<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1998
REGISTRATION NO. 33-00628
811-4424
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 25 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 27 [X]
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VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 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 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:
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on April 30, 1998 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 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.
Title of Securities Being Registered: Shares of Beneficial Interest, par value
$0.01 per share
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EXPLANATORY NOTE
The Van Kampen American Capital Life Investment Trust (the "Trust")
currently has ten operating series (each a "Series"). The purpose of this
Post-Effective Amendment is to add an additional Series, the Comstock Portfolio.
Enclosed herein is a form of prospectus containing the new Series and a form of
statement of additional information containing all Series. Six additional forms
of prospectus are incorporated herein by reference to Post-Effective Amendment
No. 24 under the Securities Act of 1933, as amended, which was filed with the
Commission on April 30, 1998. One incorporated prospectus contains all ten
Series of the Trust, the second incorporated prospectus contains eight Series of
the Trust, the third incorporated prospectus contains two of the Series of the
Trust, and the fourth, fifth and sixth incorporated prospectuses each contain
one Series of the Trust. This amendment is not intended to amend the six other
forms of prospectuses incorporated herein.
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
CROSS REFERENCE SHEET
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PROSPECTUS CAPTION
FORM N-1A ITEM ------------------
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PART A
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
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<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION CAPTION
PART B -------------------------------------------
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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
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, so numbered, 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
, 1998
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in
eleven separate portfolios. Shares of the Trust 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 ("Contract Owners"). Such allocation
rights are further described in the accompanying prospectus for the Contracts.
Only the Comstock Portfolio (the "Portfolio"), one of the Trust's eleven
portfolios, is described herein and offered by this Prospectus. The investment
objective of the Portfolio is as follows:
- --------------------------------------------------------------------------------
COMSTOCK PORTFOLIO seeks capital growth and income through investments in
equity securities including common and preferred stocks and securities
convertible into common and preferred stocks.
There is no assurance that the Portfolio will achieve its investment
objective.
- --------------------------------------------------------------------------------
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.
THE SHARES OF THE 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.
A Statement of Additional Information dated April 30, 1998, as supplemented
as of the date hereof, 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 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
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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
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Prospectus Summary....................... 3
Introduction............................. 4
Investment Objective and Policies........ 4
Investment Practices..................... 5
The Trust and Its Management............. 9
Purchase of Shares....................... 11
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Page
<S> <C>
Determination of Net Asset Value......... 11
Redemption of Shares..................... 11
Dividends, Distributions and Taxes....... 12
Portfolio Performance.................... 13
Description of Shares of the Trust....... 15
Additional Information................... 15
</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.
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<PAGE> 6
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in the Comstock Portfolio
(the "Portfolio") which is a portfolio of the Van Kampen
American Capital Life Investment Trust (the "Trust").
Type of Company.........Diversified, open-end management investment company.
Investment Objective....The Portfolio seeks capital growth and income. There can
be no assurance that the Portfolio will achieve its
investment objective.
Investment Policies.....The Portfolio seeks to achieve its investment objective
by investing in equity securities including common and
preferred stocks and securities convertible into common
and preferred stocks. 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."
Redemption..............At the net asset value next determined after the
Portfolio receives a redemption request.
Investment Adviser......Van Kampen American Capital Asset Management, Inc. is
the investment adviser for the Portfolio.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes the Portfolio's shares.
Dividends and
Distributions.........The Portfolio distributes dividends from net investment
income quarterly. Capital gains, if any, are distributed
at least annually.
The foregoing is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this
Prospectus.
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<PAGE> 7
INTRODUCTION
The Trust is a duly organized Delaware business trust with eleven separate
portfolios. The Comstock Portfolio (the "Portfolio") is the only portfolio of
the Trust 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 each 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 portfolio will
be met.
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio's investment objective is to seek capital growth and income
through investments in equity securities including common and preferred stocks
and securities convertible into common and preferred stocks.
The Portfolio invests principally in common stocks. Common stocks are
shares of a corporation or other entity that entitle the holder to a pro rata
share of the profits of the corporation, if any, without preference over any
other class of securities, including such entity's debt securities, preferred
stock and other senior equity securities. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so. In selecting
common stocks for investment, the Portfolio will focus primarily on the
security's potential for income and capital growth.
The Portfolio may invest in preferred stock. Preferred stock generally has
a preference as to dividends and liquidation over an issuer's common stock but
ranks junior to debt securities in an issuer's capital structure. Unlike
interest payments on debt securities, preferred stock dividends are payable only
if declared by the issuer's board of directors. Preferred stock also may be
subject to optional or mandatory redemption provisions.
The Portfolio also invests in convertible securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock or other
equity security of the same or a different issuer within a particular period of
time at a specified price or in accordance with a specified formula. A
convertible security entitles the holder to receive interest paid or accrued on
debt securities or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible income
securities in that they ordinarily provide a stream of income with generally
higher yields than those of common stocks of the same or similar issuers.
Convertible securities rank senior to common stock in a corporation's capital
structure but are usually subordinated to comparable nonconvertible securities.
The Portfolio generally holds up to 10% of its assets in high quality
short-term debt securities and investment grade corporate or government bonds in
order to provide liquidity. Such investments may be increased up to 100% of the
Portfolio's assets when deemed appropriate by the Adviser for temporary
defensive purposes. Investment grade bonds include bonds rated Baa or better by
Moody's Investors Service, Inc. ("Moody's") or BBB or better by Standard &
Poor's Ratings Group ("S&P"). Securities rated Baa by Moody's or BBB by S&P 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. Short-term
investments may include repurchase agreements with banks or broker-dealers. See
"Investment Practices -- Repurchase Agreements."
The Portfolio may also invest up to 15% of its total assets in securities
of foreign issuers and may invest in investment companies. See "Investment
Practices -- Foreign Securities" and "Investment Practices -- Investment in
Investment Companies." The Portfolio may engage in portfolio management
strategies and techniques involving options, futures contracts and options on
futures.
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Options, futures contracts and related options are described in "Investment
Practices -- Options, Futures Contracts and in Related Options" and in the
Statement of Additional Information.
An investment in the Portfolio may not be appropriate for all investors.
The Portfolio is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Portfolio. An investment in the
Portfolio is intended to be a long-term investment and should not be used as a
trading vehicle.
INVESTMENT PRACTICES
Repurchase Agreements. The Portfolio may enter into repurchase agreements
with banks or broker-dealers 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 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, the Portfolio could experience delays and expenses in
liquidating the underlying securities and the Portfolio could incur losses
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. The Portfolio will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by the Portfolio, exceeds the
Portfolio's limitation on illiquid securities described below.
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
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.
Foreign Securities. The Portfolio may invest up to 15% of the value of the
Portfolio's total assets in securities issued by foreign issuers. 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
Depository Receipts("ADRs") and European Depository 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
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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 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 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
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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.
Illiquid and Restricted Securities. The Portfolio may invest up to 5% of
its net assets in illiquid and restricted securities. 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
Trustee or by the Adviser pursuant to Board-approved guidelines. The
determination of liquidity is based on the volume of reported training 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.
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 transactions in options, futures contracts and
options on futures contracts on behalf of the Portfolio. The turnover rate for
the Portfolio may exceed 100% in any given year, 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 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."
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
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status of the 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. In certain cases, the options and futures markets provide investment
or risk management opportunities that are not available from direct investments
in securities. In addition, some strategies can be performed with greater ease
and at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities. However, 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
of other parties ("Counterparties") 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 above.
The Portfolio will not enter into a futures contract or option (except for
closing transactions) other than for bona fide hedging purposes if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
futures contracts and options would exceed 5% of the Portfolio's total assets
(taken at current value); however, in the case of an option that is in-the-money
at the time of the purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. Certain state securities laws to which the
Portfolio may be subject may further restrict the Portfolio's ability to engage
in transactions in futures contracts and related options.
In order to prevent leverage in connection with the purchase of futures
contracts thereon by the 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. 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.
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 Adviser may place portfolio transactions, to the extent
permitted by law, with brokerage firms affiliated with the Trust, the Adviser or
the Distributor and with brokerage firms participating in the distribution of
shares of the Portfolio if it reasonably believes that the quality of the
execution and the commission are comparable to that available from other
qualified 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.
Investment in Investment Companies. The Portfolio may invest in one or more
investment companies advised by the Adviser and its affiliates, including Van
Kampen American Capital Small
8
<PAGE> 12
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 the
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 Portfolio 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 the Portfolio and other Van Kampen American Capital funds. The 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 Portfolio will be deemed to own a pro rata portion of each investment
of the Small Cap Fund and Foreign Securities Fund. For example, if the
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.
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.
Like other mutual funds, financial and business organizations and
individuals around the world, the Trust could be adversely affected if the
computer systems used by the Trust's Adviser and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Adviser
is taking steps that it believes are reasonably designed to address the Year
2000 Problem with respect to computer systems that it uses and to obtain
reasonable assurances that comparable steps are being taken by the Trust's other
major service providers. At this time, there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the Trust. In addition,
the Year 2000 Problem may adversely affect the issuers of securities in which
the Portfolio may invest which, in turn, may adversely affect the net asset
value of the Portfolio.
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<PAGE> 13
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 $60 billion under management or supervision. Van
Kampen American Capital's more than 50 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 Dean Witter & Co. The Adviser's principal office is located at
One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management, Inc., an
investment adviser, 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; credit 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.
As of the date of this Prospectus, the Distributor owned beneficially and
of record all of the outstanding shares of the Portfolio and therefore may be
deemed to control the Portfolio.
ADVISORY AGREEMENT. The Trust and the Adviser are parties to an investment
advisory agreement (the "Advisory Agreement") pursuant to which the Trust
retains the Adviser to manage the investment of assets and to place orders for
the purchase and sale of portfolio securities for the Portfolio. Under the
Advisory Agreement, the Trust bears the cost of its accounting services, which
include maintaining its financial books and records and calculating the daily
net asset value of the 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 custodian fees, legal and auditing fees,
trustees' fees (other than those who are affiliated persons, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), of the Adviser,
Distributor, ACCESS, Van Kampen American Capital or Morgan Stanley Dean Witter &
Co.), 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 the 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 the average daily net assets of the Portfolio at an
annual rate of 0.60% on the first $500 million and 0.55% thereafter.
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.
PERSONAL INVESTMENT 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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<PAGE> 14
PORTFOLIO MANAGEMENT. The Portfolio is managed by a management team headed
by B. Robert Baker. Mr. Baker has been Vice President and Portfolio Manager of
the Adviser and Van Kampen American Capital Advisory Corp. ("Advisory Corp.")
since June 1995. Prior to that time, Mr. Baker was Associate Portfolio Manager
of the Adviser. Jason Leder and Edie Terreson are responsible as co-managers for
the day-to-day management of the Portfolio's investment portfolio. Mr. Leder has
been Assistant Vice President of the Adviser and Advisory Corp. since October
1996. Prior to that time, Mr. Leder was Associate Portfolio Manager of the
Adviser. Prior to February 1995, Mr. Leder was a Securities Analyst with Salomon
Brothers, Inc. Prior to August 1992, Mr. Leder was a Securities Analyst with
Fidelity Management and Research. Ms. Terreson has been Assistant Vice President
of the Adviser and Advisory Corp. since December 1997. Prior to that time, Ms.
Terreson was Associate Portfolio Manager of the Adviser. Prior to March 1997,
Ms. Terreson was a Securities Analyst and Associate Portfolio Manager with
Delaware Investment Advisers. Prior to May 1996, Ms. Terreson was a Securities
Analyst and Associate Portfolio Manager with J.W. Seligman & Co.
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 of the Portfolio to the Accounts at a prices equal to
the 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 of the 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 [mean between the last
reported bid and asked] 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. Securities
for which market quotations are not readily available and other assets are
valued at a fair value by the Adviser based on procedures approved by the
Trustees. Short-term investments for the Portfolio are valued as described in
the notes to financial statements in the Statement of Additional Information.
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
11
<PAGE> 15
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 quarterly. 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.
Tax Status of the Portfolios. The Portfolio has elected to be taxed as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). By maintaining its qualification as a "regulated
investment company," the Portfolio is not subject to federal income taxes to the
extent it distributes its net investment income and net 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 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. The Accounts are
subject to the diversification requirements of Section 817(h) of 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 Accounts to invest no more than 55% of their 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.
Dividends paid by the Portfolio from its ordinary income and distributions
of the Portfolio's net 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. 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 distributions designated as being made from the
Portfolio's net 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.
Certain Investment Practices of Portfolios. Certain investment practices
of the Portfolio may be subject to special provisions of the Code that, among
other things, may defer the use of certain losses of the Portfolio and affect
the holding period of the securities held by the Portfolio and the
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<PAGE> 16
character of the gains or losses realized by the Portfolio. These provisions may
also require the Portfolio to recognize income or gain without receiving cash
with which to make distributions in the amounts necessary to maintain the
Portfolio's qualification as a regulated investment company and avoid income and
excise taxes. The Portfolio will monitor its transactions and may make certain
tax elections in order to mitigate the effect of these rules and prevent
disqualification of the Portfolio as a regulated investment company.
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 contractholder level. Investors should also review
total return calculations that include those 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.
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.
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<PAGE> 17
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, waive advisory fees or reimburse a
certain amount of the future ordinary business expenses of the Portfolio. Such
waiver/reimbursement will increase the yield or total return of the Portfolio.
The Adviser may stop waiving fees or reimbursing expenses at any time without
prior notice.
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, 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, the MSCI Index, Standard & Poor's
indices, NASDAQ Composite Index, 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 and Semi-Annual Report contain additional
performance information about each of the Trust's portfolios; however, the
Comstock Portfolio had not commenced investment operations and, accordingly, no
information regarding the Comstock Portfolio is contained therein. A copy of the
Annual Report or Semi-Annual Report may be obtained without charge by calling or
writing the Trust at the telephone number and address printed on the cover of
this Prospectus.
Performance of Investment Adviser. The Adviser manages the Van Kampen
American Capital Comstock Fund (the "Comstock Fund"), which served as the model
for the Portfolio. The Comstock Portfolio has substantially the same investment
objective, policies and strategies as the Comstock Fund. In addition, the
Adviser intends the Portfolio to be managed by the same personnel and to
continue to have closely similar investment strategies, techniques and
characteristics as the Comstock Fund. Past investment performance of the
Comstock Fund, as shown in the table below, may be relevant to your
consideration of investment in the Portfolio. The investment performance of the
Comstock Fund is not necessarily indicative of future performance of the
Portfolio. Also, the
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<PAGE> 18
operating expenses of the Portfolio will be different from the operating
expenses of the Comstock Fund. The investment performance of the Comstock Fund
is provided merely to indicate the experience of the Adviser in managing a
similar investment portfolio.
The data set forth below is adjusted to reflect the Portfolio's projected
operating expenses and to eliminate a maximum 5.75% initial sales charge
applicable to purchases of Class A shares of the Comstock Fund, which will not
be applicable to purchases of shares of the Portfolio.
TOTAL RETURN FOR THE VAN KAMPEN AMERICAN CAPITAL COMSTOCK FUND'S CLASS A SHARES
(A SEPARATE MUTUAL FUND FROM THE PORTFOLIO)
FOR THE PERIOD ENDED DECEMBER 31, 1998
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES OF THE PORTFOLIO
AND THE ELIMINATION OF SALES CHARGES OF THE COMSTOCK FUND)
<TABLE>
<CAPTION>
RETURN WITHOUT
SALES CHARGE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
Class A Shares............................. [22.46]% [ ]% [16.47]% [15.87]%
</TABLE>
The past performance of the Comstock Fund is no guarantee of the future
performance of the Comstock Fund or the Portfolio.
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 Trust will assist such holders in
communicating with other shareholders of the Trust to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.
The Trust's Declaration of Trust provides that no Trustee, officer or
shareholder of the Trust 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.
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<PAGE> 19
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
200 East Randolph Drive
Chicago, IL 60601
<PAGE> 20
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
COMSTOCK PORTFOLIO
- --------------------------------------------------------------------------------
P R O S P E C T U S
, 1998
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 21
STATEMENT OF ADDITIONAL INFORMATION
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 eleven Portfolios (the
"Portfolios"): Asset Allocation Portfolio (formerly Multiple Strategy Fund),
Comstock Portfolio, 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), Morgan Stanley Real Estate Securities
Portfolio (formerly Real Estate Securities Portfolio) and Strategic Stock
Portfolio. 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-35
Legal Counsel............................................... B-45
Investment Advisory Agreements.............................. B-45
Distributor................................................. B-47
Transfer Agent.............................................. B-48
Portfolio Transactions and Brokerage........................ B-48
Portfolio Turnover.......................................... B-50
Determination of Net Asset Value............................ B-50
Purchase and Redemption of Shares........................... B-52
Tax Status.................................................. B-52
Portfolio Performance....................................... B-52
Money Market Portfolio Yield Information.................... B-53
Other Information........................................... B-54
Appendix.................................................... B-55
Report of Independent Accountants........................... B-57
Financial Statements........................................ B-58
Notes to Financial Statements............................... B-135
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998, AS
SUPPLEMENTED ON .
<PAGE> 22
GENERAL INFORMATION
Van Kampen American Capital Life Investment Trust, formerly known as
American Capital Life Investment Trust (the "Trust") was originally organized as
a business trust under the laws of the Commonwealth of Massachusetts on June 3,
1985. The Trust was reorganized under the laws of the State of Delaware as a
Delaware business trust and adopted its present name as of September 16, 1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("Van Kampen American Capital" or "VKAC"), which is an
indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal office of the Fund, the Adviser, the Distributor and VKAC is located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, 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; credit 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.
As of , 1998, 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 PERCENTAGE
RECORD HOLDER AT , 1998 OWNERSHIP
------------------- -------------------------- ----------
<S> <C> <C>
ASSET ALLOCATION FUND
Nationwide Life Insurance Co. 2,243,733 42.72%
Nationwide VL1 -- Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 2,840,894 54.08%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
COMSTOCK PORTFOLIO
Van Kampen American Capital 100%
Distributor, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois
MONEY MARKET PORTFOLIO
American General Life Insurance Co. 4,047,125 22.80%
Separate Account D
Attn. James A. Totten
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co. 6,886,304 38.79%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
B-2
<PAGE> 23
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE
RECORD HOLDER AT , 1998 OWNERSHIP
------------------- -------------------------- ----------
<S> <C> <C>
Nationwide Life Insurance Co. 5,557,964 31.31%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Van Kampen American Capital 1,238,410 6.98%
Generations Variable Annuities
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
ENTERPRISE PORTFOLIO
American General Life Insurance Co. 780,259 14.35%
Separate Account -- D
Attn. James A. Totten
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co. 2,190,017 40.27%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 1,819,433 33.46%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Van Kampen American Capital 531,375 9.77%
Generations Variable Annuities
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
GLOBAL EQUITY PORTFOLIO
Van Kampen American Capital 95,241 35.30%
Distributors, Inc.
One Chase Manhattan Plaza
37th Fl.
New York, NY 10005
Nationwide Life Insurance Co. 98,831 36.63%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 75,751 28.07%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
B-3
<PAGE> 24
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE
RECORD HOLDER AT , 1998 OWNERSHIP
------------------- -------------------------- ----------
<S> <C> <C>
GOVERNMENT PORTFOLIO
Nationwide Life Insurance Co. 5,092,084 87.02%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 498,615 8.52%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
DOMESTIC INCOME PORTFOLIO
American General Life Insurance Co. 587,993 29.53%
Separate Account D
Attn. James A. Totten
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co. 261,146 13.12%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 898,289 45.12%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Van Kampen American Capital 209,079 10.50%
Generations Variable Annuities
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
EMERGING GROWTH PORTFOLIO
Van Kampen American Capital 385,187 51.58%
Generations Variable Annuities
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
Nationwide Life Insurance Co. 207,635 27.81%
Nationwide Variable Account -- 3
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
Nationwide Life Insurance Co. 128,463 17.20%
Nationwide VLI Separate Account
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
</TABLE>
B-4
<PAGE> 25
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE
RECORD HOLDER AT , 1998 OWNERSHIP
------------------- -------------------------- ----------
<S> <C> <C>
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
Nationwide Life Insurance Co. 16,074,937 86.45%
Nationwide Variable Account II
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
GROWTH AND INCOME PORTFOLIO
Van Kampen American Capital 1,172,044 95.83%
Generations Variable Annuities
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
STRATEGIC STOCK PORTFOLIO
Van Kampen American Capital 604,798 96.33%
Generations Variable Annuities
c/o American General Life Insurance Co.
P.O. Box 1591
Houston, TX 77251-1591
</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 PORTFOLIO
The Portfolio 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.
COMSTOCK PORTFOLIO
The Portfolio seeks capital growth and income through investments in equity
securities including common and preferred stocks and securities convertible into
common and preferred stock.
DOMESTIC INCOME PORTFOLIO
The primary objective of the Portfolio is to seek current income. Capital
appreciation is a secondary objective, which is sought only when consistent with
the primary 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
B-5
<PAGE> 26
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 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.
B-6
<PAGE> 27
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 PORTFOLIO
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 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") Participation Certificate. This type of security is backed
by FHLMC 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.
B-7
<PAGE> 28
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 approximately 0.06 of 1% of the outstanding principal for
providing its guarantee, and the GNMA Certificate issuer is paid an annual
servicing fee of approximately 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.
B-8
<PAGE> 29
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 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
B-9
<PAGE> 30
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.
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 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.
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
As its primary objective, the Morgan Stanley Real Estate Securities
Portfolio (the "Real Estate Securities Portfolio") seeks long-term growth of
capital. Current income is a secondary consideration.
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STRATEGIC STOCK PORTFOLIO
The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI Index. In selecting
securities for the Portfolio, the Adviser presently intends to follow the
following procedures, subject to and limited by the Portfolio's other investment
policies and restrictions.
The Portfolio will reflect on its books twelve separate sub-accounts (each
a "Strategic Sub-Account"). Strategic Sub-Accounts will be successively
designated Strategic Sub-Account 1 through Strategic Sub-Account 12.
As of the close of business on (i) the business day immediately prior to
the Portfolio's commencement of investment operations and (ii) the last business
day of each month thereafter (each a "Strategic Determination Date"), the
Adviser will identify 20 securities pursuant to the Strategic Selection Policies
discussed in the Prospectus (the "Current Period Strategic Securities").
As of commencement of investment operations, the Portfolio will invest the
assets of Strategic Sub-Account 1 approximately equally in each of the Current
Period Strategic Securities determined on the first Strategic Determination
Date. This will result in approximately 5% of the Portfolio's assets being
invested in each of the initial Current Period Strategic Securities. On each of
the eleven subsequent Strategic Determination Dates, the Adviser will invest the
cash available for investment due to the sale of new shares and the receipt of
dividend and interest income in the next successive Strategic Sub-Account
approximately equally in each of the Current Period Strategic Securities for
that Strategic Determination Date. Following the twelfth Strategic Determination
Date the assets of one Strategic Sub-Account will be evaluated and adjusted each
month so that the assets of each Strategic Sub-Account will be reviewed and
adjusted once every 12 months.
Consistent with the Portfolio's investment objective, the Adviser may
modify these procedures without prior notice to investors to adjust the
frequency of portfolio review and adjustment and to adjust the portion of the
Portfolio's assets that is reviewed and adjusted during each period.
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 banks or
broker-dealers deemed to be 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, usually not more than seven days from the date of purchase, thereby
determining the yield during the purchaser's holding period. Repurchase
agreements are fully collateralized by the underlying debt securities and are
considered to be loans under the 1940 Act. The Portfolio pays 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 "Investment Practices -- Repurchase
Agreements" in 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, or liquid
securities with the Portfolio's custodian in an aggregate amount equal to the
amount of its commitment
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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 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, or liquid securities 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. Options may be utilized to hedge various market or 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 and Comstock
Portfolio write 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 a Portfolio owns or has the right to acquire. In
such circumstances, a Portfolio collateralizes the option by maintaining in a
segregated account with a 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
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exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, a 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 Comstock Portfolio, the Emerging Growth Portfolio, the Enterprise
Portfolio, the Growth and Income Portfolio, the Real Estate Securities Portfolio
and the Strategic Stock 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 Comstock Portfolio, the Emerging
Growth Portfolio, the Enterprise Portfolio, the Growth and Income Portfolio, the
Real Estate Securities Portfolio and the Strategic Stock 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, COMSTOCK PORTFOLIO,
EMERGING GROWTH PORTFOLIO, ENTERPRISE PORTFOLIO, GLOBAL EQUITY PORTFOLIO, GROWTH
AND INCOME PORTFOLIO, REAL ESTATE SECURITIES PORTFOLIO AND STRATEGIC STOCK
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 which 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 would be 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. Currently, stock index futures contracts
can be purchased with respect to the Standard & Poor's 500 Stock Index on the
Chicago Mercantile Exchange ("CME"), the New York Stock Exchange Composite Index
on the New York Futures Exchange and the Value Line Stock Index on the Kansas
City Board of Trade. Differences in the stocks included in the indexes may
result in differences in correlation of the futures contracts with movements in
the value of the securities being hedged.
A 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
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40 stocks on the New Zealand Stock Exchange and Toronto Index of 35 stocks on
the Toronto Stock Exchange. Futures and futures options on the Nikkei Index are
traded on the Chicago Mercantile Exchange and United States commodity exchanges
may develop futures and futures options on other indices of foreign securities.
Futures and options on United States devised index of foreign stocks are also
being developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.
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 a 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.
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 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
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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.
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.
A Portfolio will not enter into a futures contract or option (except for
closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options would exceed 5% of the Portfolio's total
assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which a Portfolio may be subject may further restrict the Portfolio's ability to
engage in transactions in futures
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contracts and related options. 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.
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 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 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.
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, 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
B-18
<PAGE> 39
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 Comstock Portfolio and 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 three 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 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).
B-19
<PAGE> 40
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 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
B-20
<PAGE> 41
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.
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.
B-21
<PAGE> 42
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;
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
B-22
<PAGE> 43
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 COMSTOCK PORTFOLIO:
1. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except the United States Government)
or purchase more than 10% of the outstanding voting securities of any
one issuer, 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. Make short sales or purchase securities on margin; but it may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities, and it may engage in transactions in
options, futures contracts and related options and make margin deposits
and payments in connection therewith.
3. Pledge any of its assets, except that the Portfolio may pledge assets
having a value of not more than 10% of its total assets in order to
secure permitted borrowings from banks. Such borrowings may not exceed
5% of the value of the Portfolio's assets and can be made only as a
temporary measure for extraordinary or emergency purposes.
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 and
payments for futures contracts and related options.
4. Invest in securities issued by other investment companies, except part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) 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.
5. Invest in real estate, commodities or commodities contracts, except
that the Portfolio may engage in transactions in futures contracts and
related options.
6. Invest in securities of a company for the purpose of exercising
management or control, 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 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions
of the 1940 Act.
7. 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 as that term is defined under the
Securities Act of 1933.
8. 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.
9. Invest more than 25% of its total net asset value in any one industry,
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.
10. Make loans except by the purchase of bonds or other debt obligations of
types commonly offered publicly or privately and purchased by financial
institutions, including investment in repurchase agreements, provided
that the Portfolio will not make any investment in repurchase
agreements maturing in more than seven days if such investments,
together with any illiquid securities held by the Portfolio, would
exceed 10% of the value of its net assets.
B-23
<PAGE> 44
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Comstock Portfolio is subject to the following
policies which may be amended by the Trustees. The Portfolio shall not:
1. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the value of the Portfolio's total assets
would be invested in securities of foreign issuers.
2. Invest more than 5% of its net assets in warrants or rights valued at
the lower of cost or market, nor more than 2% of its net assets in
warrants or rights (valued on such basis) which are not listed on the
New York Stock Exchange or American Stock Exchange. Warrants or rights
acquired in units or attached to other securities are not subject to
the foregoing limitations.
3. Invest in interests in oil, gas, or other mineral exploration or
development programs.
4. Invest more than 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation and in securities not having readily available market
quotations, 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.
5. Purchase or retain securities of any issuer if those officers and
trustees of the Portfolio or its investment adviser who own
individually more than 1/2 of 1% of the securities of such issuer
together own more than 5% of the securities of such issuer.
6. Invest more than 5% of its assets in the securities of any one issuer
other than the United States government, 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. Pledge, mortgage or hypothecate its portfolio securities to the extent
that at any time the percentage of pledged securities plus the sales
load will exceed 10% of the offering price of the Fund's shares.
Notwithstanding the foregoing, the Fund may engage in transactions in
options, futures contracts and related options, segregate or deposit
assets to cover or secure options written, and make margin deposits or
payments for futures contracts and related options.
8. Invest more than 10% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements that have
a maturity of longer than seven days.
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;
B-24
<PAGE> 45
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 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
B-25
<PAGE> 46
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;
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;
B-26
<PAGE> 47
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.
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";
B-27
<PAGE> 48
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;
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
B-28
<PAGE> 49
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.
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
B-29
<PAGE> 50
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 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.
B-30
<PAGE> 51
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;
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
B-31
<PAGE> 52
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 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
B-32
<PAGE> 53
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.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE STRATEGIC STOCK PORTFOLIO.
The Strategic Stock 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. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its instrumentalities), if, as a
result, more than 5% of the Portfolio's total assets (taken at current
value) would then be invested in securities of a single issuer or, if as
a result, such Portfolio would hold more than 10% of the outstanding
voting securities of an issuer, except that up to 25% of the Portfolio's
total assets may be invested without regard to such limitations. Neither
limitation shall apply to the acquisition of shares of other open-end
investment companies to the extent permitted by rule or order of the SEC
exempting the Portfolio from the limitations imposed by Section 12(d)(1)
of the 1940 Act.
