios 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
National Association of Securities Dealers Automated Quotations ("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 Portfolios, 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 Portfolio's net asset value is not calculated, and on which the
Portfolio does not effect sales, redemptions and repurchases of its shares.
There may be significant variations in the net asset value of Portfolio 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.
GOVERNMENT PORTFOLIO 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 Portfolios 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. 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 Portfolio of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Portfolio to
fairly determine the value of its net assets; or (d) the Securities and Exchange
Commission, by order, so permits.
TAX STATUS OF THE TRUST
The Trust and any of its series will be treated as separate corporations
for federal income tax purposes. Each Portfolio intends to qualify each year and
to elect to be treated as a regulated investment company under the Code.
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<PAGE> 165
If a Portfolio so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses) in
each year, it will not be required to pay federal income taxes on any income
distributed to shareholders. Each Portfolio intends to distribute at least the
minimum amount of net investment income necessary to satisfy the 90%
distribution requirement. No Portfolio will not be subject to federal income tax
on any net capital gains distributed to shareholders.
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 Portfolios 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 Portfolio
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 Portfolio 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 Portfolio 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 Portfolios' transactions in options, futures contracts, and
options on futures contracts, particularly hedging transactions, may constitute
"straddles" which are defined in the Code as offsetting positions with respect
to personal property. A straddle in which at least one (but not all) of the
positions are Section 1256 contracts is a "mixed straddle" under the Code if
certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Portfolio 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.
PORTFOLIO PERFORMANCE
The Adviser has agreed so long as it serves as adviser to the Portfolio to
limit the ordinary business expenses of the Asset Allocation Portfolio, the
Domestic Income Portfolio, the Enterprise Portfolio, the Government Portfolio
and the Money Market Portfolio to 0.60% per year of the average net assets of
each such Portfolio by reducing the advisory fee and/or bearing other expenses
of a Portfolio in excess of such limitation.
The average annual total return (computed in the manner described in the
Prospectus) and yield, if applicable, for each Portfolio are shown in the table
below. These results are based on historical earnings and asset value
fluctuations and are not intended to indicate future performance. Such
information should be
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<PAGE> 166
considered in light of each Portfolio's investment objectives and policies as
well as the risks incurred in each Portfolio's investment practices. All total
return figures are for the period ended December 31, 1996.
<TABLE>
<CAPTION>
TOTAL RETURN TOTAL RETURN TOTAL RETURN
FOR ONE YEAR FOR FIVE YEAR FOR TEN YEAR TOTAL RETURN
PERIOD PERIOD PERIOD SINCE INCEPTION YIELD
------------ ------------- ------------ --------------- -----
<S> <C> <C> <C> <C> <C>
Asset Allocation Portfolio
commencement date 06/30/87.......... 13.87% 10.74% -- 10.84% --
Domestic Income Portfolio*
commencement date 11/04/87.......... 6.68% 10.14% -- 7.93% 7.55%*
Emerging Growth Portfolio
commencement date 07/03/95.......... 16.55% -- -- 23.11% --
Enterprise Portfolio
commencement date 04/07/86.......... 24.80% 14.11% 12.80% 11.14% --
Global Equity Portfolio
commencement date 07/03/95.......... 16.72% -- -- 13.14% --
Government Portfolio*
commencement date 04/07/86.......... 2.12% 5.41% 6.96% 6.87% 6.25%*
Growth and Income Portfolio
commencement date 12/23/96.......... -- -- -- (13.95%) --
Money Market Portfolio**
commencement date 04/07/86.......... -- -- -- -- 4.86%*
Real Estate Securities Portfolio
commencement date 07/03/95.......... 40.53% -- -- 32.35% --
</TABLE>
- -------------------------
* For the 30-day period ended December 31, 1996. The Portfolio's 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 Portfolio, portfolio maturity and the Portfolio's
expenses.
** For the seven-day period ended December 31, 1996. The compound effective
yield for this same period was 4.98%.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Portfolio's transfer agent, in
1993. In addition, the Adviser may also refer to the Houston Awards for Quality,
received by American Capital in 1994.
From time to time, in reports or other communications, or in advertising or
sales materials the Adviser may graphically illustrate the relative average
annual returns of the following categories for the prior ten-year period:
Inflation, Short-Term Government Securities, Long-Term Government Securities,
Equity REITs and Common Stocks.
MONEY MARKET PORTFOLIO YIELD INFORMATION
The yield of the Portfolio 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 Portfolio's
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<PAGE> 167
average account size. The Portfolio may also calculate its effective yield by
compounding the unannualized base 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 Portfolio, their quality and length of maturity, and the
Portfolio's operating expenses. The length of maturity for the Portfolio is the
average dollar weighted maturity of the Portfolio. This means that the Portfolio
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
Portfolio 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 Portfolio 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 Portfolio is not insured. Investors comparing
results of the Portfolio 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 Portfolio 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 Portfolios and all cash,
including proceeds from the sale of shares of the Portfolio and of securities in
the Portfolio'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 -- Semi-annual 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, Suite 2900,
Houston, Texas 77002, the independent accountants for the Trust, performs an
annual audit of the Trust's financial statements.
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<PAGE> 168
APPENDIX
Description of the highest commercial paper, bond and other short- and
long-term rating categories assigned by Standard & Poor's Ratings Group ("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
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<PAGE> 169
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.
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<PAGE> 170
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial positions of the Asset
Allocation Fund, Domestic Income Fund, Emerging Growth Fund, Enterprise Fund,
Global Equity Fund, Government Fund, Growth and Income Fund, Money Market Fund
and Real Estate Securities Fund (constituting Van Kampen American Capital Life
Investment Trust, hereafter referred to as the "Trust") at December 31, 1996,
and the results of each of their operations, the changes in each of their net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the 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, 1996 by correspondence with the custodian and
brokers and the application of alternative auditing procedures for unsettled
security transactions, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
February 7, 1997
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<PAGE> 171
ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
COMMON STOCK 52.5%
CONSUMER DISTRIBUTION 2.4%
<S> <C> <C>
Dayton Hudson Corp.......................................... 6,100 $ 239,425
Dillard Department Stores, Inc., Class A.................... 8,600 265,525
Federated Department Stores, Inc. (b)....................... 12,200 416,325
Kroger Co. (b).............................................. 6,100 283,650
Pier 1 Imports, Inc......................................... 11,600 204,450
Tupperware Corp............................................. 2,000 107,250
----------
1,516,625
----------
CONSUMER DURABLES 1.3%
Chrysler Corp............................................... 4,400 145,200
Cooper Tire & Rubber........................................ 6,200 122,450
Ford Motor Co............................................... 3,400 108,375
Masco Corp.................................................. 3,500 126,000
Maytag Corp................................................. 8,900 175,775
Newell Co................................................... 5,300 166,950
----------
844,750
----------
CONSUMER NON-DURABLES 5.9%
American Brands, Inc........................................ 8,900 441,663
First Brands Corp........................................... 6,100 173,088
Philip Morris Cos., Inc..................................... 13,100 1,475,387
Quaker Oats Co.............................................. 3,200 122,000
RJR Nabisco Holdings Corp................................... 31,500 1,071,000
Tambrands, Inc.............................................. 3,200 130,800
Unilever NV - New York Shares (Netherlands)................. 2,100 368,025
----------
3,781,963
----------
CONSUMER SERVICES 4.4%
Comcast Corp., Class A...................................... 9,600 171,000
Cox Communications, Inc., Class A (b)....................... 8,900 205,813
Gannett, Inc................................................ 2,300 172,213
Harcourt General, Inc....................................... 5,800 267,525
Tele-Communications, Inc., Class A (b)...................... 84,600 1,105,087
Time Warner, Inc............................................ 24,100 903,750
----------
2,825,388
----------
ENERGY 6.1%
Amerada Hess Corp........................................... 6,000 347,250
Amoco Corp.................................................. 2,500 201,250
Atlantic Richfield Co....................................... 1,900 251,750
British Petroleum PLC - ADR (United Kingdom)................ 1,100 155,513
Coastal Corp................................................ 3,400 166,175
Coflexip SA - ADR (France) (b).............................. 4,700 123,375
J. Ray McDermott SA (b)..................................... 9,400 206,800
Occidental Petroleum Corp................................... 7,200 168,300
PanEnergy Corp.............................................. 12,100 544,500
Repsol SA - ADR (Spain)..................................... 7,800 297,375
Seagull Energy Corp. (b).................................... 7,900 173,800
Sonat, Inc.................................................. 800 41,200
Texaco, Inc................................................. 2,700 264,937
Total SA - ADR (France)..................................... 3,956 152,950
Unocal Corp................................................. 6,500 264,062
USX Marathon Group.......................................... 10,000 238,750
YPF Sociedad Anonima - ADR (Argentina), Class D............. 12,500 315,625
----------
3,913,612
----------
</TABLE>
B-54
See Notes to Financial Statements
<PAGE> 172
ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 8.4%
Aetna, Inc.................................................. 8,400 $ 672,000
AFLAC, Inc.................................................. 7,200 307,800
Allstate Corp............................................... 4,000 231,500
AMBAC, Inc.................................................. 3,900 258,862
American Bankers Insurance Group, Inc....................... 8,400 429,450
BankAmerica Corp............................................ 2,600 259,350
Bankers Trust New York Corp................................. 2,300 198,375
Bear Stearns Cos., Inc...................................... 10,465 291,712
Chase Manhattan Corp........................................ 3,600 321,300
CIGNA Corp.................................................. 2,500 341,562
CMAC Investment Corp........................................ 7,600 279,300
Conseco, Inc................................................ 2,500 159,375
Everest Reinsurance Holdings................................ 6,400 184,000
First USA, Inc.............................................. 4,100 141,963
Great Western Financial Corp................................ 5,200 150,800
J.P. Morgan & Co., Inc...................................... 3,200 312,400
MBIA, Inc................................................... 4,400 445,500
PNC Financial Corp.......................................... 5,800 218,225
Travelers Group, Inc........................................ 4,133 187,535
----------
5,391,009
----------
HEALTHCARE 2.7%
American Home Products Corp................................. 7,800 457,275
Lincare Holdings, Inc. (b).................................. 4,500 184,500
Mallinckrodt, Inc........................................... 13,600 600,100
Schering Plough Corp........................................ 1,700 110,075
SmithKline Beecham PLC - ADR (United Kingdom)............... 1,900 129,200
Warner Lambert Co........................................... 2,400 180,000
Wellpoint Health Networks, Inc., Class A (b)................ 700 24,063
----------
1,685,213
----------
PRODUCER MANUFACTURING 4.8%
Bouygues Offshore SA - ADR (France) (b)..................... 14,800 190,550
Browning Ferris Industries, Inc............................. 12,800 336,000
Caterpillar, Inc............................................ 2,700 203,175
Dover Corp.................................................. 2,600 130,650
Ingersoll Rand Co........................................... 6,000 267,000
Johnson Controls, Inc....................................... 1,000 82,875
LucasVarity PLC - ADR (United Kingdom) (b).................. 4,300 163,400
Rockwell International Corp................................. 1,900 115,662
Stewart & Stevenson Services, Inc........................... 4,600 133,975
TRW, Inc.................................................... 2,400 118,800
WMX Technologies, Inc....................................... 41,200 1,344,150
----------
3,086,237
----------
RAW MATERIALS/PROCESSING INDUSTRIES 3.6%
Bethlehem Steel Corp. (b)................................... 44,900 404,100
Boise Cascade Corp.......................................... 22,600 717,550
Dow Chemical Co............................................. 3,700 289,987
LTV Corp.................................................... 14,500 172,187
Lyondell Petrochemical Co................................... 6,900 151,800
Mead Corp................................................... 2,100 122,063
Stone Container Corp........................................ 6,600 98,175
Weyerhaeuser Co............................................. 3,600 170,550
Willamette Industries, Inc.................................. 2,100 146,213
----------
2,272,625
----------
</TABLE>
B-55
See Notes to Financial Statements
<PAGE> 173
ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 2.5%
Avnet, Inc.................................................. 4,500 $ 262,125
BMC Software, Inc. (b)...................................... 4,200 173,775
Computer Associates International, Inc...................... 2,800 139,300
Ericsson L M Telephone Co. - ADR (Sweden), Class B.......... 4,500 135,844
Gateway 2000, Inc. (b)...................................... 1,900 101,769
Hewlett Packard Co.......................................... 2,600 130,650
International Business Machines Corp........................ 1,300 196,300
Nokia Corp. - ADR (Finland)................................. 2,900 167,112
Pitney Bowes, Inc........................................... 1,500 81,750
SunGard Data Systems, Inc. (b).............................. 4,800 189,600
-----------
1,578,225
-----------
TRANSPORTATION 0.4%
Canadian National Railway Co................................ 7,100 269,800
-----------
UTILITIES 10.0%
Ameritech Corp. ............................................ 3,000 181,875
AT & T Corp. ............................................... 17,000 739,500
Baltimore Gas & Electric Co. ............................... 3,700 98,975
Bell Atlantic Corp. ........................................ 3,400 220,150
Bellsouth Corp. ............................................ 2,700 109,013
Boston Edison Co. .......................................... 4,000 107,500
Carolina Power & Light Co. ................................. 3,100 113,150
Central & South West Corp. ................................. 3,300 84,563
Cincinnati Bell, Inc. ...................................... 3,250 200,281
CMS Energy Corp. ........................................... 3,200 107,600
DTE Energy Co. ............................................. 9,000 291,375
Entergy Corp. .............................................. 4,800 133,200
FPL Group, Inc. ............................................ 2,600 119,600
GPU, Inc. .................................................. 4,200 141,225
Houston Industries, Inc. ................................... 14,100 319,012
Idaho Power Co. ............................................ 5,500 171,187
Illinova Corp. ............................................. 7,700 211,750
MCI Communications Corp. ................................... 30,000 980,625
Nipsco Industries, Inc. .................................... 1,700 67,363
Oklahoma Gas & Electric Co. ................................ 8,300 346,525
Pacificorp.................................................. 4,900 100,450
Peco Energy Co. ............................................ 6,800 171,700
Pinnacle West Capital Corp. ................................ 4,400 139,700
Public Service Co. of New Mexico............................ 6,800 133,450
SBC Communications, Inc. ................................... 5,500 284,625
Sierra Pacific Resources.................................... 2,400 69,000
Southwestern Public Service Co. ............................ 3,900 137,962
Sprint Corp. ............................................... 8,000 319,000
Texas Utilities Co. ........................................ 6,800 277,100
-----------
6,377,456
-----------
TOTAL COMMON STOCK................................................. 33,542,903
-----------
</TABLE>
B-56
See Notes to Financial Statements
<PAGE> 174
ASSET ALLOCATION FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE DEBT 19.8%
CONSUMER DISTRIBUTION 1.5%
$1,000 Sears Roebuck Acceptance Corp.......... 6.750% 09/15/05 $ 984,790
-----------
CONSUMER NON-DURABLES 1.6%
1,000 Anheuser Busch Co., Inc................ 7.000 09/01/05 1,001,090
-----------
CONSUMER SERVICES 1.5%
1,000 Cox Communications, Inc................ 6.875 06/15/05 984,210
-----------
ENERGY 3.4%
1,000 Burlington Resources, Inc.............. 9.125 10/01/21 1,174,800
1,000 Enron Corp............................. 6.875 10/15/07 989,450
-----------
2,164,250
-----------
FINANCE 1.7%
1,000 American General Corp.................. 9.625 02/01/18 1,065,900
-----------
HEALTHCARE 1.6%
1,000 Aetna, Inc............................. 7.125 08/15/06 1,007,550
-----------
PRODUCER MANUFACTURING 1.8%
1,000 Caterpillar, Inc....................... 9.000 04/15/06 1,144,900
-----------
TECHNOLOGY 3.4%
1,000 Boeing, Inc............................ 8.100 11/15/06 1,089,800
1,000 Phillips Electronics NV................ 8.375 09/15/06 1,087,900
-----------
2,177,700
-----------
UTILITIES 3.3%
1,000 Baltimore Gas & Electric Co............ 7.500 01/15/07 1,042,000
1,000 Texas Utilities Electric Co............ 8.250 04/01/04 1,073,750
-----------
2,115,750
-----------
TOTAL CORPORATE DEBT.................................... 12,646,140
-----------
U.S. GOVERNMENT OBLIGATIONS 15.9%
3,000 U.S. Treasury Bond..................... 7.250 05/15/16 3,172,020
4,200 U.S. Treasury Bond..................... 7.125 02/15/23 4,385,724
2,500 U.S. Treasury Note..................... 7.250 08/15/04 2,633,975
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS....................... 10,191,719
-----------
GOVERNMENT AND AGENCY FIXED-INCOME
OBLIGATIONS 1.6%
1,000 Province of Nova Scotia (Canada)....... 7.250 07/27/13 1,010,500
-----------
TOTAL LONG-TERM INVESTMENTS 89.8%
(Cost $52,474,795) (a)....................................... 57,391,262
REPURCHASE AGREEMENT 8.8%
BA Securities ($5,650,000 par collateralized by U.S.
Government obligations in a pooled cash account, dated
12/31/96, to be sold on 01/02/97 at $5,652,175)............. 5,650,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%.................... 907,803
-----------
NET ASSETS 100.0%............................................. $63,949,065
-----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $52,576,003,
the aggregate gross unrealized appreciation is $5,557,365 and the aggregate
gross unrealized depreciation is $742,106, resulting in net unrealized
appreciation of $4,815,259.
(b) Non-income producing security as this stock currently does not declare
dividends.
B-57
See Notes to Financial Statements
<PAGE> 175
ASSET ALLOCATION FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $52,474,795) (Note 1). $57,391,262
Repurchase Agreement (Note 1)...................................... 5,650,000
Cash............................................................... 5,090
Receivables:
Securities Sold................................................... 822,495
Interest.......................................................... 502,024
Dividends......................................................... 86,961
Other.............................................................. 15,551
-----------
Total Assets...................................................... 64,473,383
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased........................................... 228,869
Securities Purchased.............................................. 205,612
Investment Advisory Fee (Note 2).................................. 20,115
Distributor and Affiliates (Note 2)............................... 2,562
Deferred Compensation and Retirement Plans (Note 2)................ 39,272
Accrued Expenses................................................... 27,888
-----------
Total Liabilities................................................. 524,318
-----------
NET ASSETS......................................................... $63,949,065
-----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $57,866,139
Accumulated Net Realized Gain on Securities........................ 1,119,228
Net Unrealized Appreciation on Securities.......................... 4,916,467
Accumulated Undistributed Net Investment Income.................... 47,231
-----------
NET ASSETS......................................................... $63,949,065
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $63,949,065 and 5,633,242 shares of
beneficial interest issued and outstanding)....................... $ 11.35
-----------
</TABLE>
B-58
See Notes to Financial Statements
<PAGE> 176
ASSET ALLOCATION FUND STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................... $ 1,889,646
Dividends.......................................................... 879,270
-----------
Total Income...................................................... 2,768,916
-----------
EXPENSES:
Investment Advisory Fee (Note 2)................................... 316,002
Accounting (Note 2)................................................ 51,837
Trustees Fees and Expenses (Note 2)................................ 30,314
Custody............................................................ 22,628
Audit.............................................................. 19,433
Shareholder Services (Note 2)...................................... 15,323
Legal (Note 2)..................................................... 9,796
Other ............................................................. 45,742
-----------
Total Expenses.................................................... 511,075
Less Fees Waived and Expenses Reimbursed ($113,873 and $18,000,
respectively) (Note 2)............................................ 131,873
-----------
Net Expenses...................................................... 379,202
-----------
NET INVESTMENT INCOME.............................................. $ 2,389,714
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments................................... $ 6,901,393
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period........................................... 6,032,972
End of the Period:
Investments....................................................... 4,916,467
-----------
Net Unrealized Depreciation on Securities During the Period........ (1,116,505)
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES..................... $ 5,784,888
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $ 8,174,602
-----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 2,389,714 $ 2,324,931
Net Realized Gain on Securities.......... 6,901,393 6,122,759
Net Unrealized Appreciation/Depreciation
on Securities During the Period......... (1,116,505) 7,920,361
------------ ------------
Change in Net Assets from Operations..... 8,174,602 16,368,051
------------ ------------
Distributions from Net Investment Income. (2,362,025) (2,326,257)
Distributions from Net Realized Gain on
Securities (Note 1)..................... (6,874,314) (4,841,441)
------------ ------------
Total Distributions...................... (9,236,339) (7,167,698)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... (1,061,737) 9,200,353
------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 4,725,803 1,931,514
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 9,236,339 7,167,697
Cost of Shares Repurchased............... (11,932,457) (11,954,380)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. 2,029,685 (2,855,169)
------------ ------------
TOTAL INCREASE IN NET ASSETS............. 967,948 6,345,184
NET ASSETS:
Beginning of the Period.................. 62,981,117 56,635,933
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$47,231 and $19,542, respectively)...... $ 63,949,065 $ 62,981,117
------------ ------------
</TABLE>
B-59
See Notes to Financial Statements
<PAGE> 177
ASSET ALLOCATION FUND FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.. $11.64 $9.99 $11.80 $11.92 $12.08
------- ------ ------ ------ ------
Net Investment Income.................... .482 .48 .45 .29 .37
Net Realized and Unrealized
Gain/Loss on Securities................. 1.083 2.6425 (.89) .6025 .493
------- ------ ------ ------ ------
Total from Investment Operations.......... 1.565 3.1225 (.44) .8925 .863
------- ------ ------ ------ ------
Less:
Distributions from Net Investment Income. .478 .4775 .45 .2925 .3689
Distributions from Net Realized
Gain on Securities...................... 1.375 .995 .90 .63 .6541
Distributions in Excess of Net Realized
Gain on Securities...................... -0- -0- .02 .09 -0-
------- ------ ------ ------ ------
Total Distributions....................... 1.853 1.4725 1.37 1.0125 1.023
------- ------ ------ ------ ------
Net Asset Value, End of the Period........ $11.352 $11.64 $9.99 $11.80 $11.92
------- ------ ------ ------ ------
Total Return*............................. 13.87% 31.36% (3.66%) 7.71% 7.28%
Net Assets at End of the Period (In
millions)................................. $63.9 $63.0 $56.6 $64.9 $59.6
Ratio of Expenses to Average Net Assets*.. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average
Net Assets*............................... 3.78% 3.85% 3.70% 2.34% 3.05%
Portfolio Turnover........................ 118% 124% 163% 150% 126%
Average Commission Paid Per Equity Share
Traded (a)................................ $.0561 -- -- -- --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets... .81% .74% .72% .74% .77%
Ratio of Net Investment Income to Average
Net Assets................................ 3.57% 3.71% 3.58% 2.20% 2.88%
</TABLE>
(a) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
See Notes to Financial Statements
B-60
<PAGE> 178
DOMESTIC INCOME FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
CORPORATE DEBT OBLIGATIONS 81.9%
CONSUMER DISTRIBUTION 15.8%
$ 500 Borden, Inc............................ 7.875% 02/15/23 $ 447,800
500 CompUSA, Inc........................... 9.500 06/15/00 513,750
300 ConAgra, Inc........................... 9.750 03/01/21 374,730
500 Nabisco, Inc........................... 7.550 06/15/15 497,500
500 Orchard Supply......................... 9.375 02/15/02 531,875
500 Petro PSC Properties................... 12.500 06/01/02 508,750
250 Specialty Retailers, Inc............... 11.000 08/15/03 261,875
----------
3,136,280
----------
CONSUMER NON-DURABLES 2.7%
500 Dimon, Inc............................. 8.875 06/01/06 524,750
----------
CONSUMER SERVICES 15.3%
500 Circus Circus Enterprises, Inc......... 6.450 02/01/06 481,300
500 Cox Communications, Inc................ 7.250 11/15/15 488,400
500 News America Holdings, Inc............. 10.125 10/15/12 578,290
500 TCI Communications, Inc................ 8.750 08/01/15 497,700
500 Valassis Communications, Inc........... 9.550 12/01/03 523,500
500 Viacom, Inc............................ 7.625 01/15/16 463,500
----------
3,032,690
----------
ENERGY 12.5%
455 Coastal Corp........................... 10.250 10/15/04 539,995
500 HS Resources, Inc...................... 9.875 12/01/03 522,500
300 Noram Energy Corp...................... 10.000 11/15/19 337,875
500 Occidental Petroleum Corp.............. 10.125 11/15/01 570,850
500 PDV America, Inc....................... 7.875 08/01/03 497,550
----------
2,468,770
----------
FINANCE 4.9%
376 First PV Funding Corp., Ser 1986A...... 10.300 01/15/14 399,970
540 Phoenix RE Corp........................ 9.750 08/15/03 580,500
----------
980,470
----------
HEALTHCARE 8.0%
500 Allegiance Corp........................ 7.800 10/15/16 511,600
500 Manor Care, Inc........................ 7.500 06/15/06 513,900
500 Quorum Health Group.................... 11.875 12/15/02 550,000
----------
1,575,500
----------
PRODUCER MANUFACTURING 3.9%
500 Tarkett International GMBH (Germany)
(Yankee Bond).......................... 9.000 03/01/02 513,750
250 U.S. Can Corp., 144A Private Placement
(c).................................... 10.125 10/15/06 263,125
----------
776,875
----------
RAW MATERIALS/PROCESSING INDUSTRIES 2.9%
500 Georgia-Pacific Corp................... 9.950 06/15/02 571,600
----------
TRANSPORTATION 9.6%
500 Delta Airlines, Inc.................... 9.750 05/15/21 605,500
500 International Shipholding Corp......... 9.000 07/01/03 505,000
500 Southwest Airlines Co.................. 9.400 07/01/01 553,415
200 United Airlines, Inc................... 10.020 03/22/14 241,200
----------
1,905,115
----------
</TABLE>
B-61
See Notes to Financial Statements
<PAGE> 179
DOMESTIC INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
UTILITIES 6.3%
$ 500 360 Communications Co.................. 7.500% 03/01/06 $ 497,300
350 Monongahela Power Co................... 8.375 07/01/22 374,150
350 Public Service Co. of Colorado......... 8.750 03/01/22 378,175
-----------
1,249,625
-----------
TOTAL CORPORATE DEBT OBLIGATIONS....... 16,221,675
-----------
GOVERNMENT OBLIGATIONS 9.9%
839 Federal National Mortgage Association,
Pool................................... 10.000 04/01/21 918,967
500 Republic of South Africa (South
Africa)................................ 8.375 10/17/06 504,050
500 United Mexican States (Mexico)......... 11.375 09/15/16 526,250
-----------
TOTAL GOVERNMENT OBLIGATIONS........... 1,949,267
-----------
COMMON AND PREFERRED STOCK 3.8%
FF Holdings Co., 2,500 common shares (b)................ 25
Supermarkets General Holdings Corp., 6,889 preferred
shares, dividends of $3.52 per share (d)................ 175,669
Time Warner, Inc., 537 Series M preferred shares,
dividend rate of $10.251 (c)............................ 583,108
-----------
TOTAL COMMON AND PREFERRED STOCK........................ 758,802
-----------
TOTAL LONG-TERM INVESTMENTS 95.6%
(Cost $18,265,945) (a)........................................ 18,929,744
REPURCHASE AGREEMENT 3.0%
BA Securities ($585,000 par collateralized by U.S. Government
obligations in a pooled cash
account, dated 12/31/96, to be sold on 01/02/97 at $585,225).. 585,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%..................... 282,553
-----------
NET ASSETS 100.0%.............................................. $19,797,297
-----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $18,268,915,
the aggregate gross unrealized appreciation is $786,395 and the aggregate
gross unrealized depreciation is $125,565 resulting in net unrealized
appreciation of $660,830.
(b) Non-income producing security as this stock currently does not declare
dividends.
(c) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(d) Payment-in-kind security.
