<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1998.
REGISTRATION NO. 33-00628
811-4424
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 24 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 26 [X]
</TABLE>
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:
[X] 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)
[ ] 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
================================================================================
<PAGE> 2
EXPLANATORY NOTE
The Van Kampen American Capital Life Investment Trust (the "Trust")
currently has ten operating series (each a "Series"). Enclosed herein are six
forms of prospectus and one form of statement of additional information. One
prospectus contains all ten Series of the Trust, the second prospectus contains
eight Series of the Trust, the third prospectus contains two of the Series of
the Trust, and the fourth, fifth and sixth prospectuses each contain one Series
of the Trust.
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
PROSPECTUS CAPTION
FORM N-1A ITEM ------------------
<C> <S> <C>
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
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF ADDITIONAL INFORMATION CAPTION
PART B -------------------------------------------
<C> <S> <C>
10. Cover Page................................. Cover Page
11. Table of Contents.......................... Table of Contents
12. General Information and History............ General Information
13. Investment Objectives and Policies......... Investment Objectives and Policies;
Repurchase Agreements; Forward Commitments;
Depositary Receipts; Options, Futures
Contracts and Options on Futures
Contracts; Loans on Portfolio Securities;
Investment Restrictions; Portfolio
Turnover
14. Management of the Fund..................... General Information; Trustees and Officers;
Investment Advisory Agreements
15. Control Persons and Principal Holders of
Securities............................... General Information; Trustees and Officers;
Investment Advisory Agreements
16. Investment Advisory and Other Services..... Investment Advisory Agreements;
Distributor; Transfer Agent; Portfolio
Transactions and Brokerage; Other
Information
17. Brokerage Allocation and Other Practices... Portfolio Transactions and Brokerage
18. Capital Stock and Other Securities......... Purchase and Redemption of Shares
19. Purchase, Redemption and Pricing of
Securities Being Offered................. Determination of Net Asset Value; Purchase
and Redemption of Shares
20. Tax Status................................. Tax Status
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
April 30, 1998
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in ten
separate Portfolios (the "Portfolios"), each of which is described herein and
offered pursuant to this Prospectus. Each Portfolio is in effect a separate
mutual fund. Shares are sold only to separate accounts (the "Accounts") of
various insurance companies to fund the benefits of variable annuity or variable
life insurance policies (the "Contracts"). The Accounts may invest in shares of
the Portfolios in accordance with allocation instructions received from Contract
owners ("Contract Owners"). Such allocation rights are further described in the
accompanying prospectus for the Contracts. The investment objectives of the ten
Portfolios are as follows:
- --------------------------------------------------------------------------------
ASSET ALLOCATION PORTFOLIO (formerly known as Asset Allocation Fund) seeks
high total investment return consistent with prudent risk through a fully
managed investment policy utilizing equity securities as well as investment
grade intermediate and long-term debt securities and money market
securities.
DOMESTIC INCOME PORTFOLIO (formerly known as the Domestic Strategic Income
Fund) seeks current income as its primary investment objective. Capital
appreciation is a secondary objective, which will be sought only when
consistent with its primary investment objective. The Portfolio attempts to
achieve these objectives through investment primarily in a diversified
portfolio of fixed-income securities. The Portfolio may invest in
investment grade securities and lower rated and nonrated securities. LOWER
RATED SECURITIES (COMMONLY KNOWN AS "JUNK BONDS") ARE REGARDED BY THE
RATING AGENCIES AS PREDOMINANTLY SPECULATIVE WITH RESPECT TO THE ISSUER'S
CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.
EMERGING GROWTH PORTFOLIO (formerly known as the Emerging Growth Fund)
seeks capital appreciation by investing in a portfolio of securities
consisting principally of common stocks of small and medium sized companies
considered by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") to be emerging growth companies.
ENTERPRISE PORTFOLIO (formerly known as the Common Stock Fund) seeks
capital appreciation through investments believed by the Adviser to have
above average potential for capital appreciation.
GLOBAL EQUITY PORTFOLIO (formerly Global Equity Fund) seeks long-term
growth of capital through investments in an internationally diversified
portfolio of equity securities of companies of any nation including the
United States.
GOVERNMENT PORTFOLIO (formerly known as the Government Fund) seeks to
provide investors with a high current return consistent with preservation
of capital. The Portfolio invests primarily in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In
order to hedge against changes in interest rates, the Portfolio may also
purchase or sell options and engage in transactions involving interest rate
futures contracts and options on such contracts.
GROWTH AND INCOME PORTFOLIO (formerly known as the Growth and Income Fund)
seeks long-term growth of capital and income. The Portfolio invests
principally in income-producing equity securities, including common stocks
and convertible securities. Investments are also made in non-convertible
preferred stocks and debt securities.
MONEY MARKET PORTFOLIO (formerly known as the Money Market Fund) seeks
protection of capital and high current income through investments in money
market instruments. INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE MONEY MARKET
PORTFOLIO SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE,
THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
<PAGE> 5
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO (formerly known as the Real
Estate Securities Fund) seeks as its primary investment objective long-term
growth of capital. Current income is a secondary consideration. The
Portfolio seeks to achieve its objectives by investing principally in
securities of companies operating in the real estate industry ("Real Estate
Securities"). A "real estate industry company" is a company that derives at
least 50% of its assets (marked to market), gross income or net profits
from the ownership, construction, management or sale of residential,
commercial or industrial real estate. Under normal market conditions, at
least 65% of the Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate investment trusts.
STRATEGIC STOCK PORTFOLIO seeks to provide investors with an above average
total return through a combination of potential capital appreciation and
dividend income, 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 (the "DJIA") or in the Morgan
Stanley Capital International USA Index (the "MSCI Index"). Subject to the
Portfolio's other investment policies and restrictions, the Portfolio
attempts to achieve its investment objective by investing primarily in a
portfolio of actively traded equity securities comprised of (i) high
dividend yield stocks periodically selected from the companies included in
the DJIA and (ii) high dividend yield stocks periodically selected from a
pre-screened subset of the companies included in the MSCI Index. A
security's dividend yield is a primary factor in the security selection
process. The MSCI Index is the property of Morgan Stanley Capital
International ("MSCI"). MSCI has granted a license for use by the Trust of
the MSCI Index and related trademarks and tradenames. The DJIA is the
property of Dow Jones & Company, Inc. Dow Jones & Company, Inc. has not
granted to the Strategic Stock Portfolio a license to use the DJIA. Neither
MSCI nor Dow Jones & Company, Inc. has participated in any way in the
creation of the Strategic Stock Portfolio or in the selection of the stocks
included in such Portfolio and neither has approved any information herein
relating thereto. Shares of the Strategic Stock Portfolio are not designed
so that their prices will parallel or correlate with any movements in the
DJIA or the MSCI Index, and it is expected that their prices will not
parallel or correlate with such movements.
There is no assurance that any Portfolio will achieve its investment
objective.
- --------------------------------------------------------------------------------
This Prospectus tells Contract Owners briefly the information they should
know before allocating premiums or cash value to a Portfolio. Investors should
read and retain this Prospectus for future reference.
THE SHARES OF THE PORTFOLIOS 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 containing
additional information about the Trust and the Portfolios is hereby incorporated
in its entirety into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 421-2833. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials 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> 6
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri 64141-9256
DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Morgan Stanley Asset
SUBADVISER Management Inc.
(FOR GLOBAL 1221 Avenue of the Americas
EQUITY PORTFOLIO): New York, New York 10020
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................... 4
Financial Highlights..................... 9
Introduction............................. 19
Investment Objectives and Policies....... 19
Asset Allocation Portfolio............. 19
Domestic Income Portfolio.............. 20
Emerging Growth Portfolio.............. 23
Enterprise Portfolio................... 24
Global Equity Portfolio................ 24
Government Portfolio................... 27
Growth and Income Portfolio............ 31
Money Market Portfolio................. 31
</TABLE>
<TABLE>
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Page
<S> <C>
Real Estate Securities Portfolio....... 32
Strategic Stock Portfolio.............. 34
Investment Practices..................... 37
The Trust and Its Management............. 43
Purchase of Shares....................... 48
Determination of Net Asset Value......... 49
Redemption of Shares..................... 49
Dividends, Distributions and Taxes....... 49
Portfolio Performance.................... 51
Description of Shares of the Trust....... 53
Additional Information................... 53
Appendix................................. 54
</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.
3
<PAGE> 7
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in ten Portfolios: 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, the Money
Market Portfolio, the Morgan Stanley Real Estate
Securities Portfolio (the "Real Estate Securities
Portfolio") and the Strategic Stock Portfolio
(collectively, the "Portfolios"), each of which is a
separate portfolio of the Van Kampen American Capital
Life Investment Trust (the "Trust").
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Asset Allocation Portfolio seeks high total
investment return consistent with prudent risk through a
fully managed investment policy utilizing equity
securities as well as investment grade intermediate and
long-term debt securities and money market securities.
The Domestic Income Portfolio seeks current income as
its primary investment objective; capital appreciation
is a secondary objective, which will be sought only when
consistent with its primary investment objective. The
Emerging Growth Portfolio seeks capital appreciation by
investing in a portfolio of securities consisting
principally of common stock of small and medium sized
companies considered by the Van Kampen American Capital
Asset Management, Inc. (the "Adviser") to be emerging
growth companies. The Enterprise Portfolio seeks capital
appreciation through investments in securities believed
by the Adviser to have above average potential for
capital appreciation. The Global Equity Portfolio seeks
long-term growth of capital through investments in an
internationally diversified portfolio of equity
securities of companies of any nation including the
United States. The Government Portfolio seeks high
current return consistent with preservation of capital.
The Growth and Income Portfolio seeks long-term growth
of capital and income. The Money Market Portfolio seeks
protection of capital and high current income through
investments in money market investments. The Real Estate
Securities Portfolio seeks long-term growth of capital
as its primary investment objective; current income is a
secondary consideration. The Strategic Stock Portfolio
seeks above average total return through a combination
of potential capital appreciation and dividend income,
consistent with the preservation of invested capital, by
investing primarily in a portfolio of dividend paying
equity securities included in the DJIA or in the MSCI
Index. There can be no assurance that any Portfolio will
achieve its investment objective.
Investment Policies and
Risk Factors..........The Asset Allocation Portfolio may, at various times, be
substantially invested in equity securities, bonds and
notes or money market securities, based upon the
Adviser's evaluation of economic and market trends and
anticipated relative return available from a particular
kind of security. Because prices of securities
fluctuate, the value of an investment in the Portfolio
will vary based upon the Portfolio's investment
performance. Use of options, futures contracts and
options on futures contracts may include additional
risk. See "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
The Domestic Income Portfolio invests in a diversified
portfolio of fixed-income securities. The Portfolio
expects that at all times at least 80% of its assets
will be invested in fixed-income securities rated at the
time of purchase B or higher by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P"), nonrated debt securities
4
<PAGE> 8
believed by the Adviser to be of comparable quality and
U.S. Government securities. Securities rated BB or lower
are regarded by the rating agencies as predominantly
speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Such
securities are commonly referred to as "junk bonds."
Because investment in lower rated securities involves
greater investment risk, achievement of the Portfolio's
investment objectives may be more dependent on the
Adviser's credit analysis than would be the case if the
Portfolio were investing in higher rated securities.
Lower rated securities may be more susceptible to real
or perceived adverse economic and competitive industry
conditions than investment grade securities and thus be
subject to higher risk. A projection of an economic
downturn, for example, could cause a decline in lower
rated securities prices because the advent of a
recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its
debt securities. In addition, the secondary trading
market for lower rated securities may be less liquid
than the market for higher grade securities. The market
prices of debt securities also generally fluctuate with
changes in interest rates so that the Portfolio's net
asset value can be expected to decrease as long-term
interest rates rise and to increase as long-term
interest rates fall. The above risks may be increased by
investments in debt securities not producing immediate
cash income, such as zero-coupon and pay-in-kind
securities. See "Investment Objectives and Policies."
The Emerging Growth Portfolio under normal market
conditions invests at least 65% of its total assets in
common stocks of small and medium sized companies (less
than $2 billion of market capitalization or annual
sales), both domestic and foreign, considered by the
Adviser to be emerging growth companies. The companies
in which the Portfolio invests may offer greater
opportunities for growth of capital than larger, more
established companies, but investments in such companies
may involve special risks. See "Investment Objectives
and Policies" and "Investment Practices -- Foreign
Securities." The use of options, futures contracts and
related options may include additional risks. See
"Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."
The Enterprise Portfolio invests principally in common
stocks of companies which, in the judgment of the
Adviser, have above average potential for capital
appreciation. Because prices of common stocks and other
securities fluctuate, the value of an investment in the
Portfolio will vary based upon the Portfolio's
investment performance. Use of options, futures
contracts and options on futures contracts may include
additional risk. See "Investment Practices -- Using
Options, Futures Contracts and Options on Futures
Contracts."
The Global Equity Portfolio invests in an
internationally diversified portfolio of equity
securities of companies of any nation including the
United States. See "Investment Objectives and Policies."
Use of options, futures contracts and related options
may include additional risks. See "Investment Practices
-- Using Options, Futures Contracts and Related
Options."
The Government Portfolio invests primarily in debt
securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. The Portfolio may
sell (write) and purchase call and put options. The
5
<PAGE> 9
Portfolio also may purchase and sell interest rate
futures contracts and options on such contracts since
such transactions are entered into for bona fide hedging
purposes. The Portfolio may purchase or sell U.S.
Government securities on a forward commitment basis. The
market prices of debt securities, including U.S.
Government securities, generally fluctuate with changes
in interest rates so that the Portfolio's net asset
value can be expected to decrease as long-term interest
rates rise and to increase as long-term interest rates
fall. See "Investment Objectives and
Policies -- Government Portfolio -- General."
The Growth and Income Portfolio invests principally in
income-producing equity securities including common
stock and convertible securities, although investments
are also made in non-convertible preferred stocks and
debt securities. Use of options, futures contracts and
related options may include additional risks. See
"Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."
The Money Market Portfolio invests in money market
instruments.
The Real Estate Securities Portfolio invests in a
portfolio of securities of companies operating in the
real estate industry ("Real Estate Securities"). Real
Estate Securities include equity securities, including
common stocks and convertible securities, as well as
non-convertible preferred stocks and debt securities of
real estate industry companies. A "real estate industry
company" is a company that derives at least 50% of its
assets (marked to market), gross income or net profits
from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Under
normal market conditions, at least 65% of the
Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate
investment trusts. The Portfolio's investment in debt
securities will be rated, at the time of investment, at
least Baa by Moody's or BBB by S&P, a comparable rating
by any other nationally recognized statistical rating
organization or if unrated, determined by the Adviser to
be of comparable quality. Under normal market
conditions, the Portfolio may invest up to 35% of its
total assets in equity and debt securities of companies
outside the real estate industry, U.S. Government
securities, cash and money market instruments. Because
of the Portfolio's policy of concentrating its
investments in Real Estate Securities, the Portfolio may
be more susceptible than an investment company without
such a policy to any single economic, political or
regulatory occurrence affecting the real estate
industry. In addition, the Portfolio will be affected by
general changes in interest rates which will result in
increases or decreases in the market value of the debt
securities (and, to a lesser degree, equity securities)
held by the Portfolio; the market value of such
securities tends to have an inverse relationship to the
movement of interest rates. For additional information
regarding the risk connected with investment in Real
Estate Securities, see "Investment Objectives and
Policies -- Real Estate Securities Portfolio -- Risk
Factors." The Portfolio may invest up to 25% of its
total assets in securities issued by foreign issuers,
some or all of which may also be Real Estate Securities.
Investments in foreign securities involve certain risks
not ordinarily associated with investments in securities
of domestic issuers, including fluctuations in foreign
exchange rates, future political and economic
developments, and the possible imposition of exchange
controls or
6
<PAGE> 10
other foreign governmental laws or restrictions. See
"Investment Practices -- Foreign Securities." The
Portfolio may purchase or sell debt securities on a
forward commitment basis. See "Investment
Practices -- Forward Commitments." The Portfolio may use
portfolio management techniques and strategies involving
options, futures contracts and options on futures. The
utilization of options, futures contracts and options on
futures contracts may involve greater than ordinary
risks and the likelihood of more volatile price
fluctuation. See "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
The Strategic Stock Portfolio invests primarily in
dividend paying equity securities of companies included
in the DJIA or in the MSCI Index. The Portfolio
initially invested approximately equally in 20
securities identified by the Adviser based on the
Portfolio's strategic stock selection policies as
described below in the following manner (the "Strategic
Selection Policies"). The ten highest dividend yielding
securities in the DJIA are identified for investment. In
addition, all companies having securities in the MSCI
Index are reviewed by the Adviser and securities of
companies in the financial or utility sectors and of
companies having securities included in the DJIA are
excluded. The remaining pool of MSCI Index securities is
further evaluated and securities of companies that do
not have positive one- and three-year sales and earnings
growth rates and two years of positive dividend growth
are excluded. The Adviser also excludes MSCI Index
securities that are in the bottom 25% of all MSCI Index
securities measured in terms of total annual trading
volume. MSCI Index securities of the remaining companies
are ranked by dividend yield, and the ten
highest-yielding such MSCI Index securities are
identified for investment. The 20 securities so
identified (the "Strategic Securities") represented the
Portfolio's initial investments. The Adviser
periodically employs the same Strategic Selection
Policies to identify a new list of 20 Strategic
Securities and reviews and adjusts a portion or all of
the Portfolio's assets so as to invest that portion of
the Portfolio's assets approximately equally in the new
list of 20 Strategic Securities. In this manner, the
Adviser expects that each security in the Portfolio will
be reviewed and potentially adjusted approximately
annually. Application of the Strategic Selection
Policies will be subject to and limited by certain of
the Portfolio's other investment policies and
restrictions, including restrictions and limitations
which must be met in order for the Portfolio to qualify
to be treated for U.S. federal income tax purposes as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"),
or in order to comply with requirements of the
Investment Company Act of 1940, as amended (the "1940
Act") (such as investment diversification requirements
and industry concentration limitations). In addition,
the Adviser will try to avoid transacting in odd-lots of
securities in order to minimize transaction costs. These
limitations may, at times, cause the composition of the
Portfolio's investment portfolio to differ significantly
from that which would have resulted had the Strategic
Selection Policies been fully implemented. Although each
new list of Strategic Securities will include only 20
securities, because only a portion of the Portfolio's
assets may be reviewed and adjusted at any given time,
the Adviser expects that the number of securities held
by the Portfolio will over time increase and that the
Portfolio may at times hold forty or more different
securities. Except to raise cash for
7
<PAGE> 11
operational purposes, the Portfolio ordinarily will not
sell securities or reevaluate its portfolio investments
except as periodically determined by the Adviser. As a
result, the adverse financial condition of a company
will not result in its elimination from the Portfolio,
except under extraordinary circumstances. Risks
associated with an investment in the Portfolio include
the possible deterioration of either the financial
condition of the issuers or the general condition of the
stock market, and general price volatility. The
relatively high dividend yield (calculated based on the
current stock price and the annualized most recent
dividend payment amount) of certain securities that the
Portfolio may acquire may reflect the market's
assessment of the risk that the company may reduce or
eliminate the dividend in the current period or in the
future, or otherwise reflect the market's unfavorable
assessment of the company's performance outlook. The
Adviser generally will not take these considerations
into account in implementing the Strategic Selection
Policies. 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. (the
"Adviser") is the investment adviser for each
Portfolio. Morgan Stanley Asset Management Inc. (the
"Subadviser") provides subadvisory services to the
Adviser with respect to the Global Equity Portfolio.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes each Portfolio's shares.
Dividends and
Distributions.........Dividends from net investment income are declared each
business day for the Money Market Portfolio and the
Government Portfolio. Such dividends are distributed
monthly. The Government Portfolio may distribute any net
short-term capital gains and any net long-term capital
gains at least annually. The Asset Allocation Portfolio,
Domestic Income Portfolio, Emerging Growth Portfolio,
the Enterprise Portfolio, the Global Equity Portfolio,
the Growth and Income Portfolio, the Real Estate
Securities Portfolio and the Strategic Stock Portfolio
declare dividends and any capital gains distributions
annually.
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
8
<PAGE> 12
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charges by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
ASSET ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------- ------ ------- ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $11.352 $ 11.64 $ 9.99 $11.80 $ 11.92 $12.08 $10.43 $ 10.77 $ 9.67 $ 9.56
------- ------- ------- ------ ------- ------ ------ ------- ------- ------
Net Investment Income........... .513 .482 .48 .45 .29 .37 .47 .52 .59 .61
Net Realized and Unrealized
Gain/Loss..................... 1.897 1.083 2.6425 (.89) .6025 .493 2.27 (.325) 1.13 .1125
------- ------- ------- ------ ------- ------ ------ ------- ------- ------
Total From Investment
Operations...................... 2.410 1.565 3.1225 (.44) .8925 .863 2.74 .195 1.72 .7225
------- ------- ------- ------ ------- ------ ------ ------- ------- ------
LESS:
Distributions from Net
Investment Income............. .518 .478 .4775 .45 .2925 .3689 .4825 .535 .595 .6125
Distributions from Net Realized
Gain.......................... 1.334 1.375 .995 .90 .63 .6541 .6075 -- .025
Distributions in Excess of Net
Realized Gain................. -- -- -- .02 .09 -- -- -- -- --
------- ------- ------- ------ ------- ------ ------ ------- ------- ------
Total Distributions............... 1.852 1.853 1.4725 1.37 1.0125 1.023 1.09 .535 .62 .6125
------- ------- ------- ------ ------- ------ ------ ------- ------- ------
Net Asset Value, End of the
Period.......................... $11.910 $11.352 $ 11.64 $ 9.99 $ 11.80 $11.92 $12.08 $ 10.43 $ 10.77 $ 9.67
======= ======= ======= ====== ======= ====== ====== ======= ======= ======
Total Return*..................... 21.81% 13.87% 31.36% (3.66%) 7.71% 7.28% 27.05% 1.89% 17.82% 7.56%
Net Assets at End of the Period
(In millions)................... $ 63.3 $ 63.9 $ 63.0 $ 56.6 $ 64.9 $ 59.6 $ 52.2 $ 40.3 $ 40.5 $ 31.4
Ratio of Expenses to Average Net
Assets*......................... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*............. 3.86% 3.78% 3.85% 3.70% 2.34% 3.05% 4.12% 4.70% 5.93% 6.36%
Portfolio turnover................ 58% 118% 124% 163% 150% 126% 88% 46% 50% 48%
Average Commission Paid Per Equity
Share Traded(1)................. $ .0602 $ .0561 -- -- -- -- -- -- -- --
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets.......................... .71% .81% .74% .72% .74% .77% .80% .80% .86% .90%
Ratio of Net Investment Income to
Average Net Assets.............. 3.75% 3.57% 3.71% 3.58% 2.20% 2.88% 3.92% 4.50% 5.67% 6.06%
</TABLE>
- ---------------------
(1) 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.
9
<PAGE> 13
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
DOMESTIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
PER SHARE OPERATING PERFORMANCE ------- ------- ------- -------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period......................... $ 8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96 $ 10.15
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Net Investment Income.......... .704 .755 .71 .85 .72 .69 .685 1.035 1.725 .62
Net Realized and Unrealized
Gain/Loss.................... .252 (.212) .8525 (1.2275) .5825 .2725 .7525 (1.64) (2.31) .8975
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Total from Investment
Operations..................... .956 .543 1.5625 (.3775) 1.3025 .9625 1.4375 (.605) (.585) 1.5175
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Distributions from Net
Investment Income............ .712 .745 .7025 .8525 .7225 .7025 .6775 1.055 1.725 .61
Distributions from Net Realized
Gain......................... -- -- -- -- -- -- -- -- .01 .0975
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Total Distributions.............. .712 .745 .7025 .8525 .7225 .7025 .6775 1.055 1.735 .7075
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Net Asset Value, End of the
Period......................... $ 8.252 $ 8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96
======= ======= ======= ======== ======= ======= ======= ======= ======= ========
Total Return*.................... 11.90% 6.68% 21.37% (4.33%) 16.32% 12.50% 21.23% (7.23%) (5.44%) 14.95%
Net Assets at End of the Period
(In millions).................. $ 17.2 $ 19.8 $ 26.6 $ 21.3 $ 27.4 $ 21.1 $ 17.4 $ 6.3 $ 8.1 $ 8.1
Ratio of Expenses to Average Net
Assets*........................ .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*............ 7.74% 7.97% 8.11% 8.35% 7.80% 8.89% 9.72% 11.99% 12.92% 10.88%
Portfolio Turnover............... 78% 77% 54% 94% 130% 117% 90% 123% 56% 44%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets......................... 1.05% 1.29% .93% .95% .95% .95% .95% .95% .95% .95%
Ratio of Net Investment Income to
Average Net Assets............. 7.29% 7.28% 7.78% 8.00% 7.40% 8.54% 9.37% 11.64% 12.57% 10.53%
</TABLE>
10
<PAGE> 14
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last three
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1995
DECEMBER 31, (COMMENCEMENT OF
--------------------------- INVESTMENT OPERATIONS) TO
1997 1996 DECEMBER 31, 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%(1)
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%(1)
Average Commission Per Equity Share Traded(2)............... $ .0502 $ .0470 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 2.14% 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (1.40%) (2.60%) (4.35%)
</TABLE>
- -------------------------
(1) Non-Annualized
(2) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
11
<PAGE> 15
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Net Investment Income.............. .091 .113 .32 .25 .21 .23 .265 .395 .40 .32
Net Realized and Unrealized
Gain/Loss........................ 4.734 3.417 4.22 (.7625) 1.0325 .77 3.37 (1.17) 2.57 .765
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Total from Investment Operations..... 4.825 3.530 4.54 (.5125) 1.2425 1.00 3.635 (.775) 2.97 1.085
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Less:
Distributions from Net Investment
Income........................... .096 .109 .3175 .25 .215 .23 .285 .435 .37 .30
Distributions from Net Realized
Gain............................. 2.885 1.849 1.9225 1.4175 .6675 -0- -0- -0- -0- .055
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Total Distributions.................. 2.981 1.958 2.24 1.6675 .8825 .23 .285 .435 .37 .355
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Net Asset Value, End of the Period... $18.106 $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70
======= ======= ====== ====== ====== ====== ====== ====== ====== =======
Total Return*........................ 30.66% 24.80% 36.98% (3.39%) 8.98% 7.48% 36.41% (6.84%) 34.23% 13.61%
Net Assets at End of the Period (In
millions).......................... $98.7 $84.8 $76.0 $67.5 $72.3 $65.6 $57.8 $27.2 $31.8 $24.0
Ratio of Expenses to Average Net
Assets*............................ .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*................ .47% .68% 2.06% 1.72% 1.41% 1.78% 2.33% 3.64% 3.74% 3.13%
Portfolio Turnover................... 82% 152% 145% 153% 139% 116% 95% 122% 86% 63%
Average Commission Paid per Equity
Share Traded(1).................... $.0566 $.0435 -- -- -- -- -- -- -- --
*If certain expenses had not been
assumed by the Adviser. Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................. .66% .75% .68% .68% .72% .74% .90% .93% .93% .95%
Ratio of Net Investment Income to
Average Net Assets................. .41% .53% 1.98% 1.64% 1.29% 1.64% 2.03% 3.31% 3.41% 2.78%
</TABLE>
- ---------------------
(1)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
12
<PAGE> 16
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last three
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
GLOBAL EQUITY PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1995
DECEMBER 31, (COMMENCEMENT OF
--------------------------- INVESTMENT OPERATIONS) TO
1997 1996 DECEMBER 31, 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 --
Distributions from Net Realized Gain...................... 2.354 .176 --
------- ------- -------
Total Distributions......................................... 2.460 .364 --
------- ------- -------
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(1).......... $ .0574 $ .0245 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 6.78% 7.43% 8.27%
Ratio of Net Investment Loss to Average Net Assets.......... (4.82%) (5.96%) (6.68%)
</TABLE>
- ---------------------
** Non-Annualized.
(1) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
13
<PAGE> 17
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............ $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Investment
Income.......... .566 .569 .60 .56 .57 .665 .74 .785 .84 .88
Net Realized and
Unrealized
Gain/Loss....... .231 (.388) .78 (.985) .135 (.1575) .60 (.105) .325 (.215)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total from
Investment
Operations........ .797 .181 1.38 (.425) .705 .5075 1.34 .68 1.165 .665
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Less Distributions
from and in Excess
of Net Investment
Income............ .543 .575 .60 .555 .575 .6675 .75 .78 .845 .865
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Asset Value, End
of the Period..... $8.920 $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48
====== ====== ====== ====== ======= ====== ====== ====== ====== ======
Total Return*....... 9.61% 2.12% 17.17% (4.63%) 7.86% 5.73% 16.23% 8.31% 14.31% 6.74%
Net Assets at End of
the Period (In
millions)......... $ 52.6 $ 57.3 $ 67.0 $ 65.5 $ 80.6 $ 74.8 $ 77.0 $ 73.2 $ 81.2 $ 90.6
Ratio of Expenses to
Average Net
Assets*........... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net
Investment Income
to Average Net
Assets*........... 6.51% 6.56% 6.89% 6.71% 6.45% 7.29% 8.37% 9.19% 9.56% 9.29%
Portfolio
Turnover.......... 119% 143% 164% 192% 91% 36% 57% 164% 42% 88%
*If certain expenses
had not been
assumed by the
Adviser, Total
Return would have
been lower and the
ratios would have
been as follows:
Ratio of Expenses to
Average Net
Assets............ .74% .80% .72% .70% .70% .70% .70% .69% .66% .64%
Ratio of Net
Investment Income
to Average Net
Assets............ 6.37% 6.36% 6.77% 6.61% 6.35% 7.19% 8.27% 9.10% 9.50% 9.25%
</TABLE>
14
<PAGE> 18
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last two
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 23, 1996
(COMMENCEMENT OF
YEAR ENDED INVESTMENT 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%)(1)
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%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0398 $.0203
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 1.63% 45.97%
Ratio of Net Investment Income/Loss to Average Net Assets... .31% (40.74%)
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
15
<PAGE> 19
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) in included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Investment Income........... .049 .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714
Less Distributions From Net
Investment Income............. .049 .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Asset Value, End of the
Period........................ $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ======= ======= ======= ======= ======= ====== ======= ======= ========
Total Return*................... 5.06% 4.89% 5.46% 3.71% 2.66% 3.36% 5.46% 7.83% 9.13% 7.38%
Net Assets at End of the Period
(In millions)................. $19.7 $ 19.6 $ 21.6 $ 28.5 $ 30.0 $ 32.9 $ 38.0 $ 34.3 $ 29.0 $ 24.5
Ratio of Expenses to Average Net
Assets*....................... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income
to Average Net Assets*........ 4.95% 4.78% 5.33% 3.63% 2.63% 3.32% 5.44% 7.59% 8.76% 7.22%
*If certain expenses had not
been assumed by the Adviser,
Total Return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets........................ .98% 1.29% .93% .87% .95% .89% .87% .89% .95% .95%
Ratio of Net Investment Income
to Average Net Assets......... 4.57% 4.10% 5.00% 3.37% 2.28% 3.03% 5.17% 7.30% 8.41% 6.87%
</TABLE>
16
<PAGE> 20
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last three
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1995
DECEMBER 31, (COMMENCEMENT OF
----------------- INVESTMENT OPERATIONS) TO
1997 1996 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%(1)
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%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0597 $ .0313 --
* If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... N/A 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets........ N/A 4.89% 3.36%
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was not
required in fiscal periods prior to 1996.
N/A = Not Applicable
17
<PAGE> 21
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the most
recent fiscal period) is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
STRATEGIC STOCK PORTFOLIO
<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%(1)
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%(1)
Average Commission Paid per Equity Share Traded(2).......... $.0282
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets..................... 2.59%
Ratio of Net Investment Income to Average Net Assets........ .68%
</TABLE>
- ---------------------
(1) Non-Annualized
(2)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable.
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<PAGE> 22
INTRODUCTION
The Trust is a duly organized Delaware business trust with ten separate
portfolios, each of which is described herein and offered pursuant to this
Prospectus. Each portfolio has separate assets and liabilities and a separate
net asset value per share. Shares of 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 OBJECTIVES AND POLICIES
Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. See "Investment
Practices" for further discussion of investment techniques and strategies. The
investment objective of each Portfolio, except the Morgan Stanley Real Estate
Securities Portfolio (the "Real Estate Securities Portfolio"), is a fundamental
policy and may not be changed without shareholder approval. With respect to the
Real Estate Securities Portfolio, the investment objective may be changed by the
Trustees. If there is a change in the objective of such Portfolio, shareholders
should consider whether the Portfolio remains an appropriate investment in light
of their then current financial position and needs. The differences in
objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk to which
each Portfolio is subject.
ASSET ALLOCATION PORTFOLIO
The investment objective of the Asset Allocation Portfolio is to seek a
high total investment return consistent with prudent risk through a fully
managed investment policy utilizing equity as well as investment grade
intermediate and long-term debt securities and money market securities. Total
investment return consists of current income, including dividends, interest and
discount accruals, and capital appreciation. The Adviser may vary the
composition of the Portfolio from time to time based upon an evaluation of
economic and market trends and the anticipated relative total return available
from a particular type of security. Accordingly, the Asset Allocation Portfolio
may, at any given time, be substantially invested in equity securities, bonds
and notes or money market securities. Achieving this objective depends on
management's abilities to assess the effect of economic and market trends on
different sectors of the market. There can be no assurances that the investment
objective of the Portfolio will be achieved.
The Portfolio may invest in those money market securities which are
eligible investments for the Fund's Money Market Portfolio. It may also invest
in intermediate and long-term debt securities, including convertible securities,
and in preferred and convertible preferred stock which are rated at the time of
purchase BBB or better by S&P or Baa or better by Moody's, or in nonrated
securities determined by the Adviser to be of comparable quality. To the extent
investments are made in fixed-income securities, the Portfolio will invest
primarily in such securities which are rated A or better by either rating
agency. These ratings are described in the Appendix hereto. The Portfolio is not
limited as to the maturities of the debt securities it may purchase. Debt
securities with longer maturities generally tend to produce higher yields and
are subject to greater market fluctuation as a result of changes in interest
rates than debt securities with shorter maturities.
The common stocks in which the Portfolio may invest will be primarily
stocks of large-capitalization companies. Generally, the characteristics of such
companies include a strong balance sheet, good financial resources, a
satisfactory rate of return on capital, a good industry position and superior
management skills. The Adviser believes that companies that conform most closely
to these characteristics often tend to exhibit generally consistent earnings
growth.
The Portfolio may engage in portfolio management strategies and techniques
involving options, futures, contracts and options on futures contracts. Options,
futures contracts, and options on futures contracts are described in "Investment
Practices -- Using Options, Futures Contracts, and Options on Futures
Contracts."
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<PAGE> 23
The Portfolio may also invest in equity and debt securities of foreign
issuers, including non-U.S. dollar denominated debt securities, Eurodollar
securities and securities issued, assumed or guaranteed by foreign governments
or political subdivisions or instrumentalities thereof. The Portfolio will limit
its investment in foreign securities to 25% of its total assets, taken at market
value at the time of each investment. See "Investment Practices -- Foreign
Securities." For a discussion of the Portfolio's practices regarding investment
companies see "Investment Practices -- Investment in Investment Companies."
Because of the fully managed approach of the Portfolio, portfolio turnover
may be greater resulting in increased brokerage charges to the Portfolio.
DOMESTIC INCOME PORTFOLIO
The primary investment objective of the Domestic Income Portfolio is to
seek current income. Capital appreciation is a secondary objective, which will
be sought only when consistent with its primary objective. The Portfolio
attempts to achieve these investment objectives by investing primarily in
fixed-income securities, including both convertible and non-convertible debt
securities and preferred stocks. The Portfolio may invest in investment grade
securities and lower rated and nonrated securities. There is no assurance that
these objectives will be achieved and yields may fluctuate over time. The
Portfolio may also invest in debt securities of foreign issuers, including non-
U.S. dollar denominated debt securities, Eurodollar securities and securities
issued, assumed or guaranteed by foreign governments or political subdivisions
or instrumentalities thereof. The Portfolio will limit its investment in foreign
securities to 25% of its total assets at the time of investment. See "Investment
Practices -- Foreign Securities."
The Portfolio expects that at all times at least 80% of its assets will be
invested in fixed-income securities rated at the time of purchase B or higher by
Moody's or S&P, nonrated debt securities considered by the Adviser to be of
comparable quality and U.S. Government securities. See the Appendix for a
description of corporate bond ratings. The Portfolio may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices -- Forward Commitments."
The Portfolio may invest in debt securities rated Ba or below by Moody's or
BB or below by S&P or nonrated debt securities considered by the Adviser to be
of comparable quality (commonly known as "junk bonds"), common stocks or other
equity securities and income bonds on which interest is not accrued by the
Portfolio when such investments are consistent with the Portfolio's investment
objectives or are acquired as part of a unit consisting of a combination of
fixed-income or equity securities. The Portfolio may also invest in prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. See "Investment Practices -- Repurchase Agreements."
Equity securities as referred to herein do not include preferred stocks. The
Portfolio will not purchase any such securities which will cause more than 20%
of its total assets to be so invested or which would cause more than 10% of its
total assets to be invested in common stocks or other equity securities.
In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Portfolio has no policy limiting the maturities of the
debt securities in which it may invest, the Adviser seeks to moderate market
risk by generally maintaining a portfolio duration within a range of four to six
years.
20
<PAGE> 24
Duration is a measure of the expected life of a debt security on a present
value basis expressed in years that incorporates a security's yield, coupon
interest payments, final maturity and call features into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the "interest rate risk" or "price volatility" of the security). However, "term
to maturity" measures only the time until a debt security provides its final
payment taking no account of the pattern of the security's payments of interest
or principal prior to maturity. Duration measures the length of the time
interval between the present and the time when the interest and principal
payments are scheduled to be received (or in the case of a callable bond,
expected to be received), weighing them by the present value of the cash to be
received at each future point in time. In general, the lower the coupon rate of
interest or the longer the maturity, or the lower the yield-to-maturity of a
debt security, the longer its duration; conversely, the higher the coupon rate
of interest, the shorter the maturity or the higher the yield-to-maturity of a
debt security, the shorter its duration. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. In these and other similar situations,
the Adviser will use more sophisticated analytical techniques that incorporate
the economic life of a security into the determination of its interest rate
exposure. The duration is likely to vary from time to time as the Adviser
pursues its strategy of striving to maintain a balance between seeking to
maximize income and endeavoring to maintain the value of the Portfolio's
capital.
The higher yields sought by the Portfolio are generally obtainable from
securities rated in the lower categories by recognized rating services. These
securities generally are subordinated to the prior claims of banks and other
senior lenders. The lower rated debt securities in which the Portfolio may
invest are regarded as predominately speculative with respect to the issuers
continuing ability to meet principal and interest payments. The ratings of
Moody's and S&P represent their opinions of the quality of the debt securities
they undertake to rate, but not the market value risk of such securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, debt securities with the same maturity,
coupon and rating may have different yields while debt securities of the same
maturity and coupon with different ratings may have the same yield.
During the fiscal year ended December 31, 1997, the average percentage of
the Portfolio's assets invested in debt securities within the various rating
categories (based on the higher of the S&P or Moody's ratings), determined on a
dollar weighted average, and other assets of the Portfolio were as follows:
<TABLE>
<S> <C> <C>
AAA/Aaa.............................................. 3.76%
AA/Aa................................................ 0.00
A/A.................................................. 4.51
BBB/Baa.............................................. 54.55
BB/Ba................................................ 26.75
B/B.................................................. 3.59
Preferred Stocks/Common Stocks/Warrants.............. 3.88
Cash and Equivalents................................. 2.96
------
Total Net Assets................................ 100.00%
</TABLE>
The securities in which the Portfolio may invest include the following:
-- Straight fixed-income debt securities. These include bonds and other
debt obligations which bear a fixed or variable rate of interest payable at
regular intervals and have a fixed or resettable maturity date. The particular
terms of such securities vary and may include features such as call provisions
and sinking funds.
21
<PAGE> 25
-- Pay-in-kind debt securities. These pay interest in additional debt
securities rather than in cash.
-- Zero-coupon debt securities. These bear no interest obligation but are
issued at a discount from their value at maturity. When held to maturity,
their entire return equals the difference between their issue price and their
maturity value. Interest is however accrued by the Portfolio each day for
accounting and Federal income tax purposes.
-- Zero-fixed-coupon debt securities. These are zero-coupon debt securities
which convert on a specified date to interest-bearing debt securities.
Fixed-income securities rated below B by both Moody's and S&P include debt
obligations or other securities of companies that are financially troubled, in
default or are in bankruptcy or reorganization ("Deep Discount Securities").
Debt obligations of such companies are usually available at a deep discount from
the face value of the instrument. The Portfolio will invest in Deep Discount
Securities when the Adviser believes that existing factors are likely to restore
the company to a healthy financial condition. Such factors include a
restructuring of debt, management changes, existence of adequate assets, or
other unusual circumstances.
A debt instrument purchased at a deep discount may currently pay a very
high effective yield. In addition, if the financial condition of the issuer
improves, the underlying value of the security may increase, resulting in a
capital gain. If the company defaults on its obligations or remains in default,
or if the plan of reorganization is insufficient for debtholders, the Deep
Discount Securities may stop generating income and lose value or become
worthless. The Adviser will balance the benefits of Deep Discount Securities
with their risks. While a diversified portfolio may reduce the overall impact of
a Deep Discount Security that is in default or loses its value, the risk cannot
be eliminated.
Risk Factors of Investing in Lower Rated Debt Securities. Past experience
may not provide an accurate indication of future performance of the market for
lower rated debt securities, particularly during periods of economic recession.
An economic downturn or increase in interest rates is likely to have a greater
negative effect on this market, the value of lower rated debt securities in the
Portfolio, the Portfolio's net asset value and the ability of the bonds' issuers
to repay principal and interest, meet projected business goals and obtain
additional financing than on higher rated securities. These circumstances also
may result in a higher incidence of defaults than with respect to higher rated
securities. An investment in this Portfolio may be considered more speculative
than investment in shares of a fund which invests primarily in higher rated debt
securities.
Prices of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of lower rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash. When
it deems it appropriate and in the best interests of Portfolio shareholders, the
Portfolio may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect its interests
of security holders of its companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Nonrated
securities are usually not as attractive to as many buyers as rated securities
are, a factor which may make nonrated securities less marketable. These factors
may have the effect of limiting the availability of the securities for purchase
by the Portfolio and may also limit the ability of the Portfolio to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of lower rated debt securities, especially in a thinly
traded market. To the extent the Portfolio
22
<PAGE> 26
owns or may acquire illiquid or restricted lower rated securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties. Changes in values of debt
securities which the Portfolio owns will affect its net asset value per share.
If market quotations are not readily available for the Portfolio's lower rated
or nonrated securities, these securities will be valued at fair value by the
Adviser based on procedures approved by the Trustees. Judgment plays a greater
role in valuing lower rated debt securities than with respect to securities for
which more external sources of quotations and last sale information are
available.
Special tax considerations are associated with investing in lower rated
debt securities structured as zero coupon or pay-in-kind securities. The
Portfolio accrues income on these securities prior to the receipt of cash
payments. The Portfolio must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax laws and may,
therefore, have to dispose a portion of its portfolio securities to satisfy
distribution requirements.
While credit ratings are only one factor the Adviser relies on in
evaluating lower rated debt securities, certain risks are associated with using
credit ratings. Credit rating agencies may fail to timely change the credit
ratings to reflect subsequent events; however, the Adviser continuously monitors
the issuers of lower rated debt securities in its portfolio in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. Achievement of the Portfolio's
investment objective may be more dependent upon the Adviser's credit analysis
than is the case for higher quality debt securities. Credit ratings for
individual securities may change from time to time and the Portfolio may retain
a portfolio security whose rating has been changed.
Investors should consider carefully the additional risks associated with
investment in securities which carry lower ratings, which are not generally
meant for short-term investment.
EMERGING GROWTH PORTFOLIO
The investment objective of the Emerging Growth Portfolio is to seek
capital appreciation by investing in a portfolio of securities consisting
principally of common stocks of small and medium sized companies considered by
the Adviser to be emerging growth companies. Any ordinary income received from
portfolio securities is entirely incidental.
As a fundamental investment policy, the Portfolio under normal conditions
invests at least 65% of its total assets in common stocks of small and medium
sized companies (less than $2 billion of market capitalization), both domestic
and foreign, considered by the Adviser to be emerging growth companies. The
companies may be in the early stages of their respective life cycles and the
Adviser believes such companies have the potential to become major enterprises.
Investments in such companies may offer greater opportunities for growth of
capital than larger, more established companies, but also may involve certain
special risks. Emerging growth companies often have limited product lines,
markets, or financial resources, and they may be dependent upon one or a few key
people for management. The securities of such companies may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. While the Portfolio will invest
primarily in common stocks, to a limited extent it may invest in other
securities such as preferred stocks, convertible securities and warrants.