3. Invest more than 25% of its assets in a single 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. (Neither the U.S. Government nor any of its agencies or
instrumentalities will be considered an industry for purposes of this
restriction.)
4. 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;
5. 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;
6. Issue senior securities, borrow money from banks or enter into reverse
repurchase agreements with banks in the aggregate in excess of 33 1/3%
of the Portfolio's total assets (after giving effect to any such
borrowing); which amount does not include borrowings and reverse
repurchase agreements with any entity where such borrowings and reverse
repurchase agreements are in an amount not exceeding 5% of its total
assets and for temporary purposes only. The Portfolio will not mortgage,
pledge or hypothecate any assets other than in connection with issuances
of senior securities, borrowings, delayed delivery, and when issued
transactions, options, futures contracts, options on futures contracts,
forward contracts, forward commitments and other investment strategies
and instruments;
7. Make loans of money or property to any person, except (i) to the extent
the securities in which the Portfolio may invest are considered to be
loans, (ii) through the loan of portfolio securities, and (iii) to the
extent that the Portfolio may lend money or property in connection with
maintenance of the value of, or the Portfolio's interest with respect
to, the securities owned by the Portfolio.
In addition to the foregoing fundamental policies which may not be changed
without shareholder approval, the Strategic Stock Portfolio is subject to the
following policies which may be amended by the Strategic Stock Portfolio's
Trustees and which apply at the time of purchase of portfolio securities.
1. 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.
2. 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
B-33
<PAGE> 54
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. 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;
4. 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 as part of a merger, consolidation or other
acquisition and 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;
5. 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;
6. 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;
7. 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;
8. 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
9. 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-34
<PAGE> 55
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Trust and other
executive officers of the Trust'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.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Trust'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 Advisers (excluding the Van Kampen American Capital
Exchange Fund).
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/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the 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/Director of each of the funds in the Fund
Complex.
</TABLE>
B-35
<PAGE> 56
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
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/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman, President and a Director of VKAC. Chairman and
2800 Post Oak Blvd. a Director of the Advisers and the Distributor. Chairman
Houston, TX 77056 and a Director of ACCESS. Director or officer of certain
Date of Birth: 10/19/39 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.
Trustee/Director of each of the funds in the Fund Complex
and other funds advised by the Advisers or Van Kampen
American Capital Management, Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Trust by reason of
his firm currently acting as legal counsel to the Trust. Messrs. DeMartini and
Powell are interested persons of the Trust and the Advisers by reason of their
positions with Morgan Stanley Dean Witter & Co. and its affiliates.
B-36
<PAGE> 57
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Trust'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>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President 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.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
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.
</TABLE>
B-37
<PAGE> 58
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. 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.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. 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 and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice 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.
</TABLE>
B-38
<PAGE> 59
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
John L. Sullivan............ Treasurer First Vice President of the 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 their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
</TABLE>
B-39
<PAGE> 60
<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, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael 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 their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS or Morgan Stanley Dean Witter & Co. (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 (except the money
market series of the MS Funds) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees/directors to defer receipt of their
compensation and earn a return on such deferred amounts. Deferring compensation
has the economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex (except the money
market series of the MS Funds) 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 trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the 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.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from 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
B-40
<PAGE> 61
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.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund 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.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
Under the deferred compensation plan, 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.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such 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 retirement from such Fund. Non-Affiliated 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 such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
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.
B-41
<PAGE> 62
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
-----------------------------------------------------------
AGGREGATE
ESTIMATED
MAXIMUM
AGGREGATE ANNUAL
AGGREGATE PENSION OR BENEFITS FROM
COMPENSATION RETIREMENT BENEFITS THE FUND
YEAR FIRST APPOINTED OR BEFORE DEFERRAL ACCRUED AS PART OF UPON
NAME(1) ELECTED TO THE BOARD FROM THE FUND(2) EXPENSES(3) RETIREMENT(4)
------- ----------------------- ---------------- ------------------- -------------
<S> <C> <C> <C> <C>
J. Miles Branagan* $6,680 $30,328 $60,000 $111,197
Linda Hutton Heagy* 6,680 3,141 60,000 111,197
R. Craig Kennedy* 6,680 2,229 60,000 111,197
Jack E. Nelson* 6,680 15,820 60,000 104,322
Jerome L. Robinson 6,680 32,020 15,750 107,947
Phillip B. Rooney* 5,010 0 60,000 74,697
Dr. Fernando Sisto* 6,680 60,208 60,000 111,197
Wayne W. Whalen* 6,680 10,788 60,000 111,197
</TABLE>
- ---------------
* Currently a member of the Board of Trustees. Mr. Phillip B. Rooney became a
member of the Board of Trustees effective April 14, 1997 and thus does not
have a full fiscal year of information to report.
(1) Mr. Robinson is not designated by an asterisk because he is not currently a
member of the Board of Trustees, but he was a member of the Board of
Trustees during the Trust's most recently completed fiscal year. Mr.
Robinson retired from the Board of Trustees on December 31, 1997. Trustees
not eligible for compensation are not included in the compensation table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Trust's fiscal year ended December 31, 1997.
The details of aggregate compensation before deferral for each Portfolio are
shown in Table A below. The details of amounts deferred for each Portfolio
are shown in Table B below. Amounts deferred are retained by the Portfolios
and earn a rate of return determined by reference to either the return on
the common shares of the Portfolios 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 Portfolio
may invest in securities of those funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The details
of cumulative deferred compensation (including interest) are shown in Table
C below.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for their respective fiscal years ended in 1997. The retirement
plan is described above the Compensation Table.
(4) For Mr. Robinson, this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of his
retirement for each year of the 10-year period since his retirement. For the
remaining trustees, this is the sum of the estimated maximum annual benefits
payable by the operating investment companies in the Fund Complex for each
year of the 10-year period commencing in the year of such trustee's
anticipated retirement. The Retirement Plan is described above the
Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. 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
B-42
<PAGE> 63
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 Advisers and their affiliates also serve as investment
adviser for other investment companies; however, with the exception of Mr.
Whalen, the Non-Affiliated 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
$268,447 during the calendar year ended December 31, 1997.
As of , 1998, the trustees and officers of the Trust as a group
owned no shares of the Trust.
B-43
<PAGE> 64
TABLE A
1997 AGGREGATE COMPENSATION FROM THE TRUST AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
-----------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
-------------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio................... $ 880 $ 880 $ 880 $ 880 $ 880 $ 660 $ 880 $ 880
LIT Comstock Portfolio........................... 0 0 0 0 0 0 0 0
LIT Domestic Income Portfolio.................... 840 840 840 840 840 630 840 840
LIT Emerging Growth Portfolio.................... 800 800 800 800 800 600 800 800
LIT Enterprise Portfolio......................... 880 880 880 880 880 660 880 880
LIT Global Equity Portfolio...................... 800 800 800 800 800 600 800 800
LIT Government Portfolio......................... 880 880 880 880 880 660 880 880
LIT Growth and Income Portfolio.................. 0 0 0 0 0 0 0 0
LIT Money Market Portfolio....................... 800 800 800 800 800 600 800 800
LIT Real Estate Securities Portfolio............. 800 800 800 800 800 600 800 800
LIT Strategic Stock Portfolio.................... 0 0 0 0 0 0 0 0
Life Investment Trust Total.................... 6,680 6,680 6,680 6,680 6,680 5,010 6,680 6,680
</TABLE>
TABLE B
1997 AGGREGATE COMPENSATION DEFERRED FROM THE TRUST AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
---------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN
-------------- -------- ----- ------- ------ -------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation Portfolio...................... $ 880 $ 880 $ 440 $ 880 $ 880 $ 440 $ 440 $ 880
LIT Comstock Portfolio.............................. 0 0 0 0 0 0 0 0
LIT Domestic Income Portfolio....................... 840 840 420 840 840 420 420 840
LIT Emerging Growth Portfolio....................... 800 800 400 800 800 400 400 800
LIT Enterprise Portfolio............................ 880 880 440 880 880 440 440 880
LIT Global Equity Portfolio......................... 800 800 400 800 800 400 400 800
LIT Government Portfolio............................ 880 880 440 880 880 440 440 880
LIT Growth and Income Portfolio..................... 0 0 0 0 0 0 0 0
LIT Money Market Portfolio.......................... 800 800 400 800 800 400 400 800
LIT Real Estate Securities Portfolio................ 800 800 400 800 800 400 400 800
LIT Strategic Stock Portfolio....................... 0 0 0 0 0 0 0 0
Life Investment Trust Total:...................... 6,680 6,680 3,340 6,680 6,680 3,340 3,340 6,680
</TABLE>
TABLE C
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE TRUST
AND EACH PORTFOLIO
<TABLE>
<CAPTION>
TRUSTEE
----------------------------------------------------------------------------------------
PORTFOLIO NAME BRANAGAN HEAGY KENNEDY NELSON ROBINSON ROONEY SISTO WHALEN CARUSO
-------------- -------- ----- ------- ------ -------- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LIT Asset Allocation
Portfolio..................... $ 1,523 $ 2,150 $ 1,377 $ 2,677 $ 2,648 $ 444 $ 8,271 $ 2,675 $ 4,934
LIT Comstock Portfolio.......... 0 0 0 0 0 0 0 0 0
LIT Domestic Income Portfolio... 1,467 1,994 1,270 2,565 2,477 424 7,019 2,543 3,754
LIT Emerging Growth Portfolio... 1,399 1,922 1,211 2,409 2,389 403 433 2,406 0
LIT Enterprise Portfolio........ 1,535 2,275 1,484 2,768 2,835 444 9,939 2,766 6,147
LIT Global Equity Portfolio..... 1,399 1,918 1,211 2,418 2,363 403 433 2,416 0
LIT Government Portfolio........ 1,523 2,072 1,305 2,669 2,579 444 7,203 2,667 3,635
LIT Growth and Income
Portfolio..................... 0 0 0 0 0 0 0 0 0
LIT Money Market Portfolio...... 1,423 1,911 1,224 2,534 2,391 403 6,409 2,533 3,113
LIT Real Estate Securities
Portfolio..................... 1,411 2,155 1,433 2,516 2,517 403 433 2,514 0
LIT Strategic Stock Portfolio... 0 0 0 0 0 0 0 0 0
Life Investment Trust Total... 11,680 16,397 10,515 20,556 20,199 3,368 40,140 20,520 21,583
<CAPTION>
TRUSTEE
----------------------------------------------
PORTFOLIO NAME GAUGHAN LIPSHIE MILLER REES VERNON
-------------- ------- ------- ------ ---- ------
<S> <C> <C> <C> <C> <C>
LIT Asset Allocation
Portfolio..................... $ 323 $ 195 $ 1,503 $ 4,728 $ 492
LIT Comstock Portfolio.......... 0 0 0 0 0
LIT Domestic Income Portfolio... 260 78 1,443 3,916 357
LIT Emerging Growth Portfolio... 295 0 1,350 184 0
LIT Enterprise Portfolio........ 400 425 1,584 5,947 670
LIT Global Equity Portfolio..... 278 0 1,358 184 0
LIT Government Portfolio........ 261 471 1,498 6,554 738
LIT Growth and Income
Portfolio..................... 0 0 0 0 0
LIT Money Market Portfolio...... 239 420 1,454 5,981 672
LIT Real Estate Securities
Portfolio..................... 355 0 1,446 195 0
LIT Strategic Stock Portfolio... 0 0 0 0 0
Life Investment Trust Total... 2,411 1,589 11,636 27,689 2,929
</TABLE>
TABLE D
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 Comstock Portfolio............................... 1998 1998 1998 1998 1998 1998 1998 1998
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 Securities Portfolio................. 1995 1995 1995 1995 1997 1995 1995 1995
LIT Strategic Stock Portfolio........................ 1997 1997 1997 1997 1997 1997 1997 1997
</TABLE>
B-44
<PAGE> 65
As of the date of this Statement of Additional Information the Comstock
Portfolio had not commenced investment operations.
LEGAL COUNSEL
Skadden, Arps Slate, Meagher & Flom (Illinois).
INVESTMENT ADVISORY AGREEMENTS
The Trust and the Adviser are parties to an investment advisory agreement
(the "Combined Advisory Agreement") 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 (collectively, the
"Combined Portfolios"). 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 six advisory agreements
designated herein as "Comstock Advisory Agreement," "Emerging Growth Advisory
Agreement," "Global Equity Advisory Agreement," "Growth and Income Advisory
Agreement", "Real Estate Advisory Agreement" and the "Strategic Stock Advisory
Agreement" for the Comstock Portfolio, the Emerging Growth Portfolio, the Global
Equity Portfolio, the Growth and Income Portfolio, the Real Estate Securities
Portfolio and the Strategic Stock Portfolio, respectively (such advisory
agreements together with Combined Advisory Agreement 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 custodian fees, legal and auditing
fees, the costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser. The Advisory 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 the Combined 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 Combined
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. Under the Comstock
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 0.60% of the
first $500 million and 0.55% in excess of $500 million for the Comstock
Portfolio. 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%
B-45
<PAGE> 66
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. Under the Strategic Stock 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 Strategic Stock Portfolio at an annual rate of
0.50% of the first $500 million of the Strategic Stock Portfolio's average daily
net assets and 0.45% of such Portfolio's average daily net assets in excess of
$500 million.
The Combined Advisory Agreement 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 0.60% of the average daily net
assets.
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.
B-46
<PAGE> 67
The following table shows expenses paid under the Advisory Agreements
during the periods ended December 31, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
GROWTH
ASSET DOMESTIC EMERGING GLOBAL AND MONEY
PERIOD ENDING ALLOCATION INCOME GROWTH ENTERPRISE EQUITY GOVERNMENT INCOME MARKET
DECEMBER 31, 1995: PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ ---------- --------- --------- ---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $302,141 $130,064 $ 4,798 $355,715 $ 10,893 $333,447 $ -- $121,552
Accounting Services $ 57,576 $ 49,819 $ 3,222 $ 55,772 $ 7,200 $ 57,526 $ -- $ 48,109
Contractual expense
reimbursement $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Voluntary expense
reimbursement $ 85,602 $ 86,887 $19,858 $ 56,680 $ 43,031 $ 77,421 $ -- $100,495
<CAPTION>
REAL
ESTATE STRATEGIC
PERIOD ENDING SECURITIES STOCK
DECEMBER 31, 1995: PORTFOLIO PORTFOLIO
------------------ ---------- ---------
<S> <C> <C>
Advisory fees $ 18,136 $ --
Accounting Services $ 3,153 $ --
Contractual expense
reimbursement $ -- $ --
Voluntary expense
reimbursement $ 7,173 $ --
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1996:
------------------
<S> <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
Accounting Services $ 56,837 $ 44,328 $41,089 $ 52,282 $ 29,400 $ 55,531 $ -- $ 76,975
Contractual expense
reimbursement $ -- $ 73,932 $ -- $ -- $ -- $ -- $ -- $ 70,526
Voluntary expense
reimbursement $113,873 $ 77,170 $97,987 $123,582 $177,139 $122,474 $ 5,591 $ 73,366
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1996:
------------------
<S> <C> <C>
Advisory fees $ 428,166 $ --
Accounting Services $ 44,869 $ --
Contractual expense
reimbursement $ -- $ --
Voluntary expense
reimbursement $ 70,941 $ --
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1997:
------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Advisory fees $311,514 $ 86,700 $48,713 $467,494 $ 31,290 $267,568 $30,777 $106,891
Accounting Services $ 14,290 $ 8,861 $ 9,145 $ 19,566 $ 21,596 $ 13,895 $ 4,410 $ 10,155
Contractual expense
reimbursement $ -- $ 17,857 $ -- $ -- $ -- $ -- $ -- $ 6,147
Voluntary expense
reimbursement $ 68,780 $ 60,681 $89,683 $ 55,090 $174,632 $ 72,820 $45,369 $ 74,791
<CAPTION>
PERIOD ENDING
DECEMBER 31, 1997:
------------------
<S> <C> <C>
Advisory fees $2,269,511 $1,083
Accounting Services $ 32,983 $ --
Contractual expense
reimbursement $ -- $ --
Voluntary expense
reimbursement $ -- $4,892
</TABLE>
As of December 31, 1997, the Comstock Portfolio had not commenced
investment operations and, accordingly, no expenses have been paid under the
Comstock Advisory Agreement.
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 a written agreement (the "Distribution and Service
Agreement"). 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 90 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
B-47
<PAGE> 68
filing fees, the cost of preparation of the prospectuses, related legal and
auditing expenses, and the cost of printing prospectuses for current
shareholders.
TRANSFER AGENT
For the fiscal years ended December 31, 1995, 1996 and 1997, 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 $6,300 and the Strategic Stock Portfolio from which ACCESS
received no fees and excluding the Comstock Portfolio which had not yet
commenced investment operations as of December 31, 1997. Beginning in 1998, the
transfer agency prices are determined through negotiations with the Fund's Board
of Trustees and are based on competitive market benchmarks.
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 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
B-48
<PAGE> 69
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
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 relative net assets, 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.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.
The Portfolios paid the following commissions to these brokers during the
periods shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
-----------------------------------------------------
MORGAN STANLEY DEAN WITTER
-------------- -----------
<S> <C> <C>
Fiscal year 1995................................ NA NA
Fiscal year 1996................................ $10,732(AssetAllocationPortfolio) NA
18,166(EnterprisePortfolio) NA
------- ---
Fiscal year 1997 (for all Portfolios)........... 0 0
Fiscal year 1997 Percentages:
Commissions with affiliate to total
commissions................................ 0 0
Value of brokerage transactions with affiliate
to total transactions...................... 0 0
</TABLE>
B-49
<PAGE> 70
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
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
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
Value of research
transactions $28,024,814 $68,820,181 -- -- $5,170,364 -- $ 19,899,335
1997
- ----------------------------
Total brokerage
commissions $ 100,020 $ 140,036 $30,799 -- $ 10,436 $2,119,980 $ 1,823,718
Commissions for research
services $ 27,325 $ 47,085 -- -- $ 5,597 -- $ 1,446,147
Value of research
transactions $17,590,482 $51,189,635 -- -- $9,900,077 -- $656,816,992
<CAPTION>
GROWTH
AND MONEY STRATEGIC
INCOME MARKET STOCK
PORTFOLIO PORTFOLIO PORTFOLIO
--------- --------- ----------
<S> <C> <C> <C>
1995
- ----------------------------
Total brokerage
commissions -- -- --
Commissions for research
services -- -- --
Value of research
transactions -- -- --
1996
- ----------------------------
Total brokerage
commissions -- -- --
Commissions for research
services $ 187 -- --
Value of research
transactions $481,917 -- --
1997
- ----------------------------
Total brokerage
commissions $ 13,809 -- $ 1,172
Commissions for research
services -- -- $ 1,172
Value of research
transactions -- -- $2,327,597
</TABLE>
As of December 31, 1997 the Comstock Portfolio had not commenced investment
operations and, accordingly, no tabular information is included for the Comstock
Portfolio.
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 determined
for each Portfolio as of the close of business of the New York Stock Exchange
(the "Exchange") (currently 4:00 p.m., New York time) on each business day on
which the Exchange is open.
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.
B-50
<PAGE> 71
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.
ASSET ALLOCATION, DOMESTIC INCOME, EMERGING GROWTH, ENTERPRISE, GLOBAL EQUITY,
GROWTH AND INCOME, REAL ESTATE SECURITIES AND STRATEGIC STOCK 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 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 Adviser
based on procedures approved 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 Adviser based on procedures approved by the
Trust's Trustees.
COMSTOCK PORTFOLIO NET ASSET VALUATION
Such computation is made by using prices as of the close of trading on the
Exchange and (i) valuing securities traded on a national securities exchange at
the last reported sale price, or if there has been no sale that day, at the mean
between the last reported bid and asked quotations, (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, (iii) valuing all other over-the-counter securities for which market
quotations are available at the mean between the most recent bid and asked
quotations supplied by NASDAQ or broker-dealers, and (iv) valuing any securities
for which market quotations are not readily available, and any other assets at
fair value as determined in good faith by the Adviser based on procedures
approved by the Trustees of the Portfolio. Short-term investments are valued in
the manner described in the notes to the financial statements included in this
Statement of Additional Information.
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.
B-51
<PAGE> 72
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 the Adviser based on procedures approved by the
Trust's Trustees.
PURCHASE AND REDEMPTION OF SHARES
The purchase of shares of the Portfolios is currently limited to the
Accounts as explained 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 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 Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the
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 SEC, by order, so permits.
TAX STATUS
The Trust and each of its Portfolios will be treated as separate
corporations for federal income tax purposes. A Portfolio will be subject to tax
if, among other things, it fails to distribute net capital gains, or if its
annual distributions, as a percentage of its income, are less than the
distributions required by tax laws.
PORTFOLIO PERFORMANCE
The Adviser has voluntarily elected 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.
In addition, the Adviser voluntarily elected to limit the ordinary business
expenses of the Strategic Stock Portfolio to 0.65% per year of the average net
assets of such Portfolio by reducing the advisory fee and/or bearing other
expenses of such 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
B-52
<PAGE> 73
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, 1997.
<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......... 21.81% 13.59% 12.78% 11.84% --
Domestic Income Portfolio*
commencement date 11/04/87......... 11.90% 10.02% 8.29% 8.31% 7.18%*
Emerging Growth Portfolio
commencement date 07/03/95......... 20.42% -- -- 22.03% --
Enterprise Portfolio
commencement date 04/07/86......... 30.66% 18.65% 17.23% 12.69% --
Global Equity Portfolio
commencement date 07/03/95......... 15.85% -- -- 14.21% --
Government Portfolio*
commencement date 04/07/86......... 9.61% 6.17% 8.17% 7.10% 6.12%*
Growth and Income Portfolio
commencement date 12/23/96......... 23.90% -- -- 23.02% --
Money Market Portfolio**
commencement date 04/07/86......... -- -- -- -- 5.11%*
Real Estate Securities Portfolio
commencement date 07/03/95......... 21.47% -- -- 27.89% --
Strategic Stock Portfolio
commencement date 11/03/97......... -- -- -- 2.45% --
</TABLE>
- -------------------------
* For the 30-day period ended December 31, 1997. 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, 1997. The compound effective
yield for this same period was 5.24%.
As of December 31, 1997 the Comstock Portfolio had not commenced investment
operations and, accordingly, no performance information is included for the
Comstock Portfolio.
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
B-53
<PAGE> 74
that are charged to all shareholder accounts, in proportion to the length of the
base period and the Portfolio's 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 West 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, 200 East Randolph Drive,
Chicago, Illinois 60601, the independent accountants for the Trust, performs an
annual audit of the Trust's financial statements.
B-54
<PAGE> 75
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
B-55
<PAGE> 76
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.