B-62
See Notes to Financial Statements
<PAGE> 180
DOMESTIC INCOME FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $18,265,945) (Note
1)................................................................ $18,929,744
Repurchase Agreement (Note 1)..................................... 585,000
Cash.............................................................. 1,401
Interest Receivable............................................... 371,587
Other............................................................. 1,132
-----------
Total Assets..................................................... 19,888,864
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased.......................................... 34,998
Distributor and Affiliates (Note 2).............................. 2,510
Deferred Compensation and Retirement Plans (Note 2)............... 44,659
Accrued Expenses.................................................. 9,400
-----------
Total Liabilities................................................ 91,567
-----------
NET ASSETS........................................................ $19,797,297
-----------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $20,772,963
Net Unrealized Appreciation on Securities......................... 663,799
Accumulated Undistributed Net Investment Income................... 34,326
Accumulated Net Realized Loss on Securities....................... (1,673,791)
-----------
NET ASSETS........................................................ $19,797,297
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $19,797,297 and 2,472,121 shares of
beneficial interest issued and outstanding)...................... $ 8.01
-----------
</TABLE>
B-63
See Notes to Financial Statements
<PAGE> 181
DOMESTIC INCOME FUND STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $1,836,107
Dividends........................................................... 38,241
Other............................................................... 15,000
----------
Total Income....................................................... 1,889,348
----------
EXPENSES:
Investment Advisory Fee (Note 2).................................... 110,243
Accounting (Note 2)................................................. 44,328
Trustees Fees and Expenses (Note 2)................................. 38,560
Audit............................................................... 20,174
Shareholder Services (Note 2)....................................... 15,317
Printing............................................................ 13,977
Custody............................................................. 12,116
Legal (Note 2)...................................................... 7,282
Other .............................................................. 21,397
----------
Total Expenses..................................................... 283,394
Less Fee Waived and Expenses Reimbursed ($110,243 and $40,859,
respectively) (Note 2)............................................. 151,102
----------
Net Expenses....................................................... 132,292
----------
NET INVESTMENT INCOME............................................... $1,757,056
----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments........................................................ $ 372,946
Forward Commitments................................................ (22,031)
----------
Net Realized Gain on Securities..................................... 350,915
----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................ 1,508,520
End of the Period:
Investments........................................................ 663,799
----------
Net Unrealized Depreciation on Securities During the Period......... (844,721)
----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES...................... $ (493,806)
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $1,263,250
----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 1,757,056 $ 2,110,912
Net Realized Gain on Securities.......... 350,915 222,049
Net Unrealized Appreciation/Depreciation
on Securities During the Period......... (844,721) 2,671,771
----------- -----------
Change in Net Assets from Operations..... 1,263,250 5,004,732
Distributions from Net Investment Income. (1,735,294) (2,098,216)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... (472,044) 2,906,516
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 6,174,993 7,719,168
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 1,735,294 2,098,217
Cost of Shares Repurchased............... (14,203,241) (7,435,575)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. (6,292,954) 2,381,810
----------- -----------
TOTAL INCREASE/DECREASE IN NET ASSETS.... (6,764,998) 5,288,326
NET ASSETS:
Beginning of the Period.................. 26,562,295 21,273,969
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$34,326 and $16,531, respectively)...... $19,797,297 $26,562,295
----------- -----------
</TABLE>
B-64
See Notes to Financial Statements
<PAGE> 182
DOMESTIC INCOME FUND FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $8.21 $7.35 $8.58 $8.00 $7.74
------ ------ -------- ------ -------
Net Investment Income................. .755 .71 .85 .72 .69
Net Realized and Unrealized
Gain/Loss on Securities.............. (.212) .8525 (1.2275) .5825 .2725
------ ------ -------- ------ -------
Total from Investment Operations....... .543 1.5625 (.3775) 1.3025 .9625
Less Distributions from Net Investment
Income................................. .745 .7025 .8525 .7225 .7025
------ ------ -------- ------ -------
Net Asset Value, End of the Period..... $8.008 $8.21 $7.35 $8.58 $8.00
------ ------ -------- ------ -------
Total Return*.......................... 6.68% 21.37% (4.33%) 16.32% 12.50%
Net Assets at End of the Period (In
millions).............................. $19.8 $26.6 $21.3 $27.4 $21.1
Ratio of Expenses to Average Net
Assets*................................ .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*.................... 7.97% 8.11% 8.35% 7.80% 8.89%
Portfolio Turnover..................... 77% 54% 94% 130% 117%
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets................................. 1.29% .93% .95% .95% .95%
Ratio of Net Investment Income to
Average Net Assets..................... 7.28% 7.78% 8.00% 7.40% 8.54%
</TABLE>
B-65
See Notes to Financial Statements
<PAGE> 183
EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 94.0%
CONSUMER DISTRIBUTION 8.8%
Bed Bath & Beyond, Inc. (b)................................ 1,050 $ 25,462
CDW Computer Centers, Inc. (b)............................. 400 23,725
Central Garden & Pet Co. (b)............................... 300 6,319
CompUSA, Inc. (b).......................................... 1,100 22,688
Consolidated Stores Corp. (b).............................. 812 26,085
Danka Business Systems--ADR (United Kingdom)............... 325 11,497
Dollar General Corp........................................ 350 11,200
Eagle Hardware & Garden, Inc. (b).......................... 600 12,450
Finish Line, Inc., Class A (b)............................. 600 12,675
Hughes Supply, Inc......................................... 200 8,625
Inacom Corp. (b)........................................... 375 15,000
Ingram Micro, Inc., Class A (b)............................ 500 11,500
Interstate Bakeries Corp................................... 500 24,562
Just for Feet, Inc. (b).................................... 450 11,813
Kroger Co. (b)............................................. 450 20,925
Miller (Herman) Inc........................................ 100 5,663
Richfood Holdings, Inc..................................... 525 12,731
Ross Stores, Inc........................................... 550 27,500
Safeway, Inc. (b).......................................... 950 40,612
Saks Holdings, Inc......................................... 400 10,800
Sports Authority, Inc. (b)................................. 300 6,525
Staples, Inc. (b).......................................... 700 12,644
Tiffany & Co............................................... 550 20,144
TJX Cos., Inc.............................................. 450 21,319
U.S. Office Products Co. (b)............................... 250 8,531
Vons Cos., Inc. (b)........................................ 750 44,906
--------
455,901
--------
CONSUMER DURABLES 0.4%
Blyth Industries, Inc. (b)................................. 200 9,125
Ethan Allen Interiors, Inc................................. 300 11,550
--------
20,675
--------
CONSUMER NON-DURABLES 5.3%
Borders Group, Inc. (b).................................... 350 12,556
Coca-Cola Enterprises, Inc................................. 500 24,250
Gadzooks, Inc. (b)......................................... 350 6,388
Gucci Group NV (b)......................................... 275 17,566
Liz Claiborne, Inc......................................... 450 17,381
Nautica Enterprises, Inc. (b).............................. 1,050 26,512
Nike, Inc., Class B........................................ 1,275 76,181
St. John Knits, Inc........................................ 550 23,925
Tommy Hilfiger Corp. (b)................................... 750 36,000
USA Detergents, Inc. (b)................................... 400 16,650
Wolverine World Wide, Inc.................................. 625 18,125
--------
275,534
--------
CONSUMER SERVICES 10.9%
AccuStaff, Inc. (b)........................................ 706 14,914
Amresco, Inc. (b).......................................... 800 21,400
APAC Teleservices, Inc. (b)................................ 700 26,862
Apollo Group, Inc., Class A (b)............................ 500 16,719
Boston Chicken, Inc. (b)................................... 250 8,969
Caribiner International, Inc. (b).......................... 150 7,538
CKE Restaurants, Inc....................................... 100 3,600
</TABLE>
B-66
See Notes to Financial Statements
<PAGE> 184
EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES (CONTINUED)
Consolidated Graphics, Inc. (b)............................ 250 $ 14,000
COREstaff, Inc. (b)........................................ 450 10,659
Corrections Corp. of America (b)........................... 900 27,562
Doubletree Corp. (b)....................................... 900 40,500
Evergreen Media, Class A (b)............................... 675 16,875
Gartner Group, Inc., Class A (b)........................... 650 25,309
HA-LO Industries, Inc. (b)................................. 437 12,017
HFS, Inc. (b).............................................. 1,000 59,750
Imperial Credit Industries, Inc. (b)....................... 1,800 37,800
Infinity Broadcasting Corp. (b)............................ 300 10,088
International Game Technology.............................. 500 9,125
Interpublic Group of Cos., Inc............................. 350 16,625
Landry's Seafood Restaurant, Inc. (b)...................... 200 4,275
Meredith Corp.............................................. 600 31,650
MGM Grand, Inc. (b)........................................ 200 6,975
National Data Corp......................................... 450 19,575
Omnicom Group.............................................. 400 18,300
Penske Motorsports, Inc. (b)............................... 200 5,050
Prime Hospitality Corp. (b)................................ 300 4,838
Promus Hotel Corp. (b)..................................... 450 13,331
Rainforest Cafe, Inc. (b).................................. 350 8,225
Regal Cinemas, Inc. (b).................................... 900 27,675
Reynolds & Reynolds Co., Class A........................... 725 18,850
Robert Half International, Inc. (b)........................ 300 10,313
Sitel Corp. (b)............................................ 1,000 14,125
Whittman-Hart, Inc......................................... 100 2,563
--------
566,057
--------
ENERGY 10.3%
Baker Hughes, Inc.......................................... 300 10,350
Barrett Resources Corp. (b)................................ 300 12,788
Benton Oil & Gas Co. (b)................................... 400 9,050
BJ Services Co. (b)........................................ 300 15,300
Chesapeake Energy Corp. (b)................................ 850 47,281
Cliffs Drilling Co. (b).................................... 250 15,813
Comstock Resources, Inc. (b)............................... 700 9,100
Cooper Cameron Corp. (b)................................... 500 38,250
Diamond Offshore Drilling, Inc. (b)........................ 600 34,200
ENSCO International, Inc. (b).............................. 375 18,188
Falcon Drilling (b)........................................ 300 11,775
Flores & Rucks, Inc. (b)................................... 400 21,300
Forcenergy Gas Exploration, Inc. (b)....................... 550 19,938
Global Marine, Inc. (b).................................... 1,100 22,687
Marine Drilling Cos., Inc. (b)............................. 750 14,766
Noble Drilling Corp. (b)................................... 650 12,919
Nuevo Energy Co. (b)....................................... 200 10,400
Pogo Producing Co.......................................... 650 30,712
Reading & Bates Corp. (b).................................. 1,000 26,500
Rowan Cos., Inc. (b)....................................... 1,350 30,544
Smith International, Inc. (b).............................. 750 33,656
Tidewater, Inc............................................. 550 24,887
Transocean Offshore, Inc................................... 650 40,706
United Meridian Corp. (b).................................. 450 23,287
--------
534,397
--------
</TABLE>
B-67
See Notes to Financial Statements
<PAGE> 185
EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 10.7%
Aames Financial Corp....................................... 450 $ 16,144
American Bankers Insurance Group, Inc...................... 250 12,781
Astoria Financial Corp..................................... 200 7,375
Bank of Boston Corp........................................ 500 32,125
CMAC Investment Corp....................................... 800 29,400
Conseco, Inc............................................... 700 44,625
ContiFinancial Corp. (b)................................... 200 7,225
CRA Managed Care, Inc. (b)................................. 100 4,500
Cullen Frost Bankers, Inc.................................. 300 9,975
Finova Group, Inc.......................................... 600 38,550
First Bank System, Inc..................................... 250 17,063
Green Tree Financial Corp.................................. 700 27,037
GreenPoint Financial Corp.................................. 275 12,994
Household International, Inc............................... 400 36,900
Money Store, Inc........................................... 600 16,575
North Fork Bancorp, Inc.................................... 250 8,906
Old Republic International Corp............................ 400 10,700
Penncorp Financial Group, Inc.............................. 600 21,600
Peoples Heritage Financial Group........................... 350 9,800
RAC Financial Group, Inc. (b).............................. 400 8,450
Star Banc Corp............................................. 175 16,078
Student Loan Marketing Assn................................ 350 32,594
SunAmerica, Inc............................................ 1,200 53,250
TCF Financial Corp. (b).................................... 600 26,100
TIG Holdings Inc........................................... 250 8,469
Washington Mutual, Inc..................................... 1,000 43,312
--------
552,528
--------
HEALTHCARE 7.5%
Curative Health Services, Inc. (b)......................... 300 8,306
Dura Pharmaceuticals, Inc. (b)............................. 1,400 66,850
ESC Medical Systems, Ltd. (b).............................. 200 5,100
HBO & Co................................................... 550 32,656
Health Management Association, Inc., Class A (b)........... 1,000 22,500
Healthsouth Corp. (b)...................................... 1,050 40,556
Henry Schein, Inc. (b)..................................... 200 6,875
Jones Medical Industries, Inc.............................. 500 18,313
Medicis Pharmaceutical Corp., Class A (b).................. 400 17,600
Mentor Corp................................................ 600 17,700
MiniMed Inc. (b)........................................... 400 12,900
Omnicare, Inc.............................................. 1,650 53,006
Parexel International Corp. (b)............................ 200 10,325
Quintiles Transnational Corp. (b).......................... 350 23,187
Renal Treatment Centers, Inc. (b).......................... 750 19,125
Rexall Sundown, Inc. (b)................................... 350 9,516
Total Renal Care Holdings, Inc. (b)........................ 350 12,688
Universal Health Services, Inc., Class B (b)............... 350 10,019
--------
387,222
--------
PRODUCER MANUFACTURING 4.2%
American Power Conversion Corp. (b)........................ 400 10,900
Camco International, Inc................................... 300 13,838
Danaher Corp............................................... 425 19,816
ITT Hartford Group, Inc.................................... 200 13,500
Mastec, Inc. (b)........................................... 300 15,900
</TABLE>
B-68
See Notes to Financial Statements
<PAGE> 186
EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
Mueller Industries, Inc. (b)............................... 250 $ 9,625
Precision Castparts Corp................................... 350 17,369
Shaw Group, Inc. (b)....................................... 200 4,675
U.S. Filter Corp. (b)...................................... 1,050 33,337
United Waste Systems, Inc. (b)............................. 1,000 34,375
USA Waste Services, Inc. (b)............................... 1,285 40,959
--------
214,294
--------
RAW MATERIALS/PROCESSING INDUSTRIES 2.2%
Cytec Industries, Inc. (b)................................. 200 8,125
Goodrich (B.F.) Co......................................... 600 24,300
Praxair, Inc............................................... 550 25,369
Raychem Corp............................................... 400 32,050
Sealed Air Corp. (b)....................................... 250 10,406
Titanium Metals Corp. (b).................................. 400 13,150
--------
113,400
--------
TECHNOLOGY 31.4%
Acxiom Corp. (b)........................................... 1,000 24,000
ADC Telecommunications, Inc. (b)........................... 1,100 34,237
Andrew Corp. (b)........................................... 500 26,531
Applied Magnetics Corp. (b)................................ 200 5,975
Ascend Communications, Inc................................. 1,400 86,975
Aspect Telecommunications Corp. (b)........................ 600 38,100
Aspen Technology, Inc. (b)................................. 300 24,075
BMC Industries, Inc........................................ 350 11,025
BMC Software, Inc. (b)..................................... 1,350 55,856
Cadence Design Systems, Inc. (b)........................... 1,100 43,725
Cambridge Technology Partners (b).......................... 700 23,494
Cascade Communications Corp. (b)........................... 850 46,856
CBT Group PLC--ADR (Ireland) (b)........................... 100 5,425
Ciber, Inc. (b)............................................ 400 12,000
Cisco Systems, Inc. (b).................................... 1,200 76,350
Citrix Systems, Inc. (b)................................... 500 19,531
Clarify, Inc. (b).......................................... 400 19,200
Cognos, Inc. (b)........................................... 400 11,250
Compuware Corp. (b)........................................ 700 35,087
Comverse Technology, Inc. (b).............................. 450 17,016
Concord EFS, Inc. (b)...................................... 475 13,419
Dell Computer Corp. (b).................................... 1,600 85,000
DSP Communications, Inc. (b)............................... 300 5,813
Dynatech Corp. (b)......................................... 650 28,763
Encad, Inc. (b)............................................ 300 12,375
Engineering Animation, Inc. (b)............................ 100 2,425
Intel Corp................................................. 325 42,555
Legato Systems Inc. (b).................................... 450 14,681
Lucent Technologies, Inc................................... 400 18,500
McAfee Associates, Inc. (b)................................ 2,187 96,228
National TechTeam, Inc. (b)................................ 250 5,000
Network General Corp. (b).................................. 300 9,075
Oracle Systems Corp. (b)................................... 550 22,963
PairGain Technologies, Inc. (b)............................ 2,900 88,269
Parametric Technology Corp. (b)............................ 900 46,237
Paychex, Inc............................................... 600 30,862
</TABLE>
B-69
See Notes to Financial Statements
<PAGE> 187
EMERGING GROWTH FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONTINUED)
Peoplesoft, Inc. (b)....................................... 1,950 $ 93,478
Rational Software Corp. (b)................................ 350 13,847
Remedy Corp. (b)........................................... 200 10,750
Sanmina Corp. (b).......................................... 250 14,125
Saville Systems PLC--ADR (Ireland) (b)..................... 300 12,188
SCI Systems, Inc. (b)...................................... 500 22,313
Security Dynamics Technology (b)........................... 700 22,050
Sun Microsystems, Inc. (b)................................. 900 23,119
SunGard Data Systems, Inc. (b)............................. 700 27,650
Technology Solutions Co. (b)............................... 400 16,600
Tellabs, Inc. (b).......................................... 1,300 48,912
3Com Corp. (b)............................................. 500 36,687
Ultrak, Inc. (b)........................................... 150 4,575
Uniphase Corp. (b)......................................... 250 13,125
Vanstar Corp. (b).......................................... 800 19,600
Vantive Corp. (b).......................................... 400 12,500
Viasoft, Inc. (b).......................................... 1,000 47,250
Visio Corp. (b)............................................ 100 4,950
Vitesse Semiconductor Corp. (b)............................ 550 25,025
Wind River Systems, Inc. (b)............................... 400 18,950
----------
1,626,567
----------
TRANSPORTATION 0.7%
Comair Holdings, Inc....................................... 450 10,800
Continental Airlines, Inc., Class B (b).................... 600 16,950
Trico Marine Services, Inc. (b)............................ 200 9,600
----------
37,350
----------
UTILITIES 1.6%
ACC Corp. (b).............................................. 400 12,100
AES Corp. (b).............................................. 350 16,275
Billing Information Concepts Corp. (b)..................... 500 14,375
Cincinnati Bell, Inc....................................... 600 36,975
VideoServer, Inc. (b)...................................... 100 4,250
----------
83,975
----------
TOTAL LONG-TERM INVESTMENTS 94.0%
(Cost $3,923,841) (a)............................................ 4,867,900
REPURCHASE AGREEMENT 5.9%
BA Securities ($305,000 par collateralized by U.S. Government
obligations in a pooled cash account, dated 12/31/96, to be sold
on 01/02/97 at $305,117)......................................... 305,000
OTHER ASSETS IN EXCESS OF LIABILITIES 0.1%........................ 5,287
----------
NET ASSETS 100.0%................................................. $5,178,187
----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $3,933,227,
the aggregate gross unrealized appreciation is $1,047,590 and the aggregate
gross unrealized depreciation is $112,917, resulting in net unrealized ap-
preciation of $934,673.
(b) Non-income producing security as this stock currently does not declare div-
idends.
B-70
See Notes to Financial Statements
<PAGE> 188
EMERGING GROWTH FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $3,923,841) (Note 1).. $4,867,900
Repurchase Agreement (Note 1)...................................... 305,000
Cash............................................................... 4,586
Receivables:
Securities Sold................................................... 44,738
Fund Shares Sold.................................................. 4,419
Dividends......................................................... 1,142
Unamortized Organizational Expenses (Note 1)....................... 4,779
----------
Total Assets...................................................... 5,232,564
----------
LIABILITIES:
Payables:
Fund Shares Repurchased........................................... 28,363
Distributor and Affiliates (Note 2)............................... 2,150
Accrued Expenses................................................... 18,937
Deferred Compensation and Retirement Plans (Note 2)................ 4,927
----------
Total Liabilities................................................. 54,377
----------
NET ASSETS......................................................... $5,178,187
----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $4,650,241
Net Unrealized Appreciation on Securities.......................... 944,059
Accumulated Net Investment Loss.................................... (4,926)
Accumulated Net Realized Loss on Securities........................ (411,187)
----------
NET ASSETS......................................................... $5,178,187
----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $5,178,187 and 379,065 shares of
beneficial interest issued and outstanding)....................... $ 13.66
----------
</TABLE>
B-71
See Notes to Financial Statements
<PAGE> 189
EMERGING GROWTH FUND STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $ 15,312
Dividends........................................................... 12,069
---------
Total Income....................................................... 27,381
---------
EXPENSES:
Accounting (Note 2)................................................. 41,089
Investment Advisory Fee (Note 2).................................... 28,284
Audit............................................................... 15,874
Shareholder Services (Note 2)....................................... 15,534
Printing............................................................ 13,817
Trustees Fees and Expenses (Note 2)................................. 9,414
Legal (Note 2)...................................................... 6,223
Amortization of Organizational Expenses (Note 1).................... 1,365
Other .............................................................. 732
---------
Total Expenses..................................................... 132,332
Less Fees Waived and Expenses Reimbursed ($28,284 and $69,703,
respectively) (Note 2)............................................. 97,987
---------
Net Expenses....................................................... 34,345
---------
NET INVESTMENT LOSS................................................. $ (6,964)
---------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Loss on Investments.................................... $(353,684)
---------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................ 244,665
End of the Period:
Investments........................................................ 944,059
---------
Net Unrealized Appreciation on Securities During the Period......... 699,394
---------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES...................... $ 345,710
---------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $ 338,746
---------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1996 and the Period July 3, 1995 (Commencement
of Investment Operations) to December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Loss...................... $ (6,964) $ (9,942)
Net Realized Loss on Securities.......... (353,684) (57,503)
Net Unrealized Appreciation
on Securities During the Period......... 699,394 244,665
---------- ----------
Change in Net Assets from Operations..... 338,746 177,220
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 4,967,397 2,362,883
Cost of Shares Repurchased............... (2,417,613) (250,546)
---------- ----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. 2,549,784 2,112,337
---------- ----------
TOTAL INCREASE IN NET ASSETS............. 2,888,530 2,289,557
NET ASSETS:
Beginning of the Period.................. 2,289,657 100
---------- ----------
End of the Period (Including accumulated
net investment loss of
$4,926 and $1,050, respectively)........ $5,178,187 $2,289,657
---------- ----------
</TABLE>
B-72
See Notes to Financial Statements
<PAGE> 190
EMERGING GROWTH FUND FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
July 3, 1995
(Commencement
of Investment
Year Ended Operations)
December 31, to December
1996 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period......... $11.72 $10.00
------- ------
Net Investment Loss............................. (.016) (.08)
Net Realized and Unrealized
Gain on Securities............................. 1.956 1.80
------- ------
Total from Investment Operations................. 1.940 1.72
------- ------
Net Asset Value, End of the Period............... $13.660 $11.72
------- ------
Total Return*.................................... 16.55% 17.20%**
Net Assets at End of the Period (In millions).... $5.2 $2.3
Ratio of Expenses to Average Net Assets*......... .85% 2.50%
Ratio of Net Investment Loss to Average Net
Assets*.......................................... (.17%) (1.45%)
Portfolio Turnover............................... 102% 41%**
Average Commission Per Equity Share Traded (a)... $ .0470 --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.......... 3.28% 5.40%
Ratio of Net Investment Loss to Average Net
Assets........................................... (2.60%) (4.35%)
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
B-73
See Notes to Financial Statements
<PAGE> 191
ENTERPRISE FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 97.0%
CONSUMER DISTRIBUTION 9.1%
Bed Bath & Beyond, Inc. (b)................................. 10,000 $ 242,500
CompUSA, Inc. (b)........................................... 20,000 412,500
Gap, Inc.................................................... 9,800 295,225
General Nutrition Companies, Inc. (b)....................... 16,000 270,000
Kroger Co. (b).............................................. 16,500 767,250
Lear Corp. (b).............................................. 7,100 242,288
Lowe's Companies, Inc....................................... 10,000 355,000
Ross Stores, Inc............................................ 11,500 575,000
Safeway, Inc. (b)........................................... 36,300 1,551,825
Sears Roebuck & Co.......................................... 10,800 498,150
Tiffany & Co................................................ 13,000 476,125
TJX Companies, Inc.......................................... 14,300 677,462
U.S. Office Products Co. (b)................................ 14,600 498,225
Vons Companies, Inc. (b).................................... 14,500 868,187
----------
7,729,737
----------
CONSUMER DURABLES 1.0%
Chrysler Corp............................................... 14,100 465,300
Harley Davidson, Inc........................................ 8,700 408,900
----------
874,200
----------
CONSUMER NON-DURABLES 8.8%
Fila Holdings SpA - ADR (Italy) (b)......................... 7,600 441,750
Liz Claiborne, Inc.......................................... 12,800 494,400
Nautica Enterprises, Inc. (b)............................... 15,800 398,950
Nike, Inc., Class B......................................... 7,000 418,250
Philip Morris Companies, Inc................................ 37,900 4,268,487
Procter & Gamble Co......................................... 4,500 483,750
RJR Nabisco Holdings Corp................................... 19,000 646,000
Tommy Hilfiger Corp. (b).................................... 7,000 336,000
----------
7,487,587
----------
CONSUMER SERVICES 6.7%
AccuStaff, Inc. (b)......................................... 16,524 349,070
Boston Chicken, Inc. (b).................................... 12,000 430,500
Equifax, Inc................................................ 17,500 535,937
Evergreen Media Corp., Class A (b).......................... 23,700 592,500
Hilton Hotels Corp.......................................... 14,000 365,750
Knight Ridder, Inc.......................................... 3,000 114,750
Marriot International, Inc.................................. 13,700 756,925
Omnicom Group............................................... 19,000 869,250
Promus Hotel Corp. (b)...................................... 10,500 311,063
RAC Financial Group, Inc. (b)............................... 17,400 367,575
Scripps Co. (EW), Class A (b)............................... 5,000 175,000
Service Corp. International................................. 30,000 840,000
----------
5,708,320
----------
ENERGY 5.4%
Apache Corp................................................. 10,000 353,750
Baker Hughes, Inc........................................... 9,800 338,100
Exxon Corp.................................................. 6,500 637,000
Phillips Petroleum Co....................................... 16,000 708,000
Smith International, Inc. (b)............................... 19,500 875,062
Texaco, Inc................................................. 5,000 490,625
Transocean Offshore, Inc.................................... 6,000 375,750
Williams Companies, Inc..................................... 21,975 824,063
----------
4,602,350
----------
</TABLE>
B-74
See Notes to Financial Statements
<PAGE> 192
ENTERPRISE FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 20.0%
Aames Financial Corp........................................ 10,650 $ 382,069
Alex Brown, Inc............................................. 7,300 529,250
Bank of Boston Corp......................................... 13,000 835,250
BankAmerica Corp............................................ 10,200 1,017,450
Charles Schwab Corp......................................... 10,000 320,000
Chase Manhattan Corp........................................ 14,300 1,276,275
Citicorp.................................................... 5,100 525,300
CMAC Investment Corp........................................ 16,600 610,050
Conseco, Inc................................................ 19,100 1,217,625
Federal National Mortgage Association....................... 68,000 2,533,000
First Bank System, Inc...................................... 6,500 443,625
Green Tree Financial Corp................................... 24,500 946,312
Merrill Lynch & Co., Inc.................................... 14,645 1,193,567
MGIC Investment Corp........................................ 7,200 547,200
Money Store, Inc............................................ 15,100 417,138
Penncorp Financial Group, Inc............................... 11,800 424,800
Student Loan Marketing Association.......................... 8,900 828,813
SunAmerica, Inc............................................. 34,800 1,544,250
Travelers Group, Inc........................................ 30,000 1,361,250
-----------
16,953,224
-----------
HEALTHCARE 13.6%
Amgen, Inc. (b)............................................. 12,300 668,812
Bristol Myers Squibb Co..................................... 12,100 1,315,875
Columbia / HCA Healthcare Corp.............................. 15,000 611,250
ESC Medical Systems, Ltd. (b)............................... 8,900 226,950
Health Management Association, Inc., Class A (b)............ 18,500 416,250
Healthsouth Corp. (b)....................................... 17,900 691,387
Johnson & Johnson........................................... 23,700 1,179,075
Lincare Holdings, Inc. (b).................................. 14,000 574,000
Medtronic, Inc.............................................. 8,300 564,400
Merck & Co., Inc............................................ 18,400 1,458,200
Pfizer, Inc................................................. 14,900 1,234,837
Physician Reliance Network, Inc. (b)........................ 9,200 71,300
Renal Treatment Centers, Inc. (b)........................... 15,800 402,900
Schering Plough Corp........................................ 13,200 854,700
Universal Health Services, Inc., Class B (b)................ 13,700 392,163
Warner Lambert Co........................................... 6,000 450,000
Watson Pharmaceuticals, Inc. (b)............................ 9,800 440,388
-----------
11,552,487
-----------
PRODUCER MANUFACTURING 6.4%
Allied Signal, Inc.......................................... 6,400 428,800
Deere & Co.................................................. 14,700 597,187
Dover Corp.................................................. 12,200 613,050
Illinois Tool Workers, Inc.................................. 5,500 439,313
Textron Inc................................................. 4,500 424,125
Tyco International, Ltd..................................... 11,600 613,350
United Technologies Corp.................................... 11,600 765,600
United Waste Systems, Inc. (b).............................. 30,000 1,031,250
USA Waste Services, Inc. (b)................................ 15,400 490,875
-----------
5,403,550
-----------
</TABLE>
B-75
See Notes to Financial Statements
<PAGE> 193
ENTERPRISE FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES 3.6%
Air Products & Chemicals, Inc.............................. 7,000 $ 483,875
Cytec Industries, Inc. (b)................................. 11,100 450,938
Praxair, Inc............................................... 25,700 1,185,412
Raychem Corp............................................... 8,000 641,000
Union Carbide Corp......................................... 6,200 253,425
-----------
3,014,650
-----------
TECHNOLOGY 21.8%
3Com Corp. (b)............................................. 17,300 1,269,387
ADC Telecommunications, Inc. (b)........................... 21,000 653,625
Altera Corp. (b)........................................... 5,000 363,438
Analog Devices, Inc. (b)................................... 7,500 254,063
Ascend Communications, Inc. (b)............................ 10,000 621,250
Aspect Telecommunications Corp. (b)........................ 9,700 615,950
Atmel Corp. (b)............................................ 12,000 397,500
BMC Industries, Inc........................................ 9,100 286,650
BMC Software, Inc. (b)..................................... 26,000 1,075,750
Boeing Co.................................................. 8,700 925,462
Cadence Design Systems, Inc. (b)........................... 17,000 675,750
Cisco Systems, Inc. (b).................................... 19,400 1,234,325
Compaq Computer Corp. (b).................................. 8,700 645,975
Computer Associates International, Inc..................... 14,450 718,887
Compuware Corp. (b)........................................ 5,000 250,625
DST Systems, Inc. (b)...................................... 13,900 436,112
Input/Output, Inc. (b)..................................... 6,800 125,800
Intel Corp................................................. 13,900 1,820,031
International Business Machines Corp....................... 4,200 634,200
Linear Technology Corp..................................... 7,700 337,838
Lucent Technologies, Inc................................... 7,500 346,875
Microsoft Corp. (b)........................................ 17,400 1,437,675
PairGain Technologies, Inc. (b)............................ 10,000 304,375
Sanmina Corp. (b).......................................... 10,000 565,000
SCI Systems, Inc. (b)...................................... 8,500 379,313
Sun Microsystems, Inc. (b)................................. 38,000 976,125
Tellabs, Inc. (b).......................................... 20,000 752,500
Wind River Systems, Inc. (b)............................... 7,300 345,838
-----------
18,450,319
-----------
UTILITIES 0.6%
Worldcom, Inc. (b)......................................... 20,000 521,250
-----------
TOTAL LONG-TERM INVESTMENTS 97.0%
(Cost $63,240,692) (a)........................................... 82,297,674
REPURCHASE AGREEMENT 4.1%
BA Securities ($3,470,000 par collateralized by U.S. Government
obligations in a pooled cash account,
dated 12/31/96, to be sold on 01/02/97 at $3,471,336)........... 3,470,000
LIABILITIES IN EXCESS OF OTHER ASSETS (1.1%)...................... (962,504)
-----------
NET ASSETS 100.0%................................................. $84,805,170
-----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $63,335,245,
the aggregate gross unrealized appreciation is $19,634,505 and the
aggregate gross unrealized depreciation is $672,076, resulting in net
unrealized appreciation of $18,962,429.
(b) Non-income producing security as this stock currently does not declare
dividends.
B-76
See Notes to Financial Statements
<PAGE> 194
ENTERPRISE FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $63,240,692) (Note 1). $82,297,674
Repurchase Agreement (Note 1)...................................... 3,470,000
Cash............................................................... 2,257
Receivables:
Securities Sold................................................... 690,496
Dividends......................................................... 91,618
Other.............................................................. 1,856
-----------
Total Assets...................................................... 86,553,901
-----------
LIABILITIES:
Payables:
Securities Purchased.............................................. 1,584,170
Fund Shares Repurchased........................................... 83,451
Investment Advisory Fee (Note 2).................................. 13,203
Distributor and Affiliates (Note 2)............................... 2,750
Deferred Compensation and Retirement Plans (Note 2)................ 44,929
Accrued Expenses................................................... 20,228
-----------
Total Liabilities................................................. 1,748,731
-----------
NET ASSETS......................................................... $84,805,170
-----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $64,671,892
Net Unrealized Appreciation on Securities.......................... 19,056,982
Accumulated Net Realized Gain on Securities........................ 1,016,856
Accumulated Undistributed Net Investment Income.................... 59,440
-----------
NET ASSETS......................................................... $84,805,170
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $84,805,170 and 5,214,950 shares of
beneficial interest issued and outstanding)....................... $ 16.26
-----------
</TABLE>
B-77
See Notes to Financial Statements
<PAGE> 195
ENTERPRISE FUND STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................... $ 946,594
Interest........................................................... 99,309
-----------
Total Income...................................................... 1,045,903
-----------
EXPENSES:
Investment Advisory Fee (Note 2)................................... 407,693
Accounting (Note 2)................................................ 53,732
Custody............................................................ 23,024
Shareholder Services (Note 2)...................................... 15,628
Trustees Fees and Expenses (Note 2)................................ 13,897
Legal (Note 2)..................................................... 10,696
Other ............................................................. 88,143
-----------
Total Expenses.................................................... 612,813
Less Fees Waived and Expenses Reimbursed ($104,582 and $19,000,
respectively) (Note 2)............................................ 123,582
-----------
Net Expenses...................................................... 489,231
-----------
NET INVESTMENT INCOME.............................................. $ 556,672
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments................................... $ 7,574,164
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period........................................... 9,274,444
End of the Period:
Investments....................................................... 19,056,982
-----------
Net Unrealized Appreciation on Securities During the Period........ 9,782,538
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES..................... $17,356,702
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $17,913,374
-----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 556,672 $ 1,464,956
Net Realized Gain on Securities.......... 7,574,164 10,869,574
Net Unrealized Appreciation on Securities
During the Period....................... 9,782,538 9,837,636
----------- ------------
Change in Net Assets from Operations..... 17,913,374 22,172,166
----------- ------------
Distributions from Net Investment Income. (530,417) (1,446,938)
Distributions from Net Realized Gain on
Securities (Note 1)..................... (9,089,491) (8,808,250)
----------- ------------
Total Distributions...................... (9,619,908) (10,255,188)
----------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... 8,293,466 11,916,978
----------- ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 7,883,906 6,340,082
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 9,619,909 10,255,188
Cost of Shares Repurchased............... (17,001,971) (19,974,310)
----------- ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. 501,844 (3,379,040)
----------- ------------
TOTAL INCREASE IN NET ASSETS............. 8,795,310 8,537,938
NET ASSETS:
Beginning of the Period.................. 76,009,860 67,471,922
----------- ------------
End of the Period (Including accumulated
undistributed net investment income of
$59,440 and $33,185, respectively)...... $84,805,170 $ 76,009,860
----------- ------------
</TABLE>
B-78
See Notes to Financial Statements
<PAGE> 196
ENTERPRISE FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period. $14.69 $12.39 $14.57 $14.21 $13.44
------- ------ ------- ------ ------
Net Investment Income................... .113 .32 .25 .21 .23
Net Realized and Unrealized Gain/Loss on
Securities............................. 3.417 4.22 (.7625) 1.0325 .77
------- ------ ------- ------ ------
Total from Investment Operations......... 3.530 4.54 (.5125) 1.2425 1.00
------- ------ ------- ------ ------
Less:
Distributions from Net Investment
Income.................................. .109 .3175 .25 .215 .23
Distributions from Net Realized Gain on
Securities............................. 1.849 1.9225 1.4175 .6675 -0-
------- ------ ------- ------ ------
Total Distributions...................... 1.958 2.24 1.6675 .8825 .23
------- ------ ------- ------ ------
Net Asset Value, End of the Period....... $16.262 $14.69 $12.39 $14.57 $14.21
------- ------ ------- ------ ------
Total Return*............................ 24.80% 36.98% (3.39)% 8.98% 7.48%
Net Assets at End of the Period (In
millions)................................ $84.8 $76.0 $67.5 $72.3 $65.6
Ratio of Expenses to Average Net Assets*. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average
Net Assets*.............................. .68% 2.06% 1.72% 1.41% 1.78%
Portfolio Turnover....................... 152% 145% 153% 139% 116%
Average Commission Paid per Equity Share
Traded (a)............................... $.0435 -- -- -- --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.. .75% .68% .68% .72% .74%
Ratio of Net Investment Income to Average
Net Assets............................... .53% 1.98% 1.64% 1.29% 1.64%
</TABLE>
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
B-79
See Notes to Financial Statements
<PAGE> 197
GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK & EQUIVALENTS 95.0%
AUSTRIA 4.2%
Flughafen Wien............................................. 300 $ 15,293
Scala ECE (b).............................................. 200 27,797
Slovakofarma (b)........................................... 300 39,710
Wolford.................................................... 200 24,195
--------
106,995
--------
CROATIA 0.3%
Pliva d.d. (GDR) (b)....................................... 168 8,820
--------
CZECH REPUBLIC 4.8%
Ceske Radiokomunikace (b).................................. 500 70,228
Inzenyrske a Prumyslove Stavby Praha (b)................... 2,200 23,458
Komercni Banka (GDR) (b)................................... 1,000 26,600
--------
120,286
--------
FRANCE 5.9%
Adecco SA.................................................. 102 25,812
Cap Gemini Sogeti (b)...................................... 500 24,178
Christian Dior SA.......................................... 280 45,169
Cie De St. Gobain.......................................... 200 28,293
Compagnie Financiere de Paris (GDR)........................ 600 18,150
Sidel SA (b)............................................... 120 8,257
--------
149,859
--------
GERMANY 3.7%
Adidas AG.................................................. 500 43,215
Deutsche Telekom (b)....................................... 1,000 21,088
SAP AG..................................................... 200 27,944
--------
92,247
--------
HONG KONG 1.6%
First Pacific Co........................................... 7,000 9,096
Henderson Land Development................................. 1,000 10,085
Jilin Chemical Industries, Class H (b)..................... 70,000 10,860
Swire Pacific.............................................. 1,000 9,535
--------
39,576
--------
HUNGARY 3.1%
Graboplast Textiles........................................ 1,000 33,828
Tiszai Vegyi Kombinat (GDR) (b)............................ 4,000 44,800
--------
78,628
--------
INDONESIA 0.5%
BK Bira.................................................... 10,000 11,854
--------
IRELAND 1.5%
Adare Printing Group....................................... 2,000 19,188
Bank of Ireland............................................ 2,000 18,263
--------
37,451
--------
ITALY 4.6%
Bulgari SpA................................................ 2,000 40,606
Gucci Group................................................ 875 55,891
Mediolanum SpA (b)......................................... 2,000 18,932
--------
115,429
--------
JAPAN 10.5%
Bank of Tokyo.............................................. 1,600 29,704
Fuji Photo Film Co......................................... 1,000 32,985
Honda Motor Co............................................. 1,000 28,581
Japan Radio Co............................................. 1,000 10,707
Kawasaki Heavy Industries.................................. 6,000 24,817
</TABLE>
B-80
See Notes to Financial Statements
<PAGE> 198
GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONTINUED)
Matsushita Electric Industries............................. 1,000 $ 16,320
Mitsubishi Chemical........................................ 4,000 12,952
Mitsubishi Estate.......................................... 2,000 20,551
Nichiei Construction....................................... 2,000 13,850
Nomura Securities.......................................... 1,000 15,025
NTT Data Communications Systems............................ 1 29,272
Takashimaya Co............................................. 1,000 12,002
Toshiba Corp............................................... 3,000 18,858
--------
265,624
--------
MALAYSIA 0.8%
Jaya Tiasa Holdings........................................ 2,000 10,612
Metacorp Berhad............................................ 4,000 10,216
--------
20,828
--------
MEXICO 1.4%
Cemex SA (ADR)............................................. 1,100 8,456
Empresas ICA Sociedad Controladora (ADR) (b)............... 1,000 14,625
Telefonos de Mexico (ADR).................................. 400 13,200
--------
36,281
--------
NETHERLANDS 6.2%
ASM Lithography Holding (b)................................ 400 19,994
Cap Gemini Group........................................... 1,000 29,076
ING Groep.................................................. 1,100 39,629
PolyGram................................................... 500 25,485
Ver Ned Uitgevers.......................................... 2,000 41,819
--------
156,003
--------
NORWAY 3.4%
Tandberg (b)............................................... 1,000 30,886
Uni-Storebrand ASA (b)..................................... 5,500 31,584
VISMA...................................................... 4,500 23,048
--------
85,518
--------
POLAND 0.6%
Bank Gdanski SA (GDR)...................................... 1,000 12,520
Krosno SA.................................................. 71 1,362
--------
13,882
--------
SINGAPORE 1.0%
Fraser & Neave............................................. 1,400 14,407
Singapore Land............................................. 2,000 11,077
--------
25,484
--------
SWEDEN 2.7%
Astra, Class B............................................. 800 38,593
Nobel Biocare.............................................. 1,600 28,153
--------
66,746
--------
SWITZERLAND 3.0%
Adecco SA.................................................. 100 25,103
Novartis AG (b)............................................ 21 24,430
Schweizerischer Bankverein................................. 140 26,619
--------
76,152
--------
THAILAND 0.1%
Thai Military Bank PLC..................................... 1,100 2,166
--------
UNITED KINGDOM 7.9%
Astec (BSR)................................................ 10,000 26,884
BOC Group.................................................. 1,000 14,973
</TABLE>
B-81
See Notes to Financial Statements
<PAGE> 199
GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONTINUED)
Boots Co................................................... 2,000 $ 20,627
Carlton Communications..................................... 3,000 26,294
Dixons Group............................................... 4,000 37,211
Marks & Spencer............................................ 2,800 23,601
National Westminster Bank.................................. 2,000 23,505
Reuters Holdings........................................... 2,000 25,715
--------
198,810
--------
UNITED STATES 27.2%
Aames Financial Corp....................................... 150 5,381
AccuStaff, Inc. (b)........................................ 107 2,260
ADC Telecommunications, Inc. (b)........................... 140 4,357
Air Products & Chemicals, Inc.............................. 70 4,839
Alex Brown, Inc............................................ 70 5,075
Allied Signal, Inc......................................... 60 4,020
Amgen, Inc. (b)............................................ 120 6,525
Apache Corp................................................ 70 2,476
Ascend Communications, Inc. (b)............................ 50 3,106
Aspect Telecommunications Corp. (b)........................ 70 4,445
Atmel Corp. (b)............................................ 100 3,312
Baker Hughes, Inc.......................................... 70 2,415
Bank of Boston Corp........................................ 90 5,782
BankAmerica Corp........................................... 70 6,982
Bed Bath & Beyond, Inc. (b)................................ 150 3,637
BMC Industries, Inc........................................ 70 2,205
BMC Software, Inc. (b)..................................... 200 8,275
Boeing Co.................................................. 50 5,319
Boston Chicken, Inc. (b)................................... 70 2,511
Bristol-Myers Squibb Co.................................... 90 9,787
Cadence Design Systems, Inc. (b)........................... 110 4,372
Chase Manhattan Corp. (c).................................. 120 10,710
Chrysler Corp.............................................. 100 3,300
Cisco Systems, Inc. (b)(c)................................. 190 12,089
Citicorp................................................... 50 5,150
CMAC Investment Corp....................................... 140 5,145
Columbia / HCA Healthcare Corp............................. 100 4,075
Compaq Computer Corp. (b).................................. 50 3,712
CompUSA, Inc. (b).......................................... 140 2,887
Computer Associates International, Inc..................... 200 9,950
Compuware Corp. (b)........................................ 50 2,506
Conseco, Inc............................................... 150 9,563
Cytec Industries, Inc. (b)................................. 220 8,938
Deere & Co................................................. 70 2,844
Dover Corp................................................. 70 3,518
DST Systems, Inc. (b)...................................... 70 2,196
Equifax, Inc............................................... 180 5,513
Evergreen Media Corp., Class A (b)......................... 220 5,500
Exxon Corp................................................. 60 5,975
Federal National Mortgage Association (b)(c)............... 590 21,978
First Bank System, Inc..................................... 50 3,413
Gap, Inc................................................... 120 3,615
General Nutrition Cos., Inc. (b)........................... 150 2,531
Green Tree Financial Corp. (c)............................. 260 10,043
</TABLE>
B-82
See Notes to Financial Statements
<PAGE> 200
GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Harley-Davidson, Inc....................................... 70 $ 3,290
Health Management Associates, Inc., Class A (b)............ 190 4,275
Healthsouth Corp. (b)...................................... 150 5,794
Illinois Tool Workers, Inc................................. 70 5,591
Input/Output, Inc. (b)..................................... 70 1,295
Intel Corp. (c)............................................ 130 17,022
International Business Machines............................ 30 4,530
Johnson & Johnson.......................................... 175 8,706
Kroger Co. (b)............................................. 150 6,975
Lear Corp. (b)............................................. 70 2,389
Lincare Holdings, Inc. (b)................................. 150 6,150
Liz Claiborne, Inc......................................... 125 4,828
Lowe's Co., Inc............................................ 75 2,663
Lucent Technologies, Inc................................... 70 3,238
Marriott International, Inc................................ 150 8,288
Medtronic, Inc............................................. 70 4,760
Merck & Co., Inc. (c)...................................... 150 11,888
Merrill Lynch & Co., Inc. (c).............................. 125 10,188
Metalclad Corp. (b)........................................ 3,000 5,437
MGIC Investment Corp....................................... 70 5,320
Microsoft Corp. (b)(c)..................................... 120 9,915
Money Store, Inc........................................... 150 4,144
Nautica Enterprises, Inc. (b).............................. 150 3,788
Nike, Inc., Class B........................................ 50 2,988
Omnicom Group, Inc......................................... 150 6,863
PairGain Technologies, Inc. (b)............................ 100 3,044
Penncorp Financial Group, Inc.............................. 110 3,960
Pfizer, Inc................................................ 120 9,945
Philip Morris Cos., Inc. (c)............................... 325 36,603
Phillips Petroleum Co...................................... 110 4,868
Physician Reliance Network, Inc. (b)....................... 150 1,163
Praxair, Inc. (c).......................................... 220 10,148
Procter & Gamble Co........................................ 40 4,300
Promus Hotel Corp. (b)..................................... 70 2,074
RAC Financial Group, Inc. (b).............................. 140 2,958
Raychem Corp............................................... 70 5,609
Renal Treatment Centers, Inc. (b).......................... 150 3,825
RJR Nabisco Holdings Corp.................................. 170 5,756
Ross Stores, Inc........................................... 70 3,500
Safeway, Inc. (b)(c)....................................... 330 14,108
Sanmina Corp. (b).......................................... 70 3,955
Schering-Plough Corp....................................... 100 6,475
Schwab (Charles) Corp...................................... 100 3,200
SCI Systems, Inc. (b)...................................... 70 3,124
Scripps Howard, Inc., Class A.............................. 50 1,750
Service Corp. International................................ 300 8,400
Smith International, Inc. (b).............................. 150 6,731
Student Loan Marketing Association......................... 70 6,519
Sun Microsystems, Inc. (b)................................. 300 7,706
SunAmerica, Inc. (c)....................................... 300 13,313
Tellabs, Inc. (b).......................................... 250 9,406
Texaco, Inc................................................ 70 6,869
</TABLE>
B-83
See Notes to Financial Statements
<PAGE> 201
GLOBAL EQUITY FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Textron, Inc.............................................. 40 $ 3,770
3Com Corp. (b)............................................ 110 8,071
Tiffany & Co.............................................. 110 4,029
TJX Cos., Inc............................................. 120 5,685
Tommy Hilfiger Corp. (b).................................. 130 6,240
Transocean Offshore, Inc.................................. 70 4,384
Travelers Group, Inc. (c)................................. 253 11,480
Tyco International, Ltd................................... 100 5,288
U.S. Office Products Co. (b).............................. 150 5,119
Union Carbide Corp........................................ 70 2,861
United Waste Systems, Inc. (b)(c)......................... 360 12,375
Universal Health Services, Inc., Class B (b).............. 120 3,435
USA Waste Services, Inc. (b).............................. 110 3,506
Vons Cos., Inc. (b)....................................... 120 7,185
Watson Pharmaceuticals, Inc. (b)(c)....................... 70 3,146
Williams Cos., Inc........................................ 225 8,438
Wind River Systems, Inc. (b).............................. 70 3,316
Worldcom, Inc. (b)........................................ 180 4,691
----------
684,885
----------
TOTAL COMMON STOCK AND EQUIVALENTS............................... 2,393,524
----------
PREFERRED STOCK 1.2%
FINLAND 1.2%
Nokia Corp. (Ab) Oy (ADR)................................. 500 29,000
----------
UNITED STATES CORPORATE OBLIGATIONS 0.3%
United Micro Electric Corp. ($6,000 par, 1.250% coupon, 06/08/04
maturity, convertible into 6,437 common shares).................. 8,423
----------
TOTAL LONG-TERM INVESTMENTS 96.5%
(Cost $2,034,679) (a)........................................... 2,430,947
FOREIGN CURRENCY 3.7% (Various Denominations, Cost $90,172) (a).. 92,175
LIABILITIES IN EXCESS OF OTHER ASSETS (0.2%)..................... (6,098)
----------
NET ASSETS 100.0%................................................ $2,517,024
----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $2,125,213,
the aggregate gross unrealized appreciation is $488,693 and the aggregate
gross unrealized depreciation is $90,784, resulting in net unrealized
appreciation of $397,909.