The Portfolio does not limit its investment to any single group or type of
security. The Portfolio may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Portfolio's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above average volatility of price
movement. Because prices of common stocks and other securities
23
<PAGE> 27
fluctuate, the value of an investment in the Portfolio will vary based upon the
Portfolio's investment performance. The Portfolio attempts to reduce overall
exposure to risk from declines in securities prices by spreading its investments
over many different companies in a variety of industries. There is, however, no
assurance that the Portfolio will be successful in achieving its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. See "Investment Practices -- Foreign Securities." Additionally,
the Portfolio may invest up to 15% of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the Securities Act of 1933) and in other securities not having readily available
market quotations. The Portfolio may enter into repurchase agreements with
domestic banks and broker-dealers which involve certain risks. The Portfolio may
invest in warrants so long as such investments aggregate less than 5% of the
Portfolio's total assets. The risks involved in investing in restricted
securities, warrants and repurchase agreements are described in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
The investment objective of the Enterprise Portfolio is to seek capital
appreciation through investments in securities believed by the Adviser to have
above average potential for capital appreciation. Any income received on such
securities is incidental to the objective of capital appreciation.
The Portfolio invests principally in growth common stocks. Such securities
generally include those of companies with established records of growth in sales
or earnings, and companies with new products, new services, or new processes.
The Portfolio may also invest in companies in cyclical industries during periods
when their securities appear attractive to the Adviser for capital appreciation.
In addition to common stock, the Portfolio may invest in warrants and preferred
stocks, and in investment companies. See "Investment Practices -- Investment in
Investment Companies."
The Portfolio generally holds a portion of its assets in investment grade
short-term debt securities and investment grade corporate or government bonds in
order to provide liquidity. Such investments may be increased to up to 100% of
the Portfolio's assets when deemed appropriate by the Adviser for temporary
defensive purposes. Short-term investments may include repurchase agreements
with banks or broker-dealers. See "Investment Practices -- Repurchase
Agreements."
The Portfolio's primary approach is to seek what the Adviser believes to be
attractive growth investments on an individual company basis. The Portfolio may
invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Portfolio will vary based upon the Portfolio's investment
performance. The Portfolio attempts to reduce overall exposure to risk from
declines in securities prices by spreading its investments over many different
companies in a variety of industries. There is, however, no assurance that the
Portfolio will be successful in achieving its objective. The Portfolio may also
invest in debt securities of foreign issuers, including non-U.S. dollar
denominated debt securities, Eurodollar securities and securities issued,
assumed or guaranteed by foreign governments or political subdivisions or
instrumentalities thereof. The Portfolio will limit its investment in foreign
securities to 10% of its total assets, taken at market value at the time of each
investment. See "Investment Practices -- Foreign Securities." The Portfolio may
engage in portfolio management strategies and techniques involving options,
futures contracts and options on futures. Options, futures contracts and options
on futures contracts are described in "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
GLOBAL EQUITY PORTFOLIO
The investment objective of the Global Equity Portfolio is to seek
long-term growth of capital through investments in an internationally
diversified portfolio of equity securities of companies of
24
<PAGE> 28
any nation including the United States. The Portfolio intends to be invested in
equity securities of companies of at least three countries including the United
States. Under normal market conditions, at least 65% of the Portfolio's total
assets are so invested. Equity securities include common stocks, preferred
stocks and warrants or options to acquire such securities.
The Adviser, subject to the direction of the Trust's Trustees, provides the
Portfolio with an overall investment program consistent with the Portfolio's
objective and policies. Investments may be shifted among the world's various
capital markets and among different types of securities in accordance with
ongoing analysis provided by the Adviser and the Subadviser of trends and
developments affecting such markets and securities. The Adviser and the
Subadviser are sometimes referred to as the "Advisers."
The Advisers utilize a "top-down" approach in selecting investments for the
Portfolio that emphasizes country selection and weighting rather than individual
securities selection. This approach reflects the Advisers' philosophy for this
Portfolio that a diversified selection of securities representing exposure to
world markets based upon the economic outlook and current valuation levels for
each country is an effective way to maximize the return and minimize the risk
associated with global investment.
The Advisers determine country allocations for the Portfolio on an ongoing
basis within policy ranges dictated by each country's market capitalization and
liquidity. The Portfolio will invest in the United States and other
industrialized countries throughout the world that comprise the Morgan Stanley
Capital International World Index. These countries currently are Australia,
Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Italy,
Japan, the Netherlands, New Zealand, Norway, Singapore/Malaysia, Spain, Sweden,
Switzerland, the United Kingdom and the United States. In addition, the
Portfolio may invest a portion of its assets in emerging country equity
securities. The Portfolio currently intends to invest in some or all of the
following countries: Argentina, Indonesia, Portugal, South Africa, Brazil,
Malaysia, Philippines, Thailand, India, Mexico, South Korea and Turkey.
By analyzing a variety of macroeconomic and political factors, the Advisers
develop fundamental projections on interest rates, currencies, corporate profits
and economic growth for each country. These country projections are then used to
determine what the Advisers believe to be a fair value for the stock market of
each country. Discrepancies between actual value and fair value, as determined
by the Advisers, provide an expected return for each stock market. The expected
return is adjusted by currency return expectations derived from the Advisers'
purchasing-power parity exchange rate model to arrive at an expected total
return in U.S. Dollars. The final country allocation decision is then reached by
considering the expected total return in light of various country specific
considerations such as market size, volatility, liquidity and country risk.
Within a particular country, investments are made through the purchase of
equity securities which, in the aggregate, replicate a broad market index, which
in most cases will be the Morgan Stanley Capital International ("MSCI") Index
for the particular country. The MSCI Indices measure the performance of stock
markets worldwide. The various MSCI Indices are based on the share prices of
companies listed on the local stock exchange of the specified country or
countries within a specified region. The combined market capitalization of
companies in these indices represent approximately 60 percent of the aggregate
market value of the covered stock exchanges. Companies included in the MSCI
country index replicate the industry composition of the local market and are a
representative sampling of large, medium and small companies, subject to
liquidity. Non-domiciled companies traded on the local exchange and companies
with restricted float due to dominant shareholders or cross-ownership are
avoided. The Advisers may overweight or underweight an industry segment of a
particular index if it concludes this would be advantageous to the Portfolio.
The Portfolio may purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underly-
25
<PAGE> 29
ing shares of foreign companies. ADRs are publicly traded on exchanges or
over-the-counter in the United States and are issued through "sponsored" or
"unsponsored" arrangements. In a sponsored ADR arrangement, the foreign issuer
assumes the obligations to pay some or all of the depositary's transaction fees,
whereas under an unsponsored arrangement, the foreign issuer assumes no
obligations and the depositary's transaction fees are paid by the ADR holders.
In addition, less information is available in the United States about an
unsponsored ADR than about a sponsored ADR. The Portfolio may invest in ADRs
through both sponsored and unsponsored arrangements. For further information on
ADRs and EDRs, investors should refer to the Statement of Additional
Information.
The Portfolio may invest cash temporarily in short-term debt instruments.
Such temporary investments will only be made with cash held to maintain
liquidity or pending investment. See "Temporary Short-Term Investments" herein.
Risk Factors. An investment in the Portfolio involves risks similar to
those of investing in foreign common stocks generally. Investment in common
stocks of foreign issuers may subject the Portfolio to risk of foreign
political, economic and legal conditions and developments. Such conditions or
developments might include favorable or unfavorable changes in currency exchange
rates, exchange control regulations (including currency blockage), expropriation
of assets of companies, imposition of withholding taxes on dividend or interest
payments, and possible difficulty in obtaining and enforcing judgments against a
foreign issuer. Also, foreign common stocks may not be as liquid and may be more
volatile than comparable domestic common stocks.
Furthermore, issuers of foreign common stocks are subject to different,
often less comprehensive, accounting, reporting and disclosure requirements than
domestic issuers. The Portfolio, in connection with its purchases and sales of
foreign securities, other than securities purchased or sold in United States
dollars, will incur transaction costs in converting currencies. Also, brokerage
costs incurred in purchasing and selling securities in foreign securities
markets generally are higher than such costs in comparable transactions in
domestic securities markets, and foreign custodial costs relating to the
Portfolio securities are higher than domestic custodial costs. See also
"Investment Practices" for a discussion of certain additional risks related to
investment practices that may be utilized by the Portfolio, including use of
options, futures contracts and related options.
Foreign Currency Transactions. The value of the Portfolio's securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Portfolio will
incur costs in connection with conversions between various currencies. The
Portfolio's foreign currency exchange transactions generally will be conducted
on a spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Portfolio
purchases and sells foreign currency on a spot basis in connection with the
settlement of transactions in securities traded in such foreign currency. The
Portfolio does not purchase and sell foreign currencies as an investment.
The Portfolio also may enter into contracts with banks or other foreign
currency brokers or dealers to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts to hedge against changes in foreign currency exchange rates. A foreign
currency forward contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time at
a specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
The Portfolio may attempt to hedge against changes in the value of the
United States dollar in relation to a foreign currency by entering into a
forward contract for the purchase or sale of the amount of foreign currency
invested or to be invested, or by buying or selling a foreign currency futures
contract for such amount. Such hedging strategies may be employed before the
Portfolio purchases a foreign security traded in the hedged currency which the
Portfolio anticipates acquiring or between the date the foreign security is
purchased or sold and the date on which payment therefor is made or received.
Hedging against a change in the value of a foreign currency in the
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<PAGE> 30
foregoing manner does not eliminate fluctuations in the prices of portfolio
securities or prevent losses if the prices of such securities decline.
Furthermore, such hedging transactions reduce or preclude the opportunity for
gain if the value of the hedged currency should move in the direction opposite
to the hedged position. The Portfolio will not speculate in foreign currency
forward or futures contracts or through the purchase and sale of foreign
currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the forward
contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
Temporary Short-Term Investments. It is the Portfolio's policy to be
substantially invested in common stocks and securities convertible into common
stocks. However, the Portfolio may hold a portion of its assets in cash to meet
redemptions and other day-to-day operating expenses. The Portfolio may invest
cash held for such purposes in obligations of the United States and of foreign
governments, including their political subdivisions, commercial paper, bankers'
acceptances, certificates of deposit, repurchase agreements collateralized by
these securities, and other short-term evidences of indebtedness. The Portfolio
will only purchase commercial paper if it is rated Prime-1 or Prime-2 by Moody's
or A-1 or A-2 by S&P. The Portfolio also may invest cash held for such purposes
in short-term, high grade foreign debt securities. High grade foreign debt
securities are those debt securities of foreign issuers which the Advisers
determine to have creditworthiness substantially equivalent to that of domestic
issuers of debt securities rated investment grade.
GOVERNMENT PORTFOLIO
GENERAL
The investment objective of the Government Portfolio is to seek to provide
investors with a high current return consistent with preservation of capital.
The Portfolio invests primarily in debt securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Under normal circumstances,
at least 80% of the total assets of the Portfolio are invested in such
securities. The Portfolio may invest its remaining assets (up to 20%) in other
government related securities and in repurchase agreements fully collateralized
by U.S. Government securities. The other government related securities include
mortgage-related and mortgage-backed securities and certificates issued by
financial institutions or broker-dealers representing "stripped" mortgage-
related securities. See "Other Government Related Securities" below. In order to
hedge against changes in interest rates, the Portfolio may purchase or sell
options and engage in transactions involving interest rate futures contracts and
options on such contracts. See "Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts" and the Statement of Additional
Information for discussion of options, futures contracts and options on futures
contracts. The Portfolio may also purchase or sell U.S. Government securities on
a forward commitment basis. See "Investment Practices -- Forward Commitments."
The Portfolio is not designed for investors seeking capital appreciation. Shares
of the Portfolio are not insured or guaranteed by the U.S. Government, its
agencies or instrumentalities or by any other person or entity. There is no
assurance that the Portfolio's objective will be achieved.
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Since the value of U.S. Government securities owned by the Portfolio will
fluctuate depending upon market factors and inversely with prevailing interest
rates, the net asset value of shares of the Portfolio will fluctuate. If
interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gaining
or losing more in value) than shorter-maturity debt securities, and generally
offer higher yields than shorter-maturity debt securities, all other factors,
including credit quality, being equal. This potential for a decline in prices of
debt securities due to rising interest rates is referred to herein as "market
risk." While the Portfolio has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of four to six years.
Duration is a measure of the expected life of a debt security that incorporates
a security's yield, coupon interest payments, final maturity and call features
into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration measures the length of the
time interval between the present and the time when the interest and principal
payments are scheduled to be received (or in the case of a callable bond,
expected to be received), weighing them by the present value of the cash to be
received at each future point in time. In general, the lower the coupon rate of
interest or the longer the maturity, or the lower the yield-to-maturity of a
debt security, the longer its duration; conversely, the higher the coupon rate
of interest, the shorter the maturity or the higher the yield-to-maturity of a
debt security, the shorter its duration. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. In these and other similar situations,
the Adviser will use more sophisticated analytical techniques that incorporate
the economic life of a security into the determination of its interest rate
exposure.
The Portfolio often purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount of
any premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Portfolio's net asset value. Any such decline is realized for accounting
purposes as a capital loss at maturity or upon resale. Prior to maturity or
resale, such decline in value could be offset, in whole or part, or increased by
changes in the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Portfolio reduces its
potential for capital appreciation on debt securities if interest rates decline.
Thus if market prices of debt securities increase, the Portfolio receives less
total return from its optioned positions than it would have received if the
options had not been sold. During periods when the Portfolio has capital loss
carry forwards, any capital gains generated from such transactions will be
retained in the Portfolio. See "Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts" and "Dividends, Distributions and
Taxes" and the Statement of Additional Information for discussion of options,
futures contracts and options on futures contracts.
The purchase and sale of options may result in a high portfolio turnover
rate. The Portfolio's turnover rate is shown in the table of "Financial
Highlights." See "Investment Practices -- Portfolio Turnover."
The Portfolio intends to invest in U.S. Treasury securities and in
securities issued by at least four U.S. Government agencies or instrumentalities
in the amounts necessary to permit the Accounts to meet certain diversification
requirements imposed by Section 817(h) of the Code (as defined below) at the end
of each quarter of the year (or within 30 days thereafter). See "Dividends,
Distributions and Taxes." In the event the Portfolio does not meet the
diversification
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requirements of Section 817(h) of the Code, the policies funded by shares of the
Portfolio will not be treated as life insurance for Federal income tax purposes
and the owners of the policies will be subject to taxation on their share of the
dividends and distributions paid by the Portfolio.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities include: (1) U.S. Treasury
obligations, which differ in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the full faith and
credit of the U.S. Treasury, some of which are supported by the right of the
issuer to borrow from the U.S. Government and some of which are backed only by
the credit of the issuer itself.
Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."
Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and privately
owned corporation, and FHLMC, a federal corporation, are instrumentalities of
the United States. The securities and guarantees of FNMA and FHLMC are not
backed, directly or indirectly, by the full faith and credit of the United
States. Although the Secretary of the Treasury of the United States has
discretionary authority to lend to FNMA at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. Securities of FNMA and FHLMC
include those issued in principal only or interest only components.
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Portfolio), like the payments on the underlying loans, represent both principal
and interest. Although the underlying mortgage loans are for specified periods
of time, such as 20 or 30 years, the borrowers can, and typically do, pay them
off sooner. Thus, the securityholders frequently receive prepayments of
principal, in addition to the principal which is part of the regular monthly
payment. A borrower is more likely to prepay a mortgage which bears a relatively
high rate of interest. This means that in times of declining interest rates,
some of the Portfolio's higher yielding securities might be converted to cash,
and the Portfolio will be forced to accept lower interest rates when that cash
is used to purchase additional securities. The increased likelihood of
prepayment when interest rates decline also limits market price appreciation of
mortgage-related securities. If the Portfolio buys mortgage-related securities
at a premium, mortgage foreclosures or mortgage prepayments may result in a loss
to the Portfolio of up to the amount of the premium paid since only timely
payment of principal and interest is guaranteed.
OTHER GOVERNMENT RELATED SECURITIES
The Portfolio may invest up to 20% of its assets in other government
related securities and in repurchase agreements fully collateralized by U.S.
Government securities. A principal type of government related security in which
the Portfolio may invest are mortgage-backed securities
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including collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs").
CMOs are debt securities issued by U.S. Government agencies or by financial
institutions and other mortgage lenders and collateralized by a pool of
mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986 (the "Tax
Reform Act"), are private entities formed for the purpose of holding a fixed
pool of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. The Portfolio will invest in
such privately issued securities only if they are 100% collateralized at the
time of issuance by securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Portfolio intends to invest in privately
issued CMOs and REMICs only if they are rated at the time of purchase in the two
highest grades by a nationally-recognized rating agency.
STRIPPED SECURITIES
Stripped mortgage-related securities (hereinafter referred to as "Stripped
Mortgage Securities") are derivative multiclass mortgage securities. Stripped
Mortgage Securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The
yield-to-maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets, and
a rapid rate of principal payments may have a material adverse effect on the
securities' yield-to-maturity since interest payments cease as soon as the
related principal amount is repaid. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the security is
rated AAA or Aaa. Holders of PO securities are not entitled to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Current federal tax law requires that a holder (such as the Portfolio)
of such securities accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the certificate during the year. Such securities may involve
greater risk than securities issued directly by the U.S. Government, its
agencies or instrumentalities.
Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the
Portfolio's limitation on investments in illiquid securities. The Trustees will
establish guidelines and standards for determining whether a particular
government-
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issued IO or PO backed by fixed-rate mortgages is liquid. Generally, such a
security may be deemed liquid if it can be disposed of promptly in the ordinary
course of business at a value reasonably close to that used in the calculation
of the net asset value per share. Stripped Mortgage Securities, other than
government-issued IO and PO securities backed by fixed-rate mortgages, are
presently considered by the staff of the SEC to be illiquid securities and thus
subject to the Portfolio's limitation on investment in illiquid securities.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek long-term
growth of capital and income. Since investment in securities involves potential
gain or loss, there is no assurance that the Portfolio's objective will be
achieved.
In view of the investment objective, the Portfolio generally invests
principally in income-producing equity securities including common stocks and
convertible securities; although investments are also made in non-convertible
preferred stocks and debt securities rated "investment grade," i.e., within the
four highest grades assigned by S&P or by Moody's. Ratings at the time of
purchase determine which securities may be acquired, and a subsequent reduction
in rating does not require the Portfolio to dispose of a security. Securities
rated BBB by S&P or Baa by Moody's are in the lowest of the four investment
grades and are considered by the rating agencies to be medium grade obligations
which possess speculative characteristics so that changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher rated securities. The
market prices of preferred stocks and debt securities generally fluctuate with
changes in interest rates so that the value of investments in such securities
can be expected to decrease as interest rates rise and increase as interest
rates fall. The Portfolio may also invest in warrants and in securities of
newly-formed companies and in investment companies. See "Investment
Practices -- Investment in Investment Companies." The Portfolio may invest up to
15% of its assets in securities of foreign issuers. See "Investment
Practices -- Foreign Securities." The Portfolio may enter into repurchase
agreements with banks and broker-dealers which involves certain risks or may
lend portfolio securities on a fully collateralized basis. See "Investment
Practices -- Repurchase Agreements" and "Investment Practices -- Loans of
Portfolio Securities". When deemed appropriate for temporary defensive purposes,
the Portfolio may invest up to 100% of its total assets in U.S. Government
securities and investment grade corporate debt securities.
The Portfolio may dispose of a security whenever, in the opinion of the
Adviser, factors indicate it is desirable to do so. Such factors include a
change in economic or market factors in general or with respect to a particular
industry, a change in the market trend of or other factors affecting an
individual security, changes in the relative market performance of or
appreciation possibilities offered by individual securities and other
circumstances bearing on the desirability of a given investment.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to seek
protection of capital and high current income through investments in money
market instruments. The investment policies, the percentage limitations, and the
kinds of securities in which the Portfolio can invest may be changed by the
Trustees, unless expressly governed by those limitations stated under
"Investment Restrictions" in the Statement of Additional Information which can
be changed only by action of the shareholders of the Portfolio. It is not the
intention of the Trustees, however, to change these policies without prior
notice to shareholders.
The Portfolio seeks to maintain a constant net asset value of $1.00 per
share by investing in a diversified portfolio of money-market instruments
maturing within one year with a dollar-weighted average maturity of 90 days or
less. It seeks high current income from these short-term investments
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to the extent consistent with protection of capital. Of course, there can be no
guarantee that the Portfolio will achieve its objective or be able at all times
to maintain its net asset value per share at $1.00. In addition, the daily
dividend rate paid by the Portfolio may be expected to fluctuate. The Portfolio
uses the amortized cost method for valuing portfolio securities purchased at a
discount. See "Determination of Net Asset Value." It may invest in instruments
of the following types, all of which will be U.S. dollar obligations:
OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES
The Portfolio may invest in obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line of credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration.
BANK OBLIGATIONS
The Portfolio may invest in negotiable time deposits, certificates of
deposit and bankers' acceptances which are obligations of domestic banks having
total assets in excess of $1 billion as of the date of their most recently
published financial statements. The Portfolio is also authorized to invest up to
5% of its total assets in certificates of deposit issued by domestic banks
having total assets of less than $1 billion, provided that the principal amount
of the certificate of deposit acquired by the Portfolio is insured in full by
the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER
The Portfolio may invest in short-term obligations of companies which at
the time of investment are (a) rated in one of the two highest categories by at
least two nationally recognized statistical organizations (or one rating
organization if the obligation was rated by only one such organization), or (b)
if not rated, are of comparable quality as determined in accordance with
procedures established by the Trustees. See the Statement of Additional
Information. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. (See the Appendix in the Statement of Additional
Information for an explanation of these ratings). The Portfolio's current policy
is to limit investments in commercial paper to obligations rated in the highest
rating category.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements with banks and
broker-dealers which involve certain risks in the event of a default by the
other party. See "Investment Practices -- Repurchase Agreements."
REAL ESTATE SECURITIES PORTFOLIO
General. The Real Estate Securities Portfolio's primary investment
objective is to provide shareholders with long-term growth of capital. Current
income is a secondary consideration. The Portfolio will seek to achieve its
investment objectives by investing principally in a diversified portfolio of
Real Estate Securities which include equity securities, including common stocks
and convertible securities, as well as non-convertible preferred stocks and debt
securities of real estate industry companies. A "real estate industry company"
is a company that derives at least 50% of its assets (marked to market), gross
income or net profits from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Real estate industry
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companies may include among others: equity real estate investment trusts, which
pool investors' funds for investment primarily in commercial real estate
properties; mortgage real estate investment trusts, which invest pooled funds in
real estate related loans; brokers or real estate developers; and companies with
substantial real estate holdings, such as paper and lumber products and hotel
and entertainment companies. Under normal market conditions, at least 65% of the
Portfolio's total assets will be invested in Real Estate Securities, primarily
equity securities of real estate investment trusts. The Portfolio's investment
in debt securities will be rated, at the time of investment, at least Baa by
Moody's or BBB by S&P, a comparable rating by any other nationally recognized
statistical rating organization or if unrated, determined by the Adviser to be
of comparable quality. Ratings at the time of purchase determine which
securities may be acquired, and a subsequent reduction in ratings does not
require the Portfolio to dispose of a security. Securities rated Baa by Moody's
or BBB by S&P are considered to be medium grade obligations which possess
speculative characteristics so that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher rated securities. The rating of
the ratings agencies represent their opinions of the quality of the debt
securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. The Portfolio may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Portfolio may invest up to 35% of its
total assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments.
The Portfolio may invest up to 25% of its assets in securities issued by
foreign issuers, some or all of which also may be Real Estate Securities. See
"Investment Practices -- Foreign Securities." The Portfolio may engage in
portfolio management strategies and techniques involving options, futures
contracts and options on futures. Options, futures contracts and related options
are described in "Investment Practices -- Using Options, Futures Contracts and
Options on Futures Contracts" and the Statement of Additional Information.
For temporary defensive purposes, the Portfolio may invest up to 100% of
its total assets in short-term investments as described below. The Portfolio
will assume a temporary defensive posture only when economic and other factors
affect the real estate industry market to such an extent that the Adviser
believes there to be extraordinary risks in being primarily in Real Estate
Securities.
There can be no assurance that the Portfolio will achieve its investment
objectives.
Short-Term Investments. The Portfolio may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness. The Portfolio will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.
Risk Factors. Although the Portfolio does not invest directly in real
estate, an investment in the Portfolio will generally be subject to the risks
associated with real estate because of its policy of concentration in the
securities of companies in the real estate industry. These risks include, among
others: declines in the value of real estate; risks related to general and local
economic conditions; overbuilding and increased competition; increases in
property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income; changes in neighborhood
values; the appeal of properties of tenants and changes in interest rates. The
value of securities of companies which service the real estate industry will
also be affected by such risks. If the Portfolio has rental income or income
from the disposition of real property acquired as a result
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of a default on securities the Portfolio owns, the receipt of such income may
adversely affect its ability to retain its tax status as a regulated investment
company.
In addition, equity real estate investment trusts may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage real estate investment trusts may be affected by the quality of credit
extended. Equity and mortgage real estate investment trusts are dependent upon
management skill, may not be diversified and are subject to the risks of
financing projects. Such real estate investment trusts are also subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Code and to maintain exemption from the 1940 Act. Changes in interest rates may
also affect the value of the debt securities in the Portfolio's portfolio. Like
investment companies such as the Portfolio, real estate investment trusts are
not taxed on income distributed to shareholders provided they comply with
several requirements of the Code. The Portfolio will indirectly bear its
proportionate share of any expenses paid by the real estate investment trusts in
which it invests in addition to the expenses paid by the Portfolio.
Because of the Portfolio's policy of concentrating its investments in Real
Estate Securities, the Portfolio may be more susceptible than an investment
company without such a policy to any single economic, political or regulatory
occurrence affecting the real estate industry.
Additional information about the Portfolio's investment practices and the
risks associated with such practices are contained in "Investment Practices"
herein and in the Statement of Additional Information.
STRATEGIC STOCK PORTFOLIO
General. The investment objective of the Strategic Stock Portfolio is to
seek an above average total return through a combination of potential capital
appreciation and dividend income, consistent with the preservation of invested
capital.
The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI Index. The DJIA was
first published in The Wall Street Journal in 1896. Initially consisting of just
12 stocks, the DJIA expanded to 20 stocks in 1916 and to its present size of 30
stocks on October 1, 1928. The MSCI Index consists of approximately 370 large
domestic companies in the United States and has existed since January 1, 1970.
In selecting securities for the Fund, the Adviser intends to follow the
following policies (the "Strategic Selection Policies").
The ten highest dividend yielding securities in the DJIA are identified for
investment. In addition, all companies having securities in the MSCI Index are
reviewed by the Adviser and securities of companies in the financial or utility
sectors and of companies having securities included in the DJIA are excluded.
The remaining pool of MSCI Index securities is further evaluated and securities
of companies that do not have positive one- and three-year sales and earnings
growth rates and two years of positive dividend growth are excluded. The Adviser
also excludes MSCI Index securities that are in the bottom 25% of all MSCI Index
securities measured in terms of total annual trading volume. MSCI Index
securities of the remaining companies are ranked by dividend yield, and the ten
highest-yielding such MSCI Index securities are identified for investment. In
the event that this process results in less than 10 remaining MSCI Index
securities, those companies with the most favorable one- and three-year sales
and earnings performance and two-year dividend performance as determined by the
Adviser are added back until the number of MSCI Index securities equals 10.
Dividend yield for purposes of applying the foregoing investment policies is
calculated for each security by annualizing the last quarterly or semi-annual
ordinary dividend declared on the security and dividing the result by the
security's closing sale price on the applicable date. This yield is historical
and there can be no assurance that any dividends will be declared or paid in the
future.
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The 20 securities so identified (the "Strategic Securities") represented
the Portfolio's initial investments. The Adviser periodically employs the same
Strategic Selection Policies to identify a new list of 20 Strategic Securities
and reviews and adjusts a portion or all of the Portfolio's assets so as to
invest that portion of the Portfolio's assets approximately equally in the new
list of 20 Strategic Securities. In this manner, the Adviser expects that
beginning with the reevaluation in month thirteen each security in the Portfolio
will be reviewed and potentially adjusted approximately annually, although
reviews and adjustments may be made more frequently. For a more detailed
discussion of the Portfolio's investment policies, including the frequency of
security reevaluations and the portion of the Portfolio's assets that the
Adviser presently expects to reevaluate at the end of each period, see the
Statement of Additional Information.
The Adviser generally seeks to allocate cash available for investment due
to the sale of new Shares of the Portfolio and the receipt of dividends and
interest income from the portfolio investments approximately proportionately
among the current list of Strategic Securities in the Portfolio. To the extent
that the Strategic Stock Portfolio is required to dispose of securities in order
to satisfy redemption requests, make distributions, pay expenses or otherwise
raise cash for operational purposes, the Adviser generally intends to sell
approximately proportionate amounts of securities from all securities in the
Portfolio.
Application of the foregoing Strategic Selection Policies will be subject
to and limited by certain of the Portfolio's other investment policies and
restrictions, including restrictions and limitations which must be met in order
for the Portfolio to qualify to be treated for U.S. federal income tax purposes
as a "regulated investment company" under Subchapter M of the Code or in order
to comply with requirements of the 1940 Act. The Portfolio is subject to
investment diversification requirements that generally provide that the
Portfolio may not, with respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer or purchase more than 10% of the
outstanding voting securities of any one issuer. Further, the Portfolio
generally may not invest more than 25% of the value of its total assets in
securities of issuers in any particular industry. The Portfolio's satisfaction
of these requirements will take precedent over the Strategic Selection Policies.
In addition, the Adviser will try to avoid transacting in odd-lots of securities
in order to minimize transaction costs. These limitations may, at times, cause
the composition of the Portfolio's investment portfolio to differ significantly
from that which would have resulted had the Strategic Selection Policies been
fully implemented. In selecting securities for investment or disposition at
times that the Portfolio's investment policies and restrictions do not permit
full implementation of the Strategic Selection Policies, the Adviser will have
sole discretion to select securities for purchase or sale and generally will
make such selections in a manner that is consistent with the Portfolio's
investment objective and in a manner that it believes is consistent with the
investment rationale that is the basis for the Strategic Selection Policies.
The Portfolio will continue to hold securities, even though such securities
may not be included in the most recent list of Strategic Securities determined
for the review and adjustment of a portion of the Portfolio's assets. In
addition, although each new list of Strategic Securities will include only 20
securities, because only a portion of the Portfolio's assets may be reviewed and
adjusted at any given time, the Adviser expects that the number of securities
held by the Portfolio may over time increase and that the Portfolio may at times
hold forty or more different securities.
The Strategic Stock Portfolio may invest up to 5% of its total assets in
options on equity securities indices, futures contracts on such indices and
options on such futures contracts for both hedging purposes and in an attempt to
enhance gain. The Strategic Stock Portfolio also may invest up to 5% of its
total assets in securities of other registered investment companies that seek to
provide investment results that generally correspond to the performance of
securities included in one or more broad market indices. Investment in
securities of other investment companies will subject the Portfolio to
additional and potentially duplicative costs and expenses, including investment
management fees charged by such registered investment companies. Pending
investment and for temporary defensive purposes the Portfolio may invest without
limit in short-term, high
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quality fixed income securities and in money-market instruments. The Adviser
expects that the portfolio turnover rate for the Strategic Stock Portfolio will
not exceed 100%. A high rate of portfolio turnover may result in increased
brokerage and other transaction expenses.
The DJIA is the property of Dow Jones & Company, Inc. Dow Jones & Company,
Inc. has not granted to the Strategic Stock Portfolio a license to use the DJIA.
Dow Jones & Company, Inc. has not participated in any way in the creation of the
Strategic Stock Portfolio or in the selection of the stocks included in such
Portfolio and has not approved any information herein relating thereto. Shares
of the Strategic Stock Portfolio are not designed so that their prices will
parallel or correlate with any movements in the DJIA, and it is expected that
their prices will not parallel or correlate with such movements.
The Strategic Stock Portfolio is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of shares of the Portfolio or any member of the public
regarding the advisability of investing in investment portfolios generally or in
the Strategic Stock Portfolio particularly or the ability of the MSCI Index to
track general stock market performance. Morgan Stanley is the licensor of
certain trademarks, service marks and trade names of Morgan Stanley and of the
MSCI Index which is determined, composed and calculated by Morgan Stanley
without regard to this Portfolio. Morgan Stanley has no obligation to take the
needs of this Portfolio or the owners of this Portfolio into consideration in
determining, composing or calculating the MSCI Index. Morgan Stanley is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of this Portfolio to be issued. Morgan Stanley has no
obligation or liability to owners of this Portfolio in connection with the
administration, marketing or trading of this Portfolio.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR
USE IN THE CALCULATION OF THE INDICES FROM SOURCES WHICH MORGAN STANLEY
CONSIDERS RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE
ACCURACY AND/OR THE COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN.
NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE INDICES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER
PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY
OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
Risk Factors. There is no guarantee that the investment objective of the
Portfolio will be achieved because it is subject to the continuing ability of
the respective issuers of equities in which the Portfolio invests to declare and
pay dividends and because the market value of such equities can be affected by a
variety of factors. Common stocks may be especially susceptible to general stock
market movements and to volatile increases and decreases of value as market
confidence in and perceptions of the issuers change. There can be no assurance
that the value of the underlying securities will increase or that the issuers of
the securities will pay dividends on outstanding securities. The declaration of
dividends by any issuer depends upon several factors including the financial
condition of the issuer and general economic conditions. Risks associated with
an investment in the Portfolio include the possible deterioration of either the
financial condition of the issuers or the general condition of the stock market,
and general price volatility. The relatively high dividend yield of certain
securities that the Portfolio will acquire may reflect the market's assessment
of the risk that the company may reduce or eliminate the dividend in the current
period or in the
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future, or otherwise reflect the market's unfavorable assessment of the
company's performance outlook. The Adviser generally will not take these
considerations into account in implementing the Strategic Selection Policies
and, accordingly, the Portfolio may at times acquire securities of companies
that the market and the Adviser believe are more susceptible to financial
difficulty and corresponding adverse market performance than are other companies
with securities included in the DJIA or in the MSCI Index.
In addition, investors should be aware that the Portfolio is not "actively
managed." Except to raise cash for operational purposes, the Portfolio
ordinarily will not sell securities or reevaluate its portfolio investments
except as periodically determined by the Adviser. In addition, only a portion of
the Portfolio's assets may be reviewed and adjusted for any given period. As a
result, although the Portfolio may (but need not) dispose of a security in
certain events such as the issuer having defaulted on the payment on any of its
outstanding obligations or the price of a security having declined to such an
extent or other factors existing so that in the opinion of the Adviser the
retention of such security would be detrimental to the Portfolio, the adverse
financial condition of a company will not result in its elimination from the
Portfolio prior to scheduled review and adjustment except under extraordinary
circumstances. Similarly, securities held in the Portfolio ordinarily will not
be sold by the Portfolio for the purpose of taking advantage of market
fluctuations or changes in anticipated rates of appreciation.
INVESTMENT PRACTICES
Repurchase Agreements. Each 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., a Portfolio) acquires ownership of a
debt security and the seller agrees to repurchase the obligation at a future
time and set price, thereby determining the yield during the purchaser's holding
period. Repurchase agreements involve certain risks in the event of a default by
the other party. In the event of a bankruptcy or other default of the seller of
a repurchase agreement, a Portfolio could experience delays and expenses in
liquidating the underlying securities and a Portfolio could incur losses
including: (a) possible decline in the value of the underlying security during
the period while a Portfolio seeks to enforce its rights thereto, (b) possible
lack of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights. No Portfolio will invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by such Portfolio, exceeds such
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
Portfolios than would be available to the Portfolios investing separately. The
manner in which the joint account is managed is subject to conditions set forth
in the SEC exemptive order authorizing this practice, which conditions are
designed to ensure the fair administration of the joint account and to protect
the amounts in that account.
Loans of Portfolio Securities. Each Portfolio, except the Real Estate
Securities Portfolio, may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that (a) immediately after any such
loan, the value of the securities loaned does not exceed 10% of the total value
of that Portfolio's assets and (b) any securities loan is collateralized in
accordance with applicable regulatory requirements. See the Statement of
Additional Information.
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Foreign Securities. The Asset Allocation Portfolio, Domestic Income
Portfolio, the Emerging Growth Portfolio, the Enterprise Portfolio, the Growth
and Income Portfolio and the Real Estate Securities Portfolio may invest up to
25%, 25%, 20%, 10%, 15% and 25%, respectively, of the value of such Portfolios'
total assets in securities issued by foreign issuers. With respect to the Real
Estate Securities Portfolio, some of such securities may also be Real Estate
Securities. With respect to the Global Equity Portfolio, see "Investment
Objectives and Policies -- Global Equity Portfolio." Investments in securities
of foreign entities and securities denominated in foreign currencies involve
risks not typically involved in domestic investment, including fluctuations in
foreign exchange rates, future foreign political and economic developments, and
the possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since a
Portfolio may invest in securities denominated or quoted in currencies other
than the United States dollar, changes in foreign currency exchange rates may
affect the value of investments in the portfolio and the accrued income and
unrealized appreciation or depreciation of investments. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S. dollar
value of a Portfolio's assets denominated in that currency and a Portfolio's
yield on such assets.
A Portfolio may also purchase foreign securities in the form of ADRs and
EDRs or other securities representing underlying shares of foreign companies.
ADRs are publicly traded on exchanges or over-the-counter in the United States
and are issued through "sponsored" or "unsponsored" arrangements. In a sponsored
ADR arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. A Portfolio may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by a Portfolio may be subject to foreign withholding taxes,
which would reduce a Portfolio's total return on such investments and the
amounts available for distributions by a Portfolio to its shareholders. See
"Dividends, Distributions and Taxes." Foreign financial markets, while growing
in volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause a Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Portfolio due to subsequent declines in value of
the portfolio security or, if a Portfolio has entered into a contract to sell
the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities, including custodial costs
and foreign brokerage commissions, are generally higher than with transactions
in United States securities. In addition, the Portfolio will incur costs in
connection with conversions between various currencies. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
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Foreign Currency Transactions. The value of a Portfolio's portfolio
securities that are traded in foreign markets may be affected by changes in
currency exchange rates and exchange control regulations. In addition, the
Portfolio will incur costs in connection with conversions between various
currencies. A Portfolio's foreign currency exchange transactions generally will
be conducted on a spot basis (that is, cash basis) at the spot rate for
purchasing or selling currency prevailing in the foreign currency exchange
market. A Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. A Portfolio does not purchase and sell foreign currencies as
an investment.
A Portfolio also may enter into contracts with banks or other foreign
currency brokers and dealers to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts to hedge against changes in foreign currency exchange rates. A foreign
currency forward contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time at
a specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
A Portfolio may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before a Portfolio
purchases a foreign security traded in the hedged currency which a Portfolio
anticipates acquiring or between the date the foreign security is purchased or
sold and the date on which payment therefore is made or received. Hedging
against a change in the value of a foreign currency in the foregoing manner does
not eliminate fluctuations in the price of portfolio securities or prevent
losses if the prices of such securities decline. Furthermore, such hedging
transactions reduce or preclude the opportunity for gain if the value of the
hedged currency should move in the direction opposite to the hedged position. A
Portfolio will not speculate in foreign currency forward or futures contracts or
through the purchase and sale of foreign currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the forward
contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
Illiquid and Restricted Securities. Each of the Emerging Growth Portfolio,
the Global Equity Portfolio, the Growth and Income Portfolio, the Real Estate
Securities Portfolio and the Strategic Stock Portfolio may invest up to 15% of
its net assets in illiquid and restricted securities. Each of the Asset
Allocation Portfolio, Domestic Income Portfolio, Enterprise Portfolio,
Government Portfolio and Money Market 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
Trustees or by the Adviser pursuant to Board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. Since it is not possible to
predict with assurance how the markets for restricted securities sold and
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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.
Short Sales Against the Box. The Global Equity Portfolio may from time to
time make short sales of securities it owns or has the right to acquire through
conversion or exchange of other securities it owns. A short sale is "against the
box" to the extent that the Portfolio contemporaneously owns or has the right to
obtain at no added cost securities identical to those sold short. In a short
sale, the Portfolio does not immediately deliver the securities sold and does
not receive the proceeds from the sale. The Portfolio is said to have a short
position in the securities sold until it delivers the securities sold, at which
time it receives the proceeds of the sale. The Portfolio may not make short
sales or maintain a short position if to do so would cause more than 25% of its
total assets, taken at market value, to be held as collateral for such sales.
To secure its obligation to deliver the securities sold short, the
Portfolio will deposit in escrow in a separate account with its Custodian an
equal amount of the securities sold short or securities convertible into or
exchangeable for such securities. The Portfolio may close out a short position
by purchasing and delivering an equal amount of the securities sold short,
rather than by delivering securities already held by the Portfolio, because the
Portfolio may want to continue to receive interest and dividend payments on
securities in its portfolio that are convertible into the securities sold short.
Forward Commitments. The Domestic Income Portfolio, the Government
Portfolio and the Real Estate Securities Portfolio may purchase or sell U.S.
Government securities (or debt securities with respect to the Real Estate
Securities Portfolio) on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold by
the Portfolio with payment and delivery taking place in the future, frequently a
month or more after such transaction. The price is fixed on the date of the
commitment, and the seller continues to accrue interest on the securities
covered by the Forward Commitment until delivery and payment takes place. At the
time of settlement, the market value of the securities may be more or less than
the purchase or sale price.
Each Portfolio may either settle a Forward Commitment by taking delivery of
the securities or may resell or repurchase a Forward Commitment on or before the
settlement date in which event a Portfolio may reinvest the proceeds in another
Forward Commitment. A Portfolio's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, a Portfolio relies on the other party to
complete the transaction; should the other party fail to do so, a Portfolio
might lose a purchase or sale opportunity that could be more advantageous than
alternative opportunities at the time of the failure.
Each Portfolio maintains a segregated account (which is marked to market
daily) of cash, liquid securities or the security covered by the Forward
Commitment (in the case of a Forward Currency sale) with the Portfolio's
custodian in an aggregate amount equal to the amount of its commitment as long
as the obligation to purchase or sell continues.
Portfolio Turnover. Each Portfolio may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Securities with maturities of less than one year are excluded in the
computation of the portfolio turnover rate. The portfolio turnover rate is not a
limiting factor when the Adviser deems it
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desirable to purchase or sell securities or to engage in transactions in
options, futures contracts and options on futures contracts on behalf of the
Asset Allocation Portfolio, Emerging Growth Portfolio, the Enterprise Portfolio,
the Global Equity Portfolio, the Government Portfolio, the Growth and Income
Portfolio, the Real Estate Securities Portfolio or the Strategic Stock
Portfolio. The annual turnover rates of each Portfolio is shown under "Financial
Highlights." The turnover rate for certain Portfolios may exceed 100%, which is
higher than that of many other investment companies. Higher portfolio turnover
involves correspondingly greater transaction costs, including any brokerage
commissions, which are borne directly by a Portfolio. In addition, higher
portfolio turnover may increase the recognition of short-term, rather than
long-term, capital gains. See "Dividends, Distributions and Taxes."
Using Options, Futures Contracts and Options on Futures Contracts. The
Asset Allocation Portfolio, Emerging Growth Portfolio, the Enterprise Portfolio,
the Global Equity Portfolio, the Government Portfolio, the Growth and Income
Portfolio, the Real Estate Securities Portfolio and the Strategic Stock
Portfolio may purchase or sell options, futures contracts or options on futures
contracts. The Portfolios expect to utilize options, futures contracts and
options thereon in several different ways, depending upon the status of a
Portfolio's portfolio securities and the Adviser's expectations concerning the
securities markets. See the Statement of Additional Information for a discussion
of options, futures contracts and options on futures contracts.
Potential Risks of Options, Futures Contracts and Options on Futures
Contracts. 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 a Portfolio, if the
Adviser, and, in the case of the Global Equity Portfolio, the Subadviser, is not
successful in employing such instruments in managing a Portfolio's investments,
a Portfolio's performance will be worse than if a Portfolio did not make such
investments. In addition, a Portfolio would pay commissions and other costs in
connection with such investments, which may increase a Portfolio's expenses and
reduce its return. Each Portfolio is authorized to purchase and sell over-
the-counter options ("OTC Options"). OTC Options are purchased from or sold to
securities dealers, financial institutions of other parties ("Counterparties")
through direct bilateral agreement with the Counterparty. A Portfolio will sell
only OTC Options (other than over-the-counter currency options) that are subject
to a buy-back provision permitting a Portfolio to require to the Counterparty to
sell the option back to a Portfolio at a formula price within seven days. The
staff of the SEC currently takes the position that, in general, OTC Options on
securities other than U.S. Government securities purchased by a Portfolio, and
portfolio securities covering OTC Options sold by a Portfolio, are illiquid
securities subject to a Portfolio limitation on illiquid securities described
above. 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 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 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. 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.