B-56
<PAGE> 77
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 position of Asset Allocation Portfolio,
Domestic Income Portfolio, Emerging Growth Portfolio, Enterprise Portfolio,
Global Equity Portfolio, Government Portfolio, Growth and Income Portfolio,
Money Market Portfolio, Morgan Stanley Real Estate Securities Portfolio and
Strategic Stock Portfolio (constituting Van Kampen American Capital Life
Investment Trust, hereafter referred to as the "Trust") at December 31, 1997,
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, 1997 by correspondence with the custodian and brokers and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 6, 1998
B-57
<PAGE> 78
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 51.7%
CONSUMER DISTRIBUTION 1.5%
Federated Department Stores, Inc. (a).......... 10,700 $ 460,769
Office Depot, Inc. (a)......................... 6,100 146,019
Sears Roebuck & Co............................. 7,600 343,900
-----------
950,688
-----------
CONSUMER DURABLES 0.3%
Cooper Tire & Rubber Co........................ 4,200 102,375
Maytag Corp.................................... 3,100 115,669
-----------
218,044
-----------
CONSUMER NON-DURABLES 5.3%
Dial Corp...................................... 41,800 869,962
First Brands Corp.............................. 14,800 398,675
Kimberly Clark Corp............................ 9,500 468,469
Philip Morris Cos., Inc........................ 12,200 552,812
RJR Nabisco Holdings Corp...................... 14,600 547,500
Tommy Hilfiger Corp. (a)....................... 15,300 537,413
-----------
3,374,831
-----------
CONSUMER SERVICES 1.1%
International Game Technology.................. 9,800 247,450
Outback Steakhouse, Inc. (a)................... 4,200 120,750
Time Warner, Inc............................... 5,500 341,000
-----------
709,200
-----------
ENERGY 3.2%
Amoco Corp..................................... 1,800 153,225
Atlantic Richfield Co.......................... 2,000 160,250
Chevron Corp................................... 3,200 246,400
Coastal Corp................................... 2,800 173,425
ENI, SpA---ADR (Italy)......................... 4,800 273,900
Equitable Resources, Inc....................... 3,300 116,737
Texaco, Inc.................................... 3,200 174,000
Total, SA--ADR (France)........................ 3,956 219,558
USX--Marathon Group............................ 4,500 151,875
YPF Sociedad Anonima, Class DNADR (Argentina).. 10,900 372,644
-----------
2,042,014
-----------
FINANCE 8.3%
Aetna, Inc..................................... 2,600 183,463
Ambac Financial Group, Inc..................... 11,200 515,200
American Bankers Insurance Group, Inc.......... 12,300 565,031
</TABLE>
B-58 See Notes to Financial Statements
<PAGE> 79
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (CONTINUED)
BancOne Corp................................... 8,600 $ 467,087
BankAmerica Corp............................... 3,700 270,100
Bear Stearns Cos., Inc......................... 5,738 272,555
Chase Manhattan Corp........................... 2,400 262,800
CIGNA Corp..................................... 1,600 276,900
CMAC Investment Corp........................... 7,400 446,775
Conseco, Inc................................... 8,200 372,587
Everest Reinsurance Holdings, Inc.............. 5,800 239,250
First Union Corp............................... 10,300 527,875
Liberty Financial Cos., Inc.................... 3,150 118,913
MBIA, Inc...................................... 3,400 227,162
Nationwide Financial Services, Inc., Class A... 400 14,450
Norwest Corp................................... 4,300 166,088
Travelers Group, Inc........................... 3,199 172,346
United Asset Management Corp................... 5,800 141,738
------------
5,240,320
------------
HEALTHCARE 3.7%
American Home Products Corp.................... 7,300 558,450
Bausch & Lomb, Inc............................. 9,300 368,512
Lincare Holdings, Inc. (a)..................... 6,400 364,800
Mylan Laboratories, Inc........................ 8,100 169,594
PacifiCare Health Systems, Class B (a)......... 10,500 549,937
Pharmacia & Upjohn, Inc........................ 8,900 325,963
------------
2,337,256
------------
PRODUCER MANUFACTURING 3.2%
Bouygues Offshore, SA--ADR (France)............ 10,200 221,850
Cognex Corp. (a)............................... 4,100 111,725
Ingersoll-Rand Co.............................. 2,400 97,200
ITT Corp. (a).................................. 3,100 256,913
LucasVarity PLC--ADR (United Kingdom).......... 9,900 345,262
Tubos De Acero De Mexico, SA--ADR (Mexico) (a). 3,400 73,525
Waste Management, Inc.......................... 32,200 885,500
------------
1,991,975
------------
RAW MATERIALS/PROCESSING INDUSTRIES 5.3%
Barrick Gold Corp.............................. 23,100 430,237
Bethlehem Steel Corp. (a)...................... 16,000 138,000
Boise Cascade Corp............................. 14,900 450,725
British Steel PLC--ADR (United Kingdom)........ 23,100 495,206
</TABLE>
B-59 See Notes to Financial Statements
<PAGE> 80
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES (CONTINUED)
Georgia Pacific Corp................................... 1,900 $ 115,425
Georgia Pacific Corp.--Timber Group (a)................ 1,900 43,106
Homestake Mining Co.................................... 38,200 339,025
Imperial Chemical Industries PLC--ADR (United Kingdom). 2,100 136,369
International Paper Co................................. 5,900 254,438
Louisiana-Pacific Corp................................. 9,500 180,500
Newmont Mining Corp.................................... 9,300 273,187
Placer Dome, Inc....................................... 23,200 294,350
Temple Inland, Inc..................................... 1,600 83,700
Union Camp Corp........................................ 1,800 96,638
-----------
3,330,906
-----------
TECHNOLOGY 4.6%
3Com Corp. (a)......................................... 7,400 258,538
Avnet, Inc............................................. 2,800 184,800
Compaq Computer Corp. (a).............................. 9,500 536,156
Dell Computer Corp. (a)................................ 2,000 168,000
Gateway 2000, Inc. (a)................................. 3,800 123,975
Intel Corp............................................. 1,400 98,350
LSI Logic Corp. (a).................................... 3,000 59,250
Micron Technology, Inc. (a)............................ 7,900 205,400
Nokia Corp.--ADR (Finland)............................. 1,600 112,000
Quantum Corp. (a)...................................... 18,100 363,131
SunGard Data Systems, Inc. (a)......................... 20,400 632,400
VLSI Technology, Inc. (a).............................. 7,000 165,375
-----------
2,907,375
-----------
TRANSPORTATION 0.5%
Canadian National Railway Co........................... 7,100 335,475
-----------
UTILITIES 14.7%
Ameritech Corp......................................... 6,600 531,300
Baltimore Gas & Electric Co............................ 5,600 190,750
Bell Atlantic Corp..................................... 3,000 273,000
BellSouth Corp......................................... 4,300 242,144
Boston Edison Co....................................... 8,600 325,725
CMS Energy Corp........................................ 7,200 317,250
DTE Energy Co.......................................... 7,700 267,094
Duke Power Co.......................................... 3,037 168,174
Edison International................................... 2,500 67,969
Endesa, SA--ADR (Spain)................................ 7,600 138,225
</TABLE>
B-60 See Notes to Financial Statements
<PAGE> 81
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES (CONTINUED)
FPL Group, Inc............................ 3,300 $ 195,319
GPU, Inc.................................. 11,100 467,588
Houston Industries, Inc................... 35,000 934,062
Idaho Power Co............................ 12,600 474,075
Illinova Corp............................. 8,000 215,500
New Century Energies, Inc................. 3,705 177,608
Nipsco Industries, Inc.................... 3,200 158,200
Northeast Utilities....................... 10,300 121,669
Northern States Power Co.--Minnesota...... 4,600 267,950
OGE Energy Corp........................... 11,200 612,500
PacifiCorp................................ 10,600 289,513
Pinnacle West Capital Corp................ 13,500 572,062
Public Service Co. of New Mexico.......... 19,800 469,012
SBC Communications, Inc................... 4,500 329,625
Sierra Pacific Resources.................. 2,400 90,000
Texas Utilities Co........................ 23,000 955,937
U.S. WEST Communications Group............ 9,300 419,663
----------
9,271,914
----------
TOTAL COMMON STOCKS 51.7%............ 32,709,998
----------
</TABLE>
B-61 See Notes to Financial Statements
<PAGE> 82
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE DEBT 23.1%
CONSUMER DISTRIBUTION 1.6%
$ 1,000 Sears Roebuck Acceptance Corp.......................... 6.750% 09/15/05 $ 1,017,890
-----------
CONSUMER NON-DURABLES 1.6%
1,000 Anheuser Busch Co., Inc................................ 7.000 09/01/05 1,023,660
-----------
CONSUMER SERVICES 1.6%
1,000 Cox Communications, Inc................................ 6.875 06/15/05 1,030,700
-----------
ENERGY 3.6%
1,000 Burlington Resources, Inc.............................. 9.125 10/01/21 1,266,200
1,000 Enron Corp............................................. 6.875 10/15/07 1,015,400
-----------
2,281,600
-----------
FINANCE 1.7%
1,000 American General Corp.................................. 9.625 02/01/18 1,048,300
-----------
PRODUCER MANUFACTURING 1.9%
1,000 Caterpillar, Inc....................................... 9.000 04/15/06 1,169,800
-----------
TECHNOLOGY 5.1%
1,000 Boeing, Inc............................................ 8.100 11/15/06 1,123,300
1,000 Philips Electronics NV (Netherlands)................... 8.375 09/15/06 1,102,700
1,000 Raytheon Co............................................ 6.750 08/15/07 1,019,270
-----------
3,245,270
-----------
TRANSPORTATION 2.6%
1,000 Norfolk Southern Corp.................................. 7.700 05/15/17 1,110,400
500 Southwest Airlines Co.................................. 7.375 03/01/27 537,475
-----------
1,647,875
-----------
UTILITIES 3.4%
1,000 Baltimore Gas & Electric Co............................ 7.500 01/15/07 1,078,500
1,000 Texas Utilities Electric Co............................ 8.250 04/01/04 1,095,050
-----------
2,173,550
-----------
TOTAL CORPORATE DEBT 23.1%................................................ 14,638,645
-----------
GOVERNMENT AND AGENCY OBLIGATIONS 1.7%
1,000,000 Province of Nova Scotia (Canada)....................... 7.250 07/27/13 1,075,700
-----------
UNITED STATES GOVERNMENT OBLIGATIONS 13.1%
3,800,000 United States Treasury Bond............................ 7.125 02/15/23 4,336,750
500,000 United States Treasury Note............................ 7.250 08/15/04 540,470
3,000,000 United States Treasury Bond............................ 7.250 05/15/16 3,416,250
-----------
TOTAL UNITED STATES GOVERNMENT OBLIGATIONS 13.1%.......................... 8,293,470
-----------
TOTAL LONG-TERM INVESTMENTS 89.6%E(COST $49,103,971)...................... 56,717,813
</TABLE>
B-62 See Notes to Financial Statements
<PAGE> 83
ASSET ALLOCATION PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Description Market Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
REPURCHASE AGREEMENT 9.3%
SBC Warburg ($5,895,000 par collateralized by U.S. Government obligations in a pooled
cash account, dated 12/31/97, to be sold on 01/02/98 at $5,896,998)
(Cost $5,895,000).............................................................................. $ 5,895,000
-----------
TOTAL INVESTMENTS 98.9%
(Cost $54,998,971)............................................................................. 62,612,813
OTHER ASSETS IN EXCESS OF LIABILITIES 1.1%....................................................... 684,899
-----------
NET ASSETS 100.0%................................................................................ $63,297,712
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
B-63 See Notes to Financial Statements
<PAGE> 84
ASSET ALLOCATION PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Total Investments (Cost $54,998,971)......................................................... $62,612,813
Cash......................................................................................... 1,362
Receivables:
Interest................................................................................ 458,848
Investments Sold........................................................................ 308,594
Dividends............................................................................... 81,127
Other........................................................................................ 42,954
-----------
Total Assets............................................................................ 63,505,698
-----------
LIABILITIES:
Payables:
Investments Purchased................................................................... 69,740
Investment Advisory Fee................................................................. 15,037
Distributor and Affiliates.............................................................. 4,221
Portfolio Shares Repurchased............................................................ 3,507
Trustees' Deferred Compensation and Retirement Plans......................................... 92,111
Accrued Expenses............................................................................. 23,370
-----------
Total Liabilities....................................................................... 207,986
-----------
NET ASSETS................................................................................... $63,297,712
===========
NET ASSETS CONSIST OF:
Capital...................................................................................... $53,888,909
Net Unrealized Appreciation.................................................................. 7,613,842
Accumulated Net Realized Gain................................................................ 1,777,211
Accumulated Undistributed Net Investment Income.............................................. 17,750
-----------
NET ASSETS................................................................................... $63,297,712
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $63,297,712 and 5,314,563 shares of beneficial interest
issued and outstanding)................................................................. $ 11.91
===========
</TABLE>
B-64 See Notes to Financial Statements
<PAGE> 85
ASSET ALLOCATION PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................................... $ 2,015,818
Dividends.................................................... 764,885
-----------
Total Income............................................ 2,780,703
===========
EXPENSES:
Investment Advisory Fee...................................... 311,514
Audit........................................................ 23,008
Custody...................................................... 21,787
Shareholder Reports.......................................... 19,494
Shareholder Services......................................... 15,613
Accounting................................................... 14,290
Trustees' Fees and Expenses.................................. 11,359
Legal........................................................ 7,971
Other........................................................ 17,514
-----------
Total Expenses.......................................... 442,550
Less Fees Waived........................................ 68,780
-----------
Net Expenses............................................ 373,770
-----------
NET INVESTMENT INCOME........................................ $ 2,406,933
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain............................................ $ 7,064,899
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................. 4,916,467
End of the Period:
Investments............................................. 7,613,842
-----------
Net Unrealized Appreciation During the Period................ 2,697,375
-----------
NET REALIZED AND UNREALIZED GAIN............................. $ 9,762,274
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS................... $12,169,207
===========
</TABLE>
B-65 See Notes to Financial Statements
<PAGE> 86
ASSET ALLOCATION PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
========================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income........................................... $ 2,406,933 $ 2,389,714
Net Realized Gain............................................... 7,064,899 6,901,393
Net Unrealized Appreciation/Depreciation During the Period...... 2,697,375 (1,116,505)
------------ ------------
Change in Net Assets from Operations............................ 12,169,207 8,174,602
------------ ------------
Distributions from Net Investment Income........................ (2,436,414) (2,362,025)
Distributions from Net Realized Gain............................ (6,406,916) (6,874,314)
------------ ------------
Total Distributions............................................. (8,843,330) (9,236,339)
------------ ------------
Net Change in Net Assets from Investment Activities............. 3,325,877 (1,061,737)
------------ ------------
From Capital Transactions:
Proceeds from Shares Sold....................................... 2,681,711 4,725,803
Net Asset Value of Shares Issued Through Dividend Reinvestment.. 8,843,330 9,236,339
Cost of Shares Repurchased...................................... (15,502,271) (11,932,457)
------------ ------------
Net Change in Net Assets from Capital Transactions.............. (3,977,230) 2,029,685
------------ ------------
Total Increase/Decrease in Net Assets........................... (651,353) 967,948
Net Assets:
Beginning of the Period......................................... 63,949,065 62,981,117
============ ============
End of the Period (Including accumulated undistributed net
investment income of $17,750 and $47,231, respectively)......... $ 63,297,712 $ 63,949,065
============ ============
</TABLE>
B-66 See Notes to Financial Statements
<PAGE> 87
ASSET ALLOCATION PORTFOLIO FINANCIAL HIGHLIGHTS
The following presents financial highlights for one share of the Portfolio
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period......................... $11.352 $ 11.64 $ 9.99 $11.80 $ 11.92
------- ------- ------- ------ -------
Net Investment Income....................................... .513 .482 .48 .45 .29
Net Realized and Unrealized Gain/Loss....................... 1.897 1.083 2.6425 (.89) .6025
------- ------- ------- ------ -------
Total from Investment Operations................................. 2.410 1.565 3.1225 (.44) .8925
------- ------- ------- ------ -------
Less:
Distributions from Net Investment Income.................... .518 .478 .4775 .45 .2925
Distributions from Net Realized Gain........................ 1.334 1.375 .995 .90 .63
Distributions in Excess of Net Realized Gain................ -0- -0- -0- .02 .09
------- ------- ------- ------ -------
Total Distributions.............................................. 1.852 1.853 1.4725 1.37 1.0125
------- ------- ------- ------ -------
Net Asset Value, End of the Period............................... $11.910 $11.352 $ 11.64 $ 9.99 $ 11.80
======= ======= ======= ====== =======
Total Return*.................................................... 21.81% 13.87% 31.36% (3.66%) 7.71%
Net Assets at End of the Period (In millions).................... $ 63.3 $ 63.9 $ 63.0 $ 56.6 $ 64.9
Ratio of Expenses to Average Net Assets*......................... .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*............ 3.86% 3.78% 3.85% 3.70% 2.34%
Portfolio Turnover............................................... 58% 118% 124% 163% 150%
Average Commission Paid Per Equity Share Traded (a).............. $ .0602 $ .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.......................... .71% .81% .74% .72% .74%
Ratio of Net Investment Income to Average Net Assets............. 3.75% 3.57% 3.71% 3.58% 2.20%
</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.
B-67 See Notes to Financial Statements
<PAGE> 88
DOMESTIC INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE DEBT 80.2%
CONSUMER DISTRIBUTION 8.9%
$500 Borden, Inc............................................ 7.875% 02/15/23 $500,200
500 Gruma SA De CV, 144A - Private Placement (Mexico) (b).. 7.625 10/15/07 493,000
500 Nabisco, Inc........................................... 7.550 06/15/15 536,550
---------
1,529,750
---------
CONSUMER DURABLES 5.1%
500 Brunswick Corp......................................... 7.125 08/01/27 513,600
375 Oriole Homes Corp...................................... 12.500 01/15/03 358,125
---------
871,725
---------
CONSUMER SERVICES 21.7%
500 Cablevision Systems Corp............................... 7.875 12/15/07 511,250
500 Circus Circus Enterprises, Inc......................... 6.450 02/01/06 488,350
500 News America Holdings, Inc............................. 10.125 10/15/12 586,550
500 Royal Caribbean Cruises Limited........................ 7.500 10/15/27 510,750
500 TCI Communications, Inc................................ 8.750 08/01/15 582,050
500 Valassis Communications, Inc........................... 9.550 12/01/03 560,000
500 Viacom, Inc............................................ 7.625 01/15/16 498,750
---------
3,737,700
---------
ENERGY 9.3%
500 Occidental Petroleum Corp.............................. 10.125 11/15/01 565,250
500 PDV America, Inc....................................... 7.875 08/01/03 516,850
500 Seagull Energy Corp.................................... 7.500 09/15/27 517,500
---------
1,599,600
---------
FINANCE 5.1%
395 First PV Funding Corp., Series 1986 A.................. 10.300 01/15/14 428,034
500 Macsaver Financial Services, Inc....................... 7.600 08/01/07 456,250
---------
884,284
---------
HEALTHCARE 3.0%
500 Manor Care, Inc........................................ 7.500 06/15/06 517,950
---------
PRODUCER MANUFACTURING 1.5%
250 American Builders & Contractors........................ 10.625 05/15/07 259,375
---------
RAW MATERIALS/PROCESSING INDUSTRIES 6.4%
500 Georgia-Pacific Corp................................... 9.950 06/15/02 567,250
500 Viacap SA De CV, 144A - Private Placement (Mexico) (b). 11.375 05/15/07 535,000
---------
1,102,250
---------
</TABLE>
B-68 See Notes to Financial Statements
<PAGE> 89
DOMESTIC INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TECHNOLOGY 3.1%
$500 Raytheon Co............................................ 7.200% 08/15/27 $524,650
-----------
TRANSPORTATION 8.5%
500 Delta Airlines, Inc.................................... 9.750 05/15/21 647,200
500 Norfolk Southern Corp.................................. 7.700 05/15/17 555,200
200 United Airlines, Inc................................... 10.020 03/22/14 251,460
-----------
1,453,860
-----------
UTILITIES 7.6%
500 360 Communication Co................................... 7.600 04/01/09 524,810
350 Monongahela Power Co................................... 8.375 07/01/22 384,643
350 Public Service Co. of Colorado......................... 8.750 03/01/22 390,512
-----------
1,299,965
-----------
TOTAL CORPORATE DEBT 80.2%.................................................. 13,781,109
-----------
GOVERNMENT OBLIGATIONS 13.0%
597 Federal National Mortgage Association Pool (U.S.)...... 10.000 04/01/21 647,378
500 Republic of Argentina (Argentina)...................... 11.000 10/09/06 536,700
500 Republic of South Africa (South Africa)................ 8.500 06/23/17 483,375
500 United Mexican States (Mexico)......................... 11.375 09/15/16 575,000
-----------
TOTAL GOVERNMENT OBLIGATIONS................................................ 2,242,453
-----------
COMMON AND PREFERRED STOCK 3.9%
FF Holdings Corp., 2,500 common shares, 144A - Private Placement (a) (b)......... 25
Time Warner, Inc., 594 Series M preferred shares, dividend rate of $ 10.25,
144A - Private Placement (b)................................................ 666,765
-----------
TOTAL COMMON AND PREFERRED STOCK............................................ 666,790
-----------
TOTAL LONG-TERM INVESTMENTS 97.1% (COST $15,840,299).............................. 16,690,352
REPURCHASE AGREEMENT 1.7%
DLJ ($300,000 par collateralized by U.S. Government obligations in a pooled
cash account, dated 12/31/97, to be sold on 01/02/98 at $300,108) (Cost
$300,000)................................................................... 300,000
-----------
TOTAL INVESTMENTS 98.8% (COST $16,140,299)........................................ 16,990,352
OTHER ASSETS IN EXCESS OF LIABILITIES 1.2%........................................ 208,441
-----------
NET ASSETS 100.0%................................................................. $17,198,793
-----------
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may be resold only in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
B-69 See Notes to Financial Statements
<PAGE> 90
DOMESTIC INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
==================================================================================
<S> <C>
ASSETS:
Total Investments (Cost $16,140,299)................................. $16,990,352
Cash................................................................. 4,433
Receivables:
Interest........................................................... 320,086
Investments Sold................................................... 14,000
Expense Reimbursement by Adviser................................... 440
Other................................................................ 43,520
-----------
Total Assets..................................................... 17,372,831
-----------
LIABILITIES:
Payables:
Portfolio Shares Repurchased....................................... 53,466
Distributor and Affiliates......................................... 3,224
Trustees' Deferred Compensation and Retirement Plans................. 89,376
Accrued Expenses..................................................... 27,972
===========
Total Liabilities................................................ 174,038
-----------
NET ASSETS........................................................... $17,198,793
===========
NET ASSETS CONSIST OF:
Capital.............................................................. $17,644,290
Net Unrealized Appreciation.......................................... 850,053
Accumulated Undistributed Net Investment Income...................... 11,345
Accumulated Net Realized Loss........................................ (1,306,895)
===========
NET ASSETS........................................................... $17,198,793
===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $17,198,793 and 2,084,276 shares of
beneficial interest issued and outstanding)......................... $8.25
===========
</TABLE>
B-70 See Notes to Financial Statements
<PAGE> 91
DOMESTIC INCOME PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
================================================================================
<S> <C>
INVESTMENT INCOME:
Interest........................................................ $1,373,451
Dividends....................................................... 62,730
Other........................................................... 10,295
----------
Total Income............................................... 1,446,476
----------
EXPENSES:
Investment Advisory Fee......................................... 86,700
Audit........................................................... 22,323
Shareholder Reports............................................. 18,545
Shareholder Services............................................ 15,859
Trustees' Fees and Expenses..................................... 11,996
Accounting...................................................... 8,861
Custody......................................................... 7,233
Legal........................................................... 5,777
Other........................................................... 5,267
----------
Total Expenses............................................. 182,561
Less Fees Waived........................................... 78,538
----------
Net Expenses............................................... 104,023
----------
NET INVESTMENT INCOME........................................... $1,342,453
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain............................................... $ 366,896
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period....................................... 663,799
End of the Period:
Investments................................................ 850,053
----------
Net Unrealized Appreciation During the Period................... 186,254
----------
NET REALIZED AND UNREALIZED GAIN................................ $ 553,150
----------
NET INCREASE IN NET ASSETS FROM OPERATIONS...................... $1,895,603
==========
</TABLE>
B-71 See Notes to Financial Statements
<PAGE> 92
DOMESTIC INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
===================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................................ $ 1,342,453 $ 1,757,056
Net Realized Gain................................................ 366,896 350,915
Net Unrealized Appreciation/Depreciation During the Period....... 186,254 (844,721)
------------ ------------
Change in Net Assets from Operations............................. 1,895,603 1,263,250
Distributions from Net Investment Income......................... (1,365,434) (1,735,294)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.............. 530,169 (472,044)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................................ 5,508,385 6,174,993
Net Asset Value of Shares Issued Through Dividend Reinvestment... 1,365,434 1,735,294
Cost of Shares Repurchased....................................... (10,002,492) (14,203,241)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............... (3,128,673) (6,292,954)
------------ ------------
TOTAL DECREASE IN NET ASSETS..................................... (2,598,504) (6,764,998)
NET ASSETS:
Beginning of the Period.......................................... 19,797,297 26,562,295
------------ ------------
End of the Period (Including accumulated undistributed net
investment income of $11,345 and $34,326, respectively)......... $ 17,198,793 $ 19,797,297
============ ============
</TABLE>
B-72 See Notes to Financial Statements
<PAGE> 93
DOMESTIC INCOME PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio See Notes to Financial Statements
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.......................... $8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00
------ ------ ------- -------- -------
Net Investment Income........................................ .704 .755 .71 .85 .72
Net Realized and Unrealized Gain/Loss........................ .252 (.212) .8525 (1.2275) .5825
------ ------ ------- -------- -------
Total from Investment Operations.................................. .956 .543 1.5625 (.3775) 1.3025
Less Distributions from Net Investment Income..................... .712 .745 .7025 .8525 .7225
------ ------ ------- -------- -------
Net Asset Value, End of the Period................................ $8.252 $8.008 $ 8.21 $ 7.35 $ 8.58
====== ====== ======= ======== =======
Total Return*..................................................... 11.90% 6.68% 21.37% (4.33%) 16.32%
Net Assets at End of the Period (In millions)..................... $ 17.2 $ 19.8 $ 26.6 $ 21.3 $ 27.4
Ratio of Expenses to Average Net Assets*.......................... .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*............. 7.74% 7.97% 8.11% 8.35% 7.80%
Portfolio Turnover................................................ 78% 77% 54% 94% 130%
* 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........................... 1.05% 1.29% .93% .95% .95%
Ratio of Net Investment Income to Average Net Assets.............. 7.29% 7.28% 7.78% 8.00% 7.40%
</TABLE>
B-73 See Notes to Financial Statements
<PAGE> 94
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
================================================================================
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 92.1%
CONSUMER DISTRIBUTION 14.5%
Americredit Corp. (a).................................... 300 $ 8,306
Barnes & Noble, Inc. (a)................................. 1,600 53,400
Bed Bath & Beyond, Inc. (a).............................. 1,150 44,275
Best Buy Co., Inc. (a)................................... 1,500 55,312
Brightpoint, Inc. (a).................................... 1,800 24,975
CompUSA, Inc. (a)........................................ 3,300 102,300
Consolidated Stores Corp. (a)............................ 1,600 70,300
Costco Cos., Inc. (a).................................... 1,500 66,937
CVS Corp................................................. 800 51,250
Dollar General Corp...................................... 1,200 43,500
Dollar Tree Stores, Inc. (a)............................. 500 20,688
Family Dollar Stores, Inc................................ 1,750 51,297
Fred Meyer, Inc. (a)..................................... 1,600 58,200
General Nutrition Cos., Inc. (a)......................... 3,200 108,800
Interstate Bakeries Corp................................. 1,700 63,537
Jacor Communications, Inc., Class A (a).................. 600 31,875
Kohls Corp. (a).......................................... 600 40,875
McKesson Corp............................................ 400 43,275
Miller Herman, Inc....................................... 1,500 81,844
Pacific Sunwear of California (a)........................ 887 26,222
Pier 1 Imports, Inc...................................... 1,800 40,725
Proffitt's, Inc. (a)..................................... 1,800 51,188
Ross Stores, Inc......................................... 2,200 80,025
Safeway, Inc. (a)........................................ 650 41,113
Stage Stores, Inc. (a)................................... 750 28,031
Tech Data Corp. (a)...................................... 850 33,044
TJX Cos., Inc............................................ 2,500 85,937
U.S. Office Products Co. (a)............................. 1,125 22,078
Whole Foods Market, Inc. (a)............................. 1,150 58,794
Williams Sonoma, Inc. (a)................................ 700 29,313
-----------
1,517,416
-----------
CONSUMER NON-DURABLES 2.9%
Abercrombie & Fitch Co., Class A (a)..................... 300 9,375
Action Performance Cos., Inc. (a)........................ 500 18,937
Borders Group, Inc. (a).................................. 1,650 51,666
Canandaigua Brands, Inc., Class A (a).................... 650 35,994
Jones Apparel Group, Inc. (a)............................ 500 21,500
Linens N Things, Inc. (a)................................ 750 32,719
</TABLE>
B-74 See Notes to Financial Statements
<PAGE> 95
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==============================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER NON-DURABLES (CONTINUED)
Nautica Enterprises, Inc. (a)..................... 700 $ 16,275
Smithfield Foods, Inc. (a)........................ 850 28,050
Suiza Foods Corp. (a)............................. 600 35,737
Westpoint Stevens, Inc. (a)....................... 700 33,075
Wolverine World Wide, Inc......................... 1,050 23,756
--------
307,084
--------
CONSUMER SERVICES 8.0%
AccuStaff, Inc. (a)............................... 600 13,800
Apollo Group, Inc., Class A (a)................... 1,000 47,250
Capstar Hotel Co. (a)............................. 500 17,156
Caribiner International, Inc. (a)................. 700 31,150
Chancellor Media Corp. (a)........................ 2,100 156,712
CKE Restaurants, Inc.............................. 750 31,594
Clear Channel Communications, Inc. (a)............ 1,025 81,423
Consolidated Graphics, Inc. (a)................... 800 37,300
COREstaff, Inc. (a)............................... 600 15,900
Foodmaker, Inc. (a)............................... 1,000 15,063
Interpublic Group of Cos., Inc.................... 1,037 51,656
Laundry's Seafood Restaurants, Inc. (a)........... 700 16,800
Meredith Corp..................................... 1,600 57,100
Omnicom Group, Inc................................ 1,700 72,037
Outdoor Systems, Inc. (a)......................... 700 26,863
Promus Hotel Corp. (a)............................ 1,255 52,710
Rainforest Cafe, Inc. (a)......................... 600 19,800
Robert Half International, Inc. (a)............... 1,137 45,480
Signature Resorts, Inc. (a)....................... 1,125 24,609
Staffmark, Inc. (a)............................... 300 9,488
Valassis Communications, Inc. (a)................. 550 20,350
--------
844,241
--------
ENERGY 9.2%
BJ Services Co. (a)............................... 600 43,163
Cliffs Drilling Co. (a)........................... 750 37,406
Coflexip SA - ADR (France) (a).................... 550 30,525
Comstock Resources, Inc. (a)...................... 1,000 11,938
Cooper Cameron Corp. (a).......................... 1,200 73,200
ENSCO International, Inc.......................... 3,450 115,575
EVI, Inc. (a)..................................... 1,750 90,562
Falcon Drilling, Inc. (a)......................... 2,350 82,397
Key Energy Group, Inc. (a)........................ 450 9,759
</TABLE>
B-75 See Notes to Financial Statements
<PAGE> 96
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
=============================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------
<S> <C> <C>
ENERGY (CONTINUED)
Marine Drilling Cos., Inc. (a)........................ 2,400 $ 49,800
Nabors Industries, Inc. (a)........................... 2,700 84,881
National Oilwell, Inc. (a)............................ 900 30,769
Parker Drilling Co. (a)............................... 800 9,750
Patterson Energy, Inc. (a)............................ 500 19,344
Rowan Cos., Inc. (a).................................. 2,750 83,875
Santa Fe International Corp........................... 700 28,481
Smith International, Inc. (a)......................... 1,250 76,719
Stolt Comex Seaway S.A. (a)........................... 250 12,500
Varco International, Inc. (a)......................... 3,500 75,031
--------
965,675
--------
FINANCE 8.9%
Ahmanson H.F. & Co.................................... 300 20,081
Associates First Capital Corp., Class A............... 100 7,113
Astoria Financial Corp................................ 500 27,875
Avis Rental A Car, Inc. (a)........................... 400 12,775
Bank United Corp...................................... 200 9,788
Capital One Financial Corp............................ 400 21,675
CMAC Investment Corp.................................. 1,000 60,375
Comdisco, Inc......................................... 900 30,094
Concentra Managed Care, Inc. (a)...................... 600 20,250
Conseco, Inc.......................................... 3,400 154,487
Cullen Frost Bankers, Inc............................. 500 30,344
Dime Bancorp, Inc..................................... 600 18,150
Everest Reinsurance Holdings, Inc..................... 400 16,500
Finova Group, Inc..................................... 1,750 86,953
Golden State Bancorp, Inc. (a)........................ 700 26,162
GreenPoint Financial Corp............................. 550 39,909
Lehman Brothers Holdings, Inc......................... 400 20,400
Mercury General Corp.................................. 250 13,813
National Commerce Bancorp............................. 375 13,219
North Fork Bancorp, Inc............................... 850 28,528
Peoples Heritage Financial Group, Inc................. 550 25,300
Protective Life Corp.................................. 400 23,900
Providian Financial Corp.............................. 1,100 49,706
Silicon Valley Bancshares (a)......................... 175 9,844
Sovereign Bancorp, Inc................................ 1,000 20,750
St. Paul Bancorp, Inc................................. 900 23,625
Star Banc Corp........................................ 650 37,294
</TABLE>
B-76 See Notes to Financial Statements
<PAGE> 97
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==============================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (CONTINUED)
Starwood Lodging Trust............................ 300 $ 17,363
State Street Corp................................. 600 34,912
SunAmerica, Inc................................... 450 19,237
Transatlantic Holdings, Inc....................... 100 7,150
Vesta Insurance Group, Inc........................ 125 7,422
---------
934,994
---------
HEALTHCARE 12.4%
Arterial Vascular Engineering, Inc. (a)........... 1,150 74,750
Curative Health Services, Inc. (a)................ 300 9,113
Dura Pharmaceuticals, Inc. (a).................... 2,000 91,750
ESC Medical Systems Ltd. (a)...................... 1,400 54,250
FPA Medical Management, Inc. (a).................. 1,000 18,625
Guidant Corp...................................... 2,400 149,400
Gulf South Medical Supply, Inc. (a)............... 300 11,175
HBO & Co.......................................... 5,600 268,800
Health Care & Retirement Corp. (a)................ 650 26,162
Health Management Assn., Inc., Class A (a)........ 2,462 62,165
Healthsouth Corp. (a)............................. 3,600 99,900
Medicis Pharmaceutical Corp., Class A (a)......... 625 31,953
MiniMed, Inc. (a)................................. 500 19,437
Omnicare, Inc..................................... 1,975 61,225
Parexel International Corp. (a)................... 750 27,750
Quintiles Transnational Corp. (a)................. 1,300 49,725
Renal Treatment Centers, Inc. (a)................. 600 21,675
Rexall Sundown, Inc. (a).......................... 2,150 64,903
Steris Corp. (a).................................. 500 24,125
Sunrise Assisted Living, Inc. (a)................. 300 12,938
Sybron International Corp. (a).................... 500 23,469
Theragenics Corp. (a)............................. 600 21,600
Total Renal Care Holdings, Inc. (a)............... 916 25,190
Universal Health Services, Inc., Class B (a)...... 450 22,669
Watson Pharmaceuticals, Inc. (a).................. 800 25,950
---------
1,298,699
---------
PRODUCER MANUFACTURING 4.6%
Allied Waste Industries, Inc. (a)................. 2,050 47,791
ASM Lithography Holding NV (Netherlands) (a)...... 600 40,500
Danaher Corp...................................... 650 41,031
Federal Mogul Corp................................ 600 24,300
Global Industries, Inc. (a)....................... 2,250 38,250
</TABLE>
B-77 See Notes to Financial Statements
<PAGE> 98
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
Mueller Industries, Inc. (a).......................... 400 $ 23,600
Newpark Resources, Inc. (a)........................... 1,600 28,000
Precision Castparts Corp.............................. 500 30,156
Sipex Corp. (a)....................................... 700 21,175
Tyco International Ltd................................ 2,200 99,137
USA Waste Services, Inc. (a).......................... 2,210 86,743
------------
480,683
------------
RAW MATERIALS/PROCESSING INDUSTRIES 1.4%
Maverick Tube Corp. (a)............................... 850 21,516
Safeskin Corp. (a).................................... 1,550 87,962
Sealed Air Corp. (a).................................. 400 24,700
Witco Corp............................................ 200 8,163
------------
142,341
------------
TECHNOLOGY 24.7%
Advanced Fibre Communications, Inc. (a)............... 2,000 58,250
America Online, Inc. (a).............................. 1,300 115,944
Apex PC Solutions, Inc. (a)........................... 500 11,063
Applied Graphics Technologies, Inc. (a)............... 450 23,963
Aspect Development, Inc. (a).......................... 400 20,800
Baan's Co. NV (Netherlands) (a)....................... 800 26,400
BMC Software, Inc. (a)................................ 2,300 150,937
Cambridge Technology Partners, Inc. (a)............... 900 37,462
CBT Group PLC - ADR (Ireland) (a)..................... 625 51,328
Check Point Software Tech Ltd. (a).................... 100 4,075
CHS Electronics, Inc. (a)............................. 1,300 22,263
Ciber, Inc. (a)....................................... 700 40,600
CIENA Corp. (a)....................................... 700 42,787
Citrix Systems, Inc. (a).............................. 1,350 102,600
Compaq Computer Corp.................................. 700 39,506
Computer Horizons Corp. (a)........................... 500 22,500
Computer Learning Centers, Inc. (a)................... 400 24,500
Compuware Corp. (a)................................... 5,500 176,000
Dell Computer Corp. (a)............................... 4,550 382,200
Digital Microwave Corp. (a)........................... 1,200 17,400
DII Group, Inc. (a)................................... 300 8,175
EMC Corp. (a)......................................... 4,000 109,750
Engineering Animation, Inc. (a)....................... 100 4,600