(b) Non-income producing security as this stock currently does not declare
dividends.
(c) Assets segregated as collateral for open forward currency contracts.
B-84
See Notes to Financial Statements
<PAGE> 202
GLOBAL EQUITY FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $2,034,679) (Note 1).. $2,430,947
Foreign Currency, at Market Value (Cost $90,172) (Note 1).......... 92,175
Cash............................................................... 21,012
Receivables:
Dividends......................................................... 3,484
Securities Sold................................................... 3,452
Interest.......................................................... 27
Unamortized Organizational Expenses (Note 1)....................... 4,770
----------
Total Assets...................................................... 2,555,867
----------
LIABILITIES:
Payables:
Securities Purchased.............................................. 13,483
Distributor and Affiliates (Note 2)............................... 3,050
Fund Shares Repurchased........................................... 991
Accrued Expenses................................................... 15,172
Deferred Compensation and Retirement Plans (Note 2)................ 4,642
Forward Currency Contracts (Note 5)................................ 1,505
----------
Total Liabilities................................................. 38,843
----------
NET ASSETS......................................................... $2,517,024
----------
NET ASSETS CONSIST OF:
Capital (Note 3)................................................... $2,102,301
Net Unrealized Appreciation on Securities.......................... 396,734
Accumulated Net Realized Gain on Securities........................ 27,719
Accumulated Distributions in Excess of Net Investment Income (Note
1)................................................................. (9,730)
----------
NET ASSETS......................................................... $2,517,024
----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $2,517,024 and 215,901 shares of
beneficial interest issued and outstanding)....................... $ 11.66
----------
</TABLE>
B-85
See Notes to Financial Statements
<PAGE> 203
GLOBAL EQUITY FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $4,658)................ $ 38,087
Interest.............................................................. 3,720
--------
Total Income......................................................... 41,807
--------
EXPENSES:
Custody and Accounting................................................ 116,865
Investment Advisory Fee (Note 2)...................................... 28,416
Audit................................................................. 18,897
Shareholder Services (Note 2)......................................... 15,384
Printing.............................................................. 15,219
Trustees Fees and Expenses (Note 2)................................... 8,980
Legal (Note 2)........................................................ 5,843
Amortization of Organizational Expenses (Note 1)...................... 1,369
Other ................................................................ 265
--------
Total Expenses....................................................... 211,238
Less Fees Waived and Expenses Reimbursed ($28,416 and $148,723,
respectively) (Note 2)............................................... 177,139
--------
Net Expenses......................................................... 34,099
--------
NET INVESTMENT INCOME................................................. $ 7,708
--------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments.......................................................... $ 73,020
Forward Currency Contracts........................................... 34,640
--------
Net Realized Gain on Securities....................................... 107,660
--------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period.............................................. 102,678
--------
End of the Period:
Investments.......................................................... 396,268
Forward Currency Contracts........................................... (1,505)
Foreign Currency Translation......................................... 1,971
--------
396,734
--------
Net Unrealized Appreciation on Securities During the Period........... 294,056
--------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES........................ $401,716
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS............................ $409,424
--------
</TABLE>
B-86
See Notes to Financial Statements
<PAGE> 204
GLOBAL EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1996 and the Period July 3, 1995 (Commencement
of Investment Operations) to December 31, 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income/Loss.............. $ 7,708 $ (30,335)
Net Realized Gain/Loss on Securities.... 107,660 (6,056)
Net Unrealized Appreciation on
Securities During the Period........... 294,056 102,678
---------- ----------
Change in Net Assets from Operations.... 409,424 66,287
---------- ----------
Distributions from Net Investment
Income.................................. (7,708) -0-
Distributions in Excess of Net
Investment Income (Note 1).............. (32,197) -0-
---------- ----------
Distributions from and in Excess of Net
Investment Income....................... (39,905) -0-
Distributions from Net Realized Gain on
Securities (Note 1)..................... (37,458) -0-
---------- ----------
Total Distributions..................... (77,363) -0-
---------- ----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES.............................. 332,061 66,287
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............... 1,241,023 2,319,291
Net Asset Value of Shares Issued through
Dividend Reinvestment................... 42,743 -0-
Cost of Shares Repurchased.............. (1,473,972) (10,509)
---------- ----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................ (190,206) 2,308,782
---------- ----------
TOTAL INCREASE IN NET ASSETS............ 141,855 2,375,069
NET ASSETS:
Beginning of the Period................. 2,375,169 100
---------- ----------
End of the Period (Including accumulated
distributions in excess of net
investment income of $9,730 and
$12,173, respectively)................. $2,517,024 $2,375,169
---------- ----------
</TABLE>
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Fundoutstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
July 3, 1995
(Commencement
Year of Investment
Ended Operations)
December 31, to December
1996 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period......... $10.30 $10.00
------- ------
Net Investment Income/Loss...................... .035 (.16)
Net Realized and Unrealized Gain on Securities.. 1.687 .46
------- ------
Total from Investment Operations................. 1.722 .30
------- ------
Less:
Distributions from and in Excess of Net
Investment Income............................... .188 -0-
Distributions from Net Realized Gain on
Securities...................................... .176 -0-
------- ------
Total Distributions.............................. .364 -0-
------- ------
Net Asset Value, End of the Period............... $11.658 $10.30
------- ------
Total Return*.................................... 16.72% 3.00%**
Net Assets at End of the Period (In millions).... $2.5 $2.4
Ratio of Expenses to Average Net Assets*......... 1.20% 4.35%
Ratio of Net Investment Income/Loss to Average
Net Assets*...................................... .27% (2.76%)
Portfolio Turnover............................... 94% 42%**
Average Commission Rate per Equity Share Traded
(a).............................................. $.0245 --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.......... 7.43% 8.27%
Ratio of Net Investment Loss to Average Net
Assets........................................... (5.96%) (6.68%)
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
B-87
See Notes to Financial Statements
<PAGE> 205
GOVERNMENT FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES GOVERNMENT
AGENCY OBLIGATIONS 67.6%
$2,399 Federal Home Loan Mortgage
Corp. CMO................. 6.088% 11/15/18 $ 2,341,379
2,603 Federal Home Loan Mortgage
Corp. Gold 30 Year Pool
(b)....................... 7.000 05/01/24 to 07/01/24 2,554,113
1,479 Federal Home Loan Mortgage
Corp. Gold 30 Year Pool
(b)....................... 7.500 06/01/24 to 10/01/24 1,479,908
1,507 Federal Home Loan Mortgage
Corp. Gold 30 Year Pool... 8.000 09/01/24 to 10/01/24 1,535,527
1,985 Federal National Mortgage
Association Var Rate Cpn
(b)....................... 6.149 03/25/09 1,986,364
2,066 Federal National Mortgage
Association CMO Var Rate
Cpn....................... 6.169 03/25/09 2,071,656
1,943 Federal National Mortgage
Association 15 Year Dwarf
Pool...................... 6.500 06/01/09 to 04/01/11 1,907,791
1,980 Federal National Mortgage
Association 15 Year Dwarf
Pool...................... 7.000 07/01/10 to 12/01/11 1,979,387
997 Federal National Mortgage
Association Pool.......... 6.500 03/01/26 to 05/01/26 950,350
1,781 Federal National Mortgage
Association Pool.......... 7.000 12/01/23 to 06/01/24 1,743,821
1,638 Federal National Mortgage
Association Pool.......... 7.500 05/01/24 to 10/01/24 1,636,947
744 Federal National Mortgage
Association Pool.......... 8.000 06/01/24 to 10/01/24 757,678
1,985 Federal National Mortgage
Association Pool (b)...... 9.000 02/01/17 2,112,158
1,134 Federal National Mortgage
Association Pool.......... 11.000 11/01/20 1,257,610
6,355 Government National
Mortgage Association Pool. 7.000 04/15/23 to 10/15/24 6,214,371
2,195 Government National
Mortgage Association Pool. 7.500 04/15/22 to 06/15/24 2,195,812
2,855 Government National
Mortgage Association Pool. 8.000 05/15/17 to 11/15/24 2,913,926
2,632 Government National
Mortgage Association Pool
(b)....................... 8.500 03/15/17 to 07/15/17 2,770,516
240 Government National
Mortgage Association Pool. 11.000 09/15/10 to 08/15/20 267,934
-----------
TOTAL UNITED STATES GOVERNMENT AGENCY OBLIGATIONS...... 38,677,248
-----------
UNITED STATES TREASURY
OBLIGATIONS 26.8%
1,000 United States Treasury
Notes (b)................. 5.000 02/15/99 982,030
2,000 United States Treasury
Notes (b)................. 5.625 02/15/06 1,893,760
3,000 United States Treasury
Notes (b)................. 6.750 05/31/99 3,052,020
4,000 United States Treasury
Notes (b)................. 7.750 11/30/99 4,180,640
1,000 United States Treasury
Notes (b)................. 7.875 04/15/98 1,025,780
4,000 United States Treasury
Notes (b)................. 8.000 08/15/99 to 05/15/01 4,235,020
-----------
TOTAL UNITED STATES TREASURY OBLIGATIONS............... 15,369,250
-----------
OTHER MORTGAGE-BACKED
SECURITIES 1.3%
720 FBC Mortgage Securities
Trust 7 Var Rate Cpn...... 5.963 01/25/17 720,361
-----------
FORWARD PURCHASE COMMITMENT 3.7%
2,000 Government National
Mortgage Association,
January Forward........... 9.000 TBA 2,141,260
-----------
TOTAL LONG-TERM INVESTMENTS 99.4%
(Cost $56,238,811) (a)....................................... 56,908,119
SHORT-TERM INVESTMENTS AT AMORTIZED COST 4.1%
Federal Home Loan Mortgage Corp. Discount Note ($2,325,000
par yielding 6.502%, maturity 01/02/97)...................... 2,324,160
LIABILITIES IN EXCESS OF OTHER ASSETS (3.5%).................. (1,977,897)
-----------
NET ASSETS 100.0%............................................. $57,254,382
-----------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $56,242,249,
the gross unrealized appreciation is $833,009 and the gross unrealized
depreciation is $191,607, resulting in net unrealized appreciation
including open forward commitments of $641,402.
(b) Assets segregated as collateral for open forward commitments and open
futures transactions.
TBA--To be announced, maturity date has not yet been established. Upon
settlement and delivery of the mortgage pools, maturity dates will be
assigned.
B-88
See Notes to Financial Statements
<PAGE> 206
GOVERNMENT FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $56,238,811) (Note
1)................................................................ $56,908,119
Short-Term Investments (Note 1)................................... 2,324,160
Cash.............................................................. 2,070
Interest Receivable............................................... 460,013
Other............................................................. 14,566
-----------
Total Assets..................................................... 59,708,928
-----------
LIABILITIES:
Payables:
Securities Purchased............................................. 2,156,057
Variation Margin on Futures (Note 5)............................. 143,170
Fund Shares Repurchased.......................................... 32,974
Forward Commitments (Note 6)..................................... 24,468
Distributor and Affiliates (Note 2).............................. 2,650
Deferred Compensation and Retirement Plans (Note 2)............... 41,849
Accrued Expenses.................................................. 53,378
-----------
Total Liabilities................................................ 2,454,546
-----------
NET ASSETS........................................................ $57,254,382
-----------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $70,107,395
Net Unrealized Appreciation on Securities......................... 446,722
Accumulated Distributions in Excess of Net Investment Income (Note
1)................................................................ (11,355)
Accumulated Net Realized Loss on Securities....................... (13,288,380)
-----------
NET ASSETS........................................................ $57,254,382
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $57,254,382 and 6,606,459 shares of
beneficial interest issued and outstanding)...................... $ 8.67
-----------
</TABLE>
B-89
See Notes to Financial Statements
<PAGE> 207
GOVERNMENT FUND STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 4,347,277
-----------
EXPENSES:
Investment Advisory Fee (Note 2).................................. 303,695
Accounting Services (Note 2)...................................... 55,531
Shareholder Services (Note 2)..................................... 15,421
Trustees Fees and Expenses (Note 2)............................... 12,119
Legal (Note 2).................................................... 9,843
Custody........................................................... 8,206
Other ............................................................ 82,093
-----------
Total Expenses................................................... 486,908
Less Fees Waived and Expenses Reimbursed ($103,474 and $19,000,
respectively) (Note 2)........................................... 122,474
-----------
Net Expenses..................................................... 364,434
-----------
NET INVESTMENT INCOME............................................. $ 3,982,843
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments...................................................... $ (703,703)
Futures.......................................................... (103,280)
Forward Commitments.............................................. (86,987)
-----------
Net Realized Loss on Securities................................... (893,970)
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period.......................................... 2,397,568
-----------
End of the Period:
Investments...................................................... 669,308
Futures.......................................................... (198,118)
Forward Commitments.............................................. (24,468)
-----------
446,722
-----------
Net Unrealized Depreciation on Securities During the Period....... (1,950,846)
-----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES.................... $(2,844,816)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS........................ $ 1,138,027
-----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 3,982,843 $ 4,592,403
Net Realized Gain/Loss on Securities..... (893,970) 1,258,015
Net Unrealized Appreciation/Depreciation
on Securities During the Period......... (1,950,846) 4,705,976
----------- -----------
Change in Net Assets from Operations..... 1,138,027 10,556,394
----------- -----------
Distributions from Net Investment Income. (3,998,258) (4,588,452)
Distributions in Excess of Net Investment
Income (Note 1)......................... (25,823) -0-
----------- -----------
Distributions from and in Excess of Net
Investment Income....................... (4,024,081) (4,588,452)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... (2,886,054) 5,967,942
----------- -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 1,607,635 2,668,721
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 4,024,080 4,588,452
Cost of Shares Repurchased............... (12,510,487) (11,719,168)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. (6,878,772) (4,461,995)
----------- -----------
TOTAL INCREASE/DECREASE IN NET ASSETS.... (9,764,826) 1,505,947
NET ASSETS:
Beginning of the Period.................. 67,019,208 65,513,261
----------- -----------
End of the Period (Including accumulated
undistributed net investment income of
$(11,355) and $15,415, respectively).... $57,254,382 $67,019,208
----------- -----------
</TABLE>
B-90
See Notes to Financial Statements
<PAGE> 208
GOVERNMENT FUND FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Fundoutstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.. $9.06 $8.28 $9.26 $9.13 $9.29
------ ------ ------ ----- ------
Net Investment Income.................... .569 .60 .56 .57 .665
Net Realized and Unrealized Gain/Loss on
Securities.............................. (.388) .78 (.985) .135 (.1575)
------ ------ ------ ----- ------
Total from Investment Operations.......... .181 1.38 (.425) .705 .5075
Less Distributions from and in Excess of
Net Investment Income (Note 1)............ .575 .60 .555 .575 .6675
------ ------ ------ ----- ------
Net Asset Value, End of the Period........ $8.666 $9.06 $8.28 $9.26 $9.13
------ ------ ------ ----- ------
Total Return*............................. 2.12% 17.17% (4.63%) 7.86% 5.73%
Net Assets at End of the Period (In
millions)................................. $57.3 $67.0 $65.5 $80.6 $74.8
Ratio of Expenses to Average Net Assets*.. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average
Net Assets*............................... 6.56% 6.89% 6.71% 6.45% 7.29%
Portfolio Turnover........................ 143% 164% 192% 91% 36%
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets... .80% .72% .70% .70% .70%
Ratio of Net Investment Income to Average
Net Assets................................ 6.36% 6.77% 6.61% 6.35% 7.19%
</TABLE>
B-91
See Notes to Financial Statements
<PAGE> 209
GROWTH AND INCOME FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 98.7%
CONSUMER DISTRIBUTION 5.4%
Dayton Hudson Corp......................................... 110 $ 4,318
Federated Department Stores, Inc. (b)...................... 260 8,873
Gymboree Corp. (b)......................................... 70 1,601
Revco D.S., Inc. (b)....................................... 40 1,480
Sears Roebuck & Co......................................... 60 2,768
Talbots, Inc............................................... 100 2,863
Toys R Us, Inc. (b)........................................ 60 1,800
Vons Companies, Inc. (b)................................... 50 2,994
-------
26,697
-------
CONSUMER DURABLES 1.9%
Eastman Kodak Co........................................... 40 3,210
Masco Corp................................................. 100 3,600
Newell Co.................................................. 90 2,835
-------
9,645
-------
CONSUMER NON-DURABLES 9.0%
Adidas AGS (Germany)....................................... 100 4,263
American Brands, Inc....................................... 80 3,970
Campbell Soup Co........................................... 30 2,408
Colgate Palmolive Co....................................... 40 3,690
Nabisco Holdings Corp., Class A............................ 140 5,443
Philip Morris Companies, Inc............................... 100 11,259
Procter & Gamble Co........................................ 30 3,225
Quaker Oats Co............................................. 80 3,050
Ralston Purina Group....................................... 30 2,201
RJR Nabisco Holdings Corp.................................. 160 5,440
-------
44,949
-------
CONSUMER SERVICES 3.2%
Cognizant Corp............................................. 40 1,320
Deluxe Corp................................................ 70 2,293
H&R Block, Inc............................................. 90 2,610
Omnicom Group.............................................. 70 3,203
Time Warner, Inc........................................... 50 1,875
Tribune Co................................................. 30 2,366
Walt Disney Co............................................. 30 2,089
-------
15,756
-------
ENERGY 9.2%
Apache Corp................................................ 70 2,476
Burlington Resources, Inc.................................. 80 4,030
Coastal Corp............................................... 50 2,444
Exxon Corp................................................. 25 2,450
Royal Dutch Petroleum Co.--ADR (Netherlands)............... 50 8,538
Texaco, Inc................................................ 160 15,695
Unocal Corp................................................ 160 6,500
USX-Marathon Group......................................... 150 3,581
-------
45,714
-------
</TABLE>
B-92
See Notes to Financial Statements
<PAGE> 210
GROWTH AND INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 17.9%
Aetna, Inc.................................................. 45 $ 3,600
Allstate Corp............................................... 100 5,788
American International Group, Inc........................... 60 6,495
BankAmerica Corp............................................ 110 10,973
Bankers Trust Corp.......................................... 50 4,313
Chase Manhattan Corp........................................ 60 5,355
Comerica, Inc............................................... 70 3,666
Conseco, Inc................................................ 50 3,188
Everest Reinsurance Holdings................................ 130 3,738
Federal National Mortgage Association....................... 210 7,823
First Bank System, Inc...................................... 50 3,413
First Union Corp............................................ 30 2,220
Horace Mann Educators Corp.................................. 80 3,230
J.P. Morgan & Co., Inc...................................... 50 4,881
MBIA, Inc................................................... 40 4,050
NationsBank Corp............................................ 30 2,933
Student Loan Marketing Association.......................... 60 5,588
Travelers Group, Inc........................................ 110 4,991
USF&G Corp.................................................. 150 3,131
-------
89,376
-------
HEALTHCARE 11.6%
Abbott Labs................................................. 110 5,583
Amgen, Inc. (b)............................................. 70 3,806
Bristol Myers Squibb Co..................................... 60 6,525
Glaxo Wellcome--ADR (United Kingdom)........................ 160 5,080
Merck & Co., Inc............................................ 80 6,340
Nellcor Puitan Bennett, Inc. (b)............................ 60 1,313
Novartis AG--ADR (Switzerland) (b).......................... 100 5,700
Pacificare Health Sysem, Inc., Class B (b).................. 60 5,115
SmithKline Beecham--ADR (United Kingdom).................... 110 7,480
Teva Pharmaceutical Industries Ltd.--ADR (Israel)........... 60 3,015
Warner Lambert Co........................................... 70 5,250
Watsons Pharmaceuticals, Inc. (b)........................... 60 2,696
-------
57,903
-------
PRODUCER MANUFACTURING 8.5%
Allied Signal, Inc.......................................... 100 6,700
Canadian Pacific Ltd........................................ 260 6,890
General Electric Co......................................... 50 4,944
Honeywell, Inc.............................................. 80 5,260
Ingersoll Rand Co........................................... 110 4,895
Johnson Controls, Inc....................................... 40 3,315
Keystone International, Inc................................. 60 1,208
Stewart & Stevenson Services, Inc........................... 160 4,660
WMX Technologies, Inc....................................... 140 4,568
-------
42,440
-------
RAW MATERIALS/PROCESSING INDUSTRIES 4.9%
Betzdearborn, Inc........................................... 60 3,510
Crown Cork & Seal, Inc...................................... 160 8,700
James River Corp............................................ 90 2,981
Monsanto Co................................................. 40 1,555
Morton International, Inc................................... 60 2,445
Praxair, Inc................................................ 110 5,074
-------
24,265
-------
</TABLE>
B-93
See Notes to Financial Statements
<PAGE> 211
GROWTH AND INCOME FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Security Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY 15.4%
3Com Corp. (b)............................................. 90 $ 6,604
BMC Software, Inc. (b)..................................... 120 4,965
Boeing Co.................................................. 60 6,383
Cisco Systems, Inc. (b).................................... 60 3,818
Computer Associates International, Inc..................... 120 5,970
Ericsson (LM) Class B--ADR (Sweden)........................ 140 4,226
General Instruments Corp. (b).............................. 170 3,676
General Signal Corp........................................ 100 4,275
Hewlett Packard Co......................................... 40 2,010
Intel Corp................................................. 50 6,547
International Business Machines, Inc....................... 40 6,040
Linear Technology Corp..................................... 50 2,194
Lucent Technologies, Inc................................... 90 4,163
Microsoft Corp. (b)........................................ 50 4,131
Newbridge Networks Corp. (b)............................... 150 4,238
Nokia Corp.--ADR (Finland)................................. 80 4,610
Tellabs, Inc. (b).......................................... 80 3,010
--------
76,860
--------
TRANSPORTATION 1.5%
Canadian National Railway Co............................... 120 4,560
Union Pacific Corp......................................... 50 3,006
--------
7,566
--------
UTILITIES 10.2%
Allegheny Power Systems, Inc. ............................. 70 2,126
AT&T Corp. ................................................ 350 15,220
Boston Edison Co. ......................................... 120 3,225
Cable & Wireless--ADR (United Kingdom)..................... 110 2,709
Cincinnati Bell, Inc. ..................................... 70 4,314
DTE Energy Co. ............................................ 220 7,123
Edison International....................................... 130 2,584
Frontier Corp. ............................................ 120 2,715
Houston Industries, Inc. .................................. 60 1,358
Nipsco Industries, Inc. ................................... 10 396
Ohio Edison Co. ........................................... 150 3,413
Scana Corp. ............................................... 90 2,408
Unicom Corp. .............................................. 110 2,984
--------
50,575
--------
TOTAL LONG-TERM INVESTMENTS 98.7%
(Cost $493,716) (a).............................................. 491,746
OTHER ASSETS IN EXCESS OF LIABILITIES 1.3%........................ 6,756
--------
NET ASSETS 100.0%................................................. $498,502
--------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $493,716, the
aggregate gross unrealized appreciation is $5,528 and the aggregate gross
unrealized depreciation is $7,498, resulting in net unrealized depreciation
of $1,970.
(b) Non-income producing security as this stock currently does not declare
dividends.
B-94
See Notes to Financial Statements
<PAGE> 212
GROWTH AND INCOME FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $493,716) (Note 1)...... $491,746
Cash................................................................. 22,120
Receivables:
Securities Sold..................................................... 1,699
Dividends........................................................... 363
--------
Total Assets........................................................ 515,928
--------
LIABILITIES:
Payable for Securities Purchased..................................... 17,333
Accrued Expenses..................................................... 93
--------
Total Liabilities................................................... 17,426
--------
NET ASSETS........................................................... $498,502
--------
NET ASSETS CONSIST OF:
Capital (Note 3)..................................................... $500,000
Accumulated Undistributed Net Investment Income...................... 553
Accumulated Net Realized Loss on Securities.......................... (81)
Net Unrealized Depreciation on Securities............................ (1,970)
--------
NET ASSETS........................................................... $498,502
--------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE (Based
on net assets of $498,502 and 50,000 shares of
beneficial interest issued and outstanding)......................... $ 9.97
--------
</TABLE>
B-95
See Notes to Financial Statements
<PAGE> 213
GROWTH AND INCOME FUND STATEMENT OF OPERATIONS
For the Period December 23, 1996 (Commencement of Investment Operations) to
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends............................................................. $ 363
Interest.............................................................. 283
-------
Total Income......................................................... 646
-------
EXPENSES:
Audit................................................................. 5,000
Printing.............................................................. 200
Registration.......................................................... 160
Custody............................................................... 150
Investment Advisory Fee (Note 2)...................................... 74
Other................................................................. 100
-------
Total Expenses....................................................... 5,684
Less Fees Waived and Expenses Reimbursed ($74 and $5,517,
respectively) (Note 2)............................................... 5,591
-------
Net Expenses......................................................... 93
-------
NET INVESTMENT INCOME................................................. $ 553
-------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Loss on Investments...................................... $ (81)
-------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period.............................................. 0
End of the Period:
Investments.......................................................... (1,970)
-------
Net Unrealized Depreciation on Securities During the Period........... (1,970)
-------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES........................ $(2,051)
-------
NET DECREASE IN NET ASSETS FROM OPERATIONS............................ $(1,498)
-------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Period December 23, 1996 (Commencement of Investment Operations) to
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Period Ended
December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income ...................................... $ 553
Net Realized Loss on Securities............................. (81)
Net Unrealized Depreciation on Securities During the Period. (1,970)
--------
TOTAL DECREASE IN NET ASSETS................................ (1,498)
NET ASSETS:
Beginning of the Period..................................... 500,000
--------
End of the Period (Including accumulated undistributed net
investment income of $553)................................. $498,502
--------
</TABLE>
B-96
See Notes to Financial Statements
<PAGE> 214
GROWTH AND INCOME FUND FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the period indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 23, 1996
(Commencement
of Investment
Operations) to
December 31,
1996
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of the Period.................... $10.000
-------
Net Investment Income...................................... .011
Net Realized and Unrealized
Loss on Securities........................................ (.041)
-------
Total from Investment Operations............................ (.030)
-------
Net Asset Value, End of the Period.......................... $9.970
-------
Total Return*............................................... (.30)%**
Net Assets at End of the Period (In millions)............... $0.5
Ratio of Expenses to Average Net Assets*.................... .75%
Ratio of Net Investment Income to Average Net Assets*....... 4.47%
Portfolio Turnover.......................................... 0%**
Average Commission Paid Per Equity Share Traded (a)......... $.0203
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets..................... 45.97%
Ratio of Net Investment Loss to Average Net Assets.......... (40.74)%
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable.
B-97
See Notes to Financial Statements
<PAGE> 215
MONEY MARKET FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Discount
Par Yield on
Amount Date of Amortized
(000) Description Maturity Purchase Cost
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS
77.5%.
$2,000 Federal Farm Credit Bank Discount
Note.................................. 01/09/97 5.387% $ 1,997,315
1,000 Federal Home Loan Bank Discount Note.. 01/06/97 5.241 999,132
1,000 Federal Home Loan Bank Discount Note.. 03/17/97 5.571 988,558
1,000 Federal Home Loan Mortgage Corp.
Discount Note......................... 01/07/97 5.304 998,981
1,000 Federal Home Loan Mortgage Corp.
Discount Note......................... 03/19/97 5.413 988,408
1,000 Federal National Mortgage Association
Discount Note......................... 01/17/97 5.379 997,507
1,000 Federal National Mortgage Association
Discount Note......................... 02/18/97 5.433 992,772
1,000 Federal National Mortgage Association
Discount Note......................... 03/06/97 5.637 990,106
1,000 Federal National Mortgage Association
Discount Note......................... 03/27/97 5.457 987,315
1,000 Federal National Mortgage Association
Discount Note......................... 06/10/97 5.281 977,012
2,260 Student Loan Marketing Association
Discount Note......................... 01/02/97 6.502 2,259,184
2,000 Tennessee Valley Authority Discount
Note.................................. 01/28/97 5.296 1,991,818
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS............... 15,168,108
-----------
COMMERCIAL PAPER 23.0%
900 Associates Corp. of North America..... 01/10/97 5.404 898,655
900 Chevron Oil Finance Corp.............. 01/06/97 5.211 899,214
900 General Electric Capital Corp......... 01/10/97 5.424 898,650
900 Metlife Funding Inc................... 02/18/97 5.376 893,483
900 Toronto Dominion Holdings............. 01/13/97 5.307 898,290
-----------
TOTAL COMMERCIAL PAPER................................. 4,488,292
-----------
TOTAL INVESTMENTS 100.5% (A).................................... 19,656,400
LIABILITIES IN EXCESS OF OTHER ASSETS (0.5%).................... (90,465)
-----------
NET ASSETS 100.0%............................................... $19,565,935
-----------
</TABLE>
(a) At December 31, 1996, cost is identical for both book and federal income
tax purposes.
B-98
See Notes to Financial Statements
<PAGE> 216
MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Amortized Cost which Approximates Market (Note 1). $19,656,400
Cash.............................................................. 3,525
Other............................................................. 18,092
-----------
Total Assets..................................................... 19,678,017
-----------
LIABILITIES:
Payables:
Fund Shares Repurchased.......................................... 49,883
Distributor and Affiliates (Note 2).............................. 2,188
Deferred Compensation and Retirement Plans (Note 2)............... 40,062
Accrued Expenses.................................................. 19,949
-----------
Total Liabilities................................................ 112,082
-----------
NET ASSETS........................................................ $19,565,935
-----------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $19,565,725
Accumulated Undistributed Net Investment Income................... 210
-----------
NET ASSETS (Equivalent to $1.00 per share for 19,565,725 shares
outstanding)...................................................... $19,565,935
-----------
</TABLE>
B-99
See Notes to Financial Statements
<PAGE> 217
MONEY MARKET FUND STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................ $1,128,132
----------
EXPENSES:
Investment Advisory Fee (Note 2).................................... 104,808
Accounting (Note 2)................................................. 46,975
Trustees Fees and Expenses (Note 2)................................. 31,835
Shareholder Services (Note 2)....................................... 15,616
Audit............................................................... 14,374
Custody............................................................. 14,055
Legal (Note 2)...................................................... 8,228
Other............................................................... 33,770
----------
Total Expenses..................................................... 269,661
Less Fees Waived and Expenses Reimbursed ($104,808 and $39,084,
respectively) (Note 2)............................................. 143,892
----------
Net Expenses....................................................... 125,769
----------
NET INVESTMENT INCOME............................................... $1,002,363
----------
NET REALIZED GAIN ON SECURITIES..................................... $ 415
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $1,002,778
----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................... $ 1,002,363 $ 1,294,856
Net Realized Gain on Securities.......... 415 -0-
------------ ------------
Change in Net Assets from Operations..... 1,002,778 1,294,856
------------ ------------
Distributions from Net Investment Income. (1,001,453) (1,295,753)
Distributions from Net Realized Gain on
Securities (Note 1)..................... (415) -0-
------------ ------------
Total Distributions...................... (1,001,868) (1,295,753)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................... 910 (897)
------------ ------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................ 15,915,843 10,862,643
Net Asset Value of Shares Issued Through
Dividend Reinvestment.................... 1,001,868 1,295,753
Cost of Shares Repurchased............... (18,927,603) (19,130,257)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS............................. (2,009,892) (6,971,861)
------------ ------------
TOTAL DECREASE IN NET ASSETS............. (2,008,982) (6,972,758)
NET ASSETS:
Beginning of the Period.................. 21,574,917 28,547,675
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$210 and $(700), respectively).......... $ 19,565,935 $ 21,574,917
------------ ------------
</TABLE>
B-100
See Notes to Financial Statements
<PAGE> 218
MONEY MARKET FUND FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Fundoutstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........ $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Net Investment Income........................... .048 .0533 .0365 .0262 .0331
Less Distributions from Net Investment Income... .048 .0533 .0365 .0262 .0331
----- ----- ----- ----- -----
Net Asset Value, End of the Period.............. $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Total Return*................................... 4.89% 5.46% 3.71% 2.66% 3.36%
Net Assets at End of the Period (In millions)... $19.6 $21.6 $28.5 $30.0 $32.9
Ratio of Expenses to Average Net Assets*........ .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net
Assets*......................................... 4.78% 5.33% 3.63% 2.63% 3.32%
*If certain expenses had not been assumed by
VKAC, Total Return would have
been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets......... 1.29% .93% .87% .95% .89%
Ratio of Net Investment Income to Average Net
Assets.......................................... 4.10% 5.00% 3.37% 2.28% 3.03%
</TABLE>
B-101
See Notes to Financial Statements
<PAGE> 219
REAL ESTATE SECURITIES FUND PORTFOLIO OF INVESTMENTS
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description
Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 87.5%
APARTMENTS 18.1%
Ambassador Apartments, Inc................................ 138,800 $ 3,279,150
Avalon Properties, Inc.................................... 105,900 3,044,625
Bay Apartment Communities, Inc............................ 126,500 4,554,000
BRE Properties, Inc., Class A............................. 121,100 2,997,225
Camden Property Trust..................................... 96,600 2,765,175
Columbus Realty Trust..................................... 103,900 2,363,725
Equity Residential Properties Trust....................... 94,700 3,906,375
Gables Residential Trust.................................. 98,500 2,856,500
Oasis Residential, Inc.................................... 82,600 1,879,150
Summit Properties, Inc.................................... 121,100 2,679,337
-----------
30,325,262
-----------
HEALTHCARE FACILITIES 3.9%
Nationwide Health Properties, Inc......................... 96,700 2,344,975
Omega Healthcare Investors................................ 128,600 4,275,950
-----------
6,620,925
-----------
HOTELS 9.7%
American General Hospitality Corp......................... 96,700 2,296,625
Felcor Suite Hotels, Inc.................................. 60,200 2,129,575
Innkeepers USA Trust...................................... 216,500 3,003,938
Patriot American Hospitality, Inc......................... 74,200 3,199,875
Starwood Lodging Trust.................................... 101,600 5,600,700
-----------
16,230,713
-----------
MANUFACTURED HOME COMMUNITIES 2.1%
Sun Communities, Inc...................................... 100,300 3,460,350
-----------
NET LEASE 5.9%
Excel Realty Trust, Inc................................... 140,200 3,557,575
Franchise Finance Corp. of America........................ 125,000 3,453,125
Trinet Corporate Realty Trust, Inc........................ 81,700 2,900,350
-----------
9,911,050
-----------
OFFICE/INDUSTRIAL 24.0%
Arden Realty Group, Inc................................... 126,500 3,510,375
Beacon Properties Corp.................................... 98,300 3,600,237
Bedford Property Investors, Inc........................... 173,700 3,039,750
Cali Realty Corp.......................................... 137,800 4,254,575
CarrAmerica Realty Corp................................... 108,400 3,170,700
Crescent Real Estate Equities Trust....................... 75,100 3,961,525
First Industrial Realty Trust, Inc........................ 123,800 3,760,425
Highwoods Properties, Inc................................. 98,300 3,317,625
Meridan Industrial Trust, Inc............................. 118,100 2,480,100
Reckson Associates Realty Corp. .......................... 84,700 3,578,575
Security Capital Industrial Trust......................... 95,700 2,045,588
Spieker Properties, Inc. ................................. 95,700 3,445,200
-----------
40,164,675
-----------
SELF-STORAGE 5.2%
Public Storage, Inc. ..................................... 156,700 4,857,700
Storage Trust Realty...................................... 143,900 3,885,300
-----------
8,743,000
-----------
SHOPPING CENTERS 9.1%
Bradley Real Estate, Inc. ................................ 197,400 3,553,200
JDN Realty Corp. ......................................... 137,100 3,787,387
Kimco Realty Corp. ....................................... 78,200 2,727,225
</TABLE>
B-102
See Notes to Financial Statements
<PAGE> 220
REAL ESTATE SECURITIES FUND PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Security Description
Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
SHOPPING CENTERS (CONTINUED)
Regency Realty Corp. ..................................... 82,100 $ 2,155,125
Vornado Realty Trust...................................... 57,000 2,992,500
------------
15,215,437
------------
SHOPPING MALLS 9.5%
CBL & Associates Properties, Inc. ........................ 91,600 2,370,150
JP Realty, Inc. .......................................... 154,000 3,984,750
Macerich Co. ............................................. 132,700 3,466,788
Simon DeBartolo Group, Inc. .............................. 149,788 4,643,428
Urban Shopping Centers, Inc. ............................. 50,400 1,461,600
------------
15,926,716
------------
TOTAL LONG-TERM INVESTMENTS 87.5%
(Cost $124,552,063) (a).......................................... 146,598,128
REPURCHASE AGREEMENT 5.6%
BA Securities ($9,385,000 par collateralized by U.S. Government
obligations in a pooled cash account, dated 12/31/96, to be
sold on 01/02/97 at $9,388,613).................................. 9,385,000
OTHER ASSETS IN EXCESS OF LIABILITIES 6.9%........................ 11,500,626
------------
NET ASSETS 100.0%................................................. $167,483,754
------------
</TABLE>
(a) At December 31, 1996, for federal income tax purposes cost is $124,672,190;
the aggregate gross unrealized appreciation is $21,955,365 and the
aggregate gross unrealized depreciation is $29,427, resulting in net
unrealized appreciation of $21,925,938.