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Investment in Investment Companies. The Asset Allocation Portfolio, the
Enterprise Portfolio and the Growth and Income Portfolio may invest in one or
more investment companies advised by the Adviser and its affiliates, including
Van Kampen American Capital Small Capitalization Fund ("Small Cap Fund") and Van
Kampen American Capital Foreign Securities Fund ("Foreign Securities Fund"). The
shares of the Small Cap Fund and Foreign Securities Fund are available for
investment only by certain Van Kampen American Capital funds. The Adviser
believes that the use of the Small Cap Fund and Foreign Securities Fund may,
from time to time, provide such Portfolio with the most effective exposure to
the performance of the small capitalization sector of the stock market and to
foreign securities while at the same time minimizing costs. The advisers charge
no advisory fees for managing the Small Cap Fund or Foreign Securities Fund, nor
are there any sales load or other charges associated with distribution of its
shares. Other expenses incurred by the Small Cap Fund and Foreign Securities
Fund are borne by them, and thus indirectly by the Van Kampen American Capital
funds that invest in them. With respect to such other expenses, the Adviser
anticipates that the efficiencies resulting from use of the Small Cap Fund or
the Foreign Securities Fund will result in cost savings for the Fund and other
Van Kampen American Capital funds. In large part, these savings are attributable
to the fact that administrative actions that would have to be performed multiple
times if each Van Kampen American Capital fund held its own portfolio of small
capitalization or foreign securities will need to be performed only once. The
Adviser expects that the Small Cap Fund and Foreign Securities Fund will
experience trading costs that will be substantially less than the trading costs
that would be incurred if small capitalization or foreign securities were
purchased separately by a Portfolio and other Van Kampen American Capital funds.
A Portfolio's investment in the Small Cap Fund and the Foreign Securities Fund
are subject to the terms and conditions set forth in the SEC exemptive orders
authorizing such investments.
The securities of small and medium sized companies that the Small Cap Fund
may invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies. The securities of foreign issuers
that the Foreign Securities Fund may invest in are subject to certain risks as
described under "Investment Practices -- Foreign Securities."
The Asset Allocation Portfolio, the Enterprise Portfolio and the Growth and
Income Portfolio will each be deemed to own a pro rata portion of each
investment of the Small Cap Fund and Foreign Securities Fund. For example, if a
Portfolio's investment in the Small Cap Fund were $10 million, and the Small Cap
Fund had 5% of its assets invested in the electronics industry, the Portfolio
would be considered to have an investment of $500,000 in the electronics
industry.
Brokerage Practices. The Adviser, and in the case of the Global Equity
Portfolio the Subadviser, is responsible for the placement of orders for the
purchase and sale of portfolio securities for a Portfolio and the negotiation of
brokerage commissions on such transactions. Brokerage firms are selected on the
basis of their professional capability for the type of transaction and the value
and quality of execution services rendered on a continuing basis. The Adviser,
and in the case of the Global Equity Portfolio the Subadviser, 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 a 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, and in the
case of the Global Equity Portfolio the Subadviser, is authorized to pay higher
commissions to brokerage firms that provide it with investment and research
information than to firms which do not provide such services if the Adviser, and
in the case of the Global Equity Portfolio the Subadviser, determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser, and
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in the case of the Global Equity Portfolio the Subadviser, in managing the
assets of other advisory accounts as well as in the management of the assets of
the Portfolio.
THE TRUST AND ITS MANAGEMENT
The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. A mutual fund provides, for those who have
similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
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
each Portfolio may invest which, in turn, may adversely affect the net asset
value of such Portfolio.
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 April 3, 1998, the Distributor owned beneficially and of record
approximately 35.30% of the outstanding shares of the Global Equity Portfolio,
and therefore, may be deemed to control this Portfolio.
THE SUBADVISER. The Subadviser is a wholly-owned subsidiary of Morgan
Stanley Group Inc., and is an affiliate of the Adviser. The Subadviser provides
portfolio management and named fiduciary services to various closed-end and
open-end investment companies, taxable and nontaxable institutions,
international organizations and individuals investing in United States and
international equities and fixed income securities. At December 31, 1997, the
Subadviser had assets under management totaling approximately $87 billion. The
Subadviser emphasizes a global investment strategy and benefits from research
coverage of a broad spectrum of investment opportunities worldwide and draws
upon the capabilities of its asset management specialists located in various
offices throughout the world, including New York, London, Tokyo, Singapore,
Bombay, Hong Kong,
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Milan and Sydney. The Subadviser also draws upon the research capabilities of
Morgan Stanley Dean Witter & Co. and its other affiliates as well as the
research and investment ideas of other companies whose brokerage services the
Subadviser utilizes. The Subadviser's address is 1221 Avenue of the Americas,
New York, New York, 10020.
ADVISORY AGREEMENTS. The Trust and the Adviser are parties to an investment
advisory agreement (the "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 of the
Trust (the "Combined Portfolios") including the Asset Allocation Portfolio,
Domestic Income Portfolio, the Enterprise Portfolio, the Government Portfolio
and the Money Market Portfolio. The Trust and the Adviser are also parties to
additional investment advisory agreements for its remaining portfolios
designated herein as "Emerging Growth Advisory Agreement", "Global Equity
Advisory Agreement", "Growth and Income Advisory Agreement", "Real Estate
Advisory Agreement" and the "Strategic Stock Advisory Agreement" pursuant to
which the Trust retains the Adviser to manage the investment of assets and
placement orders for the purchase and sale of portfolio securities for the
Emerging Growth Portfolio, the Global Equity Portfolio, the Growth and Income
Portfolio, the Real Estate Securities Portfolio and the Strategic Stock
Portfolio, respectively. The Combined Advisory Agreement, Emerging Growth
Advisory Agreement, Global Equity Advisory Agreement, Growth and Income Advisory
Agreement, Real Estate Advisory Agreement and Strategic Stock Advisory Agreement
are referred to herein collectively as the "Advisory Agreements".
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. The Trust also pays custodian fees,
legal and auditing fees, trustees' fees (other than those who are affiliated
persons, as defined in 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 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 the combined 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. Each Portfolio pays its
pro rata share of the fee based upon its average daily net assets. The Combined
Advisory Agreement provides that in the event the ordinary business expenses of
certain Portfolios including 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. Expenses
subject to such limitation do not include (1) interest and taxes, (2) brokerage
commissions, (3) certain litigation and indemnification expenses as described in
the Combined Advisory Agreement and (4) any distribution expenses which may be
incurred by a Portfolio in the event a Distribution Plan is adopted. In addition
to the contractual expense limitation, the Adviser also voluntarily elected to
reimburse the Asset Allocation Portfolio, 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. For the fiscal year ended December 31, 1997, advisory fees plus the cost
of accounting services payable by the Trust, before expense reimbursements,
equaled 0.52%, 0.55%, 0.52%,
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0.53% and 0.55% for the Asset Allocation Portfolio, the Domestic Income
Portfolio, the Enterprise Portfolio, the Government Portfolio and the Money
Market Portfolio, respectively, of each Portfolio's average daily net assets.
For the same period, each Portfolio's net total operating expenses (after fee
waivers and expense reimbursements) were 0.60%. In the absence of
waivers/reimbursements, the total operating expenses would have been 0.71%,
1.05%, 0.66%, 0.74% and 0.98% for the Asset Allocation Portfolio, the Domestic
Income Portfolio, the Enterprise Portfolio, the Government Portfolio and the
Money Market Portfolio, respectively. There can be no assurance the Adviser will
continue to waive its fee or reimburse expenses in the future.
Under the Emerging Growth Advisory Agreement, the Trust pays to the Adviser
as compensation for the services rendered, facilities furnished, and expenses
paid by it a fee payable monthly computed on average daily net assets of the
Emerging Growth Portfolio at an annual rate of 0.70%. For the fiscal year ended
December 31, 1997, advisory fees plus the cost of accounting services payable by
the Trust, before expense reimbursements, were 0.83% of the Portfolio's average
net assets. For the same period, the Portfolio's net total operating expenses
(after fee waivers and separate reimbursements) were 0.85%. In the the absence
of waivers/reimbursements, total operating expenses would have been 2.14%. There
can be no assurance the Adviser will continue to waive its fee or reimburse
expenses in the future.
The Trust retains the Adviser to manage the investment of the Global Equity
Portfolio's assets and to place orders for the purchase and sale of its
portfolio securities. The Adviser has entered into a subadvisory agreement (the
"Subadvisory Agreement") with the Subadviser to assist it in performing its
investment advisory functions. The Subadviser will be primarily responsible for
recommending the allocation of investments among various international markets
and currencies; recommendation and selection of particular securities in the
international markets and placement of portfolio transactions in the foreign
equity markets. Under the Global Equity Advisory Agreement, the Trust pays to
the Adviser as compensation for the services rendered, facilities furnished, and
expenses paid by it a fee payable monthly, computed on average daily net assets
of the Global Equity Portfolio at the annual rate of 1.00%. This fee is higher
than that charged by most other mutual funds but the Trustees believe it is
justified by the special international nature of the Portfolio and is not
necessarily higher than the fees charged by certain mutual funds with investment
objective and policies similar to those of the Portfolio. Pursuant to the
Subadvisory Agreement, the Subadviser receives on an annual basis 50% of the
compensation received by the Adviser. For the fiscal year ended December 31,
1997, advisory fees plus the cost of accounting services payable by the Trust,
before expense reimbursement, were 1.69% of the Portfolio's average daily net
assets. For the same period, the Portfolio's net total operating expenses (after
fee waivers and expense reimbursements) were 1.20%. In the absence of
waivers/reimbursements, total operating expenses would have been 6.78%. There
can be no assurance that the Adviser will continue to waive its fees or
reimburse expenses in the future.
Under the Growth and Income Advisory Agreement, the Trust pays the Adviser
as compensation for the services rendered, facilities furnished, and expenses
paid by it a fee payable monthly computed on average daily net assets of the
Growth and Income Portfolio at an annual rate of 0.60% of the first $500 million
of the Growth and Income Portfolio's average daily net assets; and 0.55% of the
Growth and Income Portfolio's average daily net assets in excess of $500
million. For the fiscal year ended December 31, 1997, advisory fees plus the
cost of accounting services payable by the Trust, before expense reimbursements,
were 0.68% of the Portfolio's average net assets. For the same period, the
Portfolio's net total operating expenses (after fee waivers and expense
reimbursements) were 0.75%. In the absence of waivers/reimbursements, total
operating expenses would have been 1.63%. There can be no assurance that the
Adviser will continue to waive its fees or reimburse expenses in the future.
Under the Real Estate Advisory Agreement, the Trust pays the Adviser a
monthly fee computed on average daily net assets of the Real Estate Securities
Portfolio at the annual rate of 1.00% of the Real Estate Securities Portfolio's
average daily net assets. This fee is higher than that charged by
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most other mutual funds but the Trustees believe it is justified by the special
nature of the Real Estate Securities Portfolio and is not necessarily higher
than the fees charged by certain mutual funds with investment objectives and
policies similar to those of the Real Estate Securities Portfolio. For the
fiscal year ended December 31, 1997, advisory fees plus the cost of accounting
services payable by the Trust on behalf of the Real Estate Securities Portfolio
were 1.01% of the Portfolio's average net assets. For the same period, the
Portfolio's net total operating expenses were 1.07%.
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 net assets and 0.45% of such
Portfolio's average net assets in excess of $500 million. For the fiscal period
ended December 31, 1997, advisory fees plus the cost of accounting services
payable by the Trust, before expense reimbursement, were 0.48% of the
Portfolio's average daily net assets. For the same period, the Portfolio's net
total operating expenses (after fee waivers and expense reimbursements) were
0.61%. In absence of waivers/reimbursements, total operating expenses would have
been 2.59%. There can be no assurance the Adviser will continue to waive its fee
or reimburse expenses in the future.
From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse any Portfolio for ordinary
business expenses in excess of an agreed upon amount.
With regard to the Money Market Portfolio, the Domestic Income Portfolio
and Government Portfolio, the Adviser may utilize at its own expense credit
analysis, research and trading support services provided by its affiliate, Van
Kampen American Capital Investment Advisory Corp. ("Advisory Corp.")
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.
PORTFOLIO MANAGEMENT. The Portfolios have different portfolio managers.
Except as described below for the Global Equity Portfolio, each portfolio
manager is an employee of the Adviser.
John Cunniff is responsible for allocating the Asset Allocation Portfolio's
assets between the equity and fixed-income categories in which the Portfolio
invests. The Asset Allocation Portfolio's equity investments are managed by a
management team headed by B. Robert Baker. Mr. Baker has been primarily
responsible for managing the Asset Allocation Portfolio's equity investments.
Jason Leder and Edie Terreson are responsible as co-managers for the day-to-day
management of the Portfolio's equity investments. Tom Copper manages the Asset
Allocation Portfolio's fixed income investments. Mr. Cunniff has managed the
Portfolio's investment portfolio since March 1996, Mr. Baker has managed the
Portfolio's investment portfolio since May 1994 and Mr. Copper has managed the
Portfolio's investment portfolio since August 1995. Mr. Cunniff has been Vice
President, Director of Equity Research with the Adviser since October 1995.
Prior to that he was a portfolio manager with Templeton Quantitative Advisors, a
subsidiary of the Franklin Group. Mr. Baker has been Vice President and
Portfolio Manager of the Adviser since June 1995. Prior to that he was Associate
Portfolio Manager of the Adviser. Mr. Leder has been Assistant Vice President of
the Adviser since October 1996. Prior to that he was Associate Portfolio Manager
of the Adviser. Prior to February 1995, he was a Securities Analyst with Salomon
Brothers, Inc. Prior to August 1992, he was a Securities Analyst with Fidelity
Management and Research. Ms. Terreson has been Assistant Vice President of the
Adviser since December 1997. Prior to that she was Associate Portfolio Manager
of the Adviser. Prior to March 1997, she was a Securities Analyst and Associate
Portfolio Manager with Delaware Investment Advisers. Prior to May 1996, she was
a
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Securities Analyst and Associate Portfolio Manager with J.W. Seligman & Co. Mr.
Copper has been Vice President and Portfolio Manager of the Adviser since
December 1997. Prior to that Mr. Copper was Associate Portfolio Manager of the
Adviser.
Walter W. Stabell, III is primarily responsible for the day-to-day
management of the Domestic Income Portfolio's investment portfolio. Mr. Stabell
is a Vice President and Portfolio Manager of the Adviser. From December, 1986 to
August, 1989, Mr. Stabell was a Senior Securities Analyst of the Adviser. Mr.
Stabell has been primarily responsible for managing the Portfolio's investment
portfolio since June, 1990.
The Emerging Growth Portfolio is managed by a management team headed by
Gary M. Lewis. Mr. Lewis has been primarily responsible for managing the
Portfolio's investment portfolio since its inception. Mr. Lewis has been Senior
Vice President and Portfolio Manager of the Adviser since October 1995. Prior to
that Mr. Lewis was Vice President and Portfolio Manager of the Adviser. Dudley
Brickhouse, David Walker and Janet Willis are responsible as co-managers for the
day-to-day management of the Emerging Growth Portfolio's investment portfolio.
Mr. Brickhouse has been an Associate Portfolio Manager of the Adviser since
September 1997. Prior to that Mr. Brickhouse was with NationsBank Investment
Management. Mr. Walker has been an Assistant Vice President of the Adviser since
June 1995. Prior to that Mr. Walker was a Quantitative Analyst of the Adviser.
Ms. Willis has been an Assistant Vice President of the Adviser since December
1997. Prior to that Ms. Willis was Associate Portfolio Manager of the Adviser.
Prior to July 1995, Ms. Willis was with AIM Capital Management, Inc.
The Enterprise Portfolio is managed by a management team headed by Jeff
New. Mr. New has been primarily responsible for managing the Fund's investment
portfolio since March 1996. Mr. New has been Senior Vice President and Portfolio
Manager of the Adviser and Advisory Corp. since December 1997. Prior to December
1997, Mr. New was Vice President and Portfolio Manager of the Adviser and
Advisory Corp. Prior to 1994, Mr. New was Associate Portfolio Manager of the
Adviser. Evan Harrel and Michael Davis are responsible as co-managers for the
day-to-day management of the Fund's investment portfolio. Mr. Harrel has been
Vice President of the Adviser and Advisory Corp. since October 1996. Prior to
that Mr. Harrel was Associate Portfolio Manager of the Adviser. Prior to May
1994, Mr. Harrel was a Vice President with Fayez Sarofim and Co. Mr. Davis has
been Vice President and Portfolio Manager of the Adviser and Advisory Corp.
since March 1998. Mr. Davis has been an investment professional since 1983 and
was most recently the owner of Davis Equity, a stock research company.
Effective April 1, 1997, Barton M. Biggs, Madhav Dhar, Francine J. Bovich
and Ann D. Thivierge assumed the primary responsibility for the day-to-day
management of the Global Equity Portfolio. Since 1980, Mr. Biggs has been
Chairman and a director of the Subadviser, and a Managing Director of the
Subadviser and Morgan Stanley & Co. Incorporated since 1975. Mr. Biggs is a
director of Morgan Stanley Group, Inc. and a director and chairman of other
investment companies of the Subadviser. Mr. Biggs holds a B.A. from Yale
University and an M.B.A. from New York University. Mr. Dhar is Managing Director
of the Subadviser and Morgan Stanley & Co. Incorporated. He has been with the
Subadviser since 1984. Mr. Dhar is a co-head of the Subadviser's emerging
markets group, and has been involved in the launching of the Subadviser's
country funds. Mr. Dhar holds a B.S. from St. Stephens College in Delhi
University (India) and an M.B.A. from Carnegie-Mellon University. Ms. Bovich has
been with the Subadviser since 1993. She is responsible for portfolio management
and communication of the Subadviser's asset allocation strategy to institutional
investor clients. Prior to 1993, Ms. Bovich was a Principal and Executive Vice
President of Westwood Management Corp. Prior to that, Ms. Bovich was a Managing
Director of Citicorp Investment Management, Inc. where she was responsible for
the Institutional Investment Management group. Ms. Bovich holds a B.A. in
Economics from Connecticut College and an M.B.A. in Finance from New York
University. Ms. Thivierge is a Principal of the Subadviser. She is a member of
the Subadviser's asset allocation committee, primarily representing the Total
Fund Management team since its inception in 1991. Ms. Thivierge has been with
the Subadviser since 1986.
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Ms. Thivierge holds a B.A. in International Relations from James Madison
College, Michigan State University, and an M.B.A. in Finance from New York
University.
John R. Reynoldson is primarily responsible for the day-to-day management
of the Government Portfolio's investment portfolio. Mr. Reynoldson has been
Senior Vice President of the Adviser since July, 1991. Mr. Reynoldson has been
primarily responsible for managing the Portfolio's investment portfolio since
December, 1989.
David R. Troth is primarily responsible for the day-to-day management of
the Money Market Portfolio's investment portfolio. Mr. Troth has been Senior
Vice President of the Adviser since March, 1978. Mr. Troth has been primarily
responsible for managing the Portfolio's investment portfolio since its
inception.
The Growth and Income Portfolio is managed by a management team headed by
James A. Gilligan. Bret Stanley and Scott Carroll are responsible as co-managers
for the day-to-day management of the Growth and Income Portfolio's investment
portfolio. Mr. Gilligan and Mr. Stanley have been responsible for managing the
Portfolio's investment portfolio since its inception. Mr. Gilligan has been
Senior Vice President and Portfolio Manager of the Adviser since September 1995.
Prior to that Mr. Gilligan was Vice President and Portfolio Manager of the
Adviser. Mr. Stanley has been Vice President and Portfolio Manager of the
Adviser since October 1996. Prior to that time, Mr. Stanley was Assistant Vice
President and Associate Portfolio Manager of the Adviser. Prior to January 1995,
Mr. Stanley was a Portfolio Manager with Gulf Investment Management. Mr. Carroll
has been Associate Portfolio Manager of the Adviser since December 1996. Prior
to that Mr. Carroll was an Equity Analyst with Lincoln Capital Management
Company. Prior to September 1992, Mr. Carroll was a Senior Internal Auditor with
Pittway Corporation.
Russell C. Platt and Theodore R. Bigman assumed responsibility for the
day-to-day management of the Real Estate Portfolio's investment portfolio
effective January 1, 1997. Mr. Platt became Executive Vice President of the
Adviser on December 31, 1996. Since 1994, Mr. Platt has also been a Principal,
and as of December 1, 1996, a Managing Director, of Morgan Stanley Asset
Management Inc. ("MSAM") where he has primary responsibility for managing the
real estate securities investment business for MSAM and serves as a member of
the Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF"). From
1991 to 1993, Mr. Platt was head of Morgan Stanley Realty's Transaction
Development Group. From 1990 to 1991, Mr. Platt was based in Morgan Stanley
Realty's London Office. Prior to this he had extensive transaction
responsibilities involving portfolio, retail, office, hotel and apartment sales
and financings. Mr. Bigman became Senior Vice President of the Adviser on
December 31, 1996. Since 1995, Mr. Bigman has also been a Vice President, and as
of December 1, 1996, a Principal, of MSAM where, together with Mr. Platt, he is
responsible for MSAM's real estate securities research. Prior to joining MSAM,
he was a Director at CS First Boston, where he worked for eight years in the
Real Estate Group.
John Cunniff has been primarily responsible for the day-to-day management
of the Strategic Stock Portfolio's investment portfolio since its inception. Mr.
Cunniff is a Vice President of the Adviser and Advisory Corp and has been
employed by the Adviser since October 1995. Prior to that time, Mr. Cunniff was
Vice President, Portfolio Manager at Templeton Quantitative Advisors.
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
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shares in each of the Portfolios to the Accounts at prices equal to the
respective per share net asset value of the Portfolio. The Distributor, located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, acts as the distributor
of the shares. Net asset value is determined in the manner set forth below under
"Determination of Net Asset Value."
DETERMINATION OF NET ASSET VALUE
Net asset value per share is computed for each Portfolio as of the close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. See the accompanying Prospectus for the policies for
information regarding holidays observed by the insurance company. Net asset
value of each Portfolio is determined by adding the total market value of all
portfolio securities held by the Portfolio, cash and other assets, including
accrued interest. All liabilities, including accrued expenses, of the Portfolio
are subtracted. The resulting amount is divided by the total number of
outstanding shares of the Portfolio to arrive at the net asset value of each
share. See "Determination of Net Asset Value" in the Statement of Additional
Information for further information.
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which the
last sales price is not available are valued at the most recent bid price. U.S.
Government and agency obligations are valued at the last reported bid price.
Listed options are valued at the last reported sale price in the exchange on
which such option is traded or, if no sales are reported, at the mean between
the last reported bid and asked prices. Options for which market quotations are
not readily available are valued at a fair value by the Adviser based on
procedures approved by the Trustees. Short-term investments for all Portfolios
other than the Money Market Portfolio are valued as described in the notes to
financial statements in the Statement of Additional Information.
The Money Market Portfolio's assets are valued on the basis of amortized
cost, which involves valuing a portfolio security at its cost, assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the security. While
this method provides certainty in valuation, it may result in periods in which
value as determined by amortized cost is higher or lower than the price the
Portfolio would receive if it sold the security. During such periods, the yield
to investors in the Portfolio may differ somewhat from that obtained in a
similar fund which uses available market quotations to value all of its
portfolio securities.
REDEMPTION OF SHARES
Payment for shares tendered for redemption by the insurance company is made
ordinarily in cash within seven days after tender in proper form, except under
unusual circumstances as determined by the SEC. The redemption price will be the
net asset value next determined after the receipt of a request in proper form.
The market value of the securities in each Portfolio is subject to daily
fluctuations and the net asset value of each Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions of each Portfolio are
automatically reinvested by the Account in additional shares of such Portfolio.
Shares of the Money Market Portfolio and Government Portfolio become
entitled to income distributions declared on the day the shareholder service
agent receives payment of the purchase price in the form of federal funds. Such
shares do not receive income distributions declared on the date of redemption.
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Dividends of the Money Market Portfolio. The Money Market Portfolio
declares income dividends each business day. The Portfolio's net income for
dividend purposes is calculated daily and consists of interest accrued or
discount earned, plus or minus any net realized gains or losses on portfolio
securities, less any amortization of premium and the expenses of the Portfolio.
Dividends and Distributions of the Asset Allocation Portfolio, the Domestic
Income Portfolio, the Emerging Growth Portfolio, Enterprise Portfolio, the
Global Equity Portfolio, the Growth and Income Portfolio, the Real Estate
Securities Portfolio, and the Strategic Stock Portfolio. Dividends from stocks
and interest earned from other investments are the main source of income for
these Portfolios. Substantially all of this income, less expenses, is
distributed on an annual basis. When a Portfolio sells portfolio securities, it
may realize capital gains or losses, depending on whether the prices of the
securities sold are higher or lower than the prices the Portfolio paid to
purchase them. Net realized capital gains represent the total profit from sales
of securities minus total losses from sales of securities including any losses
carried forward from prior years. Each of these Portfolios distributes any net
realized capital gains to the Account no less frequently than annually.
Dividends and Distributions of the Government Portfolio. The Government
Portfolio declares income dividends each business day. Such dividends are
distributed monthly. The daily dividend is a fixed amount determined at least
monthly which is expected not to exceed the net income of the Portfolio for the
month divided by the number of business days in the month. The Government
Portfolio intends to distribute monthly, or on such other basis as may be
determined from time to time by the Trustees, its net realized short-term
capital gains, including such gains realized from net premiums received from
expired options, net gains from closing purchase transactions and net short-term
gains from securities sold upon the exercise of options or otherwise, less any
net realized long-term capital loss. Net realized long-term capital gains, if
any, are generally distributed at least annually.
Tax Status of the Portfolios. Each Portfolio has elected to be taxed as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). By maintaining its qualification as a "regulated
investment company," a 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 a 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 each Portfolio from its ordinary income and distributions
of each 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 a
Portfolio represents dividends on equity securities rather than interest income,
its distributions are eligible for the 70% dividends received deduction
applicable in the case of a life insurance company as provided in the Code. The
Trust will send to the Account a written notice required by the Code designating
the amount and character of any distributions made during such year.
Under the Code, any distribution designated as being made from a
Portfolio's net 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
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<PAGE> 54
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 a 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 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. Each 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 Portfolios, except the Money Market Portfolio, may
advertise their total return for prior periods. Any such advertisement would
include at least average annual total return quotations for one, five and ten
year periods or for the life of the Portfolio. Other total return quotations,
aggregate or average, over other time periods may also be included. Total return
calculations do not take into account expenses at the "wrap" or contractholder
level. Investors should also review total return calculations that include those
expenses.
The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio from the beginning to the end of the period. Total return is
calculated by subtracting the value of the initial investment from the ending
value and showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the maximum public
offering price and that all income dividends or capital gains distributions
during the period are reinvested in Portfolio shares at net asset value. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Portfolio.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, certain Portfolios may also
advertise their current "yield." Yield figures are based on historical earnings
and are not intended to indicate future performance. Yield is determined by
analyzing the Portfolio's net income per share for a 30-day (or one-month)
period (which period will be stated in the advertisement), and dividing by the
maximum offering price per share on the last day of the period. A "bond
equivalent" annualization method is used to reflect a semiannual compounding.
Yield calculations do not take into account expenses at the "wrap" or
contractholder level. Investors should also review yield calculations that
include those expenses.
From time to time, certain Portfolios may include in their 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
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<PAGE> 55
complete measure of the Portfolio's performance. Distribution rate may sometimes
be greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Portfolio.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Portfolio in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Portfolio's then current dividend rate.
A Portfolio's yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by a Portfolio, portfolio maturity and
a Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Adviser may, from time to time, waive advisory fees or reimburse a
certain amount of the future ordinary business expenses of a Portfolio. Such
waiver/reimbursement will increase the yield or total return of a Portfolio. The
Adviser may stop waiving fees or reimbursing expenses at any time without prior
notice.
From time to time the Money Market Portfolio advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Portfolio refers
to the income generated by an investment in the Portfolio over a seven-day
period (which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The current and effective yields for the seven-day period ending
December 31, 1997, and a description of the method by which the yield was
calculated is contained in the Statement of Additional Information.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instrument held in a
portfolio, portfolio maturity, operating expenses and market conditions.
In reports or other communications to shareholders or in advertising
material, a Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, Salomon Brothers High Grade Bond Index, Standard & Poor's
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
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<PAGE> 56
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. 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.
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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APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE'S BOND RATINGS:
AAA -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NONRATED -- Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
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Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S BOND RATINGS:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -- B -- CCC -- CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR -- Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS:
Both Moody's and S&P use the same designations for corporate bonds as they
do for preferred stock except in the case of Moody's preferred stock ratings the
initial letter rating is not capitalized. While the descriptions are tailored
for preferred stocks and relative quality distinctions are comparable to those
described above for corporate bonds.
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EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE PORTFOLIO'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 421-2833
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Investment Subadviser--
Global Equity Portfolio
MORGAN STANLEY
ASSET MANAGEMENT INC.
1221 Avenue of the Americas
New York, New York 10020
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Life Investment Trust Portfolios
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Life Investment Trust Portfolios
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
200 East Randolph Drive
Chicago, IL 60601
<PAGE> 60
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 61
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1998
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in ten
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
Domestic Income Portfolio, Emerging Growth Portfolio, Enterprise Portfolio,
Government Portfolio, Growth and Income Portfolio, Money Market Portfolio,
Morgan Stanley Real Estate Securities Portfolio and Strategic Stock Portfolio
(collectively, the "Portfolios"), eight of the Trust's ten portfolios, are
described herein and offered by this Prospectus. The investment objectives of
the eight Portfolios are as follows:
- --------------------------------------------------------------------------------
DOMESTIC INCOME PORTFOLIO (formerly known as the Domestic Strategic Income
Fund) seeks current income as its primary investment objective. Capital
appreciation is a secondary objective, which will be sought only when
consistent with its primary investment objective. The Portfolio attempts to
achieve these objectives through investment primarily in a diversified
portfolio of fixed-income securities. The Portfolio may invest in
investment grade securities and lower rated and nonrated securities. LOWER
RATED SECURITIES (COMMONLY KNOWN AS "JUNK BONDS") ARE REGARDED BY THE
RATING AGENCIES AS PREDOMINANTLY SPECULATIVE WITH RESPECT TO THE ISSUER'S
CONTINUING ABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS.
EMERGING GROWTH PORTFOLIO (formerly known as the Emerging Growth Fund)
seeks capital appreciation by investing in a portfolio of securities
consisting principally of common stocks of small and medium sized companies
considered by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") to be emerging growth companies.
ENTERPRISE PORTFOLIO (formerly known as the Common Stock Fund) seeks
capital appreciation through investments believed by the Adviser to have
above average potential for capital appreciation.
GOVERNMENT PORTFOLIO (formerly known as the Government Fund) seeks to
provide investors with a high current return consistent with preservation
of capital. The Portfolio invests primarily in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. In
order to hedge against changes in interest rates, the Portfolio may also
purchase or sell options and engage in transactions involving interest rate
futures contracts and options on such contracts.
GROWTH AND INCOME PORTFOLIO (formerly known as the Growth and Income Fund)
seeks long-term growth of capital and income. The Portfolio invests
principally in income-producing equity securities, including common stocks
and convertible securities. Investments are also made in non-convertible
preferred stocks and debt securities.
MONEY MARKET PORTFOLIO (formerly known as the Money Market Fund) seeks
protection of capital and high current income through investments in money
market instruments. INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE MONEY MARKET
PORTFOLIO SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE,
THERE IS NO ASSURANCE THAT IT WILL BE ABLE TO DO SO.
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO (formerly known as the Real
Estate Securities Fund) seeks as its primary investment objective long-term
growth of capital. Current income is a secondary consideration. The
Portfolio seeks to achieve its objectives by investing principally
<PAGE> 62
in securities of companies operating in the real estate industry ("Real
Estate Securities"). A "real estate industry company" is a company that
derives at least 50% of its assets (marked to market), gross income or net
profits from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Under normal market
conditions, at least 65% of the Portfolio's total assets will be invested
in Real Estate Securities, primarily equity securities of real estate
investment trusts.
STRATEGIC STOCK PORTFOLIO seeks to provide investors with an above average
total return through a combination of potential capital appreciation and
dividend income, 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 (the "DJIA") or in the Morgan
Stanley Capital International USA Index (the "MSCI Index"). Subject to the
Portfolio's other investment policies and restrictions, the Portfolio
attempts to achieve its investment objective by investing primarily in a
portfolio of actively traded equity securities comprised of (i) high
dividend yield stocks periodically selected from the companies included in
the DJIA and (ii) high dividend yield stocks periodically selected from a
pre-screened subset of the companies included in the MSCI Index. A
security's dividend yield is a primary factor in the security selection
process. The MSCI Index is the property of Morgan Stanley Capital
International ("MSCI"). MSCI has granted a license for use by the Trust of
the MSCI Index and related trademarks and tradenames. The DJIA is the
property of Dow Jones & Company, Inc. Dow Jones & Company, Inc. has not
granted to the Strategic Stock Portfolio a license to use the DJIA. Neither
MSCI nor Dow Jones & Company, Inc. has participated in any way in the
creation of the Strategic Stock Portfolio or in the selection of the stocks
included in such Portfolio and neither has approved any information herein
relating thereto. Shares of the Strategic Stock Portfolio are not designed
so that their prices will parallel or correlate with any movements in the
DJIA or the MSCI Index, and it is expected that their prices will not
parallel or correlate with such movements.
There is no assurance that any Portfolio will achieve its investment
objective.
- --------------------------------------------------------------------------------
This Prospectus tells Contract Owners briefly the information they should
know before allocating premiums or cash value to a Portfolio. Investors should
read and retain this Prospectus for future reference.
THE SHARES OF THE PORTFOLIOS 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 containing
additional information about the Trust and the Portfolios is hereby incorporated
in its entirety into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 421-2833. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials 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.
2
<PAGE> 63
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri 64141-9256
DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................... 4
Financial Highlights..................... 9
Introduction............................. 17
Investment Objectives and Policies....... 17
Domestic Income Portfolio.............. 17
Emerging Growth Portfolio.............. 20
Enterprise Portfolio................... 21
Government Portfolio................... 22
Growth and Income Portfolio............ 25
Money Market Portfolio................. 26
Real Estate Securities Portfolio....... 27
Strategic Stock Portfolio.............. 29
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Investment Practices..................... 32
The Trust and Its Management............. 37
Purchase of Shares....................... 41
Determination of Net Asset Value......... 41
Redemption of Shares..................... 42
Dividends, Distributions and Taxes....... 42
Portfolio Performance.................... 44
Description of Shares of the Trust....... 46
Additional Information................... 46
Appendix................................. 47
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Trust, the Adviser or the Distributor. This
Prospectus does not constitute an offer by the Trust or by the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful for the Trust to make
such an offer in such jurisdiction.
3
<PAGE> 64
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in eight Portfolios: the
Domestic Income Portfolio, the Emerging Growth
Portfolio, the Enterprise Portfolio, the Government
Portfolio, the Growth and Income Portfolio, the Money
Market Portfolio, the Morgan Stanley Real Estate
Securities Portfolio (the "Real Estate Securities
Portfolio") and the Strategic Stock Portfolio
(collectively, the "Portfolios"), each of which is a
separate portfolio of the Van Kampen American Capital
Life Investment Trust (the "Trust").
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Domestic Income Portfolio seeks current income as
its primary investment objective; capital appreciation
is a secondary objective, which will be sought only when
consistent with its primary investment objective. The
Emerging Growth Portfolio seeks capital appreciation by
investing in a portfolio of securities consisting
principally of common stock of small and medium sized
companies considered by the Van Kampen American Capital
Asset Management, Inc. (the "Adviser") to be emerging
growth companies. The Enterprise Portfolio seeks capital
appreciation through investments in securities believed
by the Adviser to have above average potential for
capital appreciation. The Government Portfolio seeks
high current return consistent with preservation of
capital. The Growth and Income Portfolio seeks long-
term growth of capital and income. The Money Market
Portfolio seeks protection of capital and high current
income through investments in money market investments.
The Real Estate Securities Portfolio seeks long-term
growth of capital as its primary investment objective;
current income is a secondary consideration. The
Strategic Stock Portfolio seeks above average total
return through a combination of potential capital
appreciation and dividend income, consistent with the
preservation of invested capital, by investing primarily
in a portfolio of dividend paying equity securities
included in the DJIA or in the MSCI Index. There can be
no assurance that any Portfolio will achieve its
investment objective.
Investment Policies and
Risk Factors..........The Domestic Income Portfolio invests in a diversified
portfolio of fixed-income securities. The Portfolio
expects that at all times at least 80% of its assets
will be invested in fixed-income securities rated at the
time of purchase B or higher by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P"), nonrated debt securities believed by the
Adviser to be of comparable quality and U.S. Government
securities. Securities rated BB or lower are regarded by
the rating agencies as predominantly speculative with
respect to the issuer's continuing ability to meet
principal and interest payments. Such securities are
commonly referred to as "junk bonds." Because investment
in lower rated securities involves greater investment
risk, achievement of the Portfolio's investment
objectives may be more dependent on the Adviser's credit
analysis than would be the case if the Portfolio were
4
<PAGE> 65
investing in higher rated securities. Lower rated
securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions
than investment grade securities and thus be subject to
higher risk. A projection of an economic downturn, for
example, could cause a decline in lower rated securities
prices because the advent of a recession could lessen
the ability of a highly leveraged company to make
principal and interest payments on its debt securities.
In addition, the secondary trading market for lower
rated securities may be less liquid than the market for
higher grade securities. The market prices of debt
securities also generally fluctuate with changes in
interest rates so that the Portfolio's net asset value
can be expected to decrease as long-term interest rates
rise and to increase as long-term interest rates fall.
The above risks may be increased by investments in debt
securities not producing immediate cash income, such as
zero-coupon and pay-in-kind securities. See "Investment
Objectives and Policies."
The Emerging Growth Portfolio under normal market
conditions invests at least 65% of its total assets in
common stocks of small and medium sized companies (less
than $2 billion of market capitalization or annual
sales), both domestic and foreign, considered by the
Adviser to be emerging growth companies. The companies
in which the Portfolio invests may offer greater
opportunities for growth of capital than larger, more
established companies, but investments in such companies
may involve special risks. See "Investment Objectives
and Policies" and "Investment Practices -- Foreign
Securities." The use of options, futures contracts and
related options may include additional risks. See
"Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."
The Enterprise Portfolio invests principally in common
stocks of companies which, in the judgment of the
Adviser, have above average potential for capital
appreciation. Because prices of common stocks and other
securities fluctuate, the value of an investment in the
Portfolio will vary based upon the Portfolio's
investment performance. Use of options, futures
contracts and options on futures contracts may include
additional risk. See "Investment Practices -- Using
Options, Futures Contracts and Options on Futures
Contracts."
The Government Portfolio invests primarily in debt
securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities. The Portfolio may
sell (write) and purchase call and put options. The
Portfolio also may purchase and sell interest rate
futures contracts and options on such contracts since
such transactions are entered into for bona fide hedging
purposes. The Portfolio may purchase or sell U.S.
Government securities on a forward commitment basis. The
market prices of debt securities, including U.S.
Government securities, generally fluctuate with changes
in interest rates so that the Portfolio's net asset
value can be expected to decrease as long-term interest
rates
5
<PAGE> 66
rise and to increase as long-term interest rates fall.
See "Investment Objectives and Policies -- Government
Portfolio -- General."
The Growth and Income Portfolio invests principally in
income-producing equity securities including common
stock and convertible securities, although investments
are also made in non-convertible preferred stocks and
debt securities. Use of options, futures contracts and
related options may include additional risks. See
"Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts."
The Money Market Portfolio invests in money market
instruments.
The Real Estate Securities Portfolio invests in a
portfolio of securities of companies operating in the
real estate industry ("Real Estate Securities"). Real
Estate Securities include equity securities, including
common stocks and convertible securities, as well as
non-convertible preferred stocks and debt securities of
real estate industry companies. A "real estate industry
company" is a company that derives at least 50% of its
assets (marked to market), gross income or net profits
from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Under
normal market conditions, at least 65% of the
Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate
investment trusts. The Portfolio's investment in debt
securities will be rated, at the time of investment, at
least Baa by Moody's or BBB by S&P, a comparable rating
by any other nationally recognized statistical rating
organization or if unrated, determined by the Adviser to
be of comparable quality. Under normal market
conditions, the Portfolio may invest up to 35% of its
total assets in equity and debt securities of companies
outside the real estate industry, U.S. Government
securities, cash and money market instruments. Because
of the Portfolio's policy of concentrating its
investments in Real Estate Securities, the Portfolio may
be more susceptible than an investment company without
such a policy to any single economic, political or
regulatory occurrence affecting the real estate
industry. In addition, the Portfolio will be affected by
general changes in interest rates which will result in
increases or decreases in the market value of the debt
securities (and, to a lesser degree, equity securities)
held by the Portfolio; the market value of such
securities tends to have an inverse relationship to the
movement of interest rates. For additional information
regarding the risk connected with investment in Real
Estate Securities, see "Investment Objectives and
Policies -- Real Estate Securities Portfolio -- Risk
Factors." The Portfolio may invest up to 25% of its
total assets in securities issued by foreign issuers,
some or all of which may also be Real Estate Securities.
Investments in foreign securities involve certain risks
not ordinarily associated with investments in securities
of domestic issuers, including fluctuations in foreign
exchange rates, future political and economic
developments, and the possible imposition of exchange
controls or other foreign governmental laws or
restrictions. See "Investment Practices -- Foreign
Securities." The Portfolio may purchase or sell debt
6
<PAGE> 67
securities on a forward commitment basis. See
"Investment Practices -- Forward Commitments." The
Portfolio may use portfolio management techniques and
strategies involving options, futures contracts and
options on futures. The utilization of options, futures
contracts and options on futures contracts may involve
greater than ordinary risks and the likelihood of more
volatile price fluctuation. See "Investment
Practices -- Using Options, Futures Contracts and
Options on Futures Contracts."
The Strategic Stock Portfolio invests primarily in
dividend paying equity securities of companies included
in the DJIA or in the MSCI Index. The Portfolio
initially invested approximately equally in 20
securities identified by the Adviser based on the
Portfolio's strategic selection policies as described
below (the "Strategic Selection Policies"). The ten
highest dividend yielding securities in the DJIA are
identified for investment. In addition, all companies
having securities in the MSCI Index are reviewed by the
Adviser and securities of companies in the financial or
utility sectors and of companies having securities
included in the DJIA are excluded. The remaining pool of
MSCI Index securities is further evaluated and
securities of companies that do not have positive one-
and three-year sales and earnings growth rates and two
years of positive dividend growth are excluded. The
Adviser also excludes MSCI Index securities that are in
the bottom 25% of all MSCI Index securities measured in
terms of total annual trading volume. MSCI Index
securities of the remaining companies are ranked by
dividend yield, and the ten highest-yielding such MSCI
Index securities are identified for investment. The 20
securities so identified (the "Strategic Securities")
represented the Portfolio's initial investments. The
Adviser periodically employs the same Strategic
Selection Policies to identify a new list of 20
Strategic Securities and reviews and adjusts a portion
or all of the Portfolio's assets so as to invest that
portion of the Portfolio's assets approximately equally
in the new list of 20 Strategic Securities. In this
manner, the Adviser expects that each security in the
Portfolio will be reviewed and potentially adjusted
approximately annually. Application of the Strategic
Selection Policies will be subject to and limited by
certain of the Portfolio's other investment policies and
restrictions, including restrictions and limitations
which must be met in order for the Portfolio to qualify
to be treated for U.S. federal income tax purposes as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"),
or in order to comply with requirements of the
Investment Company Act of 1940, as amended (the "1940
Act") (such as investment diversification requirements
and industry concentration limitations). In addition,
the Adviser will try to avoid transacting in odd-lots of
securities in order to minimize transaction costs. These
limitations may, at times, cause the composition of the
Portfolio's investment portfolio to differ significantly
from that which would have resulted had the Strategic
Selection Policies been fully implemented. Although each
new list of Strategic Securities will include only 20
securities, because only a portion of the
7
<PAGE> 68
Portfolio's assets may be reviewed and adjusted at any
given time, the Adviser expects that the number of
securities held by the Portfolio will over time increase
and that the Portfolio may at times hold 40 or more
different securities. Except to raise cash for
operational purposes, the Portfolio ordinarily will not
sell securities or reevaluate its portfolio investments
except as periodically determined by the Adviser. As a
result, the adverse financial condition of a company
will not result in its elimination from the Portfolio,
except under extraordinary circumstances. Risks
associated with an investment in the Portfolio include
the possible deterioration of either the financial
condition of the issuers or the general condition of the
stock market, and general price volatility. The
relatively high dividend yield (calculated based on the
current stock price and the annualized most recent
dividend payment amount) of certain securities that the
Portfolio may acquire may reflect the market's
assessment of the risk that the company may reduce or
eliminate the dividend in the current period or in the
future, or otherwise reflect the market's unfavorable
assessment of the company's performance outlook. The
Adviser generally will not take these considerations
into account in implementing the Strategic Selection
Policies. 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. (the
"Adviser") is the investment adviser for each Portfolio.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes each Portfolio's shares.
Dividends and
Distributions.........Dividends from net investment income are declared each
business day for the Money Market Portfolio and the
Government Portfolio. Such dividends are distributed
monthly. The Government Portfolio may distribute any net
short-term capital gains and any net long-term capital
gains at least annually. The Domestic Income Portfolio,
Emerging Growth Portfolio, the Enterprise Portfolio, the
Growth and Income Portfolio, the Real Estate Securities
Portfolio and the Strategic Stock Portfolio declare
dividends and any capital gains distributions annually.
The foregoing is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this
Prospectus.