HNC Software, Inc. (a)................................ 700 30,100
Hyperion Software Corp. (a)........................... 1,200 42,900
</TABLE>
B-78 See Notes to Financial Statements
<PAGE> 99
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONTINUED)
Information Management Resources, Inc. (a)............. 550 $ 20,625
Input/Output, Inc. (a)................................. 500 14,844
Jabil Circuit, Inc. (a)................................ 900 35,775
Keane, Inc. (a)........................................ 1,500 60,937
Legato Systems, Inc. (a)............................... 700 30,800
Level One Communications, Inc. (a)..................... 750 21,188
Manugistics Group, Inc. (a)............................ 500 22,313
Micrel, Inc. (a)....................................... 700 19,600
Network Appliance, Inc. (a)............................ 350 12,425
Nice Systems Ltd. (a).................................. 400 16,800
Paychex, Inc........................................... 600 30,375
Peoplesoft, Inc. (a)................................... 3,800 148,200
Saville Systems PLC - ADR (Ireland) (a)................ 800 33,200
Siebel Systems, Inc. (a)............................... 1,200 50,175
Smart Modular Technologies, Inc. (a)................... 1,250 28,750
SunGard Data Systems, Inc. (a)......................... 2,000 62,000
Tekelec, Inc. (a)...................................... 500 15,250
Teradyne, Inc. (a)..................................... 1,250 40,000
Uniphase Corp. (a)..................................... 1,600 66,200
Veritas Software Co. (a)............................... 1,200 61,200
Visio Corp. (a)........................................ 900 34,537
Vitesse Semiconductor Corp. (a)........................ 1,100 41,525
Wind River Systems, Inc. (a)........................... 650 25,797
World Access, Inc. (a)................................. 700 16,713
Yahoo!, Inc. (a)....................................... 1,450 100,412
Yurie Systems, Inc. (a)................................ 700 14,131
------------
2,589,875
------------
TRANSPORTATION 3.5%
Airborne Freight Corp.................................. 800 49,700
CNF Transportation, Inc................................ 1,100 42,212
Comair Holdings, Inc................................... 900 21,713
Continental Airlines, Inc., Class B (a)................ 1,250 60,156
Expeditores International Washington, Inc.............. 200 7,700
Halter Marine Group, Inc. (a).......................... 1,225 35,372
Hvide Marine, Inc., Class A (a)........................ 500 12,875
Southwest Airlines Co.................................. 2,350 57,869
U.S. Airways Group, Inc. (a)........................... 1,350 84,375
------------
371,972
------------
</TABLE>
B-79 See Notes to Financial Statements
<PAGE> 100
EMERGING GROWTH PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Description Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 2.0%
AES Corp. (a)........................................................................ 1,200 $ 55,950
AirTouch Communications, Inc. (a).................................................... 3,800 157,937
------------
213,887
------------
TOTAL LONG-TERM INVESTMENTS 92.1%
(Cost $7,725,771)....................................................................... 9,666,867
REPURCHASE AGREEMENT 8.2%
Swiss Bank Corp., ($855,000 par collateralized by U.S. Government obligations
in a pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $855,290)
(Cost $855,000)......................................................................... 855,000
------------
TOTAL INVESTMENTS 100.3%
(Cost $8,580,771)....................................................................... 10,521,867
LIABILITIES IN EXCESS OF OTHER ASSETS (0.3%)................................................. (30,013)
------------
NET ASSETS 100.0%............................................................................ $ 10,491,854
============
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
B-80 See Notes to Financial Statements
<PAGE> 101
EMERGING GROWTH PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $8,580,771)....................................................... $ 10,521,867
Cash...................................................................................... 5,539
Receivables:
Investments Sold..................................................................... 33,070
Portfolio Shares Sold................................................................ 5,622
Dividends............................................................................ 1,968
Expense Reimbursement by Adviser..................................................... 967
Unamortized Organizational Expenses....................................................... 3,411
------------
Total Assets......................................................................... 10,572,444
------------
LIABILITIES:
Payables:
Investments Purchased................................................................ 24,577
Distributor and Affiliates........................................................... 2,442
Portfolio Shares Repurchased......................................................... 169
Accrued Expenses.......................................................................... 35,901
Trustees' Deferred Compensation and Retirement Plans....................................... 17,501
------------
Total Liabilities.................................................................... 80,590
------------
NET ASSETS................................................................................ $ 10,491,854
============
NET ASSETS CONSIST OF:
Capital................................................................................... $ 8,818,482
Net Unrealized Appreciation............................................................... 1,941,096
Accumulated Net Investment Loss........................................................... (12,701)
Accumulated Net Realized Loss............................................................. (255,023)
------------
NET ASSETS................................................................................ $ 10,491,854
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $10,491,854 and 637,815 shares of beneficial interest
issued and outstanding)................................................................. $ 16.45
============
</TABLE>
B-81 See Notes to Financial Statements
<PAGE> 102
EMERGING GROWTH PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
- --------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest............................................................................ $ 35,862
Dividends........................................................................... 15,652
----------
Total Income................................................................... 51,514
----------
EXPENSES:
Investment Advisory Fee............................................................. 48,713
Audit............................................................................... 24,728
Shareholder Reports................................................................. 22,156
Shareholder Services................................................................ 15,942
Trustees' Fees and Expenses......................................................... 10,626
Accounting.......................................................................... 9,145
Legal............................................................................... 5,281
Trustees' Retirement Plan........................................................... 4,329
Amortization of Organizational Costs................................................ 1,368
Custody............................................................................. 117
Other............................................................................... 6,567
----------
Total Expenses................................................................. 148,972
Less Fees Waived and Expenses Reimbursed ($48,713 and $40,970, respectively)... 89,683
----------
Net Expenses................................................................... 59,289
----------
NET INVESTMENT LOSS................................................................. $ (7,775)
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain................................................................... $ 156,164
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period........................................................ 944,059
End of the Period:
Investments.................................................................... 1,941,096
----------
Net Unrealized Appreciation During the Period....................................... 997,037
----------
NET REALIZED AND UNREALIZED GAIN.................................................... $1,153,201
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.......................................... $1,145,426
==========
</TABLE>
B-82 See Notes to Financial Statements
<PAGE> 103
EMERGING GROWTH PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
=========================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Loss............................................ $ (7,775) $ (6,964)
Net Realized Gain/Loss......................................... 156,164 (353,684)
Net Unrealized Appreciation During the Period.................. 997,037 699,394
----------- -----------
Change in Net Assets from Operations........................... 1,145,426 338,746
----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold...................................... 8,526,700 4,967,397
Cost of Shares Repurchased..................................... (4,358,459) (2,417,613)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............. 4,168,241 2,549,784
----------- -----------
TOTAL INCREASE IN NET ASSETS................................... 5,313,667 2,888,530
NET ASSETS:
Beginning of the Period........................................ 5,178,187 2,289,657
----------- -----------
End of the Period (Including accumulated net investment loss
of $12,701 and $4,926, respectively)......................... $10,491,854 $ 5,178,187
=========== ===========
</TABLE>
B-83 See Notes to Financial Statements
<PAGE> 104
EMERGING GROWTH PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
July 3, 1995
(Commencement
of Investment
Year Ended Year Ended Operations) to
December 31, December 31, December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 13.660 $ 11.72 $ 10.00
----------- ---------- ----------
Net Investment Loss.................................... (.007) (.016) (.08)
Net Realized and Unrealized Gain....................... 2.797 1.956 1.80
----------- ---------- ----------
Total from Investment Operations............................ 2.790 1.940 1.72
----------- ---------- ----------
Net Asset Value, End of the Period.......................... $ 16.450 $ 13.660 $ 11.72
=========== ========== ==========
Total Return*............................................... 20.42% 16.55% 17.20%**
Net Assets at End of the Period (In millions)............... $ 10.5 $ 5.2 $ 2.3
Ratio of Expenses to Average Net Assets*.................... .85% .85% 2.50%
Ratio of Net Investment Loss to Average Net Assets*......... (.11%) (.17%) (1.45%)
Portfolio Turnover.......................................... 116% 102% 41%**
Average Commission Per Equity Share Traded (a).............. $ .0502 $ .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..................... 2.14% 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (1.40%) (2.60%) (4.35%)
</TABLE>
**Non-Annualized
(a) Represents the average brokerage commission 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-84 See Notes to Financial Statements
<PAGE> 105
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 100.3%
CONSUMER DISTRIBUTION 13.6%
Bed Bath & Beyond, Inc. (a)......................... 8,200 $ 315,700
Brightpoint, Inc. (a)............................... 20,100 278,888
Consolidated Stores Corp. (a)....................... 6,275 275,708
Costco Cos., Inc. (a)............................... 14,500 647,062
CVS Corp............................................ 6,500 416,406
Dayton Hudson Corp.................................. 15,800 1,066,500
Family Dollar Stores, Inc........................... 17,300 507,106
General Nutrition Cos., Inc. (a).................... 14,800 503,200
Home Depot, Inc..................................... 7,350 432,731
Ingram Micro, Inc., Class A (a)..................... 16,100 468,913
Jacor Communications, Inc., Class A (a)............. 8,600 456,875
Kroger Co. (a)...................................... 27,600 1,019,475
Lear Corp. (a)...................................... 8,000 380,000
McKesson Corp....................................... 5,800 627,488
Profitt's, Inc. (a)................................. 13,500 383,906
Rite Aid Corp....................................... 10,200 598,613
Ross Stores, Inc.................................... 23,200 843,900
Safeway, Inc. (a)................................... 25,662 1,623,121
Sysco Corp.......................................... 11,800 537,638
Tech Data Corp. (a)................................. 7,200 279,900
TJX Cos., Inc....................................... 33,100 1,137,812
U.S. Office Products Co. (a)........................ 34,850 683,931
-----------
13,484,873
-----------
CONSUMER DURABLES 2.7%
Dana Corp........................................... 13,500 641,250
Eaton Corp.......................................... 10,000 892,500
Ford Motor Co....................................... 23,800 1,158,763
-----------
2,692,513
-----------
CONSUMER NON-DURABLES 6.6%
Borders Group, Inc. (a)............................. 15,900 497,869
Dial Corp........................................... 36,600 761,737
Liz Claiborne, Inc.................................. 9,000 376,313
Nautica Enterprises, Inc. (a)....................... 8,200 190,650
Philip Morris Cos., Inc............................. 95,300 4,318,281
Tommy Hilfiger Corp. (a)............................ 10,000 351,250
-----------
6,496,100
-----------
CONSUMER SERVICES 13.4%
Accustaff, Inc. (a)................................. 28,724 660,652
AMR Corp............................................ 2,700 346,950
Apple South, Inc.................................... 15,500 203,438
Brinker International, Inc. (a)..................... 33,900 542,400
</TABLE>
B-85 See Notes to Financial Statements
<PAGE> 106
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
============================================================================
Description Shares Market Value
- ----------------------------------------------------------------------------
<S> <C> <C>
CONSUMER SERVICES (CONTINUED)
CBS Corp............................................. 36,000 $ 1,059,750
Cendant Corp. (a).................................... 35,325 1,214,297
Chancellor Media Corp. (a)........................... 17,500 1,305,937
CORESTAFF, Inc. (a).................................. 18,000 477,000
Cracker Barrel Old Country Store, Inc................ 12,700 423,862
FIRSTPLUS Financial Group, Inc. (a).................. 19,800 759,825
Foodmaker, Inc. (a).................................. 25,400 382,588
Gannett Co., Inc..................................... 11,200 692,300
Landry's Seafood Restaurants, Inc. (a)............... 12,800 307,200
Marriot International, Inc........................... 7,200 498,600
New York Times Co., Class A.......................... 12,600 833,175
Omnicom Group, Inc.................................. 26,600 1,127,175
Promus Hotel Corp. (a)............................... 9,500 399,000
Time Warner, Inc..................................... 12,500 775,000
Tribune Co........................................... 15,400 958,650
Universal Outdoor Holdings Inc. (a).................. 5,000 260,000
----------
13,227,799
----------
ENERGY 5.3%
British Petroleum Co. PLC - ADR (United Kingdom)..... 10,000 796,875
El Paso Natural Gas Co............................... 15,000 997,500
Schlumberger, Ltd.................................... 8,100 652,050
Smith International, Inc. (a)........................ 10,200 626,025
Texaco, Inc.......................................... 16,500 897,187
Tidewater, Inc....................................... 6,400 352,800
Weatherford Enterra, Inc. (a)........................ 7,400 323,750
YPF Sociedad Anonima, Class D - ADR (Argentina)...... 17,600 601,700
----------
5,247,887
----------
FINANCE 16.4%
Allstate Corp........................................ 9,000 817,875
Ambac Financial Group, Inc........................... 12,100 556,600
BankAmerica Corp..................................... 8,700 635,100
BankBoston Corp...................................... 10,100 948,769
Bear Stearns Cos., Inc............................... 12,300 584,250
Chase Manhattan Corp................................. 10,000 1,095,000
CMAC Investment Corp................................. 14,900 899,587
Conseco, Inc......................................... 66,400 3,017,050
Federal National Mortgage Assn....................... 16,400 935,825
Green Tree Financial Corp............................ 9,600 251,400
Household International, Inc......................... 3,300 420,956
Merrill Lynch & Co., Inc............................. 10,590 772,408
MGIC Investment Corp................................. 5,600 372,400
Money Store, Inc..................................... 15,200 319,200
SLM Holding Corp..................................... 4,300 598,238
</TABLE>
B-86 See Notes to Financial Statements
<PAGE> 107
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==============================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
FINANCE (CONTINUED)
SunAmerica, Inc..................................... 21,150 $ 904,162
Torchmark, Inc...................................... 18,200 765,538
Travelers Group, Inc................................ 30,200 1,627,025
U.S. Bancorp........................................ 6,300 705,206
----------
16,226,589
----------
HEALTHCARE 13.4%
Bristol Myers Squibb Co............................. 22,000 2,081,750
ESC Medical Systems Ltd. (a)........................ 19,500 755,625
Guidant Corp........................................ 5,400 336,150
Health Care & Retirement Corp. (a).................. 17,900 720,475
Health Management Assn., Inc., Class A (a).......... 24,300 613,575
Healthsouth Corp. (a)............................... 35,300 979,575
Lincare Holdings, Inc. (a).......................... 14,900 849,300
Merck & Co., Inc.................................... 4,200 446,250
Mylan Labs., Inc.................................... 21,500 450,156
Pfizer, Inc......................................... 8,500 633,781
Renal Treatment Centers, Inc. (a)................... 14,800 534,650
Schering-Plough Corp................................ 20,700 1,285,987
Tenet Healthcare Corp. (a).......................... 17,300 573,063
Total Renal Care Holdings, Inc. (a)................. 12,033 330,908
Universal Health Services, Inc., Class B (a)........ 16,500 831,187
Watson Pharmaceuticals, Inc. (a).................... 24,000 778,500
Wellpoint Health Networks, Inc., Class A (a)........ 23,600 997,100
----------
13,198,032
----------
PRODUCER MANUFACTURING 5.5%
Aeroquip Vickers, Inc............................... 5,900 289,469
Illinois Tool Works, Inc............................ 5,900 354,737
Philips Electronics N.V. (Netherlands).............. 4,000 242,000
Textron, Inc........................................ 15,700 981,250
Tyco International Ltd.............................. 26,100 1,176,131
United Technologies Corp............................ 13,100 953,844
USA Waste Services, Inc. (a)........................ 36,557 1,434,862
----------
5,432,293
----------
RAW MATERIALS/PROCESSING INDUSTRIES 2.4%
Bowater, Inc........................................ 10,900 484,369
Crompton & Knowles Corp............................. 20,900 553,850
Cytec Industries, Inc. (a).......................... 10,500 492,844
Fort James Corp..................................... 11,000 420,750
Praxair, Inc........................................ 9,600 432,000
----------
2,383,813
----------
TECHNOLOGY 16.1%
Adaptec, Inc. (a)................................... 14,600 542,025
Analog Devices, Inc. (a)............................ 11,200 310,100
</TABLE>
B-87 See Notes to Financial Statements
<PAGE> 108
ENTERPRISE PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
==========================================================================================================
Description Shares Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY (CONTINUED)
BMC Software, Inc. (a)........................................................ 29,500 $ 1,935,937
Cadence Design Systems, Inc. (a).............................................. 26,700 654,150
CIENA Corp. (a)............................................................... 7,600 464,550
Cisco Systems, Inc. (a)....................................................... 9,750 543,563
Citrix Systems, Inc. (a)...................................................... 6,900 524,400
Compaq Computer Corp.......................................................... 26,400 1,489,950
Computer Associates International, Inc........................................ 11,950 631,856
Compuware Corp. (a)........................................................... 22,000 704,000
Dell Computer Corp. (a)....................................................... 5,200 436,800
EMC Corp. (a)................................................................. 20,800 570,700
International Business Machines Corp.......................................... 17,000 1,777,562
Linear Technology Corp........................................................ 7,800 449,475
Lucent Technologies, Inc...................................................... 3,600 287,550
Microsoft Corp. (a)........................................................... 4,300 555,775
National Semiconductor Corp. (a).............................................. 16,300 422,781
Networks Associates, Inc. (a)................................................. 12,400 655,650
Nokia Corp. - ADR (Finland)................................................... 5,100 357,000
Sanmina Corp. (a)............................................................. 7,500 508,125
SCI Systems, Inc. (a)......................................................... 20,400 888,675
Tellabs, Inc. (a)............................................................. 11,100 586,913
VLSI Technology, Inc. (a)..................................................... 15,500 366,188
Xerox Corp.................................................................... 2,700 199,294
-----------
15,863,019
-----------
TRANSPORTATION 1.2%
Continental Airlines, Inc., Class B (a)....................................... 9,000 433,125
Delta Air Lines, Inc.......................................................... 3,000 357,000
Federal Express Corp. (a)..................................................... 5,900 360,269
-----------
1,150,394
-----------
UTILITIES 3.7%
Ameritech Corp................................................................ 8,700 700,350
Bell Atlantic Corp............................................................ 9,200 837,200
Cincinnati Bell, Inc.......................................................... 11,900 368,900
CMS Energy Corp............................................................... 8,200 361,313
GPU, Inc...................................................................... 7,000 294,875
SBC Communications, Inc....................................................... 7,000 512,750
U.S. West Communications Group................................................ 12,300 555,037
-----------
3,630,425
-----------
TOTAL LONG TERM INVESTMENTS 100.3% (COST $69,715,702)......................... 99,033,737
REPURCHASE AGREEMENT 0.6%
DLJ ($525,000 par collateralized by U.S. Government obligations in a pooled
cash account, dated 12/31/97, to be sold on 01/02/98 at $525,190) (Cost
$525,000).................................................................... 525,000
-----------
TOTAL INVESTMENTS 100.9% (COST $70,240,702)................................... 99,558,737
LIABILITIES IN EXCESS OF OTHER ASSETS (0.9%).................................. (844,661)
-----------
NET ASSETS 100.0%............................................................. $98,714,076
===========
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
B-88 See Notes to Financial Statements
<PAGE> 109
ENTERPRISE PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $70,240,702)................................... $99,558,737
Cash................................................................... 1,447
Receivables:
Dividends......................................................... 102,353
Portfolio Shares Sold............................................. 25,226
Other.................................................................. 46,687
------------
Total Assets...................................................... 99,734,450
------------
LIABILITIES:
Payables:
Investments Purchased............................................. 756,452
Portfolio Shares Repurchased...................................... 97,165
Investment Advisory Fee........................................... 33,278
Distributor and Affiliates........................................ 12,053
Trustees' Deferred Compensation and Retirement Plans................... 99,283
Accrued Expenses....................................................... 22,143
------------
Total Liabilities................................................. 1,020,374
------------
NET ASSETS............................................................. $98,714,076
------------
NET ASSETS CONSIST OF:
Capital................................................................ $68,610,247
Net Unrealized Appreciation............................................ 29,318,035
Accumulated Net Realized Gain.......................................... 748,449
Accumulated Undistributed Net Investment Income........................ 37,345
------------
NET ASSETS............................................................. $98,714,076
------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $98,714,076 and 5,452,063 shares of beneficial
interest issued and outstanding)................................... $ 18.11
------------
</TABLE>
B-89 See Notes to Financial Statements
<PAGE> 110
ENTERPRISE PORTFOLIO STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................... $ 864,258
Interest........................................................... 131,879
-----------
Total Income.................................................. 996,137
-----------
EXPENSES:
Investment Advisory Fee............................................ 467,494
Custody............................................................ 19,783
Legal.............................................................. 15,923
Trustees' Fees and Expenses........................................ 12,281
Other.............................................................. 100,570
-----------
Total Expenses................................................ 616,051
Less Fees Waived.............................................. 55,090
-----------
Net Expenses.................................................. 560,961
-----------
NET INVESTMENT INCOME.............................................. $ 435,176
-----------
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain.................................................. $13,400,141
Unrealized Appreciation/Depreciation:
Beginning of the Period............................................ 19,056,982
End of the Period:
Investments................................................... 29,318,035
-----------
Net Unrealized Appreciation During the Period...................... 10,261,053
-----------
NET REALIZED AND UNREALIZED GAIN................................... $23,661,194
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $24,096,370
===========
</TABLE>
B-90 See Notes to Financial Statements
<PAGE> 111
ENTERPRISE PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31,1997 December 31,1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......................................... $ 435,176 $ 556,672
Net Realized Gain.............................................. 13,400,141 7,574,164
Net Unrealized Appreciation During the Period.................. 10,261,053 9,782,538
------------ ------------
Change in Net Assets from Operations........................... 24,096,370 17,913,374
------------ ------------
Distributions from Net Investment Income....................... (457,271) (530,417)
Distributions from Net Realized Gain........................... (13,668,548) (9,089,491)
------------ ------------
Total Distributions............................................ (14,125,819) (9,619,908)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES............ 9,970,551 8,293,466
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold...................................... 16,421,893 7,883,906
Net Asset Value of Shares Issued Through Dividend Reinvestment. 14,125,818 9,619,909
Cost of Shares Repurchased..................................... (26,609,356) (17,001,971)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............. 3,938,355 501,844
------------ ------------
TOTAL INCREASE IN NET ASSETS................................... 13,908,906 8,795,310
NET ASSETS:
Beginning of the Period........................................ 84,805,170 76,009,860
------------ ------------
End of the Period (Including accumulated undistributed net
investment income of $37,345 and $59,440, respectively)...... $ 98,714,076 $ 84,805,170
============ ============
</TABLE>
B-91 See Notes to Financial Statements
<PAGE> 112
ENTERPRISE PORTFOLIO FINANCIAL HIGHLIGHTS
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE
PORTFOLIO OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................................. $16.262 $ 14.69 $ 12.39 $ 14.57 $ 14.21
------- ------- ------- ------- -------
Net Investment Income................................................ .091 .113 .32 .25 .21
Net Realized and Unrealized Gain/Loss................................ 4.734 3.417 4.22 (.7625) 1.0325
------- ------- ------- ------- -------
Total from Investment Operations.......................................... 4.825 3.530 4.54 (.5125) 1.2425
------- ------- ------- ------- -------
Less:
Distributions from Net Investment Income............................. .096 .109 .3175 .25 .215
Distributions from Net Realized Gain................................. 2.885 1.849 1.9225 1.4175 .6675
------- ------- ------- ------- -------
Total Distributions....................................................... 2.981 1.958 2.24 1.6675 .8825
------- ------- ------- ------- -------
Net Asset Value, End of the Period........................................ $18.106 $16.262 $ 14.69 $ 12.39 $ 14.57
======= ======= ======= ======= =======
Total Return*............................................................. 30.66% 24.80% 36.98% (3.39)% 8.98%
Net Assets at End of the Period (In millions)............................. $ 98.7 $ 84.8 $ 76.0 $ 67.5 $ 72.3
Ratio of Expenses to Average Net Assets*.................................. .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*..................... .47% .68% 2.06% 1.72% 1.41%
Portfolio Turnover........................................................ 82% 152% 145% 153% 139%
Average Commission Paid per Equity Share Traded (a)....................... $ .0566 $ .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................................... .66% .75% .68% .68% .72%
Ratio of Net Investment Income to Average Net Assets...................... .41% .53% 1.98% 1.64% 1.29%
</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-92 See Notes to Financial Statements
<PAGE> 113
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 96.9%
AUSTRALIA 2.1%
ICI Australia Ltd...................................... 1,900 $13,312
Pacific Dunlop Ltd..................................... 8,200 17,369
Rio Tinto Ltd.......................................... 2,600 30,338
------------
61,019
------------
AUSTRIA 0.9%
OMV, AG................................................ 200 27,709
------------
Belgium 2.4%
Almanij................................................ 1,400 70,659
------------
BRAZIL 0.7%
Centrais Eletricas Brasileiras SA Electrobras - ADR.... 340 7,947
Telecomunicacoes Brasileiras - ADR..................... 100 11,644
------------
19,591
------------
CANADA 3.0%
Barrick Gold Corp. (a)................................. 100 1,865
IPL Energy, Inc. (a)................................... 1,500 68,647
Northern Telecom Ltd. (a).............................. 200 17,795
Placer Dome, Inc. (a).................................. 100 1,260
------------
89,567
------------
DENMARK 0.5%
Novo Nordisk A/S, Ser B................................ 100 14,303
------------
FRANCE 3.4%
Alcatel Alsthom (Cie Gen El)........................... 165 20,973
Axa-UAP................................................ 230 17,797
Compagnie de Saint Gobain.............................. 148 21,025
Elf Aquitaine.......................................... 150 17,446
LVMH (Moet Hennessy Louis Vuitton)..................... 55 9,130
Total, Class B......................................... 135 14,692
------------
101,063
------------
GERMANY 4.3%
Allianz, AG............................................ 100 25,904
BASF, AG............................................... 250 8,859
Bayer, AG.............................................. 200 7,471
Daimler-Benz, AG....................................... 250 17,538
Degussa, AG............................................ 50 2,502
Deutsche Telekom, AG................................... 550 10,349
Linde.................................................. 50 30,518
Siemens, AG............................................ 200 11,840
</TABLE>
B-93 See Notes to Financial Statements
<PAGE> 114
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================
Description Shares Market Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY (CONTINUED)
VEBA, AG...................................................... 200 $ 13,619
----------
128,600
----------
ITALY 2.0%
Ente Nazionale Idrocarburi, SpA............................... 2,000 11,340
Fiat, SpA..................................................... 4,000 11,633
Instituto Nazionale delle Assicurazioni (INA)................. 12,000 24,319
Telecom Italia................................................ 2,500 11,539
Telecom Italia SpA (a)........................................ 2 13
----------
58,844
----------
JAPAN 10.9%
Acom Co., Ltd................................................. 300 16,543
Asahi Glass Co................................................ 1,000 4,748
Bank of Tokyo................................................. 600 8,271
Daiwa Securities.............................................. 1,000 3,446
East Japan Railway............................................ 1 4,511
Fujitsu....................................................... 1,000 10,722
Hitachi....................................................... 2,000 14,245
Honda Motor Co................................................ 1,000 36,685
Japan Air Lines Co............................................ 1,000 2,719
Japan Energy Corp............................................. 4,000 3,768
Kao Corp...................................................... 1,000 14,398
Kawasaki Heavy Industries..................................... 2,000 3,094
Kawasaki Steel Corp........................................... 3,000 4,090
Komatsu....................................................... 1,000 5,017
Kyocera Corp.................................................. 100 4,534
Matsushita Electric Industries................................ 1,000 14,628
Mitsubishi Electric Corp...................................... 3,000 7,674
Mitsubishi Estate............................................. 1,000 10,875
Nagoya Railroad Co............................................ 4,000 13,724
NEC Corp...................................................... 1,000 10,646
Nippon Steel Corp............................................. 2,000 2,956
Nippon Telegraph & Telephone Corp............................. 4 34,311
Nippon Yusen Kabushiki Kaisha................................. 3,000 8,226
Nissan Motor Co............................................... 2,000 8,271
NSK Ltd....................................................... 1,000 2,489
Oji Paper Co.................................................. 2,000 7,950
Sekisui House................................................. 1,000 6,426
Sharp Corp.................................................... 1,000 6,878
Teijin........................................................ 2,000 4,182
</TABLE>
B-94 See Notes to Financial Statements
<PAGE> 115
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
===============================================================================
Description Shares Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONTINUED)
Tobu Railway Co................................ 2,000 $ 6,250
Toppan Printing Co............................. 1,000 13,020
Toyobo Co...................................... 1,000 1,210
Toyota Motor Corp.............................. 1,000 28,644
-----------
325,151
-----------
MALAYSIA 0.1%
DCB Holdings Berhard........................... 9,000 4,350
-----------
MEXICO 1.7%
Telefonos De Mexico SA, Ser L.................. 18,000 50,740
-----------
NETHERLANDS 2.3%
ABN Amro Holdings.............................. 627 12,214
Akzo Nobel..................................... 100 17,242
Elsevier....................................... 700 11,323
Koninklijke Ahold.............................. 517 13,488
Wolters Kluwer................................. 101 13,046
-----------
67,313
-----------
NEW ZEALAND 1.0%
Deutsche Bank, AG.............................. 400 28,239
-----------
REPUBLIC OF KOREA 0.3%
Korea Electric Power Corp. - ADR (a)........... 307 3,089
Pohang Iron & Steel Co., Ltd. - ADR (a)........ 317 5,528
-----------
8,617
-----------
SINGAPORE 1.5%
Singapore Telecommunications................... 24,000 44,711
-----------
SOUTH AFRICA 0.7%
De Beers Cons Mines Ltd. - ADR................. 500 10,219
Sasol Ltd. - ADR............................... 1,126 11,893
-----------
22,112
-----------
SPAIN 1.5%
EMP Nac Electricid............................. 300 5,327
Repsol, SA..................................... 400 17,066
Telefonica De Espana........................... 800 22,842
-----------
45,235
-----------
SWEDEN 0.6%
Astra, AB, Ser A............................... 200 3,463
Ericsson Telefon LM, Ser B..................... 400 15,038
-----------
18,501
-----------
</TABLE>
B-95 See Notes to Financial Statements
<PAGE> 116
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND 3.3%
Credit Suisse Group.................................. 200 $ 30,933
Nestle, AG........................................... 10 14,981
Novartis, AG......................................... 20 32,439
Roche Holdings Genusscheine, AG...................... 2 19,854
----------
98,207
----------
UNITED KINGDOM 10.5%
B.A.T. Industries.................................... 1,700 15,503
Barclays............................................. 1,000 26,622
Bass................................................. 1,300 20,222
British Petroleum.................................... 1,116 14,763
British Telecommunications........................... 2,400 18,911
BTR.................................................. 2,900 8,764
Burmah Castrol....................................... 700 12,210
Carlton Communications............................... 2,500 19,299
Glaxo Wellcome....................................... 1,000 23,841
HSBC Holdings........................................ 400 10,381
HSBC Holdings - ADR.................................. 700 17,269
Lloyds TSB Group..................................... 2,100 27,320
Marks & Spencer...................................... 1,200 11,867
Rank Group........................................... 2,400 13,363
Scot & Newcastle..................................... 2,100 25,714
Smithkline Beecham................................... 2,000 20,613
Smiths Industries.................................... 1,000 13,929
Zeneca Group......................................... 300 10,626
----------
311,217
----------
UNITED STATES 43.2%
Abbott Laboratories, Inc. (b)........................ 400 26,225
Aluminum Co. of America.............................. 200 14,075
American Express Co.................................. 300 26,775
American Home Products Corp.......................... 300 22,950
American International Group, Inc.................... 200 21,750
Amoco Corp........................................... 200 17,025
AT&T Corp. (b)....................................... 600 36,750
BellSouth Corp....................................... 500 28,156
Boeing Co............................................ 100 4,894
Bristol-Myers Squibb Co. (b)......................... 400 37,850
Chevron Corp......................................... 300 23,100
Cisco Systems, Inc. (a).............................. 300 16,725
</TABLE>
B-96 See Notes to Financial Statements
<PAGE> 117
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
Citicorp.............................................. 200 $ 25,287
Coca Cola Co. (b)..................................... 800 53,300
Columbia / HCA Healthcare Corp........................ 300 8,888
Dominion Resources, Inc............................... 800 34,050
Dow Chemical Co....................................... 200 20,300
Du Pont (E. I.) de Nemours & Co....................... 200 12,013
Eastman Kodak Co...................................... 200 12,162
Federal National Mortgage Assn........................ 400 22,825
First Data Corp....................................... 500 14,625
FPL Group, Inc........................................ 500 29,594
General Electric Co................................... 400 29,350
General Motors Corp................................... 400 24,250
Gillette Co........................................... 200 20,087
Hewlett Packard Co.................................... 300 18,750
Home Depot, Inc....................................... 250 14,719
Illinois Tool Works, Inc.............................. 200 12,025
Intel Corp............................................ 200 14,050
International Business Machines Corp.................. 200 20,912
International Paper Co................................ 400 17,250
J.C. Penney, Inc...................................... 400 24,125
Johnson & Johnson, Inc................................ 400 26,350
JP Morgan & Co., Inc. (b)............................. 300 33,862
Kimberly Clark Corp................................... 300 14,794
Lilly Eli & Co........................................ 400 27,850
Lucent Technologies, Inc. (b)......................... 400 31,950
McDonald's Corp. (b).................................. 500 23,875
Meritor Automotive Inc................................ 100 2,106
Microsoft Corp. (a)(b)................................ 300 38,775
Minnesota Mining & Manufacturing Co................... 300 24,619
Mobil Corp............................................ 200 14,437
Motorola, Inc......................................... 200 11,413
NationsBank Corp...................................... 400 24,325
Oracle Systems Corp. (a).............................. 250 5,578
PacifiCorp............................................ 1,100 30,044
Pfizer, Inc........................................... 200 14,912
Procter & Gamble Co................................... 400 31,925
Raytheon Co., Class A................................. 25 1,233
Rockwell International Corp........................... 300 15,675
</TABLE>
B-97 See Notes to Financial Statements
<PAGE> 118
GLOBAL EQUITY PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONTINUED)
SBC Communications, Inc......................... 500 $ 36,625
Schering-Plough Corp............................ 200 12,425
Sears Roebuck & Co.............................. 300 13,575
Time Warner, Inc................................ 300 18,600
Warner-Lambert Co............................... 200 24,800
Wells Fargo & Co................................ 100 33,944
Weyerhaeuser Co................................. 400 19,625
Worldcom, Inc................................... 800 24,200
Xerox Corp...................................... 300 22,144
---------
1,284,498
---------
TOTAL COMMON STOCKS 96.9%...................................... 2,880,246
PREFERRED STOCK 0.7%
FINLAND 0.7%
Nokia (Ab) Oy, Ser A - ADR...................... 300 21,299
---------
TOTAL LONG-TERM INVESTMENTS 97.6%
(Cost $2,616,902).......................................... 2,901,545
OTHER ASSETS IN EXCESS OF LIABILITIES 2.4%..................... 72,464
---------
NET ASSETS 100.0%.............................................. $ 2,974,009
---------
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
(b) Assets segregated as collateral for open forward and open futures
transactions.