B-103
See Notes to Financial Statements
<PAGE> 221
REAL ESTATE SECURITIES FUND STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Long-Term Investments, at Market Value (Cost $124,552,063) (Note
1)................................................................ $146,598,128
Repurchase Agreement (Note 1)..................................... 9,385,000
Cash.............................................................. 1,836
Receivables:
Fund Shares Sold................................................. 10,697,189
Dividends........................................................ 952,583
Unamortized Organizational Expenses (Note 1)...................... 5,007
------------
Total Assets..................................................... 167,639,743
------------
LIABILITIES:
Payables:
Investment Advisory Fee (Note 2)................................. 125,871
Distributor and Affiliates (Note 2).............................. 2,950
Fund Shares Repurchased.......................................... 114
Accrued Expenses.................................................. 22,194
Deferred Compensation and Retirement Plans (Note 2)............... 4,860
------------
Total Liabilities................................................ 155,989
------------
NET ASSETS........................................................ $167,483,754
------------
NET ASSETS CONSIST OF:
Capital (Note 3).................................................. $144,550,380
Net Unrealized Appreciation on Securities......................... 22,046,065
Accumulated Net Realized Gain on Securities....................... 558,446
Accumulated Undistributed Net Investment Income................... 328,863
------------
NET ASSETS........................................................ $167,483,754
------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $167,483,754 and 11,328,283 shares of
beneficial interest issued and outstanding)...................... $14.78
------------
</TABLE>
B-104
See Notes to Financial Statements
<PAGE> 222
REAL ESTATE SECURITIES FUND STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends........................................................... $ 2,436,458
Interest............................................................ 199,508
-----------
Total Income....................................................... 2,635,966
-----------
EXPENSES:
Investment Advisory Fee (Note 2).................................... 428,166
Accounting (Note 2)................................................. 44,869
Shareholder Services (Note 2)....................................... 16,205
Trustees Fees and Expenses (Note 2)................................. 9,612
Legal (Note 2)...................................................... 7,214
Custody............................................................. 2,824
Amortization of Organizational Expenses (Note 1) ................... 1,138
Other .............................................................. 31,896
-----------
Total Expenses..................................................... 541,924
Less Fees Waived (Note 2).......................................... 70,941
-----------
Net Expenses....................................................... 470,983
-----------
NET INVESTMENT INCOME............................................... $ 2,164,983
-----------
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments.................................... $ 1,465,073
-----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................ 332,105
End of the Period:
Investments........................................................ 22,046,065
-----------
Net Unrealized Appreciation on Securities During the Period......... 21,713,960
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES...................... $23,179,033
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................... $25,344,016
-----------
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1996 and the Period July 3, 1995
(Commencement of Investment Operations) to December 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................. $ 2,164,983 $ 68,091
Net Realized Gain/Loss on Securities... 1,465,073 (32,530)
Net Unrealized Appreciation on
Securities During the Period.......... 21,713,960 332,105
------------ -----------
Change in Net Assets from Operations... 25,344,016 367,666
------------ -----------
Distributions from Net Investment
Income................................ (1,844,832) (60,786)
Distributions from Net Realized Gain on
Securities (Note 1)................... (874,097) -0-
------------ -----------
Total Distributions.................... (2,718,929) (60,786)
------------ -----------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES.................. 22,625,087 306,880
------------ -----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold.............. 178,078,191 11,796,374
Net Asset Value of Shares Issued
Through Dividend Reinvestment.......... 2,718,725 60,786
Cost of Shares Repurchased............. (44,523,570) (3,578,819)
------------ -----------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS........................... 136,273,346 8,278,341
TOTAL INCREASE IN NET ASSETS........... 158,898,433 8,585,221
NET ASSETS:
Beginning of the Period................ 8,585,321 100
------------ -----------
End of the Period (Including
accumulated undistributed net
investment income of $328,863 and
$8,712, respectively)................. $167,483,754 $ 8,585,321
------------ -----------
</TABLE>
B-105
See Notes to Financial Statements
<PAGE> 223
REAL ESTATE SECURITIES FUND FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
July 3, 1995
(Commencement of
Year Ended Investment Operations)
December 31, 1996 to December 31, 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $ 10.74 $10.00
------- ------
Net Investment Income.............. .217 .20
Net Realized and Unrealized Gain on
Securities........................ 4.117 .6325
------- ------
Total from Investment Operations.... 4.334 .8325
------- ------
Less:
Distributions from Net Investment
Income............................. .199 .0925
Distributions from Net Realized
Gain on Securities (Note 1)........ .091 -0-
------- ------
Total Distributions................. .290 .0925
------- ------
Net Asset Value, End of the Period.. $14.784 $10.74
------- ------
Total Return*....................... 40.53% 8.35%**
Net Assets at End of the Period (In
millions)........................... $167.5 $8.6
Ratio of Expenses to Average Net
Assets*............................. 1.10% 2.50%
Ratio of Net Investment Income to
Average Net Assets*................. 5.06% 3.75%
Portfolio Turnover.................. 84% 85%**
Average Commission Paid Per Equity
Share Traded (a).................... $.0313 --
*If certain expenses had not been assumed by VKAC, Total Return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets.............................. 1.27% 2.90%
Ratio of Net Investment Income to
Average Net Assets.................. 4.89% 3.36%
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was
not required in fiscal periods prior to 1996.
B-106
See Notes to Financial Statements
<PAGE> 224
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Life Investment Trust (the "Trust") is registered
under the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company comprised of nine Portfolios, hereafter referred
to as Funds: Asset Allocation Fund ("Asset Allocation", formerly known as
Multiple Strategy Fund), Domestic Income Fund ("Domestic", formerly known as
Domestic Strategic Income Fund), Emerging Growth Fund ("Emerging Growth"),
Enterprise Fund ("Enterprise", formerly known as Common Stock Fund), Global
Equity Fund ("Global Equity"), Government Fund ("Government"), Growth and Income
Fund ("Growth and Income"), Money Market Fund ("Money Market") and Real Estate
Securities Fund ("Real Estate") (collectively the "Funds"). Each Fund is
accounted for as a separate entity.
The goals of the Funds are as follows: Asset Allocation seeks a high total
investment return consistent with prudent risk; Domestic seeks income as its
primary objective and capital appreciation as a secondary objective; Emerging
Growth seeks capital appreciation by investing principally in common stocks of
small and medium sized companies; Enterprise seeks capital appreciation by
investing principally in common stocks; Global Equity seeks long-term growth of
capital through an internationally diversified portfolio of equity securities
of any nation, including the United States; Government seeks high current
return consistent with preservation of capital; Growth and Income seeks
long-term growth of capital and income by investing primarily in income-
producing equity securities including common stocks and convertible securities;
Money Market seeks protection of capital and high current income by investing
in short-term money market instruments; and Real Estate seeks long-term growth
of capital by investing principally in securities of companies operating in
the real estate industry.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION-Investments in securities listed on a securities exchange
are valued at their sales price as of the close of such securities exchange.
Fixed income investments are stated at value using market quotations. Unlisted
securities and listed securities for which the last sales price is not
available are valued at the last bid price. For those securities where prices or
quotations are not available, valuations are determined in accordance with
procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at
amortized cost. For Money Market, all investments are valued at amortized cost.
Domestic's investments include lower rated and unrated debt securities which
may be more susceptible to a decline in value due 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 41% of Domestic's net assets at December 31, 1996.
B. SECURITY TRANSACTIONS-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggre-
gate value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made.
B-107
<PAGE> 225
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
The Fund may invest in repurchase agreements which are short-term investments
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 by Van Kampen American Capital Asset Management, Inc. (the "Adviser")
or its affiliates, the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are fully 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.
Domestic, Global Equity, Government and Real Estate may trade 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 for 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 term of the commitment, the Fund may sell
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.
C. INVESTMENT INCOME-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Issuers of Payment-in-Kind
securities may make dividend or interest payments by issuing additional stocks
or bonds in lieu of cash payments. Original issue discounts on debt securities
purchased are amortized over the expected life of each applicable 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.
D. ORGANIZATIONAL EXPENSES-Emerging Growth, Global Equity and Real Estate have
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
(collectively "VKAC") for costs incurred in connection with each Fund's
organization in the amount of $6,828 per Fund. These costs are being amortized
on a straight line basis over the 60 month period ending July 2, 2000. The
Adviser has agreed that in the event any of the initial shares of the Funds
originally purchased by VKAC are redeemed during the amortization period, the
Funds will be reimbursed for any unamortized organizational expenses in the
same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
E. FEDERAL INCOME TAXES-It is each Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
Each Fund intends to utilize provisions of the federal income tax laws which
allow each Fund to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. The following table presents the realized capital loss
carryforward for each applicable Fund at December 31, 1996, along with its
expiration period:
<TABLE>
<CAPTION>
GROWTH
EMERGING AND MONEY
DOMESTIC GROWTH GOVERNMENT INCOME MARKET
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Realized capital loss
carryforward................... $1,670,821 $ 318,252 $13,378,887 $ 81 $1,644
Expiration dates of capital loss
carryforward.................... 1998-2002 2003-2004 1997-2004 2004 2003
Amount expiring on 12/31/97..... -- -- $ 3,377,875 -- --
</TABLE>
B-108
<PAGE> 226
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year,
gains or losses recognized for tax purposes on the mark-to-market of open
futures at December 31, 1996, and the deferral of losses for tax purposes
resulting from wash sales.
F. DISTRIBUTION OF INCOME AND GAINS-Government and Money Market declare
dividends from net investment income on each business day. Asset Allocation,
Domestic, Emerging Growth, Enterprise, Global Equity, Growth and Income and
Real Estate declare dividends annually. Government declares distributions
from short-term capital gains, if any, monthly. Asset Allocation, Domestic,
Emerging Growth, Enterprise, Global Equity, Growth and Income, Money Market and
Real Estate distribute net realized gains, if any, annually. Distributions from
net realized gains for book purposes may include short-term capital gains and
gains on option and futures transactions. All short-term capital gains and a
portion of option and futures gains are included in ordinary income for tax
purposes.
The following table presents the amount of long-term capital gains
distributed during the period:
<TABLE>
<CAPTION>
FUND AMOUNT
- --------------------------------------------------------------------------
<S> <C>
Allocation..................................................... $2,465,254
Enterprise..................................................... 4,855,272
Global Equity.................................................. 20,006
Real Estate.................................................... 24,014
</TABLE>
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and for
federal income tax purposes, the amount of distributable net investment income
may differ between book and federal income tax purposes for a particular
period. These differences are temporary in nature, but may result in book
basis distribution in excess of net investment income for certain periods. The
following permanent differences between book and tax basis reporting for the
1996 fiscal year have been identified and appropriately reclassified:
<TABLE>
<CAPTION>
EMERGING GLOBAL
DOMESTIC GROWTH EQUITY GOVERNMENT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated
Undistributed Net
Investment Income....... $(3,967)(c) $ 3,088 (a) $ 34,640 (b) $14,468 (c)
Accumulated Net Realized
Gain/Loss on Securities. 3,967 (c) -- (34,640) (b) 1,150,219 (c,d)
Capital................. -- (3,088)(a) -- (1,164,687)(d)
</TABLE>
(a) For federal income tax purposes, net operating losses may not be used to
offset income generated in future tax years, therefore, these losses have
been reclassified from accumulated undistributed net investment income to
capital.
(b) For federal income tax purposes, realized gains and losses on transactions
in foreign currencies are included as ordinary income. These realized gains
and losses are included in net realized gain/loss on securities for
financial reporting purposes and have been reclassified from accumulated
net realized gain/loss on securities to accumulated undistributed net
investment income.
(c) Accretion of market discounts on bonds and paydowns of mortgage pool
obligations are recognized as ordinary income/loss for federal income tax
purposes but as realized gains or losses for book purposes. These permanent
differences have been reclassified from accumulated net realized gain/loss
on securities to accumulated undistributed net investment income.
(d) At December 31, 1996, all or a portion of capital loss carryforward expired
creating a permanent difference between book and tax basis reporting. These
items have been reclassified from accumulated net realized loss on
securities to capital.
G. FOREIGN CURRENCY TRANSLATION-The market values of foreign securities,
forward currency exchange contracts and other assets and liabilities denominated
in a foreign currency are translated into U.S. dollars based on quoted exchange
rates as of noon Eastern Standard Time. The cost of securities is determined
using historical exchange rates. Income and expenses are translated at
prevailing exchange 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
B-109
<PAGE> 227
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- -------------------------------------------------------------------------------
exchange rates and amounts arising from changes in the market prices of
securities. Realized gain and loss on foreign currency includes the net realized
amount from the sale of currency and the amount realized between trade date and
settlement date on security transactions.
H. PRIVATE PLACEMENTS-A Fund may own securities purchased in private placement
transactions, which have not been registered under the Securities Act of 1933.
Such securities generally may be resold only in a privately negotiated
transaction with a limited number of purchasers or in a public offering after
they have been registered under the Securities Act of 1933. The issuers of
privately placed debt securities held by a Fund generally have agreed to
register the securities within specified time periods or increase the interest
paid on such securities.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES Under
the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee
payable monthly based on the combined average daily net assets of Asset
Allocation, Domestic, Enterprise, Government and Money Market as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- -------------------------------------------------------------------------------
<S> <C>
First $500 million.................................................. .50 of 1%
Next $500 million................................................... .45 of 1%
Over $1 billion..................................................... .40 of 1%
</TABLE>
The resulting fee is prorated to Asset Allocation, Domestic, Enterprise,
Government and Money Market based on their respective average daily net assets.
Under the terms of the advisory agreement, if the total ordinary business
expenses, exclusive of taxes, distribution fees and interest, exceed .60% of
average daily net assets, the Adviser will reimburse Asset Allocation, Domestic,
Enterprise, Government, and Money Market for the amount of the excess. The
contractual expense reimbursement shall be made monthly.
For Emerging Growth, the Adviser will provide investment advice and
facilities to the Fund for an annual fee payable monthly of .70% of the average
daily net assets of the Fund.
For Global Equity, the Adviser has entered into a subadvisory agreement which
will terminate on March 31, 1997 with John Govett & Co., Limited
("Subadviser--Global Equity"), who provides advisory services to Global Equity
and the Adviser with respect to Global Equity's investments in foreign
securities. Advisory fees are calculated monthly, based on the average daily
net assets of Global Equity at the annual rate of 1.00%. The Adviser pays 50%
of its advisory fee to the Subadviser--Global Equity. Shareholders have
approved a change in the Subadvisor--Global Equity from John Govett & Co.,
Limited to Morgan Stanley Asset Management Inc. effective April 1, 1997.
For Growth and Income, the Adviser will provide investment advice and
facilities to the Fund for an annual fee payable monthly, based on the average
daily net assets of the Fund, of .60% for the first $500 million and .55% for
the amount in excess of $500 million.
For Real Estate, the Adviser will provide investment advice and facilities to
the Fund for an annual fee equal to 1.00% of the average net assets of the
Fund. This fee is payable monthly. During the period, the Adviser had a
subadvisory agreement with Hines Interest Realty Advisers Limited Partnership
("Hines"), who provided advisory services to the Fund and the Adviser with
respect to the Fund's investments in real estate. The Adviser paid 50% of its
investment advisory fee to Hines for these services. Effective December 31,
1996, the subadvisory agreement was terminated.
For the period, the Adviser has volunteered to reimburse all expenses in
excess of .85% for Emerging Growth, 1.20% for Global Equity, .75% for Growth and
Income and 1.10% for Real Estate, of each of the Funds' average daily net
assets.
B-110
<PAGE> 228
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
Other transactions with affiliates during the period were approximately as
follows:
<TABLE>
<CAPTION>
GROWTH
ASSET EMERGING GLOBAL AND MONEY REAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY GOVERNMENT INCOME MARKET ESTATE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accounting.............. $51,800 $44,300 $41,100 $53,700 $29,400 $55,500 -- $47,000 $44,900
Shareholder servicing
agent's fees........... 15,000 15,000 15,000 15,000 15,000 15,000 -- 15,000 15,000
</TABLE>
For the year ended December 31, 1996, the Funds incurred expenses as shown in
the table above representing VKAC's cost of providing accounting and cash
management services to the Funds. These services are provided by VKAC at cost.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Funds. For the year ended
December 31, 1996, the Funds incurred expenses as shown in the table above,
representing ACCESS' cost of providing transfer agency and shareholder services
plus a profit.
Certain officers and trustees of the Funds are also officers and directors of
VKAC. The Funds do not compensate their officers or trustees who are officers
of VKAC.
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel to the Funds, of which a trustee of the Funds is an
affiliated person.
The Funds have implemented deferred compensation and retirement plans for
their trustees. Under the deferred compensation plan, trustees may elect to
defer all or a portion of their compensation to a later date. The retirement
plan covers those trustees who are not officers of VKAC. During the year ended
December 31, 1996, VKAC reimbursed the Fund for all expenses related to the
retirement plan. At December 31, 1996, VKAC owned 10 shares of Emerging Growth,
95,241 shares of Global Equity, 50,000 shares of Growth and Income and 10
shares of Real Estate.
3. CAPITAL TRANSACTIONS
The Funds have outstanding shares of beneficial interest with a par value of
$.01 per share. There are an unlimited number of shares authorized.
For the year ended December 31, 1996, share transactions were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING
ALLOCATION DOMESTIC GROWTH ENTERPRISE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Shares................. 5,409,616 3,235,694 195,420 5,173,759
Sales............................ 387,499 755,420 366,538 489,441
Dividend Reinvestment............ 821,862 217,401 -0- 611,154
Repurchases...................... (985,735) (1,736,394) (182,893) (1,059,404)
--------- --------- ------- ---------
Ending Shares.................... 5,633,242 2,472,121 379,065 5,214,950
--------- --------- ------- ---------
<CAPTION>
GLOBAL GROWTH AND MONEY REAL
EQUITY GOVERNMENT INCOME MARKET ESTATE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares........ 230,530 7,399,648 50,000/1/ 21,575,617 799,347
Sales................... 110,151 184,739 -0- 15,915,843 13,855,117
Dividend Reinvestment... 3,772 464,018 -0- 1,001,868 197,332
Repurchases............. (128,552) (1,441,946) -0- (18,927,603) (3,523,513)
-------- ---------- --------- ----------- ----------
Ending Shares........... 215,901 6,606,459 50,000 19,565,725 11,328,283
-------- ---------- --------- ----------- ----------
</TABLE>
/1/Fund commenced investment operations during the period.
B-111
<PAGE> 229
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
For the year ended December 31, 1995, share transactions were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING
ALLOCATION DOMESTIC GROWTH ENTERPRISE
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Shares............ 5,668,898 2,894,700 10 5,444,930
Sales....................... 166,906 997,934 217,875 438,275
Dividend Reinvestment....... 619,366 258,208 -0- 703,905
Repurchases................. (1,045,554) (915,148) (22,465) (1,413,351)
----------- ----------- ---------- -----------
Ending Shares............... 5,409,616 3,235,694 195,420 5,173,759
----------- ----------- ---------- -----------
Ending Capital.............. $55,836,454 $27,065,917 $2,103,545 $64,170,048
----------- ----------- ---------- -----------
<CAPTION>
GLOBAL MONEY REAL
EQUITY GOVERNMENT MARKET ESTATE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Shares............ 10 7,914,930 28,547,478 10
Sales....................... 231,560 307,711 10,862,643 1,140,133
Dividend Reinvestment....... -0- 524,601 1,295,753 5,789
Repurchases................. (1,040) (1,347,594) (19,130,257) (346,585)
---------- ----------- ---------- -----------
Ending Shares............... 230,530 7,399,648 21,575,617 799,347
---------- ----------- ---------- -----------
Ending Capital.............. $2,292,507 $78,150,854 $21,575,617 $ 8,277,034
---------- ----------- ---------- -----------
</TABLE>
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of
investments, including principal paydowns and excluding forward commitment
transactions and short-term investments, were:
<TABLE>
<CAPTION>
GROWTH
ASSET EMERGING GLOBAL AND
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY GOVERNMENT INCOME REAL ESTATE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases............... $66,177,988 $16,681,252 $6,028,295 $121,174,572 $2,507,479 $ 84,157,768 $495,497 $151,556,550
Sales................... 70,975,721 22,906,157 3,768,758 128,112,318 2,773,679 106,194,527 1,700 35,707,086
</TABLE>
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Funds have a variety of reasons to use derivative instruments, such as to
attempt to protect the Funds against possible changes in the market value of
its portfolio, manage the portfolio's effective yield, foreign currency
exposure, maturity and duration or generate potential gain. All of the Funds'
portfolio holdings, including derivative instruments, are marked to market
each day with the change in value reflected in the unrealized appreciation/
depreciation on securities. Upon disposition, a realized gain or loss is
recognized accordingly, except when taking delivery of a security underlying a
futures or forward contract. In these instances, the recognition of gain or
loss is postponed until the disposal of the security underlying the futures or
forward contract.
Summarized below are the specific types of derivative financial instruments
used by the Funds.
B-112
<PAGE> 230
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
A. FUTURES CONTRACTS--A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Funds generally invests in futures on U.S. Treasury Bonds and Notes. Upon
entering into futures contracts, the Funds maintain, in a segregated account
with its custodian, securities with a value equal to its obligation under the
futures contracts. During the period the futures contract is open, payments are
received from or made to the broker based upon changes in the value of the
contract (the variation margin).
Transactions in futures contracts for the year ended December 31, 1996 for
Government, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1995..................................... 175
Futures Opened....................................................... 2,021
Futures Closed....................................................... (2,086)
------
Outstanding at December 31, 1996..................................... 110
------
</TABLE>
The futures contracts outstanding at December 31, 1996, and the descriptions
and unrealized depreciation for Government are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C>
BUYS TO OPEN
U.S. Treasury Bonds--Mar 1997 (Current Notional Value
$112,625 per contract)................................ 99 $183,214
U.S. Treasury Notes--Mar 1997 (Five Year) (Current
Notional Value $106,593 per contract)................. 5 5,453
U.S. Treasury Notes--Mar 1997 (Ten Year) (Current
Notional Value $109,125 per contract)................. 6 9,451
--- --------
110 $198,118
--- --------
</TABLE>
B. FORWARD CURRENCY CONTRACTS-A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Upon the settlement of the contract, a realized gain or loss is
recognized and is included as a component of realized gain/loss on forwards.
The following forward currency contracts were outstanding in Global Equity as
of December 31, 1996:
<TABLE>
<CAPTION>
UNREALIZED
ORIGINAL CURRENT APPRECIATION/
DESCRIPTION VALUE VALUE DEPRECIATION
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
SELLS TO OPEN
British Pound Sterling, 66,698, expiring
07/16/97..................................... $100,000 $113,650 $(13,650)
Japanese Yen, 10,140,000, expiring 01/24/97... 100,000 87,855 12,145
--------
$ (1,505)
--------
</TABLE>
6. FORWARD COMMITMENTS
Government trades certain securities under the terms of forward commitments, as
described in Note 1. The change in value of these items is reflected as a
component of unrealized appreciation/depreciation on forward commitments.
B-113
<PAGE> 231
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996
- --------------------------------------------------------------------------------
The following forward commitments were outstanding in Government as of December
31, 1996:
<TABLE>
<CAPTION>
UNREALIZED
PAR AMOUNT ORIGINAL CURRENT APPRECIATION/
(000) DESCRIPTION EXPIRATION VALUE VALUE DEPRECIATION
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BUYS TO OPEN
$4,000 U.S. T-Note, 7.25%,
08/15/04 maturity...... 01/16/97 $4,250,313 $4,212,400 $(37,913)
SELLS TO OPEN
1,000 FHLMC Gold 30 Yr, 8.00%,
12/31/23 maturity...... 01/14/97 1,021,875 1,019,060 2,815
2,000 GNMA, 7.00%, 12/31/23
maturity............... 01/21/97 1,966,250 1,955,620 10,630
--------
$(24,468)
--------
</TABLE>
B-114
<PAGE> 232
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
Included in the Prospectus:
Financial Highlights
Included in the Statement of Additional Information:
Report of Independent Accountants
Financial Statements
Notes to Financial Statements
(b) Exhibits
<TABLE>
<C> <S> <C>
(1) (a) First Amended and Restated Agreement and Declaration of
Trust(6)
(b) Certificate of Amendment(6)
(c) Amended and Restated Certificate of Designation of
Enterprise Portfolio+
(d) Amended and Restated Certificate of Designation of Domestic
Income Portfolio+
(e) Certificate of Designation of Emerging Growth Portfolio(6)
(f) Certificate of Designation of Global Equity Portfolio(6)
(g) Certificate of Designation of Government Portfolio(6)
(h) Certificate of Designation of Money Market Portfolio(6)
(i) Amended and Restated Certificate of Designation of Asset
Allocation Portfolio+
(j) Certificate of Designation of Real Estate Securities
Portfolio(6)
(k) Certificate of Designation of Growth and Income Portfolio+
(2) Amended and Restated Bylaws(6)
(5) (a) Investment Advisory Agreement for Asset Allocation
Portfolio, Domestic Income Portfolio, Enterprise Portfolio,
Government Portfolio and Money Market Portfolio+
(b) Investment Advisory Agreement for Emerging Growth Portfolio+
(c) Investment Advisory Agreement for Global Equity Portfolio+
(d) Investment Sub-Advisory Agreement for Global Equity
Portfolio+
(e) Investment Advisory Agreement for Real Estate Securities
Portfolio+
(f) Investment Advisory Agreement for Growth and Income
Portfolio+
(6) Distribution and Service Agreement+
(8) (a) Custodian Agreement+
(b) Transfer Agency and Servicing Agreement(6)
(9) (a) Data Access Services Agreement+
(b) Fund Accounting Agreement+
(10) Opinion of Counsel+
(11) Consent of Independent Accountants+
(13) (a) Investment Letter(2)
(b) Investment Letter dated July 3, 1995 for the Emerging Growth
Portfolio, Global Equity Portfolio and Real Estate
Securities Portfolio(7)
(16) Computation Measure for Performance Information+
(17) (a) List of certain investment companies in response to Item
29(a)+
(b) List of officers and directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)+
</TABLE>
C-1
<PAGE> 233
(19) Power of Attorney+
(27) Financial Data Schedules+
- ---------------
(2) Incorporated herein by reference to Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
April 11, 1986.
(6) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
December 22, 1995.
(7) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
March 6, 1996.
+ Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
AS OF APRIL 4, 1997
<TABLE>
<CAPTION>
NUMBER OF RECORD
TITLE OF CLASS HOLDERS
-------------- ----------------
<S> <C>
Asset Allocation Portfolio 5
Domestic Income Portfolio 7
Emerging Growth Portfolio 6
Enterprise Portfolio 8
Global Equity Portfolio 5
Government Portfolio 6
Growth and Income Portfolio 2
Money Market Portfolio 7
Real Estate Securities Portfolio 14
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8; Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of (i) not
acting in good faith in the reasonable belief that such person's actions were
not in the best interest of the Trust, (ii) willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office, (iii) for a criminal proceeding, not having a reasonable
cause to believe that such conduct was unlawful (collectively "Disabling
Conduct"). Absent a court determination that an officer or trustee seeking
indemnification was not liable on the merits or guilty of Disabling Conduct in
the conduct of his or her office, the decision by the Registrant to indemnify
such person must be based upon the reasonable determination of independent
counsel or non-party independent trustees, after review of the facts, that such
officer or trustee is not guilty of Disabling Conduct in the conduct of his or
her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officer or
C-2
<PAGE> 234
trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides a security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Trustees and
Officers" in the Statement of Additional Information for information regarding
the business of the Adviser. For information as to the business, profession,
vocation and employment of a substantial nature of directors and officers of the
Adviser, reference is made to the Adviser's current Form ADV (File No. 801-1669)
filed under the Investment Advisers Act of 1940, as amended, incorporated herein
by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc., which acts as principal underwriter for certain investment
companies and unit investment trusts set forth in Exhibit 17(a) incorporated by
reference herein.
(b) Van Kampen American Capital Distributors, Inc. is an affiliated person
of an affiliated person of Registrant and is the only principal underwriter for
Registrant. The name, principal business address and positions and offices with
Van Kampen American Capital Distributors, Inc. of each of the directors and
officers thereof are set forth in Exhibit 17(b). Except as disclosed under the
heading, "Trustees and Executive Officers" in Part B of this Registration
Statement, none of such persons has any position or office with Registrant.
C-3
<PAGE> 235
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
Registrant will be maintained at its offices, located at One Parkway Plaza,
Oakbrook Terrace, Illinois 60181, ACCESS Investor Services, Inc., 7501 Tiffany
Springs Parkway, Kansas City, Missouri 64153, or at the State Street Bank and
Trust Company, 1776 Heritage Drive, North Quincy, MA; (ii) by the Adviser, will
be maintained at its offices, located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181; and (iii) by the Distributor, the principal underwriter, will be
maintained at its offices located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
Registrant hereby undertakes to furnish to each person to whom a prospectus
is delivered a copy of the Registrant's latest annual report to shareholders,
upon request and without charge.
Registrant hereby undertakes, if requested to do so by the holders of at
least 10% of the Registrant's outstanding shares, to call a meeting of
shareholders for the purpose of voting upon the question of removal of a trustee
or trustees and to assist in communications with other shareholders as required
by Section 16(c) of the Investment Company Act of 1940.
C-4
<PAGE> 236
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, VAN KAMPEN AMERICAN CAPITAL LIFE
INVESTMENT TRUST, certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under the
Securities Act of 1933 and has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereto duly authorized
in the City of Oakbrook Terrace, and State of Illinois, on the 30th day of
April, 1997.
VAN KAMPEN AMERICAN CAPITAL LIFE
INVESTMENT TRUST
By /s/ RONALD A. NYBERG
----------------------------------------------
Ronald A. Nyberg,
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed on April 30, 1997 by the following
persons in the capacities indicated:
<TABLE>
<S> <S>
Principal Executive Officer:
/s/ DENNIS J. MCDONNELL* President and Trustee
- -----------------------------------------------------
Dennis McDonnell
Principal Financial Officer:
/s/ EDWARD C. WOOD III* Vice President and Chief Financial
- ----------------------------------------------------- Officer
Edward C. Wood III
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
Trustee
- -----------------------------------------------------
Jerome L. Robinson
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
* Signed by Ronald A. Nyberg pursuant to a
power of attorney.
/s/ RONALD A. NYBERG
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
April 30, 1997
<PAGE> 237
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
INDEX TO EXHIBITS TO FORM N-1A
REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
(1) (c) Amended and Restated Certificate of Designation of
Enterprise Portfolio
(d) Amended and Restated Certificate of Designation of Domestic
Income Portfolio
(i) Amended and Restated Certificate of Designation of Asset
Allocation Portfolio
(k) Certificate of Designation of Growth and Income Portfolio
(5) (a) Investment Advisory Agreement for Asset Allocation
Portfolio, Domestic Income Portfolio, Enterprise Portfolio,
Government Portfolio and Money Market Portfolio
(b) Investment Advisory Agreement for Emerging Growth Portfolio
(c) Investment Advisory Agreement for Global Equity Portfolio
(d) Investment Sub-Advisory Agreement for Global Equity
Portfolio
(e) Investment Advisory Agreement for Real Estate Securities
Portfolio
(f) Investment Advisory Agreement for Growth and Income
Portfolio
(6) Distribution and Service Agreement
(8) (a) Custodian Agreement
(9) (a) Data Access Service Agreement
(b) Fund Accounting Agreement
(10) Opinion of Counsel
(11) Consent of Independent Accountants
(16) Computation Measure for Performance Information
(17) (a) List of Certain Investment Companies in response to Item
29(a)
(b) List of Officers and Directors Van Kampen American Capital
Distributors, Inc. in Response to Item 29(b)
(19) Power of Attorney
(27) Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT (1)(c)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Enterprise Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Certificate of Designation of the
Common Stock Fund Series of the Trust dated June 21, 1995, by redesignating
such Series as the Enterprise Portfolio (the "Fund") with the following rights,
preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares,
all of one class, having a nominal or par value of $0.01 per Share, of which an
unlimited number may be issued, which Shares shall represent interests only in
the Fund. The Trustees shall have the authority from time to time to authorize
separate Series of Shares for the Trust as they deem necessary or desirable.
2. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust set forth in the Declaration shall apply to Shares of the
Fund unless otherwise specified in this Certificate of Designation, in which
case this Certificate of Designation shall govern.
3. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
4. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
1
<PAGE> 2
June 21, 1995
/s/ NORI L. GABERT
- ---------------------
Nori L. Gabert,
Secretary
2
<PAGE> 1
EXHIBIT (l)(d)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Domestic Income Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Certificate of Designation of the
Domestic Strategic Income Fund Series of the Trust dated June 21, 1995, by
redesignating such Series as the Domestic Income Portfolio (the "Fund") with the
following rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares,
all of one class, having a nominal or par value of $0.01 per Share, of which an
unlimited number may be issued, which Shares shall represent interests only in
the Fund. The Trustees shall have the authority from time to time to authorize
separate Series of Shares for the Trust as they deem necessary or desirable.
2. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust set forth in the Declaration shall apply to Shares of the
Fund unless otherwise specified in this Certificate of Designation, in which
case this Certificate of Designation shall govern.
3. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
4. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
1
<PAGE> 2
June 21, 1995
/s/ NORI L. GABERT
- --------------------------
Nori L. Gabert,
Secretary
2
<PAGE> 1
EXHIBIT (1)(i)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Asset Allocation Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
First Amended and Restated Agreement and Declaration of Trust ("Declaration"),
and by the affirmative vote of a Majority of the Trustees does hereby amend and
restate in its entirety the Certificate of Designation of the Multiple Strategy
Fund Series of the Trust dated June 21, 1995, by redesignating such Series as
the Asset Allocation Portfolio (the "Fund") with the following rights,
preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares,
all of one class, having a nominal or par value of $0.01 per Share, of which an
unlimited number may be issued, which Shares shall represent interests only in
the Fund. The Trustees shall have the authority from time to time to authorize
separate Series of Shares for the Trust as they deem necessary or desirable.
2. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust set forth in the Declaration shall apply to Shares of the
Fund unless otherwise specified in this Certificate of Designation, in which
case this Certificate of Designation shall govern.
3. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
4. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
1
<PAGE> 2
June 21, 1995
/s/ NORI L. GABERT
- ----------------------
Nori L. Gabert,
Secretary
2
<PAGE> 1
EXHIBIT (1)(k)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Certificate of Designation
of
Growth and Income Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby establish and designate as a Series of the Trust the Growth and Income
Portfolio (the "Fund") with the following rights, preferences and
characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares,
all of one class, having a nominal or par value of $0.01 per Share, of which an
unlimited number may be issued, which Shares shall represent interests only in
the Fund. The Trustees shall have the authority from time to time to authorize
separate Series of Shares for the Trust as they deem necessary or desirable.
2. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust set forth in the Declaration shall apply to Shares of the
Fund unless otherwise specified in this Certificate of Designation, in which
case this Certificate of Designation shall govern.
3. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
4. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
June 21, 1995
/s/ NORI L. GABERT
- ------------------------
Nori L. Gabert,
Secretary
1
<PAGE> 1
EXHIBIT (5)(a)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 31st day of October, 1996, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust, hereinafter
referred to as the "TRUST," and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation, hereinafter referred to as the "ADVISER".
The Trust and the ADVISER agree as follows:
1. Appointment
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST's Asset Allocation Portfolio, Domestic Income Portfolio, Enterprise
Portfolio, Government Portfolio and Money Market Portfolio ("Initial
Portfolios"), for the period and on the terms set forth in this Agreement. The
ADVISER accepts such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
b. In the event that the TRUST establishes one or more portfolios other than
the Initial Portfolios with respect to which it desires to retain the ADVISER to
act as investment adviser hereunder, it shall notify the ADVISER in writing. If
the ADVISER is willing to render such services it shall notify the TRUST in
writing whereupon such portfolio shall become a Portfolio hereunder and the
compensation payable by such new portfolio to the ADVISER will be as agreed in
writing at the time.
2. Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), Bylaws, registration statement,
prospectus and the stated investment objectives, policies and restrictions of
each Portfolio, shall:
a. manage the investment and reinvestment of the TRUST's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in each of the TRUST's Portfolios, and formulation and
implementation of investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of each Portfolio of the TRUST with
brokers or dealers selected by the ADVISER;
c. conduct and manage the day-to-day operations of the TRUST including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing of
legal services except for services provided by outside counsel to the TRUST
selected by the Trustees, and the supervision of the TRUST's Treasurer and the
personnel working under his direction; and
<PAGE> 2
d. furnish to the TRUST office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each TRUST trustee and Trust officer who is an
affiliated person of the ADVISER, except the compensation of the TRUST's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the TRUST and each Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization by
the TRUST's Trustees of appropriate policies and procedures, the ADVISER may, to
the extent authorized by law, cause the TRUST to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law the ADVISER shall not be deemed to have acted unlawfully or to have breached
any duty created by this Agreement or otherwise solely by reason of such action.
Except as otherwise agreed, or as otherwise provided herein, the TRUST shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
TRUST shall include (i) interest and taxes; (ii) brokerage commissions and
other costs in connection with the purchase and sale of portfolio investments;
(iii) compensation of its trustees and officers other than those who are
affiliated persons of the ADVISER; (iv) compensation of its Treasurer,
compensation of personnel working under the Treasurer's direction, and expenses
of office space, facilities, and equipment used by the Treasurer and such
personnel in the performance of their normal duties for the TRUST which consist
of maintenance of the accounts, books and other documents which constitute the
record forming the basis for the TRUST's financial statements, preparation of
such financial statements and other Trust documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the TRUST's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the TRUST selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the TRUST and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the TRUST; (xi) all other expenses incidental to holding meetings of the
TRUST's shareholders including proxy solicitations therefor; (xii) expenses for
2
<PAGE> 3
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the TRUST's membership in
trade associations approved by the Trustees; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits, or
proceedings to which the TRUST is a party and the legal obligation which the
TRUST may have to indemnify its officers and trustees with respect thereto. To
the extent that any of the foregoing expenses are allocated between the TRUST
and any other party, such allocations shall be pursuant to methods approved by
the Trustees.
3. Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the TRUST are not impaired.
Except as otherwise required by the Investment Company Act of 1940 any of the
shareholders, trustees, officers and employees of the TRUST may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the TRUST.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties hereunder on the
part of the ADVISER, the ADVISER shall not be subject to liability to the
TRUST, or to any shareholder of the TRUST, for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
4. Compensation Payable to ADVISER
The TRUST shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, with respect to the
Portfolios set forth below, a monthly fee computed at the following annual
rates:
3
<PAGE> 4
.50% on the first $500 million of the Portfolio's average daily net assets; .45%
on the next $500 million of the Portfolio's average daily net assets; and .40%
of any excess over $1 billion.
For purposes of this calculation, assets of such Portfolios shall be combined in
calculating the investment advisory fee. Each Portfolio shall bear its pro rata
share of such fee based upon its average daily net assets.
Average daily net assets shall be determined by taking the average of the net
assets for each business day (for each calendar day in the case of the Money
Market Portfolio) during a given calendar month, calculated in the manner
provided in the TRUST's Declaration of Trust. Such fee shall be payable for each
calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall
be reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding Inc., in connection with the
purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with each of the TRUST's portfolio
transactions and shall advise the Trustees of any other commissions, fees,
brokerage or similar payments which may be possible for the ADVISER or any
other direct or indirect majority owned subsidiary of VK/AC Holding, Inc. to
receive in connection with the TRUST's portfolio transactions or other
arrangements which may benefit the Trust.
In the event that the ordinary business expenses of the TRUST for any fiscal
year should exceed .95% of average daily net assets, the compensation due the
ADVISER for such fiscal year shall be reduced by the amount of such excess. The
ADVISER's compensation shall be so reduced by a reduction or a refund thereof,
at the time such compensation is payable after the end of each calendar month
during such fiscal year of the TRUST, and if such amount should exceed such
monthly compensation, the ADVISER shall pay the TRUST an amount sufficient to
make up the deficiency, subject to readjustment during the TRUST's fiscal year.
For purposes of this paragraph, all ordinary business expenses of the TRUST
include the investment advisory fee and other operating expenses paid by the
TRUST except (i) for interest and taxes; (ii) brokerage commissions; (iii) as a
result of litigation in connection with a suit involving a claim for recovery
by the TRUST; (iv) as a result of litigation involving a defense against a
liability asserted against the TRUST, provided that, if the ADVISER made the
decision or took the actions which resulted in such claim, it acted in good
faith without negligence or misconduct; and (v) any indemnification paid by the
TRUST to its officers and trustees and the ADVISER in accordance with
applicable state and federal laws as a result of such litigation.
4
<PAGE> 5
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
5. Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the TRUST are the
property of the TRUST and further agrees to surrender promptly to the TRUST any
of such records upon the TRUST's request. The ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under the Act.
6. Duration and Termination
This Agreement shall become effective with respect to the initial Portfolios on
the date hereof, and with respect to any additional Portfolios, on the date of
receipt by the TRUST of notice from the ADVISER in accordance with Section 1(b)
hereof that the ADVISER is willing to serve as investment adviser with respect
to such Portfolio, provided that this Agreement (as supplemented by the terms
specified in any notice and agreement pursuant to Section 1(b) hereof) shall
have been approved by the shareholders of each Portfolio subject to this
Agreement, in accordance with the requirements under the 1940 Act, and, unless
sooner terminated as provided herein, shall remain in full force until May 30,
1997. Thereafter, if not terminated, this Agreement shall continue in effect as
to a particular Portfolio for successive periods of twelve months each, provided
such continuance is specifically approved at least annually, (a) by the vote of
a majority of those members of the Trust's Trustees who are not interested
persons of any party to this Agreement, cast in person at a meeting called for
the purpose of voting on such approval, and (b) by the TRUST's Trustees or by
vote of a majority of the outstanding voting securities of such TRUST. Not
withstanding the foregoing, this Agreement may be terminated as to any TRUST at
any time, without the payment of any penalty, by the TRUST (by vote of the
TRUST's Trustees or by vote of a majority of the outstanding voting securities
of such Portfolio), or by the ADVISER, on sixty days' written notice. This
Agreement will immediately terminate in the event of its assignment.
7. Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person," "assignment,"
"interested person," and "majority of the outstanding voting securities" shall
have their respective meanings defined in the Investment Company Act of 1940
(the "1940 Act") and the Rules and Regulations thereunder, subject, however, to
such exemptions as may be granted to either the ADVISER or the TRUST by the
Securities and Exchange Commission, or such interpretive positions as may be
taken by the Commission or its staff, under said Act, and the term "brokerage
and research services" shall have the meaning given in the Securities Exchange
Act of 1934 and the Rules and Regulations thereunder.
5
<PAGE> 6
The execution of this Agreement has been authorized by the TRUST's Trustees and
by the sole shareholder. This Agreement is executed on behalf of the TRUST or
the Trustees of the TRUST as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees, officers
or shareholders of the TRUST individually but are binding only upon the assets
and property of the TRUST. The TRUST is composed of multiple Portfolios. All
obligations of the TRUST under this Agreement shall apply only on a Portfolio by
Portfolio basis and the assets of one Portfolio shall not be liable for the
obligations of any other Portfolio. A Certificate of TRUST in respect of the
Trust is on file with the Secretary of the State of Delaware.
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
By /s/ DENNIS J. MCDONNELL
______________________________________
Name: Dennis J. McDonnell
__________________________________
Its: President
___________________________________
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By /s/ PETER W. HEGEL
______________________________________
Name: Peter W. Hegel
__________________________________
Its: Executive Vice President
___________________________________
6
<PAGE> 1
EXHIBIT (5)(b)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 31st of October, 1996 by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust, hereinafter
referred to as the "TRUST," and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation, hereinafter referred to as the "ADVISER".
The FUND and the ADVISER agree as follows:
1. Appointment
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
FUND'S Emerging Growth Portfoliio ("the Portfolio"), for the period and on the
terms set forth in this Agreement. The ADVISER accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
b. In the event that the TRUST establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the TRUST in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new Fund to the ADVISER will be as agreed in writing at the time.
2. Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), Bylaws, registration statement,
prospectus and the stated investment objectives, policies and restrictions of
the Portfolio, shall:
a. manage the investment and reinvestment of the TRUST's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the TRUST's Portfolio, and formulation and implementation of
investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of the Portfolio of the TRUST with brokers
or dealers selected by the ADVISER;
c. conduct and manage the day-to-day operations of the TRUST including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing of
legal services except for services provided by outside counsel to the TRUST
selected by the Trustees, and the supervision of the TRUST's Treasurer and the
<PAGE> 2
personnel working under his direction; and
d. furnish to the TRUST office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each TRUST trustee and TRUST officer who is an
affiliated person of the ADVISER, except the compensation of the TRUST's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the TRUST and the Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization by
the TRUST's Trustees of appropriate policies and procedures, the ADVISER may, to
the extent authorized by law, cause the TRUST to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law the ADVISER shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of
such action.
Except as otherwise agreed, or as otherwise provided herein, the TRUST shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
TRUST shall include (i) interest and taxes; (ii) brokerage commissions and other
costs in connection with the purchase and sale of portfolio investments; (iii)
compensation of its trustees and officers other than those who are affiliated
persons of the ADVISER; (iv) compensation of its Treasurer, compensation of
personnel working under the Treasurer's direction, and expenses of office
space, facilities, and equipment used by the Treasurer and such personnel in
the performance of their normal duties for the TRUST which consist of
maintenance of the accounts, books and other documents which constitute the
record forming the basis for the TRUST's financial statements, preparation of
such financial statements and other TRUST documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the TRUST's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the TRUST selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the TRUST and its shares for distribution under state and
2
<PAGE> 3
federal securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the TRUST; (xi) all other expenses incidental to holding meetings of the TRUST's
shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the TRUST's membership in
trade associations approved by the Trustees; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits, or
proceedings to which the TRUST is a party and the legal obligation which the
TRUST may have to indemnify its officers and trustees with respect thereto. To
the extent that any of the foregoing expenses are allocated between the TRUST
and any other party, such allocations shall be pursuant to methods approved by
the Trustees.
3. Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the TRUST are not impaired.
Except as otherwise required by the Investment Company Act of 1940 any of the
shareholders, trustees, officers and employees of the TRUST may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the TRUST.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties hereunder on the
part of the ADVISER, the ADVISER shall not be subject to liability to the TRUST,
or to any shareholder of the TRUST, for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
4. Compensation Payable to ADVISER
The TRUST shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, with respect to the
Portfolio, a monthly fee computed at the following annual rate: 0.70% of
average daily net assets.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month, calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
3
<PAGE> 4
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with each of the TRUST's portfolio
transactions and shall advise the Trustees of any other commissions, fees,
brokerage or similar payments which may be possible for the ADVISER or any
other direct or indirect majority owned subsidiary of VK/AC Holding, Inc. to
receive in connection with the TRUST's portfolio transactions or other
arrangements which may benefit the TRUST.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
5. Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the TRUST are the
property of the TRUST and further agrees to surrender promptly to the TRUST any
of such records upon the TRUST's request. The ADVISER further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the Act.
6. Duration and Termination
This Agreement will become effective with respect to the Portfolio on the date
hereof, and with respect to any additional Portfolios, on the date of receipt by
the TRUST of notice from the ADVISER in accordance with Section 1(b) hereof that
the ADVISER is willing to serve as investment adviser with respect to such
Portfolio, provided that this Agreement (as supplemented by the terms specified
in any notice and agreement pursuant to Section 1(b) hereof) shall have been
approved by the shareholders of each Portfolio subject to this Agreement, in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, shall remain in full force until May 30, 1997.
Thereafter, if not terminated, this Agreement shall continue in effect as to a
particular Portfolio for successive periods of twelve months each, provided such
continuance is specifically approved at least annually, (a) by the vote of a
majority of those members of the TRUST's Trustees who are not interested persons
of any party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the TRUST's Trustees or by vote
of a majority of the outstanding voting securities of such Portfolio. Not
withstanding
4
<PAGE> 5
the foregoing, this Agreement may be terminated as to any Portfolio at any time,
without the payment of any penalty, by the TRUST (by vote of the TRUST's
Trustees or by vote of a majority of the outstanding voting securities of such
Portfolio), or by the ADVISER, on sixty days' written notice. This Agreement
will immediately terminate in the event of its assignment.
7. Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the Investment
Company Act of 1940 (the "1940 Act") and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted to either the ADVISER or
the TRUST by the Securities and Exchange Commission, or such interpretive
positions as may be taken by the Commission or its staff, under said Act, and
the term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the TRUST's Trustees and
by the sole shareholder. This Agreement is executed on behalf of the TRUST or
the Trustees of the TRUST as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees, officers
or shareholders of the TRUST individually but are binding only upon the assets
and property of the TRUST. The TRUST is composed of multiple Portfolios. All
obligations of the TRUST under this Agreement shall apply only on a Portfolio by
Portfolio basis and the assets of one Fund shall not be liable for the
obligations of any other Portfolio. A Certificate of TRUST in respect of the
TRUST is on file with the Secretary of the State of Delaware.
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
By /s/ DENNIS J. MCDONNELL
______________________________________
Name: Dennis J. McDonnell
__________________________________
Its: President
___________________________________
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By /s PETER W. HEGEL
______________________________________
Name: Peter W. Hegel
__________________________________
Its: Executive Vice President
___________________________________
5
<PAGE> 1
EXHIBIT (5)(c)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 31st day of October, 1996, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust, hereinafter
referred to as the "TRUST," and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation, hereinafter referred to as the "ADVISER".
The TRUST and the ADVISER agree as follows:
1. Appointment
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST'S Global Equity Portfolio ("the Portfolio"), for the period and on the
terms set forth in this Agreement. The ADVISER accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
b. In the event that the TRUST establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the TRUST in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new portfolio to the ADVISER will be as agreed in writing at the time.
2. Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), Bylaws, registration statement,
prospectus and the stated investment objectives, policies and restrictions of
the Portfolio, shall:
a. manage the investment and reinvestment of the TRUST's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the TRUST's Portfolio, and formulation and implementation of
investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of the Portfolio of the TRUST with brokers
or dealers selected by the ADVISER;
c. conduct and manage the day-to-day operations of the TRUST including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing of
legal services except for services provided by outside counsel to the TRUST
selected by the Trustees, and the supervision of the TRUST's Treasurer and the
personnel working under his direction; and
d. furnish to the TRUST office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each TRUST trustee and TRUST officer who is an
affiliated person of the ADVISER, except the compensation of the TRUST's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the TRUST and the Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization by
the
<PAGE> 2
TRUST's Trustees of appropriate policies and procedures, the ADVISER may, to
the extent authorized by law, cause the TRUST to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law the ADVISER shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of
such action.
Except as otherwise agreed, or as otherwise provided herein, the TRUST shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
TRUST shall include (i) interest and taxes; (ii) brokerage commissions and
other costs in connection with the purchase and sale of portfolio investments;
(iii) compensation of its trustees and officers other than those who are
affiliated persons of the ADVISER; (iv) compensation of its Treasurer,
compensation of personnel working under the Treasurer's direction, and expenses
of office space, facilities, and equipment used by the Treasurer and such
personnel in the performance of their normal duties for the TRUST which consist
of maintenance of the accounts, books and other documents which constitute the
record forming the basis for the TRUST's financial statements, preparation of
such financial statements and other TRUST documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the TRUST's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the TRUST selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the TRUST and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the TRUST; (xi) all other expenses incidental to holding meetings of the
TRUST's shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the TRUST's membership in
trade associations approved by the Trustees; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits, or
proceedings to which the TRUST is a party and the legal obligation which the
TRUST may have to indemnify its officers and trustees with respect thereto. To
the extent that any of the foregoing expenses are allocated between the TRUST
and any other party, such allocations shall be pursuant to methods approved by
the Trustees.
3. Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the TRUST are not impaired.
Except as otherwise required by the Investment Company Act of 1940 any of the
shareholders, trustees, officers and employees of the TRUST may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the TRUST.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties hereunder on the
part of the ADVISER, the ADVISER shall not be subject to liability to the
TRUST, or to any shareholder of the TRUST, for any act or omission in the
2
<PAGE> 3
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
4. Compensation Payable to ADVISER
The TRUST shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, with respect to the
Portfolio, a monthly fee computed at the following annual rate: 1.00% of
average daily net assets.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month, calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such commissions,
fees, brokerage or similar payments. The ADVISER shall use its best efforts to
recapture all available tender offer solicitation fees and exchange offer fees
in connection with each of the TRUST's portfolio transactions and shall advise
the Trustees of any other commissions, fees, brokerage or similar payments which
may be possible for the ADVISER or any other direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. to receive in connection with the TRUST's
portfolio transactions or other arrangements which may benefit the TRUST.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
5. Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the TRUST are the
property of the TRUST and further agrees to surrender promptly to the TRUST any
of such records upon the TRUST's request. The ADVISER further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records required
to be maintained by Rule 31a-1 under the Act.
6. Duration and Termination
This Agreement will become effective with respect to the Portfolio on the date
hereof, and with respect to any additional Portfolios, on the date of receipt by
the TRUST of notice from the ADVISER in accordance with Section 1(b) hereof that
the ADVISER is willing to serve as investment adviser with respect to such
Portfolio, provided that this Agreement (as supplemented by the terms
specified in any notice and agreement pursuant to Section 1(b) hereof)
shall have been approved by the shareholders of each Portfolio subject to this
Agreement, in accordance with the requirements under the 1940 Act, and, unless
sooner terminated as provided herein, shall remain in full force until May 30,
1997. Thereafter, if not terminated, this Agreement shall continue in effect
as to a particular Portfolio for successive periods of twelve months each,
provided such continuance is specifically approved at least annually, (a) by
the vote of a majority of those members of the TRUST's Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the TRUST's
Trustees or by vote of a majority of the outstanding voting securities of such
Portfolio. Notwithstanding the foregoing, this Agreement may be terminated as
to any Portfolio at any time, without the payment of any
3
<PAGE> 4
penalty, by the TRUST (by vote of the TRUST's Trustees or by vote of a majority
of the outstanding voting securities of such Portfolio), or by the ADVISER, on
sixty days' written notice. This Agreement will immediately terminate in the
event of its assignment.
7. Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the Investment
Company Act of 1940 (the "1940 Act") and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted to either the ADVISER or
the TRUST by the Securities and Exchange Commission, or such interpretive
positions as may be taken by the Commission or its staff, under said Act, and
the term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the TRUST's Trustees and
by the sole shareholder. This Agreement is executed on behalf of the TRUST or
the Trustees of the TRUST as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees, officers
or shareholders of the TRUST individually but are binding only upon the assets
and property of the TRUST. The TRUST is composed of multiple Portfolios. All
obligations of the TRUST under this Agreement shall apply only on a Portfolio by
Portfolio basis and the assets of one Portfolio shall not be liable for the
obligations of any other Portfolio. A Certificate of TRUST in respect of the
Trust is on file with the Secretary of the State of Delaware.
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
By /s/ DENNIS J. MCDONNELL
___________________________________
Name: Dennis J. McDonnell
___________________________________
Its: President
___________________________________
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By /s/ PETER W. HEGEL
___________________________________
Name: Peter W. Hegel
___________________________________
Its: Executive Vice President
___________________________________
4
<PAGE> 1
Exhibit (5) (d)
INVESTMENT SUB-ADVISORY AGREEMENT BETWEEN
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
AND
MORGAN STANLEY ASSET MANAGEMENT INC.
THIS AGREEMENT is made as of this 31st day of October, 1996 by and between
MORGAN STANLEY ASSET MANAGEMENT INC., a Delaware Corporation, located at 1221
Avenue of the Americas, New York, New York 10020, and VAN KAMPEN AMERICAN
CAPITAL ASSET MANAGEMENT, INC. ("VKAC") a Delaware Corporation, located at 2800
Post Oak Boulevard, Houston, Texas 77056.
WHEREAS, VKAC has heretofore sponsored and acts as Investment Adviser to the
Global Equity Portfolio (the "Fund"), a series of Van Kampen American Capital
Life Investment Trust; and
WHEREAS, MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM") has available a staff of
experienced investment personnel and facilities for providing investment
sub-advisory services to the investment portfolio; and
WHEREAS, MSAM is an investment adviser registered under the Investment Advisers
Act of 1940, as amended and is willing to provide VKAC with investment advisory
services on the terms and conditions hereinafter set forth; and
WHEREAS, VKAC and MSAM (jointly referred to as "the Advisers") desire to enter
into an agreement for MSAM to provide sub-advisory services to the Fund and to
VKAC with respect to the Fund's investments.
NOW THEREFORE it is mutually agreed:
1. INVESTMENT SUB-ADVISORY SERVICES
1.1 Investment Advice
a) Effective on April 1, 1997, and subject to the overall policies,
control, direction and review of the Fund's Trustees, MSAM shall keep under
review the investments of the Fund and continuously furnish to the Fund and to
VKAC (1) investment advice with respect to all or such portion of the Fund's
assets as the Advisers agree to from time to time; (2) economic, statistical
and research information and advice, including advice on the allocation of
investments among countries, relating to all or such portion of the Fund's
assets as the Advisers shall agree to from time to time; (3) recommendations as
to the voting of proxies solicited by or with respect to securities under
MSAM's supervision; and (4) an investment program with respect to securities
and recommendations as to what securities shall be purchased, sold or
exchanged, and what portion, if any, of the securities shall be held in money
market instruments.
b) The Advisers are responsible for the allocation of the Fund's assets
among the various securities markets of the world. The Advisers will determine
at least quarterly the percentage of the assets that shall be allocated to each
of the Advisers (the "Asset Allocation"). The Asset Allocation will specify the
percentage and nature of the assets of the Fund allocated to each of the
Advisers for management on the effective date of the determination and will
apply to cash inflows or outflows and income and expense accruals thereafter
until such time as the Asset Allocation is redetermined. Each of the Advisers
will be responsible for the allocation of assets among the securities markets
within various regions as they agree to from time to time.
<PAGE> 2
c) Unless otherwise instructed by VKAC or the Trustees, and subject to
the provisions of this Agreement and to any guidelines or limitations specified
from time to time by VKAC or by the Trustees, MSAM shall determine the
securities to be purchased and sold by the Fund and shall place orders for the
purchase, sale or exchange of securities for the Fund's accounts with brokers
or dealers and to that end MSAM is authorized by the Trustees to give
instructions to the Custodian and any Sub-Custodian of the Fund as to
deliveries of such securities, transfers of currencies and payments of cash for
the account of the Fund.
d) In performing these services, MSAM shall adhere to the Fund's
investment objectives, restrictions and limitations as contained in its
Prospectus, Statement of Additional Information, or Agreement and Declaration
of Trust and shall comply with all statutory and regulatory restrictions,
limitations and requirements applicable to the activity of the Fund.
e) Unless otherwise instructed by VKAC or the Trustees, and subject to
the provisions of this Agreement and to any guidelines or limitations specified
from time to time by VKAC or by the Trustees, MSAM shall have executed and
performed on behalf of and at the expense of the Fund:
i) Purchases, sales, exchanges, conversions, and placement or orders for
execution, and
ii) Reporting of all transactions to VKAC and to other entities as
directed by VKAC or by the Trustees.
f) MSAM shall provide the Trustees at least quarterly, in advance of the
regular meetings of the Trustees, a report of its activities hereunder on
behalf of the Fund and its proposed strategy for the next quarter, all in such
form and detail as requested by the Trustees. MSAM shall also make an
investment officer available to attend such meetings of the Trustees as the
Trustees may reasonably request.
g) During the period commencing with the date of this Agreement and
continuing through March 31, 1997, MSAM shall consult with VKAC and John Govett
& Company Limited ("Govett") regarding the Fund's investment portfolio and
operations in order to provide for the orderly transition of subadvisory
services from Govett to MSAM. During this period, MSAM will not provide VKAC,
Govett or the Fund with investment subadvisory services or make recommendations
with respect to the execution of portfolio trades and will not receive any
investment fees.
1.2 Restriction of MSAM's Powers
(a) MSAM shall not commit the Fund to any extent beyond the amount of the
cash and securities placed by the Fund under the control of MSAM.
(b) In carrying out its duties hereunder MSAM shall comply with all
reasonable instruction of the Fund or VKAC in connection therewith. Such
instructions may be given by letter, telex, telefax or telephone confirmed by
telex, by the Trustees or by any other person authorized by a resolution of the
Trustees provided a certified copy of such resolution has been supplied to
MSAM.
(c) All securities, cash, and other assets of the Fund shall be placed
and maintained in the care of a member bank of the Federal Reserve System of
the United States approved by the Trustees as custodian and one or more
"Eligible Foreign Custodians" (as defined in Rule 17f-5 under the Investment
Company Act of 1940 (the "1940 Act")) approved by the Trustees as
sub-custodians.
(d) Persons authorized by resolution of the Trustees shall have the right
to inspect and copy contracts, notes, vouchers, and copies of entries in books
or electronic recording media relating to the Fund's transactions at the
registered office of MSAM at any time during normal business hours. Such
records, in relation to each transaction effected by MSAM on behalf of the Fund
shall be maintained by MSAM for a period of seven years from the date of such
transaction.
<PAGE> 3
1.3 Purchase and Sale of Securities
In performing the services described above, MSAM shall use its best
efforts to obtain for the Fund the most favorable price and execution
available. Subject to prior authorization of appropriate policies and
procedures by the Trustees, MSAM may, to the extent authorized by law, cause
the Fund to pay a broker or dealer who provides brokerage and research services
an amount of commission for effecting the Fund's investment transaction in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction, in recognition of the brokerage and research
services provided by the broker or dealer. To the extent authorized by law,
MSAM shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of such action.
1.4 Custodian
MSAM shall not act as Custodian for the securities or any other assets of
the Fund. All such assets shall be held by the Custodian or Sub-Custodian
appointed by the Trustees.
2. DUTIES OF VKAC
2.1 Provision of Information
VKAC shall advise MSAM from time to time with respect to the Fund of its
investment objectives and of any changes or modifications thereto, as well as
any specific investment restrictions or limitations by sending to MSAM a copy
of each registration statement relating to the Fund as filed with the
Securities and Exchange Commission. As requested by MSAM, VKAC shall furnish
such information to MSAM as to holdings, purchases, and sales of the securities
under its management as will reasonably enable MSAM to furnish its investment
advice under this Agreement.
2.2 Compensation to MSAM
The fee for the services provided under this Agreement will be determined
as follows:
(a) An amount for each month (or such other valuation period as may be
mutually agreed upon) equivalent, on an annual basis, to 50% of the
compensation actually received by VKAC pursuant to the investment advisory fee
schedule set forth in the Investment Advisory Agreement between the Fund and
VKAC taking into account any waiver or return to the Fund of any or all of such
advisory fee by VKAC (with any such return of fees to be treated as if not
actually received). The value of the assets of the Fund shall be computed as of
the close of business on the last day of each valuation period for the Fund,
using the average of all the daily determinations of the net value of the
assets of the Fund.
(b) The foregoing fee shall be paid in cash by VKAC to MSAM within five
(5) business days after the last day of the valuation period.
3. MISCELLANEOUS
3.1 Activities of MSAM
The services of MSAM as Sub-Adviser to VKAC under this Agreement are not
to be deemed exclusive, MSAM and its affiliates being free to render services
to others. It is understood that shareholders, trustees, officers and employees
of MSAM may become interested in the Fund or VKAC as a shareholder, trustee,
officer, partner or otherwise.
<PAGE> 4
3.2 Services to Other Clients
VKAC acknowledges that MSAM may have investment responsibilities, or
render investment advice to, or perform other investment advisory services for,
other individuals or entities, ("Clients"). Subject to the provisions of this
paragraph, VKAC agrees that MSAM may give advice or exercise investment
responsibility and take such other action with respect to such Clients which
may differ from advice given or the timing or nature of action taken with
respect to the Fund, provided that MSAM acts in good faith, and provided,
further, that it is MSAM policy to allocate, within its reasonable discretion,
investment opportunities to the Fund over a period of time on a fair and
equitable basis relative to the Clients, taking into account the investment
objectives and policies of the Fund and any specific investment restrictions
applicable thereto. VKAC acknowledges that one or more of the Clients may at
any time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Fund may have an interest from time to
time, whether in transactions which may involve the Fund or otherwise. MSAM
shall have no obligation to acquire for the Fund a position in any investment
which any Client may acquire, and VKAC shall have no first refusal,
coinvestment or other rights in respect of any such investment, either for the
Fund or otherwise.
3.3 Best Efforts
It is understood and agreed that in furnishing the investment advice and
other services as herein provided, MSAM shall use its best professional
judgment to recommend actions which will provide favorable results for the
Fund. MSAM shall not be liable to the Fund or to any shareholder of the Fund
to any greater degree than VKAC.
3.4 Duration of Agreement
a) This Agreement, unless terminated pursuant to paragraph b or c below
or Section 2.2(c), shall continue in effect through May 31, 1997, and
thereafter shall continue in effect from year to year, provided its continued
applicability is specifically approved at least annually by the Trustees or by
a vote of the holders of a majority of the outstanding shares of the Fund. In
addition, such continuation shall be approved by vote of a majority of the
Trustees who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on
such approval. As used in this paragraph, the term "interested person" shall
have the same meaning as set forth in the 1940 Act.
b) This Agreement may be terminated by sixty (60) days' written notice by
either VKAC or MSAM to the other party. The Agreement may also be terminated at
any time, without the payment of any penalty, by the Fund (by vote of the
Trustees or, by the vote of a majority of the outstanding voting securities of
such Fund), on sixty (60) days' written notice to both VKAC and MSAM. This
Agreement shall automatically terminate in the event of the termination of the
investment advisory agreement between VKAC and the Fund.
c) This Agreement shall terminate in the event of its assignment. The
term "assignment" for this purpose shall have the same meaning set forth in
Section 2(a)(4) of the 1940 Act.
d) Termination shall be without prejudice to the completion of any
transactions which MSAM shall have committed to on behalf of the Fund prior to
the time of termination. MSAM shall not effect and the Fund shall not be
entitled to instruct MSAM to effect any further transactions on behalf of the
Fund subsequent to the time termination takes effect.
e) This Agreement shall terminate forthwith by notice in writing on the
happening of any of the following events:
<PAGE> 5
i) If VKAC or MSAM shall go into liquidation (except a voluntary
liquidation for the purpose of and followed by a bona fide reconstruction or
amalgamation upon terms previously approved in writing by the party not in
liquidation) or if a receiver or receiver and manager of any of the assets of
any of them is appointed; or
ii) If either of the parties hereto shall commit any breach of the
provisions hereof and shall not have remedied such breach within 30 days after
the service of notice by the party not in breach on the other requiring the
same to be remedied.
f) On the termination of this Agreement and completion of all matters
referred to in the foregoing paragraph (d) MSAM shall deliver or cause to be
delivered to the Fund copies of all documents, records and books of the Fund
required to be maintained pursuant to Rules 31a-1 or 31a-2 of the 1940 Act
which are in MSAM's possession, power or control and which are valid and in
force at the date of termination.
3.5 Notices
Any notice, request, instruction, or other document to be given under this
Agreement by any party hereto to the other parties shall be in writing and
delivered personally or sent by mail or telecopy (with a hard copy to follow),
If to MSAM, to:
Morgan Stanley Asset Management, Inc.
1221 Avenue of the Americas
New York, New York 10020
Atten: Warren J. Olsen
with a copy to:
Morgan Stanley Asset Management, Inc.
1221 Avenue of the Americas
New York, New York 10020
Atten: Harold J. Schaaff, Esq.
If to VKAC, to:
Van Kampen American Capital Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Atten: Dennis J. McDonnell
with a copy to:
Van Kampen American Capital Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Atten: Ronald A. Nyberg, Esq.
or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party (or its agent for notices hereunder). Any notice that is
addressed and mailed in the manner herein provided shall be presumed to have
been duly given to the party to which it is addressed, on the date three (3)
days after mailing, and in the case of delivery by telecopy, on the date the
hard copy is received.
<PAGE> 6
3.6 Choice of Law
This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of the United
States and the State of New York, without regard to the conflicts of laws
principles thereof.
3.7 Miscellaneous Provisions
The execution of this Agreement has been authorized by the Fund's Trustees
and by the shareholders. This Agreement is executed on behalf of the Fund or
the Trustees of the Fund as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the Fund individually but are binding only upon the
assets and property of the Fund. A Certificate of Trust in respect of the Fund
is on file with the Secretary of State of Delaware.
IN WITNESS WHEREOF, the Agreement has been executed as of the date first above
given.
VAN KAMPEN AMERICAN CAPITAL MORGAN STANLEY
ASSET MANAGEMENT, INC. ASSET MANAGEMENT INC.
By: /s/ DENNIS J. McDONNELL By: /s/ BARTON M. BIGGS
----------------------------- ----------------------
Name: Dennis J. McDonnell Name: Barton M. Biggs
--------------------------- ---------------------
Its: President Its: Manging Director
---------------------------- ---------------------
<PAGE> 1
EXHIBIT (5)(e)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 31st day of October, 1996, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust, hereinafter
referred to as the "TRUST," and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation, hereinafter referred to as the "ADVISER".
The TRUST and the ADVISER agree as follows:
1. Appointment
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST'S Real Estate Securities Portfolio ("the Portfolio"), for the period and
on the terms set forth in this Agreement. The ADVISER accepts such appointment
and agrees to furnish the services herein set forth for the compensation herein
provided.
b. In the event that the TRUST establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the TRUST in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new portfolio to the ADVISER will be as agreed in writing at the time.
2. Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), Bylaws, registration statement,
prospectus and the stated investment objectives, policies and restrictions of
the Portfolio, shall:
a. manage the investment and reinvestment of the TRUST's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the TRUST's Portfolio, and formulation and implementation of
investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of the Portfolio of the TRUST with brokers
or dealers selected by the ADVISER;
c. conduct and manage the day-to-day operations of the TRUST including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing of
legal services except for services provided by outside counsel to the TRUST
selected by the Trustees, and the supervision of the TRUST's Treasurer and the
personnel working under his direction; and
<PAGE> 2
d. furnish to the TRUST office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each TRUST trustee and TRUST officer who is an
affiliated person of the ADVISER, except the compensation of the TRUST's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the TRUST and the Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization by
the TRUST's Trustees of appropriate policies and procedures, the ADVISER may, to
the extent authorized by law, cause the TRUST to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law the ADVISER shall not be deemed to have acted unlawfully or to have breached
any duty created by this Agreement or otherwise solely by reason of such action.