8
<PAGE> 69
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
DOMESTIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
PER SHARE OPERATING PERFORMANCE ------- ------- ------- -------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period......................... $ 8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96 $ 10.15
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Net Investment Income.......... .704 .755 .71 .85 .72 .69 .685 1.035 1.725 .62
Net Realized and Unrealized
Gain/Loss.................... .252 (.212) .8525 (1.2275) .5825 .2725 .7525 (1.64) (2.31) .8975
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Total from Investment
Operations..................... .956 .543 1.5625 (.3775) 1.3025 .9625 1.4375 (.605) (.585) 1.5175
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Distributions from Net
Investment Income............ .712 .745 .7025 .8525 .7225 .7025 .6775 1.055 1.725 .61
Distributions from Net Realized
Gain......................... -- -- -- -- -- -- -- -- .01 .0975
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Total Distributions.............. .712 .745 .7025 .8525 .7225 .7025 .6775 1.055 1.735 .7075
------- ------- ------- -------- ------- ------- ------- ------- ------- --------
Net Asset Value, End of the
Period......................... $ 8.252 $ 8.008 $ 8.21 $ 7.35 $ 8.58 $ 8.00 $ 7.74 $ 6.98 $ 8.64 $ 10.96
======= ======= ======= ======== ======= ======= ======= ======= ======= ========
Total Return*.................... 11.90% 6.68% 21.37% (4.33%) 16.32% 12.50% 21.23% (7.23%) (5.44%) 14.95%
Net Assets at End of the Period
(In millions).................. $ 17.2 $ 19.8 $ 26.6 $ 21.3 $ 27.4 $ 21.1 $ 17.4 $ 6.3 $ 8.1 $ 8.1
Ratio of Expenses to Average Net
Assets*........................ .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*............ 7.74% 7.97% 8.11% 8.35% 7.80% 8.89% 9.72% 11.99% 12.92% 10.88%
Portfolio Turnover............... 78% 77% 54% 94% 130% 117% 90% 123% 56% 44%
*If certain expenses had not been
assumed by the Adviser, Total
Return would have been lower and
the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets......................... 1.05% 1.29% .93% .95% .95% .95% .95% .95% .95% .95%
Ratio of Net Investment Income to
Average Net Assets............. 7.29% 7.28% 7.78% 8.00% 7.40% 8.54% 9.37% 11.64% 12.57% 10.53%
</TABLE>
9
<PAGE> 70
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last three
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1995
DECEMBER 31, (COMMENCEMENT OF
--------------------------- INVESTMENT OPERATIONS) TO
1997 1996 DECEMBER 31, 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%(1)
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%(1)
Average Commission Per Equity Share Traded(2)............... $ .0502 $ .0470 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 2.14% 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (1.40%) (2.60%) (4.35%)
</TABLE>
- -------------------------
(1) Non-Annualized
(2) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
10
<PAGE> 71
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Net Investment Income.............. .091 .113 .32 .25 .21 .23 .265 .395 .40 .32
Net Realized and Unrealized
Gain/Loss........................ 4.734 3.417 4.22 (.7625) 1.0325 .77 3.37 (1.17) 2.57 .765
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Total from Investment Operations..... 4.825 3.530 4.54 (.5125) 1.2425 1.00 3.635 (.775) 2.97 1.085
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Less:
Distributions from Net Investment
Income........................... .096 .109 .3175 .25 .215 .23 .285 .435 .37 .30
Distributions from Net Realized
Gain............................. 2.885 1.849 1.9225 1.4175 .6675 -0- -0- -0- -0- .055
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Total Distributions.................. 2.981 1.958 2.24 1.6675 .8825 .23 .285 .435 .37 .355
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Net Asset Value, End of the Period... $18.106 $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70
======= ======= ====== ====== ====== ====== ====== ====== ====== =======
Total Return*........................ 30.66% 24.80% 36.98% (3.39%) 8.98% 7.48% 36.41% (6.84%) 34.23% 13.61%
Net Assets at End of the Period (In
millions).......................... $98.7 $84.8 $76.0 $67.5 $72.3 $65.6 $57.8 $27.2 $31.8 $24.0
Ratio of Expenses to Average Net
Assets*............................ .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*................ .47% .68% 2.06% 1.72% 1.41% 1.78% 2.33% 3.64% 3.74% 3.13%
Portfolio Turnover................... 82% 152% 145% 153% 139% 116% 95% 122% 86% 63%
Average Commission Paid per Equity
Share Traded(1).................... $.0566 $.0435 -- -- -- -- -- -- -- --
*If certain expenses had not been
assumed by the Adviser. Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................. .66% .75% .68% .68% .72% .74% .90% .93% .93% .95%
Ratio of Net Investment Income to
Average Net Assets................. .41% .53% 1.98% 1.64% 1.29% 1.64% 2.03% 3.31% 3.41% 2.78%
</TABLE>
- ---------------------
(1)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
11
<PAGE> 72
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
GOVERNMENT PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of the
Period............ $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48 $ 8.68
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Investment
Income.......... .566 .569 .60 .56 .57 .665 .74 .785 .84 .88
Net Realized and
Unrealized
Gain/Loss....... .231 (.388) .78 (.985) .135 (.1575) .60 (.105) .325 (.215)
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Total from
Investment
Operations........ .797 .181 1.38 (.425) .705 .5075 1.34 .68 1.165 .665
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Less Distributions
from and in Excess
of Net Investment
Income............ .543 .575 .60 .555 .575 .6675 .75 .78 .845 .865
------ ------ ------ ------ ------- ------ ------ ------ ------ ------
Net Asset Value, End
of the Period..... $8.920 $8.666 $ 9.06 $ 8.28 $ 9.26 $ 9.13 $ 9.29 $ 8.70 $ 8.80 $ 8.48
====== ====== ====== ====== ======= ====== ====== ====== ====== ======
Total Return*....... 9.61% 2.12% 17.17% (4.63%) 7.86% 5.73% 16.23% 8.31% 14.31% 6.74%
Net Assets at End of
the Period (In
millions)......... $ 52.6 $ 57.3 $ 67.0 $ 65.5 $ 80.6 $ 74.8 $ 77.0 $ 73.2 $ 81.2 $ 90.6
Ratio of Expenses to
Average Net
Assets*........... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net
Investment Income
to Average Net
Assets*........... 6.51% 6.56% 6.89% 6.71% 6.45% 7.29% 8.37% 9.19% 9.56% 9.29%
Portfolio
Turnover.......... 119% 143% 164% 192% 91% 36% 57% 164% 42% 88%
*If certain expenses
had not been
assumed by the
Adviser, Total
Return would have
been lower and the
ratios would have
been as follows:
Ratio of Expenses to
Average Net
Assets............ .74% .80% .72% .70% .70% .70% .70% .69% .66% .64%
Ratio of Net
Investment Income
to Average Net
Assets............ 6.37% 6.36% 6.77% 6.61% 6.35% 7.19% 8.27% 9.10% 9.50% 9.25%
</TABLE>
12
<PAGE> 73
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last two
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 23, 1996
(COMMENCEMENT OF
YEAR ENDED INVESTMENT 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%)(1)
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%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0398 $.0203
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 1.63% 45.97%
Ratio of Net Investment Income/Loss to Average Net Assets... .31% (40.74%)
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period for trades where commissions were applicable.
13
<PAGE> 74
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) in included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Investment Income........... .049 .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714
Less Distributions From Net
Investment Income............. .049 .048 .0533 .0365 .0262 .0331 .0546 .076 .0877 .0714
----- ------- ------- ------- ------- ------- ------ ------- ------- --------
Net Asset Value, End of the
Period........................ $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
===== ======= ======= ======= ======= ======= ====== ======= ======= ========
Total Return*................... 5.06% 4.89% 5.46% 3.71% 2.66% 3.36% 5.46% 7.83% 9.13% 7.38%
Net Assets at End of the Period
(In millions)................. $19.7 $ 19.6 $ 21.6 $ 28.5 $ 30.0 $ 32.9 $ 38.0 $ 34.3 $ 29.0 $ 24.5
Ratio of Expenses to Average Net
Assets*....................... .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income
to Average Net Assets*........ 4.95% 4.78% 5.33% 3.63% 2.63% 3.32% 5.44% 7.59% 8.76% 7.22%
*If certain expenses had not
been assumed by the Adviser,
Total Return would have been
lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net
Assets........................ .98% 1.29% .93% .87% .95% .89% .87% .89% .95% .95%
Ratio of Net Investment Income
to Average Net Assets......... 4.57% 4.10% 5.00% 3.37% 2.28% 3.03% 5.17% 7.30% 8.41% 6.87%
</TABLE>
14
<PAGE> 75
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last three
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1995
DECEMBER 31, (COMMENCEMENT OF
----------------- INVESTMENT OPERATIONS) TO
1997 1996 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%(1)
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%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0597 $ .0313 --
* If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets..................... N/A 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets........ N/A 4.89% 3.36%
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was not
required in fiscal periods prior to 1996.
N/A = Not Applicable
15
<PAGE> 76
FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the most
recent fiscal period) is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
STRATEGIC STOCK PORTFOLIO
<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%(1)
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%(1)
Average Commission Paid per Equity Share Traded(2).......... $.0282
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets..................... 2.59%
Ratio of Net Investment Income to Average Net Assets........ .68%
</TABLE>
- ---------------------
(1) Non-Annualized
(2)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable.
16
<PAGE> 77
INTRODUCTION
The Trust is a duly organized Delaware business trust with ten separate
portfolios. The Domestic Income Portfolio, Emerging Growth Portfolio, Enterprise
Portfolio, Government Portfolio, Growth and Income Portfolio, Money Market
Portfolio, Real Estate Securities Portfolio and Strategic Stock Portfolio are
the only portfolios of the Trust which are described herein and offered pursuant
to this Prospectus. Each portfolio has separate assets and liabilities and a
separate net asset value per share. Shares of 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 OBJECTIVES AND POLICIES
Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. See "Investment
Practices" for further discussion of investment techniques and strategies. The
investment objective of each Portfolio, except the Morgan Stanley Real Estate
Securities Portfolio (the "Real Estate Securities Portfolio"), is a fundamental
policy and may not be changed without shareholder approval. With respect to the
Real Estate Securities Portfolio, the investment objective may be changed by the
Trustees. If there is a change in the objective of such Portfolio, shareholders
should consider whether the Portfolio remains an appropriate investment in light
of their then current financial position and needs. The differences in
objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk to which
each Portfolio is subject.
DOMESTIC INCOME PORTFOLIO
The primary investment objective of the Domestic Income Portfolio is to
seek current income. Capital appreciation is a secondary objective, which will
be sought only when consistent with its primary objective. The Portfolio
attempts to achieve these investment objectives by investing primarily in
fixed-income securities, including both convertible and non-convertible debt
securities and preferred stocks. The Portfolio may invest in investment grade
securities and lower rated and nonrated securities. There is no assurance that
these objectives will be achieved and yields may fluctuate over time. The
Portfolio may also invest in debt securities of foreign issuers, including non-
U.S. dollar denominated debt securities, Eurodollar securities and securities
issued, assumed or guaranteed by foreign governments or political subdivisions
or instrumentalities thereof. The Portfolio will limit its investment in foreign
securities to 25% of its total assets at the time of investment. See "Investment
Practices -- Foreign Securities."
The Portfolio expects that at all times at least 80% of its assets will be
invested in fixed-income securities rated at the time of purchase B or higher by
Moody's or S&P, nonrated debt securities considered by the Adviser to be of
comparable quality and U.S. Government securities. See the Appendix for a
description of corporate bond ratings. The Portfolio may also purchase or sell
U.S. Government securities on a forward commitment basis. See "Investment
Practices -- Forward Commitments."
The Portfolio may invest in debt securities rated Ba or below by Moody's or
BB or below by S&P or nonrated debt securities considered by the Adviser to be
of comparable quality (commonly known as "junk bonds"), common stocks or other
equity securities and income bonds on which interest is not accrued by the
Portfolio when such investments are consistent with the Portfolio's investment
objectives or are acquired as part of a unit consisting of a combination of
fixed-income or equity securities. The Portfolio may also invest in prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million, and
repurchase agreements. See "Investment Practices -- Repurchase Agreements."
Equity securities as referred to herein do not include preferred stocks. The
Portfolio will not purchase any such securities which will cause more than 20%
of its total assets to be so invested or
17
<PAGE> 78
which would cause more than 10% of its total assets to be invested in common
stocks or other equity securities.
In general, the prices of debt securities vary inversely with interest
rates. If interest rates rise, debt security prices generally fall; if interest
rates fall, debt security prices generally rise. In addition, for a given change
in interest rates, longer-maturity debt securities fluctuate more in price
(gaining or losing more in value) than shorter-maturity debt securities, and
generally offer higher yields than shorter-maturity debt securities, all other
factors, including credit quality, being equal. This potential for a decline in
prices of debt securities due to rising interest rates is referred to herein as
"market risk." While the Portfolio has no policy limiting the maturities of the
debt securities in which it may invest, the Adviser seeks to moderate market
risk by generally maintaining a portfolio duration within a range of four to six
years.
Duration is a measure of the expected life of a debt security on a present
value basis expressed in years that incorporates a security's yield, coupon
interest payments, final maturity and call features into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (which is
the "interest rate risk" or "price volatility" of the security). However, "term
to maturity" measures only the time until a debt security provides its final
payment taking no account of the pattern of the security's payments of interest
or principal prior to maturity. Duration measures the length of the time
interval between the present and the time when the interest and principal
payments are scheduled to be received (or in the case of a callable bond,
expected to be received), weighing them by the present value of the cash to be
received at each future point in time. In general, the lower the coupon rate of
interest or the longer the maturity, or the lower the yield-to-maturity of a
debt security, the longer its duration; conversely, the higher the coupon rate
of interest, the shorter the maturity or the higher the yield-to-maturity of a
debt security, the shorter its duration. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. In these and other similar situations,
the Adviser will use more sophisticated analytical techniques that incorporate
the economic life of a security into the determination of its interest rate
exposure. The duration is likely to vary from time to time as the Adviser
pursues its strategy of striving to maintain a balance between seeking to
maximize income and endeavoring to maintain the value of the Portfolio's
capital.
The higher yields sought by the Portfolio are generally obtainable from
securities rated in the lower categories by recognized rating services. These
securities generally are subordinated to the prior claims of banks and other
senior lenders. The lower rated debt securities in which the Portfolio may
invest are regarded as predominately speculative with respect to the issuers
continuing ability to meet principal and interest payments. The ratings of
Moody's and S&P represent their opinions of the quality of the debt securities
they undertake to rate, but not the market value risk of such securities. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, debt securities with the same maturity,
coupon and rating may have different yields while debt securities of the same
maturity and coupon with different ratings may have the same yield.
18
<PAGE> 79
During the fiscal year ended December 31, 1997, the average percentage of
the Portfolio's assets invested in debt securities within the various rating
categories (based on the higher of the S&P or Moody's ratings), determined on a
dollar weighted average, and other assets of the Portfolio were as follows:
<TABLE>
<S> <C>
AAA/Aaa..................................................... 3.76%
AA/Aa....................................................... 0.00
A/A......................................................... 4.51
BBB/Baa..................................................... 54.55
BB/Ba....................................................... 26.75
B/B......................................................... 3.59
Preferred Stocks/Common Stocks/Warrants..................... 3.88
Cash and Equivalents........................................ 2.96
------
Total Net Assets....................................... 100.00%
</TABLE>
The securities in which the Portfolio may invest include the following:
-- Straight fixed-income debt securities. These include bonds and other
debt obligations which bear a fixed or variable rate of interest payable at
regular intervals and have a fixed or resettable maturity date. The particular
terms of such securities vary and may include features such as call provisions
and sinking funds.
-- Pay-in-kind debt securities. These pay interest in additional debt
securities rather than in cash.
-- Zero-coupon debt securities. These bear no interest obligation but are
issued at a discount from their value at maturity. When held to maturity,
their entire return equals the difference between their issue price and their
maturity value. Interest is however accrued by the Portfolio each day for
accounting and Federal income tax purposes.
-- Zero-fixed-coupon debt securities. These are zero-coupon debt securities
which convert on a specified date to interest-bearing debt securities.
Fixed-income securities rated below B by both Moody's and S&P include debt
obligations or other securities of companies that are financially troubled, in
default or are in bankruptcy or reorganization ("Deep Discount Securities").
Debt obligations of such companies are usually available at a deep discount from
the face value of the instrument. The Portfolio will invest in Deep Discount
Securities when the Adviser believes that existing factors are likely to restore
the company to a healthy financial condition. Such factors include a
restructuring of debt, management changes, existence of adequate assets, or
other unusual circumstances.
A debt instrument purchased at a deep discount may currently pay a very
high effective yield. In addition, if the financial condition of the issuer
improves, the underlying value of the security may increase, resulting in a
capital gain. If the company defaults on its obligations or remains in default,
or if the plan of reorganization is insufficient for debtholders, the Deep
Discount Securities may stop generating income and lose value or become
worthless. The Adviser will balance the benefits of Deep Discount Securities
with their risks. While a diversified portfolio may reduce the overall impact of
a Deep Discount Security that is in default or loses its value, the risk cannot
be eliminated.
Risk Factors of Investing in Lower Rated Debt Securities. Past experience
may not provide an accurate indication of future performance of the market for
lower rated debt securities, particularly during periods of economic recession.
An economic downturn or increase in interest rates is likely to have a greater
negative effect on this market, the value of lower rated debt securities in the
Portfolio, the Portfolio's net asset value and the ability of the bonds' issuers
to repay principal and interest, meet projected business goals and obtain
additional financing than on higher rated securities. These circumstances also
may result in a higher incidence of defaults than with respect to higher rated
19
<PAGE> 80
securities. An investment in this Portfolio may be considered more speculative
than investment in shares of a fund which invests primarily in higher rated debt
securities.
Prices of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated investments. Debt
securities with longer maturities, which may have higher yields, may increase or
decrease in value more than debt securities with shorter maturities. Market
prices of lower rated debt securities structured as zero coupon or pay-in-kind
securities are affected to a greater extent by interest rate changes and may be
more volatile than securities which pay interest periodically and in cash. When
it deems it appropriate and in the best interests of Portfolio shareholders, the
Portfolio may incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to protect its interests
of security holders of its companies.
Because the market for lower rated securities may be thinner and less
active than for higher rated securities, there may be market price volatility
for these securities and limited liquidity in the resale market. Nonrated
securities are usually not as attractive to as many buyers as rated securities
are, a factor which may make nonrated securities less marketable. These factors
may have the effect of limiting the availability of the securities for purchase
by the Portfolio and may also limit the ability of the Portfolio to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may decrease
the values and liquidity of lower rated debt securities, especially in a thinly
traded market. To the extent the Portfolio owns or may acquire illiquid or
restricted lower rated securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties. Changes in values of debt securities which the Portfolio
owns will affect its net asset value per share. If market quotations are not
readily available for the Portfolio's lower rated or nonrated securities, these
securities will be valued at fair value by the Adviser based on procedures
approved by the Trustees. Judgment plays a greater role in valuing lower rated
debt securities than with respect to securities for which more external sources
of quotations and last sale information are available.
Special tax considerations are associated with investing in lower rated
debt securities structured as zero coupon or pay-in-kind securities. The
Portfolio accrues income on these securities prior to the receipt of cash
payments. The Portfolio must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax laws and may,
therefore, have to dispose a portion of its portfolio securities to satisfy
distribution requirements.
While credit ratings are only one factor the Adviser relies on in
evaluating lower rated debt securities, certain risks are associated with using
credit ratings. Credit rating agencies may fail to timely change the credit
ratings to reflect subsequent events; however, the Adviser continuously monitors
the issuers of lower rated debt securities in its portfolio in an attempt to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. Achievement of the Portfolio's
investment objective may be more dependent upon the Adviser's credit analysis
than is the case for higher quality debt securities. Credit ratings for
individual securities may change from time to time and the Portfolio may retain
a portfolio security whose rating has been changed.
Investors should consider carefully the additional risks associated with
investment in securities which carry lower ratings, which are not generally
meant for short-term investment.
EMERGING GROWTH PORTFOLIO
The investment objective of the Emerging Growth Portfolio is to seek
capital appreciation by investing in a portfolio of securities consisting
principally of common stocks of small and medium sized companies considered by
the Adviser to be emerging growth companies. Any ordinary income received from
portfolio securities is entirely incidental.
20
<PAGE> 81
As a fundamental investment policy, the Portfolio under normal conditions
invests at least 65% of its total assets in common stocks of small and medium
sized companies (less than $2 billion of market capitalization), both domestic
and foreign, considered by the Adviser to be in emerging growth companies. The
companies may be in the early stages of their respective life cycles and the
Adviser believes such companies have the potential to become major enterprises.
Investments in such companies may offer greater opportunities for growth of
capital than larger, more established companies, but also may involve certain
special risks. Emerging growth companies often have limited product lines,
markets, or financial resources, and they may be dependent upon one or a few key
people for management. The securities of such companies may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. While the Portfolio will invest
primarily in common stocks, to a limited extent it may invest in other
securities such as preferred stocks, convertible securities and warrants.
The Portfolio does not limit its investment to any single group or type of
security. The Portfolio may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Portfolio's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above average volatility of price
movement. Because prices of common stocks and other securities fluctuate, the
value of an investment in the Portfolio will vary based upon the Portfolio's
investment performance. The Portfolio attempts to reduce overall exposure to
risk from declines in securities prices by spreading its investments over many
different companies in a variety of industries. There is, however, no assurance
that the Portfolio will be successful in achieving its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. See "Investment Practices -- Foreign Securities." Additionally,
the Portfolio may invest up to 15% of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the Securities Act of 1933) and in other securities not having readily available
market quotations. The Portfolio may enter into repurchase agreements with
domestic banks and broker-dealers which involve certain risks. The Portfolio may
invest in warrants so long as such investments aggregate less than 5% of the
Portfolio's total assets. The risks involved in investing in restricted
securities, warrants and repurchase agreements are described in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
The investment objective of the Enterprise Portfolio is to seek capital
appreciation through investments in securities believed by the Adviser to have
above average potential for capital appreciation. Any income received on such
securities is incidental to the objective of capital appreciation.
The Portfolio invests principally in growth common stocks. Such securities
generally include those of companies with established records of growth in sales
or earnings, and companies with new products, new services, or new processes.
The Portfolio may also invest in companies in cyclical industries during periods
when their securities appear attractive to the Adviser for capital appreciation.
In addition to common stock, the Portfolio may invest in warrants and preferred
stocks, and in investment companies. See "Investment Practices -- Investment in
Investment Companies."
The Portfolio generally holds a portion of its assets in investment grade
short-term debt securities and investment grade corporate or government bonds in
order to provide liquidity. Such investments may be increased to up to 100% of
the Portfolio's assets when deemed appropriate by
21
<PAGE> 82
the Adviser for temporary defensive purposes. Short-term investments may include
repurchase agreements with banks or broker-dealers. See "Investment
Practices -- Repurchase Agreements."
The Portfolio's primary approach is to seek what the Adviser believes to be
attractive growth investments on an individual company basis. The Portfolio may
invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Portfolio will vary based upon the Portfolio's investment
performance. The Portfolio attempts to reduce overall exposure to risk from
declines in securities prices by spreading its investments over many different
companies in a variety of industries. There is, however, no assurance that the
Portfolio will be successful in achieving its objective. The Portfolio may also
invest in debt securities of foreign issuers, including non-U.S. dollar
denominated debt securities, Eurodollar securities and securities issued,
assumed or guaranteed by foreign governments or political subdivisions or
instrumentalities thereof. The Portfolio will limit its investment in foreign
securities to 10% of its total assets, taken at market value at the time of each
investment. See "Investment Practices -- Foreign Securities." The Portfolio may
engage in portfolio management strategies and techniques involving options,
futures contracts and options on futures. Options, futures contracts and options
on futures contracts are described in "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
GOVERNMENT PORTFOLIO
GENERAL
The investment objective of the Government Portfolio is to seek to provide
investors with a high current return consistent with preservation of capital.
The Portfolio invests primarily in debt securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Under normal circumstances,
at least 80% of the total assets of the Portfolio are invested in such
securities. The Portfolio may invest its remaining assets (up to 20%) in other
government related securities and in repurchase agreements fully collateralized
by U.S. Government securities. The other government related securities include
mortgage-related and mortgage-backed securities and certificates issued by
financial institutions or broker-dealers representing "stripped" mortgage-
related securities. See "Other Government Related Securities" below. In order to
hedge against changes in interest rates, the Portfolio may purchase or sell
options and engage in transactions involving interest rate futures contracts and
options on such contracts. See "Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts" and the Statement of Additional
Information for discussion of options, futures contracts and options on futures
contracts. The Portfolio may also purchase or sell U.S. Government securities on
a forward commitment basis. See "Investment Practices -- Forward Commitments."
The Portfolio is not designed for investors seeking capital appreciation. Shares
of the Portfolio are not insured or guaranteed by the U.S. Government, its
agencies or instrumentalities or by any other person or entity. There is no
assurance that the Portfolio's objective will be achieved.
Since the value of U.S. Government securities owned by the Portfolio will
fluctuate depending upon market factors and inversely with prevailing interest
rates, the net asset value of shares of the Portfolio will fluctuate. If
interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gaining
or losing more in value) than shorter-maturity debt securities, and generally
offer higher yields than shorter-maturity debt securities, all other factors,
including credit quality, being equal. This potential for a decline in prices of
debt securities due to rising interest rates is referred to herein as "market
risk." While the Portfolio has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of four to six years.
Duration is a measure of the expected life of a debt security that incorporates
a security's yield, coupon interest payments, final maturity and call features
into one measure.
22
<PAGE> 83
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration measures the length of the
time interval between the present and the time when the interest and principal
payments are scheduled to be received (or in the case of a callable bond,
expected to be received), weighing them by the present value of the cash to be
received at each future point in time. In general, the lower the coupon rate of
interest or the longer the maturity, or the lower the yield-to-maturity of a
debt security, the longer its duration; conversely, the higher the coupon rate
of interest, the shorter the maturity or the higher the yield-to-maturity of a
debt security, the shorter its duration. With respect to some securities, there
are some situations where even a duration calculation does not properly reflect
the interest rate exposure of a security. In these and other similar situations,
the Adviser will use more sophisticated analytical techniques that incorporate
the economic life of a security into the determination of its interest rate
exposure.
The Portfolio often purchases debt securities at a premium over the
principal or face value in order to obtain higher current income. The amount of
any premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Portfolio's net asset value. Any such decline is realized for accounting
purposes as a capital loss at maturity or upon resale. Prior to maturity or
resale, such decline in value could be offset, in whole or part, or increased by
changes in the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. By selling options, the Portfolio reduces its
potential for capital appreciation on debt securities if interest rates decline.
Thus if market prices of debt securities increase, the Portfolio receives less
total return from its optioned positions than it would have received if the
options had not been sold. During periods when the Portfolio has capital loss
carry forwards, any capital gains generated from such transactions will be
retained in the Portfolio. See "Investment Practices -- Using Options, Futures
Contracts and Options on Futures Contracts" and "Dividends, Distributions and
Taxes" and the Statement of Additional Information for discussion of options,
futures contracts and options on futures contracts.
The purchase and sale of options may result in a high portfolio turnover
rate. The Portfolio's turnover rate is shown in the table of "Financial
Highlights." See "Investment Practices -- Portfolio Turnover."
The Portfolio intends to invest in U.S. Treasury securities and in
securities issued by at least four U.S. Government agencies or instrumentalities
in the amounts necessary to permit the Accounts to meet certain diversification
requirements imposed by Section 817(h) of the Code (as defined below) at the end
of each quarter of the year (or within 30 days thereafter). See "Dividends,
Distributions and Taxes." In the event the Portfolio does not meet the
diversification requirements of Section 817(h) of the Code, the policies funded
by shares of the Portfolio will not be treated as life insurance for Federal
income tax purposes and the owners of the policies will be subject to taxation
on their share of the dividends and distributions paid by the Portfolio.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities include: (1) U.S. Treasury
obligations, which differ in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, including government guaranteed
mortgage-related securities, some of which are backed by the full faith and
23
<PAGE> 84
credit of the U.S. Treasury, some of which are supported by the right of the
issuer to borrow from the U.S. Government and some of which are backed only by
the credit of the issuer itself.
Mortgage loans made by banks, savings and loan institutions, and other
lenders are often assembled into pools, which are issued or guaranteed by an
agency or instrumentality of the U.S. Government, though not necessarily by the
U.S. Government itself. Interests in such pools are what this Prospectus calls
"mortgage-related securities."
Mortgage-related securities include, but are not limited to, obligations
issued or guaranteed by the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate instrumentality
of the United States whose securities and guarantees are backed by the full
faith and credit of the United States. FNMA, a federally chartered and privately
owned corporation, and FHLMC, a federal corporation, are instrumentalities of
the United States. The securities and guarantees of FNMA and FHLMC are not
backed, directly or indirectly, by the full faith and credit of the United
States. Although the Secretary of the Treasury of the United States has
discretionary authority to lend to FNMA at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. Securities of FNMA and FHLMC
include those issued in principal only or interest only components.
Mortgage-related securities are characterized by monthly payments to the
holder, reflecting the monthly payments made by the borrowers who received the
underlying mortgage loans. The payments to the securityholders (such as the
Portfolio), like the payments on the underlying loans, represent both principal
and interest. Although the underlying mortgage loans are for specified periods
of time, such as 20 or 30 years, the borrowers can, and typically do, pay them
off sooner. Thus, the securityholders frequently receive prepayments of
principal, in addition to the principal which is part of the regular monthly
payment. A borrower is more likely to prepay a mortgage which bears a relatively
high rate of interest. This means that in times of declining interest rates,
some of the Portfolio's higher yielding securities might be converted to cash,
and the Portfolio will be forced to accept lower interest rates when that cash
is used to purchase additional securities. The increased likelihood of
prepayment when interest rates decline also limits market price appreciation of
mortgage-related securities. If the Portfolio buys mortgage-related securities
at a premium, mortgage foreclosures or mortgage prepayments may result in a loss
to the Portfolio of up to the amount of the premium paid since only timely
payment of principal and interest is guaranteed.
OTHER GOVERNMENT RELATED SECURITIES
The Portfolio may invest up to 20% of its assets in other government
related securities and in repurchase agreements fully collateralized by U.S.
Government securities. A principal type of government related security in which
the Portfolio may invest are mortgage-backed securities including collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs").
CMOs are debt securities issued by U.S. Government agencies or by financial
institutions and other mortgage lenders and collateralized by a pool of
mortgages held under an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are retired in sequence
as the underlying mortgages are repaid. Prepayment may shorten the stated
maturity of the obligation and can result in a loss of premium, if any has been
paid. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
REMICs, which were authorized under the Tax Reform Act of 1986 (the "Tax
Reform Act"), are private entities formed for the purpose of holding a fixed
pool of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities.
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CMOs and REMICs issued by private entities are not government securities
and are not directly guaranteed by any government agency. They are secured by
the underlying collateral of the private issuer. The Portfolio will invest in
such privately issued securities only if they are 100% collateralized at the
time of issuance by securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities. The Portfolio intends to invest in privately
issued CMOs and REMICs only if they are rated at the time of purchase in the two
highest grades by a nationally-recognized rating agency.
STRIPPED SECURITIES
Stripped mortgage-related securities (hereinafter referred to as "Stripped
Mortgage Securities") are derivative multiclass mortgage securities. Stripped
Mortgage Securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The
yield-to-maturity on an IO class is extremely sensitive to the rate of principal
payments (including prepayments) on the related underlying mortgage assets, and
a rapid rate of principal payments may have a material adverse effect on the
securities' yield-to-maturity since interest payments cease as soon as the
related principal amount is repaid. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Portfolio may fail to
fully recoup its initial investment in these securities even if the security is
rated AAA or Aaa. Holders of PO securities are not entitled to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and are subject to greater
fluctuations of market value in response to changing interest rates than debt
obligations of comparable maturities which make current distributions of
interest. Current federal tax law requires that a holder (such as the Portfolio)
of such securities accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the certificate during the year. Such securities may involve
greater risk than securities issued directly by the U.S. Government, its
agencies or instrumentalities.
Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the
Portfolio's limitation on investments in illiquid securities. The Trustees will
establish guidelines and standards for determining whether a particular
government-issued IO or PO backed by fixed-rate mortgages is liquid. Generally,
such a security may be deemed liquid if it can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of the net asset value per share. Stripped Mortgage Securities,
other than government-issued IO and PO securities backed by fixed-rate
mortgages, are presently considered by the staff of the SEC to be illiquid
securities and thus subject to the Portfolio's limitation on investment in
illiquid securities.
GROWTH AND INCOME PORTFOLIO
The Growth and Income Portfolio's investment objective is to seek long-term
growth of capital and income. Since investment in securities involves potential
gain or loss, there is no assurance that the Portfolio's objective will be
achieved.
In view of the investment objective, the Portfolio generally invests
principally in income-producing equity securities including common stocks and
convertible securities; although invest-
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ments are also made in non-convertible preferred stocks and debt securities
rated "investment grade," i.e., within the four highest grades assigned by S&P
or by Moody's. Ratings at the time of purchase determine which securities may be
acquired, and a subsequent reduction in rating does not require the Portfolio to
dispose of a security. Securities rated BBB by S&P or Baa by Moody's are in the
lowest of the four investment grades and are considered by the rating agencies
to be medium grade obligations which possess speculative characteristics so that
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity to make principal and interest payments than in the case of
higher rated securities. The market prices of preferred stocks and debt
securities generally fluctuate with changes in interest rates so that the value
of investments in such securities can be expected to decrease as interest rates
rise and increase as interest rates fall. The Portfolio may also invest in
warrants and in securities of newly-formed companies and in investment
companies. See "Investment Practices -- Investment in Investment Companies." The
Portfolio may invest up to 15% of its assets in securities of foreign issuers.
See "Investment Practices -- Foreign Securities." The Portfolio may enter into
repurchase agreements with banks and broker-dealers which involves certain risks
or may lend portfolio securities on a fully collateralized basis. See
"Investment Practices -- Repurchase Agreements" and "Investment
Practices -- Loans of Portfolio Securities". When deemed appropriate for
temporary defensive purposes, the Portfolio may invest up to 100% of its total
assets in U.S. Government securities and investment grade corporate debt
securities.
The Portfolio may dispose of a security whenever, in the opinion of the
Adviser, factors indicate it is desirable to do so. Such factors include a
change in economic or market factors in general or with respect to a particular
industry, a change in the market trend of or other factors affecting an
individual security, changes in the relative market performance of or
appreciation possibilities offered by individual securities and other
circumstances bearing on the desirability of a given investment.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to seek
protection of capital and high current income through investments in money
market instruments. The investment policies, the percentage limitations, and the
kinds of securities in which the Portfolio can invest may be changed by the
Trustees, unless expressly governed by those limitations stated under
"Investment Restrictions" in the Statement of Additional Information which can
be changed only by action of the shareholders of the Portfolio. It is not the
intention of the Trustees, however, to change these policies without prior
notice to shareholders.
The Portfolio seeks to maintain a constant net asset value of $1.00 per
share by investing in a diversified portfolio of money-market instruments
maturing within one year with a dollar-weighted average maturity of 90 days or
less. It seeks high current income from these short-term investments to the
extent consistent with protection of capital. Of course, there can be no
guarantee that the Portfolio will achieve its objective or be able at all times
to maintain its net asset value per share at $1.00. In addition, the daily
dividend rate paid by the Portfolio may be expected to fluctuate. The Portfolio
uses the amortized cost method for valuing portfolio securities purchased at a
discount. See "Determination of Net Asset Value." It may invest in instruments
of the following types, all of which will be U.S. dollar obligations:
OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES
The Portfolio may invest in obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line of credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
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Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration.
BANK OBLIGATIONS
The Portfolio may invest in negotiable time deposits, certificates of
deposit and bankers' acceptances which are obligations of domestic banks having
total assets in excess of $1 billion as of the date of their most recently
published financial statements. The Portfolio is also authorized to invest up to
5% of its total assets in certificates of deposit issued by domestic banks
having total assets of less than $1 billion, provided that the principal amount
of the certificate of deposit acquired by the Portfolio is insured in full by
the Federal Deposit Insurance Corporation.
COMMERCIAL PAPER
The Portfolio may invest in short-term obligations of companies which at
the time of investment are (a) rated in one of the two highest categories by at
least two nationally recognized statistical organizations (or one rating
organization if the obligation was rated by only one such organization), or (b)
if not rated, are of comparable quality as determined in accordance with
procedures established by the Trustees. See the Statement of Additional
Information. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. (See the Appendix in the Statement of Additional
Information for an explanation of these ratings). The Portfolio's current policy
is to limit investments in commercial paper to obligations rated in the highest
rating category.
REPURCHASE AGREEMENTS
The Portfolio may enter into repurchase agreements with banks and
broker-dealers which involve certain risks in the event of a default by the
other party. See "Investment Practices -- Repurchase Agreements."
REAL ESTATE SECURITIES PORTFOLIO
General. The Real Estate Securities Portfolio's primary investment
objective is to provide shareholders with long-term growth of capital. Current
income is a secondary consideration. The Portfolio will seek to achieve its
investment objectives by investing principally in a diversified portfolio of
Real Estate Securities which include equity securities, including common stocks
and convertible securities, as well as non-convertible preferred stocks and debt
securities of real estate industry companies. A "real estate industry company"
is a company that derives at least 50% of its assets (marked to market), gross
income or net profits from the ownership, construction, management or sale of
residential, commercial or industrial real estate. Real estate industry
companies may include among others: equity real estate investment trusts, which
pool investors' funds for investment primarily in commercial real estate
properties; mortgage real estate investment trusts, which invest pooled funds in
real estate related loans; brokers or real estate developers; and companies with
substantial real estate holdings, such as paper and lumber products and hotel
and entertainment companies. Under normal market conditions, at least 65% of the
Portfolio's total assets will be invested in Real Estate Securities, primarily
equity securities of real estate investment trusts. The Portfolio's investment
in debt securities will be rated, at the time of investment, at least Baa by
Moody's or BBB by S&P, a comparable rating by any other nationally recognized
statistical rating organization or if unrated, determined by the Adviser to be
of comparable quality. Ratings at the time of purchase determine which
securities may be acquired, and a subsequent reduction in ratings does not
require the Portfolio to dispose of a security. Securities rated Baa by Moody's
or BBB by S&P are considered to be medium grade obligations which possess
speculative characteristics so that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher rated securities. The rating of
the ratings agencies represent their opinions of the quality of the debt
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securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. The Portfolio may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Portfolio may invest up to 35% of its
total assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments.
The Portfolio may invest up to 25% of its assets in securities issued by
foreign issuers, some or all of which also may be Real Estate Securities. See
"Investment Practices -- Foreign Securities." The Portfolio may engage in
portfolio management strategies and techniques involving options, futures
contracts and options on futures. Options, futures contracts and related options
are described in "Investment Practices -- Using Options, Futures Contracts and
Options on Futures Contracts" and the Statement of Additional Information.
For temporary defensive purposes, the Portfolio may invest up to 100% of
its total assets in short-term investments as described below. The Portfolio
will assume a temporary defensive posture only when economic and other factors
affect the real estate industry market to such an extent that the Adviser
believes there to be extraordinary risks in being primarily in Real Estate
Securities.
There can be no assurance that the Portfolio will achieve its investment
objectives.
Short-Term Investments. The Portfolio may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness. The Portfolio will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary defensive measure.
Risk Factors. Although the Portfolio does not invest directly in real
estate, an investment in the Portfolio will generally be subject to the risks
associated with real estate because of its policy of concentration in the
securities of companies in the real estate industry. These risks include, among
others: declines in the value of real estate; risks related to general and local
economic conditions; overbuilding and increased competition; increases in
property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income; changes in neighborhood
values; the appeal of properties of tenants and changes in interest rates. The
value of securities of companies which service the real estate industry will
also be affected by such risks. If the Portfolio has rental income or income
from the disposition of real property acquired as a result of a default on
securities the Portfolio owns, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
In addition, equity real estate investment trusts may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage real estate investment trusts may be affected by the quality of credit
extended. Equity and mortgage real estate investment trusts are dependent upon
management skill, may not be diversified and are subject to the risks of
financing projects. Such real estate investment trusts are also subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Code and to maintain exemption from the 1940 Act. Changes in interest rates may
also affect the value of the debt securities in the Portfolio's portfolio. Like
investment companies such as the Portfolio, real estate investment trusts are
not taxed on income distributed to shareholders provided they comply with
several requirements of the Code. The Portfolio will indirectly bear its
proportionate share of any expenses paid by the real estate investment trusts in
which it invests in addition to the expenses paid by the Portfolio.
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Because of the Portfolio's policy of concentrating its investments in Real
Estate Securities, the Portfolio may be more susceptible than an investment
company without such a policy to any single economic, political or regulatory
occurrence affecting the real estate industry.
Additional information about the Portfolio's investment practices and the
risks associated with such practices are contained in "Investment Practices"
herein and in the Statement of Additional Information.
STRATEGIC STOCK PORTFOLIO
General. The investment objective of the Strategic Stock Portfolio is to
seek an above average total return through a combination of potential capital
appreciation and dividend income, consistent with the preservation of invested
capital.
The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI Index. The DJIA was
first published in The Wall Street Journal in 1896. Initially consisting of just
12 stocks, the DJIA expanded to 20 stocks in 1916 and to its present size of 30
stocks on October 1, 1928. The MSCI Index consists of approximately 370 large
domestic companies in the United States and has existed since January 1, 1970.
In selecting securities for the Fund, the Adviser intends to follow the
following policies (the "Strategic Selection Policies").
The ten highest dividend yielding securities in the DJIA are identified for
investment. In addition, all companies having securities in the MSCI Index are
reviewed by the Adviser and securities of companies in the financial or utility
sectors and of companies having securities included in the DJIA are excluded.
The remaining pool of MSCI Index securities is further evaluated and securities
of companies that do not have positive one- and three-year sales and earnings
growth rates and two years of positive dividend growth are excluded. The Adviser
also excludes MSCI Index securities that are in the bottom 25% of all MSCI Index
securities measured in terms of total annual trading volume. MSCI Index
securities of the remaining companies are ranked by dividend yield, and the ten
highest-yielding such MSCI Index securities are identified for investment. In
the event that this process results in less than 10 remaining MSCI Index
securities, those companies with the most favorable one- and three-year sales
and earnings performance and two-year dividend performance as determined by the
Adviser are added back until the number of MSCI Index securities equals 10.
Dividend yield for purposes of applying the foregoing investment policies is
calculated for each security by annualizing the last quarterly or semi-annual
ordinary dividend declared on the security and dividing the result by the
security's closing sale price on the applicable date. This yield is historical
and there can be no assurance that any dividends will be declared or paid in the
future.
The 20 securities so identified (the "Strategic Securities") represented
the Portfolio's initial investments. The Adviser periodically employs the same
Strategic Selection Policies to identify a new list of 20 Strategic Securities
and reviews and adjusts a portion or all of the Portfolio's assets so as to
invest that portion of the Portfolio's assets approximately equally in the new
list of 20 Strategic Securities. In this manner, the Adviser expects that
beginning with the reevaluation in month thirteen each security in the Portfolio
will be reviewed and potentially adjusted approximately annually, although
reviews and adjustments may be made more frequently. For a more detailed
discussion of the Portfolio's investment policies, including the frequency of
security reevaluations and the portion of the Portfolio's assets that the
Adviser presently expects to reevaluate at the end of each period, see the
Statement of Additional Information.
The Adviser generally seeks to allocate cash available for investment due
to the sale of new Shares of the Portfolio and the receipt of dividends and
interest income from the portfolio investments approximately proportionately
among the current list of Strategic Securities in the Portfolio. To the extent
that the Strategic Stock Portfolio is required to dispose of securities in order
to satisfy redemption requests, make distributions, pay expenses or otherwise
raise cash for operational purposes, the Adviser generally intends to sell
approximately proportionate amounts of securities from all securities in the
Portfolio.
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Application of the foregoing Strategic Selection Policies will be subject
to and limited by certain of the Portfolio's other investment policies and
restrictions, including restrictions and limitations which must be met in order
for the Portfolio to qualify to be treated for U.S. federal income tax purposes
as a "regulated investment company" under Subchapter M of the Code or in order
to comply with requirements of the 1940 Act. The Portfolio is subject to
investment diversification requirements that generally provide that the
Portfolio may not, with respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer or purchase more than 10% of the
outstanding voting securities of any one issuer. Further, the Portfolio
generally may not invest more than 25% of the value of its total assets in
securities of issuers in any particular industry. The Portfolio's satisfaction
of these requirements will take precedent over the Strategic Selection Policies.
In addition, the Adviser will try to avoid transacting in odd-lots of securities
in order to minimize transaction costs. These limitations may, at times, cause
the composition of the Portfolio's investment portfolio to differ significantly
from that which would have resulted had the Strategic Selection Policies been
fully implemented. In selecting securities for investment or disposition at
times that the Portfolio's investment policies and restrictions do not permit
full implementation of the Strategic Selection Policies, the Adviser will have
sole discretion to select securities for purchase or sale and generally will
make such selections in a manner that is consistent with the Portfolio's
investment objective and in a manner that it believes is consistent with the
investment rationale that is the basis for the Strategic Selection Policies.
The Portfolio will continue to hold securities, even though such securities
may not be included in the most recent list of Strategic Securities determined
for the review and adjustment of a portion of the Portfolio's assets. In
addition, although each new list of Strategic Securities will include only 20
securities, because only a portion of the Portfolio's assets may be reviewed and
adjusted at any given time, the Adviser expects that the number of securities
held by the Portfolio may over time increase and that the Portfolio may at times
hold 40 or more different securities.