B-98 See Notes to Financial Statements
<PAGE> 119
GLOBAL EQUITY PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Total Investments (Cost $2,616,902)............................................................... $ 2,901,545
Cash.............................................................................................. 56,999
Foreign Currency (Cost $23,087)................................................................... 22,360
Receivables:
Expense Reimbursement by Adviser............................................................. 15,850
Dividends.................................................................................... 5,474
Forward Currency Contracts........................................................................ 24,182
Unamortized Organizational Costs.................................................................. 3,405
------------
Total Assets................................................................................. 3,029,815
------------
LIABILITIES:
Payables:
Distributor and Affiliates................................................................... 3,143
Portfolio Shares Repurchased................................................................. 171
Accrued Expenses.................................................................................. 35,969
Trustees' Deferred Compensation and Retirement Plans.............................................. 16,523
------------
Total Liabilities............................................................................ 55,806
------------
NET ASSETS........................................................................................ $ 2,974,009
------------
NET ASSETS CONSIST OF:
Capital........................................................................................... $ 2,701,945
Net Unrealized Appreciation....................................................................... 307,950
Accumulated Distributions in Excess of Net Investment Income...................................... (14,504)
Accumulated Distributions in Excess of Net Realized Gain.......................................... (21,382)
------------
NET ASSETS........................................................................................ $ 2,974,009
------------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $2,974,009 and 270,266 shares of beneficial interest
issued and outstanding)......................................................................... $ 11.00
------------
</TABLE>
B-99 See Notes to Financial Statements
<PAGE> 120
GLOBAL EQUITY PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
===================================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $5,109)................................ $ 53,293
Interest.............................................................................. 7,646
Other................................................................................. 541
-----------
Total Income..................................................................... 61,480
-----------
EXPENSES:
Custody............................................................................... 74,070
Investment Advisory Fee............................................................... 31,290
Audit................................................................................. 24,832
Accounting............................................................................ 21,596
Shareholder Reports................................................................... 18,284
Shareholder Services.................................................................. 15,965
Trustees' Fees and Expenses........................................................... 9,857
Legal................................................................................. 4,984
Amortization of Organizational Costs.................................................. 1,365
Other................................................................................. 9,936
-----------
Total Expenses................................................................... 212,179
Less Fees Waived and Expenses Reimbursed ($31,290 and $143,342, respectively).... 174,632
-----------
Net Expenses..................................................................... 37,547
-----------
NET INVESTMENT INCOME................................................................. $ 23,933
-----------
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments...................................................................... $ 510,380
Forward Currency Contracts....................................................... (1,690)
-----------
Net Realized Gain..................................................................... 508,690
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period.......................................................... 396,734
---------
End of the Period:
Investments................................................................... 284,643
Forward Currency Contracts.................................................... 24,182
Foreign Currency Translation.................................................. (875)
-----------
307,950
-----------
Net Unrealized Depreciation During the Period......................................... (88,784)
-----------
NET REALIZED AND UNREALIZED GAIN...................................................... $ 419,906
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS............................................ $ 443,839
-----------
</TABLE>
B-100 See Notes to Financial Statements
<PAGE> 121
GLOBAL EQUITY PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
===============================================================================================================
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.............................................. $ 23,933 $ 7,708
Net Realized Gain.................................................. 508,690 107,660
Net Unrealized Appreciation/Depreciation During the Period......... (88,784) 294,056
----------- -----------
Change in Net Assets from Operations............................... 443,839 409,424
----------- -----------
Distributions from Net Investment Income........................... (23,933) (7,708)
Distributions in Excess of Net Investment Income................... (1,351) (32,197)
----------- -----------
Distributions from and in Excess of Net Investment Income.......... (25,284) (39,905)
----------- -----------
Distributions from Net Realized Gain............................... (536,409) (37,458)
Distributions in Excess of Net Realized Gain....................... (24,805) -0-
----------- -----------
Distributions from and in Excess of Net Realized Gain.............. (561,214) (37,458)
----------- -----------
Total Distributions................................................ (586,498) (77,363)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES................ (142,659) 332,061
----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.......................................... 1,501,991 1,241,023
Net Asset Value of Shares Issued through Dividend Reinvestment..... 352,262 42,743
Cost of Shares Repurchased......................................... (1,254,609) (1,473,972)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS................. 599,644 (190,206)
----------- -----------
TOTAL INCREASE IN NET ASSETS....................................... 456,985 141,855
NET ASSETS:
Beginning of the Period............................................ 2,517,024 2,375,169
----------- -----------
End of the Period (Including accumulated distributions in excess of
net investment income of $14,504 and $9,730, respectively)........ $ 2,974,009 $ 2,517,024
----------- -----------
</TABLE>
B-101 See Notes to Financial Statements
<PAGE> 122
GLOBAL EQUITY PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
================================================================================================================
JULY 3, 1995
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED YEAR ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period........................ $ 11.658 $ 10.30 $ 10.00
-------- -------- --------
Net Investment Income/Loss................................. .110 .035 (.16)
Net Realized and Unrealized Gain........................... 1.696 1.687 .46
-------- -------- --------
Total from Investment Operations................................ 1.806 1.722 .30
-------- -------- --------
Less:
Distributions from and in Excess of
Net Investment Income.................................. .106 .188 -0-
Distributions from and in Excess of
Net Realized Gain...................................... 2.354 .176 -0-
-------- -------- --------
Total Distributions............................................. 2.460 .364 -0-
-------- -------- --------
Net Asset Value, End of the Period.............................. $ 11.004 $11.658 $ 10.30
-------- -------- --------
Total Return*................................................... 15.85% 16.72% 3.00%**
Net Assets at End of the Period (In millions)................... $ 3.0 $ 2.5 $ 2.4
Ratio of Expenses to Average Net Assets*........................ 1.20% 1.20% 4.35%
Ratio of Net Investment Income/Loss to
Average Net Assets*........................................ .76% .27% (2.76%)
Portfolio Turnover.............................................. 132% 94% 42%**
Average Commission Rate per Equity Share Traded (a)........... $ .0574 $ .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......................... 6.78% 7.43% 8.27%
Ratio of Net Investment Loss to Average Net Assets.............. (4.82%) (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-102 See Notes to Financial Statements
<PAGE> 123
GOVERNMENT PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
=======================================================================================================================
Par
Amount
(000) Description Coupon Market Market Value
=======================================================================================================================
<S> <C> <C> <C> <C>
UNITED STATES GOVERNMENT AGENCY OBLIGATIONS 53.1%
$2,000 Federal Farm Credit Bank Medium Term Note.......................... 6.520% 09/24/07 $2,067,260
1,688 Federal Home Loan Mortgage Corp. CMO Var Rate Cpn.................. 6.150 11/15/18 1,690,062
1,425 Federal Home Loan Mortgage Corp. Gold 30 Year Pools................ 7.000 05/01/24 to 07/01/24 1,439,015
402 Federal Home Loan Mortgage Corp. Gold 30 Year Pools................ 7.500 10/01/24 411,961
407 Federal Home Loan Mortgage Corp. Gold 30 Year Pools................ 8.000 09/01/24 to 10/01/24 420,814
1,733 Federal National Mortgage Association 15 Year Dwarf Pools.......... 6.500 06/01/09 to 04/01/11 1,741,226
1,805 Federal National Mortgage Association 15 Year Dwarf Pools.......... 7.000 07/01/10 to 12/01/11 1,834,416
961 Federal National Mortgage Association Pools........................ 6.500 03/01/26 to 05/01/26 949,046
1,612 Federal National Mortgage Association Pools........................ 7.000 12/01/23 to 06/01/24 1,625,830
1,450 Federal National Mortgage Association Pools........................ 7.500 05/01/24 to 10/01/24 1,484,315
622 Federal National Mortgage Association Pools........................ 8.000 06/01/24 to 10/01/24 644,442
1,618 Federal National Mortgage Association Pools........................ 9.000 02/01/17 1,745,755
876 Federal National Mortgage Association Pools........................ 11.000 11/01/20 970,122
2,899 Government National Mortgage Association Pools..................... 7.000 04/15/23 to 10/15/24 2,922,883
1,859 Government National Mortgage Association Pools..................... 7.500 04/15/22 to 06/15/24 1,904,081
2,493 Government National Mortgage Association Pools..................... 8.000 05/15/17 to 11/15/24 2,586,045
2,249 Government National Mortgage Association Pools..................... 8.500 03/15/17 to 07/15/17 2,403,957
855 Government National Mortgage Association Pools..................... 9.500 06/15/09 to 10/15/09 923,342
108 Government National Mortgage Association Pools..................... 11.000 09/15/10 to 08/15/20 120,066
----------
TOTAL UNITED STATES GOVERNMENT AGENCY OBLIGATIONS................................................... 27,884,638
----------
UNITED STATES TREASURY OBLIGATIONS 44.3%
1,000 United States Treasury Bonds (a)................................... 6.000 02/15/26 999,060
1,500 United States Treasury Notes....................................... 5.000 02/15/99 1,488,990
5,000 United States Treasury Notes....................................... 5.250 01/31/01 4,936,700
6,500 United States Treasury Notes (a)................................... 5.625 02/15/06 6,427,915
3,000 United States Treasury Notes (a)................................... 5.875 02/15/04 3,025,320
6,000 United States Treasury Notes (a)................................... 7.500 05/15/02 6,404,040
----------
TOTAL UNITED STATES TREASURY OBLIGATIONS............................................................ 23,282,025
----------
</TABLE>
B-103 See Notes to Financial Statements
<PAGE> 124
GOVERNMENT PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================
Par
Amount
(000) Description Coupon Maturity Market Value
====================================================================================================================
<S> <C> <C> <C>
FORWARD PURCHASE COMMITMENT 3.7%
$2,000 Federal National Mortgage Association 30 Year, January Forward 6.500% TBA $ 1,975,000
-----------
TOTAL LONG-TERM INVESTMENTS 101.1%
(Cost $51,722,491)................................................................................ 53,141,663
REPURCHASE AGREEMENT 1.4%
DLJ ($715,000 par collateralized by U.S. Government obligations in
a pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $715,258)
(Cost $715,000)................................................................................... 715,000
-----------
TOTAL INVESTMENTS 102.5%
(Cost $52,437,491)................................................................................ 53,856,663
LIABILITIES IN EXCESS OF OTHER ASSETS (2.5%)......................................................... (1,298,324)
-----------
NET ASSETS 100.0%.................................................................................... $52,558,339
===========
</TABLE>
(a) Assets segregated as collateral for open forward 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-104 See Notes to Financial Statements
<PAGE> 125
GOVERNMENT PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
===============================================================================
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $52,437,491)............................................................ $ 53,856,663
Cash............................................................................................ 3,667
Receivables:
Interest................................................................................... 625,264
Portfolio Shares Sold...................................................................... 90,685
Variation Margin on Futures................................................................ 41,468
Other........................................................................................... 46,402
------------
Total Assets............................................................................... 54,664,149
------------
LIABILITIES:
Payables:
Investments Purchased...................................................................... 1,954,375
Investment Advisory Fee.................................................................... 16,572
Distributor and Affiliates................................................................. 3,650
Portfolio Shares Repurchased............................................................... 181
Forward Commitments............................................................................. 7,815
Trustees' Deferred Compensation and Retirement Plans............................................ 97,081
Accrued Expenses................................................................................ 26,136
------------
Total Liabilities.......................................................................... 2,105,810
------------
NET ASSETS...................................................................................... $ 52,558,339
============
NET ASSETS CONSIST OF:
Capital......................................................................................... $ 61,104,562
Net Unrealized Appreciation..................................................................... 1,515,218
Accumulated Undistributed Net Investment Income................................................. 105,149
Accumulated Net Realized Loss................................................................... (10,166,590)
------------
NET ASSETS...................................................................................... $ 52,558,339
============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $52,558,339 and 5,892,077 shares of beneficial interest
issued and outstanding).................................................................... $8.92
============
</TABLE>
B-105 See Notes to Financial Statements
<PAGE> 126
GOVERNMENT PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................................... $3,804,789
----------
EXPENSES:
Investment Advisory Fee..................................................... 267,568
Audit....................................................................... 22,414
Custody..................................................................... 19,427
Shareholder Reports......................................................... 18,385
Trustees' Fees and Expenses................................................. 13,525
Legal....................................................................... 6,050
Other....................................................................... 46,497
----------
Total Expenses......................................................... 393,866
Less Fees Waived....................................................... 72,820
----------
Net Expenses........................................................... 321,046
----------
NET INVESTMENT INCOME....................................................... $3,483,743
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................................ $ 152,940
Futures................................................................ 81,948
Forward Commitments.................................................... 22,462
----------
Net Realized Gain........................................................... 257,350
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................................ 446,722
----------
End of the Period:
Investments............................................................ 1,419,172
Futures................................................................ 103,861
Forward Commitments.................................................... (7,815)
----------
1,515,218
----------
Net Unrealized Appreciation During the Period............................... 1,068,496
==========
NET REALIZED AND UNREALIZED GAIN............................................ $1,325,846
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................................. $4,809,589
==========
</TABLE>
B-106 See Notes to Financial Statements
<PAGE> 127
GOVERNMENT PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
=============================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................................... $ 3,483,743 $ 3,982,843
Net Realized Gain/Loss.............................................. 257,350 (893,970)
Net Unrealized Appreciation/Depreciation During the Period.......... 1,068,496 (1,950,846)
------------ ------------
Change in Net Assets from Operations................................ 4,809,589 1,138,027
------------ ------------
Distributions from Net Investment Income............................ (3,344,474) (3,998,258)
Distributions in Excess of Net Investment Income.................... -0- (25,823)
------------ ------------
Distributions from and in Excess of Net Investment Income........... (3,344,474) (4,024,081)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES................. 1,465,115 (2,886,054)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................................... 2,642,182 1,607,635
Net Asset Value of Shares Issued Through Dividend Reinvestment...... 3,344,475 4,024,080
Cost of Shares Repurchased.......................................... (12,147,815) (12,510,487)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.................. (6,161,158) (6,878,772)
------------ ------------
TOTAL DECREASE IN NET ASSETS........................................ (4,696,043) (9,764,826)
NET ASSETS:
Beginning of the Period............................................. 57,254,382 67,019,208
------------ ------------
End of the Period (Including accumulated undistributed net
investment income of $105,149 and $(11,355), respectively)......... $ 52,558,339 $ 57,254,382
============ ============
</TABLE>
B-107 See Notes to Financial Statements
<PAGE> 128
GOVERNMENT PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
===============================================================================================================
Year Ended December 31,
------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period....................... $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13
------ ------ ------ ------ ------
Net Investment Income..................................... .566 .569 .60 .56 .57
Net Realized and Unrealized Gain/Loss..................... .231 (.388) .78 (.985) .135
------ ------ ------ ------ ------
Total from Investment Operations............................... .797 .181 1.38 (.425) .705
Less Distributions from and in Excess of Net
Investment Income......................................... .543 .575 .60 .555 .575
------ ------ ------ ------ ------
Net Asset Value, End of the Period............................. $8.920 $8.666 $ 9.06 $ 8.28 $ 9.26
====== ====== ====== ====== ======
Total Return*.................................................. 9.61% 2.12% 17.17% (4.63%) 7.86%
Net Assets at End of the Period (In millions).................. $ 52.6 $ 57.3 $ 67.0 $ 65.5 $80.6
Ratio of Expenses to Average Net Assets*....................... .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*.......... 6.51% 6.56% 6.89% 6.71% 6.45%
Portfolio Turnover............................................. 119% 143% 164% 192% 91%
* 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........................ .74% .80% .72% .70% .70%
Ratio of Net Investment Income to Average Net Assets........... 6.37% 6.36% 6.77% 6.61% 6.35%
</TABLE>
B-108 See Notes to Financial Statements
<PAGE> 129
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
=========================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK 93.7%
CONSUMER DISTRIBUTION 2.5%
Federated Department Stores, Inc. (a)........................... 2,480 $ 106,795
Gap, Inc........................................................ 2,490 88,239
Gymboree Corp. (a).............................................. 3,400 93,075
----------
288,109
----------
CONSUMER DURABLES 0.7%
Black & Decker Corp............................................. 2,130 83,203
----------
CONSUMER NON-DURABLES 7.9%
Adidas - ADR (Germany).......................................... 900 58,050
Avon Products, Inc.............................................. 150 9,206
Benckiser NV, Class B (a)....................................... 1,370 56,341
Colgate - Palmolive Co.......................................... 1,900 139,650
Nabisco Holdings Corp., Class A................................. 3,150 152,578
Philip Morris Cos., Inc......................................... 6,340 287,281
Ralston Purina Group............................................ 1,480 137,548
Tommy Hilfiger Corp. (a)........................................ 2,420 85,003
----------
925,657
----------
CONSUMER SERVICES 4.2%
Bell & Howell Co. (a)........................................... 1,240 29,993
Cognizant Corp.................................................. 3,390 151,067
H & R Block, Inc................................................ 3,260 146,089
Lone Star Steakhouse & Saloon (a)............................... 2,250 39,375
Readers Digest Association, Inc., Class A....................... 1,490 35,201
Walt Disney Co.................................................. 950 94,109
----------
495,834
----------
ENERGY 9.3%
Coastal Corp.................................................... 2,720 168,470
El Paso Natural Gas Co.......................................... 1,870 124,355
Exxon Corp...................................................... 950 58,128
McDermott International, Inc.................................... 1,670 61,164
Royal Dutch Petroleum Co. - ADR (Netherlands)................... 2,330 126,257
Texaco, Inc..................................................... 3,820 207,712
USX - Marathon Group............................................ 4,640 156,600
Valero Energy Corp.............................................. 360 11,318
YPF Sociedad Anonima, Class D - ADR (Argentina)................. 5,250 179,484
----------
1,093,488
----------
</TABLE>
B-109 See Notes to Financial Statements
<PAGE> 130
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
================================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCE 16.2%
Aetna, Inc........................................................... 245 $ 17,288
Allstate Corp........................................................ 2,200 199,925
American General Corp................................................ 2,120 114,612
BankAmerica Corp..................................................... 3,760 274,480
BankBoston Corp...................................................... 1,730 162,512
Bankers Trust New York Corp.......................................... 180 20,239
Chase Manhattan Corp................................................. 2,450 268,275
Conseco, Inc......................................................... 2,180 99,054
Equitable Cos., Inc.................................................. 1,990 99,002
Everest Reinsurance Holdings, Inc.................................... 1,190 49,088
First Union Corp..................................................... 2,010 103,012
Golden West Financial Corp........................................... 940 91,944
NationsBank Corp..................................................... 860 52,299
Provident Cos., Inc.................................................. 2,450 94,631
Travelers Group, Inc................................................. 2,270 122,296
Washington Mutual, Inc............................................... 1,371 87,487
Wells Fargo & Co..................................................... 130 44,127
------------
1,900,271
------------
HEALTHCARE 11.9%
Alza Corp. (a)....................................................... 3,410 108,481
American Home Products Corp.......................................... 2,320 177,480
Beckman Instruments, Inc............................................. 1,200 48,000
Merck & Co., Inc..................................................... 1,190 126,437
Mylan Labs., Inc..................................................... 3,840 80,400
PacifiCare Health Systems, Inc., Class B (a)......................... 3,150 164,981
Pfizer, Inc.......................................................... 540 40,264
Pharmacia & Upjohn, Inc.............................................. 4,930 180,561
Rhne-Poulenc, SA - ADR (France), Class A............................. 2,639 117,106
Rhne-Poulenc, SA - ADR (France) Warrants (expiring 11/05/01)......... 2,079 6,757
SmithKline Beecham PLC - ADR (United Kingdom)........................ 4,960 255,130
Watson Pharmaceuticals, Inc. (a)..................................... 2,800 90,825
------------
1,396,422
------------
PRODUCER MANUFACTURING 9.8%
AGCO Corp............................................................ 3,550 103,837
AlliedSignal, Inc.................................................... 2,800 109,025
Canadian Pacific, Ltd................................................ 6,680 182,030
Flowserve Corp....................................................... 2,660 74,314
Fluor Corp........................................................... 750 28,031
Ingersoll-Rand Co.................................................... 4,240 171,720
</TABLE>
B-110 See Notes to Financial Statements
<PAGE> 131
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
ITT Corp. (a)............................................ 820 $ 67,957
Johnson Controls, Inc.................................... 3,020 144,205
Philips Electronics N.V. - ADR (Netherlands)............ 2,100 127,050
Rockwell International Corp.............................. 1,250 65,313
Waste Management, Inc.................................... 2,660 73,150
------------
1,146,632
------------
RAW MATERIALS/PROCESSING INDUSTRIES 4.8%
BetzDearborn, Inc........................................ 1,700 103,806
Boise Cascade Corp....................................... 2,820 85,305
Crown Cork & Seal Co., Inc............................... 2,640 132,330
Fort James Corp.......................................... 1,800 68,850
Reynolds Metals Co....................................... 480 28,800
Union Camp Corp.......................................... 1,300 69,794
W.R. Grace & Co.......................................... 850 68,372
------------
557,257
------------
TECHNOLOGY 12.0%
3Com Corp. (a)........................................... 2,010 70,224
Alcatel Alsthom CGE - ADR (France)....................... 5,550 140,485
BMC Software, Inc. (a)................................... 1,810 118,781
Cabletron System, Inc. (a)............................... 4,640 69,600
Computer Associates International, Inc................... 1,065 56,312
Creative Technology Ltd. (a)............................. 3,380 74,360
Ericsson (L M) Telephone Co., Class B - ADR (Sweden)..... 2,260 84,326
International Business Machines Corp..................... 3,500 365,969
Motorola, Inc............................................ 1,830 104,424
Newbridge Networks Corp. (a)............................. 1,860 64,868
Nokia Corp - ADR (Finland)............................... 1,760 123,200
VLSI Technology, Inc. (a)................................ 2,670 63,079
Xerox Corp............................................... 990 73,074
------------
1,408,702
------------
TRANSPORTATION 1.2%
Canadian National Railway Co............................. 3,020 142,695
------------
UTILITIES 13.2%
AirTouch Communications, Inc. (a)........................ 1,480 61,513
AT&T Corp................................................ 1,320 80,850
BellSouth Corp........................................... 2,990 168,374
Boston Edison Co......................................... 2,660 100,748
Cincinnati Bell, Inc..................................... 4,170 129,270
</TABLE>
B-111 See Notes to Financial Statements
<PAGE> 132
GROWTH AND INCOME PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Description Shares Market Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES (CONTINUED)
Consolidated Edison Co....................................................... 2,770 $ 113,570
Edison International......................................................... 3,280 89,175
FPL Group, Inc............................................................... 1,310 77,536
GPU, Inc..................................................................... 3,060 128,902
GTE Corp..................................................................... 2,560 133,760
Houston Industries, Inc...................................................... 300 8,006
Northeast Utilities.......................................................... 9,690 114,463
PG&E Corp.................................................................... 3,740 113,836
SBC Communications, Inc...................................................... 1,550 113,538
U.S. West Communications Group............................................... 2,450 110,556
------------
1,544,097
------------
TOTAL COMMON STOCKS 93.7%................................................................... 10,982,367
CORPORATE DEBT 0.6%
Hewlett Packard Co., LYON, 144A - Private Placement ($125,000 par, yielding 3.125%,
10/14/17 maturity) (b)..................................................................... 65,313
------------
TOTAL LONG-TERM INVESTMENTS 94.3%
(Cost $10,508,144)..................................................................... 11,047,680
REPURCHASE AGREEMENT 7.5%
SBC Warburg ($880,000 par, collateralized by U.S. Government obligations in a pooled cash
account, dated 12/31/97, to be sold on 01/02/98 at $880,298)
(Cost $880,000)............................................................................ 880,000
------------
TOTAL INVESTMENTS 101.8%
(Cost $11,388,144).......................................................................... 11,927,680
LIABILITIES IN EXCESS OF OTHER ASSETS (1.8%)................................................ (214,090)
------------
NET ASSETS 100.0%........................................................................... $11,713,590
------------
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
B-112 See Notes to Financial Statements
<PAGE> 133
GROWTH AND INCOME PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $11,388,144)................................................... $11,927,680
Cash................................................................................... 3,507
Receivables:
Investments Sold..................................................................... 23,454
Dividends............................................................................ 13,206
-----------
Total Assets......................................................................... 11,967,847
-----------
LIABILITIES:
Payables:
Investments Purchased................................................................ 225,821
Distributor and Affiliates........................................................... 3,419
Porfolio Shares Repurchased.......................................................... 1,268
Investment Advisory Fee.............................................................. 938
Accrued Expenses....................................................................... 18,886
Trustees' Deferred Compensation and Retirement Plans.................................. 3,925
-----------
Total Liabilities................................................................. 254,257
-----------
NET ASSETS............................................................................. $11,713,590
-----------
NET ASSETS CONSIST OF:
Capital................................................................................ $11,202,241
Net Unrealized Appreciation............................................................ 539,536
Accumulated Undistributed Net Investment Income........................................ 14,691
Accumulated Distributions in Excess of Net Realized Gain............................... (42,878)
-----------
NET ASSETS............................................................................. $11,713,590
-----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $11,713,590 and 966,202 shares of beneficial interest
issued and outstanding)............................................................... $ 12.12
-----------
</TABLE>
B-113 See Notes to Financial Statements
<PAGE> 134
GROWTH AND INCOME PORTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends.......................................................................... $ 76,803
Interest........................................................................... 23,134
--------
Total Income..................................................................... 99,937
--------
EXPENSES:
Investment Advisory Fee............................................................ 30,777
Audit.............................................................................. 19,513
Shareholder Reports................................................................ 10,114
Shareholder Services............................................................... 6,867
Trustees' Fees and Expenses........................................................ 4,843
Accounting......................................................................... 4,410
Legal.............................................................................. 3,269
Custody............................................................................ 87
Other.............................................................................. 4,079
--------
Total Expenses................................................................. 83,959
Less Fees Waived and Expenses Reimbursed ($30,777 and $14,592, respectively)... 45,369
--------
Net Expenses................................................................... 38,590
--------
NET INVESTMENT INCOME.............................................................. $ 61,347
--------
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain.................................................................. $105,366
--------
Unrealized Appreciation/Depreciation:
Beginning of the Period.......................................................... (1,970)
End of the Period:
Investments.................................................................... 539,536
--------
Net Unrealized Appreciation During the Period...................................... 541,506
--------
NET REALIZED AND UNREALIZED GAIN................................................... $646,872
--------
NET INCREASE IN NET ASSETS FROM OPERATIONS......................................... $708,219
--------
</TABLE>
B-114 See Notes to Financial Statements
<PAGE> 135
GROWTH AND INCOME PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended December 31, 1997 and the Period December 23, 1996
(Commencement of Investment Operations) to December 31, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year Ended Period Ended