Except as otherwise agreed, or as otherwise provided herein, the TRUST shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
TRUST shall include (i) interest and taxes; (ii) brokerage commissions and
other costs in connection with the purchase and sale of portfolio investments;
(iii) compensation of its trustees and officers other than those who are
affiliated persons of the ADVISER; (iv) compensation of its Treasurer,
compensation of personnel working under the Treasurer's direction, and expenses
of office space, facilities, and equipment used by the Treasurer and such
personnel in the performance of their normal duties for the TRUST which consist
of maintenance of the accounts, books and other documents which constitute the
record forming the basis for the TRUST's financial statements, preparation of
such financial statements and other TRUST documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the TRUST's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the TRUST selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the TRUST and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and
2
<PAGE> 3
proxy solicitation materials of the TRUST; (xi) all other expenses incidental
to holding meetings of the TRUST's shareholders including proxy solicitations
therefor; (xii) expenses for servicing shareholder accounts; (xiii) insurance
premiums for fidelity coverage and errors and omissions insurance; (xiv) dues
for the TRUST's membership in trade associations approved by the Trustees; and
(xv) such nonrecurring expenses as may arise, including those associated with
actions, suits, or proceedings to which the TRUST is a party and the legal
obligation which the TRUST may have to indemnify its officers and trustees with
respect thereto. To the extent that any of the foregoing expenses are allocated
between the TRUST and any other party, such allocations shall be pursuant to
methods approved by the Trustees.
3. Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the TRUST are not impaired.
Except as otherwise required by the Investment Company Act of 1940 any of the
shareholders, trustees, officers and employees of the TRUST may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the TRUST.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties hereunder on the
part of the ADVISER, the ADVISER shall not be subject to liability to the
TRUST, or to any shareholder of the TRUST, for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
4. Compensation Payable to ADVISER
The TRUST shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, with respect to the
Portfolio, a monthly fee computed at the following annual rate: 1.00% of
average daily net assets.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month, calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall
be reduced by any commissions, tender solicitation
3
<PAGE> 4
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 TRUST,
less any direct expenses incurred by such person, in connection with obtaining
such commissions, fees, brokerage or similar payments. The ADVISER shall use
its best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with each of the TRUST's portfolio
transactions and shall advise the Trustees of any other commissions, fees,
brokerage or similar payments which may be possible for the ADVISER or any
other direct or indirect majority owned subsidiary of VK/AC Holding, Inc. to
receive in connection with the TRUST's portfolio transactions or other
arrangements which may benefit the TRUST.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
5. Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the TRUST are the
property of the TRUST and further agrees to surrender promptly to the TRUST any
of such records upon the TRUST's request. The ADVISER further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the records required
to be maintained by Rule 31a-1 under the Act.
6. Duration and Termination
This Agreement will become effective with respect to the Portfolio on the date
hereof, and with respect to any additional Portfolios, on the date of receipt by
the TRUST of notice from the ADVISER in accordance with Section 1(b) hereof that
the ADVISER is willing to serve as investment adviser with respect to such
Portfolio, provided that this Agreement (as supplemented by the terms specified
in any notice and agreement pursuant to Section 1(b) hereof) shall have been
approved by the shareholders of each Portfolio subject to this Agreement, in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, shall remain in full force until May 30, 1997.
Thereafter, if not terminated, this Agreement shall continue in
effect as to a particular Portfolio for successive periods of twelve months
each, provided such continuance is specifically approved at least annually, (a)
by the vote of a majority of those members of the TRUST's Trustees who are not
interested persons of any party to this Agreement, cast in person at a meeting
called for the purpose of voting on such approval, and (b) by the TRUST's
Trustees or by vote of a majority of the outstanding voting securities of such
Portfolio. Not withstanding the foregoing, this Agreement may be terminated as
to any Portfolio at any time, without the payment of any penalty, by the TRUST
(by vote of the TRUST's Trustees or by vote
4
<PAGE> 5
of a majority of the outstanding voting securities of such Portfolio), or by the
ADVISER, on sixty days' written notice. This Agreement will immediately
terminate in the event of its assignment.
7. Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the Investment
Company Act of 1940 (the "1940 Act") and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted to either the ADVISER or
the TRUST by the Securities and Exchange Commission, or such interpretive
positions as may be taken by the Commission or its staff, under said Act, and
the term "brokerage and research services" shall have the meaning given in the
Securities Exchange Act of 1934 and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the TRUST's Trustees and
by the sole shareholder. This Agreement is executed on behalf of the TRUST or
the Trustees of the TRUST as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees, officers
or shareholders of the TRUST individually but are binding only upon the assets
and property of the TRUST. The TRUST is composed of multiple Portfolios. All
obligations of the TRUST under this Agreement shall apply only on a Portfolio by
Portfolio basis and the assets of one Portfolio shall not be liable for the
obligations of any other Portfolio. A Certificate of TRUST in respect of the
TRUST is on file with the Secretary of the State of Delaware.
It is understood and agreed that the ADVISER may engage a subadviser to assist
it in the performance of its duties hereunder.
5
<PAGE> 6
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
By /s/ DENNIS J. MCDONNELL
___________________________________
Name: Dennis J. McDonnell
__________________________________
Its: President
___________________________________
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By /s/ PETER W. HEGEL
______________________________________
Name: Peter W. Hegel
__________________________________
Its: Executive Vice President
___________________________________
6
<PAGE> 1
EXHIBIT (5)(f)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made this 31st day of October, 1996, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust, hereinafter
referred to as the "TRUST," and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation, hereinafter referred to as the "ADVISER".
The TRUST and the ADVISER agree as follows:
1. Appointment
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST'S Growth and Income Portfolio ("the Portfolio"), for the period and on the
terms set forth in this Agreement. The ADVISER accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
b. In the event that the TRUST establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the TRUST in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new portfolio to the ADVISER will be as agreed in writing at the time.
2. Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), Bylaws, registration statement,
prospectus and the stated investment objectives, policies and restrictions of
the Portfolio, shall:
a. manage the investment and reinvestment of the TRUST's assets including, by
way of illustration, the evaluation of pertinent economic, statistical,
financial and other data, determination of the industries and companies to be
represented in the TRUST's Portfolio, and formulation and implementation of
investment programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the account of the Portfolio of the TRUST with brokers
or dealers selected by the ADVISER;
c. conduct and manage the day-to-day operations of the TRUST including, by way
of illustration, the preparation of registration statements, prospectuses,
reports, proxy solicitation materials and amendments thereto, the furnishing of
legal services except for services provided by outside counsel to the TRUST
selected by the Trustees, and the supervision of the TRUST's Treasurer and the
personnel working under his direction; and
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d. furnish to the TRUST office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each TRUST trustee and TRUST officer who is an
affiliated person of the ADVISER, except the compensation of the TRUST's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the TRUST and the Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization by
the TRUST's Trustees of appropriate policies and procedures, the ADVISER may, to
the extent authorized by law, cause the TRUST to pay a broker or dealer that
provides brokerage and research services to the ADVISER an amount of commission
for effecting a portfolio investment transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction. In the event of such authorization and to the extent authorized by
law the ADVISER shall not be deemed to have acted unlawfully or to have breached
any duty created by this Agreement or otherwise solely by reason of such action.
Except as otherwise agreed, or as otherwise provided herein, the TRUST shall
pay, or arrange for others to pay, all its expenses other than those expressly
stated to be payable by the ADVISER hereunder, which expenses payable by the
TRUST shall include (i) interest and taxes; (ii) brokerage commissions and
other costs in connection with the purchase and sale of portfolio investments;
(iii) compensation of its trustees and officers other than those who are
affiliated persons of the ADVISER; (iv) compensation of its Treasurer,
compensation of personnel working under the Treasurer's direction, and expenses
of office space, facilities, and equipment used by the Treasurer and such
personnel in the performance of their normal duties for the TRUST which consist
of maintenance of the accounts, books and other documents which constitute the
record forming the basis for the TRUST's financial statements, preparation of
such financial statements and other TRUST documents and reports of a financial
nature required by federal and state laws, and participation in the production
of the TRUST's registration statement, prospectuses, proxy solicitation
materials and reports to shareholders; (v) fees of outside counsel to and of
independent accountants of the TRUST selected by the Trustees; (vi) custodian,
registrar and shareholder service agent fees and expenses; (vii) expenses
related to the repurchase or redemption of its shares including expenses
related to a program of periodic repurchases or redemptions; (viii) expenses
related to the issuance of its shares against payment therefor by or on behalf
of the subscribers thereto; (ix) fees and related expenses of registering and
qualifying the TRUST and its shares for distribution under state and federal
securities laws; (x) expenses of printing and mailing of registration
statements, prospectuses, reports, notices and proxy solicitation materials of
the TRUST; (xi) all other expenses incidental to holding meetings of the
TRUST's shareholders including proxy solicitations therefor; (xii) expenses for
servicing shareholder accounts; (xiii) insurance premiums for fidelity coverage
and errors and omissions insurance; (xiv) dues for the TRUST's membership in
trade associations approved by the Trustees; and (xv) such nonrecurring
expenses as may arise, including those associated with actions, suits, or
proceedings to which the TRUST is a party and the legal obligation which the
TRUST may have to indemnify its officers and trustees with respect thereto. To
the extent that any of the foregoing expenses are allocated
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between the TRUST and any other party, such allocations shall be pursuant to
methods approved by the Trustees.
3. Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services rendered to the TRUST are not impaired.
Except as otherwise required by the Investment Company Act of 1940 any of the
shareholders, trustees, officers and employees of the TRUST may be a
shareholder, director, officer or employee of, or be otherwise interested in,
the ADVISER, and in any person controlled by or under common control with the
ADVISER, and the ADVISER, and any person controlled by or under common control
with the ADVISER, may have an interest in the TRUST.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence, or reckless disregard of obligations or duties hereunder on the
part of the ADVISER, the ADVISER shall not be subject to liability to the
TRUST, or to any shareholder of the TRUST, for any act or omission in the
course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security.
4. Compensation Payable to ADVISER
The TRUST shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, with respect to the
Portfolio, a monthly fee computed at the following annual rates: 0.60% on the
first $500 million of the Portfolio's average daily net assets; and 0.55% on
any excess over $500 million.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month, calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall
be reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with each of the TRUST's portfolio
transactions and shall advise the Trustees of any other commissions, fees,
brokerage or similar payments which may be possible for the ADVISER or any
other direct or indirect majority
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owned subsidiary of VK/AC Holding, Inc. to receive in connection with the
TRUST's portfolio transactions or other arrangements which may benefit the
TRUST.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
5. Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the TRUST are the
property of the TRUST and further agrees to surrender promptly to the TRUST any
of such records upon the TRUST's request. The ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under the Act.
6. Duration and Termination
This Agreement will become effective with respect to the Portfolio on the date
hereof, and with respect to any additional Portfolios, on the date of receipt by
the TRUST of notice from the ADVISER in accordance with Section 1(b) hereof that
the ADVISER is willing to serve as investment adviser with respect to such
Portfolio, provided that this Agreement (as supplemented by the terms specified
in any notice and agreement pursuant to Section 1(b) hereof) shall have been
approved by the shareholders of each Portfolio subject to this Agreement, in
accordance with the requirements under the 1940 Act, and, unless sooner
terminated as provided herein, shall remain in full force until May 30, 1997.
Thereafter, if not terminated, this Agreement shall continue in effect as to a
particular Portfolio for successive periods of twelve months each, provided such
continuance is specifically approved at least annually, (a) by the vote of a
majority of those members of the TRUST's Trustees who are not interested persons
of any party to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval, and (b) by the TRUST's Trustees or by vote
of a majority of the outstanding voting securities of such Portfolio. Not
withstanding the foregoing, this Agreement may be terminated as to any Portfolio
at any time, without the payment of any penalty, by the TRUST (by vote of the
TRUST's Trustees or by vote of a majority of the outstanding voting securities
of such Portfolio), or by the ADVISER, on sixty days' written notice. This
Agreement will immediately terminate in the event of its assignment.
7. Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"
"assignment," "interested person," and "majority of the outstanding voting
securities" shall have their respective meanings defined in the Investment
Company Act of 1940 (the "1940 Act") and the Rules and Regulations thereunder,
subject, however, to such exemptions as may be granted to either the ADVISER or
the TRUST by the Securities and Exchange Commission, or such interpretive
positions as may be taken by the Commission or its staff, under said Act, and
the term "brokerage and research
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services" shall have the meaning given in the Securities Exchange Act of 1934
and the Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the TRUST's Trustees and
by the sole shareholder. This Agreement is executed on behalf of the TRUST or
the Trustees of the TRUST as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees, officers
or shareholders of the TRUST individually but are binding only upon the assets
and property of the TRUST. The TRUST is composed of multiple Portfolios. All
obligations of the TRUST under this Agreement shall apply only on a Portfolio by
Portfolio basis and the assets of one Portfolio shall not be liable for the
obligations of any other Portfolio. A Certificate of Trust in respect of the
TRUST is on file with the Secretary of the State of Delaware.
It is understood and agreed that the ADVISER may engage a subadviser to assist
it in the performance of its duties hereunder.
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
By /s/ DENNIS J. McDONNELL
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Name: Dennis J. McDonnell
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Its: President
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VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By /s/ PETER W. HEGEL
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Name: Peter W. Hegel
-----------------------------------
Its: Executive Vice President
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EXHIBIT (6)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of October 31, 1996 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
FUND, a Delaware business trust (the "Fund"), and VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short positions
in the Shares, except for long positions in those Shares purchased by the
Distributor in accordance with any systematic sales plan described in the then
current Prospectus of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any of its
trustees, officers or shareholders from taking any long or short positions in
the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor
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from dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. Public Offering Price. The public offering price per Share shall be
determined in accordance with the then current Prospectus of the Fund. In no
event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund Shares,
the Distributor will in all respects duly comply with all state and federal
laws relating to the sale of such securities and with all applicable rules and
regulations of all regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and all
applicable rules and regulations of the Securities and Exchange Commission
under the 1940 Act, and will indemnify and save the Fund harmless from any
damage or expense on account of any unlawful act by the Distributor or its
agents or employees. The Distributor is not, however, to be responsible for
the acts of other dealers or agents, except to the extent that they shall be
acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply with
certain standards, as set forth in Exhibit III attached hereto as to when each
respective class of Shares may appropriately be sold to particular investors.
The Distributor will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt and comply with
such standards as a condition precedent to their participation in the offering.
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5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration
of Shares under the federal securities laws, and the Fund will
exercise its best efforts to obtain said registration and
qualification;
(ii) all expenses in connection with the printing of
any notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any other
notice or communication sent to shareholders in connection
with any meeting of the shareholders or otherwise, any annual,
semiannual or other reports or communications sent to the
shareholders, and the expenses of sending prospectuses
relating to the Shares to existing shareholders;
(iii) all expenses of any federal or state
original-issue tax or transfer tax payable upon the issuance,
transfer or delivery of Shares from the Fund to the
Distributor; and
(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.
(b) The Distributor will also permit its officers and employees to serve
without compensation as trustees and officers of the Fund if duly elected to
such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket costs and
expenses actually incurred by it in connection with distribution of each class
of Shares respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as such
12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts so paid and
the purposes for which such expenditures were made for each such class of
Shares.
(d) The Fund shall compensate the Distributor for providing services to,
and the maintenance of, shareholder accounts in the Fund (including prepaying
service fees to eligible brokers, dealers and financial intermediaries and
expenses incurred in connection therewith) and the Distributor may pay as agent
for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"),
as such Service Plan may be in effect from time to time; provided, however,
that no service fee payments shall be due or paid to the Distributor hereunder
with respect to a class of Shares unless and until this Agreement shall have
been approved for each such class by a majority of the Board of Trustees of the
Fund and by a majority of the Disinterested Trustees by vote cast in person at
a meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The
persons authorized to direct the payment of funds pursuant to this Agreement
and the Service Plan shall provide to the Fund's Board of Trustees, and the
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Trustees shall review, at least quarterly, a written report with respect to
each of the classes of Shares of the amounts paid as service fees for each such
class of Shares.
6. Redemption of Shares. In connection with the Fund's redemption of its
Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal and state
legislation, any applicable rules of the National Association of Securities
Dealers, Inc., and any applicable rules and regulations of the Securities and
Exchange Commission under the 1940 Act, the Distributor may accept offers of
holders of Shares to resell such Shares to the Fund on such terms and
conditions and at such prices as described and provided for in the then current
Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as the Fund
may specify of the number of each class of Shares, respectively, repurchased
for the Fund's account and the time or times of such repurchases, and the Fund
shall notify the Distributor of the prices and, in the case of a class of CDSC
Shares or Combination Shares, of the deferred sales charge as described below,
if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the foregoing
authorization at any time; unless otherwise stated, any such suspension or
revocation shall be effective forthwith upon receipt of notice thereof by
telegraph or by written instrument from any of the Fund's officers. In the
event that the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of
the Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made by the
Distributor shall be made only as agent for the Fund's account and pursuant to
the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to pay, for the
Fund's account, the repurchase price (together with any applicable contingent
deferred sales charge) of any Shares so repurchased for the Fund against the
authorized transfer of book shares from an open account and against delivery of
any other documentation required by the Board of Trustees of the Fund or, in
the case of certificated Shares, against delivery of the certificates
representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other compensation in
respect of any repurchases of FESC Shares for the Fund under the foregoing
authorization and appointment as agent. With respect to any repurchase of CDSC
Shares or Combination Shares, the Distributor shall receive the deferred sales
charge, if any, applicable to the respective class of Shares that have been
held for less than a specified period of time with respect to such class as set
forth from time to time in the Fund's Prospectus. The Distributor shall
receive no other commission or other compensation in respect of any repurchases
of CDSC Shares or Combination Shares for the Fund under the foregoing
authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms of this
Agreement are redeemed or repurchased by the Fund or by the Distributor as
agent or are tendered for redemption within seven business days after the date
of the Distributor's confirmation of the original purchase by the Distributor,
the Distributor shall forfeit the amount above the net asset value received by
it in respect of such Shares, provided that the portion, if any, of such amount
re-allowed by the Distributor to dealers or agents shall be repayable to the
Fund only to the extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with such dealers and
agents a corresponding provision for the forfeiture by them of their concession
with respect to FESC Shares purchased by them or their principals and redeemed
or repurchased by the Fund or by the Distributor as agent within seven business
days after the date of the Distributor's confirmation of such initial
purchases.
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7. Indemnification. The Fund agrees to indemnify and hold harmless the
Distributor and each of its trustees and officers and each person, if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and hold
harmless the Fund and each of its trustees and officers and each person, if
any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the Fund or
5
<PAGE> 6
person (or after the Fund or such person shall have received notice of service
on any designated agent). However, failure to notify the Distributor of any
claim shall not relieve the Distributor from any liability which it may have to
the Fund or any person against whom the action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. In the case of
any notice to the Distributor, it shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense, of any
suit brought to enforce the claim, but if the Distributor elects to assume the
defense, the defense shall be conducted by counsel chosen by it and
satisfactory to the Fund, to its officers and trustees and to any controlling
person or persons, defendant or defendants in the suit. In the event that the
Distributor elects to assume the defense of any suit and retain counsel, the
Fund or controlling persons, defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them. If the Distributor does
not elect to assume the defense of any suit, it will reimburse the Fund,
officers and trustees or controlling person or persons, defendant or defendants
in the suit, for the reasonable fees and expenses of any counsel retained by
them. The Distributor agrees to notify the Fund promptly of the commencement
of any litigation or proceedings against it in connection with the issue and
sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in writing,
addressed and delivered, or mailed postpaid, to the other party at any office
of such party or at such other address as such party shall have designated in
writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST FUND
By: /s/ DENNIS J. McDONNELL
-----------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ RONALD A. NYBERG
-------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT (8)(a)
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES LISTED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Employment of Custodian and Property to be Held By
It . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States . . . . . . 2
2.1 Holding Securities . . . . . . . . . . . . . . . . . . . . 2
2.2 Delivery of Securities . . . . . . . . . . . . . . . . . . 2
2.3 Registration of Securities . . . . . . . . . . . . . . . . 4
2.4 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Availability of Federal Funds . . . . . . . . . . . . . . 5
2.6 Collection of Income . . . . . . . . . . . . . . . . . . . 5
2.7 Payment of Fund Moneys . . . . . . . . . . . . . . . . . . 6
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased . . . . . . . . . . . . . 7
2.9 Appointment of Agents . . . . . . . . . . . . . . . . . . 7
2.10 Deposit of Fund Assets in Securities System . . . . . . . 8
2.11 Fund Assets Held in the Custodian's Direct
Paper System . . . . . . . . . . . . . . . . . . . . . . . 9
2.12 Segregated Account . . . . . . . . . . . . . . . . . . . . 10
2.13 Ownership Certificates for Tax Purposes . . . . . . . . . 10
2.14 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.15 Communications Relating to Fund Securities . . . . . . . . 11
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States . . . . . . . . . . . . 11
3.1 Appointment of Foreign Sub-Custodians . . . . . . . . . . 11
3.2 Assets to be Held . . . . . . . . . . . . . . . . . . . . 11
3.3 Foreign Securities Systems . . . . . . . . . . . . . . . . 12
3.4 Agreements with Foreign Banking Institutions . . . . . . . 12
3.5 Access of Independent Accountants of the Fund . . . . . . 12
3.6 Reports by Custodian . . . . . . . . . . . . . . . . . . . 12
3.7 Transactions in Foreign Custody Account . . . . . . . . . 13
3.8 Liability of Foreign Sub-Custodians . . . . . . . . . . . 13
3.9 Liability of Custodian . . . . . . . . . . . . . . . . . . 13
3.10 Reimbursement for Advances . . . . . . . . . . . . . . . . 14
3.11 Monitoring Responsibilities . . . . . . . . . . . . . . . 14
3.12 Branches of U.S. Banks . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
3.13 Tax Law . . . . . . . . . . . . . . . . . . . . . . . . . 15
4. Payments for Sales or Repurchase or Redemptions
of Shares of the Fund . . . . . . . . . . . . . . . . . . . . . . 15
5. Proper Instructions . . . . . . . . . . . . . . . . . . . . . . . 16
6. Actions Permitted Without Express Authority . . . . . . . . . . . 16
7. Evidence of Authority . . . . . . . . . . . . . . . . . . . . . . 17
8. Duties of Custodian With Respect to the Books
of Account and Calculation of Net Asset Value
and Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9. Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
10. Opinion of Fund's Independent Accountants . . . . . . . . . . . . 18
11. Reports to Fund by Independent Public Accountants . . . . . . . . 18
12. Compensation of Custodian . . . . . . . . . . . . . . . . . . . . 18
13. Responsibility of Custodian . . . . . . . . . . . . . . . . . . . 18
14. Effective Period, Termination and Amendment . . . . . . . . . . . 19
15. Successor Custodian . . . . . . . . . . . . . . . . . . . . . . . 20
16. Interpretive and Additional Provisions . . . . . . . . . . . . . . 21
17. Additional Funds . . . . . . . . . . . . . . . . . . . . . . . . . 21
18. Massachusetts Law to Apply . . . . . . . . . . . . . . . . . . . . 22
19. Prior Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 22
20. Shareholder Communications . . . . . . . . . . . . . . . . . . . . 22
21. Limitation of Liability . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE> 4
CUSTODIAN CONTRACT
This Contract between each fund or series of a fund listed on
Appendix A which evidences its agreement to be bound hereby by executing a copy
of this Contract (each such fund is individually hereafter referred to as
the "Fund"), and State Street Bank and Trust Company, a Massachusetts trust
company, having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH:
WITNESSETH THAT, in consideration of the mutual covenants and
agreements hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of the assets
of the Fund, including securities which the Fund desires to be held in places
within the United States ("domestic securities") and securities it desires to
be held outside the United States ("foreign securities") pursuant to the
provisions of the Fund's governing documents. The Fund agrees to deliver to
the Custodian all securities and cash of the Fund, and all payments of income,
payments of principal or capital distributions received by it with respect to
all securities owned by the Fund from time to time, and the cash consideration
received by it for such new or treasury shares of capital stock, beneficial
interest or partnership interest, as applicable, of the Fund, ("Shares") as
may be issued or sold from time to time. The Custodian shall not be
responsible for any property of a Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article
5), the Custodian shall on behalf of the applicable Fund from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of the Fund, and provided
that the Custodian shall have no more or less responsibility or liability to
the Fund on account of any actions or omissions of any sub-custodian so
employed than any such sub-custodian has to the Custodian. The Custodian may
employ as sub-custodian for the Fund's foreign securities the foreign banking
institutions and foreign securities depositories designated in Schedule A
hereto but only in accordance with the provisions of Article 3.
1
<PAGE> 5
2. Duties of the Custodian with Respect to Property of the Fund Held By
the Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate
for the account of each Fund all non-cash property, to be held by it
in the United States including all domestic securities owned by such
Fund, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities
depository or in a book-entry system authorized by the U.S. Department
of the Treasury, collectively referred to herein as "Securities
System" and (b) commercial paper of an issuer for which State Street
Bank and Trust Company acts as issuing and paying agent ("Direct
Paper") which is deposited and/or maintained in the Direct Paper
System of the Custodian (the "Direct Paper System") pursuant to
Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver
domestic securities owned by a Fund held by the Custodian or in a
Securities System account of the Custodian or in the Custodian's
Direct Paper book entry system account ("Direct Paper System Account")
only upon receipt of Proper Instructions from the Fund, which may be
continuing instructions when deemed appropriate by the parties, and
only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee
2
<PAGE> 6
name of any agent appointed pursuant to Section 2.9 or into
the name or nominee name of any sub-custodian appointed
pursuant to Article 1; or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in
any such case, the new securities are to be delivered to the
Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
3
<PAGE> 7
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund ("Prospectus"), in
satisfaction of requests by holders of Shares for repurchase
or redemption; and
15) For any other proper corporate purpose, but only upon receipt
of, in addition to Proper Instructions from the Fund, a
certified copy of a resolution of the Board or of the
Executive Committee of the Fund signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Fund to be delivered, setting
forth the purpose for which such delivery is to be made,
declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such
securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of
the Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a nominee
to be used in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or nominee
name of any agent appointed pursuant to Section 2.9 or in the name or
nominee name of any sub-custodian appointed pursuant to
4
<PAGE> 8
Article 1. All securities accepted by the Custodian under the terms
of this Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its best
efforts only to timely collect income due the Fund on such securities
and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of each Fund ,
subject only to draft or order by the Custodian acting pursuant to the
terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by it from or for
the account of the Fund, other than cash maintained by the Fund in a
bank account established and used in accordance with Rule 17f-3 under
the Investment Company Act of 1940. Funds held by the Custodian for a
Fund may be deposited by it to its credit as Custodian in the Banking
Department of the Custodian or in such other banks or trust companies
as it may in its discretion deem necessary or desirable; provided,
however, that every such bank or trust company shall be qualified to
act as a custodian under the Investment Company Act of 1940 and that
each such bank or trust company and the funds to be deposited with
each such bank or trust company shall on behalf of each applicable
Fund be approved by vote of a majority of the Board of the Fund.
Such funds shall be deposited by the Custodian in its capacity as
Custodian and shall be withdrawable by the Custodian only in that
capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund
and the Custodian, the Custodian shall, upon the receipt of Proper
Instructions from the Fund, make federal funds available to such Fund
as of specified times agreed upon from time to time by the Fund and
the Custodian in the amount of checks received in payment for Shares
of such Fund which are deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other
payments with respect to registered domestic securities held hereunder
to which each Fund shall be entitled either by law or pursuant to
custom in the securities business, and shall collect on a timely basis
all income and other payments with respect to bearer domestic
securities if, on the date of payment by the issuer, such securities
are held by the Custodian or its agent thereof and shall credit such
income, as collected, to such Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest
when
5
<PAGE> 9
due on securities held hereunder. Income due each Fund on securities
loaned pursuant to the provisions of Section 2.2 (10) shall be the
responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund
in arranging for the timely delivery to the Custodian of the income to
which the Fund is properly entitled.
2.7 Payment of Fund Moneys. Upon receipt of Proper Instructions from the
Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out moneys of a Fund in the
following cases only:
1) Upon the purchase of domestic securities, options, futures
contracts or options on futures contracts for the account of
the Fund but only (a) against the delivery of such securities
or evidence of title to such options, futures contracts or
options on futures contracts to the Custodian (or any bank,
banking firm or trust company doing business in the United
States or abroad which is qualified under the Investment
Company Act of 1940, as amended, to act as a custodian and has
been designated by the Custodian as its agent for this
purpose) registered in the name of the Fund or in the name of
a nominee of the Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the case
of a purchase involving the Direct Paper System, in accordance
with the conditions set forth in Section 2.11; (d) in the case
of repurchase agreements entered into between the Fund and
the Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either
in certificate form or through an entry crediting the
Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing
purchase by the Fund of securities owned by the Custodian
along with written evidence of the agreement by the Custodian
to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank,
whether domestic or foreign; such transfer may be effected
prior to receipt of a confirmation from a broker and/or the
applicable bank pursuant to Proper Instructions from the Fund
as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
6
<PAGE> 10
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares of the Fund
declared pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions from the Fund, a certified
copy of a resolution of the Board or of the Executive
Committee of the Fund signed by an officer of the Fund and
certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and
every case where payment for purchase of domestic securities for the
account of a Fund is made by the Custodian in advance of receipt of
the securities purchased in the absence of specific written
instructions from the Fund to so pay in advance, the Custodian shall
be absolutely liable to the Fund for such securities to the same
extent as if the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to carry
out such of the provisions of this Article 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
7
<PAGE> 11
2.10 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by a Fund in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Securities Exchange Act of 1934, which acts as a
securities depository, or in the book-entry system authorized by the
U.S. Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities System" in accordance
with applicable Federal Reserve Board and Securities and Exchange
Commission rules and regulations, if any, and subject to the following
provisions:
1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian or otherwise for
customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all
advices from the Securities System of transfers of securities
for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to
the Fund at its request. Upon request, the Custodian shall
furnish the Fund confirmation of each transfer to or from the
account of the Fund in the form of a written advice or notice
and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transactions in the Securities
System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
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<PAGE> 12
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Article 14
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the
Fund for any loss or damage to the Fund resulting from use of
the Securities System by reason of any negligence, misfeasance
or misconduct of the Custodian or any of its agents or of any
of its or their employees or from failure of the Custodian or
any such agent to enforce effectively such rights as it may
have against the Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The
Custodian may deposit and/or maintain securities owned by a Fund in
the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund ;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
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<PAGE> 13
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
Instructions from the Fund establish and maintain a segregated account
or accounts for and on behalf of each such Fund, into which account or
accounts may be transferred cash and/or securities, including
securities maintained in an account by the Custodian pursuant to
Section 2.10 hereof, (i) in accordance with the provisions of any
agreement among the Fund , the Custodian and a broker-dealer
registered under the Exchange Act and a member of the NASD (or any
futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract
market), or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund, (ii) for purposes of segregating cash or government securities
in connection with options purchased, sold or written by the Fund or
commodity futures contracts or options thereon purchased or sold by
the Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or
any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
addition to Proper Instructions from the Fund , a certified copy of a
resolution of the Board or of the Executive Committee of the Fund
signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such
segregated account and declaring such purposes to be proper corporate
purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to domestic securities of each Fund held by it
and in connection with transfers of securities.
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<PAGE> 14
2.14 Proxies. The Custodian shall, with respect to the domestic securities
held hereunder, cause to be promptly executed by the registered holder
of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Fund Securities. Subject to the provisions
of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls
and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased
or sold by the Fund) received by the Custodian from issuers of the
securities being held for the Fund. With respect to tender or
exchange offers, the Custodian shall transmit promptly to the Fund all
written information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Fund desires
to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is
to take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held
Outside of the United States
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories
designated on Schedule A hereto ("foreign sub-custodians"). Upon
receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board,
the Custodian and the Fund may agree to amend Schedule A hereto from
time to time to designate additional foreign banking institutions and
foreign securities depositories to act as sub-custodian. Upon receipt
of Proper Instructions, the Fund may instruct the Custodian to cease
the employment of any one or more such sub-custodians for maintaining
custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to:
(a) "foreign securities", as defined in
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<PAGE> 15
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of
1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to
effect the Fund's foreign securities transactions. The Custodian
shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Funds shall be
maintained in foreign securities depositories only through
arrangements implemented by the foreign banking institutions serving
as sub-custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the
provisions set forth in Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set
forth in Exhibit 1 hereto and shall provide that: (a) the assets of
the Fund will not be subject to any right, charge, security interest,
lien or claim of any kind in favor of the foreign banking institution
or its creditors or agent, except a claim of payment for their safe
custody or administration; (b) beneficial ownership for the assets of
the Fund will be freely transferable without the payment of money or
value other than for custody or administration; (c) adequate records
will be maintained identifying the assets as belonging to the Fund;
(d) officers of or auditors employed by, or other representatives of
the Custodian, including to the extent permitted under applicable law
the independent public accountants for the Fund, will be given access
to the books and records of the foreign banking institution relating
to its actions under its agreement with the Custodian; and (e) assets
of the Fund held by the foreign sub-custodian will be subject only to
the instructions of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the
Fund, the Custodian will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a foreign
sub-custodian insofar as such books and records relate to the
performance of such foreign banking institution under its agreement
with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time
to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by foreign
sub-custodians, including but not limited to an identification of
entities having possession of the Fund securities and other assets and
advices or notifications of any transfers of securities to or from
each custodial account maintained by a foreign banking
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<PAGE> 16
institution for the Custodian on behalf of the Fund indicating, as to
securities acquired for a Fund, the identity of the entity having
physical possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise
provided in paragraph (b) of this Section 3.7, the provision of
Sections 2.2 and 2.7 of this Contract shall apply, mutatis mutandis to
the foreign securities of the Fund held outside the United States by
foreign sub-custodians. (b) Notwithstanding any provision of this
Contract to the contrary, settlement and payment for securities
received for the account of the Fund and delivery of securities
maintained for the account of the Fund may be effected in accordance
with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in
which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor
(or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer. (c) Securities maintained in the custody of a
foreign sub-custodian may be maintained in the name of such entity's
nominee to the same extent as set forth in Section 2.3 of this
Contract, and the Fund agrees to hold any such nominee harmless from
any liability as a holder of record of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which
the Custodian employs a foreign banking institution as a foreign
sub-custodian shall require the institution to exercise reasonable
care in the performance of its duties and to indemnify, and hold
harmless, the Custodian and each Fund from and against any loss,
damage, cost, expense, liability or claim arising out of or in
connection with the institution's performance of such obligations. At
the election of the Fund, it shall be entitled to be subrogated to the
rights of the Custodian with respect to any claims against a foreign
banking institution as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Fund has not
been made whole for any such loss, damage, cost, expense, liability or
claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set
forth with respect to sub-custodians generally in this Contract and,
regardless of whether assets are maintained in the custody of a
foreign banking institution, a foreign securities depository or a
branch of a U.S. bank as contemplated by paragraph 3.12 hereof, the
Custodian shall not be liable for any loss, damage, cost, expense,
liability or claim resulting from nationalization, expropriation,
currency restrictions, or acts of war or terrorism or any loss where
the sub-custodian has otherwise exercised reasonable care.
Notwithstanding the foregoing provisions of this
13
<PAGE> 17
paragraph 3.9, in delegating custody duties to State Street London
Ltd., the Custodian shall not be relieved of any responsibility to the
Fund for any loss due to such delegation, except such loss as may
result from (a) political risk (including, but not limited to,
exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or
(b) other losses (excluding a bankruptcy or insolvency of State Street
London Ltd. not caused by political risk) due to Acts of God, nuclear
incident or other losses under circumstances where the Custodian and
State Street London Ltd. have exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to
advance cash or securities for any purpose for the benefit of a Fund
including the purchase or sale of foreign exchange or of contracts for
foreign exchange, or in the event that the Custodian or its nominee
shall incur or be assessed any taxes, charges, expenses, assessments,
claims or liabilities in connection with the performance of this
Contract, except such as may arise from its or its nominee's own
negligent action, negligent failure to act or willful misconduct, any
property at any time held for the account of the applicable Fund shall
be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash
and to dispose of such Fund's assets to the extent necessary to obtain
reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to
the Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection
with the initial approval of this Contract. In addition, the
Custodian will promptly inform the Fund in the event that the
Custodian learns of a material adverse change in the financial
condition of a foreign sub-custodian or any material loss of the
assets of the Fund or in the case of any foreign sub-custodian not the
subject of an exemptive order from the Securities and Exchange
Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent
thereof) or that its shareholders' equity has declined below $200
million (in each case computed in accordance with generally accepted
U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this
Contract, the provisions hereof shall not apply where the custody of
the Fund's assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of
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<PAGE> 18
said Act. The appointment of any such branch as a sub-custodian shall
be governed by paragraph 1 of this Contract. (b) Cash held for each
Fund in the United Kingdom shall be maintained in an interest bearing
account established for the Fund with the Custodian's London branch,
which account shall be subject to the direction of the Custodian,
State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for
any obligations now or hereafter imposed on the Fund or the Custodian
as custodian of the Fund by the tax law of the United States of
America or any state or political subdivision thereof. It shall be
the responsibility of the Fund to notify the Custodian of the
obligations imposed on the Fund or the Custodian as custodian of the
Fund by the tax law of jurisdictions other than those mentioned in the
above sentence, including responsibility for withholding and other
taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with
regard to such tax law shall be to use reasonable efforts to assist
the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such
information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
The Custodian shall receive from the distributor for the Shares or
from the Transfer Agent of the Fund and deposit into the account of the
appropriate Fund such payments as are received for Shares of that Fund issued
or sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund and the Transfer Agent of any receipt by it of
payments for Shares of such Fund.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board
of the Fund pursuant thereto, the Custodian shall, upon receipt of instructions
from the Transfer Agent, make funds available for payment to holders of Shares
who have delivered to the Transfer Agent a request for redemption or repurchase
of their Shares. In connection with the redemption or repurchase of Shares of
a Fund, the Custodian is authorized upon receipt of instructions from the
Transfer Agent to wire funds to or through a commercial bank designated by the
redeeming shareholders. In connection with the redemption or repurchase of
Shares of the Fund, the Custodian shall honor checks drawn on the Custodian by
a holder of Shares, which checks have been furnished by the Fund to the holder
of Shares, when presented to the Custodian in accordance with such procedures
and controls as are mutually agreed upon from time to time between the Fund and
the Custodian.