The Strategic Stock Portfolio may invest up to 5% of its total assets in
options on equity securities indices, futures contracts on such indices and
options on such futures contracts for both hedging purposes and in an attempt to
enhance gain. The Strategic Stock Portfolio also may invest up to 5% of its
total assets in securities of other registered investment companies that seek to
provide investment results that generally correspond to the performance of
securities included in one or more broad market indices. Investment in
securities of other investment companies will subject the Portfolio to
additional and potentially duplicative costs and expenses, including investment
management fees charged by such registered investment companies. Pending
investment and for temporary defensive purposes the Portfolio may invest without
limit in short-term, high quality fixed income securities and in money-market
instruments. The Adviser expects that the portfolio turnover rate for the
Strategic Stock Portfolio will not exceed 100%. A high rate of portfolio
turnover may result in increased brokerage and other transaction expenses.
The DJIA is the property of Dow Jones & Company, Inc. Dow Jones & Company,
Inc. has not granted to the Strategic Stock Portfolio a license to use the DJIA.
Dow Jones & Company, Inc. has not participated in any way in the creation of the
Strategic Stock Portfolio or in the selection of the stocks included in such
Portfolio and has not approved any information herein relating thereto. Shares
of the Strategic Stock Portfolio are not designed so that their prices will
parallel or correlate with any movements in the DJIA, and it is expected that
their prices will not parallel or correlate with such movements.
The Strategic Stock Portfolio is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of shares of the Portfolio or any member of the public
regarding the advisability of investing in investment portfolios generally or in
the Strategic Stock Portfolio particularly or the ability of the MSCI Index to
track general stock market performance. Morgan Stanley is the licensor of
certain trademarks, service marks and trade names of Morgan Stanley and of the
MSCI Index which is determined, composed and calculated by Morgan Stanley
without regard to this Portfolio. Morgan Stanley has no
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obligation to take the needs of this Portfolio or the owners of this Portfolio
into consideration in determining, composing or calculating the MSCI Index.
Morgan Stanley is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of this Portfolio to be
issued. Morgan Stanley has no obligation or liability to owners of this
Portfolio in connection with the administration, marketing or trading of this
Portfolio.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR
USE IN THE CALCULATION OF THE INDICES FROM SOURCES WHICH MORGAN STANLEY
CONSIDERS RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE
ACCURACY AND/OR THE COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN.
NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE INDICES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER
PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY
OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
Risk Factors. There is no guarantee that the investment objective of the
Portfolio will be achieved because it is subject to the continuing ability of
the respective issuers of equities in which the Portfolio invests to declare and
pay dividends and because the market value of such equities can be affected by a
variety of factors. Common stocks may be especially susceptible to general stock
market movements and to volatile increases and decreases of value as market
confidence in and perceptions of the issuers change. There can be no assurance
that the value of the underlying securities will increase or that the issuers of
the securities will pay dividends on outstanding securities. The declaration of
dividends by any issuer depends upon several factors including the financial
condition of the issuer and general economic conditions. Risks associated with
an investment in the Portfolio include the possible deterioration of either the
financial condition of the issuers or the general condition of the stock market,
and general price volatility. The relatively high dividend yield of certain
securities that the Portfolio will acquire may reflect the market's assessment
of the risk that the company may reduce or eliminate the dividend in the current
period or in the future, or otherwise reflect the market's unfavorable
assessment of the company's performance outlook. The Adviser generally will not
take these considerations into account in implementing the Strategic Selection
Policies and, accordingly, the Portfolio may at times acquire securities of
companies that the market and the Adviser believe are more susceptible to
financial difficulty and corresponding adverse market performance than are other
companies with securities included in the DJIA or in the MSCI Index.
In addition, investors should be aware that the Portfolio is not "actively
managed." Except to raise cash for operational purposes, the Portfolio
ordinarily will not sell securities or reevaluate its portfolio investments
except as periodically determined by the Adviser. In addition, only a portion of
the Portfolio's assets may be reviewed and adjusted for any given period. As a
result, although the Portfolio may (but need not) dispose of a security in
certain events such as the issuer having defaulted on the payment on any of its
outstanding obligations or the price of a security having declined to such an
extent or other factors existing so that in the opinion of the Adviser the
retention of such security would be detrimental to the Portfolio, the adverse
financial condition of a company will not result in its elimination from the
Portfolio prior to scheduled review and adjustment except under extraordinary
circumstances. Similarly, securities held in the Portfolio ordinarily will not
be
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sold by the Portfolio for the purpose of taking advantage of market fluctuations
or changes in anticipated rates of appreciation.
INVESTMENT PRACTICES
Repurchase Agreements. Each 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., a Portfolio) acquires ownership of a
debt security and the seller agrees to repurchase the obligation at a future
time and set price, thereby determining the yield during the purchaser's holding
period. Repurchase agreements involve certain risks in the event of a default by
the other party. In the event of a bankruptcy or other default of the seller of
a repurchase agreement, a Portfolio could experience delays and expenses in
liquidating the underlying securities and a Portfolio could incur losses
including: (a) possible decline in the value of the underlying security during
the period while a Portfolio seeks to enforce its rights thereto, (b) possible
lack of access to income on the underlying security during this period, and (c)
expenses of enforcing its rights. No Portfolio will invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by such Portfolio, exceeds such
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
Portfolios than would be available to the Portfolios investing separately. The
manner in which the joint account is managed is subject to conditions set forth
in the SEC exemptive order authorizing this practice, which conditions are
designed to ensure the fair administration of the joint account and to protect
the amounts in that account.
Loans of Portfolio Securities. Each Portfolio, except the Real Estate
Securities Portfolio, may lend portfolio securities to unaffiliated brokers,
dealers and financial institutions provided that (a) immediately after any such
loan, the value of the securities loaned does not exceed 10% of the total value
of that Portfolio's assets and (b) any securities loan is collateralized in
accordance with applicable regulatory requirements. See the Statement of
Additional Information.
Foreign Securities. The Domestic Income Portfolio, the Emerging Growth
Portfolio, the Enterprise Portfolio, the Growth and Income Portfolio and the
Real Estate Securities Portfolio may invest up to 25%, 20%, 10%, 15% and 25%,
respectively, of the value of such Portfolios' total assets in securities issued
by foreign issuers. With respect to the Real Estate Securities Portfolio, some
of such securities may also be Real Estate Securities. Investments in securities
of foreign entities and securities denominated in foreign currencies involve
risks not typically involved in domestic investment, including fluctuations in
foreign exchange rates, future foreign political and economic developments, and
the possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since a
Portfolio may invest in securities denominated or quoted in currencies other
than the United States dollar, changes in foreign currency exchange rates may
affect the value of investments in the portfolio and the accrued income and
unrealized appreciation or depreciation of investments. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S. dollar
value of a Portfolio's assets denominated in that currency and a Portfolio's
yield on such assets.
A Portfolio may also purchase foreign securities in the form of ADRs and
EDRs or other securities representing underlying shares of foreign companies.
ADRs are publicly traded on exchanges or over-the-counter in the United States
and are issued through "sponsored" or
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"unsponsored" arrangements. In a sponsored ADR arrangement, the foreign issuer
assumes the obligation to pay some or all of the depositary's transaction fees,
whereas under an unsponsored arrangement, the foreign issuer assumes no
obligation and the depositary's transaction fees are paid by the ADR holders. In
addition, less information is available in the United States about an
unsponsored ADR than about a sponsored ADR and the financial information about a
company may not be as reliable for an unsponsored ADR as it is for a sponsored
ADR. A Portfolio may invest in ADRs through both sponsored and unsponsored
arrangements. For further information on ADRs and EDRs, investors should refer
to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by a Portfolio may be subject to foreign withholding taxes,
which would reduce a Portfolio's total return on such investments and the
amounts available for distributions by a Portfolio to its shareholders. See
"Dividends, Distributions and Taxes." Foreign financial markets, while growing
in volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a Portfolio are not invested and no return is earned thereon. The
inability of a Portfolio to make intended security purchases due to settlement
problems could cause a Portfolio to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Portfolio due to subsequent declines in value of
the portfolio security or, if a Portfolio has entered into a contract to sell
the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities, including custodial costs
and foreign brokerage commissions, are generally higher than with transactions
in United States securities. In addition, the Portfolio will incur costs in
connection with conversions between various currencies. There is generally less
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
Foreign Currency Transactions. The value of a Portfolio's portfolio
securities that are traded in foreign markets may be affected by changes in
currency exchange rates and exchange control regulations. In addition, the
Portfolio will incur costs in connection with conversions between various
currencies. A Portfolio's foreign currency exchange transactions generally will
be conducted on a spot basis (that is, cash basis) at the spot rate for
purchasing or selling currency prevailing in the foreign currency exchange
market. A Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. A Portfolio does not purchase and sell foreign currencies as
an investment.
A Portfolio also may enter into contracts with banks or other foreign
currency brokers and dealers to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts to hedge against changes in foreign currency exchange rates. A foreign
currency forward contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time at
a specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
A Portfolio may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency
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futures contract for such amount. Such hedging strategies may be employed before
a Portfolio purchases a foreign security traded in the hedged currency which a
Portfolio anticipates acquiring or between the date the foreign security is
purchased or sold and the date on which payment therefore is made or received.
Hedging against a change in the value of a foreign currency in the foregoing
manner does not eliminate fluctuations in the price of portfolio securities or
prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value of
the hedged currency should move in the direction opposite to the hedged
position. A Portfolio will not speculate in foreign currency forward or futures
contracts or through the purchase and sale of foreign currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the Portfolio may purchase a
call option permitting the Portfolio to purchase the amount of foreign currency
being hedged by a forward sale contract at a price no higher than the forward
contract price or the Portfolio may purchase a put option permitting the
Portfolio to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Portfolio than if it had not entered into such contracts.
Illiquid and Restricted Securities. Each of the Emerging Growth Portfolio,
the Growth and Income Portfolio, the Real Estate Securities Portfolio and the
Strategic Stock Portfolio may invest up to 15% of its net assets in illiquid and
restricted securities. Each of the Domestic Income Portfolio, Enterprise
Portfolio, Government Portfolio and Money Market 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
Trustees or by the Adviser pursuant to Board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. Since it is not possible to
predict with assurance how the markets for restricted securities sold and
offered under Rule 144A will develop, the Trustees will monitor a Portfolio's
investment in these securities focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in a Portfolio to
the extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. These difficulties and delays could
result in a Portfolio's inability to realize a favorable price upon disposition
of restricted securities, and in some cases might make disposition of such
securities at the time desired by a Portfolio impossible. Since market
quotations are not readily available for restricted securities, such securities
will be valued by a method that a Portfolio's Trustees believe accurately
reflects fair value.
Forward Commitments. The Domestic Income Portfolio, the Government
Portfolio and the Real Estate Securities Portfolio may purchase or sell U.S.
Government securities (or debt securities with respect to the Real Estate
Securities Portfolio) on a "when-issued" or "delayed delivery" basis ("Forward
Commitments"). These transactions occur when securities are purchased or sold by
the Portfolio with payment and delivery taking place in the future, frequently a
month or more after such transaction. The price is fixed on the date of the
commitment, and the seller continues to accrue interest on the securities
covered by the Forward Commitment until delivery and payment takes place. At the
time of settlement, the market value of the securities may be more or less than
the purchase or sale price.
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Each Portfolio may either settle a Forward Commitment by taking delivery of
the securities or may resell or repurchase a Forward Commitment on or before the
settlement date in which event a Portfolio may reinvest the proceeds in another
Forward Commitment. A Portfolio's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, a Portfolio relies on the other party to
complete the transaction; should the other party fail to do so, a Portfolio
might lose a purchase or sale opportunity that could be more advantageous than
alternative opportunities at the time of the failure.
Each Portfolio maintains a segregated account (which is marked to market
daily) of cash, liquid securities or the security covered by the Forward
Commitment (in the case of a Forward Currency sale) with the Portfolio's
custodian in an aggregate amount equal to the amount of its commitment as long
as the obligation to purchase or sell continues.
Portfolio Turnover. Each Portfolio may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Securities with maturities of less than one year are excluded in the
computation of the portfolio turnover rate. The portfolio turnover rate is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
options on futures contracts on behalf of the Emerging Growth Portfolio, the
Enterprise Portfolio, the Government Portfolio, the Growth and Income Portfolio,
the Real Estate Securities Portfolio or the Strategic Stock Portfolio. The
annual turnover rates of each Portfolio is shown under "Financial Highlights."
The turnover rate for certain Portfolios may exceed 100%, which is higher than
that of many other investment companies. Higher portfolio turnover involves
correspondingly greater transaction costs, including any brokerage commissions,
which are borne directly by a Portfolio. In addition, higher portfolio turnover
may increase the recognition of short-term, rather than long-term, capital
gains. See "Dividends, Distributions and Taxes."
Using Options, Futures Contracts and Options on Futures Contracts. The
Emerging Growth Portfolio, the Enterprise Portfolio, the Government Portfolio,
the Growth and Income Portfolio, the Real Estate Securities Portfolio and the
Strategic Stock Portfolio may purchase or sell options, futures contracts or
options on futures contracts. The Portfolios expect to utilize options, futures
contracts and options thereon in several different ways, depending upon the
status of a Portfolio's portfolio securities and the Adviser's expectations
concerning the securities markets. See the Statement of Additional Information
for a discussion of options, futures contracts and options on futures contracts.
Potential Risks of Options, Futures Contracts and Options on Futures
Contracts. 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 a Portfolio, if the
Adviser is not successful in employing such instruments in managing a
Portfolio's investments, a Portfolio's performance will be worse than if a
Portfolio did not make such investments. In addition, a Portfolio would pay
commissions and other costs in connection with such investments, which may
increase a Portfolio's expenses and reduce its return. Each Portfolio is
authorized to purchase and sell over-the-counter options ("OTC Options"). OTC
Options are purchased from or sold to securities dealers, financial institutions
of other parties ("Counterparties") through direct bilateral agreement with the
Counterparty. A Portfolio will sell only OTC Options (other than
over-the-counter currency options) that are subject to a buy-back provision
permitting a Portfolio to require to the Counterparty to sell the option back to
a Portfolio at a formula price within seven days. The staff of the SEC currently
takes the position that, in general, OTC Options on securities other than U.S.
Government securities purchased by a Portfolio, and portfolio
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securities covering OTC Options sold by a Portfolio, are illiquid securities
subject to a Portfolio limitation on illiquid securities described above. 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 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 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. A more complete discussion of the potential risks involved in
transactions in options, futures contracts and options on futures contracts is
contained in the Statement of Additional Information.
Investment in Investment Companies. The Enterprise Portfolio and the Growth
and Income Portfolio may invest in one or more investment companies advised by
the Adviser and its affiliates, including Van Kampen American Capital Small
Capitalization Fund ("Small Cap Fund") and Van Kampen American Capital Foreign
Securities Fund ("Foreign Securities Fund"). The shares of the Small Cap Fund
and Foreign Securities Fund are available for investment only by certain Van
Kampen American Capital funds. The Adviser believes that the use of the Small
Cap Fund and Foreign Securities Fund may, from time to time, provide such
Portfolios the most effective exposure to the performance of the small
capitalization sector of the stock market and to foreign securities while at the
same time minimizing costs. The advisers charge no advisory fees for managing
the Small Cap Fund or Foreign Securities Fund, nor are there any sales load or
other charges associated with distribution of its shares. Other expenses
incurred by the Small Cap Fund and Foreign Securities Fund are borne by them,
and thus indirectly by the Van Kampen American Capital funds that invest in
them. With respect to such other expenses, the Adviser anticipates that the
efficiencies resulting from use of the Small Cap Fund or the Foreign Securities
Fund will result in cost savings for the Fund and other Van Kampen American
Capital funds. In large part, these savings are attributable to the fact that
administrative actions that would have to be performed multiple times if each
Van Kampen American Capital fund held its own portfolio of small capitalization
or foreign securities will need to be performed only once. The Adviser expects
that the Small Cap Fund and Foreign Securities Fund will experience trading
costs that will be substantially less than the trading costs that would be
incurred if small capitalization or foreign securities were purchased separately
by a Portfolio and other Van Kampen American Capital funds. A Portfolio's
investment in the Small Cap Fund and the Foreign Securities Fund are subject to
the terms and conditions set forth in the SEC exemptive orders authorizing such
investments.
The securities of small and medium sized companies that the Small Cap Fund
may invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies. The securities of foreign issuers
that the Foreign Securities Fund may invest in are subject to certain risks as
described under "Investment Practices -- Foreign Securities."
The Enterprise Portfolio and the Growth and Income Portfolio will each be
deemed to own a pro rata portion of each investment of the Small Cap Fund and
Foreign Securities Fund. For example, if a Portfolio's investment in the Small
Cap Fund were $10 million, and the Small Cap Fund had 5% of
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its assets invested in the electronics industry, the Portfolio would be
considered to have an investment of $500,000 in the electronics industry.
Brokerage Practices. The Adviser is responsible for the placement of orders
for the purchase and sale of portfolio securities for a Portfolio and the
negotiation of brokerage commissions on such transactions. Brokerage firms are
selected on the basis of their professional capability for the type of
transaction and the value and quality of execution services rendered on a
continuing basis. The Adviser may to 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 a 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.
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
each Portfolio may invest which, in turn, may adversely affect the net asset
value of such Portfolio.
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
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foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
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 of the
Trust (the "Combined Portfolios") including the Domestic Income Portfolio, the
Enterprise Portfolio, the Government Portfolio and the Money Market Portfolio.
The Trust and the Adviser are also parties to additional investment advisory
agreements for its remaining portfolios, including four investment advisory
agreements designated herein as "Emerging Growth Advisory Agreement", "Growth
and Income Advisory Agreement", "Real Estate Advisory Agreement" and the
"Strategic Stock Advisory Agreement" pursuant to which the Trust retains the
Adviser to manage the investment of assets and placement orders for the purchase
and sale of portfolio securities for the Emerging Growth Portfolio, the Growth
and Income Portfolio, the Real Estate Securities Portfolio and the Strategic
Stock Portfolio, respectively. The Combined Advisory Agreement, Emerging Growth
Advisory Agreement, Growth and Income Advisory Agreement, Real Estate Advisory
Agreement and Strategic Stock Advisory Agreement are referred to herein
collectively as the "Advisory Agreements".
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. The Trust also pays custodian fees,
legal and auditing fees, trustees' fees (other than those who are affiliated
persons, as defined in 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 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 the combined 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. Each Portfolio pays its
pro rata share of the fee based upon its average daily net assets. The Combined
Advisory Agreement provides that in the event the ordinary business expenses of
certain Portfolios including 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. Expenses subject to such limitation do
not include (1) interest and taxes, (2) brokerage commissions, (3) certain
litigation and indemnification expenses as described in the Combined Advisory
Agreement, and (4) any distribution expenses which may be incurred by a
Portfolio in the event a Distribution Plan is adopted. In addition to the
contractual expense limitation, the Adviser also voluntarily elected to
reimburse the Domestic Income Portfolio, the Enterprise Portfolio, the
Governmental Portfolio and the Money Market Portfolio for all ordinary business
expenses in excess of 0.60% of the average daily net assets. For the fiscal year
ended December 31, 1997, advisory fees plus the cost of accounting services
payable by the Trust, before expense reimbursements, equaled 0.55%, 0.52%, 0.53%
and 0.55% for the Domestic Income Portfolio, the Enterprise Portfolio, the
Government Portfolio and the Money Market Portfolio, respectively, of each
Portfolio's average daily net assets. For the same period, each Portfolio's net
total operating expenses (after fee waivers and expense reimbursements) were
0.60%. In the
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absence of waivers/reimbursements, the total operating expenses would have been
1.05%, 0.66%, 0.74% and 0.98% for the Domestic Income Portfolio, the Enterprise
Portfolio, the Government Portfolio and the Money Market Portfolio. There can be
no assurance the Adviser will continue to waive its fee or reimburse expenses in
the future.
Under the Emerging Growth Advisory Agreement, the Trust pays to the Adviser
as compensation for the services rendered, facilities furnished, and expenses
paid by it a fee payable monthly computed on average daily net assets of the
Emerging Growth Portfolio at an annual rate of 0.70%. For the fiscal year ended
December 31, 1997, advisory fees plus the cost of accounting services payable by
the Trust, before fee waivers and expense reimbursements, were 0.83% of the
Portfolio's average net assets. For the same period, the Portfolio's net total
operating expenses (after fee waivers and expense reimbursements) were 0.85%. In
the absence of waivers/reimbursements, the total operating expenses would have
been 2.14%. There can be no assurance the Adviser will continue to waive its fee
or reimburse expenses in the future.
Under the Growth and Income Advisory Agreement, the Trust pays the Adviser
as compensation for the services rendered, facilities furnished, and expenses
paid by it a fee payable monthly computed on average daily net assets of the
Growth and Income Portfolio at an annual rate of 0.60% of the first $500 million
of the Growth and Income Portfolio's average daily net assets; and 0.55% of the
Growth and Income Portfolio's average daily net assets in excess of $500
million. For the fiscal year ended December 31, 1997, advisory fees plus the
cost of accounting service payable by the Trust before expense reimbursements,
were 0.68% of the Portfolio's average net assets. For the same period, the
Portfolio's net total operating expenses (after fee waivers and expense
reimbursements) were 0.75%. In the absence of waivers/reimbursements, total
operating expenses would have been 1.63%. There can be no assurance that the
Adviser will continue to waive its fees or reimburse expenses in the future.
Under the Real Estate Advisory Agreement, the Trust pays the Adviser a
monthly fee computed on average daily net assets of the Real Estate Securities
Portfolio at the annual rate of 1.00% of the Real Estate Securities Portfolio's
average daily net assets. This fee is higher than that charged by most other
mutual funds but the Trustees believe it is justified by the special nature of
the Real Estate Securities Portfolio and is not necessarily higher than the fees
charged by certain mutual funds with investment objectives and policies similar
to those of the Real Estate Securities Portfolio. For the fiscal year ended
December 31, 1997, advisory fees plus the cost of accounting services payable by
the Trust were 1.01% of the Portfolio's average net assets. For the same period,
the Portfolio's net total operating expenses were 1.07%.
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 net assets and 0.45% of such
Portfolio's average net assets in excess of $500 million. For the fiscal period
ended December 31, 1997, advisory fees plus the cost of accounting services
payable by the Trust before expense reimbursements, were 0.48% of the
Portfolio's average daily net assets. For the same period, the Portfolio's the
net total operating expenses (after fee waivers and expense reimbursements) were
0.61%. In the absence of waivers/reimbursements, total operating expenses would
have been 2.59%. There can be no assurance the Adviser will continue to waive
its fee or reimburse expenses in the future.
From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse any Portfolio for ordinary
business expenses in excess of an agreed upon amount.
With regard to the Money Market Portfolio, the Domestic Income Portfolio
and Government Portfolio, the Adviser may utilize at its own expense credit
analysis, research and trading support
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services provided by its affiliate, Van Kampen American Capital Investment
Advisory Corp. ("Advisory Corp.").
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.
PORTFOLIO MANAGEMENT. The Portfolios have different portfolio managers.
Each portfolio manager is an employee of the Adviser.
Walter W. Stabell, III is primarily responsible for the day-to-day
management of the Domestic Income Portfolio's investment portfolio. Mr. Stabell
is a Vice President and Portfolio Manager of the Adviser. From December, 1986 to
August, 1989 Mr. Stabell was a Senior Securities Analyst of the Adviser. Mr.
Stabell has been primarily responsible for managing the Portfolio's investment
portfolio since June, 1990.
The Emerging Growth Portfolio is managed by a management team headed by
Gary M. Lewis. Mr. Lewis has been primarily responsible for managing the
Portfolio's investment portfolio since its inception. Mr. Lewis has been Senior
Vice President and Portfolio Manager of the Adviser since October 1995. Prior to
that Mr. Lewis was Vice President and Portfolio Manager of the Adviser. Dudley
Brickhouse, David Walker and Janet Willis are responsible as co-managers for the
day-to-day management of the Emerging Growth Portfolio's investment portfolio.
Mr. Brickhouse has been an Associate Portfolio Manager of the Adviser since
September 1997. Prior to that Mr. Brickhouse was with NationsBank Investment
Management. Mr. Walker has been an Assistant Vice President of the Adviser since
June 1995. Prior to that Mr. Walker was a Quantitative Analyst of the Adviser.
Ms. Willis has been an Assistant Vice President of the Adviser since December
1997. Prior to that Ms. Willis was Associate Portfolio Manager of the Adviser.
Prior to July 1995, Ms. Willis was with AIM Capital Management, Inc.
The Enterprise Portfolio is managed by a management team headed by Jeff
New. Mr. New has been primarily responsible for managing the Fund's investment
portfolio since March 1996. Mr. New has been Senior Vice President and Portfolio
Manager of the Adviser and Advisory Corp. since December 1997. Prior to December
1997, Mr. New was Vice President and Portfolio Manager of the Adviser and
Advisory Corp. Prior to 1994, Mr. New was Associate Portfolio Manager of the
Adviser. Evan Harrel and Michael Davis are responsible as co-managers for the
day-to-day management of the Fund's investment portfolio. Mr. Harrel has been
Vice President of the Adviser and Advisory Corp. since October 1996. Prior to
that Mr. Harrel was Associate Portfolio Manager of the Adviser. Prior to May
1994, Mr. Harrel was a Vice President with Fayez Sarofim and Co. Mr. Davis has
been Vice President and Portfolio Manager of the Adviser and Advisory Corp.
since March 1998. Mr. Davis has been an investment professional since 1983 and
was most recently the owner of Davis Equity, a stock research company.
John R. Reynoldson is primarily responsible for the day-to-day management
of the Government Portfolio's investment portfolio. Mr. Reynoldson has been
Senior Vice President of the Adviser since July, 1991. Mr. Reynoldson has been
primarily responsible for managing the Portfolio's investment portfolio since
December, 1989.
David R. Troth is primarily responsible for the day-to-day management of
the Money Market Portfolio's investment portfolio. Mr. Troth has been Senior
Vice President of the Adviser since March, 1978. Mr. Troth has been primarily
responsible for managing the Portfolio's investment portfolio since its
inception.
The Growth and Income Portfolio is managed by a management team headed by
James A. Gilligan. Bret Stanley and Scott Carroll are responsible as co-managers
for the day-to-day
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management of the Growth and Income Portfolio's investment portfolio. Mr.
Gilligan and Mr. Stanley have been responsible for managing the Portfolio's
investment portfolio since its inception. Mr. Gilligan has been Senior Vice
President and Portfolio Manager of the Adviser since September 1995. Prior to
that Mr. Gilligan was Vice President and Portfolio Manager of the Adviser. Mr.
Stanley has been Vice President and Portfolio Manager of the Adviser since
October 1996. Prior to that time, Mr. Stanley was Assistant Vice President and
Associate Portfolio Manager of the Adviser. Prior to January 1995, Mr. Stanley
was a Portfolio Manager with Gulf Investment Management. Mr. Carroll has been
Associate Portfolio Manager of the Adviser since December 1996. Prior to that
Mr. Carroll was an Equity Analyst with Lincoln Capital Management Company. Prior
to September 1992, Mr. Carroll was a Senior Internal Auditor with Pittway
Corporation.
Russell C. Platt and Theodore R. Bigman assumed responsibility for the
day-to-day management of the Morgan Stanley Real Estate Securities Portfolio's
investment portfolio effective January 1, 1997. Mr. Platt became Executive Vice
President of the Adviser on December 31, 1996. Since 1994, Mr. Platt has also
been a Principal, and as of December 1, 1996, a Managing Director, of Morgan
Stanley Asset Management Inc. ("MSAM") where he has primary responsibility for
managing the real estate securities investment business for MSAM and serves as a
member of the Investment Committee of The Morgan Stanley Real Estate Fund
("MSREF"). From 1991 to 1993, Mr. Platt was head of Morgan Stanley Realty's
Transaction Development Group. From 1990 to 1991, Mr. Platt was based in Morgan
Stanley Realty's London Office. Prior to this he had extensive transaction
responsibilities involving portfolio, retail, office, hotel and apartment sales
and financings. Mr. Bigman became Senior Vice President of the Adviser on
December 31, 1996. Since 1995, Mr. Bigman has also been a Vice President, and as
of December 1, 1996, a Principal, of MSAM where, together with Mr. Platt, he is
responsible for MSAM's real estate securities research. Prior to joining MSAM,
he was a Director at CS First Boston, where he worked for eight years in the
Real Estate Group.
John Cunniff has been primarily responsible for the day-to-day management
of the Strategic Stock Portfolio's investment portfolio since its inception. Mr.
Cunniff is a Vice President of the Adviser and Advisory Corp. and has been
employed by the Adviser since October 1995. Prior to that time, Mr. Cunniff was
Vice President, Portfolio Manager at Templeton Quantitative Advisors.
PURCHASE OF SHARES
The Trust is offering its shares only to Accounts of various insurance
companies to fund the benefits of variable annuity or variable life insurance
contracts. The Trust does not foresee any disadvantage to holders of Contracts
arising out of the fact that the interests of the holders may differ from the
interests of holders of life insurance policies and that holders of one
insurance policy may differ from holders of other insurance policies.
Nevertheless, the Trust's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken. The Contracts are described in the
separate prospectuses issued by the Participating Insurance Companies. The Trust
continuously offers shares in each of the Portfolios to the Accounts at prices
equal to the respective per share net asset value of the Portfolio. The
Distributor, located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
acts as the distributor of the shares. Net asset value is determined in the
manner set forth below under "Determination of Net Asset Value."
DETERMINATION OF NET ASSET VALUE
Net asset value per share is computed for each Portfolio as of the close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. See the accompanying Prospectus for the policies for
information regarding holidays observed by the insurance company. Net asset
value of each Portfolio is determined by adding the total market value of all
portfolio securities held by the Portfolio, cash and other assets, including
accrued interest. All liabilities, including accrued expenses, of the Portfolio
are subtracted. The resulting amount is divided by the
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total number of outstanding shares of the Portfolio to arrive at the net asset
value of each share. See "Determination of Net Asset Value" in the Statement of
Additional Information for further information.
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which the
last sales price is not available are valued at the most recent bid price. U.S.
Government and agency obligations are valued at the last reported bid price.
Listed options are valued at the last reported sale price in the exchange on
which such option is traded or, if no sales are reported, at the mean between
the last reported bid and asked prices. Options for which market quotations are
not readily available are valued at a fair value by the Adviser based on
procedures approved by the Trustees. Short-term investments for all Portfolios
other than the Money Market Portfolio are valued as described in the notes to
financial statements in the Statement of Additional Information.
The Money Market Portfolio's assets are valued on the basis of amortized
cost, which involves valuing a portfolio security at its cost, assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the security. While
this method provides certainty in valuation, it may result in periods in which
value as determined by amortized cost is higher or lower than the price the
Portfolio would receive if it sold the security. During such periods, the yield
to investors in the Portfolio may differ somewhat from that obtained in a
similar fund which uses available market quotations to value all of its
portfolio securities.
REDEMPTION OF SHARES
Payment for shares tendered for redemption by the insurance company is made
ordinarily in cash within seven days after tender in proper form, except under
unusual circumstances as determined by the SEC. The redemption price will be the
net asset value next determined after the receipt of a request in proper form.
The market value of the securities in each Portfolio is subject to daily
fluctuations and the net asset value of each Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions of each Portfolio are
automatically reinvested by the Account in additional shares of such Portfolio.
Shares of the Money Market Portfolio and Government Portfolio become
entitled to income distributions declared on the day the shareholder service
agent receives payment of the purchase price in the form of federal funds. Such
shares do not receive income distributions declared on the date of redemption.
Dividends of the Money Market Portfolio. The Money Market Portfolio
declares income dividends each business day. The Portfolio's net income for
dividend purposes is calculated daily and consists of interest accrued or
discount earned, plus or minus any net realized gains or losses on portfolio
securities, less any amortization of premium and the expenses of the Portfolio.
Dividends and Distributions of the Domestic Income Portfolio, the Emerging
Growth Portfolio, Enterprise Portfolio, the Growth and Income Portfolio, the
Real Estate Securities Portfolio and the Strategic Stock Portfolio. Dividends
from stocks and interest earned from other investments are the main source of
income for these Portfolios. Substantially all of this income, less expenses, is
distributed on an annual basis. When a Portfolio sells portfolio securities, it
may realize capital gains or losses, depending on whether the prices of the
securities sold are higher or lower than the prices the Portfolio paid to
purchase them. Net realized capital gains represent the total profit from sales
of securities minus total losses from sales of securities including any losses
carried forward from prior
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years. Each of these Portfolios distributes any net realized capital gains to
the Account no less frequently than annually.
Dividends and Distributions of the Government Portfolio. The Government
Portfolio declares income dividends each business day. Such dividends are
distributed monthly. The daily dividend is a fixed amount determined at least
monthly which is expected not to exceed the net income of the Portfolio for the
month divided by the number of business days in the month. The Government
Portfolio intends to distribute monthly, or on such other basis as may be
determined from time to time by the Trustees, its net realized short-term
capital gains, including such gains realized from net premiums received from
expired options, net gains from closing purchase transactions and net short-term
gains from securities sold upon the exercise of options or otherwise, less any
net realized long-term capital loss. Net realized long-term capital gains, if
any, are generally distributed at least annually.
Tax Status of the Portfolios. Each Portfolio has elected to be taxed as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). By maintaining its qualification as a "regulated
investment company," a 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 a 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 each Portfolio from its ordinary income and distributions
of each 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 a
Portfolio represents dividends on equity securities rather than interest income,
its distributions are eligible for the 70% dividends received deduction
applicable in the case of a life insurance company as provided in the Code. The
Trust will send to the Account a written notice required by the Code designating
the amount and character of any distributions made during such year.
Under the Code, any distributions designated as being made from a
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 a 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 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
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avoid income and excise taxes. Each 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 Portfolios, except the Money Market Portfolio, may
advertise their total return for prior periods. Any such advertisement would
include at least average annual total return quotations for one, five and ten
year periods or for the life of the Portfolio. Other total return quotations,
aggregate or average, over other time periods may also be included. Total return
calculations do not take into account expenses at the "wrap" or contractholder
level. Investors should also review total return calculations that include those
expenses.
The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio from the beginning to the end of the period. Total return is
calculated by subtracting the value of the initial investment from the ending
value and showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the maximum public
offering price and that all income dividends or capital gains distributions
during the period are reinvested in Portfolio shares at net asset value. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Portfolio.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, certain Portfolios may also
advertise their current "yield." Yield figures are based on historical earnings
and are not intended to indicate future performance. Yield is determined by
analyzing the Portfolio's net income per share for a 30-day (or one-month)
period (which period will be stated in the advertisement), and dividing by the
maximum offering price per share on the last day of the period. A "bond
equivalent" annualization method is used to reflect a semiannual compounding.
Yield calculations do not take into account expenses at the "wrap" or
contractholder level. Investors should also review yield calculations that
include those expenses.
From time to time, certain Portfolios may include in their sales literature
and shareholder reports a quotation of the current "distribution rate" for
shares of the Portfolio. Distribution rate is a measure of the level of income
and short-term capital gain dividends, if any, distributed for a specified
period. Distribution rate differs from yield, which is a measure of the income
actually earned by the Portfolio's investments, and from total return, which is
a measure of the income actually earned by, plus the effect of any realized and
unrealized appreciation or depreciation of, such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Portfolio's performance. Distribution rate may sometimes be greater than
yield since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Portfolio.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Portfolio in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Portfolio's then current dividend rate.
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A Portfolio's yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by a Portfolio, portfolio maturity and
a Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Adviser may, from time to time, waive advisory fees or reimburse a
certain amount of the future ordinary business expenses of a Portfolio. Such
waiver/reimbursement will increase the yield or total return of a Portfolio. The
Adviser may stop waiving fees or reimbursing expenses at any time without prior
notice.
From time to time the Money Market Portfolio advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Portfolio refers
to the income generated by an investment in the Portfolio over a seven-day
period (which period will be stated in the advertisement). This income is then
"annualized." That is, the amount of income generated by the investment during
that week is assumed to be generated each week over a 52-week period and is
shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the
Portfolio is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. The current and effective yields for the seven-day period ending
December 31, 1997, and a description of the method by which the yield was
calculated is contained in the Statement of Additional Information.
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in the Portfolio's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is generally a function of the kind and quality of the instrument held in a
portfolio, portfolio maturity, operating expenses and market conditions.
In reports or other communications to shareholders or in advertising
material, a Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, the MSCI Index, Salomon Brothers High Grade Bond 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. 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.
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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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APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE'S BOND RATINGS:
AAA -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great period of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NONRATED -- Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
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Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S BOND RATINGS:
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -- B -- CCC -- CC -- Bonds rated BB, B, CCC and CC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
D -- Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR -- Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS:
Both Moody's and S&P use the same designations for corporate bonds as they
do for preferred stock except in the case of Moody's preferred stock ratings the
initial letter rating is not capitalized. While the descriptions are tailored
for preferred stocks and relative quality distinctions are comparable to those
described above for corporate bonds.
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EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE PORTFOLIO'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 421-2833
VAN KAMPEN AMERICAN CAPITAL
LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
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
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LIFE INVESTMENT TRUST
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
- ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
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VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1998
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in ten
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
Enterprise Portfolio and the Strategic Stock Portfolio (the "Portfolios"), two
of the Trust's ten portfolios, are described herein and offered by this
Prospectus. The investment objectives of the two portfolios are as follows:
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ENTERPRISE PORTFOLIO (formerly known as the Common Stock Fund) seeks
capital appreciation through investments believed by the Adviser to have
above average potential for capital appreciation.
STRATEGIC STOCK PORTFOLIO seeks to provide investors with an above average
total return through a combination of potential capital appreciation and
dividend income, 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 (the "DJIA") or in the Morgan
Stanley Capital International USA Index (the "MSCI Index"). Subject to the
Portfolio's other investment policies and restrictions, the Portfolio
attempts to achieve its investment objective by investing primarily in a
portfolio of actively traded equity securities comprised of (i) high
dividend yield stocks periodically selected from the companies included in
the DJIA and (ii) high dividend yield stocks periodically selected from a
pre-screened subset of the companies included in the MSCI Index. A
security's dividend yield is a primary factor in the security selection
process. The MSCI Index is the property of Morgan Stanley Capital
International ("MSCI"). MSCI has granted a license for use by the Trust of
the MSCI Index and related trademarks and tradenames. The DJIA is the
property of Dow Jones & Company, Inc. Dow Jones & Company, Inc. has not
granted to the Strategic Stock Portfolio a license to use the DJIA. Neither
MSCI nor Dow Jones & Company, Inc. has participated in any way in the
creation of the Strategic Stock Portfolio or in the selection of the stocks
included in such Portfolio and neither has approved any information herein
relating thereto. Shares of the Strategic Stock Portfolio are not designed
so that their prices will parallel or correlate with any movements in the
DJIA or the MSCI Index, and it is expected that their prices will not
parallel or correlate with such movements.
There is no assurance that any Portfolio will achieve its investment
objectives.
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This Prospectus tells Contract Owners briefly the information they should
know before allocating premiums or cash value to a Portfolio. Investors should
read and retain this Prospectus for future reference.
THE SHARES OF THE PORTFOLIOS 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 containing
additional information about the Trust and the Portfolios is hereby incorporated
in its entirety into this Prospectus. A copy of the Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 421-2833. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials 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> 112
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri 64141-9256
DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
</TABLE>
TABLE OF CONTENTS
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Page
<S> <C>
Prospectus Summary....................... 3
Financial Highlights..................... 6
Introduction............................. 8
Investment Objectives and Policies....... 8
Enterprise Portfolio................... 8
Strategic Stock Portfolio.............. 9
Investment Practices..................... 11
The Trust and Its Management............. 16
</TABLE>
<TABLE>
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Page
<S> <C>
Purchase of Shares....................... 18
Determination of Net Asset Value......... 19
Redemption of Shares..................... 19
Dividends, Distributions and Taxes....... 19
Portfolio Performance.................... 20
Description of Shares of the Trust....... 22
Additional Information................... 22
</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> 113
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in two Portfolios: the
Enterprise Portfolio and the Strategic Stock Portfolio
(collectively, the "Portfolios"), separate portfolios of
the Van Kampen American Capital Life Investment Trust
(the "Trust").
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Enterprise Portfolio seeks capital appreciation
through investments in securities believed by the
Adviser (defined below) to have above average potential
for capital appreciation. The Strategic Stock Portfolio
seeks above average total return through a combination
of potential capital appreciation and dividend income,
consistent with the preservation of invested capital, by
investing primarily in a portfolio of dividend paying
equity securities included in the DJIA or in the MSCI
Index. There can be no assurance that any Portfolio will
achieve its investment objective.
Investment Policies and
Risk Factors..........The Enterprise Portfolio invests principally in common
stocks of companies which, in the judgment of the
Adviser (defined below), have above average potential
for capital appreciation. Because prices of common
stocks and other securities fluctuate, the value of an
investment in the Portfolio will vary based upon the
Portfolio's investment performance. Use of options,
futures contracts and options on futures contracts may
include additional risk. See "Investment Practices --
Using Options, Futures Contracts and Options on Futures
Contracts."
The Strategic Stock Portfolio invests primarily in
dividend paying equity securities of companies included
in the DJIA or in the MSCI Index. The Portfolio
initially invested approximately equally in 20
securities identified by the Adviser (defined below)
based on the Portfolio's strategic selection policies as
described below (the "Strategic Selection Policies").
The ten highest dividend yielding securities in the DJIA
are identified for investment. In addition, all
companies having securities in the MSCI Index are
reviewed by the Adviser and securities of companies in
the financial or utility sectors and of companies having
securities included in the DJIA are excluded. The
remaining pool of MSCI Index securities is further
evaluated and securities of companies that do not have
positive one- and three-year sales and earnings growth
rates and two years of positive dividend growth are
excluded. The Adviser also excludes MSCI Index
securities that are in the bottom 25% of all MSCI Index
securities measured in terms of total annual trading
volume. MSCI Index securities of the remaining companies
are ranked by dividend yield, and the ten
highest-yielding such MSCI Index securities are
identified for investment. The 20 securities so
identified (the "Strategic Securities") represented the
Portfolio's initial investments. The Adviser
periodically employs the same Strategic Selection
Policies to identify a new list of 20 Strategic
Securities and reviews and adjusts
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<PAGE> 114
a portion or all of the Portfolio's assets so as to
invest that portion of the Portfolio's assets
approximately equally in the new list of 20 Strategic
Securities. In this manner, the Adviser expects that
each security in the Portfolio will be reviewed and
potentially adjusted approximately annually. Application
of the Strategic Selection Policies will be subject to
and limited by certain of the Portfolio's other
investment policies and restrictions, including
restrictions and limitations which must be met in order
for the Portfolio to qualify to be treated for U.S.
federal income tax purposes as a "regulated investment
company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), or in order to comply
with requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") (such as investment
diversification requirements and industry concentration
limitations). In addition, the Adviser will try to avoid
transacting in odd-lots of securities in order to
minimize transaction costs. These limitations may, at
times, cause the composition of the Portfolio's
investment portfolio to differ significantly from that
which would have resulted had the Strategic Selection
Policies been fully implemented. Although each new list
of Strategic Securities will include only 20 securities,
because only a portion of the Portfolio's assets may be
reviewed and adjusted at any given time, the Adviser
expects that the number of securities held by the
Portfolio will over time increase and that the Portfolio
may at times hold forty or more different securities.
Except to raise cash for operational purposes, the
Portfolio ordinarily will not sell securities or
reevaluate its portfolio investments except as
periodically determined by the Adviser. As a result, the
adverse financial condition of a company will not result
in its elimination from the Portfolio, except under
extraordinary circumstances. Risks associated with an
investment in the Portfolio include the possible
deterioration of either the financial condition of the
issuers or the general condition of the stock market,
and general price volatility. The relatively high
dividend yield (calculated based on the current stock
price and the annualized most recent dividend payment
amount) of certain securities that the Portfolio may
acquire may reflect the market's assessment of the risk
that the company may reduce or eliminate the dividend in
the current period or in the future, or otherwise
reflect the market's unfavorable assessment of the
company's performance outlook. The Adviser generally
will not take these considerations into account in
implementing the Strategic Selection Policies. 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. (the
"Adviser") is the investment adviser for each Portfolio.
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Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes each Portfolio's shares.
Dividends and
Distributions.........Dividends and any capital gains are declared and
distributed annually.
The foregoing is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this
Prospectus.
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FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the related financial statements and notes thereto included in the Statement of
Additional Information.