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income..................................................... $ 61,347 $ 553
Net Realized Gain/Loss.................................................... 105,366 (81)
Net Unrealized Appreciation/Depreciation During the Period................ 541,506 (1,970)
----------- --------
Change in Net Assets from Operations...................................... 708,219 (1,498)
----------- --------
Distributions from Net Investment Income.................................. (44,226) -0-
----------- --------
Distrbutions from Net Realized Gain....................................... (105,285) -0-
Distrbutions in Excess of Net Realized Gain............................... (45,861) -0-
----------- --------
Distributions from and in Excess of Net Realized Gain..................... (151,146) -0-
----------- --------
Total Distributions....................................................... (195,372) -0-
----------- --------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....................... 512,847 (1,498)
----------- --------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................................. 10,524,876 -0-
Net Asset Value of Shares Issued Through Dividend Reinvestment............ 195,372 -0-
Cost of Shares Repurchased................................................ (18,007) -0-
----------- --------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS........................ 10,702,241 -0-
----------- --------
TOTAL INCREASE/DECREASE IN NET ASSETS..................................... 11,215,088 (1,498)
NET ASSETS:
Beginning of the Period................................................... 498,502 500,000
----------- --------
End of the Period (including accumulated undistributed net
investment income of $14,691 and $553, respectively).................... $11,713,590 $498,502
----------- --------
</TABLE>
B-115 See Notes to Financial Statements
<PAGE> 136
GROWTH AND INCOME PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
December 23, 1996
(Commencement
Of Investment
Year Ended Operations) To
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of the Period......................................... $ 9.970 $ 10.000
------------ -----------
Net Investment Income....................................................... .072 .011
Net Realized and Unrealized Gain/Loss....................................... 2.309 (.041)
------------ -----------
Total from Investment Operations................................................. 2.381 (.030)
------------ -----------
Less:
Distributions from Net Investment Income......................................... .065 -0-
Distributions from and in Excess of Net Realized Gain............................ .163 -0-
------------ -----------
Total Distributions.............................................................. .228 -0-
------------ -----------
Net Asset Value, End of the Period............................................... $12.123 $ 9.970
------------ -----------
Total Return*.................................................................... 23.90% (.30%)**
Net Assets at End of the Period (In millions).................................... $ 11.7 $ 0.5
Ratio of Expenses to Average Net Assets*......................................... .75% .75%
Ratio of Net Investment Income to Average Net Assets*............................ 1.19% 4.47%
Portfolio Turnover............................................................... 96% 0%**
Average Commission Paid Per Equity Share Traded (a).............................. $ .0398 $ .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.......................................... 1.63% 45.97%
Ratio of Net Investment Income/Loss to Average Net Assets........................ .31% (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-116 See Notes to Financial Statements
<PAGE> 137
MONEY MARKET PORTFOLIO PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Discount
Par Yield on
Amount Maturity Date of Amortized
(000) Description Date Purchase Cost
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS 33.1%
$ 750 Federal Farm Credit Bank Discount Note................. 05/08/98 5.527% $ 735,547
1,000 Federal Home Loan Bank Discount Note................... 01/09/98 5.525 998,655
1,830 Federal Home Loan Bank Discount Note................... 01/15/98 5.482 1,825,928
1,000 Federal Home Loan Mortgage Corp. Discount Note......... 02/13/98 5.712 993,082
1,000 Federal National Mortgage Association Discount Note.... 03/03/98 5.550 990,683
1,000 Federal National Mortgage Association Discount Note.... 03/20/98 5.578 987,997
-----------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS................................. 6,531,892
-----------
COMMERCIAL PAPER 65.9%
1,000 American Express Credit Corp........................... 02/09/98 5.620 993,867
1,000 Associates Corp. of North America...................... 03/19/98 5.793 987,628
995 Chevron Oil Finance Corp............................... 01/02/98 6.602 994,635
1,000 Commercial Credit Corp................................. 01/16/98 5.596 997,556
1,100 Ford Motor Credit Co................................... 01/13/98 5.707 1,097,799
1,000 General Electric Capital Corp.......................... 01/05/98 5.622 999,226
1,000 General Electric Corp.................................. 03/18/98 5.768 987,894
1,000 John Deere Capital Corp................................ 02/09/98 5.605 993,889
1,000 IBM Credit Corp........................................ 02/09/98 5.776 993,644
1,000 Merrill Lynch & Co., Inc............................... 01/26/98 5.648 995,999
1,000 Metlife Funding, Inc................................... 02/03/98 5.794 994,569
1,000 Prudential Funding Corp................................ 01/13/98 5.628 997,996
1,000 Toronto Dominion Holdings.............................. 06/01/98 5.753 976,398
-----------
TOTAL COMMERCIAL PAPER........................................................ 13,011,100
REPURCHASE AGREEMENT 1.3%
DLJ ($265,000 par collateralized by U.S. Government obligations in a
pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $265,096) 265,000
-----------
TOTAL INVESTMENTS 100.3%.............................................................. 19,807,992
LIABILITIES IN EXCESS OF OTHER ASSETS (0.3%).......................................... (67,220)
-----------
NET ASSETS 100.0%..................................................................... $19,740,772
-----------
</TABLE>
B-117 See Notes to Financial Statements
<PAGE> 138
MONEY MARKET PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
- ------------------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at Amortized Cost which Approximates Market...................... $19,807,992
Cash.......................................................................... 5,764
Other......................................................................... 46,039
-----------
Total Assets............................................................. 19,859,795
-----------
LIABILITIES:
Payables:
Distributor and Affiliates................................................. 2,550
Investment Advisory Fee.................................................... 2,500
Portfolio Shares Repurchased............................................... 362
Trustees' Deferred Compensation and Retirement Plans.......................... 95,154
Accrued Expenses.............................................................. 18,457
-----------
Total Liabilities........................................................ 119,023
-----------
NET ASSETS.................................................................... $19,740,772
-----------
NET ASSETS CONSIST OF:
Capital....................................................................... $19,740,568
Accumulated Undistributed Net Investment Income............................... 204
-----------
NET ASSETS (Equivalent to $1.00 per share for 19,740,568 shares outstanding).. $19,740,772
-----------
</TABLE>
B-118 See Notes to Financial Statements
<PAGE> 139
MONEY MARKET PROTFOLIO STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest....................................................... $ 1,185,800
-------------
EXPENSES:
Investment Advisory Fee........................................ 106,891
Trustees' Fees and Expenses.................................... 17,090
Audit.......................................................... 16,475
Shareholder Services........................................... 16,133
Shareholder Reports............................................ 14,946
Custody........................................................ 13,396
Accounting..................................................... 10,155
Legal.......................................................... 6,140
Other.......................................................... 7,927
-------------
Total Expenses.............................................. 209,153
Less Fees Waived............................................ 80,938
-------------
Net Expenses................................................ 128,215
-------------
NET INVESTMENT INCOME.......................................... $ 1,057,585
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS..................... $ 1,057,585
-------------
</TABLE>
B-119 See Notes to Financial Statements
<PAGE> 140
MONEY MARKET PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................................... $ 1,057,585 $ 1,002,363
Net Realized Gain....................................................... 0 415
------------ ------------
Change in Net Assets from Operations.................................... 1,057,585 1,002,778
------------ ------------
Distributions from Net Investment Income................................ (1,057,591) (1,001,453)
Distributions in Excess of Net Investment Income........................ 0 (415)
------------ ------------
Total Distributions..................................................... (1,057,591) (1,001,868)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES..................... (6) 910
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................................... 22,688,459 15,915,843
Net Asset Value of Shares Issued Through Dividend Reinvestment.......... 1,057,591 1,001,868
Cost of Shares Repurchased.............................................. (23,571,207) (18,927,603)
------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS...................... 174,843 (2,009,892)
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS................................... 174,837 (2,008,982)
NET ASSETS:
Beginning of the Period................................................. 19,565,935 21,574,917
------------ ------------
End of the Period (Including accumulated undistributed net
investment income of $204 and $210, respectively)...................... $ 19,740,772 $ 19,565,935
============ ============
</TABLE>
B-120 See Notes to Financial Statements
<PAGE> 141
MONEY MARKET PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
=========================================================================================================================
Year Ended December 31,
----------------------------------------------
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<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.................................................. .049 .048 .0533 .0365 .0262
Less Distributions from Net Investment Income.......................... .049 .048 .0533 .0365 .0262
------ ------ ------ ------ ------
Net Asset Value, End of the Period..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ======
Total Return*.......................................................... 5.06% 4.89% 5.46% 3.71% 2.66%
Net Assets at End of the Period (In millions).......................... $ 19.7 $ 19.6 $ 21.6 $ 28.5 $ 30.0
Ratio of Expenses to Average Net Assets*............................... .60% .60% .60% .60% .60%
Ratio of Net Investment Income to Average Net Assets*.................. 4.95% 4.78% 5.33% 3.63% 2.63%
* 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................................ .98% 1.29% .93% .87% .95%
Ratio of Net Investment Income to Average Net Assets................... 4.57% 4.10% 5.00% 3.37% 2.28%
</TABLE>
B-121 See Notes to Financial Statements
<PAGE> 142
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================================================
Description Shares Market Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCK 92.7%
APARTMENTS 18.4%
AMLI Residential Properties Trust................................................................ 26,400 $ 587,400
Avalon Properties, Inc........................................................................... 243,400 7,530,187
Bay Apartment Communities, Inc................................................................... 315,800 12,316,200
Essex Property Trust, Inc........................................................................ 320,100 11,203,500
Irvine Apartment Communities, Inc................................................................ 46,400 1,476,100
Oasis Residential, Inc........................................................................... 269,300 6,008,756
Pennsylvania Real Estate Investment.............................................................. 85,400 2,097,638
Security Capital Atlantic, Inc................................................................... 402,546 8,503,784
Walden Residential Properties, Inc............................................................... 208,500 5,316,750
------------
55,040,315
------------
DEVELOPMENT 4.4%
Atlantic Gulf Communities Corp. (a).............................................................. 433,224 1,949,508
Atlantic Gulf Communities Corp. - Preferred Ser B
(Convertible into 96,770 common shares) (a)...................................................... 55,647 556,464
Atlantic Gulf Communities Corp. - Preferred Shares, 144A - Private Placement (a) (b)............. 79,420 794,200
Atlantic Gulf Communities Corp. Warrants, 37,098 shares
Class A, B and C, expiring 06/23/04 (a).......................................................... 111,294 163,626
Atlantic Gulf Communities Corp. Warrants, 74,352 shares Class A, B and C,
expiring 06/24/01, 144A - Private Placement (a) (b).............................................. 223,056 0
Brookfield Properties Corp....................................................................... 370,600 6,177,902
Brookfield Properties Corp. - Common Share Installment Receipts (a).............................. 195,400 2,321,352
Catellus Development Corp. (a)................................................................... 56,300 1,126,000
------------
13,089,052
------------
HEALTHCARE FACILITIES 6.2%
Nationwide Health Properties, Inc................................................................ 530,900 13,537,950
Omega Healthcare Investors, Inc.................................................................. 127,000 4,905,375
------------
18,443,325
------------
HOTEL & LODGING 10.3%
American General Hospitality Corp................................................................ 134,800 3,605,900
Capstar Hotel Co. (a)............................................................................ 278,300 9,549,169
Extended Stay America, Inc. (a).................................................................. 264,000 3,283,500
Host Marriott Corp. (a).......................................................................... 612,100 12,012,462
Suburban Lodges America, Inc. (a)................................................................ 70,300 935,869
Vail Resorts, Inc. (a)........................................................................... 53,200 1,379,875
------------
30,766,775
------------
MANUFACTURED HOME COMMUNITIES 6.5%
Chateau Properties, Inc.......................................................................... 425,417 13,400,636
Manufactured Home Communities, Inc............................................................... 223,700 6,039,900
------------
19,440,536
------------
</TABLE>
B-122 See Notes to Financial Statements
<PAGE> 143
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO OF INVESTMENTS (CONTINUED)
PORTFOLIO
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================================================
Description Shares Market Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OFFICE/INDUSTRIAL 26.4%
Arden Realty Group, Inc......................................................................... 448,000 $ 13,776,000
Bedford Property Investors, Inc................................................................. 323,600 7,078,750
Brandywine Realty Trust......................................................................... 409,900 10,298,737
CarrAmerica Realty Corp......................................................................... 300,900 9,534,769
Equity Office Properties Trust (a).............................................................. 136,411 4,305,472
Great Lakes REIT, Inc........................................................................... 268,000 5,209,250
Pacific Gulf Properties, Inc.................................................................... 463,600 11,010,500
Prime Group Realty Trust........................................................................ 283,500 5,740,875
Reckson Associates Realty Corp.................................................................. 61,400 1,558,025
Trizec Hahn Corp................................................................................ 158,900 3,684,494
Wellsford Real Properties, Inc., 144A - Private Placement (a) (b)............................... 447,242 6,988,156
------------
79,185,028
------------
PRODUCER MANUFACTURING 0.0%
ITT Corp. (a)................................................................................... 1,400 116,025
------------
SELF-STORAGE 3.2%
Public Storage, Inc............................................................................. 69,800 2,050,375
Shurgard Storage Centers, Inc., Class A......................................................... 255,800 7,418,200
------------
9,468,575
------------
SHOPPING CENTERS 7.4%
Burnham Pacific Properties, Inc................................................................. 336,800 5,157,250
Federal Realty Investment Trust................................................................. 379,000 9,759,250
First Washington Realty Trust, Inc. - Preferred Ser A
(Convertible into 74,484 common shares)......................................................... 58,100 1,946,350
Pan Pacific Retail Properties, Inc.............................................................. 145,300 3,105,788
Ramco-Gershenson Properties Trust............................................................... 1,900 37,406
Western Investment Real Estate Trust............................................................ 147,600 2,029,500
------------
22,035,544
------------
SHOPPING MALLS 9.9%
CBL & Associates Properties, Inc................................................................ 271,600 6,705,125
First Union Real Estate Investments............................................................. 142,400 2,314,000
Taubman Centers, Inc............................................................................ 1,227,200 15,953,600
Urban Shopping Centers, Inc..................................................................... 138,400 4,826,700
------------
29,799,425
------------
TOTAL COMMON AND PREFERRED STOCK 92.7%.......................................................... 277,384,600
------------
</TABLE>
B-123 See Notes to Financial Statements
<PAGE> 144
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO PORTFOLIO OF INVESTMENTS
(CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
====================================================================================================================
Description Market Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE CORPORATE OBLIGATIONS 0.6%
Brookfield Properties Corp. - Installment Receipts Representing Subordinated
Debenture ($2,262,000 par, 6.00% coupon, 02/14/07 maturity)..................................... $ 1,818,422
-------------
TOTAL LONG-TERM INVESTMENTS 93.3%
(Cost $248,129,758)............................................................................. 279,203,022
REPURCHASE AGREEMENT 8.1%
Swiss Bank Corp. ($24,270,000 par collateralized by U.S. Government obligations in a
pooled cash account, dated 12/31/97, to be sold on 01/02/98 at $24,278,225)
(Cost $24,270,000).............................................................................. 24,270,000
-------------
TOTAL INVESTMENTS 101.4%
(Cost $272,399,758)............................................................................. 303,473,022
LIABILITIES IN EXCESS OF OTHER ASSETS (1.4%)...................................................... (4,065,994)
-------------
NET ASSETS 100.0%................................................................................. $ 299,407,028
-------------
</TABLE>
(a) Non-income producing security as this stock does not declare dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
B-124 See Notes to Financial Statements
<PAGE> 145
MORGAN STANLEY REAL ESTATE SECURITIES
PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================================
<S> <C>
ASSETS:
Total Investments (Cost $272,399,758)........................................................... $ 303,473,022
Receivables:
Dividends..................................................................................... 1,861,526
Investments Sold.............................................................................. 886,181
Interest...................................................................................... 45,364
Unamortized Organizational Costs................................................................ 3,415
Other........................................................................................... 27
-------------
Total Assets................................................................................ 306,269,535
=============
LIABILITIES:
Payables:
Portfolio Shares Repurchased.................................................................. 5,037,170
Investments Purchased......................................................................... 1,513,577
Investment Advisory Fee....................................................................... 244,073
Custodian Bank................................................................................ 15,938
Distributor and Affiliates.................................................................... 6,426
Accrued Expenses................................................................................ 29,652
Trustees' Deferred Compensation and Retirement Plans............................................ 15,671
-------------
Total Liabilities........................................................................... 6,862,507
-------------
NET ASSETS...................................................................................... $ 299,407,028
=============
NET ASSETS CONSIST OF:
Capital......................................................................................... $ 263,842,945
Net Unrealized Appreciation..................................................................... 31,073,264
Accumulated Net Realized Gain................................................................... 4,055,438
Accumulated Undistributed Net Investment Income................................................. 435,381
-------------
NET ASSETS...................................................................................... $ 299,407,028
=============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $299,407,028 and 18,894,267 shares of beneficial interest
issued and outstanding)....................................................................... $ 15.85
=============
</TABLE>
B-125 See Notes to Financial Statements
<PAGE> 146
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends........................................................ $ 9,416,241
Interest......................................................... 789,383
------------
Total Income................................................. 10,205,624
------------
EXPENSES:
Investment Advisory Fee.......................................... 2,269,511
Accounting....................................................... 32,983
Shareholder Services............................................. 16,833
Legal............................................................ 12,860
Trustees' Fees and Expenses...................................... 10,241
Amortization of Organizational Costs............................. 1,592
Other............................................................ 94,656
------------
Total Expenses............................................... 2,438,676
------------
NET INVESTMENT INCOME............................................ $ 7,766,948
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain................................................ $ 28,792,309
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period........................................ 22,046,065
End of the Period:
Investments.................................................. 31,073,264
------------
Net Unrealized Appreciation During the Period.................... 9,027,199
------------
NET REALIZED AND UNREALIZED GAIN................................. $ 37,819,508
============
NET INCREASE IN NET ASSETS FROM OPERATION........................ $ 45,586,456
============
</TABLE>
B-126 See Notes to Financial Statements
<PAGE> 147
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................................. $ 7,766,948 $ 2,164,983
Net Realized Gain...................................................... 28,792,309 1,465,073
Net Unrealized Appreciation During the Period.......................... 9,027,199 21,713,960
------------- ------------
Change in Net Assets from Operations................................... 45,586,456 25,344,016
------------- ------------
Distributions from Net Investment Income............................... (7,660,430) (1,844,832)
Distributions from Net Realized Gain................................... (25,295,317) (874,097)
------------- ------------
Total Distributions.................................................... (32,955,747) (2,718,929)
------------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.................... 12,630,709 22,625,087
------------- ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.............................................. 275,023,739 178,078,191
Net Asset Value of Shares Issued Through Dividend Reinvestment......... 32,953,898 2,718,725
Cost of Shares Repurchased............................................. (188,685,072) (44,523,570)
------------- ------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS..................... 119,292,565 136,273,346
------------- ------------
TOTAL INCREASE IN NET ASSETS........................................... 131,923,274 158,898,433
NET ASSETS:
Beginning of the Period................................................ 167,483,754 8,585,321
------------- ------------
End of the Period (Including accumulated undistributed net investment
income of $435,381 and $328,863, respectively)....................... $ 299,407,028 $167,483,754
------------- ------------
</TABLE>
B-127 See Notes to Financial Statements
<PAGE> 148
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
================================================================================================================================
July 3, 1995
(Commencement of
Year Ended Year Ended Investment Operations)
December 31, 1997 December 31, 1996 to December 31, 1995
================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $ 14.784 $ 10.74 $ 10.00
========= ======== ========
Net Investment Income.................................... .464 .217 .20
Net Realized and Unrealized Gain......................... 2.617 4.117 .6325
--------- -------- --------
Total from Investment Operations............................ 3.081 4.334 .8325
========= ======== ========
Less:
Distributions from Net Investment Income................. .470 .199 .0925
Distributions from Net Realized Gain..................... 1.549 .091 -0-
--------- -------- --------
Total Distributions......................................... 2.019 .290 .0925
--------- -------- --------
Net Asset Value, End of the Period.......................... $ 15.846 $ 14.784 $ 10.74
========= ======== ========
Total Return*............................................... 21.47% 40.53% 8.35%**
Net Assets at End of the Period (In millions)............... $299.4 $ 167.5 $ 8.6
Ratio of Expenses to Average Net Assets*.................... 1.07% 1.10% 2.50%
Ratio of Net Investment Income to Average Net Assets*....... 3.42% 5.06% 3.75%
Portfolio Turnover.......................................... 177% 84% 85%**
Average Commission Paid Per Equity Share Traded (a)......... $ .0597 $ .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..................... N/A 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets........ N/A 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.
N/A = Not Applicable
B-128 See Notes to Financial Statements
<PAGE> 149
STRATEGIC STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1997
================================================================================
Description Shares Market Value
================================================================================
<S> <C> <C>
COMMON STOCK 92.4%
CONSUMER DURABLES 13.7%
Chrysler Corp........................................ 3,320 $ 116,823
General Motors Corp.................................. 1,860 112,762
Eastman Kodak Co..................................... 1,940 117,976
----------
347,561
----------
CONSUMER NON-DURABLES 14.2%
Anheuser Busch Cos., Inc............................. 2,730 120,120
H.J. Heinz Co........................................ 2,290 116,361
Philip Morris Cos., Inc.............................. 2,690 121,891
----------
358,372
----------
ENERGY 18.0%
Amoco Corp........................................... 1,320 112,365
Chevron Corp......................................... 1,450 111,650
Exxon Corp........................................... 1,890 115,644
Mobil Corp........................................... 1,600 115,500
----------
455,159
----------
FINANCE 4.5%
J.P. Morgan and Co., Inc............................. 1,000 112,875
----------
HEALTH CARE 2.9%
American Home Products Corp.......................... 960 73,440
----------
PRODUCER MANUFACTURING 6.8%
Caterpillar, Inc..................................... 1,400 67,987
Minnesota Mining & Manufacturing Co.................. 1,250 102,578
----------
170,565
----------
RAW MATERIALS/PROCESSING INDUSTRIES 8.0%
E.I. du Pont de Nemours & Co......................... 770 46,248
International Paper Co............................... 2,530 109,106
PPG Industries, Inc.................................. 830 47,414
----------
202,768
----------
TECHNOLOGY 0.2%
Raytheon Co., Class A................................ 103 5,079
----------
TRANSPORTATION 4.5%
Norfolk Southern Corp................................ 3,720 114,623
----------
UTILITIES 19.6%
AT&T Corp............................................ 2,130 130,462
Bell Atlantic Corp................................... 1,330 121,030
</TABLE>
B-129 See Notes to Financial Statements
<PAGE> 150
STRATEGIC STOCK PORTFOLIO PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
=======================================================================================================
Description Shares Market Value
=======================================================================================================
<S> <C> <C>
UTILITIES (CONTINUED)
BellSouth Corp.................................................................. 2,160 $ 121,635
SBC Communication, Inc.......................................................... 1,650 120,863
----------
493,990
----------
TOTAL LONG-TERM INVESTMENTS 92.4% (Cost $2,327,597)............................. 2,334,432
REPURCHASE AGREEMENT 12.3%
DLJ ($310,000 par collateralized by U.S. Government obligations in a pooled cash
account, dated 12/31/97, to be sold on 01/02/98 at $310,112) ( Cost $310,000). 310,000
----------
TOTAL INVESTMENTS 104.7% (Cost $2,637,597)...................................... 2,644,432
LIABILITIES IN EXCESS OF OTHER ASSETS (4.7%).................................... (118,230)
----------
Net Assets 100.0%.............................................................. $2,526,202
==========
</TABLE>
B-130 See Notes to Financial Statements
<PAGE> 151
STRATEGIC STOCK PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<CAPTION>
=================================================================================================
<S> <C>
ASSETS:
Total Investments, including repurchase agreement of $310,000 (Cost $2,637,597)....... $2,644,432
Cash.................................................................................. 2,867
Receivables:
Portfolio Shares Sold............................................................... 27,739
Dividends........................................................................... 4,050
Expense Reimbursement by Adviser.................................................... 3,809
----------
Total Assets...................................................................... 2,682,897
==========
LIABILITIES:
Payables:
Investments Purchased............................................................... 151,395
Distributor and Affiliates.......................................................... 300
Accrued Expenses...................................................................... 5,000
----------
Total Liabilities................................................................ 156,695
----------
NET ASSETS............................................................................ $2,526,202
==========
NET ASSETS CONSIST OF:
Capital............................................................................... $2,512,791
Net Unrealized Appreciation........................................................... 6,835
Accumulated Undistributed Net Investment Income....................................... 6,576
----------
NET ASSETS............................................................................ $2,526,202
==========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE
(Based on net assets of $2,526,202 and 246,576 shares of beneficial interest
issued and outstanding)............................................................. $ 10.25
==========
</TABLE>
B-131 See Notes to Financial Statements
<PAGE> 152
Strategic Stock Portfolio Statement of Operations
For Period November 3, 1997 (Commencement of Investment Operations) to December
31, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends................................................................................... $ 5,805
Interest.................................................................................... 2,262
-------
Total Income........................................................................... 8,067
-------
EXPENSES:
Audit....................................................................................... 5,000
Investment Advisory Fee..................................................................... 1,083
Legal....................................................................................... 300
-------
Total Expenses......................................................................... 6,383
Less Fees Waived and Expenses Reimbursed ($1,083 and $3,809, respectively)............. 4,892
-------
Net Expenses........................................................................... 1,491
NET INVESTMENT INCOME....................................................................... $ 6,576
-------
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................................................... $ -0-
-------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................................................ -0-
End of the Period:
Investments............................................................................ 6,835
-------
Net Unrealized Appreciation During the Period............................................... 6,835
-------
NET REALIZED AND UNREALIZED GAIN............................................................ $ 6,835
=======
NET INCREASE IN NET ASSETS FROM OPERATIONS.................................................. $13,411
=======
</TABLE>
B-132 See Notes to Financial Statements
<PAGE> 153
Strategic Stock Portfolio Statement of Changes in Net Assets
For Period November 3, 1997 (Commencement of Investment Operations) to December
31, 1997
================================================================================
<TABLE>
<CAPTION>
========================================================================================================
Period Ended
December 31, 1997
========================================================================================================
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................................................. $ 6,576
Net Unrealized Appreciation During the Period.......................................... 6,835
----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.................................... 13,411
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold.............................................................. 2,312,791
----------
TOTAL INCREASE IN NET ASSETS........................................................... 2,326,202
NET ASSETS:
Beginning of the Period................................................................ 200,000
----------
End of Period (Including accumulated undistributed net investment income of $6,576).... $2,526,202
==========
</TABLE>
B-133 See Notes to Financial Statements
<PAGE> 154
Strategic Stock Portfolio Financial Highlights
The following schedule presents financial highlights for one share of the
Portfolio outstanding throughout the period indicated.