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5. Proper Instructions
Proper Instructions as used throughout this Contract means a writing
signed or initialed by one or more person or persons as the Board of the Fund
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes
them to have been given by a person authorized to give such instructions with
respect to the transaction involved. The Fund shall cause all oral
instructions to be confirmed in writing. Upon receipt of a certificate of the
Secretary or an Assistant Secretary as to the authorization by the Board of the
Fund accompanied by a detailed description of procedures approved by the Board,
Proper Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board and the
Custodian are satisfied that such procedures afford adequate safeguards for the
Funds' assets. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party agreement
which requires a segregated asset account in accordance with Section 2.12.
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from
the Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund ;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of the
Fund.
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<PAGE> 20
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions,
notice, request, consent, certificate or other instrument or paper believed by
it to be genuine and to have been properly executed by or on behalf of the
Fund. The Custodian may receive and accept a certified copy of a vote of the
Board of the Fund as conclusive evidence (a) of the authority of any person to
act in accordance with such vote or (b) of any determination or of any action
by the Board pursuant to the governing documents of the Fund as described in
such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and
Calculation of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Board of the Fund to keep the books of
account of each Fund and/or compute the net asset value per share of the
outstanding shares of each Fund or, if the Custodian and the Fund execute the
applicable Price Source Authorization (the "Authorization"), the Custodian
shall keep such books of account and/or compute such net asset value per share
pursuant to the terms of the Authorization and the attachments thereto. If so
directed, the Custodian shall also calculate daily the net income of the Fund
as described in the Fund's currently effective Prospectus and shall advise the
Fund and the Transfer Agent daily of the total amounts of such net income and,
if instructed in writing by an officer of the Fund to do so, shall advise the
Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and the
daily income of each Fund shall be made at the time or times described from
time to time in the Fund's currently effective Prospectus.
9. Records
The Custodian shall with respect to each Fund create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company
Act of 1940, with particular attention to Section 31 thereof and Rules 31a-1
and 31a-2 thereunder. All such records shall be the property of the Fund and
shall at all times during the regular business hours of the Custodian be open
for inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Fund and held by the Custodian and shall, when requested to
17
<PAGE> 21
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's Form N-1A, and Form N-SAR or
other annual reports to the Securities and Exchange Commission and with respect
to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System, relating to the
services provided by the Custodian under this Contract; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would
be disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
12. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between
the Fund and the Custodian.
13. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Contract,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in
18
<PAGE> 22
good faith without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United states (except as specifically provided in Article 3.9)
and regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S.
bank, as contemplated by paragraph 3.12 hereof, the Custodian shall not be
liable for any loss, damage, cost, expense, liability or claim resulting from
or caused by, the direction or authorization by the Fund to maintain custody of
any securities or cash of the Fund in a foreign country including, but not
limited to, losses resulting from nationalization, expropriation, currency
restrictions or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned
to the Fund being liable for the payment of money or incurring liability of
some other form, the Fund, as a prerequisite to requiring the Custodian to take
such action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not
limited to securities settlements, foreign exchange contracts and assumed
settlement) or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the
Fund assets to the extent necessary to obtain reimbursement.
14. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30)
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<PAGE> 23
days after the date of such delivery or mailing; provided, however that the
Custodian shall not with respect to a Fund act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of the Fund has approved the initial use of a
particular Securities System by such Fund and the receipt of a certificate of
the Secretary or an Assistant Secretary that the Board has reviewed any
subsequent change regarding the use by such Fund of such Securities System, as
required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not with respect to a Fund act under
Section 2.11 hereof in the absence of receipt of an initial certificate of the
Secretary or an Assistant Secretary that the Board has approved the initial use
of the Direct Paper System by such Fund and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of the
Fund has reviewed the use by such Fund of the Direct Paper System; provided
further, however, that the Fund shall not amend or terminate this Contract in
contravention of any applicable federal or state regulations, or any provision
of the Declaration of Trust, and further provided, that the Fund may at any
time by action of its Board (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate
regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination and shall
likewise reimburse the Custodian for its costs, expenses and disbursements.
15. Successor Custodian
If a successor custodian for the Fund shall be appointed by the Board
of the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities of the Fund then held by it hereunder and shall
transfer to an account of the successor custodian all of the securities of the
Fund held in a Securities System.
If no such successor custodian shall be appointed, the Custodian
shall, in like manner, upon receipt of a certified copy of a vote of the Board
of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian
or certified copy of a vote of the Board shall have been delivered to the
Custodian on or before the date when such
20
<PAGE> 24
termination shall become effective, then the Custodian shall have the right to
deliver to a bank or trust company, which is a "bank" as defined in the
Investment Company Act of 1940, doing business in Boston, Massachusetts, of its
own selection, having an aggregate capital, surplus, and undivided profits, as
shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of the
Fund and all instruments held by the Custodian relative thereto and all other
property held by it under this Contract on behalf of the Fund and to transfer
to an account of such successor custodian all of the securities of the Fund
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and other properties and the provisions of
this Contract relating to the duties and obligations of the Custodian shall
remain in full force and effect.
16. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and
the Fund, may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision
of the governing documents of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
17. Additional Funds
In the event that Van Kampen American Capital Distributors , Inc.
establishes any funds in addition to the Funds listed on Appendix A with
respect to which it desires to have the Custodian render services as custodian
under the terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such fund shall become a
Fund hereunder, subject to the delivery by the new Fund of resolutions
authorizing the appointment of the Custodian and such other supporting or
related documentation as the Custodian may request. All references herein to
the "Fund" are to each of the Funds listed on Appendix A individually, as if
21
<PAGE> 25
this Contract were between each such individual Fund and the Custodian. With
respect to any Fund which issues shares in separate classes or series, each
class or series of such Fund shall be treated as a separate Fund hereunder.
18. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof
interpreted under and in accordance with laws of The Commonwealth of
Massachusetts.
19. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all
prior contracts between the Funds and the Custodian relating to the custody of
the Fund's assets.
20. Shareholder Communications
Securities and Exchange Commission Rule 14b-2 requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether the Fund authorizes
the Custodian to provide the Fund's name, address, and share position to
requesting companies whose stock the Fund owns. If the Fund tells the
Custodian "no", the Custodian will not provide this information to requesting
companies. If the Fund tells the Custodian "yes" or does not check either
"yes" or "no" below, the Custodian is required by the rule to treat the Fund as
consenting to disclosure of this information for all securities owned by the
Fund. For the Fund's protection, the Rule prohibits the requesting company
from using the Fund's name and address for any purpose other than corporate
communications. Please indicate below whether the Fund consent or object by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the name,
address, and share positions of each Fund listed on
Exhibit A.
NO [X] The Custodian is not authorized to release the name,
address, and share positions of each Fund listed on
Exhibit A.
22
<PAGE> 26
21. Limitation of Liability.
The execution of this Contract has been authorized by each Fund's
Board. This Contract is executed on behalf of each Fund or the trustees of
such Fund as trustees and not individually and the obligations of the Fund
under this Contract are not binding upon any of the Fund's trustees, officers
or shareholders individually but are binding only upon the assets and property
of the Fund. A Certificate of Trust in respect of each Fund is on file with
the Secretary of State of Delaware.
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and
its seal to be hereunder affixed as of the 21st day of June, 1995.
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ HUEY P. FALGOUT, JR. By: /s/ NORI L. GABERT
- ------------------------ -----------------------------------
Nori L. Gabert, Vice President
ATTEST STATE STREET BANK AND TRUST COMPANY
[ILLEGIBLE] By: [ILLEGIBLE]
- ------------------------ -----------------------------------
Executive Vice President
23
<PAGE> 27
APPENDIX A
FUND NAMES
Van Kampen American Capital Comstock Fund
Van Kampen American Capital Corporate Bond Fund
Van Kampen American Capital Emerging Growth Fund
Van Kampen American Capital Enterprise Fund
Van Kampen American Capital Equity Income Fund
Van Kampen American Capital Global Managed Assets Fund
Van Kampen American Capital Government Securities Fund
Van Kampen American Capital Government Target Fund
Van Kampen American Capital Growth and Income Fund
Van Kampen American Capital Harbor Fund
Van Kampen American Capital High Income Corporate Bond Fund
Van Kampen American Capital Life Investment Trust
Common Stock Fund
Domestic Strategic Income Fund
Emerging Growth Fund
Global Equity Fund
Government Fund
Money Market Fund
Multiple Strategy Fund
Real Estate Securities Fund
Van Kampen American Capital Limited Maturity Government Fund
Van Kampen American Capital Municipal Bond Fund
Van Kampen American Capital Pace Fund
Van Kampen American Capital Real Estate Securities Fund
Van Kampen American Capital Reserve Fund
Van Kampen American Capital Small Capitalization Fund
Van Kampen American Capital Tax-Exempt Trust
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital Insured Municipal Fund
Van Kampen American Capital Texas Tax Free Income Fund
Van Kampen American Capital U.S. Government Trust for Income
Van Kampen American Capital Utilities Income Fund
Van Kampen American Capital World Portfolio Series Trust
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities Fund
24
<PAGE> 1
EXHIBIT (9)(a)
DATA ACCESS SERVICES AGREEMENT
This Data Access Services Agreement is a supplement to that certain
Custodian Contract dated June 21, 1995 between the undersigned each of the
Funds listed on Appendix A of the Custodian Contract (the "Customer") and State
Street Bank and Trust Company ("State Street").
PREAMBLE
WHEREAS, the Customer desires the ability to access certain
Customer-related data ("Customer Data") maintained by State Street on data
bases under the control and ownership of State Street ("Data Access Services");
and
WHEREAS, State Street agrees to grant the Customer such access to the
Customer Data as is consistent with the policy and standards issued from time
to time by State Street.
NOW THEREFORE, the parties agree as follows:
1. Services
A. State Street maintains Customer Data within its proprietary data
base system. State Street agrees to provide the Customer with certain Data
Access Services as provided herein and in the Data Access operating procedures
as may be issued from time to time.
B. Customer agrees to use the Data Access Services solely for its
internal use and benefit and not for resale or other transfer or disposition
to, or use by or for the benefit of any other person or organization without
the prior written approval of State Street. Customer agrees to comply with user
identification and other password control requirements and other security
procedures as may be issued from time to time by State Street.
2. Proprietary Information
Customer acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and documentation
manuals furnished to Customer by State Street as part of the Data Access
Services constitute copyrighted, trade secret, or other proprietary information
(collectively, "Proprietary Information") of substantial value to State Street.
Customer agrees to treat all Proprietary Information as proprietary to State
Street and further agrees that it shall not divulge any Proprietary Information
to any person or organization except as may be provided hereunder. Without
limiting the foregoing, Customer agrees for itself and its employees and agents:
(1) to access Customer Data solely from locations as may be designated
in writing by State Street and solely in accordance with State Street's
applicable user documentation;
(2) to refrain from copying or duplicating in any way the Proprietary
Information;
(3) to refrain from obtaining unauthorized access to any portion of the
Proprietary Information, and if such access is inadvertently obtained,
to inform State Street in a timely manner of such fact and dispose of
such information in accordance with State Street's instructions;
<PAGE> 2
(4) to refrain from causing or allowing third-party data acquired
hereunder from being retransmitted to any other computer facility or
other location, except with the prior written consent of State Street;
(5) that the Customer shall have access only to those authorized
transactions agreed upon by the parties;
(6) to honor all reasonable written requests made by State Street to
protect at State Street's expense the rights of State Street in
Proprietary Information at common law, under federal copyright law and
under other federal or state law.
Customer's obligation to maintain the confidentiality of the
Proprietary Information shall not apply where such:
(1) was already in Customer's possession prior to disclosure by State
Street, and such was received by Customer without obligation of
confidence;
(2) is or becomes publicly available without breach of this Agreement;
(3) is rightly received by Customer from a third party, who is not a
current or former employee, officer, director or agent of State Street,
without obligation of confidence;
(4) is disclosed by Customer with the written consent of State Street;
or
(5) is released in accordance with a valid order of a court or
governmental agency.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this section 2. The obligations of this section
shall survive any earlier termination of this agreement.
3. Warranties
If Customer notifies State Street that any of the Data Access Services
do not operate in material compliance with the most recently issued user
documentation for such services, State Street shall endeavor in a timely
manner to correct such failure. Organizations from which State Street may
obtain certain data included in the Data Access Services are solely responsible
for the contents of such data and Customer agrees to make no claim against
State Street arising out of the contents of such third-party data, including,
but not limited to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER
PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED
ON AN AS IS, AS AVAILABLE BASIS. STATE STREET EXPRESSLY DISCLAIMS ALL
WARRANTIES EXCEPT THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO,
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
4. Limitation of Liability
State Street shall not be liable to the Customer for any loss or damage
claimed to have resulted from the use of the Data Access Services except for
the direct loss or damage resulting from the negligence or willful conduct of
State
-2-
<PAGE> 3
Street. STATE STREET SHALL NOT BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL,
OR CONSEQUENTIAL DAMAGES OF ANY KIND WHATSOEVER (INCLUDING, WITHOUT LIMITATION,
ATTORNEYS' FEES) IN ANY WAY DUE TO OR ARISING IN CONNECTION WITH CUSTOMER'S USE
OF THE DATA ACCESS SERVICES OR THE PERFORMANCE OF OR FAILURE TO PERFORM STATE
STREET'S OBLIGATIONS UNDER THIS AGREEMENT. This disclaimer applies without
limitation to claims (i) arising from the provision of the Data Access
Services, the delivery, installation, use, maintenance, or removal of State
Street provided equipment, or any failure or delay in connection with any of
the foregoing; (ii) regardless of the form of action, whether in contract, tort
(including negligence), strict liability, or otherwise; and (iii) regardless of
whether such damages are foreseeable. Further, in no event shall State Street be
liable for any claims that arise more than one (1) year prior to the
institution of suit therefor or any claim arising from causes beyond State
Street's control.
5. Force Majeure
State Street shall have no liability for cessation of services
hereunder or any damages resulting therefrom to the Customer as a result of
work stoppage, power or other mechanical failure, natural disaster,
governmental action, communication disruption or other impossibility of
performance.
6. Exclusive Remedy
In consideration of the fees charged for Data Access Services, if any,
Customer's exclusive recovery with respect to Data Access Services regardless
of the basis of the claims asserted by it against State Street shall not exceed
six (6) times the average monthly fees billed to Customer hereunder and
computed by averaging the monthly billing for each of the twelve months
preceding the month in which the damage or injury is alleged to have occurred,
but if this agreement has not been in effect for twelve months preceding such
date, then by averaging the monthly billings for each of the preceding months
that this agreement has been in effect.
7. Indemnification
The Customer agrees to indemnify and hold State Street free and
harmless from any expense, loss, damage or claim including reasonable
attorney's fees, (collectively "costs") suffered by State Street and caused by
or resulting from (i) the negligence or willful misconduct in the use by the
Customer, its employees or agents, of the Data Access Services or the
application software systems supporting such services, including any costs
incurred by State Street resulting from a security breach at the Customer's
location or committed by its former or present employees or agents and (ii)
claims resulting from incorrect Customer Originated Electronic Financial
Instruction.
8. Customer Originated Electronic Financial Instruction ("COEFI")
If the transactions available to Customer include the ability to
originate electronic instructions to State Street in order to (i) effect the
transfer or movement of cash or securities held under custody or (ii) transmit
accounting or other information (such transactions constituting a "COEFI"),
then in such event State Street shall be entitled to rely on the validity and
authenticity of such instruction without undertaking any further inquiry as
long as such instruction is
-3-
<PAGE> 4
undertaken in conformity with security procedures established by State Street
from time to time.
9. Injunctive Relief
In the event of a breach or threatened breach by Customer of Section 1
or 2 hereof, State Street shall be entitled to obtain injunctive relief in
addition to any other remedies available at law or equity.
10. General
10.1 Term of Agreement. This agreement is effective from the date
it is accepted by State Street and shall remain in full force
and effect until terminated as hereinafter provided. Either
party may terminate this agreement for any reason by giving the
other party at least thirty days prior written notice of
termination. In addition, either party may terminate this
agreement immediately for failure of the other party to comply
with any material term and condition by giving the other party
written notice of termination. This agreement shall in any
event terminate contemporaneously with the Custodian Contract
applicable hereto.
10.2 Charges. Charges, if any, for Data Access Services shall be
as agreed upon between the parties from time to time.
10.3 Assignment; Successors. This Agreement shall not be assigned
by either party without the prior written consent of the other
party, except that either party may assign to a successor of
all or a substantial portion of its business, or to a party
controlling, controlled by, or under common control with such
party.
10.4 Survival. All provisions regarding indemnification,
warranty, liability and limits thereon, and confidentiality
and/or protection of proprietary rights and trade secrets shall
survive the termination of this agreement.
10.5 Consent to Breach not Waiver. No term or provision hereof
shall be deemed waived and no breach excused, unless such
waiver or consent shall be in writing and signed by the party
claimed to have waived or consented. Any consent by any party
to, or waiver of, a breach by the other, whether express or
implied, shall not constitute a consent to, waiver of, or
excuse for any other different or subsequent breach.
11. Signatory
The individual signing the agreement represents that he or she is an
authorized officer of the Customer (and, if identified below or on an attached
schedule, such investment manager or other party as may use Data Access
Services with respect to the Customer) so as to cause this agreement to be a
valid and binding obligation upon the Customer (and, if applicable, such other
parties as may be identified on the signature line below or on an attached
schedule).
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have duly executed this
agreement.
STATE STREET BANK AND EACH OF THE VAN KAMPEN
TRUST COMPANY AMERICAN CAPITAL FUNDS
LISTED ON APPENDIX A OF
THE CUSTODIAN CONTRACT
By: [Illegible]
---------------------------
Title: Executive Vice President By: /s/ NORI L. GABERT
------------------------ --------------------
Nori L. Gabert
Date:
------------------------- Title: Vice President
-----------------
Date: June 21, 1995
------------------
<PAGE> 1
EXHIBIT (9)(b)
FUND ACCOUNTING AGREEMENT
THIS AGREEMENT, dated October 31, 1996, by and between the parties set
forth in Schedule A hereto (designated collectively hereafter as the "Funds")
and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware
corporation ("Advisory Corp.").
W I T N E S S E T H:
WHEREAS, each of the Funds is registered as a management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, Advisory Corp. has the capability of providing certain accounting
services to the Funds; and
WHEREAS, each desires to utilized Advisory Corp. in the provision of such
accounting services; and
WHEREAS, Advisory Corp. intends to maintain its staff in order to
accommodate the provision of all such services.
NOW THEREFORE, in consideration of the premises and the mutual covenants
spelled out herein, it is agreed between the parties hereto as follows:
1. Appointment of Advisory Corp.. As agent, Advisory Corp. shall provide each
of the Funds the accounting services ("Accounting Services") as set forth in
Paragraph 2 of this Agreement. Advisory Corp. accepts such appointment and
agrees to furnish the Accounting Services in return for the compensation
provided in Paragraph 3 of this Agreement.
2. Accounting Services to be Provided. Advisory Corp. will provide to each
respective Fund accounting related services in connection with the maintenance
of the financial records of such Fund, including without limitation: (i)
maintenance of the general ledger and other financial books and records; (ii)
processing of portfolio transactions; (iii) coordination of the valuation of
portfolio securities; (iv) calculation of the Fund's net asset value; (v)
coordination of financial and regulatory reporting; (vi) preparation of
financial reports for each Fund's Board of Trustees; (vii) coordination of tax
and financial compliance issues; (viii) the establishment and maintenance of
accounting policies; (ix) recommendations with respect to dividend policies;
(x) preparation of each Fund's financial reports and other accounting and tax
related notice information to shareholders; and (xi) the assimilation and
interpretation of accounting data for meaningful management review. Advisory
Corp. shall provide accurate maintenance of each Fund's financial books and
records as required by the applicable securities statutes and regulations, and
shall hire persons (collectively the "Accounting Service Group") as needed to
provide such Accounting Services.
<PAGE> 2
3. Expenses and Reimbursements. Advisory Corp. shall be reimbursed by the
Funds for all costs and services incurred in connection with the provision of
the aforementioned Accounting Services ("Accounting Service Expenses"),
including but not limited to all salary and related benefits paid to the
personnel of the Accounting Service Group, overhead and expenses related to
office space and related equipment and out-of-pocket expenses.
The Accounting Services Expenses will be paid by Advisory Corp. and
reimbursed by the Funds. Advisory Corp. will tender to each Fund a monthly
invoice as of the last business day of each month which shall certify the total
support service expenses expended. Except as provided herein, Advisory Corp.
will receive no other compensation in connection with Accounting Services
rendered in accordance with this Agreement.
4. Payment for Accounting Service Expenses Among the Funds. As to one quarter
(25%) of the Accounting Service Expenses incurred under the Agreement, the
expense shall be allocated between all Funds based on the number of classes of
shares of beneficial interest that each respective Fund has issued. As to the
remaining three quarters (75%) of the Accounting Service Expenses incurred
under the Agreement, the expense shall be allocated between all Funds based on
their relative net assets. For purposes of determining the percentage of
expenses to be allocated to any Fund, the liquidation preference of any
preferred shares issued by any such Fund shall not be considered a liability of
such Fund for the purposes of calculating relative net assets of such Fund.
5. Maintenance of Records. All records maintained by Advisory Corp. in
connection with the performance of its duties under this Agreement will remain
the property of each respective Fund and will be preserved by Advisory Corp.
for the periods prescribed in Section 31 of the 1940 Act and the rules
thereunder or such other applicable rules that may be adopted from time to time
under the act. In the event of termination of the Agreement, such records will
be promptly delivered to the respective Funds. Such records may be inspected
by the respective Funds at reasonable times.
6. Liability of Advisory Corp. Advisory Corp. shall not be liable to any Fund
for any action taken or thing done by it or its agents or contractors on behalf
of the fund in carrying out the terms and provisions of the Agreement if done
in good faith and without gross negligence or misconduct on the part of
Advisory Corp., its agents or contractors.
7. Indemnification By Funds. Each Fund will indemnify and hold Advisory Corp.
harmless from all lost, cost, damage and expense, including reasonable expenses
for legal counsel, incurred by Advisory Corp. resulting from: (a) any claim,
demand, action or suit in connection with Advisory Corp.'s acceptance of this
Agreement; (b) any action or omission by Advisory Corp. in the performance of
its duties hereunder; (c) Advisory Corp.'s acting upon instructions believed by
it to have been executed by a duly authorized officer of the Fund; or (d)
Advisory Corp.'s acting upon information provided by the Fund in form and under
policies agreed to by Advisory Corp. and the Fund. Advisory Corp. shall not be
entitled to such indemnification in respect of actions or omissions
constituting gross negligence or willful misconduct of Advisory Corp. or its
agents or contractors. Prior to confessing any claim against it which may be
subject to this indemnification, Advisory Corp. shall give the Fund reasonable
opportunity to defend against said claim in its own name or in the name of
Advisory Corp.
8. Indemnification By Advisory Corp. Advisory Corp. will indemnify and hold
harmless each Fund from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Fund resulting from any
claim, demand, action or suit arising out of Advisory Corp.'s failure to comply
with the terms of this Agreement or which arises out of the gross negligence or
willful misconduct of Advisory Corp. or its agents or contractors; provided
that such negligence or misconduct is not attributable to the Funds, their
agents or contractors. Prior to confessing any claim against it which may be
subject to this indemnification, the Fund shall give Advisory Corp. reasonable
opportunity to defend against said claim in its own name or in the name of such
Fund.
2
<PAGE> 3
9. Further Assurances. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.
10. Dual Interests. It is understood that some person or persons may be
directors, trustees, officers or shareholders of both the Funds and Advisory
Corp. (including Advisory Corp.'s affiliates), and that the existence of any
such dual interest shall not affect the validity hereof or of any transactions
hereunder except as otherwise provided by a specific provision of applicable
law.
11. Execution, Amendment and Termination. The term of this Agreement shall
begin as of the date first above written, and unless sooner terminated as
herein provided, this Agreement shall remain in effect through May, 1998, and
thereafter from year to year, if such continuation is specifically approved at
least annually by the Board of Trustees of each Fund, including a majority of
the independent Trustees of each Fund. This Agreement may be modified or
amended from time to time by mutual agreement between the parties hereto and
may be terminated after May, 1998, by at least sixty (60) days' written notice
given by one party to the others. Upon termination hereof, each Fund shall pay
to Advisory Corp. such compensation as may be due as of the date of such
termination and shall likewise reimburse Advisory Corp. for its costs, expenses
and disbursements payable under this Agreement to such date. This Agreement
may be amended in the future to include as additional parties to the Agreement
other investment companies for with Advisory Corp., any subsidiary or affiliate
serves as investment advisor or distributor if such amendment is approved by
the President of each Fund.
12. Assignment. Any interest of Advisory Corp. under this Agreement shall not
be assigned or transferred, either voluntarily or involuntarily, by operation
of law or otherwise, without the prior written consent of the Funds. This
Agreement shall automatically and immediately terminate in the event of its
assignment without the prior written consent of the Funds.
13. Notice. Any notice under this Agreement shall be in writing, addressed and
delivered or sent by registered or certified mail, postage prepaid, to the
other party at such address as such other party may designate for the receipt
of such notices. Until further notice to the other parties, it is agreed that
for this purpose the address of each Fund is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181, Attention: President and that of Advisory Corp. for
this purpose is One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attention: President.
14. Personal Liability. As provided for in the Agreement and Declaration of
Trust of the various Funds, under which the Funds are organized as
unincorporated trusts, the shareholders, trustees, officers, employees and
other agents of the Fund shall not personally be found by or liable for the
matters set forth hereto, nor shall resort be had to their private property for
the satisfaction of any obligation or claim hereunder.
15. Interpretative Provisions. In connection with the operation of this
Agreement, Advisory Corp. and the Funds may agree from time to time on such
provisions interpretative of or in addition to the provisions of this Agreement
as may in their joint opinion be consistent with the general tenor of this
Agreement.
16. State Law. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of Illinois.
17. Captions. The captions in this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this amended and restated
Agreement to be executed as of the day and year first above written.
ALL OF THE PARTIES SET FORTH IN SCHEDULE A
By: /s/ RONALD A. NYBERG
-----------------------------------
Ronald A. Nyberg, Vice President
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By: /s/ DENNIS J. McDONNELL
------------------------------------
Dennis J. McDonnell, President
4
<PAGE> 5
SCHEDULE A
I. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
("INVESTMENT ADVISORY CORP.") (COLLECTIVELY, THE "FORMER VAN KAMPEN FUNDS"):
CLOSED END FUNDS
Van Kampen American Capital Municipal Income Trust
Van Kampen American Capital California Municipal Trust
Van Kampen American Capital Intermediate Term High Income Trust
Van Kampen American Capital Limited Term High Income Trust
Van Kampen American Capital Investment Grade Municipal Trust
Van Kampen American Capital Municipal Trust
Van Kampen American Capital California Quality Municipal Trust
Van Kampen American Capital Florida Quality Municipal Trust
Van Kampen American Capital New York Quality Municipal Trust
Van Kampen American Capital Ohio Quality Municipal Trust
Van Kampen American Capital Pennsylvania Quality Municipal Trust
Van Kampen American Capital Trust For Insured Municipals
Van Kampen American Capital Trust For Investment Grade Municipals
Van Kampen American Capital Trust For Investment Grade California Municipals
Van Kampen American Capital Trust For Investment Grade Florida Municipals
Van Kampen American Capital Trust For Investment Grade New Jersey Municipals
Van Kampen American Capital Trust For Investment Grade New York Municipals
Van Kampen American Capital Trust For Investment Grade Pennsylvania Municipals
Van Kampen American Capital Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust
Van Kampen American Capital Advantage Pennsylvania Municipal Income Trust
Van Kampen American Capital Strategic Sector Municipal Trust
Van Kampen American Capital Value Municipal Income Trust
Van Kampen American Capital California Value Municipal Income Trust
Van Kampen American Capital Massachusetts Value Municipal Income Trust
Van Kampen American Capital New Jersey Value Municipal Income Trust
Van Kampen American Capital New York Value Municipal Income Trust
Van Kampen American Capital Ohio Value Municipal Income Trust
Van Kampen American Capital Pennsylvania Value Municipal Income Trust
Van Kampen American Capital Municipal Opportunity Trust II
Van Kampen American Capital Florida Municipal Opportunity Trust
Van Kampen American Capital Advantage Municipal Income Trust II
Van Kampen American Capital Select Sector Municipal Trust
INSTITUTIONAL FUNDS
II. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL MANAGEMENT, INC.
("MANAGEMENT, INC.") (COLLECTIVELY, THE "FORMER VAN KAMPEN FUNDS"):
The Explorer Institutional Trust
on behalf of its series
Explorer Institutional Active Core Fund
Explorer Institutional Limited Duration Fund
5
<PAGE> 6
OPEN END FUNDS
III. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
("ASSET MANAGEMENT, INC.") (COLLECTIVELY, THE "FORMER AMERICAN CAPITAL
FUNDS"):
Van Kampen American Capital Comstock Fund ("Comstock Fund")
Van Kampen American Capital Corporate Bond Fund ("Corporate Bond Fund")
Van Kampen American Capital Emerging Growth Fund ("Emerging Growth Fund")
Van Kampen American Capital Enterprise Fund ("Enterprise Fund")
Van Kampen American Capital Equity Income Fund ("Equity Income Fund")
Van Kampen American Capital Limited Maturity Government Fund ("Limited
Maturity Government Fund")
Van Kampen American Capital Global Managed Assets Fund ("Global Managed
Assets Funds")
Van Kampen American Capital Government Securities Fund ("Government
Securities Fund")
Van Kampen American Capital Government Target Fund ("Government Target
Fund")
Van Kampen American Capital Growth and Income Fund ("Growth and Income
Fund")
Van Kampen American Capital Harbor Fund ("Harbor Fund")
Van Kampen American Capital High Income Corporate Bond Fund ("High Income
Corporate Bond Fund")
Van Kampen American Capital Life Investment Trust ("Life Investment
Trust" or "LIT")
on behalf of its Series
Enterprise Portfolio ("LIT Enterprise Portfolio")
Domestic Income Portfolio ("LIT Domestic Income Portfolio")
Emerging Growth Portfolio ("LIT Emerging Growth Portfolio")
Government Portfolio ("LIT Government Portfolio")
Asset Allocation Portfolio ("LIT Asset Allocation Portfolio")
Money Market Portfolio ("LIT Money Market Portfolio")
Real Estate Securities Portfolio ("LIT Real Estate Securities
Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")
Van Kampen American Capital Pace Fund ("Pace Fund")
Van Kampen American Capital Real Estate Securities Fund ("Real Estate
Securities Fund")
Van Kampen American Capital Reserve Fund ("Reserve Fund")
Van Kampen American Capital Small Capitalization Fund ("Small
Capitalization Fund")
Van Kampen American Capital Tax-Exempt Trust ("Tax-Exempt Trust")
on behalf of its Series
Van Kampen American Capital High Yield Municipal Fund ("High Yield
Municipal Fund")
Van Kampen American Capital U.S. Government Trust for Income ("U.S.
Government Trust for Income")
6
<PAGE> 7
IV. FUNDS ADVISED BY VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY
CORP. ("INVESTMENT ADVISORY CORP.") (COLLECTIVELY, THE "FORMER VAN KAMPEN
FUNDS"):
Van Kampen American Capital U.S. Government Trust ("U.S. Government
Trust")
on behalf of its series
Van Kampen American Capital U.S. Government Fund ("U.S. Government Fund")
Van Kampen American Capital Tax Free Trust ("Tax Free Trust")
on behalf of its series
Van Kampen American Capital Insured Tax Free Income Fund ("Insured Tax
Free Income Fund")
Van Kampen American Capital Tax Free High Income Fund ("Tax Free High
Income Fund")
Van Kampen American Capital California Insured Tax Free Fund ("California
Insured Tax Free Fund")
Van Kampen American Capital Municipal Income Fund ("Municipal Income
Fund")
Van Kampen American Capital Intermediate Term Municipal Income Fund
(Intermediate Term Municipal Income Fund")
Van Kampen American Capital Florida Insured Tax Free Income Fund
("Florida Insured Tax Free Income Fund")
Van Kampen American Capital New Jersey Tax Free Income Fund ("New Jersey
Tax Free Income Fund")
Van Kampen American Capital New York Tax Free Income Fund ("New York Tax
Free Income Fund")
Van Kampen American Capital California Tax Free Income Fund ("California
Tax Free Income Fund")
Van Kampen American Capital Michigan Tax Free Income Fund ("Michigan Tax
Free Income Fund")
Van Kampen American Capital Missouri Tax Free Income Fund ("Missouri Tax
Free Income Fund")
Van Kampen American Capital Ohio Tax Free Income Fund ("Ohio Tax Free
Income Fund")
Van Kampen American Capital Trust ("VKAC Trust")
Van Kampen American Capital High Yield Fund ("High Yield Fund")
Van Kampen American Capital Short-Term Global Income Fund ("Short-Term
Global Income Fund")
Van Kampen American Capital Strategic Income Fund ("Strategic Income
Fund")
Van Kampen American Capital Equity Trust ("Equity Trust")
on behalf of its series
Van Kampen American Capital Utility Fund ("Utility Fund")
Van Kampen American Capital Balanced Fund ("Balanced Fund")
Van Kampen American Capital Growth Fund ("Growth Fund")
Van Kampen American Capital Value Fund ("Value Fund")
Van Kampen American Capital Great American Companies Fund ("Great
American Companies Fund")
Van Kampen American Capital Prospector Fund ("Prospector Fund")
Van Kampen American Capital Aggressive Growth Fund ("Aggressive Growth
Fund")
Van Kampen American Capital Foreign Securities Fund ("Foreign Securities
Fund")
Van Kampen American Capital Pennsylvania Tax Free Income Fund
("Pennsylvania Tax Free Income Fund")
Van Kampen American Capital Tax Free Money Fund ("Tax Free Money Fund");
7
<PAGE> 1
[LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)]
EXHIBIT (10)
April 29, 1997
Van Kampen American Capital
Life Investment Trust
One Parkview Plaza
Oakbrook Terrace, IL 60181
Re: Van Kampen American Capital Life Investment Trust
Registration Statement on Form N-1A
(File Nos. 33-628 and 811-4425)
Ladies and Gentlemen:
We have acted as counsel to Van Kampen American Capital Life Investment
Trust (the "Trust"), a Delaware business trust, in connection with the
preparation of Post-Effective Amendment No. 22 to the Trust's Registration
Statement on Form N-1A (as amended, the "Registration Statement") to be filed
under the Securities Act of 1933, as amended (the "1933 Act"), and the
Investment Company Act of 1940, as amended (the "1940 Act"), with the Securities
and Exchange Commission (the "Commission") on or about April 29, 1997.
The Registration Statement relates to the registration under the 1933 Act and
1940 Act of an indefinite number of each of Class A Shares of beneficial
interest, par value $.01 per share, Class B Shares of beneficial interest, par
value $.01 per share, and Class C Shares of beneficial interest, par value
$.01 per share, of the Trust (collectively, the "Shares").
This opinion is delivered in accordance with the requirements of Item
24(b)(10) of Form N-1A under the 1933 Act and the 1940 Act.
In connection with this opinion, we have examined the originals or
copies, certified or otherwise identified to our satisfaction, of (i) the
Certificate of Trust filed with the Secretary of State of Delaware, (ii)
<PAGE> 2
Van Kampen American Capital
Life Investment Trust
April 29, 1997
Page 2
the Agreement and Declaration of Trust and By-Laws of the Trust, each as
amended to date (the "Declaration of Trust" and "By-Laws", respectively), (iii)
the Certificate of Designation establishing the series of the Trust,
(iv) the resolutions adopted by the Board of Trustees of the Trust relating to
the authorization, issuance and sale of the Shares, the filing of the
Registration Statement and any amendments or supplements thereto and related
matters and (v) such other documents as we have deemed necessary or appropriate
as a basis for the opinions set forth herein.
In such examination we have assumed the legal capacity of natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed, photostatic, or other copies
and the authenticity of the originals of such latter documents. As to any
facts material to such opinion which were not independently established, we
have relied on statements or representations of officers and other
representatives of the Trust or others.
Members of our firm are admitted to the practice of law in the State
of Illinois, and we do not express any opinion as to the laws of any other
jurisdiction other than matters relating to the Delaware business
organizational statutes (including statutes relating to Delaware business
trusts) and the federal laws of the United States of America to the extent
specifically referred to herein.