ENTERPRISE PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70 $7.97
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Net Investment Income.............. .091 .113 .32 .25 .21 .23 .265 .395 .40 .32
Net Realized and Unrealized
Gain/Loss........................ 4.734 3.417 4.22 (.7625) 1.0325 .77 3.37 (1.17) 2.57 .765
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Total from Investment Operations..... 4.825 3.530 4.54 (.5125) 1.2425 1.00 3.635 (.775) 2.97 1.085
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Less:
Distributions from Net Investment
Income........................... .096 .109 .3175 .25 .215 .23 .285 .435 .37 .30
Distributions from Net Realized
Gain............................. 2.885 1.849 1.9225 1.4175 .6675 -0- -0- -0- -0- .055
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Total Distributions.................. 2.981 1.958 2.24 1.6675 .8825 .23 .285 .435 .37 .355
------- ------- ------ ------ ------ ------ ------ ------ ------ -------
Net Asset Value, End of the Period... $18.106 $16.262 $14.69 $12.39 $14.57 $14.21 $13.44 $10.09 $11.30 $8.70
======= ======= ====== ====== ====== ====== ====== ====== ====== =======
Total Return*........................ 30.66% 24.80% 36.98% (3.39%) 8.98% 7.48% 36.41% (6.84%) 34.23% 13.61%
Net Assets at End of the Period (In
millions).......................... $98.7 $84.8 $76.0 $67.5 $72.3 $65.6 $57.8 $27.2 $31.8 $24.0
Ratio of Expenses to Average Net
Assets*............................ .60% .60% .60% .60% .60% .60% .60% .60% .60% .60%
Ratio of Net Investment Income to
Average Net Assets*................ .47% .68% 2.06% 1.72% 1.41% 1.78% 2.33% 3.64% 3.74% 3.13%
Portfolio Turnover................... 82% 152% 145% 153% 139% 116% 95% 122% 86% 63%
Average Commission Paid per Equity
Share Traded(1).................... $.0566 $.0435 -- -- -- -- -- -- -- --
*If certain expenses had not been
assumed by the Adviser. Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net
Assets............................. .66% .75% .68% .68% .72% .74% .90% .93% .93% .95%
Ratio of Net Investment Income to
Average Net Assets................. .41% .53% 1.98% 1.64% 1.29% 1.64% 2.03% 3.31% 3.41% 2.78%
</TABLE>
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(1)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
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FINANCIAL HIGHLIGHTS (CONTINUED)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the most
recent fiscal period) is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
STRATEGIC STOCK PORTFOLIO
<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%(1)
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%(1)
Average Commission Paid per Equity Share Traded(2).......... $.0282
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets..................... 2.59%
Ratio of Net Investment Income to Average Net Assets........ .68%
</TABLE>
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(1) Non-Annualized
(2)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable.
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INTRODUCTION
The Trust is a duly organized Delaware business trust with ten separate
portfolios. The Enterprise Portfolio and the Strategic Stock Portfolio are the
only portfolios of the Trust which are described herein and offered pursuant to
this Prospectus. Each portfolio has separate assets and liabilities and a
separate net asset value per share. Shares of 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 OBJECTIVES AND POLICIES
Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. See "Investment
Practices" for further discussion of investment techniques and strategies. The
investment objective of each Portfolio described herein is a fundamental policy
and may not be changed without shareholder approval. The differences in
objectives and policies among the Portfolios can be expected to affect the
return of each Portfolio and the degree of market and financial risk to which
each Portfolio is subject.
ENTERPRISE PORTFOLIO
The investment objective of the Enterprise Portfolio is to seek capital
appreciation through investments in securities believed by the Adviser to have
above average potential for capital appreciation. Any income received on such
securities is incidental to the objective of capital appreciation.
The Portfolio invests principally in growth common stocks. Such securities
generally include those of companies with established records of growth in sales
or earnings, and companies with new products, new services, or new processes.
The Portfolio may also invest in companies in cyclical industries during periods
when their securities appear attractive to the Adviser for capital appreciation.
In addition to common stock, the Portfolio may invest in warrants and preferred
stocks, and in investment companies. See "Investment Practices -- Investment in
Investment Companies."
The Portfolio generally holds a portion of its assets in investment grade
short-term debt securities and investment grade corporate or government bonds in
order to provide liquidity. Such investments may be increased to up to 100% of
the Portfolio's assets when deemed appropriate by the Adviser for temporary
defensive purposes. Short-term investments may include repurchase agreements
with banks or broker-dealers. See "Investment Practices -- Repurchase
Agreements."
The Portfolio's primary approach is to seek what the Adviser believes to be
attractive growth investments on an individual company basis. The Portfolio may
invest in securities that have above average volatility of price movement.
Because prices of common stocks and other securities fluctuate, the value of an
investment in the Portfolio will vary based upon the Portfolio's investment
performance. The Portfolio attempts to reduce overall exposure to risk from
declines in securities prices by spreading its investments over many different
companies in a variety of industries. There is, however, no assurance that the
Portfolio will be successful in achieving its objective. The Portfolio may also
invest in debt securities of foreign issuers, including non-U.S. dollar
denominated debt securities, Eurodollar securities and securities issued,
assumed or guaranteed by foreign governments or political subdivisions or
instrumentalities thereof. The Portfolio will limit its investment in foreign
securities to 10% of its total assets, taken at market value at the time of each
investment. See "Investment Practices -- Foreign Securities." The Portfolio may
engage in portfolio management strategies and techniques involving options,
futures contracts and options on futures. Options, futures contracts and options
on futures contracts are described in "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
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STRATEGIC STOCK PORTFOLIO
General. The investment objective of the Strategic Stock Portfolio is to
seek an above average total return through a combination of potential capital
appreciation and dividend income, consistent with the preservation of invested
capital.
The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI Index. The DJIA was
first published in The Wall Street Journal in 1896. Initially consisting of just
12 stocks, the DJIA expanded to 20 stocks in 1916 and to its present size of 30
stocks on October 1, 1928. The MSCI Index consists of approximately 370 large
domestic companies in the United States and has existed since January 1, 1970.
In selecting securities for the Fund, the Adviser intends to follow the
following policies (the "Strategic Selection Policies").
The ten highest dividend yielding securities in the DJIA are identified for
investment. In addition, all companies having securities in the MSCI Index are
reviewed by the Adviser and securities of companies in the financial or utility
sectors and of companies having securities included in the DJIA are excluded.
The remaining pool of MSCI Index securities is further evaluated and securities
of companies that do not have positive one- and three-year sales and earnings
growth rates and two years of positive dividend growth are excluded. The Adviser
also excludes MSCI Index securities that are in the bottom 25% of all MSCI Index
securities measured in terms of total annual trading volume. MSCI Index
securities of the remaining companies are ranked by dividend yield, and the ten
highest-yielding such MSCI Index securities are identified for investment. In
the event that this process results in less than 10 remaining MSCI Index
securities, those companies with the most favorable one- and three-year sales
and earnings performance and two-year dividend performance as determined by the
Adviser are added back until the number of MSCI Index securities equals 10.
Dividend yield for purposes of applying the foregoing investment policies is
calculated for each security by annualizing the last quarterly or semi-annual
ordinary dividend declared on the security and dividing the result by the
security's closing sale price on the applicable date. This yield is historical
and there can be no assurance that any dividends will be declared or paid in the
future.
The 20 securities so identified (the "Strategic Securities") represented
the Portfolio's initial investments. The Adviser periodically employs the same
Strategic Selection Policies to identify a new list of 20 Strategic Securities
and reviews and adjusts a portion or all of the Portfolio's assets so as to
invest that portion of the Portfolio's assets approximately equally in the new
list of 20 Strategic Securities. In this manner, the Adviser expects that
beginning with the reevaluation in month thirteen each security in the Portfolio
will be reviewed and potentially adjusted approximately annually, although
reviews and adjustments may be made more frequently. For a more detailed
discussion of the Portfolio's investment policies, including the frequency of
security reevaluations and the portion of the Portfolio's assets that the
Adviser presently expects to reevaluate at the end of each period, see the
Statement of Additional Information.
The Adviser generally seeks to allocate cash available for investment due
to the sale of new Shares of the Portfolio and the receipt of dividends and
interest income from the portfolio investments approximately proportionately
among the current list of Strategic Securities in the Portfolio. To the extent
that the Strategic Stock Portfolio is required to dispose of securities in order
to satisfy redemption requests, make distributions, pay expenses or otherwise
raise cash for operational purposes, the Adviser generally intends to sell
approximately proportionate amounts of securities from all securities in the
Portfolio.
Application of the foregoing Strategic Selection Policies will be subject
to and limited by certain of the Portfolio's other investment policies and
restrictions, including restrictions and limitations which must be met in order
for the Portfolio to qualify to be treated for U.S. federal income tax purposes
as a "regulated investment company" under Subchapter M of the Code or in order
to comply with requirements of the 1940 Act. The Portfolio is subject to
investment diversification requirements that generally provide that the
Portfolio may not, with respect to 75% of its assets,
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invest more than 5% of its assets in the securities of any one issuer or
purchase more than 10% of the outstanding voting securities of any one issuer.
Further, the Portfolio generally may not invest more than 25% of the value of
its total assets in securities of issuers in any particular industry. The
Portfolio's satisfaction of these requirements will take precedent over the
Strategic Selection Policies. In addition, the Adviser will try to avoid
transacting in odd-lots of securities in order to minimize transaction costs.
These limitations may, at times, cause the composition of the Portfolio's
investment portfolio to differ significantly from that which would have resulted
had the Strategic Selection Policies been fully implemented. In selecting
securities for investment or disposition at times that the Portfolio's
investment policies and restrictions do not permit full implementation of the
Strategic Selection Policies, the Adviser will have sole discretion to select
securities for purchase or sale and generally will make such selections in a
manner that is consistent with the Portfolio's investment objective and in a
manner that it believes is consistent with the investment rationale that is the
basis for the Strategic Selection Policies.
The Portfolio will continue to hold securities, even though such securities
may not be included in the most recent list of Strategic Securities determined
for the review and adjustment of a portion of the Portfolio's assets. In
addition, although each new list of Strategic Securities will include only 20
securities, because only a portion of the Portfolio's assets may be reviewed and
adjusted at any given time, the Adviser expects that the number of securities
held by the Portfolio may over time increase and that the Portfolio may at times
hold forty or more different securities.
The Strategic Stock Portfolio may invest up to 5% of its total assets in
options on equity securities indices, futures contracts on such indices and
options on such futures contracts for both hedging purposes and in an attempt to
enhance gain. The Strategic Stock Portfolio also may invest up to 5% of its
total assets in securities of other registered investment companies that seek to
provide investment results that generally correspond to the performance of
securities included in one or more broad market indices. Investment in
securities of other investment companies will subject the Portfolio to
additional and potentially duplicative costs and expenses, including investment
management fees charged by such registered investment companies. Pending
investment and for temporary defensive purposes the Portfolio may invest without
limit in short-term, high quality fixed income securities and in money-market
instruments. The Adviser expects that the portfolio turnover rate for the
Strategic Stock Portfolio will not exceed 100%. A high rate of portfolio
turnover may result in increased brokerage and other transaction expenses.
The DJIA is the property of Dow Jones & Company, Inc. Dow Jones & Company,
Inc. has not granted to the Strategic Stock Portfolio a license to use the DJIA.
Dow Jones & Company, Inc. has not participated in any way in the creation of the
Strategic Stock Portfolio or in the selection of the stocks included in such
Portfolio and has not approved any information herein relating thereto. Shares
of the Strategic Stock Portfolio are not designed so that their prices will
parallel or correlate with any movements in the DJIA, and it is expected that
their prices will not parallel or correlate with such movements.
The Strategic Stock Portfolio is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of shares of the Portfolio or any member of the public
regarding the advisability of investing in investment portfolios generally or in
the Strategic Stock Portfolio particularly or the ability of the MSCI Index to
track general stock market performance. Morgan Stanley is the licensor of
certain trademarks, service marks and trade names of Morgan Stanley and of the
MSCI Index which is determined, composed and calculated by Morgan Stanley
without regard to this Portfolio. Morgan Stanley has no obligation to take the
needs of this Portfolio or the owners of this Portfolio into consideration in
determining, composing or calculating the MSCI Index. Morgan Stanley is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of this Portfolio to be issued. Morgan Stanley has no
obligation or liability to owners of this Portfolio in connection with the
administration, marketing or trading of this Portfolio.
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ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR
USE IN THE CALCULATION OF THE INDICES FROM SOURCES WHICH MORGAN STANLEY
CONSIDERS RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE
ACCURACY AND/OR THE COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN.
NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE INDICES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER
PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY
OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
Risk Factors. There is no guarantee that the investment objective of the
Portfolio will be achieved because it is subject to the continuing ability of
the respective issuers of equities in which the Portfolio invests to declare and
pay dividends and because the market value of such equities can be affected by a
variety of factors. Common stocks may be especially susceptible to general stock
market movements and to volatile increases and decreases of value as market
confidence in and perceptions of the issuers change. There can be no assurance
that the value of the underlying securities will increase or that the issuers of
the securities will pay dividends on outstanding securities. The declaration of
dividends by any issuer depends upon several factors including the financial
condition of the issuer and general economic conditions. Risks associated with
an investment in the Portfolio include the possible deterioration of either the
financial condition of the issuers or the general condition of the stock market,
and general price volatility. The relatively high dividend yield of certain
securities that the Portfolio will acquire may reflect the market's assessment
of the risk that the company may reduce or eliminate the dividend in the current
period or in the future, or otherwise reflect the market's unfavorable
assessment of the company's performance outlook. The Adviser generally will not
take these considerations into account in implementing the Strategic Selection
Policies and, accordingly, the Portfolio may at times acquire securities of
companies that the market and the Adviser believe are more susceptible to
financial difficulty and corresponding adverse market performance than are other
companies with securities included in the DJIA or in the MSCI Index.
In addition, investors should be aware that the Portfolio is not "actively
managed." Except to raise cash for operational purposes, the Portfolio
ordinarily will not sell securities or reevaluate its portfolio investments
except as periodically determined by the Adviser. In addition, only a portion of
the Portfolio's assets may be reviewed and adjusted for any given period. As a
result, although the Portfolio may (but need not) dispose of a security in
certain events such as the issuer having defaulted on the payment on any of its
outstanding obligations or the price of a security having declined to such an
extent or other factors existing so that in the opinion of the Adviser the
retention of such security would be detrimental to the Portfolio, the adverse
financial condition of a company will not result in its elimination from the
Portfolio prior to scheduled review and adjustment except under extraordinary
circumstances. Similarly, securities held in the Portfolio ordinarily will not
be sold by the Portfolio for the purpose of taking advantage of market
fluctuations or changes in anticipated rates of appreciation.
INVESTMENT PRACTICES
Repurchase Agreements. Each Portfolio may enter into repurchase agreements
with banks or broker-dealers which are deemed creditworthy by the Adviser under
guidelines approved by the
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Trustees. A repurchase agreement is a short-term investment in which the
purchaser (i.e., a Portfolio) acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and set price,
thereby determining the yield during the purchaser's holding period. Repurchase
agreements involve certain risks in the event of a default by the other party.
In the event of a bankruptcy or other default of the seller of a repurchase
agreement, a Portfolio could experience delays and expenses in liquidating the
underlying securities and a Portfolio could incur losses including: (a) possible
decline in the value of the underlying security during the period while a
Portfolio seeks to enforce its rights thereto, (b) possible lack of access to
income on the underlying security during this period, and (c) expenses of
enforcing its rights. No Portfolio will invest in repurchase agreements maturing
in more than seven days if any such investment, together with any other illiquid
securities held by such Portfolio, exceeds the Portfolio's limitation in
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
Portfolios than would be available to the Portfolios investing separately. The
manner in which the joint account is managed is subject to conditions set forth
in the SEC exemptive order authorizing this practice, which conditions are
designed to ensure the fair administration of the joint account and to protect
the amounts in that account.
Loans of Portfolio Securities. Each Portfolio may lend portfolio
securities to unaffiliated brokers, dealers and financial institutions provided
that (a) immediately after any such loan, the value of the securities loaned
does not exceed 10% of the total value of that Portfolio's assets and (b) any
securities loan is collateralized in accordance with applicable regulatory
requirements. See the Statement of Additional Information.
Foreign Securities. The Enterprise Portfolio may invest up to 10% of the
value of its 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 Enterprise Portfolio may also purchase foreign securities in the form
of ADRs and EDRs or other securities representing underlying shares of foreign
companies. ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligation and the depositary's
transaction fees are paid by the ADR holders. In addition, less information is
available in the United States about an unsponsored ADR than about a sponsored
ADR and the financial information about a company may not be as reliable for an
unsponsored ADR as it is for a sponsored ADR. 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.
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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 Enterprise 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 Enterprise Portfolio's
portfolio securities that are traded in foreign markets may be affected by
changes in currency exchange rates and exchange control regulations. In
addition, the Portfolio will incur costs in connection with conversions between
various currencies. The Enterprise 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 Enterprise 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 Enterprise Portfolio may attempt to hedge against changes in the value
of the United States dollar in relation to a foreign currency by entering into a
forward contract for the purchase or sale of the amount of foreign currency
invested or to be invested, or by buying or selling a foreign currency futures
contract for such amount. Such hedging strategies may be employed before the
Portfolio purchases a foreign security traded in the hedged currency which the
Portfolio anticipates acquiring or between the date the foreign security is
purchased or sold and the date on which payment therefore is made or received.
Hedging against a change in the value of a foreign currency in the foregoing
manner does not eliminate fluctuations in the price of portfolio securities or
prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value of
the hedged currency should move in the direction opposite to the hedged
position. The Enterprise Portfolio will not speculate in foreign currency
forward or futures contracts or through the purchase and sale of foreign
currencies.
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The Enterprise 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 Enterprise Portfolio may invest up
to 5% of its total assets in illiquid and restricted securities. The Strategic
Stock Portfolio may invest up to 15% 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 Trustees or by the Adviser pursuant to Board-
approved guidelines. The determination of liquidity is based on the volume of
reported trading in the institutional secondary market for each security. Since
it is not possible to predict with assurance how the markets for restricted
securities sold and offered under Rule 144A will develop, the Trustees will
monitor a Portfolio's investment in these 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. Each Portfolio may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Securities with maturities of less than one year are excluded in the
computation of the portfolio turnover rate. The portfolio turnover rate is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
options on futures contracts on behalf of the Portfolios. The annual turnover
rates of each Portfolio is shown under "Financial Highlights." Higher portfolio
turnover involves correspondingly greater transaction costs, including any
brokerage commissions, which are borne directly by a Portfolio. In addition,
higher portfolio turnover may increase the recognition of short-term, rather
than long-term, capital gains. See "Dividends, Distributions and Taxes."
Using Options, Futures Contracts and Options on Futures Contracts. The
Portfolios may purchase or sell options, futures contracts or options on futures
contracts. The Portfolios expect to utilize options, futures contracts and
options thereon in several different ways, depending upon the status of a
Portfolio's portfolio securities and the Adviser's expectations concerning the
securities markets. See the Statement of Additional Information for a discussion
of options, futures contracts and options on futures contracts.
Potential Risks of Options, Futures Contracts and Options on Futures
Contracts. In certain cases, the options and future 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
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contracts involve risks different from those involved with direct investments in
securities. While utilization of options, futures contracts and similar
instruments may be advantageous to a Portfolio, if the Adviser is not successful
in employing such instruments in managing a Portfolio's investments, a
Portfolio's performance will be worse than if a Portfolio did not make such
investments. In addition, a Portfolio would pay commissions and other costs in
connection with such investments, which may increase a Portfolio's expenses and
reduce its return. Each Portfolio is authorized to purchase and sell
over-the-counter options ("OTC Options"). OTC Options are purchased from or sold
to securities dealers, financial institutions of other parties
("Counterparties") through direct bilateral agreement with the Counterparty. A
Portfolio will sell only OTC Options (other than over-the-counter currency
options) that are subject to a buy-back provision permitting a Portfolio to
require the Counterparty to sell the option back to a Portfolio at a formula
price within seven days. The staff of the SEC currently takes the position that,
in general, OTC Options on securities other than U.S. Government securities
purchased by a Portfolio, and portfolio securities covering OTC Options sold by
a Portfolio, are illiquid securities subject to a Portfolio's limitation on
illiquid securities described above. 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 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 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. A more complete discussion of the potential risks involved in
transactions in options, futures contracts and options on futures contracts is
contained in the Statement of Additional Information.
Investment in Investment Companies. The Enterprise Portfolio may invest in
one or more investment companies advised by the Adviser and its affiliates,
including Van Kampen American Capital Small Capitalization Fund ("Small Cap
Fund") and Van Kampen American Capital Foreign Securities Fund ("Foreign
Securities Fund"). The shares of the Small Cap Fund and Foreign Securities Fund
are available for investment only by certain Van Kampen American Capital funds.
The Adviser believes that the use of the Small Cap Fund and Foreign Securities
Fund may, from time to time, provide such Portfolio 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 Enterprise
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 Enterprise Portfolio's investment in the Small Cap
Fund and the Foreign Securities Fund is subject to the terms and conditions set
forth in the SEC exemptive orders authorizing such investments.
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The securities of small and medium sized companies that the Small Cap Fund
may invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies. The securities of foreign issuers
that the Foreign Securities Fund may invest in are subject to certain risks as
described under "Investment Practices -- Foreign Securities."
The Enterprise Portfolio will be deemed to own a pro rata portion of each
investment of the Small Cap Fund and Foreign Securities Fund. For example, if
such Portfolio's investment in the Small Cap Fund were $10 million, and the
Small Cap Fund had 5% of its assets invested in the electronics industry, the
Portfolio would be considered to have an investment of $500,000 in the
electronics industry.
Brokerage Practices. The Adviser is responsible for the placement of orders
for the purchase and sale of portfolio securities for a Portfolio and the
negotiation of brokerage commissions on such transactions. Brokerage firms are
selected on the basis of their professional capability for the type of
transaction and the value and quality of execution services rendered on a
continuing basis. The Adviser 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 a 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.
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
each Portfolio may invest which, in turn, may adversely affect the net asset
value of such Portfolio.
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
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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.
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 of the
Trust (the "Combined Portfolios"), including the Enterprise Portfolio. The Trust
and the Adviser are also parties to additional investment advisory agreements
for its remaining portfolios, including an investment advisory agreement
designated herein as the "Strategic Stock Advisory Agreement" pursuant to which
the Trust retains the Adviser to manage the investment of assets and placement
orders for the purchase and sale of portfolio securities for the Strategic Stock
Portfolio. The Combined Advisory Agreement and the Strategic Stock Advisory
Agreement are referred to herein collectively as the "Advisory Agreements".
Under the Advisory Agreements, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Portfolio. The costs of such
accounting services include the salaries and overhead expenses of a Treasurer or
other principal financial officer and the personnel operating under his
direction. The services are provided at cost which is allocated among the
investment companies advised by the Adviser. The Trust also pays custodian fees,
legal and auditing fees, trustees' fees (other than those who are affiliated
persons, as defined in 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 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 the combined 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. The Enterprise Portfolio
pays its pro rata share of the fee based upon its average daily net assets. The
Combined Advisory Agreement provides that in the event the ordinary business
expenses of the Enterprise 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.
Expenses subject to such limitation do not include (1) interest and taxes, (2)
brokerage commissions, (3) certain litigation and indemnification expenses as
described in the Combined Advisory Agreement, and (4) any distribution expenses
which may be incurred by the Enterprise Portfolio in the event a Distribution
Plan is adopted. In addition to the contractual expense limitation, the Adviser
also voluntarily has elected to reimburse the Enterprise Fund for all ordinary
business expenses in excess of 0.60% of the average daily net assets. For the
fiscal year ended December 31, 1997, advisory fees plus the cost of accounting
services payable by the Trust, before fee waivers and expense reimbursements
described above, equaled 0.52% of the Enterprise Portfolio's
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average daily net assets. For the same period, the Portfolio's net total
operating expenses (after fee waivers and expense reimbursements) were 0.60%. In
the absence of waivers/reimbursements, total operating expenses would have been
0.66%. There can be no assurance the Adviser will continue to waive its fee or
reimburse expenses in the future.
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 net assets and 0.45% of such
Portfolio's average net assets in excess of $500 million. The Adviser has also
voluntarily elected to reimburse the Strategic Stock Portfolio for all ordinary
business expenses in excess of 0.65% of the average daily net assets by reducing
the advisory fee and/or bearing other expenses of the Strategic Stock Portfolio
in excess of such limitation. For the fiscal period ended December 31, 1997,
advisory fees plus the cost of accounting services payable by the Trust on
behalf of the Strategic Stock Portfolio were 0.48%. For the same period, the
Portfolio's net total operating expenses (after fee waivers and expense
reimbursements) were 0.61%. In the absence of waivers/reimbursements, total
operating expenses would have been 2.59%. There can be no assurance the Adviser
will continue to waive its fee or reimburse expenses in the future.
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.
PORTFOLIO MANAGEMENT. The Portfolios have different portfolio managers.
Each portfolio manager is an employee of the Adviser.
The Enterprise Portfolio is managed by a management team headed by Jeff
New. Mr. New has been primarily responsible for managing the Fund's investment
portfolio since March 1996. Mr. New has been Senior Vice President and Portfolio
Manager of the Adviser and Van Kampen American Capital Investment Advisory Corp.
("Advisory Corp.") since December 1997. Prior to December 1997, Mr. New was Vice
President and Portfolio Manager of the Adviser and Advisory Corp. Prior to 1994,
Mr. New was Associate Portfolio Manager of the Adviser. Evan Harrel and Michael
Davis are responsible as co-managers for the day-to-day management of the Fund's
investment portfolio. Mr. Harrel has been Vice President of the Adviser and
Advisory Corp. since October 1996. Prior to that Mr. Harrel was Associate
Portfolio Manager of the Adviser. Prior to May 1994, Mr. Harrel was a Vice
President with Fayez Sarofim and Co. Mr. Davis has been Vice President and
Portfolio Manager of the Adviser and Advisory Corp. since March 1998. Mr. Davis
has been an investment professional since 1983 and was most recently the owner
of Davis Equity, a stock research company.
John Cunniff has been primarily responsible for the day-to-day management
of the Strategic Stock Portfolio's investment portfolio since its inception. Mr.
Cunniff is a Vice President of the Adviser and Advisory Corp., an affiliate of
the Adviser, and has been employed by the Adviser since October 1995. Prior to
that time, Mr. Cunniff was Vice President, Portfolio Manager at Templeton
Quantitative Advisors.
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
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differ from the interests of holders of life insurance policies and that holders
of one insurance policy may differ from holders of other insurance policies.
Nevertheless, the Trust's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken. The Contracts are described in the
separate prospectuses issued by the Participating Insurance Companies. The Trust
continuously offers shares in each of the Portfolios to the Accounts at prices
equal to the respective per share net asset value of the Portfolio. The
Distributor, located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
acts as the distributor of the shares. Net asset value is determined in the
manner set forth below under "Determination of Net Asset Value."
DETERMINATION OF NET ASSET VALUE
Net asset value per share is computed for each Portfolio as of the close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. See the accompanying Prospectus for the policies for
information regarding holidays observed by the insurance company. Net asset
value of each Portfolio is determined by adding the total market value of all
portfolio securities held by the Portfolio, cash and other assets, including
accrued interest. All liabilities, including accrued expenses, of the Portfolio
are subtracted. The resulting amount is divided by the total number of
outstanding shares of the Portfolio to arrive at the net asset value of each
share. See "Determination of Net Asset Value" in the Statement of Additional
Information for further information.
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which the
last sales price is not available are valued at the most recent bid price. U.S.
Government and agency obligations are valued at the last reported bid price.
Listed options are valued at the last reported sale price in the exchange on
which such option is traded or, if no sales are reported, at the mean between
the last reported bid and asked prices. Options for which market quotations are
not readily available are valued at a fair value by the Adviser based on
procedures approved by the Trustees. Short-term investments for the Portfolios
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 receipt of a request in proper form.
The market value of the securities in each Portfolio is subject to daily
fluctuations and the net asset value of each Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions of each Portfolio are
automatically reinvested by the Account in additional shares of such Portfolio.
Dividends and Distributions. Dividends from stocks and interest earned from
other investments are the main source of income for the Portfolios.
Substantially all of this income, less expenses, is distributed on an annual
basis. When a Portfolio sells portfolio securities, it may realize capital gains
or losses, depending on whether the prices of the securities sold are higher or
lower than the prices the Portfolio paid to purchase them. Net realized capital
gains represent the total profit from sales of securities minus total losses
from sales of securities including any losses carried forward from prior years.
Each of the Portfolios distributes any net realized capital gains to the Account
no less frequently than annually.
Tax Status of the Portfolios. Each 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
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<PAGE> 130
qualification as a "regulated investment company," a 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 a 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 each Portfolio from its ordinary income and distributions
of each 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 a
Portfolio represents dividends on equity securities rather than interest income,
its distributions are eligible for the 70% dividends received deduction
applicable in the case of a life insurance company as provided in the Code. The
Trust will send to the Account a written notice required by the Code designating
the amount and character of any distributions made during such year.
Under the Code, any distributions designated as being made from a
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 a 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 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 excise taxes.
Each 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 Portfolios may advertise their total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one, five and ten year periods or for the life of the
Portfolio. Other total return quotations, aggregate or average, over other time
periods may also be included. Total return calculations do not take into account
expenses at the "wrap" or contractholder level. Investors should also review
total return calculations that include those expenses.
The total return of a Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio from the beginning to the end of the period. Total return is
calculated by subtracting the value of the initial investment from the ending
value and showing the difference as a percentage of the initial investment; the
calculation assumes the initial
20
<PAGE> 131
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 Portfolios may also advertise
their current "yield." Yield figures are based on historical earnings and are
not intended to indicate future performance. Yield is determined by analyzing
the Portfolio's net income per share for a 30-day (or one-month) period (which
period will be stated in the advertisement), and dividing by the maximum
offering price per share on the last day of the period. A "bond equivalent"
annualization method is used to reflect a semiannual compounding. Yield
calculations do not take into account expenses at the "wrap" or contractholder
level. Investors should also review yield calculations that include those
expenses.
From time to time, the Portfolios may include in their sales literature and
shareholder reports a quotation of the current "distribution rate" for shares of
each Portfolio. Distribution rate is a measure of the level of income and
short-term capital gain dividends, if any, distributed for a specified period.
Distribution rate differs from yield, which is a measure of the income actually
earned by the Portfolio's investments, and from total return, which is a measure
of the income actually earned by, plus the effect of any realized and unrealized
appreciation or depreciation of, such investments during a stated period.
Distribution rate is, therefore, not intended to be a complete measure of the
Portfolio's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Portfolio.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by a Portfolio in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Portfolio's then current dividend rate.
A Portfolio's yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by a Portfolio, portfolio maturity and
a Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Adviser may, from time to time, waive advisory fees or reimburse a
certain amount of the future ordinary business expenses of a Portfolio. Such
waiver/reimbursement will increase the yield or total return of a 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.
21
<PAGE> 132
In reports or other communications to shareholders or in advertising
material, a Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, 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 and Semi-Annual Report contain additional performance
information. A copy of the Annual 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.
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> 133
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> 134
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 135
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1998
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in ten
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
Emerging Growth Portfolio (the "Portfolio"), one of the Trust's ten portfolios,
is described herein and offered by this Prospectus. The investment objective of
the Portfolio is as follows:
- --------------------------------------------------------------------------------
EMERGING GROWTH PORTFOLIO (formerly known as the Emerging Growth Fund)
seeks capital appreciation by investing in a portfolio of securities
consisting principally of common stocks of small and medium sized companies
considered by Van Kampen American Capital Asset Management, Inc. (the
"Adviser") to be emerging growth companies.
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 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> 136
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri 64141-9256
DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................... 3
Financial Highlights..................... 4
Introduction............................. 5
Investment Objectives and Policies....... 5
Investment Practices..................... 6
The Trust and Its Management............. 10
Purchase of Shares....................... 11
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Determination of Net Asset Value......... 11
Redemption of Shares..................... 12
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.
2
<PAGE> 137
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest in the Emerging Growth
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 Objectives...The Portfolio seeks capital appreciation by investing in
a portfolio of securities consisting principally of
common stock of small and medium sized companies
considered by the Van Kampen American Capital Asset
Management, Inc. (the "Adviser") to be emerging growth
companies. There can be no assurance that the Portfolio
will achieve its investment objective.
Investment Policies and
Risk Factors..........The Portfolio under normal market conditions invests at
least 65% of its total assets in common stocks of small
and medium sized companies (less than $2 billion of
market capitalization or annual sales), both domestic
and foreign, considered by the Adviser to be emerging
growth companies. The companies in which the Portfolio
invests may offer greater opportunities for growth of
capital than larger, more established companies, but
investments in such companies may involve special risks.
See "Investment Objectives and Policies" and "Investment
Practices -- Foreign Securities." The use of options,
futures contracts and related options may include
additional risks. See "Investment Practices -- Using
Options, Futures Contracts and Options on Futures
Contracts."
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 each Portfolio.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes each Portfolio's shares.
Dividends and
Distributions.........The Portfolio declares dividends and any capital gains
distributions annually.
The foregoing is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this
Prospectus.
3
<PAGE> 138
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last three
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
EMERGING GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1995
DECEMBER 31, (COMMENCEMENT OF
--------------------------- INVESTMENT OPERATIONS) TO
1997 1996 DECEMBER 31, 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%(1)
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%(1)
Average Commission Per Equity Share Traded(2)............... $ .0502 $ .0470 --
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would
have been as follows:
Ratio of Expenses to Average Net Assets..................... 2.14% 3.28% 5.40%
Ratio of Net Investment Loss to Average Net Assets.......... (1.40%) (2.60%) (4.35%)
</TABLE>
- -------------------------
(1) Non-Annualized
(2) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
4
<PAGE> 139
INTRODUCTION
The Trust is a duly organized Delaware business trust with ten separate
portfolios. The Emerging Growth 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 OBJECTIVES AND POLICIES
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. Any ordinary income received from portfolio
securities is entirely incidental.
As a fundamental investment policy, the Portfolio under normal conditions
invests at least 65% of its total assets in common stocks of small and medium
sized companies (less than $2 billion of market capitalization), both domestic
and foreign, considered by the Adviser to be in emerging growth companies. The
companies may be in the early stages of their respective life cycles and the
Adviser believes such companies have the potential to become major enterprises.
Investments in such companies may offer greater opportunities for growth of
capital than larger, more established companies, but also may involve certain
special risks. Emerging growth companies often have limited product lines,
markets, or financial resources, and they may be dependent upon one or a few key
people for management. The securities of such companies may be subject to more
abrupt or erratic market movements than securities of larger, more established
companies or the market averages in general. While the Portfolio will invest
primarily in common stocks, to a limited extent it may invest in other
securities such as preferred stocks, convertible securities and warrants.
The Portfolio does not limit its investment to any single group or type of
security. The Portfolio may also invest in special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Portfolio's primary approach is to seek what the Adviser believes to be
unusually attractive growth investments on an individual company basis. The
Portfolio may invest in securities that have above average volatility of price
movement. Because prices of common stocks and other securities fluctuate, the
value of an investment in the Portfolio will vary based upon the Portfolio's
investment performance. The Portfolio attempts to reduce overall exposure to
risk from declines in securities prices by spreading its investments over many
different companies in a variety of industries. There is, however, no assurance
that the Portfolio will be successful in achieving its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. See "Investment Practices -- Foreign Securities." Additionally,
the Portfolio may invest up to 15% of the value of its assets in restricted
securities (i.e., securities which may not be sold without registration under
the Securities Act of 1933) and in other securities not having readily available
market quotations. The Portfolio may enter into repurchase agreements with
domestic banks and broker-dealers which involve certain risks. The Portfolio may
invest in warrants so long as such investments aggregate less than 5% of the
Portfolio's total assets. The risks involved in investing in restricted
securities, warrants and repurchase agreements are described in the Statement of
Additional Information.
5
<PAGE> 140
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.
Loans of Portfolio Securities. The Portfolio may lend portfolio securities
to unaffiliated brokers, dealers and financial institutions provided that (a)
immediately after any such loan, the value of the securities loaned does not
exceed 10% of the total value of the Portfolio's assets and (b) any securities
loan is collateralized in accordance with applicable regulatory requirements.
See the Statement of Additional Information.
Foreign Securities. The Portfolio may invest up to 20% 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 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
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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 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
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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 15% 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
Trustees or by the Adviser pursuant to Board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. Since it is not possible to
predict with assurance how the markets for restricted securities sold and
offered under Rule 144A will develop, the Trustees will monitor the Portfolio's
investment in these securities focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolio to
the extent that qualified 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 the Portfolio impossible. Since market
quotations are not readily available for restricted securities, such securities
will be valued by a method that the Portfolio's Trustees 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 annual turnover
rate of the Portfolio is shown in the "Financial Highlights." The turnover rate
for certain Portfolios may exceed 100%, which is higher than that of many other
investment companies. Higher portfolio turnover involves correspondingly greater
transaction costs, including any brokerage commissions, which are borne directly
by 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 status of the
Portfolio's portfolio securities and the Adviser's expectations concerning the
securities
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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 to 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.
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THE TRUST AND ITS MANAGEMENT
The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. A mutual fund provides, for those who have
similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
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.
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.
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
includes 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
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
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average daily net assets of the Portfolio at an annual rate of 0.70%. For the
fiscal year ended December 31, 1997, advisory fees plus the cost of accounting
services payable by the Trust, before fee waivers and expense reimbursements,
was 0.83% of the Portfolio's average net assets. For the same period, the
Portfolio's net total operating expenses (after fee waivers and expense
reimbursements) were 0.85%. In the absence of waivers/reimbursements, the total
operating expenses would have been 2.17%. There can be no assurance the Adviser
will continue to waive its fee or reimburse expenses in the future.
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.
PORTFOLIO MANAGEMENT. The Portfolio is managed by a management team headed
by Gary M. Lewis. Mr. Lewis has been primarily responsible for managing the
Portfolio's investment portfolio since its inception. Mr. Lewis has been Senior
Vice President and Portfolio Manager of the Adviser since October 1995. Prior to
that Mr. Lewis was Vice President and Portfolio Manager of the Adviser. Dudley
Brickhouse, David Walker and Janet Willis are responsible as co-managers for the
day-to-day management of the Portfolio's investment portfolio. Mr. Brickhouse
has been an Associate Portfolio Manager of the Adviser since September 1997.
Prior to that Mr. Brickhouse was with NationsBank Investment Management. Mr.
Walker has been an Assistant Vice President of the Adviser since June 1995.
Prior to that Mr. Walker was a Quantitative Analyst of the Adviser. Ms. Willis
has been an Assistant Vice President of the Adviser since December 1997. Prior
to that Ms. Willis was Associate Portfolio Manager of the Adviser. Prior to July
1995, Ms. Willis was with AIM Capital Management, Inc.
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
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total number of outstanding shares of the Portfolio to arrive at the net asset
value of each share. See "Determination of Net Asset Value" in the Statement of
Additional Information for further information.
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which the
last sales price is not available are valued at the most recent bid price. U.S.
Government and agency obligations are valued at the last reported bid price.
Listed options are valued at the last reported sale price in the exchange on
which such option is traded or, if no sales are reported, at the mean between
the last reported bid and asked prices. Options for which market quotations are
not readily available are valued at a fair value 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 receipt of a request in proper form.
The market value of the securities in the Portfolio is subject to daily
fluctuations and the net asset value of the Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions of the Portfolio are
automatically reinvested by the Account in additional shares of the Portfolio.
Dividends and Distributions. Dividends from stocks and interest earned from
other investments are the main source of income for the Portfolio. Substantially
all of this income, less expenses, is distributed on an annual basis. When the
Portfolio sells portfolio securities, it may realize capital gains or losses,
depending on whether the prices of the securities sold are higher or lower than
the prices the Portfolio paid to purchase them. Net realized capital gains
represent the total profit from sales of securities minus total losses from
sales of securities including any losses carried forward from prior years. The
Portfolio distributes any net realized capital gains to the Account no less
frequently than annually.
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
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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 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
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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.
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.
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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. 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.
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.
15
<PAGE> 150
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> 151
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 152
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1998
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in ten
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
Morgan Stanley Real Estate Securities Portfolio (the "Portfolio"), one of the
Trust's ten portfolios, is described herein and offered by this Prospectus. The
investment objectives of this Portfolio are as follows:
- --------------------------------------------------------------------------------
MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO (the "Portfolio")
(formerly known as the Real Estate Securities Portfolio) seeks as its
primary investment objective long-term growth of capital. Current
income is a secondary consideration. The Portfolio seeks to achieve its
objectives by investing principally in securities of companies
operating in the real estate industry ("Real Estate Securities"). A
"real estate industry company" is a company that derives at least 50%
of its assets (marked to market), gross income or net profits from the
ownership, construction, management or sale of residential, commercial
or industrial real estate. Under normal market conditions, at least 65%
of the Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate investment
trusts.
There is no assurance that the Portfolio will achieve its investment
objectives.
- --------------------------------------------------------------------------------
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 THIS PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information dated April 30, 1998 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> 153
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri
64141-9256
DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois
60181
INVESTMENT Van Kampen American Capital
ADVISER: One Parkview Plaza
Oakbrook Terrace, Illinois
60181
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary...................... 3
Financial Highlights.................... 5
Introduction............................ 6
Investment Objectives and Policies...... 6
Risk Factors............................ 7
Investment Practices.................... 7
The Trust and Its Management............ 12
Purchase of Shares...................... 14
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Determination of Net Asset Value........ 14
Redemption of Shares.................... 15
Dividends, Distributions and Taxes...... 15
Portfolio Performance................... 16
Description of Shares of the Trust...... 18
Additional Information.................. 18
Appendix................................ 19
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Trust, the Adviser or the Distributor. This
Prospectus does not constitute an offer by the Trust or by the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful for the Trust to make
such an offer in such jurisdiction.
2
<PAGE> 154
PROSPECTUS SUMMARY
Shares Offered..........Shares of beneficial interest of the Morgan Stanley Real
Estate Securities Portfolio (the "Portfolio"), a
separate portfolio of the Van Kampen American Capital
Life Investment Trust (the "Trust").
Type of Company.........Diversified, open-end management investment company.
Investment Objectives...The Portfolio's primary investment objective is to seek
long-term growth of capital. Current income is a
secondary consideration. There can be no assurance that
the Portfolio will achieve its investment objectives.
Investment Policy and
Risks.................The Portfolio will seek to achieve its investment
objectives by investing in a portfolio of securities of
companies operating in the real estate industry ("Real
Estate Securities"). Real Estate Securities include
equity securities, including common stocks and
convertible securities, as well as non-convertible
preferred stocks and debt securities of real estate
industry companies. A "real estate industry company" is
a company that derives at least 50% of its assets
(marked to market), gross income or net profits from the
ownership, construction, management or sale of
residential, commercial or industrial real estate. Under
normal market conditions, at least 65% of the
Portfolio's total assets will be invested in Real Estate
Securities, primarily equity securities of real estate
investment trusts. The Portfolio's investment in debt
securities will be rated, at the time of investment, at
least Baa by Moody's Investors Service, Inc. ("Moody's")
or BBB by Standard & Poor's Ratings Group ("S&P"), a
comparable rating by any other nationally recognized
statistical rating organization or, if unrated,
determined by the Adviser (defined below) to be of
comparable quality. Under normal market conditions, the
Portfolio may invest up to 35% of its total assets in
equity and debt securities of companies outside the real
estate industry, U.S. Government securities, cash and
money market instruments.
Because of the Portfolio's policy of concentrating its
investments in Real Estate Securities, the Portfolio may
be more susceptible than an investment company without
such a policy to any single economic, political or
regulatory occurrence affecting the real estate
industry. In addition, the Portfolio will be affected by
general changes in interest rates which will result in
increases or decreases in the market value of the debt
securities (and, to a lesser degree, equity securities)
held by the Portfolio. The market value of such
securities tends to have an inverse relationship to the
movement of interest rates. For additional information
regarding the risk connected with investment in Real
Estate Securities, see "Risk Factors."
The Portfolio may invest up to 25% of its total assets
in securities issued by foreign issuers, some or all of
which may also be Real Estate Securities. Investments in
foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic
issuers, including fluctuations in foreign exchange
rates, future political and economic developments, and
the possible imposition of exchange controls or other
foreign governmental laws or restrictions. See
"Investment Objectives and Policies -- Foreign
Securities."
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<PAGE> 155
The Portfolio may purchase or sell debt securities on a
forward commitment basis. See "Investment
Practices -- Forward Commitments." The Portfolio may use
portfolio management techniques and strategies involving
options, futures contracts and options on futures. The
utilization of options, futures contracts and options on
futures contracts may involve greater than ordinary
risks and the likelihood of more volatile price
fluctuation. See "Investment Practices -- Using Options,
Futures Contracts and Options on Futures Contracts."
Redemption..............At the net asset value next determined after the
portfolio receives a redemption request.
Investment Adviser......Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the Portfolio's investment adviser.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes the Portfolio's shares.
Dividends and
Distributions.........Dividends and any capital gains are distributed at least
annually. All dividends and distributions are
automatically reinvested by the Account in shares of the
Portfolio at net asset value per share. See "Dividends,
Distributions and Taxes."
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
4
<PAGE> 156
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the last three
fiscal periods) is included in the Statement of Additional Information and may
be obtained by shareholders without charge by calling the telephone number on
the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED JULY 3, 1995
DECEMBER 31, (COMMENCEMENT OF
----------------- INVESTMENT OPERATIONS) TO
1997 1996 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%(1)
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%(1)
Average Commission Paid Per Equity Share Traded(2).......... $ .0597 $ .0313 --
* If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets.................. N/A 1.27% 2.90%
Ratio of Net Investment Income to Average Net Assets..... N/A 4.89% 3.36%
</TABLE>
- ---------------------
(1) Non-Annualized
(2) Represents the average brokerage commissions paid per equity share traded
during the period where commissions were applicable. This disclosure was not
required in fiscal periods prior to 1996.