<TABLE>
<CAPTION>
======================================================================================================
November 3, 1997
(Commencement of
Investment Operations)
to December 31, 1997
======================================================================================================
<S> <C>
Net Asset Value, Beginning of the Period........................................ $ 10.000
--------
Net Investment Income...................................................... .027
Net Realized and Unrealized Gain........................................... .218
--------
Total from Investment Operations................................................ .245
--------
Net Asset Value, End of the Period.............................................. $ 10.245
========
Total Return*................................................................... 2.45%**
Net Assets at End of the Period (In millions)................................... $ 2.5
Ratio of Expenses to Average Net Assets*........................................ .61%
Ratio of Net Investment Income to Average Net Assets*........................... 2.67%
Portfolio Turnover.............................................................. 0%**
Average Commission Paid per Equity Share Traded (a)............................. $ .0282
* 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......................................... 2.59%
Ratio of Net Investment Income to Average Net Assets............................ .68%
</TABLE>
** Non-Annualized
(a) Represents the average brokerage commission per equity share traded during
the period for trades where commissions were applicable.
B-134 See Notes to Financial Statements
<PAGE> 155
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
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 ten Portfolios: Asset Allocation
Portfolio ("Asset Allocation"), Domestic Income Portfolio ("Domestic"), Emerging
Growth Portfolio ("Emerging Growth"), Enterprise Portfolio ("Enterprise"),
Global Equity Portfolio ("Global Equity"), Government Portfolio ("Government"),
Growth and Income Portfolio ("Growth and Income"), Money Market Portfolio
("Money Market"), Morgan Stanley Real Estate Securities Portfolio ("Real
Estate") and Strategic Stock Portfolio ("Strategic Stock") (collectively the
"Portfolios"). Each Portfolio is accounted for as a separate entity.
The goals of the Portfolios 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; Real Estate seeks long-term growth of
capital by investing principally in securities of companies operating in the
real estate industry; and Strategic Stock seeks an above average total return
consistent with the preservation of invested capital, by investing primarily in
a portfolio of dividend paying equity securities included in the Dow Jones
Industrial Average or the Morgan Stanley Capital International USA Index.
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 28% of Domestic's net assets at December 31, 1997.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Portfolios 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
Portfolios will maintain, in a segregated account with its custodian, assets
having an aggregate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made.
B-135
<PAGE> 156
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
The Portfolios may invest in repurchase agreements which are short-term
investments in which the Portfolios acquire ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Portfolios 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 Portfolios 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 Portfolios.
C. INVESTMENT INCOME--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Original issue discounts on
debt securities purchased are amortized over the expected life of each
applicable security. Premiums on debt securities are not amortized.
D. ORGANIZATIONAL COSTS--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 Portfolio's
organization in the amount of $6,828 per Portfolio. 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
Portfolios originally purchased by VKAC are redeemed during the amortization
period, the Portfolios will be reimbursed for any unamortized organizational
costs 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 Portfolio'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 Portfolio intends to utilize provisions of the federal income tax laws
which allow each Portfolio 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 capital loss
carryforward at December 31, 1997 along with its expiration dates. The table
also presents the identified cost of investments, including foreign currencies,
at December 31, 1997 for federal income tax purposes with the associated gross
unrealized appreciation, gross unrealized depreciation and net unrealized
appreciation/depreciation on investments, and foreign currency.
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Realized capital loss carryforward............. -- $ 1,289,534 $ 81,975 -- --
Expiration dates of capital loss carryforward.. -- 1998-2002 2004 -- --
Amount expiring on 12/31/98.................... -- 160,765 -- -- --
Identified cost................................ $55,048,430 $ 16,143,269 $8,597,981 $70,618,370 $2,649,384
Gross unrealized appreciation.................. 8,689,126 976,801 2,392,203 30,450,369 451,372
Gross unrealized depreciation.................. 1,124,743 129,718 468,317 1,510,002 176,851
Net unrealized appreciation/depreciation....... 7,564,383 847,083 1,923,886 28,940,367 274,521
</TABLE>
B-136
<PAGE> 157
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
AND MONEY REAL STRATEGIC
GOVERNMENT INCOME MARKET ESTATE STOCK
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Realized capital loss carryforward.............. $10,001,012 $ -- $ 1,707 -- --
Expiration dates of capital loss carryforward... 1998--2004 -- 2003--2005 -- --
Amount expiring on 12/31/98..................... $ 2,677,688 -- -- -- --
Identified cost................................. $52,437,491 $11,409,515 $19,807,992 $272,797,131 $2,637,597
Gross unrealized appreciation................... 1,450,922 914,357 -- 32,726,388 56,985
Gross unrealized depreciation................... 31,750 396,192 -- 2,050,497 50,150
Net unrealized appreciation/depreciation........ 1,419,172 518,165 -- 30,675,891 6,835
</TABLE>
Net realized gains or losses may differ for financial reporting and tax
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 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, Real
Estate and Strategic Stock declare dividends from net investment income
annually. Government declares distributions from short-term capital gains, if
any, monthly and from long-term capital gains, if any, annually. Asset
Allocation, Domestic, Emerging Growth, Enterprise, Global Equity, Growth and
Income, Money Market, Real Estate and Strategic Stock 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.
For Federal income tax purposes, the following information is furnished
with respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997.
<TABLE>
<CAPTION>
CAPITAL GAIN DISTRIBUTION
------------------------------
PORTFOLIO 28% RATE 20% RATE
- ------------------------------------------------------------------------------
<S> <C> <C>
Asset Allocation............................... 2,138,293 850,328
Enterprise..................................... 3,729,664 5,035,925
Global Equity.................................. 256,445 -0-
Growth and Income.............................. -0- -0-
Real Estate.................................... 1,784,184 422,004
</TABLE>
Shareholders were sent a 1997 Form 1099-DIV in January 1998 representing their
proportionate share of capital gain distribution to be reported on their income
tax returns.
B-137
<PAGE> 158
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
________________________________________________________________________________
The following table presents the percentage of the distributions that
qualifies for the dividend received deduction for corporate shareholders:
<TABLE>
<CAPTION>
PORTFOLIO
- ------------------------------------------------------------------------------
<S> <C>
Asset Allocation....................................................... 11.53%
Domestic............................................................... 4.53%
Enterprise............................................................. 17.65%
Global Equity.......................................................... 6.88%
Growth and Income...................................................... 32.09%
</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
1997 fiscal year have been identified and appropriately reclassified.
<TABLE>
<CAPTION>
GROWTH
GLOBAL AND
DOMESTIC EQUITY GOVERNMENT INCOME
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated Undistributed Net
Investment Income.................... $(14,391)(b) $ (3,423)(a,d) $ (22,765)(b) $(2,983)(d)
Accumulated Net Realized Gain/Loss... 14,391 (b) 3,423 (a,d) 2,864,440(b,c) 2,983 (d)
Capital.............................. -- -- (2,841,675) (c) --
</TABLE>
(a) 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 for financial reporting
purposes and have been reclassified from accumulated net realized gain/loss
to accumulated undistributed net investment income.
(b) 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
to accumulated undistributed net investment income.
(c) At December 31, 1997, 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 to capital.
(d) Miscellaneous permanent differences were reclassified from accumulated
undistributed net investment income to accumulated net realized gain/loss.
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 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.
B-138
<PAGE> 159
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
________________________________________________________________________________
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 .95% of
average daily net assets, the Adviser will reimburse Asset Allocation, Domestic,
Enterprise, Government, and Money Market for the amount of the excess. For the
period, the Adviser has volunteered to reimburse all expenses in excess of .60%
of average daily net assets. The expense reimbursement shall be made monthly.
For Emerging Growth, the Adviser will provide investment advice and
facilities to the Portfolio for an annual fee payable monthly of .70% of the
average daily net assets of the Portfolio.
For Global Equity, on April 1, 1997, the Adviser entered into a subadvisory
agreement with Morgan Stanley Asset Management Inc. (the "Subadviser") to
provide advisory services to the Portfolio and the Adviser with respect to the
Portfolio's investments. Prior to April 1, 1997, the Fund's Subadviser was John
Govett & Co., Ltd. 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.
For Growth and Income, the Adviser will provide investment advice and
facilities to the Portfolio for an annual fee payable monthly, based on the
average daily net assets of the Portfolio, 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 Portfolio for an annual fee equal to 1.00% of the average net assets of
the Portfolio. This fee is payable monthly.
For Strategic Stock, the Adviser will provide investment advice and
facilities to the Portfolio for an annual fee payable monthly of .50% of the
average daily net assets of the Portfolio.
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, 1.10% for Real Estate, and .65% for Strategic Stock of each of the
Portfolios' average daily net assets.
B-139
<PAGE> 160
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
Other transactions with affiliates during the year ended December 31, 1997
were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accounting and cash management....... $14,300 $ 8,900 $ 9,100 $19,600 $21,600
Shareholder servicing agent's fees... 15,000 15,000 15,000 15,000 15,000
Legal (Skadden)...................... 7,100 4,900 4,400 15,900 5,000
</TABLE>
<TABLE>
<CAPTION>
GROWTH
AND MONEY REAL STRATEGIC
GOVERNMENT INCOME MARKET ESTATE STOCK
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Accounting and cash management......... $13,900 $ 4,400 $10,200 $33,000 $ -0-
Shareholder servicing agent's fees..... 15,000 6,300 15,000 15,000 -0-
Legal (Skadden)........................ 6,000 3,300 5,300 12,000 300
</TABLE>
Accounting and cash management 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 Portfolios. ACCESS provides these
services at cost plus a profit. Legal services are provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Portfolios, of which a trustee
of the Portfolios is an affiliated person.
Certain officers and trustees of the Portfolios are also officers and
directors of VKAC. The Portfolios do not compensate their officers or trustees
who are officers of VKAC.
The Portfolios provide deferred compensation and retirement plans for their
trustees who are not officers of VKAC. Under the deferred compensation plan,
trustees may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each trustee's years of service to the Trust. The maximum annual
benefit per trustee under the plan is equal to $2,500 per portfolio.
For the year ended December 31, 1997, Real Estate paid brokerage
commissions to Morgan Stanley Group Inc. and Dean Witter, both of which are
affiliates of VKAC, totaling $20,148.
At December 31, 1997, VKAC owned 10 shares of Emerging Growth, 95,241
shares of Global Equity, 50,961 shares of Growth and Income, 10 shares of Real
Estate, and 20,000 shares of Strategic Stock.
3. CAPITAL TRANSACTIONS
The Portfolios 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, 1997, share transactions were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares............. 5,633,242 2,472,121 379,065 5,214,950 215,901
Sales........................ 223,088 659,893 559,402 869,947 116,532
Dividend Reinvestment........ 754,688 165,298 -0- 810,210 32,495
Repurchases.................. (1,296,455) (1,213,036) (300,652) (1,443,044) (94,662)
----------- ---------- --------- ----------- ---------
Ending Shares................ 5,314,563 2,084,276 637,815 5,452,063 270,266
=========== ========== ========= =========== =========
</TABLE>
B-140
<PAGE> 161
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
=====================================================================================================
GROWTH AND MONEY REAL STRATEGIC
GOVERNMENT INCOME MARKET ESTATE STOCK
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares............... 6,606,459 50,000 19,565,725 11,328,283 20,000<F1>
Sales.......................... 302,118 901,291 22,688,459 17,318,837 226,576
Dividend Reinvestment.......... 384,650 16,456 1,057,591 2,157,294 -0-
Repurchases.................... (1,401,150) (1,545) (23,571,207) (11,910,147) -0-
----------- -------- ----------- ------------ --------
Ending Shares.................. 5,892,077 966,202 19,740,568 18,894,267 246,576
=========== ======== =========== ============ ========
</TABLE>
<F1> Portfolio commenced investment operations during the period.
For the year ended December 31, 1996, share transactions were as follows:
<TABLE>
<CAPTION>
ASSET EMERGING GLOBAL
ALLOCATION DOMESTIC GROWTH ENTERPRISE EQUITY
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning Shares................... 5,409,616 3,235,694 195,420 5,173,759 230,530
Sales.............................. 387,499 755,420 366,538 489,441 110,151
Dividend Reinvestment.............. 821,862 217,401 -0- 611,154 3,772
Repurchases........................ (985,735) (1,736,394) (182,893) (1,059,404) (128,552)
----------- ----------- ----------- ------------ ----------
Ending Shares...................... 5,633,242 2,472,121 379,065 5,214,950 215,901
=========== =========== =========== ============ ==========
Capital at 12/31/96................ $57,866,139 $20,772,963 $ 4,650,241 $ 64,671,892 $2,102,301
=========== =========== =========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
GROWTH AND MONEY REAL
GOVERNMENT INCOME MARKET ESTATE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning Shares.............................. 7,399,648 50,000<F1> 21,575,617 799,347
Sales......................................... 184,739 -0- 15,915,843 13,855,117
Dividend Reinvestment......................... 464,018 -0- 1,001,868 197,332
Repurchases................................... (1,441,946) -0- (18,927,603) (3,523,513)
----------- ----------- ------------ ------------
Ending Shares................................. 6,606,459 50,000 19,565,725 11,328,283
----------- ----------- ------------ ------------
Capital at 12/31/96........................... $70,107,395 $ 500,000 $ 19,565,725 $144,550,380
=========== =========== ============ ============
</TABLE>
<F1> Portfolio commenced investment operations during the period.
At December 31, 1997, with the exception of VKAC's ownership of shares of
certain portfolios, two insurance companies or their separate accounts were
record owners of all but a de minimus number of the shares of each portfolio.
B-141
<PAGE> 162
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
================================================================================
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 Real Strategic
Allocation Domestic Growth Enterprise Equity Government Income Estate Stock
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases $ 32,898,983 $13,282,976 $11,014,645 $73,883,728 $3,947,336 $61,169,709 $14,551,531 $472,700,482 $2,327,597
Sales 43,334,706 16,075,670 7,368,880 80,758,859 3,875,492 65,665,559 4,642,919 378,072,839 -0-
</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 Portfolios have a variety of reasons to use derivative instruments,
such as to attempt to protect the Portfolios 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
Portfolios' holdings, including derivative instruments, are marked to market
each day with the change in value reflected in unrealized
appreciation/depreciation. 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 Portfolios.
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
Portfolios generally invest in futures on U.S. Treasury Bonds and Notes. Upon
entering into futures contracts, the Portfolios 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). The risk of loss associated with a
futures contract is in excess of the variation margin reflected on the Statement
of Assets and Liabilities.
Transactions in futures contracts for the year ended December 31, 1997, for
Government, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- --------------------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1996..................................... 110
Futures Opened....................................................... 1,311
Futures Closed....................................................... (1,323)
------
Outstanding at December 31, 1997..................................... 98
======
</TABLE>
B-142
<PAGE> 163
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
The futures contracts outstanding at December 31, 1997, and the
descriptions and unrealized appreciation/ depreciation for Government are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG CONTRACTS
U.S. Treasury Bonds - March 1998
(Current notional value of $120,469 per contract).......... 81 $ 124,418
SHORT CONTRACTS
10-year U.S. Treasury Notes - March 1998
(Current notional value of $112,156 per contract).......... 17 (20,557)
--------- ---------
98 $ 103,861
========= =========
</TABLE>
B. FORWARD COMMITMENTS--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 Portfolio and
dealers. Upon executing a forward commitment and during the period of
obligation, the Portfolio 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 Portfolio 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 Portfolio, changes in the value of the
commitment are recognized by marking the commitment to market on a daily basis
with changes in value reflected as a component of unrealized
appreciation/depreciation. Purchasing securities on a forward commitment
involves a risk that the market value at the time of delivery may be lower than
the agreed upon purchase price resulting in an unrealized loss. Selling
securities on a forward commitment involves different risks and can result in
losses more significant than those arising from the purchase of such securities.
During the term of the commitment, the Portfolio 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 Portfolio may occasionally close such forward
commitments prior to delivery.
The forward commitments outstanding in Government as of December 31, 1997
for which settlement is not intended, and the descriptions and unrealized
depreciation are as follows:
<TABLE>
<CAPTION>
PAR AMOUNT CURRENT UNREALIZED
(000) DESCRIPTION EXPIRATION VALUE DEPRECIATION
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT CONTRACTS
$1,000 FNMA 30 Yr, 9.000%, 12/31/23 maturity......... 01-14-98 $1,063,130 $ 3,755
1,000 GNMA, 8.500%, 12/31/23 maturity............... 01-22-98 1,050,310 4,060
--------
$ 7,815
========
</TABLE>
B-143
<PAGE> 164
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
- --------------------------------------------------------------------------------
C. 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, 1997:
<TABLE>
<CAPTION>
UNREALIZED
CURRENT APPRECIATION/
DESCRIPTION VALUE DEPRECIATION
- -------------------------------------------------------------------------------------------
<S> <C> <C>
LONG CONTRACTS
Deutsche Mark, 85,686 expiring 01/16/98....................... $ 47,676 $ (1,798)
Deutsche Mark, 25,835 expiring 02/12/98....................... 14,397 (727)
French Franc, 72,330 expiring 01/21/98........................ 12,033 (585)
Italian Lira, 26,816,828 expiring 01/21/98.................... 15,156 (578)
Italian Lira, 8,629,710 expiring 02/19/98..................... 4,877 (223)
Japanese Yen, 11,274,000 expiring 01/26/98.................... 86,670 (6,580)
Japanese Yen, 3,010,027 expiring 02/26/98..................... 23,247 (897)
Netherlands Guilder, 17,462 expiring 02/19/98................. 8,639 (426)
Singapore Dollar, 48,302 expiring 03/05/98.................... 28,435 (1,896)
Singapore Dollar, 14,846 expiring 03/23/98.................... 8,733 151
Spanish Peseta, 365,180, expiring 02/12/98.................... 2,400 (116)
-------- --------
$252,263 (13,675)
======== ========
SHORT CONTRACTS
Deutsche Mark, 85,686 expiring 01/16/98....................... $ 47,676 1,324
Deutsche Mark, 25,835 expiring 02/12/98....................... 14,397 603
Deutsche Mark, 26,249 expiring 03/16/98....................... 14,655 345
French Franc, 72,330 expiring 01/21/98........................ 12,033 408
French Franc, 58,572 expiring 03/16/98........................ 9,774 226
Italian Lira, 26,816,828 expiring 01/21/98.................... 15,156 536
Italian Lira, 8,629,710 expiring 02/19/98..................... 4,877 181
Japanese Yen, 11,274,000 expiring 01/26/98.................... 86,670 13,330
Japanese Yen, 12,895,723 expiring 01/29/98.................... 99,181 7,819
Japanese Yen, 11,215,260 expiring 02/05/98.................... 86,346 8,154
Japanese Yen, 8,190,980 expiring 02/26/98..................... 63,261 2,739
Netherlands Guilder, 17,462 expiring 02/19/98................. 8,639 361
Singapore Dollar, 48,302 expiring 03/05/98.................... 28,435 1,464
Singapore Dollar, 14,846 expiring 03/23/98.................... 8,733 267
Spanish Peseta, 365,180, expiring 02/12/98.................... 2,400 100
-------- --------
$502,233 37,857
======== ========
$ 24,182
========
</TABLE>
B-144
<PAGE> 165
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
List of all financial statements and exhibits as part of the Registration
Statement.
(a) Financial Statements
Included in Part A of Registration Statement:
Financial Highlights
Included in Part B of Registration Statement:
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) Second Amended and Restated Certificate of Designation of
Enterprise Portfolio(11)
(d) Second Amended and Restated Certificate of Designation of
Domestic Income Portfolio(11)
(e) Amended and Restated Certificate of Designation of Emerging
Growth Portfolio(11)
(f) Amended and Restated Certificate of Designation of Global
Equity Portfolio(11)
(g) Amended and Restated Certificate of Designation of
Government Portfolio(11)
(h) Amended and Restated Certificate of Designation of Money
Market Portfolio(11)
(i) Second Amended and Restated Certificate of Designation of
Asset Allocation Portfolio(11)
(j) Second Amended and Restated Certificate of Designation of
Morgan Stanley Real Estate Securities Portfolio(11)
(k) Amended and Restated Certificate of Designation of Growth
and Income Portfolio(11)
(l) Certificate of Designation of Strategic Stock Portfolio(11)
(m) Certificate of Designation of Comstock 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(11)
(b) Investment Advisory Agreement for Emerging Growth
Portfolio(11)
(c) Investment Advisory Agreement for Global Equity
Portfolio(11)
(d) Investment Sub-Advisory Agreement for Global Equity
Portfolio(11)
(e) Investment Advisory Agreement for Morgan Stanley Real Estate
Securities Portfolio(11)
(f) Investment Advisory Agreement for Growth and Income
Portfolio(11)
(g) Investment Advisory Agreement for Strategic Stock
Portfolio(11)
(h) Investment Advisory Agreement for Comstock Portfolio+
(6) Distribution and Service Agreement(11)
(8) (a) Custodian Contract(9)
(b) Transfer Agency and Service Agreement+
(9) (a) Data Access Services Agreement(8)
(b) Fund Accounting Agreement+
(10) Opinion of Counsel+
(11) Consent of Independent Accountants+
</TABLE>
C-1
<PAGE> 166
<TABLE>
<C> <S> <C>
(13) (a) Investment Letter(2)
(b) Investment Letter dated July 3, 1995 for the Emerging Growth Portfolio, Global Equity Portfolio and
Morgan Stanley Real Estate Securities Portfolio(7)
(16) Computation of Performance Information(11)
(17) (a) List of certain investment companies in response to Item 29(a)(9)
(b) List of officers and directors of Van Kampen American Capital Distributors, Inc. in response to Item
29(b)(9)
(24) Power of Attorney(11)
(27) Financial Data Schedules+
</TABLE>
- ---------------
(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.
(8) Incorporated herein by reference to Post-Effective Amendment No. 22 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
April 30, 1997.
(9) Incorporated herein by reference to Post-Effective Amendment No. 75 to the
Registration Statement on Form N-1A of Van Kampen American Capital Growth
and Income Fund, File Number 2-21657, filed March 27, 1998.
(10) Incorporated herein by reference to Post-Effective Amendment No. 50 to the
Registration Statement on Form N-1A of Van Kampen American Capital Comstock
Fund, File Number 2-7778, filed April 27, 1998.
(11) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 33-628, filed
April 30, 1998.
+ Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See the Statement of Additional Information.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
AS OF APRIL 3, 1998
<TABLE>
<CAPTION>
NUMBER OF RECORD
TITLE OF CLASS HOLDERS
-------------- ----------------
<S> <C>
Asset Allocation Portfolio 4
Comstock Portfolio 1
Domestic Income Portfolio 7
Emerging Growth Portfolio 6
Enterprise Portfolio 9
Global Equity Portfolio 4
Government Portfolio 6
Growth and Income Portfolio 3
Money Market Portfolio 7
Morgan Stanley Real Estate Securities Portfolio 16
Strategic Stock Portfolio 5
</TABLE>
C-2
<PAGE> 167
ITEM 27. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Amended and
Restated Agreement and Declaration of Trust.
Article 8; Section 8.4 of the Amended and Restated 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 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 Van Kampen American Capital Asset Management, Inc. (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.
C-3
<PAGE> 168
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc. (the "Distributor"), 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., which is an affiliated
person of an affiliated person of Registrant, is the sole principal underwriter
for Registrant. The name, principal business address and positions and offices
with the Distributor of each of the directors and officers thereof are set forth
in Exhibit 17(b) incorporated herein by reference. 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.
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> 169
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, 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 18th day of May, 1998.
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 May 18, 1998 by the following
persons in the capacities indicated:
<TABLE>
<C> <S> <C>
Principal Executive Officer:
/s/ DENNIS J. MCDONNELL* President
- -----------------------------------------------------
Dennis J. 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/ RICHARD M. DEMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
/s/ DON G. POWELL* Trustee
- -----------------------------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO, SC.D.* Trustee
- -----------------------------------------------------
Fernando Sisto, Sc.D.
/s/ WAYNE W. WHALEN* Trustee and Chairman
- -----------------------------------------------------
Wayne W. Whalen
* Signed by Ronald A. Nyberg pursuant to a
power of attorney filed herewith.
/s/ RONALD A. NYBERG
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
May 18, 1998
<PAGE> 170
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT NO. 25 FORM N-1A
AS SUBMITTED TO THE
SECURITIES AND EXCHANGE COMMISSION
ON MAY 18, 1998
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S> <C>
(1) (m) Certificate of Designation of Comstock Portfolio
(5) (h) Investment Advisory Agreement for Comstock Portfolio
(8) (b) Transfer Agency and Service Agreement
(9) (b) Fund Accounting Agreement
(10) Opinion of Counsel
(11) Consent of Independent Accountants
(27) Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT 1(m)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
CERTIFICATE OF DESIGNATION
OF
COMSTOCK 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 Comstock Portfolio (the "Portfolio")
with the following rights, preferences and characteristics:
1. Shares. The beneficial interest in the portfolio shall be divided into
Shares, all of one class, having a nominal or par value of $0.01 per
Shares, of which an unlimited number may be issued, which Shares shall
represent interests only in the Portfolio. 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 Portfolio 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 limitation 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 Portfolio
outstanding and entitled to vote or, if such amendment affects the Shares
of one or more but not al of the Classes of the Portfolio, 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.
April 23, 1998
/s/ Ronald A. Nyberg
- ---------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (5)(h)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this April 23, 1998, 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 Comstock 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"), By-laws, registration statements,
prospectus and 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 routine 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
<PAGE> 2
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 between the TRUST and any other party, such
allocations shall be pursuant to methods approved by the Trustees.
For a period of one year commencing on the effective date of this Agreement,
the ADVISER and the TRUST agree that the retention of (i) the chief executive
officer, president, chief financial officer and secretary of the ADVISER and
(ii) each director, officer and employee of the ADVISER or any of its Affiliates
(as defined in the Investment Company Act of 1940, as amended (the "1940 Act"))
who serves as an officer of the TRUST (each person referred to in (i) or (ii)
hereinafter being referred to as an "Essential Person"), in his or her current
capacities, is in the best interest of the TRUST and the TRUST's shareholders.
In connection with the ADVISER's acceptance of employment hereunder, the ADVISER
hereby agrees and covenants for itself and on behalf of its Affiliates that
neither the ADVISER nor any of its Affiliates shall make any material or
significant personnel changes or replace or seek to replace any Essential Person
or cause to be replaced any Essential Person, in each case without first
informing the Board of Trustees of the TRUST in a timely manner. In addition,
neither the ADVISER nor any Affiliate of the ADVISER shall change or seek to
change or cause to be changed, in any material respect, the duties and
responsibilities of any Essential Person, in each case without first informing
the Board of Trustees of the TRUST in a timely manner.
2
<PAGE> 3
(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 (the "1940
Act"), any of the shareholders, trustees, officers and employees of the TRUST
may be a shareholder, trustee, 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, neither the ADVISER nor any subadviser shall 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 THE 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 an annual rate of 0.60% on the first $500
million of the Portfolio's average daily net assets and 0.55% thereafter;
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 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 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.
3
<PAGE> 4
(6) DURATION OF AGREEMENT
This Agreement shall 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 shall
remain in full force until May 31, 1999 unless sooner terminated as hereinafter
provided. This Agreement shall continue in force as to a particular Portfolio
from year to year thereafter, but only so long as such continuance is approved
at least annually by the vote of a majority of the TRUST's Trustees who are not
parties to this Agreement or interested persons of any such parties, cast in
person at a meeting called for the purpose of voting on such approval, and by a
vote of a majority of the TRUST's Trustees or a majority of the TRUST's
outstanding voting securities.
This Agreement shall terminate automatically in the event of its assignment.
The Agreement may be terminated at any time by the TRUST's Trustees, by vote of
a majority of the TRUST's outstanding voting securities, or by the ADVISER, on
60 days' written notice, or upon such shorter notice as may be mutually agreed
upon. Such termination shall be without payment of any penalty.