Based upon and subject to the foregoing, we are of the opinion that the
issuance and sale of Shares by the Trust have been validly authorized and,
assuming certificates therefor have been duly executed, countersigned,
registered and delivered or the shareholders' accounts have been duly credited
and the Shares represented thereby have been fully paid for, such Shares will
be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 10 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Counsel" in the Registration Statement. In
giving this consent, we do not hereby
<PAGE> 3
Van Kampen American Capital
Life Investment Trust
April 29, 1997
Page 3
admit that we are in the category of persons whose consent is required under
Section 7 of the 1933 Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom (Illinois)
<PAGE> 1
EXHIBIT (11)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 22, Amendment No. 24 to
the registration statement on Form N-1A (the "Registration Statement") of our
report dated February 7, 1997, relating to the financial statements and
financial highlights of the Asset Allocation Portfolio, Domestic Strategic
Portfolio, Enterprise Portfolio, Government Portfolio, Money Market Portfolio,
Real Estate Portfolio, Emerging Growth Portfolio, Global Equity Portfolio and
Growth and Income Portfolio (constituting Van Kampen American Capital Life
Investment Trust) which appears in such Statement of Additional Information, and
to the incorporation by reference of our report into the Prospectuses which
constitute part of this Registration Statement. We also consent to the
references to us under the headings "Financial Highlights" and "Independent
Accountants" in such Prospectuses and to the reference to us under the heading
"Independent Accountants" in such Statement of Additional Information.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Houston, Texas
April 28, 1997
<PAGE> 1
EXHIBIT (16)
LIT ASSET ALLOCATION PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $11.35
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,138.72 = ERV
One year period ended 12/31/96.............................. 1 = n
TOTAL RETURN FOR THE PERIOD................................. 13.87% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $11.35
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,665.19 = ERV
One year period ended 12/31/96.............................. 5 = n
TOTAL RETURN FOR THE PERIOD................................. 10.74% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $11.35
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $2,660.70 = ERV
Inception through 12/31/96.................................. 9.51 = n
TOTAL RETURN FOR THE PERIOD................................. 10.84% = T
</TABLE>
<PAGE> 2
LIT ASSET ALLOCATION PORTFOLIO
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... ERV - P = T
---------
P
Net Asset Value............................................. $11.35
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $2,660.70 = ERV
TOTAL RETURN FOR THE PERIOD................................. 166.07% = T
</TABLE>
<PAGE> 3
LIT DOMESTIC INCOME PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $8.01
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,066.78 = ERV
One year period ended 12/31/96.............................. 1 = n
TOTAL RETURN FOR THE PERIOD................................. 6.68% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $8.01
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,620.82 = ERV
Five years ended 12/31/96................................... 5 = n
TOTAL RETURN FOR THE PERIOD................................. 10.14% = T
</TABLE>
<PAGE> 4
LIT DOMESTIC INCOME PORTFOLIO
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Net Asset Value............................................. $8.01
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $2,011.40 = ERV
Inception through 12/31/96.................................. 9.16 = n
TOTAL RETURN FOR THE PERIOD................................. 7.93% = T
</TABLE>
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... ERV - P = T
P
Net Asset Value............................................. $8.01
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $2,011.40 = ERV
TOTAL RETURN FOR THE PERIOD................................. 101.14% = T
</TABLE>
LIT DOMESTIC INCOME PORTFOLIO
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C>
Total Income - Total Expenses
Formula ----------------------- = SEC Yield
Average Dividend Shares X Public Offering Price
[((((
)+1) 6 )-1) n 2]
$129,472 - $10,220
----------------------- = 7.55%
2,402,285 X $8.01
[((((
)+1) 6 )-1) n 2]
</TABLE>
<PAGE> 5
LIT DOMESTIC INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1996
Current Annual Income Per Share
Current Offering Price
<TABLE>
<S> <C>
$.732 = 9.14%
$8.01
</TABLE>
<PAGE> 6
LIT EMERGING GROWTH PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $13.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,165.53 = ERV
One year period ended 12/31/96.............................. 1 = n
TOTAL RETURN FOR THE PERIOD................................. 16.55% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $13.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,366.00 = ERV
Inception through 12/31/96.................................. 1.5 = n
TOTAL RETURN FOR THE PERIOD................................. 23.11% = T
</TABLE>
<PAGE> 7
LIT EMERGING GROWTH PORTFOLIO
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... ERV - P = T
---------
P
Net Asset Value............................................. $13.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,366.00 = ERV
TOTAL RETURN FOR THE PERIOD................................. 36.60% = T
</TABLE>
<PAGE> 8
LIT ENTERPRISE PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $16.26
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,247.96 = ERV
One year period ended 12/31/96.............................. 1 = n
TOTAL RETURN FOR THE PERIOD................................. 24.80% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $16.26
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,934.42 = ERV
One year period ended 12/31/96.............................. 5 = n
TOTAL RETURN FOR THE PERIOD................................. 14.11% = T
TOTAL RETURN CALCULATION TEN YEAR PERIOD ENDED DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $16.26
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $3,334.16 = ERV
One year period ended 12/31/96.............................. 10 = n
TOTAL RETURN FOR THE PERIOD................................. 12.80% = T
</TABLE>
<PAGE> 9
LIT ENTERPRISE FUND
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $16.26
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $3,110.81 = ERV
Inception through 12/31/96.................................. 10.74 = n
TOTAL RETURN FOR THE PERIOD................................. 11.14% = T
</TABLE>
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... ERV - P = T
P
Net Asset Value............................................. $16.26
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $3,110.81 = ERV
TOTAL RETURN FOR THE PERIOD................................. 211.08% = T
</TABLE>
<PAGE> 10
LIT GLOBAL EQUITY PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $11.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,167.22 = ERV
One year period ended 12/31/96.............................. 1 = n
TOTAL RETURN FOR THE PERIOD................................. 16.72% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $11.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,203.41 = ERV
Inception through 12/31/96.................................. 1.5 = n
TOTAL RETURN FOR THE PERIOD................................. 13.14% = T
</TABLE>
<PAGE> 11
LIT GLOBAL EQUITY PORTFOLIO
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
<TABLE>
<S> <C> <C> <C>
Formula..................................................... ERV - P = T
---------
P
Net Asset Value............................................. $11.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,203.41 = ERV
TOTAL RETURN FOR THE PERIOD................................. 20.34% = T
</TABLE>
<PAGE> 12
LIT GOVERNMENT PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $8.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,021.17 = ERV
One year period ended 12/31/96.............................. 1 = n
TOTAL RETURN FOR THE PERIOD................................. 2.12% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $8.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,301.38 = ERV
Five years ended 12/31/96................................... 5 = n
TOTAL RETURN FOR THE PERIOD................................. 5.41% = T
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $8.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,959.29 = ERV
Ten years ended 12/31/96.................................... 10 = n
TOTAL RETURN FOR THE PERIOD................................. 6.96% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $8.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $2,042.11 = ERV
Inception through 12/31/96.................................. 10.74 = n
TOTAL RETURN FOR THE PERIOD................................. 6.87% = T
</TABLE>
<PAGE> 13
LIT GOVERNMENT PORTFOLIO
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... ERV - P = T
P
Net Asset Value............................................. $8.66
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $2,042.11 = ERV
TOTAL RETURN FOR THE PERIOD................................. 104.21% = T
</TABLE>
LIT GOVERNMENT PORTFOLIO
<TABLE>
<C> <S> <C> <C> <C> <C> <C> <C>
Total Income - Total Expenses
Formula ----------------------- = SEC Yield
Average Dividend Shares X Public Offering Price
[((((
)+1) 6 )-1) n)2]
$325,135 - $29,584
----------------------- = 6.25%
6,641,520 X $8.66
[((((
)+1) 6) -1) n)2]
</TABLE>
<PAGE> 14
LIT GOVERNMENT FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED DECEMBER 31, 1996
Current Annual Income Per Share
Current Offering Price
<TABLE>
<S> <C>
$0.57 = 6.57%
$8.67
</TABLE>
<PAGE> 15
LIT GROWTH AND INCOME PORTFOLIO
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T) n = ERV
Net Asset Value............................................. $9.97
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $997.00 = ERV
Inception through 12/31/96.................................. 0.02 = n
TOTAL RETURN FOR THE PERIOD................................. (13.95%) = T
</TABLE>
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... ERV - P = T
P
Net Asset Value............................................. $9.97
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $997.00 = ERV
TOTAL RETURN FOR THE PERIOD................................. (0.30%) = T
</TABLE>
<PAGE> 16
LIT REAL ESTATE PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C>
Formula..................................................... P(1+T)(n) = ERV
Net Asset Value............................................. $14.78
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,405.33 = ERV
One year period ended 12/31/96.............................. 1 = (n)
TOTAL RETURN FOR THE PERIOD................................. 40.53% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1996
Formula..................................................... P(1+T)(n) = ERV
Net Asset Value............................................. $11.35
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,522.62 = ERV
Inception through 12/31/96.................................. 1.50 = (n)
TOTAL RETURN FOR THE PERIOD................................. 32.35% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1996
Formula..................................................... ERV - P = T
P
Net Asset Value............................................. $11.35
Initial Investment.......................................... $1,000.00 = P
Ending Redeemable Value..................................... $1,522.62 = ERV
TOTAL RETURN FOR THE PERIOD................................. 52.26% = T
</TABLE>
<PAGE> 1
EXHIBIT (17)(a)
INVESTMENT COMPANIES FOR WHICH
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS INC.
ACTS AS PRINCIPAL UNDERWRITER OR DEPOSITOR
APRIL 4, 1997
Van Kampen American Capital U.S. Government Trust
Van Kampen American Capital U.S. Government Fund
Van Kampen American Capital Tax Free Trust
Van Kampen American Capital Insured Tax Free Income Fund
Van Kampen American Capital Tax Free High Income Fund
Van Kampen American Capital California Insured Tax Free Fund
Van Kampen American Capital Municipal Income Fund
Van Kampen American Capital Intermediate Term Municipal Income Fund
Van Kampen American Capital Florida Insured Tax Free Income Fund
Van Kampen American Capital New Jersey Tax Free Income Fund
Van Kampen American Capital New York Tax Free Income Fund
Van Kampen American Capital Trust
Van Kampen American Capital High Yield Fund
Van Kampen American Capital Short-Term Global Income Fund
Van Kampen American Capital Strategic Income Fund
Van Kampen American Capital Equity Trust
Van Kampen American Capital Utility Fund
Van Kampen American Capital Value Fund
Van Kampen American Capital Great American Companies Fund
Van Kampen American Capital Growth Fund
Van Kampen American Capital Prospector Fund
Van Kampen American Capital Aggressive Growth Fund
Van Kampen American Capital Foreign Securities Fund
Van Kampen American Capital Pennsylvania Tax Free Income Fund
Van Kampen American Capital Tax Free Money Fund
Van Kampen American Capital Prime Rate Income Trust
Van Kampen American Capital Comstock Fund
Van Kampen American Capital Corporate Bond Fund
Van Kampen American Capital Emerging Growth Fund
Van Kampen American Capital Enterprise Fund
Van Kampen American Capital Equity Income Fund
Van Kampen American Capital Limited Maturity Government Fund
Van Kampen American Capital Global Managed Assets Fund
Van Kampen American Capital Government Securities Fund
Van Kampen American Capital Government Target Fund
Van Kampen American Capital Growth and Income Fund
Van Kampen American Capital Harbor Fund
Van Kampen American Capital High Income Corporate Bond Fund
<PAGE> 2
Van Kampen American Capital Life Investment Trust
Van Kampen American Capital Enterprise Portfolio
Van Kampen American Capital Domestic Income Portfolio
Van Kampen American Capital Emerging Growth Portfolio
Van Kampen American Capital Global Equity Portfolio
Van Kampen American Capital Government Portfolio
Van Kampen American Capital Money Market Portfolio
Van Kampen American Capital Asset Allocation Portfolio
Van Kampen American Capital Real Estate Securities Portfolio
Van Kampen American Capital Growth and Income Portfolio
Van Kampen American Capital Pace Fund
Van Kampen American Capital Real Estate Securities Fund
Van Kampen American Capital Reserve Fund
Van Kampen American Capital Tax -Exempt Trust
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital U.S. Government Trust for Income
Van Kampen American Capital World Portfolio Series Trust
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities Fund
Internet Trust
Michigan Real Estate Income and Growth Trust
Van Kampen American Capital Insured Income Trust
Van Kampen American Capital Insured Income Trust (Intermediate)
Strategic Ten Trust, United States
Strategic Ten Trust, United Kingdom
Strategic Ten Trust, Hong Kong
Strategic Five Trust, United States
Global Fifteen Trust
Global Thirty Trust
Van Kampen American Capital Equity Opportunity Trust
Great International Firms Trust
Gruntal & Co. Incorporated Undervalued Growth Opportunities Trust
Principal Trust Princor Emerging Growth and Treasury
International Assets Advisory Corporation Global Blue Chip Trust
Renaissance Trust
Mississippi Insured Municipal Trust
Blue Chip Opportunity and Treasury Trust
Wheat First Butcher Singer Wheat First Strategic Opportunity Unit Trust
Baby Boomer Opportunity Trust
Van Kampen American Capital Utility Income Trust
Global Energy Trust
Michigan Select Trust
International Assets Advisory Corp. Latin American Trust
Brand Name Equity Trust
Aggressive Growth Series Global Health Care Trust
Global Precious Metals Trust
<PAGE> 3
<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust Series 1
Insured Municipals Income Trust Series 1 through 387
Insured Municipals Income Trust (Discount) Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) Series 1 through 106 1009
Insured Municipals Income Trust (Intermediate Term) Series 5 through 89
Insured Municipals Income Trust (Limited Term) Series 9 through 86
Insured Municipals Income Trust (Premium Bond Series) Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 and 2
Insured Tax Free Bond Trust Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) Series 1
Investors' Quality Tax-Exempt Trust Series 1 through 93
Investors' Quality Tax-Exempt Trust-Intermediate Series 1
Investors' Corporate Income Trust Series 1 through 12
Investors' Governmental Securities Income Trust Series 1 through 7
Van Kampen Merritt International Bond Income Trust Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust Series 1
Alabama Insured Municipals Income Trust Series 1 through 9
Arizona Investors' Quality Tax-Exempt Trust Series 1 through 16
Arizona Insured Municipals Income Trust Series 1 through 18
Arkansas Insured Municipals Income Trust Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust Series 1
California Insured Municipals Income Trust Series 1 through 164
California Insured Municipals Income Trust (Premium Bond Series) Series 1
California Insured Municipals Income Trust (1st Intermediate Series) Series 1 through 3
California Investors' Quality Tax-Exempt Trust Series 1 through 21
California Insured Municipals Income Trust (Intermediate Laddered) Series 1 through 22
Colorado Insured Municipals Income Trust Series 1 through 83
Colorado Investors' Quality Tax-Exempt Trust Series 1 through 18
Connecticut Insured Municipals Income Trust Series 1 through 34
Connecticut Investors' Quality Tax-Exempt Trust Series 1
Delaware Investor's Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipal Income Trust - Intermediate Series 1 and 2
Florida Insured Municipals Income Trust Series 1 through 113
Florida Investors' Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate Laddered) Series 1 through 13
Georgia Insured Municipals Income Trust Series 1 through 83
Georgia Investors' Quality Tax-Exempt Trust Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust Series 1
Indiana Insured Municipals Income Trust Series 1
Investors' Quality Municipals Trust (AMT) Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust Series 1 through 59
Louisiana Insured Municipals Income Trust Series 1 through 17
Maine Investor's Quality Tax-Exempt Trust Series 1
Maryland Investors' Quality Tax-Exempt Trust Series 1 through 81
Massachusetts Insured Municipals Income Trust Series 1 through 34
Massachusetts Insured Municipals Income Trust (Premium Bond Series) Series 1
Michigan Financial Institutions Trust Series 1
Michigan Insured Municipals Income Trust Series 1 through 143
Michigan Insured Municipals Income Trust (Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust (1st Intermediate Series) Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust Series 1 through 30
Michigan Select Trust Series 1
Minnesota Insured Municipals Income Trust Series 1 through 60
Minnesota Investors' Quality Tax-Exempt Trust Series 1 through 21
Mississippi Insured Municipals Income Trust Series 1
Missouri Insured Municipals Income Trust Series 1 through 100
Missouri Insured Municipals Income Trust (Premium Bond Series) Series 1
Missouri Investors' Quality Tax-Exempt Trust Series 1 through 15
Missouri Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
Nebraska Investors' Quality Tax-Exempt Trust Series 1 through 9
New Mexico Insured Municipals Income Trust Series 1 through 18
New Jersey Insured Municipals Income Trust Series 1 through 118
New Jersey Investors' Quality Tax-Exempt Trust Series 1 through 22
New Jersey Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 and 4
New York Insured Municipals Income Trust-Intermediate Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) Series 1
New York Insured Municipals Income Trust Series 1 through 140
New York Insured Tax-Free Bond Trust Series 1
New York Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 1 through 17
New York Investors' Quality Tax-Exempt Trust Series 1
North Carolina Investors' Quality Tax-Exempt Trust Series 1 through 91
Ohio Insured Municipals Income Trust Series 1 through 106
Ohio Insured Municipals Income Trust (Premium Bond Series) Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) Series 1
Ohio Insured Municipals Income Trust (Intermediate Laddered Maturity) Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust Series 1 through 16
Oklahoma Insured Municipal Income Trust Series 1 through 17
Oregon Investors' Quality Tax-Exempt Trust Series 1 through 53
Pennsylvania Insured Municipals Income Trust - Intermediate Series 1 through 6
Pennsylvania Insured Municipals Income Trust Series 1 through 228
Pennsylvania Insured Municipals Income Trust (Premium Bond Series) Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust Series 1 through 85
Stepstone Growth Equity and Treasury Securities Trust Series 1
Tennessee Insured Municipals Income Trust Series 1-3 and 5-39
Texas Insured Municipals Income Trust Series 1 through 40
Texas Insured Municipal Income Trust (Intermediate Ladder) Series 1
Virginia Investors' Quality Tax-Exempt Trust Series 1 through 76
Van Kampen American Capital Equity Opportunity Trust Series 1 through 54
Van Kampen American Capital Utility Income Trust Series 1 through 8
Van Kampen American Capital Insured Income Trust Series 1 through 64
Van Kampen American Capital Insured Income Trust (Intermediate Term) Series 1 through 62
Van Kampen Merritt Select Equity Trust Series 1
Van Kampen Merritt Select Equity and Treasury Trust Series 1
Washington Insured Municipals Income Trust Series 1
West Virginia Insured Municipals Income Trust Series 1 through 7
Principal Financial Institutions Trust Series 1
Internet Trust Series 1 through 5
Michigan Real Estate Income and Growth Trust Series 1
Strategic Ten Trust, United States Series 1 through 14
Strategic Ten Trust, United Kingdom Series 1 through 12
Strategic Ten Trust, Hong Kong Series 1 through 12
Strategic Five Trust, United States Series 1 through 8
Global Fifteen Trust Series 1 through 2
Global Thirty Trust Series 1 through 3
Great International Firms Trust Series 1 through 3
Undervalued Growth Opportunities Trust Series 1
Emerging Growth and Treasury Series 1
Global Blue Chip Trust Series 1
Renaissance Trust Series 1
Blue Chip Opportunity and Treasury Trust Series 1 through 4
Wheat First Strategic Opportunity Unit Trust Series 1
Baby Boomer Opportunity Trust Series 1 through 2
</TABLE>
<PAGE> 1
EXHIBIT 17 (b)
Officers
Van Kampen American Capital Distributors, Inc.
<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & Chief Executive Officer Houston, TX
William R. Molinari President & Chief Operating Oakbrook Terrace, IL
Officer
Ronald A. Nyberg Executive Vice President, General Oakbrook Terrace, IL
Counsel & Assistant Secretary
William R. Rybak Executive Vice President & Chief Oakbrook Terrace, IL
Financial Officer
Paul R. Wolkenberg Executive Vice President Houston, TX
Robert A. Broman Sr. Vice President Oakbrook Terrace, IL
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
Keith K. Furlong Sr. Vice President Oakbrook Terrace, IL
Douglas B. Gehrman Sr. Vice President Houston, TX
Richard D. Humphrey Sr. Vice President Houston, TX
D. Bruce Johnston Sr. Vice President Oakbrook Terrace, IL
Scott E. Martin Sr. Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Secretary
Mark T. McGannon Sr. Vice President Oakbrook Terrace, IL
Charles G. Millington Sr. Vice President & Treasurer Oakbrook Terrace,
Robert S. West Sr. Vice President Oakbrook Terrace, IL
John H. Zimmermann, III Sr. Vice President Oakbrook Terrace, IL
Dominic C. Martellaro 1st Vice President Danville, CA
Mark R. McClure 1st Vice President Oakbrook Terrace, IL
James J. Ryan 1st Vice President Oakbrook Terrace, IL
Michael L. Stallard 1st Vice President Oakbrook Terrace, IL
Patrick J. Woelfel 1st Vice President Oakbrook Terrace, IL
Laurence J. Althoff Vice President & Controller Oakbrook Terrace, IL
James K. Ambrosio Vice President Massapequa, NY
Brian P. Arcara Vice President Buffalo, NY
Sheldon Barker Vice President Moon, PA
Patricia A. Bettlach Vice President Chesterfield, MO
Carol S. Biegel Vice President Oakbrook Terrace, IL
Christopher M. Bisaillon Vice President Oakbrook Terrace, IL
James J. Boyne Vice President, Associate General Oakbrook Terrace, IL
Counsel & Assistant Secretary
Michael P. Boos Vice President Oakbrook Terrace, IL
Robert C. Brooks Vice President Oakbrook Terrace, IL
Brooksley Burke Vice President Marina Del Ray, CA
William F Burke, Jr. Vice President Mendham, NJ
Loren Burket Vice President Plymouth, MN
Christine Cleary Byrum Vice President Tampa, FL
Glenn M. Cackovic Vice President Laguna Niguel, CA
Joseph N. Caggiano Vice President New York, NY
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Richard J. Charlino Vice President Houston, TX
Deanna Margaret Chiaro Vice President Oakbrook Terrace, IL
Scott A. Chriske Vice President Plano, TX
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Michael Colston Vice President Louisville, KY
Suzanne Cummings Vice President Oakbrook Terrace, IL
Ken DeFrancesca Vice President Oakbrook Terrace, IL
Daniel R. DeJong Vice President Oakbrook Terrace, IL
Tracey M. DeLusant Vice President New York, NY
Mark B. Doremus Vice President Houston, TX
Michael E. Eccleston Vice President Oakbrook Terrace, IL
Jonathan Eckard Vice President Tampa, FL
Charles Edward Fisher Vice President Naperville, IL
William J. Fow Vice President Redding, CT
Nicholas J. Foxhoven Vice President Englewood, CO
Charles Friday Vice President Gibsonia, PA
Erich P. Gerth Vice President Piedmont, CA
Richard G. Golod Vice President Annapolis, MD
Timothy D. Griffith Vice President Kirkland, WA
Kyle D. Haas Vice President Oakbrook Terrace, IL
Daniel Hamilton Vice President Austin, TX
John A. Hanhauser Vice President Philadelphia, PA
John G. Hansen Vice President Oakbrook Terrace, IL
Eric J. Hargens Vice President Orlando, FL
Calvin B. Hays Vice President Richmond, VA
Joseph Hays Vice President Cherry Hill, NJ
Gregory Heffington Vice President Ft. Collins, CO
Scott F. Heyer Vice President Tampa, FL
Susan J. Hill Vice President Oakbrook Terrace, IL
David S. Hogaboom Vice President Oakbrook Terrace, IL
Bryn M. Hoggard Vice President Houston, TX
Robert S. Hunt Vice President Phoenix, MD
Lowell Jackson Vice President Norcross, GA
Kevin G. Jajuga Vice President Baltimore, MD
Jeffrey S. Kinney Vice President Overland Park, KS
Dana R. Klein Vice President Oakbrook Terrace, IL
Ann Marie Klingenhagen Vice President Oakbrook Terrace, IL
Frederick Kohly Vice President Miami, FL
David R. Kowalski Vice President & Director Oakbrook Terrace, IL
of Compliance
Richard D. Kozlowski Vice President Atlanta, GA
Thomas W. Knowles Vice President Cary, NC
Patricia D. Lathrop Vice President Tampa, FL
Brian Laux Vice President Statten Island, NY
S. William Lehew III Vice President Charlotte, NC
Tony E. Leal Vice President Daphne, AL
Eric Levinson Vice President San Francisco, CA
Jonathan Linstra Vice President Oakbrook Terrace, IL
Walter Lynn Vice President Flower Mound, TX
Richard M. Lundgren Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Carl Mayfield Vice President Lakewood, CO
Brooks D. McCartney Vice President Puyallup, WA
Anne Therese McGrath Vice President Los Gatos, CA
John Mills Vice President Kenner, LA
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Ted Morrow Vice President Dallas, TX
Robert Muller, Jr. Vice President Cypress, TX
Michael D. Ossmen Vice President Oakbrook Terrace, IL
Christopher Petrungaro Vice President Oakbrook Terrace, IL
Anthony Piazza Vice President Old Bridge, NJ
Ronald E. Pratt Vice President Marietta, GA
Craig S. Prichard Vice President Fairlawn, OH
Daniel D. Reams Vice President Royal Oak, MI
Walter E. Rein Vice President Oakbrook Terrace, IL
Michael W. Rohr Vice President Oakbrook Terrace, IL
Suzette N. Rothberg Vice President Plymouth, MN
Jeffrey Rourke Vice President Oakbrook Terrace, IL
Thomas Rowley Vice President St. Louis, MO
Heather R. Sabo Vice President Richmond, VA
Stephanie Scarlata Vice President Bedford Corners, NY
Ronald J. Schuster Vice President Tampa, FL
Jeffrey C. Shirk Vice President Swampscott, MA
Kimberly M. Spangler Vice President Fairfax, VA
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
Gary R. Steele Vice President Philadelphia, PA
Richard Stefanec Vice President Los Angeles, CA
James D. Stevens Vice President North Andover, MA
William C. Strafford Vice President Granger, IN
Eric Studer Vice President Flemington, NJ
David A. Tabone Vice President Scottsdale, AZ
James C. Taylor Vice President Naperville, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Todd Volkman Vice President Austin, TX
Christopher Walsh Vice President Oakbrook Terrace, IL
Jeff Warland Vice President Oakbrook Terrace, IL
Sandra A. Waterworth Vice President and Assistant Oakbrook Terrace, IL
Secretary
Weston B. Wetherell Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
Harold Whitworth, III Vice President Oakbrook Terrace, IL
Kirk Wiggins Vice President Arlington, TX
James R. Yount Vice President Mercer Island, WA
Patrick M. Zacchea Vice President Oakbrook Terrace, IL
Billie J. Bronaugh Asst. Vice President Houston, TX
Nicholas Dalmaso Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Huey P. Falgout, Jr. Asst. Vice President & Asst. Secretary Houston, TX
Walter C. Gray Asst. Vice President Houston, TX
Michael B. Kollins Asst. Vice President Oakbrook Terrace, IL
Laurie L. Jones Asst. Vice President Houston, TX
Ivan R. Lowe Asst. Vice President Houston, TX
Linda S. MacAyeal Asst. Vice President Oakbrook Terrace, IL
Stuart R. Moehlman Asst. Vice President Houston, TX
Gregory S. Parker Asst. Vice President Houston, TX
David B. Partain Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Michael Quinn Asst. Vice President Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
Thomas J. Sauerborn Asst. Vice President New York, NY
Bruce Saxon Asst. Vice President Oakbrook Terrace, IL
Andrew J. Scherer Asst. Vice President Oakbrook Terrace, IL
Traci T. Tighe Asst. Vice President Oakbrook Terrace, IL
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
Robert A. Watson Asst. Vice President Oakbrook Terrace, IL
Natalie Wilson Asst. Vice President New York, NY
Barbara A. Withers Asst. Vice President Oakbrook Terrace, IL
Gina M. Costello Asst. Secretary Oakbrook Terrace, IL
Cathy Napoli Asst. Secretary Oakbrook Terrace, IL
Elizabeth M. Brown Officer Houston, TX
John Browning Officer Oakbrook Terrace. IL
Leticia George Officer Houston, TX
Sarah Kessler Officer Oakbrook Terrace, IL
William D. McLaughlin Officer Houston, TX
Becky Newman Officer Houston, TX
Rosemary Pretty Officer Houston, TX
Colette Saucedo Officer Houston, TX
Frederick Shepherd Officer Houston, TX
Larry Vickrey Officer Houston, TX
John Yovanovic Officer Houston, TX
</TABLE>
<PAGE> 1
EXHIBIT (19)
POWER OF ATTORNEY
The undersigned, being officers and trustees of each of the Van Kampen
American Capital Open-End Trusts, as indicated on Schedule 1 attached hereto and
incorporated by reference, each a Delaware business trust, except for the Van
Kampen American Capital Pennsylvania Tax Free Income Fund, being a Pennsylvania
business trust (individually, a "Trust"), do hereby, in the capacities shown
below, individually appoint Dennis J. McDonnell and Ronald A. Nyberg, each of
Oakbrook Terrace, Illinois, and each of them, as the agents and
attorneys-in-fact with full power of substitution and resubstitution, for each
of the undersigned, to execute and deliver, for and on behalf of the
undersigned, any and all amendments to the Registration Statement filed by each
Trust with the Securities and Exchange Commission pursuant to the provisions of
the Securities Act of 1933 and the Investment Company Act of 1940.
This Power of Attorney may be executed in multiple counterparts, each of
which shall be deemed an original, but which taken together shall constitute one
instrument.
Dated: April 15, 1997
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ FERNANDO SISTO, SC.D. Trustee
- -----------------------------------------------------
Fernando Sisto, Sc.D.
/s/ DENNIS J. MCDONNELL President and Trustee
- -----------------------------------------------------
Dennis J. McDonnell
/s/ J. MILES BRANAGAN Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ LINDA HUTTON HEAGY Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ PHILLIP ROONEY Trustee
- -----------------------------------------------------
Phillip Rooney
/s/ R. CRAIG KENNEDY Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ WAYNE W. WHALEN Trustee and Chairman
- -----------------------------------------------------
Wayne W. Whalen
Trustee
- -----------------------------------------------------
Jerome L. Robinson
/s/ EDWARD C. WOOD III Vice President and
- ----------------------------------------------------- Chief Financial Officer
Edward C. Wood III
</TABLE>
2
<PAGE> 2
SCHEDULE 1
<TABLE>
<S> <S>
1. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST
2. VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
3. VAN KAMPEN AMERICAN CAPITAL TRUST
4. VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME
5. FUND
6. VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
7. VAN KAMPEN AMERICAN CAPITAL COMSTOCK FUND
8. VAN KAMPEN AMERICAN CAPITAL CORPORATE BOND FUND
9. VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH FUND
10. VAN KAMPEN AMERICAN CAPITAL ENTERPRISE FUND
11. VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
12. VAN KAMPEN AMERICAN CAPITAL LIMITED MATURITY GOVERNMENT FUND
13. VAN KAMPEN AMERICAN CAPITAL GLOBAL MANAGED ASSETS FUND
14. VAN KAMPEN AMERICAN CAPITAL GOVERNMENT SECURITIES FUND
15. VAN KAMPEN AMERICAN CAPITAL GOVERNMENT TARGET FUND
16. VAN KAMPEN AMERICAN CAPITAL GROWTH AND INCOME FUND
17. VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
18. VAN KAMPEN AMERICAN CAPITAL HIGH INCOME CORPORATE BOND FUND
19. VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
20. VAN KAMPEN AMERICAN CAPITAL PACE FUND
21. VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
22. VAN KAMPEN AMERICAN CAPITAL RESERVE FUND
23. VAN KAMPEN AMERICAN CAPITAL SMALL CAPITALIZATION FUND
24. VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
25. VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
26. VAN KAMPEN AMERICAN CAPITAL WORLD PORTFOLIO SERIES TRUST
27. VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> ASSET ALLOCATON PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-01-1996
<INVESTMENTS-AT-COST> 58124795
<INVESTMENTS-AT-VALUE> 63041262
<RECEIVABLES> 1411480
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 20641
<TOTAL-ASSETS> 64473383
<PAYABLE-FOR-SECURITIES> 205612
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 318706
<TOTAL-LIABILITIES> 524318
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 57866139
<SHARES-COMMON-STOCK> 5633242
<SHARES-COMMON-PRIOR> 5409616
<ACCUMULATED-NII-CURRENT> 47231
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1119228
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4916467
<NET-ASSETS> 63949065
<DIVIDEND-INCOME> 879270
<INTEREST-INCOME> 1889646
<OTHER-INCOME> 0
<EXPENSES-NET> (379202)
<NET-INVESTMENT-INCOME> 2389714
<REALIZED-GAINS-CURRENT> 6901393
<APPREC-INCREASE-CURRENT> (1116505)
<NET-CHANGE-FROM-OPS> 8174602
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2362025)
<DISTRIBUTIONS-OF-GAINS> (6874314)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 387499
<NUMBER-OF-SHARES-REDEEMED> (985735)
<SHARES-REINVESTED> 821862
<NET-CHANGE-IN-ASSETS> 967948
<ACCUMULATED-NII-PRIOR> 19542
<ACCUMULATED-GAINS-PRIOR> 1092149
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 316002
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 511075
<AVERAGE-NET-ASSETS> 63200351
<PER-SHARE-NAV-BEGIN> 11.64
<PER-SHARE-NII> 0.482
<PER-SHARE-GAIN-APPREC> 1.083
<PER-SHARE-DIVIDEND> (0.478)
<PER-SHARE-DISTRIBUTIONS> (1.375)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.352
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> DOMESTIC INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 18850945
<INVESTMENTS-AT-VALUE> 19514744
<RECEIVABLES> 371587
<ASSETS-OTHER> 1132
<OTHER-ITEMS-ASSETS> 1401
<TOTAL-ASSETS> 19888864
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 91567
<TOTAL-LIABILITIES> 91567
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 20772963
<SHARES-COMMON-STOCK> 2472121
<SHARES-COMMON-PRIOR> 3235694
<ACCUMULATED-NII-CURRENT> 34326
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1673791)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 663799
<NET-ASSETS> 19797297
<DIVIDEND-INCOME> 38241
<INTEREST-INCOME> 1836107
<OTHER-INCOME> 15000
<EXPENSES-NET> (132292)
<NET-INVESTMENT-INCOME> 1757056
<REALIZED-GAINS-CURRENT> 350915
<APPREC-INCREASE-CURRENT> (844721)
<NET-CHANGE-FROM-OPS> 1263250
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1735294)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 755420
<NUMBER-OF-SHARES-REDEEMED> (1736394)
<SHARES-REINVESTED> 217401
<NET-CHANGE-IN-ASSETS> (6764998)
<ACCUMULATED-NII-PRIOR> 16531
<ACCUMULATED-GAINS-PRIOR> (2028673)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 110243
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 283394
<AVERAGE-NET-ASSETS> 22048650
<PER-SHARE-NAV-BEGIN> 8.21
<PER-SHARE-NII> 0.755
<PER-SHARE-GAIN-APPREC> (0.212)
<PER-SHARE-DIVIDEND> (0.745)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.008
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 003
<NAME> EMERGING GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 4228841
<INVESTMENTS-AT-VALUE> 5172900
<RECEIVABLES> 50299
<ASSETS-OTHER> 4779
<OTHER-ITEMS-ASSETS> 4586
<TOTAL-ASSETS> 5232564
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 54377
<TOTAL-LIABILITIES> 54377
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4650241
<SHARES-COMMON-STOCK> 379065
<SHARES-COMMON-PRIOR> 195420
<ACCUMULATED-NII-CURRENT> (4926)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (411187)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 944059
<NET-ASSETS> 5178187
<DIVIDEND-INCOME> 12069
<INTEREST-INCOME> 15312
<OTHER-INCOME> 0
<EXPENSES-NET> 34345
<NET-INVESTMENT-INCOME> (6965)
<REALIZED-GAINS-CURRENT> (353684)
<APPREC-INCREASE-CURRENT> 699394
<NET-CHANGE-FROM-OPS> 338746
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 366538
<NUMBER-OF-SHARES-REDEEMED> (182893)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2888530
<ACCUMULATED-NII-PRIOR> (1050)
<ACCUMULATED-GAINS-PRIOR> (57503)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 28284
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 132332
<AVERAGE-NET-ASSETS> 4040636
<PER-SHARE-NAV-BEGIN> 11.72
<PER-SHARE-NII> (.016)
<PER-SHARE-GAIN-APPREC> 1.956
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.660
<EXPENSE-RATIO> 0.85
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> ENTERPRISE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 66710692
<INVESTMENTS-AT-VALUE> 85767674
<RECEIVABLES> 782114
<ASSETS-OTHER> 1856
<OTHER-ITEMS-ASSETS> 2257
<TOTAL-ASSETS> 86553901
<PAYABLE-FOR-SECURITIES> 1584170
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 164561
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<NAME> GLOBAL EQUITY PORTFOLIO
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<TABLE> <S> <C>
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<NAME> GOVERNMENT PORTFOLIO
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<TABLE> <S> <C>
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<NAME> VKAC-GROWTH AND INCOME PORTFOLIO
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<TABLE> <S> <C>
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<NAME> MONEY MARKET PORTFOLIO
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<NAME> REAL ESTATE PORTFOLIO
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