N/A = Not Applicable
5
<PAGE> 157
INTRODUCTION
The Trust is a duly organized Delaware business trust with ten separate
Portfolios. The Morgan Stanley Real Estate Securities 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 a portfolio
represent an interest only in that portfolio. Since market risks are inherent in
all securities to varying degrees, assurance cannot be given that the investment
objectives of any portfolio will be met.
INVESTMENT OBJECTIVES AND POLICIES
General. The Portfolio's primary investment objective is to provide
shareholders with long-term growth of capital. Current income is a secondary
consideration. The Portfolio will seek to achieve its investment objectives by
investing principally in a diversified portfolio of Real Estate Securities which
include equity securities, including common stocks and convertible securities,
as well as non-convertible preferred stocks and debt securities of real estate
industry companies. A "real estate industry company" is a company that derives
at least 50% of its assets (marked to market), gross income or net profits from
the ownership, construction, management or sale of residential, commercial or
industrial real estate. Real estate industry companies may include among others:
equity real estate investment trusts, which pool investors' funds for investment
primarily in commercial real estate properties; mortgage real estate investment
trusts, which invest pooled funds in real estate related loans; brokers or real
estate developers; and companies with substantial real estate holdings, such as
paper and lumber products and hotel and entertainment companies. Under normal
market conditions, at least 65% of the Portfolio's total assets will be invested
in Real Estate Securities, primarily equity securities of real estate investment
trusts. The Portfolio's investment in debt securities will be rated, at the time
of investment, at least Baa by Moody's or BBB by S&P, a comparable rating by any
other nationally recognized statistical rating organization or if unrated,
determined by the Adviser to be of comparable quality. Ratings at the time of
purchase determine which securities may be acquired, and a subsequent reduction
in ratings does not require the Portfolio to dispose of a security. Securities
rated Baa by Moody's or BBB by S&P are considered to be medium grade obligations
which possess speculative characteristics so that changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher rated securities. The
rating of the ratings agencies represent their opinions of the quality of the
debt securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. The Portfolio may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Portfolio may invest up to 35% of its
total assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments.
The Portfolio may invest up to 25% of its assets in securities issued by
foreign issuers. See "Investment Objectives and Policies -- Foreign Securities."
The Portfolio may engage in portfolio management strategies and techniques
involving options, futures contracts and options on futures. Options, futures
contracts and related options are described in "Investment Practices -- Using
Options, Futures Contracts and Options on Futures Contracts" and the Statement
of Additional Information.
For temporary defensive purposes, the Portfolio may invest up to 100% of
its total assets in short-term investments as described below. The Portfolio
will assume a temporary defensive posture only when economic and other factors
affect the real estate industry market to such an extent that the Adviser
believes there to be extraordinary risks in being primarily in Real Estate
Securities.
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<PAGE> 158
There can be no assurance that the Portfolio will achieve its investment
objectives. The investment objectives of the Portfolio are not fundamental
policies and may be changed by the Trustees without seeking shareholder
approval. If there is a change in the objectives of the Portfolio, shareholders
should consider whether the Portfolio remains an appropriate investment in light
of their then current financial positions and needs.
Short-Term Investments. The Portfolio may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness. The Portfolio will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such temporary investments
may be made either for liquidity purposes, to meet shareholder redemption
requirements or as a temporary measure.
RISK FACTORS
Although the Portfolio does not invest directly in real estate, an
investment in the Portfolio will generally be subject to the risks associated
with real estate because of its policy of concentration in the securities of
companies in the real estate industry. These risks include, among others:
declines in the value of real estate; risks related to general and local
economic conditions; overbuilding and increased competition; increases in
property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income; changes in neighborhood
values; the appeal of properties of tenants and changes in interest rates. The
value of securities of companies which service the real estate industry will
also be affected by such risks. If the Portfolio has rental income or income
from the disposition of real property acquired as a result of a default on
securities the Portfolio owns, the receipt of such income may adversely affect
its ability to retain its tax status as a regulated investment company.
In addition, equity real estate investment trusts may be affected by
changes in the value of the underlying property owned by the trusts, while
mortgage real estate investment trusts may be affected by the quality of credit
extended. Equity and mortgage real estate investment trusts are dependent upon
management skill, may not be diversified and are subject to the risks of
financing projects. Such real estate investment trusts are also subject to heavy
cash flow dependency, defaults by borrowers, self-liquidation and the
possibility of failing to qualify for tax-free pass-through of income under the
Internal Revenue Code of 1986, as amended (the "Code"), and to maintain
exemption from the Investment Company Act of 1940, as amended (the "1940 Act").
Changes in interest rates may also affect the value of the debt securities in
the Portfolio's portfolio. Like investment companies such as the Portfolio, real
estate investment trusts are not taxed on income distributed to shareholders
provided they comply with several requirements of the Code. The Portfolio will
indirectly bear its proportionate share of any expenses paid by the real estate
investment trusts in which it invests in addition to the expenses paid by the
Portfolio.
Because of the Portfolio's policy of concentrating its investments in Real
Estate Securities, the Portfolio may be more susceptible than an investment
company without such a policy to any single economic, political or regulatory
occurrence affecting the real estate industry.
Additional information about the Portfolio's investment practices and the
risks associated with such practices are contained in "Investment Practices"
herein and in the Statement of Additional Information.
INVESTMENT PRACTICES
Repurchase Agreements. The Portfolio may enter into repurchase agreements
with 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
7
<PAGE> 159
at a future time and set price, thereby determining the yield during the
purchaser's the holding period. Repurchase agreements involve certain risks in
the event of a default by the other party. In the event of the bankruptcy or
other default of the seller of a repurchase agreement, the Portfolio could
experience delays and expenses in liquidating the underlying securities and 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 25% of the value of its
total assets in securities issued by foreign issuers. Some of such securities
may also be Real Estate Securities. Investments in securities of foreign
entities and securities denominated in foreign currencies involve risks not
typically involved in domestic investment, including fluctuations in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since the
Portfolio may invest in securities denominated or quoted in currencies other
than the United States dollar, changes in foreign currency exchange rates may
affect the value of investments in the portfolio and the accrued income and
unrealized appreciation or depreciation of investments. Changes in foreign
currency exchange rates relative to the U.S. dollar will affect the U.S. dollar
value of the Portfolio's assets denominated in that currency and the Portfolio's
yield on such assets.
The Portfolio may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. The Portfolio may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by the Portfolio may be subject to foreign withholding taxes,
which would reduce the Portfolio's total return on such investments and the
8
<PAGE> 160
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 portfolio
securities that are traded in foreign markets may be affected by changes in
currency exchange rates and exchange control regulations. In addition, the
Portfolio will incur costs in connection with conversions between various
currencies. The Portfolio's foreign currency exchange transactions generally
will be conducted on a spot basis (that is, cash basis) at the spot rate for
purchasing or selling currency prevailing in the foreign currency exchange
market. The Portfolio purchases and sells foreign currency on a spot basis in
connection with the settlement of transactions in securities traded in such
foreign currency. The Portfolio does not purchase and sell foreign currencies as
an investment.
The Portfolio also may enter into contracts with banks or other foreign
currency brokers and dealers to purchase or sell foreign currencies at a future
date ("forward contracts") and purchase and sell foreign currency futures
contracts to hedge against changes in foreign currency exchange rates. A foreign
currency forward contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time at
a specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
The Portfolio may attempt to hedge against changes in the value of the
United States dollar in relation to a foreign currency by entering into a
forward contract for the purchase or sale of the amount of foreign currency
invested or to be invested, or by buying or selling a foreign currency futures
contract for such amount. Such hedging strategies may be employed before the
Portfolio purchases a foreign security traded in the hedged currency which the
Portfolio anticipates acquiring or between the date the foreign security is
purchased or sold and the date on which payment therefore is made or received.
Hedging against a change in the value of a foreign currency in the foregoing
manner does not eliminate fluctuations in the price of portfolio securities or
prevent losses if the prices of such securities decline. Furthermore, such
hedging transactions reduce or preclude the opportunity for gain if the value of
the hedged currency should move in the direction opposite to the hedged
position. The Portfolio will not speculate in foreign currency forward or
futures contracts or through the purchase and sale of foreign currencies.
The Portfolio's custodian will place cash or liquid securities in a
segregated account having a value equal to the aggregate amount of the
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in the
segregated account declines, additional cash or securities are placed in the
account on a daily basis so that the value of the account equals the amount of
the Portfolio's commitments with respect to such contracts. As an alternative to
maintaining all or part of the segregated account, the
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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 15% 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 ("1933 Act") and are thus subject
to restrictions on resale. Excluded from the limitation, however, are any
restricted securities which are eligible for resale pursuant to Rule 144A under
the 1933 Act and which have been determined to be liquid by the Trustees or by
the Adviser pursuant to Board-approved guidelines. The determination of
liquidity is based on the volume of reported trading in the institutional
secondary market for each security. Since it is not possible to predict with
assurance how the markets for restricted securities sold and offered under Rule
144A will develop, the Trustees will carefully monitor the Portfolio's
investment in these securities focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolio to
the extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. These difficulties and delays could
result in the Portfolio's inability to realize a favorable price upon
disposition of restricted securities, and in some cases might make disposition
of such securities at the time desired by the Portfolio impossible. Since market
quotations are not readily available for restricted securities, such securities
will be valued by a method that the Portfolio's Trustees believes accurately
reflects fair value.
Forward Commitments. The Portfolio may purchase or sell U.S. Government
securities or debt securities on a "when-issued" or "delayed delivery" basis
("Forward Commitments"). These transactions occur when securities are purchased
or sold by the Portfolio with payment and delivery taking place in the future,
frequently a month or more after such transaction. This price is fixed on the
date of the commitment, and the seller continues to accrue interest on the
securities covered by the Forward Commitment until delivery and payment take
place. At the time of settlement, the market value of the securities may be more
or less than the purchase or sale price.
The Portfolio may either settle a Forward Commitment by taking delivery of
the securities or may either resell or repurchase a Forward Commitment on or
before the settlement date in which event the Portfolio may reinvest the
proceeds in another Forward Commitment. The Portfolio's use of Forward
Commitments may increase its overall investment exposure and thus its potential
for gain or loss. When engaging in Forward Commitments, the Portfolio relies on
the other party to complete the transaction. Should the other party fail to do
so, the Portfolio might lose a purchase or sale opportunity that could be more
advantageous than alternative opportunities at the time of the failure.
The Portfolio maintains a segregated account (which is marked to market
daily) of cash, liquid securities or the security covered by the Forward
Commitment (in the case of a Forward Currency sale) with the Portfolio's
custodian in an aggregate amount equal to the amount of its commitment as long
as the obligation to purchase or sell continues.
Portfolio Turnover. The Portfolio may purchase or sell securities without
regard to the length of time the security has been held and thus may experience
a high rate of portfolio turnover. A 100% turnover rate would occur, for
example, if all the securities in a portfolio were replaced in a period of one
year. Securities with maturities of less than one year are excluded in the
computation of the portfolio turnover rate. The portfolio turnover rate is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transaction in options, futures contracts and options
on futures contracts on behalf of the Portfolio. The annual turnover rate of the
Portfolio is shown under "Financial Highlights." The turnover rate may exceed
100%, which is higher than that
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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 status of the
Portfolio's portfolio and the Adviser's expectations concerning the securities
markets. See the Statement of Additional information for a discussion of
options, futures contracts and options on futures contracts.
Potential Risks of Options, Futures Contracts and Options on Futures
Contracts. 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
or other parties ("Counterparty") through direct bilateral agreement with the
Counterparty. The Portfolio will sell only OTC Options (other than
over-the-counter currency options) that are subject to a buy-back provision
permitting the Portfolio to require to the Counterparty to sell the option back
to the Portfolio at a formula price within seven days. The staff of the SEC
currently takes the position that, in general, OTC Options on securities other
than U.S. Government securities purchased by the Portfolio, and portfolio
securities covering OTC Options sold by the Portfolio, are illiquid securities
subject to the Portfolio's limitation on illiquid securities described above.
The Portfolio may not purchase or sell futures contracts or related options for
which the aggregate initial margin and premiums exceeded 5% of the fair market
value of the Portfolio's assets.
In order to prevent leverage in connection with the purchase of futures
contracts or call options thereon by the Portfolio, an amount of cash or liquid
securities equal to the market value of the obligation under the futures
contract or option (less any related margin deposits) will be maintained in a
segregated account with the Custodian. 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.
Portfolio Transactions and Brokerage Practices. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Portfolio and the negotiation of brokerage commissions on such
transactions. Brokerage firms are selected on the basis of their professional
capability for the type of transaction and the value and quality of execution
services rendered on a continuing basis. The debt securities in the Portfolio's
portfolio generally are traded in the over-the-counter market through dealers. A
dealer is a securities firm or bank which makes a market for securities by
opening a position at one price and closing the position at a slightly more
favorable price. The difference between the prices is known as a spread. Foreign
currency and forward currency exchange contracts are traded in a similar fashion
in a dealer market maintained primarily by large commercial banks. The Portfolio
will pay brokerage commissions in connection with transactions in
exchange-traded options, futures contracts and related options. Spreads or
commissions for transactions executed in foreign markets often are higher than
in the United States. The Adviser 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
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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 brokerage firms. The Adviser is authorized to pay higher
commissions to brokerage firms that provide it with investment and research
information than to firms which do not provide such services if the Adviser
determines that such commissions are reasonable in relation to the overall
services provided. The Information received may be used by the Adviser in
managing the assets of other advisory accounts as well as in the management of
the assets of the Portfolio.
Investment Restrictions. The Portfolio has adopted a number of investment
restrictions that may not be changed without approval by the vote of a majority
of its outstanding voting shares as defined by the 1940 Act. See the Statement
of Additional Information. These restrictions provide, among other things, that
the Portfolio may not:
1. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of its
net assets, or pledge more than 10% of its net assets in connection with
permissible borrowings or purchase additional securities when money
borrowed exceeds five percent of its net assets. Margin deposits or
payments in connection with the writing of options, or in connection with
the purchase or sale of forward contracts, futures, foreign currency
futures and related options, are not deemed to be a pledge or other
encumbrance.
2. With respect to 75% of its total assets, invest more than 5% of its
assets in the securities of any one issuer (except the U.S. Government, its
agencies and instrumentalities and repurchase agreements secured thereby)
or purchase more than 10% of the outstanding voting securities of any one
issuer, except that the Portfolio may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief from the provisions of the 1940 Act.
3. Lend money or securities except by the purchase of a portion of an
issue of bonds, debentures or other obligations of types commonly
distributed to institutional investors publicly or privately (in the latter
case the investment will be subject to the stated limits on investments in
"restricted securities"), and except by the purchase of securities subject
to repurchase agreements.
4. Concentrate its investment in any one industry, except that the
Portfolio will invest more than 25% of its total assets in the real estate
industry. This limitation excludes shares of other open-end investment
companies owned by the Portfolio but includes the Portfolio's pro rata
portion of the securities and other assets owned by such company.
The Portfolio may, notwithstanding any other fundamental investment policy
or limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Portfolio.
THE TRUST AND ITS MANAGEMENT
The Trust is an open-end, diversified management investment company,
commonly known as a mutual fund. A mutual fund provides, for those who have
similar investment goals, a practical and convenient way to invest in a more
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
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
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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.
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.
ADVISORY AGREEMENT. The Trust retains the Adviser to manage the investment
of its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement (the "Advisory Agreement"),
the Trust pays the Adviser a monthly fee computed on average daily net assets of
the Portfolio at the annual rate of 1.00% of the Portfolio's average daily net
assets. This fee is higher than that charged by most other mutual funds but the
Trustees believe it is justified by the specialized nature of the Portfolio and
is not necessarily higher than the fees charged by certain mutual funds with
investment objectives and policies similar to those of the Portfolio.
Under the Advisory Agreement, the Trust also reimburses the Adviser for the
cost of the Portfolio's accounting services, which include maintaining its
financial books and records and calculating its daily net asset value. Operating
expenses paid by the Portfolio include custodian fees, legal and accounting
fees, the costs of reports and proxies to shareholders, trustees' fees (other
than those who are affiliated persons, as defined in the 1940 Act, of the
Adviser, Distributor, ACCESS, Van Kampen American Capital or Morgan Stanley Dean
Witter & Co.) and all other business expenses not specifically assumed by the
Adviser. For the fiscal year ended December 31, 1997, advisory fees plus the
cost of accounting services payable by the Trust on behalf of the Portfolio were
1.01% of the Portfolio's average daily net assets. During the same period, the
Portfolio's total operating expenses were 1.07%.
From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse the Portfolio for ordinary
business expenses in excess of an agreed upon amount.
PERSONAL 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
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for their personal accounts subject to certain restrictions. Persons with access
to certain sensitive information are subject to preclearance and other
procedures designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Russell C. Platt and Theodore R. Bigman assumed
responsibility for the day-to-day management of the Portfolio's investment
portfolio effective January 1, 1997. Mr. Platt became Executive Vice President
of the Adviser on December 31, 1996. Since 1994, Mr. Platt has also been a
Principal, and as of December 1, 1996, a Managing Director, of Morgan Stanley
Asset Management Inc. ("MSAM") where he has primary responsibility for managing
the real estate securities investment business for MSAM and serves as a member
of the Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF").
From 1991 to 1993, Mr. Platt was head of Morgan Stanley Realty's Transaction
Development Group. From 1990 to 1991, Mr. Platt was based in Morgan Stanley
Realty's London Office. Prior to this he had extensive transaction
responsibilities involving portfolio, retail, office, hotel and apartment sales
and financings. Mr. Bigman became Senior Vice President of the Adviser on
December 31, 1996. Since 1995, Mr. Bigman has also been a Vice President, and as
of December 1, 1996, a Principal, of MSAM where, together with Mr. Platt, he is
responsible for MSAM's real estate securities research. Prior to joining MSAM,
he was a Director at CS First Boston, where he worked for eight years in the
Real Estate Group.
PURCHASE OF SHARES
The Trust is offering its shares only to Accounts of various insurance
companies to fund the benefits of variable annuity or variable life insurance
contracts. The Trust does not foresee any disadvantage to holders of Contracts
arising out of the fact that the interests of the holders may differ from the
interests of holders of life insurance policies and that holders of one
insurance policy may differ from holders of other insurance policies.
Nevertheless, the Trust's Trustees intend to monitor events in order to identify
any material irreconcilable conflicts which may possibly arise and to determine
what action, if any, should be taken. The Contracts are described in the
separate prospectuses issued by the Participating Insurance Companies. The Trust
continuously offers shares in the Portfolio to the Accounts at prices equal to
the respective per share net asset value of the Portfolio. The Distributor,
located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, acts as the
distributor of the shares. Net asset value is determined in the manner set forth
below under "Determination of Net Asset Value."
DETERMINATION OF NET ASSET VALUE
Net asset value per share is computed for the Portfolio as of the close of
trading (currently 4:00 p.m., New York time) each day the New York Stock
Exchange is open. See the accompanying Prospectus for the policies for
information regarding holidays observed by the insurance company.
Net asset value per share is determined by dividing the value of the
Portfolio's securities, cash and other assets (including accrued interest)
attributable to such class less all liabilities (including accrued expenses)
attributable to such class, by the total number of shares of the class
outstanding. Such computation is made by using prices as of the close of trading
on the Exchange and (i) valuing securities listed or traded on a national
securities exchange at the last reported sale price, (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, (iii) unlisted securities and listed securities for which the last
sale price is not available are valued at the last reported bid price, (iv)
options and futures contracts are valued at the last sale price or if no sales
are reported, at the mean between the bid and asked prices, and (v) valuing any
securities for which market quotations are not readily available, and any other
assets at fair value as determined in good faith by the Adviser in accordance
with procedures approved by the Trustees of the Trust. Short-term investments
with a maturity of 60 days or less when purchased are valued at amortized cost,
which approximates market value. Short-term investments with a maturity of more
than
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60 days when purchased are valued based on market quotations until the remaining
days to maturity becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized cost using the value of the investment on
the 61st day.
REDEMPTION OF SHARES
Payment for shares tendered for redemption by the insurance company is made
ordinarily in cash within seven days after tender in proper form, except under
unusual circumstances as determined by the SEC. The redemption price will be the
net asset value next determined after the receipt of a request in proper form.
The market value of the securities in the Portfolio is subject to daily
fluctuations and the net asset value of the Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions of the Portfolio are
automatically reinvested by the Account in additional shares of the Portfolio.
Dividends and Distributions. Dividends from stocks and interest earned
from other investments are the main source of income for the Portfolio.
Substantially all of this income, less expenses, is distributed on an annual
basis. When the Portfolio sells portfolio securities, it may realize capital
gains or losses, depending on whether the prices of the securities sold are
higher or lower than the prices the Portfolio paid to purchase them. Net
realized capital gains represent the total profit from sales of securities minus
total losses from sales of securities including any losses carried forward from
prior years. The Portfolio distributes any net realized capital gains to the
Account no less frequently than annually.
Tax Status of the Portfolio. The Portfolio intends to qualify as a
"regulated investment company" under 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).
Dividends and distributions paid by the Portfolio have the effect of
reducing net asset value per share on the record date by the amount of the
payment. Therefore, a dividend or distribution paid shortly after the purchase
of shares by an investor would represent, in substance, a return of capital to
the shareholder (to the extent it is paid on the shares so purchased) even
though subject to income taxes as discussed above.
Tax Treatment to Insurance Company as Shareholder. 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.
However, a dividend received from a real estate
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investment trust does not qualify for the dividend received deduction. The Trust
will send to the Account a written notice required by the Code designating the
amount and character of any distributions made during such year.
Under the Code, any distribution designated as being made from the
Portfolio's net 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 a 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 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. Each 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 these expenses.
The total return of the Portfolio for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the
Portfolio from the beginning to the end of the period. Total return is
calculated by subtracting the value of the initial investment from the ending
value and showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the maximum public
offering price and that all income dividends or capital gains distributions
during the period are reinvested in Portfolio shares at net asset value. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and distributions paid by the
Portfolio.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, the Portfolio may also advertise
its current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Portfolio's net income per share for a 30-day (or one-month) period (which
period will be stated in the advertisement), and dividing by the maximum
offering price per share on the last day of the period. A "bond equivalent"
annualization method is used to reflect a semiannual compounding. Yield
calculations do not take into account expenses at the "wrap" or contractholder
level. Investors should also review yield calculations that include those
expenses.
From time to time, the Portfolio may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for shares of
the Portfolio. Distribution rate is a measure
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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.
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.
In reports or other communications to shareholders or in advertising
material, the Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, Salomon Brothers High Grade Bond Index, Standard & Poor's
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. 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. A copy of the Annual Report or Semi-Annual Report may
be obtained without charge by calling or writing the Trust of the telephone
number and address printed on the cover of this Prospectus.
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DESCRIPTION OF SHARES OF THE TRUST
The Trust was originally organized as a Massachusetts business trust on
June 3, 1985. The Trust was reorganized as a business trust under the laws of
Delaware on September 16, 1995 and adopted its current name at that time. The
authorized capitalization of the Trust consists of an unlimited number of shares
of beneficial interest of $0.01 par value. Shares issued by the Trust are fully
paid, non-assessable and have no preemptive or conversion rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust if set forth in the
Statement of Additional Information.
The Trust's Declaration of Trust provides that no Trustee, officer or
shareholder of the Portfolio shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Trust but the assets of the Trust only shall be liable.
ADDITIONAL INFORMATION
This Prospectus and the Statement of Additional Information do not contain
all the information set forth in the Registration Statement filed by the Trust
with the SEC under the Securities Act of 1933. Copies of the Registration
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Trust is December 31. The Trust sends to its
shareholders at least semi-annually reports showing each Portfolio's portfolio
and other information. An Annual Report, containing financial statements audited
by the Trust's independent accountants, is sent to shareholders each year. After
the end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
18
<PAGE> 170
APPENDIX
DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
AAA -- Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin; and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact, have speculative characteristics as well.
BA -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
CAA -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NONRATED -- Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
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<PAGE> 171
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S CORPORATION
AAA -- Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A -- Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB -- B -- CCC -- CC -- C -- Debt rated BB, B, CCC, CC and C is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- The rating CI is reserved for income bonds on which no interest is
being paid.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR -- Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS:
Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.
20
<PAGE> 172
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--
MORGAN STANLEY
REAL ESTATE SECURITIES PORTFOLIO
- ------------------
One Parkview Plaza
Oakbrook Terrace, IL 60181
- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Life Investment Trust
Real Estate Securities Portfolio
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Life Investment Trust
Real Estate Securities Portfolio
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
200 East Randolph Drive
Chicago, IL 60601
<PAGE> 173
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
MORGAN STANLEY
REAL ESTATE SECURITIES PORTFOLIO
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 174
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(800) 421-5666
April 30, 1998
Van Kampen American Capital Life Investment Trust (the "Trust") is a
diversified, open-end management investment company which offers shares in ten
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
Strategic Stock Portfolio (the "Portfolio"), one of the Trust's ten portfolios,
is described herein and offered by this Prospectus. The investment objective of
the Portfolio is as follows:
- --------------------------------------------------------------------------------
STRATEGIC STOCK PORTFOLIO seeks to provide investors with an above average
total return through a combination of potential capital appreciation and
dividend income, 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 (the "DJIA") or in the Morgan
Stanley Capital International USA Index (the "MSCI Index"). Subject to the
Portfolio's other investment policies and restrictions, the Portfolio
attempts to achieve its investment objective by investing primarily in a
portfolio of actively traded equity securities comprised of (i) high
dividend yield stocks periodically selected from the companies included in
the DJIA and (ii) high dividend yield stocks periodically selected from a
pre-screened subset of the companies included in the MSCI Index. A
security's dividend yield is a primary factor in the security selection
process. The MSCI Index is the property of Morgan Stanley Capital
International ("MSCI"). MSCI has granted a license for use by the Trust of
the MSCI Index and related trademarks and tradenames. The DJIA is the
property of Dow Jones & Company, Inc. Dow Jones & Company, Inc. has not
granted to the Strategic Stock Portfolio a license to use the DJIA. Neither
MSCI nor Dow Jones & Company, Inc. has participated in any way in the
creation of the Strategic Stock Portfolio or in the selection of the stocks
included in such Portfolio and neither has approved any information herein
relating thereto. Shares of the Strategic Stock Portfolio are not designed
so that their prices will parallel or correlate with any movements in the
DJIA or the MSCI Index, and it is expected that their prices will not
parallel or correlate with such movements.
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 THIS PORTFOLIO ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK AND ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information dated April 30, 1998 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> 175
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
<TABLE>
<S> <C>
CUSTODIAN: State Street Bank and Trust
Company
225 Franklin Street
Boston, Massachusetts 02110
SHAREHOLDER ACCESS Investor Services, Inc.
SERVICE AGENT: P.O. Box 418256
Kansas City, Missouri 64141-9256
DISTRIBUTOR: Van Kampen American Capital
Distributors, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
INVESTMENT Van Kampen American Capital
ADVISER: Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary...................... 3
Financial Highlights.................... 5
Introduction............................ 6
Investment Objective and Policies....... 6
Investment Practices.................... 9
The Trust and Its Management............ 11
Purchase of Shares...................... 12
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Determination of Net Asset Value........ 13
Redemption of Shares.................... 13
Dividends, Distributions and Taxes...... 13
Portfolio Performance................... 14
Description of Shares of the Trust...... 16
Additional Information.................. 16
</TABLE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Trust, the Adviser or the Distributor. This
Prospectus does not constitute an offer by the Trust or by the Distributor to
sell or a solicitation of an offer to buy any of the securities offered hereby
in any jurisdiction to any person to whom it is unlawful for the Trust to make
such an offer in such jurisdiction.
2
<PAGE> 176
PROSPECTUS SUMMARY
Shares Offered..........Shares of Beneficial Interest of the Strategic Stock
Portfolio (the "Portfolio"), a separate 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 above average total return through a
combination of potential capital appreciation and
dividend income, consistent with the preservation of
invested capital, by investing primarily in a portfolio
of dividend paying equity securities included in the
DJIA or in the MSCI Index. There can be no assurance
that the Portfolio will achieve its investment
objective.
Investment Policies and
Risk Factors..........The Portfolio invests primarily in dividend paying
equity securities of companies included in the DJIA or
in the MSCI Index. The Portfolio initially invested
approximately equally in 20 securities identified by the
Adviser (defined below) based on the Portfolio's
strategic selection policies as described below (the
"Strategic Selection Policies"). The ten highest
dividend yielding securities in the DJIA are identified
for investment. In addition, all companies having
securities in the MSCI Index are reviewed by the Adviser
and securities of companies in the financial or utility
sectors and of companies having securities included in
the DJIA are excluded. The remaining pool of MSCI Index
securities is further evaluated and securities of
companies that do not have positive one- and three-year
sales and earnings growth rates and two years of
positive dividend growth are excluded. The Adviser also
excludes MSCI Index securities that are in the bottom
25% of all MSCI Index securities measured in terms of
total annual trading volume. MSCI Index securities of
the remaining companies are ranked by dividend yield,
and the ten highest-yielding such MSCI Index securities
are identified for investment. The 20 securities so
identified (the "Strategic Securities") represented the
Portfolio's initial investments. The Adviser
periodically employs the same Strategic Selection
Policies to identify a new list of 20 Strategic
Securities and reviews and adjusts a portion or all of
the Portfolio's assets so as to invest that portion of
the Portfolio's assets approximately equally in the new
list of 20 Strategic Securities. In this manner, the
Adviser expects that each security in the Portfolio will
be reviewed and potentially adjusted approximately
annually. Application of the Strategic Selection
Policies will be subject to and limited by certain of
the Portfolio's other investment policies and
restrictions, including restrictions and limitations
which must be met in order for the Portfolio to qualify
to be treated for U.S. federal income tax purposes as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"),
or in order to comply with requirements of the
Investment Company Act of 1940, as amended (the "1940
Act") (such as investment diversification requirements
and industry concentration
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<PAGE> 177
limitations). In addition, the Adviser will try to avoid
transacting in odd-lots of securities in order to
minimize transaction costs. These limitations may, at
times, cause the composition of the Portfolio's
investment portfolio to differ significantly from that
which would have resulted had the Strategic Selection
Policies been fully implemented. Although each new list
of Strategic Securities will include only 20 securities,
because only a portion of the Portfolio's assets may be
reviewed and adjusted at any given time, the Adviser
expects that the number of securities held by the
Portfolio will over time increase and that the Portfolio
may at times hold forty or more different securities.
Except to raise cash for operational purposes, the
Portfolio ordinarily will not sell securities or
reevaluate its portfolio investments except as
periodically determined by the Adviser. As a result, the
adverse financial condition of a company will not result
in its elimination from the Portfolio, except under
extraordinary circumstances. Risks associated with an
investment in the Portfolio include the possible
deterioration of either the financial condition of the
issuers or the general condition of the stock market,
and general price volatility. The relatively high
dividend yield (calculated based on the current stock
price and the annualized most recent dividend payment
amount) of certain securities that the Portfolio may
acquire may reflect the market's assessment of the risk
that the company may reduce or eliminate the dividend in
the current period or in the future, or otherwise
reflect the market's unfavorable assessment of the
company's performance outlook. The Adviser generally
will not take these considerations into account in
implementing the Strategic Selection Policies. 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. (the
"Adviser") is the investment adviser for the Portfolio.
Distributor.............Van Kampen American Capital Distributors, Inc. (the
"Distributor") distributes the Portfolio's shares.
Dividends and
Distributions.........Dividends and any capital gains are declared and
distributed annually.
The foregoing is qualified in its entirety by reference to the
more detailed information appearing elsewhere in this
Prospectus.
4
<PAGE> 178
FINANCIAL HIGHLIGHTS
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains the financial highlights for the most
recent fiscal period) is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the cover of this Prospectus. This information should be read in conjunction
with the related financial statements and notes thereto included in the
Statement of Additional Information.
STRATEGIC STOCK PORTFOLIO
<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%(1)
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%(1)
Average Commission Paid per Equity Share Traded(2).......... $.0282
*If certain expenses had not been assumed by the Adviser,
Total Return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets..................... 2.59%
Ratio of Net Investment Income to Average Net Assets........ .68%
</TABLE>
- ---------------------
(1) Non-Annualized
(2)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable.
5
<PAGE> 179
INTRODUCTION
The Trust is a duly organized Delaware business trust with ten separate
portfolios. The Strategic Stock 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 the Portfolio represent an interest only in
that Portfolio. Since market risks are inherent in all securities to varying
degrees, assurance cannot be given that the investment objectives of any
portfolio will be met.
INVESTMENT OBJECTIVE AND POLICIES
General. The investment objective of the Portfolio is to seek an above
average total return through a combination of potential capital appreciation and
dividend income, consistent with the preservation of invested capital.
The Strategic Stock Portfolio invests primarily in dividend paying equity
securities of companies included in the DJIA or in the MSCI Index. The DJIA was
first published in The Wall Street Journal in 1896. Initially consisting of just
12 stocks, the DJIA expanded to 20 stocks in 1916 and to its present size of 30
stocks on October 1, 1928. The MSCI Index consists of approximately 370 large
domestic companies in the United States and has existed since January 1, 1970.
In selecting securities for the Fund, the Adviser intends to follow the
following policies (the "Strategic Selection Policies").
The ten highest dividend yielding securities in the DJIA are identified for
investment. In addition, all companies having securities in the MSCI Index are
reviewed by the Adviser and securities of companies in the financial or utility
sectors and of companies having securities included in the DJIA are excluded.
The remaining pool of MSCI Index securities is further evaluated and securities
of companies that do not have positive one- and three-year sales and earnings
growth rates and two years of positive dividend growth are excluded. The Adviser
also excludes MSCI Index securities that are in the bottom 25% of all MSCI Index
securities measured in terms of total annual trading volume. MSCI Index
securities of the remaining companies are ranked by dividend yield, and the ten
highest-yielding such MSCI Index securities are identified for investment. In
the event that this process results in less than 10 remaining MSCI Index
securities, those companies with the most favorable one- and three-year sales
and earnings performance and two-year dividend performance as determined by the
Adviser are added back until the number of MSCI Index securities equals 10.
Dividend yield for purposes of applying the foregoing investment policies is
calculated for each security by annualizing the last quarterly or semi-annual
ordinary dividend declared on the security and dividing the result by the
security's closing sale price on the applicable date. This yield is historical
and there can be no assurance that any dividends will be declared or paid in the
future.
The 20 securities so identified (the "Strategic Securities") represented
the Portfolio's initial investments. The Adviser periodically employs the same
Strategic Selection Policies to identify a new list of 20 Strategic Securities
and reviews and adjusts a portion or all of the Portfolio's assets so as to
invest that portion of the Portfolio's assets approximately equally in the new
list of 20 Strategic Securities. In this manner, the Adviser expects that
beginning with the reevaluation in month thirteen each security in the Portfolio
will be reviewed and potentially adjusted approximately annually, although
reviews and adjustments may be made more frequently. For a more detailed
discussion of the Portfolio's investment policies, including the frequency of
security reevaluations and the portion of the Portfolio's assets that the
Adviser presently expects to reevaluate at the end of each period, see the
Statement of Additional Information.
The Adviser generally seeks to allocate cash available for investment due
to the sale of new Shares of the Portfolio and the receipt of dividends and
interest income from the portfolio investments approximately proportionately
among the current list of Strategic Securities in the Portfolio. To the extent
that the Strategic Stock Portfolio is required to dispose of securities in order
to satisfy redemption requests, make distributions, pay expenses or otherwise
raise cash for
6
<PAGE> 180
operational purposes, the Adviser generally intends to sell approximately
proportionate amounts of securities from all securities in the Portfolio.
Application of the foregoing Strategic Selection Policies will be subject
to and limited by certain of the Portfolio's other investment policies and
restrictions, including restrictions and limitations which must be met in order
for the Portfolio to qualify to be treated for U.S. federal income tax purposes
as a "regulated investment company" under Subchapter M of the Code or in order
to comply with requirements of the 1940 Act. The Portfolio is subject to
investment diversification requirements that generally provide that the
Portfolio may not, with respect to 75% of its assets, invest more than 5% of its
assets in the securities of any one issuer or purchase more than 10% of the
outstanding voting securities of any one issuer. Further, the Portfolio
generally may not invest more than 25% of the value of its total assets in
securities of issuers in any particular industry. The Portfolio's satisfaction
of these requirements will take precedent over the Strategic Selection Policies.
In addition, the Adviser will try to avoid transacting in odd-lots of securities
in order to minimize transaction costs. These limitations may, at times, cause
the composition of the Portfolio's investment portfolio to differ significantly
from that which would have resulted had the Strategic Selection Policies been
fully implemented. In selecting securities for investment or disposition at
times that the Portfolio's investment policies and restrictions do not permit
full implementation of the Strategic Selection Policies, the Adviser will have
sole discretion to select securities for purchase or sale and generally will
make such selections in a manner that is consistent with the Portfolio's
investment objective and in a manner that it believes is consistent with the
investment rationale that is the basis for the Strategic Selection Policies.
The Portfolio will continue to hold securities, even though such securities
may not be included in the most recent list of Strategic Securities determined
for the review and adjustment of a portion of the Portfolio's assets. In
addition, although each new list of Strategic Securities will include only 20
securities, because only a portion of the Portfolio's assets may be reviewed and
adjusted at any given time, the Adviser expects that the number of securities
held by the Portfolio may over time increase and that the Portfolio may at times
hold forty or more different securities.
The Portfolio may invest up to 5% of its total assets in options on equity
securities indices, futures contracts on such indices and options on such
futures contracts for both hedging purposes and in an attempt to enhance gain.
The Strategic Stock Portfolio also may invest up to 5% of its total assets in
securities of other registered investment companies that seek to provide
investment results that generally correspond to the performance of securities
included in one or more broad market indices. Investment in securities of other
investment companies will subject the Portfolio to additional and potentially
duplicative costs and expenses, including investment management fees charged by
such registered investment companies. Pending investment and for temporary
defensive purposes the Portfolio may invest without limit in short-term, high
quality fixed income securities and in money-market instruments. The Adviser
expects that the portfolio turnover rate for the Strategic Stock Portfolio will
not exceed 100%. A high rate of portfolio turnover may result in increased
brokerage and other transaction expenses.
The DJIA is the property of Dow Jones & Company, Inc. Dow Jones & Company,
Inc. has not granted to the Strategic Stock Portfolio a license to use the DJIA.
Dow Jones & Company, Inc. has not participated in any way in the creation of the
Strategic Stock Portfolio or in the selection of the stocks included in such
Portfolio and has not approved any information herein relating thereto. Shares
of the Strategic Stock Portfolio are not designed so that their prices will
parallel or correlate with any movements in the DJIA, and it is expected that
their prices will not parallel or correlate with such movements.
The Portfolio is not sponsored, endorsed, sold or promoted by Morgan
Stanley. Morgan Stanley makes no representation or warranty, express or implied,
to the owners of shares of the Portfolio or any member of the public regarding
the advisability of investing in investment portfolios generally or in the
Strategic Stock Portfolio particularly or the ability of the MSCI Index to track
general stock
7
<PAGE> 181
market performance. Morgan Stanley is the licensor of certain trademarks,
service marks and trade names of Morgan Stanley and of the MSCI Index which is
determined, composed and calculated by Morgan Stanley without regard to this
Portfolio. Morgan Stanley has no obligation to take the needs of this Portfolio
or the owners of this Portfolio into consideration in determining, composing or
calculating the MSCI Index. Morgan Stanley is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
this Portfolio to be issued. Morgan Stanley has no obligation or liability to
owners of this Portfolio in connection with the administration, marketing or
trading of this Portfolio.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR
USE IN THE CALCULATION OF THE INDICES FROM SOURCES WHICH MORGAN STANLEY
CONSIDERS RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE
ACCURACY AND/OR THE COMPLETENESS OF THE INDICES OR ANY DATA INCLUDED THEREIN.
NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND
COUNTERPARTIES, OWNERS OF THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE INDICES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS
LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER
PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY
OTHER PARTY HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE,
CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
Risk Factors. There is no guarantee that the investment objective of the
Portfolio will be achieved because it is subject to the continuing ability of
the respective issuers of equities in which the Portfolio invests to declare and
pay dividends and because the market value of such equities can be affected by a
variety of factors. Common stocks may be especially susceptible to general stock
market movements and to volatile increases and decreases of value as market
confidence in and perceptions of the issuers change. There can be no assurance
that the value of the underlying securities will increase or that the issuers of
the securities will pay dividends on outstanding securities. The declaration of
dividends by any issuer depends upon several factors including the financial
condition of the issuer and general economic conditions. Risks associated with
an investment in the Portfolio include the possible deterioration of either the
financial condition of the issuers or the general condition of the stock market,
and general price volatility. The relatively high dividend yield of certain
securities that the Portfolio will acquire may reflect the market's assessment
of the risk that the company may reduce or eliminate the dividend in the current
period or in the future, or otherwise reflect the market's unfavorable
assessment of the company's performance outlook. The Adviser generally will not
take these considerations into account in implementing the Strategic Selection
Policies and, accordingly, the Portfolio may at times acquire securities of
companies that the market and the Adviser believe are more susceptible to
financial difficulty and corresponding adverse market performance than are other
companies with securities included in the DJIA or in the MSCI Index.
In addition, investors should be aware that the Portfolio is not "actively
managed." Except to raise cash for operational purposes, the Portfolio
ordinarily will not sell securities or reevaluate its portfolio investments
except as periodically determined by the Adviser. In addition, only a portion of
the Portfolio's assets may be reviewed and adjusted for any given period. As a
result, although the Portfolio may (but need not) dispose of a security in
certain events such as the issuer having defaulted on the payment on any of its
outstanding obligations or the price of a security having declined to such an
extent or other factors existing so that in the opinion of the Adviser the
retention of such security would be detrimental to the Portfolio, the adverse
financial condition of a company
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will not result in its elimination from the Portfolio prior to scheduled review
and adjustment except under extraordinary circumstances. Similarly, securities
held in the Portfolio ordinarily will not be sold by the Portfolio for the
purpose of taking advantage of market fluctuations or changes in anticipated
rates of appreciation.
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.
Loans of Portfolio Securities. The Portfolio may lend portfolio securities
to unaffiliated brokers, dealers and financial institutions provided that (a)
immediately after any such loan, the value of the securities loaned does not
exceed 10% of the total value of the Portfolio's assets and (b) any securities
loan is collateralized in accordance with applicable regulatory requirements.
See the Statement of Additional Information.
Illiquid and Restricted Securities. The Portfolio may invest up to 15% 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
Trustees or by the Adviser pursuant to Board-approved guidelines. The
determination of liquidity is based on the volume of reported trading in the
institutional secondary market for each security. Since it is not possible to
predict with assurance how the markets for restricted securities sold and
offered under Rule 144A will develop, the Trustees will monitor the Portfolio's
investment in these securities focusing on such factors, among others, as
valuation, liquidity and availability of information. This investment practice
could have the effect of increasing the level of illiquidity in the Portfolio to
the extent that qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. These difficulties and delays could
result in the Portfolio's inability to realize a favorable price upon
disposition of restricted securities, and in some cases might make disposition
of such securities at the time desired by the Portfolio impossible. Since market
quotations are not readily available for restricted
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securities, such securities will be valued by a method that the 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. 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 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) 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 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.
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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.
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.
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.
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ADVISORY AGREEMENTS. 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 includes 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 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 average daily net assets of the Portfolio at an
annual rate of 0.50% of the first $500 million of the Portfolio's average net
assets and 0.45% of the Portfolio's average net assets in excess of $500
million. The Adviser has also voluntarily elected to reimburse the Portfolio for
all ordinary business expenses in excess of 0.65% of the average daily net
assets by reducing the advisory fee and/or bearing other expenses of the
Portfolio in excess of such limitation. For the fiscal period ended December 31,
1997, advisory fees plus the cost of accounting services payable by the Trust on
behalf of the Strategic Stock Portfolio were 0.48%. For the same period, the
Portfolio's net total operating expenses (after fee waivers and expense
reimbursements) were 0.61%. In the absence of waivers/reimbursements, total
operating expenses would have been 2.59%. There can be no assurance the Adviser
will continue to waive its fee or reimburse expenses in the future.
From time to time the Adviser may agree to waive its investment advisory
fees or any portion thereof or elect to reimburse the Portfolio for ordinary
business expenses in excess of an agreed upon amount.
PERSONAL 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.
PORTFOLIO MANAGEMENT. John Cunniff has been primarily responsible for the
day-to-day management of the Portfolio's investment portfolio since its
inception. Mr. Cunniff is a Vice President of the Adviser and Van Kampen
American Capital Advisory Corp., an affiliate of the Adviser, and has been
employed by the Adviser since October 1995. Prior to that time, Mr. Cunniff was
Vice President, Portfolio Manager at Templeton Quantitative Advisors.
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 prices equal to
the per share net asset value of the
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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 most recent bid price. U.S.
Government and agency obligations are valued at the last reported bid price.
Listed options are valued at the last reported sale price in the exchange on
which such option is traded or, if no sales are reported, at the mean between
the last reported bid and asked prices. Options for which market quotations are
not readily available are valued at a fair value 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 receipt of a request in proper form.
The market value of the securities in the Portfolio is subject to daily
fluctuations and the net asset value of the Portfolio's shares will fluctuate
accordingly. Therefore, the redemption value may be more or less than the
investor's cost.
DIVIDENDS, DISTRIBUTIONS AND TAXES
All dividends and capital gains distributions of the Portfolio are
automatically reinvested by the Account in additional shares of the Portfolio.