(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 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 (the "Commission"), or such interpretive positions as may be taken by
the Commission or its staff, under the 1940 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. 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
State of Delaware.
All questions concerning the validity, meaning and effect of this Agreement
shall be determined in accordance with the laws (without giving effect to the
conflict-of law principles thereof) of the State of Delaware applicable to
contracts made and to be performed in that state.
In connection with its employment hereunder, the ADVISER hereby agrees and
covenants not to change its name without the prior consent of the Board of
Trustees of the TRUST.
It is understood and agreed that the ADVISER may engage a subadviser to
assist it in the performance of its duties hereunder.
4
<PAGE> 5
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 VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC. LIFE INVESTMENT TRUST
COMSTOCK PORTFOLIO
By: /s/ Dennis J. McDonnell By: /s/ Peter W. Hegel
----------------------------- ---------------------------
Name: Dennis J. McDonnell Name: Peter W. Hegel
Its: President Its: Executive Vice President
5
<PAGE> 1
EXHIBIT (8)(b)
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 31st day of May, 1997 by and between each of the
VAN KAMPEN AMERICAN CAPITAL OPEN END FUNDS set forth on Schedule "A" hereto,
which are organized under the laws of the state and as the entities set forth
in Schedule "A" hereto (collectively, the "Funds"), and ACCESS INVESTOR
SERVICES, INC., a Delaware corporation ("ACCESS").
R E C I T A L:
-------------
WHEREAS, each of the Funds desires to appoint ACCESS as its transfer
agent, dividend disbursing agent and shareholder service agent and ACCESS
desires to accept such appointments;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1. Terms of Appointment; Duties of ACCESS.
---------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement, each
of the Funds hereby employs and appoints ACCESS as its transfer agent, dividend
disbursing agent and shareholder service agent.
1.02 ACCESS hereby accepts such employment and appointments and agrees
that on and after the effective date of this Agreement it will act as the
transfer agent, dividend disbursing agent and shareholder service agent for
each of the Funds on the terms and conditions set forth herein.
1.03 ACCESS agrees that its duties and obligations hereunder will be
performed in a competent, efficient and workmanlike manner with due diligence
in accordance with reasonable industry practice, and that the necessary
facilities, equipment and personnel for such performance will be provided.
1.04 For a period of one year commencing on the effective date of this
Agreement, ACCESS and each of the Funds agree that the retention of (i) the
chief executive officer, president, chief financial officer, chief operating
officer and secretary of ACCESS and (ii) each director, officer and employee of
ACCESS or any of its Affiliates (as defined in the Investment Company Act of
1940, as amended (the "1940 Act")) who serves as an officer of the Funds (each
person referred to in (i) or (ii) hereinafter being referred to as an
"Essential Person"), in his or her current capacities, is in the best interest
<PAGE> 2
of the Funds and the Funds' shareholders. In connection with ACCESS's
acceptance of employment hereunder, ACCESS hereby agrees and covenants for
itself and on behalf of its Affiliates that neither ACCESS nor any of its
Affiliates shall make any material or significant personnel changes or replace
or seek to replace any Essential Person or cause to be replaced any Essential
Person, in each case without first informing the Board of Trustees of the Funds
in a timely manner. In addition, neither ACCESS nor any Affiliate of ACCESS
shall change or seek to change or cause to be changed, in any material
respect, the duties and responsibilities of any Essential Person, in each case
without first informing the Board of Trustees of the Funds in a timely
manner.
1.05 In order to assure compliance with section 1.03 and to implement a
cooperative effort to improve and maintain the quality of transfer agency,
dividend disbursing and shareholder services received by each of the Funds and
their shareholders, ACCESS agrees to provide and maintain quantitative
performance objectives, including maximum target turn-around times and maximum
target error rates, for the various services provided hereunder. ACCESS also
agrees to provide a reporting system designed to provide the Board of Trustees
of each of the Funds (the "Board") on a quarterly basis with quantitative data
comparing actual performance for the period with the performance objectives.
The foregoing procedures are designed to provide a basis for continuing
monitoring by the Board of the quality of services rendered hereunder.
Article 2. Fees and Expenses.
------------------
2.01 For the services to be performed by ACCESS pursuant to this
Agreement, each of the Funds agrees to pay ACCESS the fees provided in the fee
schedules agreed upon from time to time by each of the Funds and ACCESS.
2.02 In addition to the amounts paid under section 2.01 above, each of the
Funds agrees to reimburse ACCESS promptly for such Fund's reasonable
out-of-pocket expenses or advances paid on its behalf by ACCESS in connection
with its performance under this Agreement for postage, freight, envelopes,
checks, drafts, continuous forms, reports and statements, telephone, telegraph,
costs of outside mailing firms, necessary outside record storage costs, media
for storage of records (e.g., microfilm, microfiche and computer tapes) and
printing costs incurred due to special requirements of such Fund. In addition,
any other special out-of-pocket expenses paid by ACCESS at the specific request
of any of the Funds will be promptly reimbursed by the requesting Fund.
Postage for mailings of dividends, proxies, Fund reports and other mailings
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<PAGE> 3
to all shareholder accounts shall be advanced to ACCESS by the concerned Fund
three business days prior to the mailing date of such materials.
Article 3. Representations and Warranties of Access.
-----------------------------------------
ACCESS represents and warrants to each of the Funds that:
3.01 It is a corporation duly organized and existing and in good standing
under the laws of the State of Delaware.
3.02 It is duly qualified to carry on its business in each jurisdiction in
which the nature of its business requires it to be so qualified.
3.03 It is empowered under applicable laws and regulations and by its
charter and bylaws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
3.05 It has and will continue to have during the term of this Agreement
access to the necessary facilities, equipment and personnel to perform its
duties and obligations hereunder.
3.06 It will maintain a system regarding "as of" transactions as follows:
(a) Each "as of" transaction effected at a price other than that in
effect on the day of processing for which an estimate has not been given
to any of the affected Funds and which is necessitated by ACCESS' error,
or delay for which ACCESS is responsible or which could have been avoided
through the exercise of reasonable care, will be identified, and the net
effect of such transactions determined, on a daily basis for each such
Fund.
(b) The cumulative net effect of the transactions included in
paragraph (a) above will be determined each day throughout each month.
If, on any day during the month, the cumulative net effect upon any Fund
is negative and exceeds an amount equivalent to 1/2 of 1 cent per share
of such Fund, ACCESS shall promptly make a payment to such Fund (in cash
or through use of a credit as described in paragraph (c) below) in such
amount as necessary to reduce the negative cumulative net effect to less
than 1/2 of 1 cent per share of such Fund. If on the last business day
of the month the cumulative net effect (adjusted by the amount of any
payments or credits used pursuant to the preceding sentence) upon any
Fund is negative, such Fund shall be entitled to a reduction in the
monthly transfer agency fee next payable by an equivalent amount, except
as provided in paragraph (c) below. If on the last
Page 3
<PAGE> 4
business day of the month the cumulative net effect (similarly adjusted)
upon any Fund is positive, ACCESS shall be entitled to recover certain
past payments, credits used and reductions in fees, and to a credit
against all future payments and fee reductions made under this paragraph
to such Fund, as described in paragraph (c) below.
(c) At the end of each month, any positive cumulative net effect
upon any Fund shall be deemed to be a credit to ACCESS which shall first
be applied to recover any payments, credits used and fee reductions made
by ACCESS to such Fund under paragraph (b) above during the calendar year
by increasing the amount of the monthly transfer agency fee next payable
in an amount equal to prior payments, credits used and fee reductions
made during such year, but not exceeding the sum of that month's credit
and credits arising in prior months during such year to the extent such
prior credits have not previously been utilized as contemplated by this
paragraph (c). Any portion of a credit to ACCESS not so used shall
remain as a credit to be used as payment against the amount of any future
negative cumulative net effects which would otherwise require a payment,
use of a credit or fee reduction to such Fund pursuant to paragraph (b)
above.
Article 4. Representations and Warranties of the Funds.
--------------------------------------------
Each of the Funds hereby represents and warrants on behalf of itself
only and not on behalf of any other Funds which are a party to this Agreement
that:
4.01 It is duly organized and existing and in good standing under the laws
of the commonwealth or state set forth in Schedule "A" hereto.
4.02 It is empowered under applicable laws and regulations and by its
Declaration of Trust and by-laws to enter into and perform this Agreement.
4.03 All requisite proceedings have been taken by its Board to authorize
it to enter into and perform this Agreement.
4.04 It is an open-end, management investment company registered under the
Investment Company Act of 1940, as amended.
Page 4
<PAGE> 5
4.05 A registration statement under the Securities Act of 1933, as
amended, is currently effective and will remain effective, and appropriate
state securities laws filings have been made and will continue to be made, with
respect to all of its shares being offered for sale.
Article 5. Indemnification.
---------------
5.01 ACCESS shall not be responsible for and each of the Funds shall
indemnify and hold ACCESS harmless from and against any and all losses,
damages, costs, charges, reasonable counsel fees, payments, expenses and
liabilities (collectively, "Losses") arising out of or attributable to:
(a) All actions of ACCESS required to be taken by ACCESS for the
benefit of such Fund pursuant to this Agreement, provided that ACCESS has
acted in good faith with due diligence and without negligence or willful
misconduct.
(b) The reasonable reliance by ACCESS on, or reasonable use by
ACCESS of, information, records and documents which have been prepared or
maintained by or on behalf of such Fund or have been furnished to ACCESS
by or on behalf of such Fund.
(c) The reasonable reliance by ACCESS on, or the carrying out by
ACCESS of, any instructions or requests of such Fund.
(d) The offer or sale of such Fund's shares in violation of any
requirement under the federal securities laws or regulations or the
securities laws or regulations of any state or in violation of any stop
order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such shares in such state unless
such violation results from any failure by ACCESS to comply with written
instructions of such Fund that no offers or sales of such Fund's shares
be made in general or to the residents of a particular state.
(e) Such Fund's refusal or failure to comply with the terms of this
Agreement, or such Fund's lack of good faith, negligence or willful
misconduct or the breach of any representation or warranty of such Fund
hereunder. Notwithstanding the foregoing, no Fund shall be required to
indemnify or hold ACCESS harmless from and against any Losses arising out
of or attributable to any action or failure to take action, or any
information, records or
Page 5
<PAGE> 6
documents prepared or maintained, on behalf of
the Fund by the Fund's investment adviser or distributor, or any person
providing fund accounting or legal services to the Fund that is also an
officer or employee of Van Kampen American Capital, Inc. or its
subsidiaries unless such person or entity is otherwise entitled to
indemnification from the Fund.
5.02 ACCESS shall indemnify and hold harmless each of the Funds from and
against any and all Losses arising out of or attributable to ACCESS' refusal or
failure to comply with the terms of this Agreement, or ACCESS' lack of good
faith, or its negligence or willful misconduct, or the breach of any
representation or warranty of ACCESS hereunder.
5.03 At any time ACCESS may apply to any authorized officer of any of the
Funds for instructions, and may consult with any of the Funds' legal counsel,
at the expense of such concerned Fund, with respect to any matter arising in
connection with the services to be performed by ACCESS under this Agreement,
and ACCESS shall not be liable and shall be indemnified by such concerned Fund
for any action taken or omitted by it in good faith in reasonable reliance upon
such instructions or upon the opinion of such counsel. ACCESS shall be
protected and indemnified in acting upon any paper or document reasonably
believed by ACCESS to be genuine and to have been signed by the proper person
or persons and shall not be held to have notice of any change of authority of
any person, until receipt of written notice thereof from the concerned Fund.
ACCESS shall also be protected and indemnified in recognizing stock
certificates which ACCESS reasonably believes to bear the proper manual or
facsimile signatures of the officers of the concerned Fund, and the proper
countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
5.04 In the event that any party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage, or other causes reasonably beyond its control,
such party shall not be liable to the other for any damages resulting from such
failure to perform or otherwise from such causes.
5.05 In no event and under no circumstances shall any party to this
Agreement be liable to another party for consequential damages under any
provision of this Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which one party may be
required to indemnify another, the party seeking indemnification shall promptly
notify the other party of such assertion, and shall keep the other party
advised with respect to all developments concerning such claim.
Page 6
<PAGE> 7
The party who may be required to indemnify shall have the option to participate
with the party seeking indemnification in the defense of such claim. The party
seeking indemnification shall in no case confess any claim or make any
compromise in any case in which the other party may be required to indemnify it
except with the other party's prior written consent.
Article 6. Covenants of Each of the Funds and ACCESS.
------------------------------------------
6.01 Each of the Funds shall promptly furnish to ACCESS the following:
(a) Certified copies of the resolution of its Board authorizing the
appointment of ACCESS and the execution and delivery of this Agreement.
(b) Certified copies of its Declaration of Trust or Articles of
Incorporation and by-laws and all amendments thereto.
6.02 ACCESS hereby agrees to maintain facilities and procedures
reasonably acceptable to each of the Funds for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
6.03 ACCESS shall keep records relating to the services to be
performed hereunder in the form and manner as it may deem advisable; provided,
however, that all accounts, books and other records of each of the Funds
(hereinafter referred to as "Fund Records") prepared or maintained by ACCESS
hereunder shall be maintained and kept current in compliance with Section 31 of
the Investment Company Act of 1940 and the Rules thereunder (such Section and
Rules being hereinafter referred to as the "1940 Act Requirements"). To the
extent required by the 1940 Act Requirements, ACCESS agrees that all Fund
Records prepared or maintained by ACCESS hereunder are the property of the
concerned Fund and shall be preserved and made available in accordance with the
1940 Act Requirements, and shall be surrendered promptly to the concerned Fund
on its request. ACCESS agrees at such reasonable times as may be requested by
the Board and at least quarterly to provide (i) written confirmation to the
Board that all Fund Records are maintained and kept current in accordance with
the 1940 Act Requirements, and (ii) such other reports regarding its
performance hereunder as may be reasonably requested by the Board.
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<PAGE> 8
6.04 ACCESS and each of the Funds agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of any of
the Fund Records, ACCESS will endeavor to notify each of the concerned
Funds and to secure instructions from an authorized officer of each of the
concerned Funds as to such inspection. ACCESS reserves the right, however, to
exhibit such Fund Records to any person whenever it is advised by its counsel
that it may be held liable for the failure to exhibit such Fund records to such
person.
Article 7. Term and Termination Of Agreement.
----------------------------------
7.01 The initial term of this Agreement shall expire May 31, 1999,
and thereafter this Agreement shall automatically be renewed for
successive one year periods to begin on June 1 of each year unless any party
provides notice to the other party at least 120 days in advance of that date
that this Agreement is not to be renewed.
7.02 Notwithstanding the foregoing, any party may terminate this
Agreement for good and reasonable cause at any time by giving written
notice to the other party at least 60 days prior to the date on which such
termination is to be effective or such shorter period as may be required by
law.
7.03 Any unpaid fees or reimbursable expenses payable to ACCESS at
the termination date of this Agreement shall be due on that termination date.
ACCESS agrees to use its best efforts to cooperate with the Funds and the
successor transfer, dividend disbursement, or shareholder servicing agent
or agents in accomplishing an orderly transition.
Article 8. Miscellaneous.
--------------
8.01 Except as provided in section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by any party
without the written consent of ACCESS or the concerned Fund, as the case may
be; provided, however, that no consent shall be required for any merger of any
of the Funds with, or any sale of all or substantially all the assets of
any of the Funds to, another investment company.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
Page 8
<PAGE> 9
8.03 ACCESS may, without further consent on the part of any of the
Funds, subcontract with DST, Inc., a Missouri corporation, or any other
qualified servicer, for the performance of data processing activities;
provided, however, that ACCESS shall be as fully responsible to each of
the Funds for the acts and omissions of DST, Inc. or other qualified
servicer as it is for its own acts and omissions.
8.04 Without the prior approval of the Boards of Trustees of the
Funds, ACCESS shall not, directly or indirectly, provide services,
including services such as transfer agent, dividend disbursing agent or
shareholder service agent, to any investment companies.
8.05 This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof, and supersedes
any prior agreement with respect thereto, whether oral or written, and
this Agreement may not be modified except by written instrument executed
by the affected parties.
8.06 The execution of this Agreement has been authorized by the
Funds' Trustees. This Plan is executed on behalf of the Funds or the
Trustees of the Funds as Trustees and not individually and the
obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the Funds individually but are binding only
upon the assets and property of the Funds. A Certificate of Trust in
respect of each of the Funds is on file with the appropriate state
agency.
8.07 For each of those Funds which have one or more portfolios as
set forth in Schedule "A" hereto, all obligations of those Funds 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.
8.08 In the event of a change in the business or regulatory
environment affecting all or any portion of this Agreement, the parties
hereto agree to renegotiate such affected portions in good faith.
8.09 All questions concerning the validity, meaning and effect of
this Agreement shall be determined in accordance with the laws (without
giving effect to the conflict-of-law principles thereof) of the State of
Delaware applicable to contracts made and to be performed in that state.
8.10 (a) Any dispute, controversy, or claim arising out of or
relating to this Agreement, or the breach, termination or validity
thereof, shall be finally settled by arbitration in accordance with
the Expedited Procedures
Page 9
<PAGE> 10
of the commercial arbitration Rules of the American Arbitration
Association (the "AAA") then in effect (the "Rules"). The
arbitration shall be held in Chicago, Illinois.
(b) There shall be one arbitrator who shall be selected jointly by
the parties. If the parties are unable to agree on an arbitrator
within 15 days after a demand for arbitration is made by a party,
the arbitrator shall be appointed by the AAA in accordance with the
Rules. The hearing shall be held within 90 days of the appointment
of the arbitrator. Notwithstanding the Expedited Procedures
of the Rules, the arbitrator, at his discretion, may schedule
additional days of hearings.
(c) Either party may, without inconsistency with this Agreement,
seek from a court any interim or provisional relief in aid of
arbitration, pending the establishment of the arbitral tribunal.
The parties hereby submit to the exclusive jurisdiction of the
federal and state courts located in the northern district of the
state of Illinois for any such relief in aid of arbitration, or for
any relief relating to arbitration, except for the enforcement of an
arbitral award which may be enforced in any court having
jurisdiction.
(d) Any arbitration proceedings or award rendered hereunder and the
validity, effect and interpretation of Section 8.10 shall be
governed by the Federal Arbitration Act (9 U.S.C. Sections 1 et
--
seq.) The award shall be final and binding upon the parties.
---
Judgment upon any award may be entered in any court having
jurisdiction.
(e) This Agreement and the rights and obligations of the Parties
shall remain in full force and effect pending the award in any
arbitration proceeding hereunder.
Page 10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf and through their duly authorized
officers, as of the date first above written.
EACH OF THE VAN KAMPEN AMERICAN CAPITAL
OPEN END FUNDS LISTED ON SCHEDULE
"A" HERETO
BY: /s/ Ronald A. Nyberg
----------------------------------
Vice President
ATTEST:
/s/ Nicholas Dalmaso
- ----------------------------------
Assistant Secretary
ACCESS INVESTOR SERVICES, INC.
BY: /s/ Paul R. Wolkenberg
---------------------------------
President and Chief Executive Officer
ATTEST:
/s/ Huey P. Falgout
- ---------------------------------
Assistant Secretary
Page 11
<PAGE> 12
SCHEDULE "A"
------------
VAN KAMPEN AMERICAN CAPITAL OPEN-END FUNDS
<TABLE>
<CAPTION>
Organization Type
Fund Name State of [Business Trust
(including Portfolios) Organization "T"]
=====================================================================================================
<S> <C> <C>
Van Kampen American Capital Aggressive Growth Fund DE T
Van Kampen American Capital California Insured Tax Free Fund DE T
Van Kampen American Capital Comstock Fund DE T
Van Kampen American Capital Corporate Bond Fund DE T
Van Kampen American Capital Emerging Growth Fund DE T
Van Kampen American Capital Enterprise Fund DE T
Van Kampen American Capital Equity Income Fund DE T
Van Kampen American Capital Florida Insured Tax Free Income Fund DE T
Van Kampen American Capital Foreign Securities Fund DE T
Van Kampen American Capital Global Managed Assets Fund DE T
Van Kampen American Capital Government Securities Fund DE T
Van Kampen American Capital Government Target Fund DE T
Van Kampen American Capital Great American Companies Fund DE T
Van Kampen American Capital Growth Fund DE T
Van Kampen American Capital Growth and Income Fund DE T
Van Kampen American Capital Harbor Fund DE T
Van Kampen American Capital High Income Corporate Bond Fund DE T
Van Kampen American Capital High Yield Fund DE T
Van Kampen American Capital Insured Tax Free Income Fund DE T
Van Kampen American Capital Intermediate Term Municipal Income Fund DE T
</TABLE>
Page 12
<PAGE> 13
<TABLE>
<CAPTION>
Organization Type
Fund Name State of [Business Trust
(including Portfolios) Organization "T"]
=====================================================================================================
<S> <C> <C>
Van Kampen American Capital Life Investment Trust DE T
Asset Allocation Portfolio
Comstock Portfolio
Domestic Income Portfolio
Emerging Growth Portfolio
Enterprise Portfolio
Global Equity Portfolio
Government Portfolio
Growth and Income Portfolio
Money Market Portfolio
Morgan Stanley Real Estate Securities Portfolio
Strategic Stock Portfolio
Van Kampen American Capital Limited Maturity Government Fund DE T
Van Kampen American Capital Municipal Income Fund DE T
Van Kampen American Capital New Jersey Tax Free Income Fund DE T
Van Kampen American Capital New York Tax Free Income Fund DE T
Van Kampen American Capital Pace Fund DE T
Van Kampen American Capital Pennsylvania Tax Free Income Fund PA T
Van Kampen American Capital Prospector Fund DE T
Van Kampen American Capital Real Estate Securities Fund DE T
Van Kampen American Capital Reserve Fund DE T
Van Kampen American Capital Short-Term Global Income Fund DE T
Van Kampen American Capital Small Capitalization Fund DE T
Van Kampen American Capital Strategic Income Fund DE T
Van Kampen American Capital Tax-Exempt Trust DE T
Van Kampen American Capital High Yield Municipal Fund
Van Kampen American Capital Tax Free High Income Fund DE T
Van Kampen American Capital Tax Free Money Fund DE T
Van Kampen American Capital U.S. Government Fund DE T
Van Kampen American Capital U.S. Government Trust for Income DE T
Van Kampen American Capital Utility Fund DE T
Van Kampen American Capital Value Fund DE T
</TABLE>
PAGE 13
<PAGE> 14
<TABLE>
<CAPTION>
Organization Type
Fund Name State of [Business Trust
(including Portfolios) Organization "T"]
=====================================================================================================
<S> <C> <C>
Van Kampen American Capital World Portfolio Series Trust DE T
Van Kampen American Capital Global Equity Fund
Van Kampen American Capital Global Government Securities
Fund
</TABLE>
PAGE 14
<PAGE> 1
EXHIBIT (9)(b)
FUND ACCOUNTING AGREEMENT
THIS AGREEMENT, dated May 31, 1997, 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.
<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.
<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
<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 High Income Trust
Van Kampen American Capital High Income Trust II
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
<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 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 Limited Maturity Government Fund ("Limited
Maturity Government Fund")
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")
<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 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")
<PAGE> 8
AMENDMENT NUMBER ONE
TO THE
FUND ACCOUNTING AGREEMENT
THIS AMENDMENT NUMBER ONE, dated July 24, 1997, to the Fund Accounting
Agreement dated May 31, 1997 (the "Agreement") by and between the parties set
forth in Schedule A, attached hereto and incorporated by reference and VAN
KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware corporation
("Advisory Corp.").
W I T N E S S E T H
WHEREAS, the following party, being an open-end management investment
company as that term is defined in the Investment Company Act of 1940, as
amended, wishes to become party to the Agreement:
ADVISED BY VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC. ("ASSET
MANAGEMENT, INC.") (COLLECTIVELY, THE "FORMER AMERICAN CAPITAL FUNDS"):
Van Kampen American Capital Life Investment Trust ("Life Investment
Trust" or "LIT") on behalf of its Series
Strategic Stock Portfolio ("LIT Strategic Stock Portfolio")
WHEREAS, the original parties desire to add the aforementioned
additional entity as party to the Agreement;
NOW, THEREFORE, in consideration of the promises and mutual covenants
spelled out in the Agreement and herein, it is hereby agreed that Schedule A of
the Agreement be amended to add the party mentioned above as party to the
Agreement.
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this 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
<PAGE> 10
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 High Income Trust
Van Kampen American Capital High Income Trust II
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
<PAGE> 11
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 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 Limited Maturity Government Fund ("Limited
Maturity Government Fund")
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")
<PAGE> 12
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 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")
<PAGE> 13
AMENDMENT NUMBER TWO
TO THE
FUND ACCOUNTING AGREEMENT
THIS AMENDMENT NUMBER TWO, dated April 23, 1998, to the Fund Accounting
Agreement dated May 31, 1997 (the "Agreement") by and between the parties set
forth in Schedule A, attached hereto and incorporated by reference and VAN
KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP., a Delaware corporation
("Advisory Corp.").
W I T N E S S E T H
WHEREAS, the following party, being an open-end management investment
company as that term is defined in the Investment Company Act of 1940, as
amended, wishes to become party to the Agreement:
ADVISED BY VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
("ASSET MANAGEMENT, INC."):
Van Kampen American Capital Life Investment Trust ("Life Investment
Trust" or "LIT") on behalf of its Series
Comstock Portfolio ("LIT Comstock Portfolio")
WHEREAS, the original parties desire to add the aforementioned
additional entity as party to the Agreement;
NOW, THEREFORE, in consideration of the promises and mutual covenants
spelled out in the Agreement and herein, it is hereby agreed that Schedule A of
the Agreement be amended to add the party mentioned above as party to the
Agreement.
<PAGE> 14
IN WITNESS WHEREOF, the parties have caused this 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
<PAGE> 15
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 High Income Trust
Van Kampen American Capital High Income Trust II
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
Van Kampen American Capital Senior Income 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
<PAGE> 16
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 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")
Morgan Stanley Real Estate Securities Portfolio ("LIT Morgan Stanley
Real Estate Securities Portfolio")
Growth and Income Portfolio ("LIT Growth and Income Portfolio")
Strategic Stock Portfolio ("LIT Strategic Stock Portfolio")
Van Kampen American Capital Limited Maturity Government Fund ("Limited
Maturity Government Fund")
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")
<PAGE> 17
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 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")
<PAGE> 1
EXHIBIT 10
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60601
May 18, 1998
Van Kampen American Capital
Life Investment Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Re: Van Kampen American Capital
Life Investment Trust
Registration Statement on Form N-1A
(File Nos. 33-628 and 811-4424)
Ladies and Gentlemen:
We have acted as counsel to Van Kampen American Capital Life Investment
Trust (the "Trust"), a Delaware business trust, on behalf of the Comstock
Portfolio series of the Trust (the "Fund"), in connection with the preparation
of Post-Effective Amendment No. 25 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 May 18, 1998. The Registration Statement relates
to the registration under the 1933 Act and 1940 Act of an indefinite number of
shares of beneficial interest, $.01 par value per share, of the Fund
(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 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) 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 Fund and (iv) such other documents as we have
deemed necessary or appropriate as a basis for the opinions set forth herein.
<PAGE> 2
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 jurisdiction
other than matters relating to the Delaware business organizational statutes
(including statutes relating to Delaware business trusts).
Based upon and subject to the foregoing, we are of the opinion that when
(i) the Board of Trustees of the Trust has duly adopted resolutions authorizing
the issuance and sale of the Shares and filing of the Registration Statement and
(ii) certificates for the Shares 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, the issuance and
sale of Shares by the Trust will have been validly authorized and 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 admit that we are in he 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,
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. 25 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 6, 1998, relating to the financial statements and financial highlights
of the Asset Allocation Portfolio, Domestic Income Portfolio, Enterprise
Portfolio, Government Portfolio, Money Market Portfolio, Morgan Stanley Real
Estate Securities Portfolio, Emerging Growth Portfolio, Global Equity
Portfolio, Growth and Income Portfolio and Strategic Stock Portfolio
(constituting Van Kampen American Capital Life Investment Trust) which appears
in such Statement of Additional Information. We also consent to the reference
to us under the heading "Independent Accountants" in such Statement of
Additional Information and to the reference to us under the heading
"Independent Accountants" in such Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Chicago, Illinois
May 15, 1998
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<NAME> LIT DOMESTIC INCOME
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<SERIES>
<NUMBER> 005
<NAME> LIT GLOBAL EQUITY
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 006
<NAME> LIT GOVERNMENT
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 007
<NAME> LIT GROWTH & INC
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 008
<NAME> LIT MONEY MARKET
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<NET-ASSETS> 19,740,772
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<PER-SHARE-NAV-BEGIN> 1.000
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 009
<NAME> LIT REAL ESTATE
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<SHARES-COMMON-PRIOR> 11,328,283
<ACCUMULATED-NII-CURRENT> 435,381
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<ACCUMULATED-NET-GAINS> 4,055,438
<OVERDISTRIBUTION-GAINS> 0
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<DIVIDEND-INCOME> 9,416,241
<INTEREST-INCOME> 789,383
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<NUMBER-OF-SHARES-SOLD> 17,318,837
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 010
<NAME> LIT STRATEGIC STOCK
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,637,597
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<SHARES-COMMON-PRIOR> 20,000
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<ACCUM-APPREC-OR-DEPREC> 6,835
<NET-ASSETS> 2,526,202
<DIVIDEND-INCOME> 5,805
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<EXPENSES-NET> (1,491)
<NET-INVESTMENT-INCOME> 6,576
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<APPREC-INCREASE-CURRENT> 6,835
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</TABLE>