Dividends and Distributions. Dividends from stocks and interest earned
from other investments are the main source of income for the Portfolio.
Substantially all of this income, less expenses, is distributed on an annual
basis. When the Portfolio sells portfolio securities, it may realize capital
gains or losses, depending on whether the prices of the securities sold are
higher or lower than the prices the Portfolio paid to purchase them. Net
realized capital gains represent the total profit from sales of securities minus
total losses from sales of securities including any losses carried forward from
prior years. The Portfolio distributes any net realized capital gains to the
Account no less frequently than annually.
Tax Status of the Portfolio. 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).
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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 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 their total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one, five and ten year periods or for the life of the
Portfolio. Other total return quotations, aggregate or average, over other time
periods may also be included. Total return calculations do not take into account
expenses at the "wrap" or 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.
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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
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 a Portfolio in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
lesser than a Portfolio's then current dividend rate.
A Portfolio's yield is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by a Portfolio, portfolio maturity and
a Portfolio's expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Portfolio's shares, a Portfolio's investment policies, and the risks
of investing in shares of a Portfolio. The investment return and principal value
of an investment in a Portfolio will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Adviser may, from time to time, waive advisory fees or reimburse a
certain amount of the ordinary business expenses of a 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, a Portfolio may compare its performance with that of other mutual
funds as listed in the ratings or rankings prepared by Lipper Analytical
Services, Inc., CDA, Morningstar Mutual Funds or similar independent services
which monitor the performance of mutual funds, with the Consumer Price Index,
the Dow Jones Industrial Average Index, NAREIT Equity REIT Index, Lehman
Brothers REIT Index, the MSCI Index, Salomon Brothers High Grade Bond Index,
Standard & Poor's indices, NASDAQ Composite Index, other appropriate indices of
investment securities, or with investment or savings vehicles. The
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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 contain additional performance
information. 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.
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 the 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.
16
<PAGE> 190
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> 191
- --------------------------------------------------------------------------------
LIFE INVESTMENT TRUST
- --------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 30, 1998
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
- --------------------------------------------------------------------------------
<PAGE> 192
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 ten Portfolios (the
"Portfolios"): Asset Allocation Portfolio (formerly Multiple Strategy Fund),
Domestic Income Portfolio (formerly Domestic Strategic Income Fund), Emerging
Growth Portfolio (formerly Emerging Growth Fund), Enterprise Portfolio (formerly
Common Stock Fund), Global Equity Portfolio (formerly Global Equity Fund),
Government Portfolio (formerly Government Fund), Growth and Income Portfolio
(formerly Growth and Income Fund), Money Market Portfolio (formerly Money Market
Fund), 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-32
Legal Counsel............................................... B-42
Investment Advisory Agreements.............................. B-43
Distributor................................................. B-45
Transfer Agent.............................................. B-46
Portfolio Transactions and Brokerage........................ B-46
Portfolio Turnover.......................................... B-48
Determination of Net Asset Value............................ B-48
Purchase and Redemption of Shares........................... B-50
Tax Status.................................................. B-50
Portfolio Performance....................................... B-50
Money Market Portfolio Yield Information.................... B-51
Other Information........................................... B-52
Appendix.................................................... B-53
Report of Independent Accountants........................... B-55
Financial Statements........................................ B-56
Notes to Financial Statements............................... B-133
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
<PAGE> 193
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 April 3, 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 APRIL 3, 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
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> 194
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE
RECORD HOLDER AT APRIL 3, 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> 195
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE
RECORD HOLDER AT APRIL 3, 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> 196
<TABLE>
<CAPTION>
AMOUNT OF RECORD OWNERSHIP
NAME AND ADDRESS OF OF THE PORTFOLIO PERCENTAGE
RECORD HOLDER AT APRIL 3, 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 Fund seeks a high total investment return consistent with prudent risk
through a fully managed investment policy utilizing equity securities as well as
investment grade intermediate and long-term debt securities and money market
securities.
DOMESTIC INCOME PORTFOLIO
The primary objective of the Portfolio is to 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 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
B-5
<PAGE> 197
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.
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
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<PAGE> 198
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.
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
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<PAGE> 199
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.
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.
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<PAGE> 200
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 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.
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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.
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
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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 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.
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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 writes call
options either on a covered basis or for cross-hedging purposes. A call option
is covered if at all times during the option period the Portfolio owns or has
the right to acquire securities of the type that it would be obligated to
deliver if any outstanding option were exercised. Thus, the Government Portfolio
may write options on mortgage-related or other U.S. Government securities or
forward commitments of such securities. An option is for cross-hedging purposes
if it is not covered, but is designed to provide a hedge against a security
which the Portfolio owns or has the right to acquire. In such circumstances, the
Portfolio collateralizes the option by maintaining in a segregated account with
the Portfolio's custodian, cash or liquid securities in an amount not less than
the market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. A Portfolio would write put options
only on a secured basis, which means that, at all times during the option
period, the Portfolio would maintain in a segregated account with its custodian
cash or liquid securities in an amount of not less than the exercise price of
the option, or would hold a put on the same underlying security at an equal or
greater exercise price.
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
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call (put) on the same underlying security and having the same exercise price
and expiration date as the call (put) previously written by the Portfolio. The
Portfolio would realize a gain (loss) if the premium plus commission paid in the
closing purchase transaction is less (greater) than the premium it received on
the sale of the option. A Portfolio would also realize a gain if an option it
has written lapses unexercised.
A Portfolio could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A
Portfolio could close out its position as writer of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, a Portfolio could purchase an offsetting option,
which would not close out its position as a writer, but would provide an asset
of equal value to its obligation under the option written. If a Portfolio is not
able to enter into a closing purchase transaction or to purchase an offsetting
option with respect to an option it has written, it will be required to maintain
the securities subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Writing Options. By writing a call option, a Portfolio loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Portfolio might become
obligated to purchase the underlying security at an exercise price that exceeds
the then current market price.
PURCHASING CALL AND PUT OPTIONS
A Portfolio could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. In
addition, the Emerging Growth Portfolio, the Enterprise Portfolio, the Growth
and Income Portfolio, 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 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.
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
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on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Portfolio holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Portfolio will
hold the Treasury bills in a segregated account with its custodian so that it
will be treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Portfolio as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Portfolio will purchase additional mortgage-related securities from the same
pool (if obtainable) or replacement mortgage-related securities in the cash
market in order to maintain its cover. A mortgage-related security held by the
Portfolio to cover an option position in any but the nearest expiration month
may cease to represent cover for the option in the event of a decline in the
coupon rate at which new pools are originated under the FHA/VA loan ceiling in
effect at any given time. If this should occur, the Portfolio will no longer be
covered, and the Portfolio will either enter into a closing purchase transaction
or replace such mortgage-related security with a mortgage-related security which
represents cover. When the Portfolio closes its position or replaces such
mortgage-related security, it may realize an unanticipated loss and incur
transaction costs.
OPTIONS ON STOCK INDEXES (ASSET ALLOCATION PORTFOLIO, EMERGING GROWTH PORTFOLIO,
ENTERPRISE PORTFOLIO, GLOBAL EQUITY PORTFOLIO, GROWTH AND INCOME PORTFOLIO, 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.
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
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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 40 stocks
on the New Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto
Stock Exchange. Futures and futures options on the Nikkei Index are traded on
the Chicago Mercantile Exchange and United States commodity exchanges may
develop futures and futures options on other indices of foreign securities.
Futures and options on United States devised index of foreign stocks are also
being developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.
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Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, a 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 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.
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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 Fund'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 Fund
may be subject may further restrict the Fund'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 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
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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 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
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banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign special procedures on
exercise and settlement, such as technical changes in the mechanics of delivery
of currency, the fixing of dollar settlement prices or prohibitions, on
exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
LOANS OF PORTFOLIO SECURITIES
Each of the Portfolios, except the Real Estate Securities Portfolio, may
lend an amount up to 10% of the value of its portfolio securities to
unaffiliated brokers, dealers and financial institutions provided that cash
equal to 100% of the market value of the securities loaned is deposited by the
borrower with the particular Portfolio and is maintained each business day.
While such securities are on loan, the borrower is required to pay the Portfolio
any income accruing thereon. Furthermore, the Portfolio may invest the cash
collateral in portfolio securities thereby increasing the return to the
Portfolio as well as increasing the market risk to the Portfolio.
Loans would be made for short-term purposes and subject to termination by
the Portfolio in the normal settlement time, currently 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).
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
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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
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;
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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.
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;
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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
13. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 25% of the value of the Portfolio's total assets
would be invested in such securities.
THE FOLLOWING RESTRICTIONS ARE APPLICABLE TO THE EMERGING GROWTH PORTFOLIO:
The Emerging Growth Portfolio shall not:
1. Invest directly in real estate interests of any nature, although the
Portfolio may invest indirectly through media such as real estate
investment trusts;
2. Invest in commodities or commodity contracts, except that the Portfolio
may enter into transactions in futures contracts or related options;
3. Issue any of its securities for (a) services or (b) property other than
cash or securities (including securities of which the Portfolio is the
issuer), except as a dividend or distribution to its shareholders in
connection with a reorganization;
4. Issue senior securities and shall not borrow money except from banks as
a temporary measure for extraordinary or emergency purposes and in an
amount not exceeding five percent of the Portfolio's total assets.
Notwithstanding the foregoing, the Portfolio may enter into transactions
in options, futures contracts and related options and may make margin
deposits and payments in connection therewith;
5. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the United
States Government, its agencies or instrumentalities and repurchase
agreements secured hereby); provided, however, that this limitation
excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the
securities and other assets owned by any such investment company;
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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 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
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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;
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;
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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";
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;
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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 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.
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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 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;
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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.
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
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<PAGE> 220
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
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
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<PAGE> 221
Act, as amended from time to time, or (iii) an exemption or other relief
from the provisions of the 1940 Act;
2. The Portfolio may not purchase securities on margin but the Portfolio
may obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities. The deposit or payment by the
Portfolio of initial or maintenance margin in connection with forward
contracts, futures, foreign currency futures or related options is not
considered the purchase of a security on margin;
3. The Portfolio may not invest in the securities of other open-end
investment companies, or invest in the securities of closed-end
investment companies except through purchase in the open market in a
transaction involving no commission or profit to a sponsor or dealer
(other than the customary broker's commission) or as part of a merger,
consolidation or other acquisition except that the Portfolio may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
4. The Portfolio may not invest more than 5% of its net assets in warrants
or rights valued at the lower of cost or market, nor more than 2% of its
net assets in warrants or rights (valued on such basis) which are not
listed on the New York or American Stock Exchanges. Warrants or rights
acquired in units or attached to other securities are not subject to the
foregoing limitation;
5. The Portfolio may not invest in securities of any company if any officer
or trustee of the Portfolio or of the Adviser owns more than 1/2 of 1%
of the outstanding securities of such company, and such officers and
trustees who own more than 1/2 of 1% own in the aggregate more than 5%
of the outstanding securities of such issuer;
6. The Portfolio may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Portfolio may acquire securities of public
companies which themselves are engaged in such activities;
7. The Portfolio may not invest more than 5% of its total assets in
securities of unseasoned issuers which have been in operation directly
or through predecessors for less than three years, except that the
Portfolio may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act; or
8. The Portfolio may not purchase or otherwise acquire any security if, as
a result, more than 15% of its net assets (taken at current value) would
be invested in securities that are illiquid by virtue of the absence of
a readily available market. This policy does not apply to restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 which the Trustees or the Adviser under approved
guidelines, may determine are liquid nor does it apply to other
securities for which, notwithstanding legal or contractual restrictions
on resale, a liquid market exists.
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
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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 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
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<PAGE> 223
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.
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("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 Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the 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.
</TABLE>
B-32
<PAGE> 224
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
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.
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.
</TABLE>
B-33
<PAGE> 225
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
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 Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter & Co. and its affiliates.
B-34
<PAGE> 226
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
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>
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<PAGE> 227
<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-36
<PAGE> 228
<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>
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<PAGE> 229
<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
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<PAGE> 230
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-39
<PAGE> 231
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
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<PAGE> 232
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 April 3, 1998, the trustees and officers of the Fund as a group owned
no shares of the Fund.
B-41
<PAGE> 233
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 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 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 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 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 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>
LEGAL COUNSEL
Skadden, Arps Slate, Meagher & Flom (Illinois).
B-42
<PAGE> 234
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 five advisory agreements
designated herein as "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
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 Emerging Growth
Advisory Agreement, the Trust pays to the Adviser as compensation for the
services rendered, facilities furnished, and expenses paid by it a fee payable
monthly computed on average daily net assets at an annual rate of 0.70% for the
Emerging Growth Portfolio. Under the Global Equity Advisory Agreement, the Trust
pays the Adviser as compensation for the services rendered, facilities furnished
and expenses paid by it a fee payable monthly computed on average daily net
assets at an annual rate of 1.00% for the Global Equity Portfolio. Under the
Growth and Income Advisory Agreement, the Trust pays the Adviser as compensation
for the services rendered, facilities furnished and expenses paid by it a fee
payable monthly computed on average daily net assets at an annual rate of 0.60%
of the first $500 million and 0.55% in excess of $500 million for the Growth and
Income Portfolio. Under the Real Estate Advisory Agreement, the Trust pays the
Adviser as compensation for the services rendered, facilities furnished and
expenses paid by it a fee payable monthly computed on average daily net assets
at an annual rate of 1.00% for the Real Estate Securities Portfolio. 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
B-43
<PAGE> 235
$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-44
<PAGE> 236
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>
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 filing fees, the cost of preparation of the
prospectuses, related legal and auditing expenses, and the cost of printing
prospectuses for current shareholders.
B-45
<PAGE> 237
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. 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 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
B-46
<PAGE> 238
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 (Asset Allocation Portfolio) $NA
18,166 (Enterprise Portfolio) $ 0
------- ---
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-47
<PAGE> 239
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>
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.
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
B-48
<PAGE> 240
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.
With respect to certain Portfolios, trading in securities on European and
Far Eastern securities exchanges and over-the-counter markets is normally
completed well before the close of business on each business day in New York
(i.e., a day on which the Exchange is open). In addition, European or Far
Eastern securities trading generally or in a particular country or countries may
not take place on all business days in New York. Furthermore, trading takes
place on all business days in Japanese markets, on certain Saturdays, and in
various foreign markets on days which are not business days in New York, and on
which the Portfolio's net asset value is not calculated, and on which the
Portfolio does not effect sales, redemptions and repurchases of its shares.
There may be significant variations in the net asset value of Portfolio shares
on days when net asset value is not calculated and on which shareholders cannot
redeem on account of changes in prices of stocks traded in foreign stock
markets.
GOVERNMENT PORTFOLIO NET ASSET VALUATION
U.S. Government securities are traded in the over-the-counter market and
are valued at the last available bid price. Such valuations are based on
quotations of one or more dealers that make markets in the securities as
obtained from such dealers or from a pricing service. Options, interest rate
futures contracts and options thereon, which are traded on exchanges, are valued
at their last sale or settlement price as of the close of such exchanges or if
no sales are reported, at the mean between the last reported bid and asked
prices. Securities with a remaining maturity of 60 days or less are valued on an
amortized cost basis, which approximates market value. Securities and assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by the Adviser based on procedures approved by the
Trust's Trustees.
B-49
<PAGE> 241
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 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>
B-50
<PAGE> 242
- -------------------------
* 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%.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Portfolio's transfer agent, in
1993. In addition, the Adviser may also refer to the Houston Awards for Quality,
received by American Capital in 1994.
From time to time, in reports or other communications, or in advertising or
sales materials the Adviser may graphically illustrate the relative average
annual returns of the following categories for the prior ten-year period:
Inflation, Short-Term Government Securities, Long-Term Government Securities,
Equity REITs and Common Stocks.
MONEY MARKET PORTFOLIO YIELD INFORMATION
The yield of the Portfolio is its net income expressed in annualized terms.
The Securities and Exchange Commission requires by rule that a yield quotation
set forth in an advertisement for a "money market" fund be computed by a
standardized method based on a historical seven calendar day period. The
standardized yield is computed by determining the net change (exclusive of
realized gains and losses and unrealized appreciation and depreciation) in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by 365/7. The
determination of net change in account value reflects the value of additional
shares purchased with dividends from the original share, dividends declared on
both the original share and such additional shares, and all fees that are
charged to all shareholder accounts, in proportion to the length of the base
period and the Portfolio's 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.
B-51
<PAGE> 243
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-52
<PAGE> 244
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-53
<PAGE> 245
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-54
<PAGE> 246
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-55
<PAGE> 247
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-56 See Notes to Financial Statements
<PAGE> 248
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-57 See Notes to Financial Statements
<PAGE> 249
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-58 See Notes to Financial Statements
<PAGE> 250
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-59 See Notes to Financial Statements
<PAGE> 251
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-60 See Notes to Financial Statements
<PAGE> 252
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-61 See Notes to Financial Statements
<PAGE> 253
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-62 See Notes to Financial Statements
<PAGE> 254
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-63 See Notes to Financial Statements
<PAGE> 255
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-64 See Notes to Financial Statements
<PAGE> 256
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-65 See Notes to Financial Statements
<PAGE> 257
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-66 See Notes to Financial Statements
<PAGE> 258
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-67 See Notes to Financial Statements
<PAGE> 259
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-68 See Notes to Financial Statements
<PAGE> 260
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-69 See Notes to Financial Statements
<PAGE> 261
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-70 See Notes to Financial Statements
<PAGE> 262
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-71 See Notes to Financial Statements
<PAGE> 263
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-72 See Notes to Financial Statements
<PAGE> 264
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-73 See Notes to Financial Statements
<PAGE> 265
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-74 See Notes to Financial Statements
<PAGE> 266
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-75 See Notes to Financial Statements
<PAGE> 267
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-76 See Notes to Financial Statements
<PAGE> 268
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-77 See Notes to Financial Statements
<PAGE> 269
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-78 See Notes to Financial Statements
<PAGE> 270
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-79 See Notes to Financial Statements
<PAGE> 271
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-80 See Notes to Financial Statements
<PAGE> 272
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-81 See Notes to Financial Statements
<PAGE> 273
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-82 See Notes to Financial Statements
<PAGE> 274
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-83 See Notes to Financial Statements
<PAGE> 275
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-84 See Notes to Financial Statements
<PAGE> 276
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-85 See Notes to Financial Statements
<PAGE> 277
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-86 See Notes to Financial Statements
<PAGE> 278
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-87 See Notes to Financial Statements
<PAGE> 279
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-88 See Notes to Financial Statements
<PAGE> 280
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-89 See Notes to Financial Statements
<PAGE> 281
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-90 See Notes to Financial Statements
<PAGE> 282
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-91 See Notes to Financial Statements
<PAGE> 283
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-92 See Notes to Financial Statements
<PAGE> 284
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-93 See Notes to Financial Statements
<PAGE> 285
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-94 See Notes to Financial Statements
<PAGE> 286
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-95 See Notes to Financial Statements
<PAGE> 287
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-96 See Notes to Financial Statements
<PAGE> 288
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-97 See Notes to Financial Statements
<PAGE> 289
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-98 See Notes to Financial Statements
<PAGE> 290
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-99 See Notes to Financial Statements
<PAGE> 291
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-100 See Notes to Financial Statements
<PAGE> 292
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-101 See Notes to Financial Statements
<PAGE> 293
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-102 See Notes to Financial Statements
<PAGE> 294
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-103 See Notes to Financial Statements
<PAGE> 295
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-104 See Notes to Financial Statements
<PAGE> 296
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-105 See Notes to Financial Statements
<PAGE> 297
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-106 See Notes to Financial Statements
<PAGE> 298
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-107 See Notes to Financial Statements
<PAGE> 299
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-108 See Notes to Financial Statements
<PAGE> 300
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-109 See Notes to Financial Statements
<PAGE> 301
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-110 See Notes to Financial Statements
<PAGE> 302
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-111 See Notes to Financial Statements
<PAGE> 303
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-112 See Notes to Financial Statements
<PAGE> 304
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-113 See Notes to Financial Statements
<PAGE> 305
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-114 See Notes to Financial Statements
<PAGE> 306
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-115 See Notes to Financial Statements
<PAGE> 307
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-116 See Notes to Financial Statements
<PAGE> 308
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-117 See Notes to Financial Statements
<PAGE> 309
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-118 See Notes to Financial Statements
<PAGE> 310
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-119 See Notes to Financial Statements
<PAGE> 311
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-120 See Notes to Financial Statements
<PAGE> 312
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-121 See Notes to Financial Statements
<PAGE> 313
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-122 See Notes to Financial Statements
<PAGE> 314
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-123 See Notes to Financial Statements
<PAGE> 315
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-124 See Notes to Financial Statements
<PAGE> 316
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-125 See Notes to Financial Statements
<PAGE> 317
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-126 See Notes to Financial Statements
<PAGE> 318
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-127 See Notes to Financial Statements
<PAGE> 319
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-128 See Notes to Financial Statements
<PAGE> 320
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-129 See Notes to Financial Statements
<PAGE> 321
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-130 See Notes to Financial Statements
<PAGE> 322
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-131 See Notes to Financial Statements
<PAGE> 323
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-132 See Notes to Financial Statements
<PAGE> 324
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-133
<PAGE> 325
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-134
<PAGE> 326
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-135
<PAGE> 327
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-136
<PAGE> 328
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-137
<PAGE> 329
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-138
<PAGE> 330
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-139
<PAGE> 331
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-140
<PAGE> 332
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-141
<PAGE> 333
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-142
<PAGE> 334
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+
(d) Second Amended and Restated Certificate of Designation of
Domestic Income Portfolio+
(e) Amended and Restated Certificate of Designation of Emerging
Growth Portfolio+
(f) Amended and Restated Certificate of Designation of Global
Equity Portfolio+
(g) Amended and Restated Certificate of Designation of
Government Portfolio+
(h) Amended and Restated Certificate of Designation of Money
Market Portfolio+
(i) Second Amended and Restated Certificate of Designation of
Asset Allocation Portfolio+
(j) Second Amended and Restated Certificate of Designation of
Morgan Stanley Real Estate Securities Portfolio+
(k) Amended and Restated Certificate of Designation of Growth
and Income Portfolio+
(l) Certificate of Designation of Strategic Stock Portfolio+
(2) Amended and Restated Bylaws(6)
(5) (a) Investment Advisory Agreement for Asset Allocation
Portfolio, Domestic Income Portfolio, Enterprise Portfolio,
Government Portfolio and Money Market Portfolio+
(b) Investment Advisory Agreement for Emerging Growth Portfolio+
(c) Investment Advisory Agreement for Global Equity Portfolio+
(d) Investment Sub-Advisory Agreement for Global Equity
Portfolio+
(e) Investment Advisory Agreement for Morgan Stanley Real Estate
Securities Portfolio+
(f) Investment Advisory Agreement for Growth and Income
Portfolio+
(g) Investment Advisory Agreement for Strategic Stock Portfolio+
(6) Distribution and Service Agreement+
(8) (a) Custodian Contract(9)
(b) Transfer Agency and Servicing Agreement(10)
(9) (a) Data Access Services Agreement(8)
(b) Fund Accounting Agreement(10)
(10) Opinion of Counsel(8)
(11) Consent of Independent Accountants+
(13) (a) Investment Letter(2)
</TABLE>
C-1
<PAGE> 335
<TABLE>
<C> <S> <C>
(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+
(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+
(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.
+ 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
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>
ITEM 27. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Amended and
Restated Agreement and Declaration of Trust.
C-2
<PAGE> 336
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.
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.
C-3
<PAGE> 337
(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> 338
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, VAN KAMPEN AMERICAN CAPITAL LIFE
INVESTMENT TRUST certifies that it meets all of the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized in the City of Oakbrook Terrace and State of Illinois,
on the 24th day of April, 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 April 24th, 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>
April 24, 1998
<PAGE> 339
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT NO. 24 FORM N-1A
AS SUBMITTED TO THE
SECURITIES AND EXCHANGE COMMISSION
ON APRIL 30, 1998
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER ------------------------------------------------------------
- --------
<C> <S> <C>
(1) (c) Second Amended and Restated Certificate of Designation of
Enterprise Portfolio
(d) Second Amended and Restated Certificate of Designation of
Domestic Income Portfolio
(e) Amended and Restated Certificate of Designation of Emerging
Growth Portfolio
(f) Amended and Restated Certificate of Designation of Global
Equity Portfolio
(g) Amended and Restated Certificate of Designation of
Government Portfolio
(h) Amended and Restated Certificate of Designation of Money
Market Portfolio
(i) Second Amended and Restated Certificate of Designation of
Asset Allocation Portfolio
(j) Second Amended and Restated Certificate of Designation of
Morgan Stanley Real Estate Securities Portfolio
(k) Amended and Restated Certificate of Designation of Growth
and Income Portfolio
(l) Certificate of Designation of Strategic Stock Portfolio
(5) (a) Investment Advisory Agreement for Asset Allocation
Portfolio, Domestic Income Portfolio, Enterprise Portfolio,
Government Portfolio and Money Market Portfolio
(b) Investment Advisory Agreement for Emerging Growth Portfolio
(c) Investment Advisory Agreement for Global Equity Portfolio
(d) Investment Sub-Advisory Agreement for Global Equity
Portfolio
(e) Investment Advisory Agreement for Morgan Stanley Real Estate
Securities Portfolio
(f) Investment Advisory Agreement for Growth and Income
Portfolio
(g) Investment Advisory Agreement for Strategic Stock Portfolio
(6) Distribution and Service Agreement
(11) Consent of Independent Accountants
(16) Computation of Performance Information
(24) Power of Attorney
(27) Financial Data Schedules
</TABLE>
<PAGE> 1
EXHIBIT (1)(c)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Second Amended and Restated Certificate of Designation
of
Enterprise Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Amended and Restated Certificate
of Designation of the Enterprise Fund Series of the Trust dated March 6, 1996,
by redesignating such Series as the Enterprise 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- ------------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST EXHIBIT (1)(d)
Second Amended and Restated Certificate of Designation
of
Domestic Income Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Amended and Restated Certificate
of Designation of the Domestic Income Fund Series of the Trust dated March 6,
1996, by redesignating such Series as the Domestic Income 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- -------------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
EXHIBIT (1)(e)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Emerging Growth Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Certificate of Designation of the
Emerging Growth Fund Series of the Trust dated June 21, 1995 by redesignating
such Series as the Emerging Growth 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- -------------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
EXHIBIT (1)(f)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Global Equity Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Certificate of Designation of the
Global Equity Fund Series of the Trust dated June 21, 1995 by redesignating
such Series as the Global Equity 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- -------------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
EXHIBIT (1)(g)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Government Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Certificate of Designation of the
Government Fund Series of the Trust dated June 21, 1995 by redesignating such
Series as the Government 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- -----------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
EXHIBIT (1)(h)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Money Market Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Certificate of Designation of the
Money Market Fund Series of the Trust dated June 21, 1995 by redesignating such
Series as the Money Market 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- ------------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST EXHIBIT (1)(i)
Second Amended and Restated Certificate of Designation
of
Asset Allocation Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Amended and Restated Certificate
of Designation of the Asset Allocation Fund Series of the Trust dated March 6,
1996, by redesignating such Series as the Asset Allocation 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- --------------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
EXHIBIT (1)(j)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Second Amended and Restated Certificate of Designation
of
Morgan Stanley Real Estate Securities Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
First Amended and Restated Agreement and Declaration of Trust ("Declaration"),
and by the affirmative vote of a Majority of the Trustees does hereby amend and
restate in its entirety the Amended and Restated Certificate of Designation of
the Real Estate Securities Portfolio Series of the Trust dated July 25, 1996 by
redesignating such Series as the Morgan Stanley Real Estate Securities 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but not
all 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.
July 2, 1997
/s/ RONALD A. NYBERG
- -----------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (1)(k)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Amended and Restated Certificate of Designation
of
Growth and Income Portfolio
The undersigned, being the Secretary of Van Kampen American Capital Life
Investment Trust, a Delaware business trust (the "Trust"), pursuant to the
authority conferred upon the Trustees of the Trust by Section 6.1 of the
Trust's First Amended and Restated Agreement and Declaration of Trust
("Declaration"), and by the affirmative vote of a Majority of the Trustees does
hereby amend and restate in its entirety the Certificate of Designation of the
Growth and Income Fund Series of the Trust dated March 6, 1996 by redesignating
such Series as the Growth and Income 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 Share, 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 limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but
not all 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.
July 25, 1996
/s/ Ronald A. Nyberg
- -----------------------
Ronald A. Nyberg,
Secretary
<PAGE> 1
EXHIBIT (1)(l)
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
Certificate of Designation
of
Strategic Stock 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 Strategic Stock 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 Share, 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 limitations of Section 9.5 of
the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
an officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Portfolio outstanding and
entitled to vote or, if such amendment affects the Shares of one or more but not
all 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.
July 24, 1997
/s/ Ronald A. Nyberg
----------------------------
Ronald A. Nyberg, Secretary
<PAGE> 1
EXHIBIT (5)(a)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this May 31, 1997, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust (hereinafter
referred to as the "TRUST"), and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation (hereinafter referred to as the "ADVISER").
The TRUST and the ADVISER agree as follows:
(1) APPOINTMENT
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST's Asset Allocation Portfolio, Domestic Income Portfolio, Enterprise
Portfolio, Government Portfolio and Money Market Portfolio ("Initial
Portfolios"), for the period and on the terms set forth in this Agreement. The
ADVISER accepts such appointment and agrees to furnish the services herein set
forth for the compensation herein provided.
b. In the event that the TRUST establishes one or more portfolios other than
the Initial Portfolios with respect to which it desires to retain the ADVISER
to act as investment adviser hereunder, it shall notify the ADVISER in writing.
If the ADVISER is willing to render such services it shall notify the TRUST in
writing whereupon such portfolio shall become a Portfolio hereunder and the
compensation payable by such new portfolio to the ADVISER will be as agreed in
writing at the time.
(2) SERVICES RENDERED AND EXPENSES PAID BY ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), By-laws, registration
statements, prospectus and stated investment objectives, policies and
restrictions of each Portfolio, shall:
a. manage the investment and reinvestment of the TRUST's assets
including, by way of illustration, the evaluation of pertinent economic,
statistical, financial and other data, determination of the industries and
companies to be represented in each of the TRUST's Portfolios, and formulation
and implementation of investment programs;
b. maintain a trading desk and place all orders for the purchase and
sale of portfolio investments for the account of each Portfolio of the TRUST
with brokers or dealers selected by the ADVISER;
c. conduct and manage the day-to-day operations of the TRUST
including, by way of illustration, the preparation of registration statements,
prospectuses, reports, proxy solicitation materials and amendments thereto, the
furnishing of 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 each Portfolio the most
favorable price and execution available and shall maintain records adequate to
demonstrate compliance with this requirement. Subject to prior authorization
by the TRUST's Trustees of appropriate policies and procedures, the ADVISER
may, to the extent authorized by law, cause the TRUST to pay a broker or dealer
that provides brokerage and research services to the ADVISER an amount of
commission for effecting a portfolio investment
<PAGE> 2
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.
(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,
2
<PAGE> 3
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, a monthly fee
computed at the following annual rate:
.50% on the first $500 million of the Portfolios' average daily net assets;
.45% on the next $500 million of the Portfolios' average daily net assets; .and
.40% of any excess over $1 billion.
For purposes of this calculation, assets of such Portfolios shall be combined
in calculating the investment advisory fee. Each Portfolio shall bear its pro
rata share of such fee based upon its average daily net assets.
Average daily net assets shall be determined by taking the average of the net
assets for each business day (for each calendar day, in the case of the Money
Market Portfolio) during a given calendar month calculated in the manner
provided in the TRUST's Declaration of Trust. Such fee shall be payable for
each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall
be reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such
commissions, fees, brokerage or similar payments. The ADVISER shall use its
best efforts to recapture all available tender offer solicitation fees and
exchange offer fees in connection with 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.
In the event that the ordinary business expenses of the TRUST for any fiscal
year should exceed .95% of average daily net assets, the compensation due the
ADVISER for such fiscal year shall be reduced by the amount of such excess.
The Adviser's compensation shall be so reduced by a reduction or a refund
thereof, at the time such compensation is payable after the end of each
calendar month during such fiscal year of the TRUST, and if such amount should
exceed such monthly compensation, the ADVISER shall pay the TRUST an amount
sufficient to make up the deficiency, subject to readjustment during the
TRUST's fiscal year. For purposes of this paragraph, all ordinary business
expenses of the TRUST shall include the investment advisory fee and other
operating expenses paid by the TRUST except (i) for interest and taxes; (ii)
brokerage commissions; (iii) as a result of litigation in connection with a
suit involving a claim for recovery by the TRUST; (iv) as a result of
litigation involving a defense against a liability asserted against the TRUST,
provided that, if the ADVISER made the decision or took the actions which
resulted in such claim, it acted in good faith without negligence or
misconduct; and (v) any indemnification paid by the TRUST to its officers and
trustees and the ADVISER in accordance with applicable state and federal laws
as a result of such litigation.
If the ADVISER shall serve for less than the whole of any month, the
foregoing compensation shall be prorated.
3
<PAGE> 4
(5) BOOKS AND RECORDS
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the TRUST are the
property of the TRUST and further agrees to surrender promptly to the TRUST any
of such records upon the TRUST's request. The ADVISER further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under the Act.
(6) DURATION OF AGREEMENT
This Agreement shall become effective with respect to the Initial Portfolios
on the date hereof, 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 Agreements (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 s 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 as to any Portfolio 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. The TRUST is composed of multiple
Portfolios. All obligations of the TRUST under this Agreement shall apply only
on a Portfolio by Portfolio basis and the assets of one Portfolio shall not be
liable for the obligations of any other Portfolio. A Certificate of Trust in
respect of the TRUST is on file with the Secretary of 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-laws 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.
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
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 (5)(b)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this May 31, 1997, 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 Emerging Growth 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 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
<PAGE> 2
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.
(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.
2
<PAGE> 3
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 the following annual rate:
0.70% of average daily net assets.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
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.
(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.
3
<PAGE> 4
This Agreement shall terminate automatically in the event of its assignment.
The Agreement may be terminated as to any Portfolio 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. The TRUST is composed of multiple
Portfolios. All obligations of the TRUST under this Agreement shall apply only
on a Portfolio by Portfolio basis and the assets of one Portfolio shall not be
liable for the obligations of any other Portfolio. A Certificate of Trust in
respect of the TRUST is on file with the Secretary of 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.
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
By: /s/ Dennis J. McDonnell By: /s/ Peter W. Hegel
------------------------ ---------------------------
Name: Dennis J. McDonnell Name: Peter W. Hegel
Its: President Its: Executive Vice President
4
<PAGE> 1
EXHIBIT (5)(c)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this May 31, 1997, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust (hereinafter
referred to as the "TRUST"), and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation (hereinafter referred to as the "ADVISER").
The TRUST and the ADVISER agree as follows:
(1) APPOINTMENT
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST's Global Equity Portfolio ("the Portfolio"), for the period and on the
terms set forth in this Agreement. The ADVISER accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
b. In the event that the TRUST establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the TRUST in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new portfolio to the ADVISER will be as agreed in writing at the time.
(2) SERVICES RENDERED AND EXPENSES PAID BY ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), 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
account 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 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
<PAGE> 2
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.
(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.
2
<PAGE> 3
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 the following annual rate: 1.00% of average
daily net assets.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall
be reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such commissions,
fees, brokerage or similar payments. The ADVISER shall use its best efforts to
recapture all available tender offer solicitation fees and exchange offer fees
in connection with 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.
(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.
3
<PAGE> 4
This Agreement shall terminate automatically in the event of its assignment.
The Agreement may be terminated as to any Portfolio 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 amy 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.
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.
KAMPEN AMERICAN CAPITAL VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC. LIFE INVESTMENT TRUST
By: /s/ Dennis J. McDonnell By: /s/ Peter W. Hegel
----------------------------- -----------------------------
Name: Dennis J. McDonnell Name: Peter W. Hegel
Its: President Its: Executive Vice President
4
<PAGE> 1
EXHIBIT (5)(d)
INVESTMENT SUB-ADVISORY AGREEMENT BETWEEN
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
AND
MORGAN STANLEY ASSET MANAGEMENT INC.
THIS AGREEMENT is made as of this May 31, 1997 by and between MORGAN STANLEY
ASSET MANAGEMENT INC., a Delaware Corporation, located at 1221 Avenue of the
Americas, New York, New York 10020, and VAN KAMPEN AMERICAN CAPITAL ASSET
MANAGEMENT, INC. ("VKAC") a Delaware Corporation, located at One Parkview
Plaza, Oakbrook Terrace, IL 60181.
WHEREAS, VKAC has heretofore sponsored and acts as Investment Adviser to the
Global Equity Portfolio of Van Kampen American Capital Life Investment Trust
(the "Fund"); and
WHEREAS, MORGAN STANLEY ASSET MANAGEMENT INC. ("MSAM") has available a staff of
experienced investment personnel and facilities for providing investment
sub-advisory services to the investment portfolio; and
WHEREAS, MSAM is an investment adviser registered under the Investment Advisers
Act of 1940, as amended and is willing to provide VKAC with investment advisory
services on the terms and conditions hereinafter set forth; and
WHEREAS, VKAC and MSAM (jointly referred to as "the Advisers") desire to enter
into an agreement for MSAM to provide sub-advisory services to the Fund and to
VKAC with respect to the Fund's investments.
NOW THEREFORE it is mutually agreed:
1. INVESTMENT SUB-ADVISORY SERVICES
1.1 Investment Advice
a) Subject to the overall policies, control, direction and review of the
Fund's Trustees, MSAM shall keep under review the investments of the Fund and
continuously furnish to the Fund and to VKAC (1) investment advice with respect
to all or such portion of the Fund's assets as the Advisers agree to from time
to time; (2) economic, statistical and research information and advice,
including advice on the allocation of investments among countries, relating to
all or such portion of the Fund's assets as the Advisers shall agree to from
time to time; (3) recommendations as to the voting of proxies solicited by or
with respect to securities under MSAM's supervision; and (4) an investment
program with respect to securities and recommendations as to what securities
shall be purchased, sold or exchanged, and what portion, if any, of the
securities shall be held in money market instruments.
b) The Advisers are responsible for the allocation of the Fund's assets
among the various securities markets of the world. The Advisers will determine
at least quarterly the percentage of the assets that shall be allocated to each
of the Advisers (the "Asset Allocation"). The Asset Allocation will
specify the percentage and nature of the assets of the Fund allocated to each
of the Advisers for management on the effective date of the determination and
will apply to cash inflows or outflows and income and expense accruals
thereafter until such time as the Asset Allocation is redetermined. Each of
the Advisers will be responsible for the allocation of assets among the
securities markets within various regions as they agree to from time to time.
c) Unless otherwise instructed by VKAC or the Trustees, and subject to
the provisions of this Agreement and to any guidelines or limitations specified
from time to time by VKAC or by the Trustees, MSAM shall determine the
securities to be purchased and sold by the Fund and shall place orders for the
purchase, sale or exchange of securities for the Fund's accounts with brokers
or dealers and to that end
<PAGE> 2
MSAM is authorized by the Trustees to give instructions to the Custodian and
any Sub-Custodian of the Fund as to deliveries of such securities, transfers of
currencies and payments of cash for the account of the Fund.
d) In performing these services, MSAM shall adhere to the Fund's
investment objectives, restrictions and limitations as contained in its
Prospectus, Statement of Additional Information, or Agreement and Declaration
of Trust and shall comply with all statutory and regulatory restrictions,
limitations and requirements applicable to the activity of the Fund.
e) Unless otherwise instructed by VKAC or the Trustees, and subject to
the provisions of this Agreement and to any guidelines or limitations specified
from time to time by VKAC or by the Trustees, MSAM shall have executed and
performed on behalf of and at the expense of the Fund:
i) Purchases, sales, exchanges, conversions, and placement or orders for
execution, and
ii) Reporting of all transactions to VKAC and to other entities as
directed by VKAC or by the Trustees.
f) MSAM shall provide the Trustees at least quarterly, in advance of the
regular meetings of the Trustees, a report of its activities hereunder on
behalf of the Fund and its proposed strategy for the next quarter, all in such
form and detail as requested by the Trustees. MSAM shall also make an
investment officer available to attend such meetings of the Trustees as the
Trustees may reasonably request.
1.2 Restriction of MSAM's Powers
(a) MSAM shall not commit the Fund to any extent beyond the amount of the
cash and securities placed by the Fund under the control of MSAM.
(b) In carrying out its duties hereunder MSAM shall comply with all
reasonable instruction of the Fund or VKAC in connection therewith. Such
instructions may be given by letter, telex, telefax or telephone confirmed by
telex, by the Trustees or by any other person authorized by a resolution of the
Trustees provided a certified copy of such resolution has been supplied to
MSAM.
(c) All securities, cash, and other assets of the Fund shall be placed
and maintained in the care of a member bank of the Federal Reserve System of
the United States approved by the Trustees as custodian and one or more
"Eligible Foreign Custodians" (as defined in Rule 17f-5 under the Investment
Company Act of 1940 (the "1940 Act")) approved by the Trustees as
sub-custodians.
(d) Persons authorized by resolution of the Trustees shall have the right
to inspect and copy contracts, notes, vouchers, and copies of entries in books
or electronic recording media relating to the Fund's transactions at the
registered office of MSAM at any time during normal business hours. Such
records, in relation to each transaction effected by MSAM on behalf of the Fund
shall be maintained by MSAM for a period of seven years from the date of such
transaction.
1.3 Purchase and Sale of Securities
In performing the services described above, MSAM shall use its best
efforts to obtain for the Fund the most favorable price and execution
available. Subject to prior authorization of appropriate policies and
procedures by the Trustees, MSAM may, to the extent authorized by law, cause
the Fund to pay a broker or dealer who provides brokerage and research services
an amount of commission for effecting the Fund's investment transaction in
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction, in recognition of the brokerage and research
services provided by the broker or dealer. To the extent authorized by law,
MSAM shall not be deemed to have acted unlawfully or to have breached any duty
created by this Agreement or otherwise solely by reason of such action.
<PAGE> 3
1.4 Custodian
MSAM shall not act as Custodian for the securities or any other assets of
the Fund. All such assets shall be held by the Custodian or Sub-Custodian
appointed by the Trustees.
2. DUTIES OF VKAC
2.1 Provision of Information
VKAC shall advise MSAM from time to time with respect to the Fund of its
investment objectives and of any changes or modifications thereto, as well as
any specific investment restrictions or limitations by sending to MSAM a copy
of each registration statement relating to the Fund as filed with the
Securities and Exchange Commission. As requested by MSAM, VKAC shall furnish
such information to MSAM as to holdings, purchases, and sales of the securities
under its management as will reasonably enable MSAM to furnish its investment
advice under this Agreement.
2.2 Compensation to MSAM
The fee for the services provided under this Agreement will be determined
as follows:
(a) An amount for each month (or such other valuation period as may be
mutually agreed upon) equivalent, on an annual basis, to 50% of the
compensation actually received by VKAC pursuant to the investment advisory fee
schedule set forth in the Investment Advisory Agreement between the Fund and
VKAC taking into account any waiver or return to the Fund of any or all of such
advisory fee by VKAC (with any such return of fees to be treated as if not
actually received). The value of the assets of the Fund shall be computed as of
the close of business on the last day of each valuation period for the Fund,
using the average of all the daily determinations of the net value of the
assets of the Fund.
(b) The foregoing fee shall be paid in cash by VKAC to MSAM within five
(5) business days after the last day of the valuation period.
3. MISCELLANEOUS
3.1 Activities of MSAM
The services of MSAM as Sub-Adviser to VKAC under this Agreement are not
to be deemed exclusive, MSAM and its affiliates being free to render services
to others. It is understood that shareholders, trustees, officers and employees
of MSAM may become interested in the Fund or VKAC as a shareholder, trustee,
officer, partner or otherwise.
3.2 Services to Other Clients
VKAC acknowledges that MSAM may have investment responsibilities, or
render investment advice to, or perform other investment advisory services for,
other individuals or entities ("Clients"). Subject to the provisions of this
paragraph, VKAC agrees that MSAM may give advice or exercise investment
responsibility and take such other action with respect to such Clients which
may differ from advice given or the timing or nature of action taken with
respect to the Fund, provided that MSAM acts in good faith, and provided,
further, that it is MSAM policy to allocate, within its reasonable discretion,
investment opportunities to the Fund over a period of time on a fair and
equitable basis relative to the Clients, taking into account the investment
objectives and policies of the Fund and any specific investment restrictions
applicable thereto. VKAC acknowledges that one or more of the Clients may at
any time hold, acquire, increase, decrease, dispose of or otherwise deal with
positions in investments in which the Fund may have an interest from time to
time, whether in transactions which may involve the Fund or otherwise. MSAM
shall have no obligation to acquire for the Fund a position in any investment
which any Client may acquire, and VKAC shall have no first refusal,
coinvestment or other rights in respect of any such investment, either for the
Fund or otherwise.
<PAGE> 4
3.3 Best Efforts
It is understood and agreed that in furnishing the investment advice and
other services as herein provided, MSAM shall use its best professional
judgment to recommend actions which will provide favorable results for the
Fund. MSAM shall not be liable to the Fund or to any shareholder of the Fund
to any greater degree than VKAC.
3.4 Duration of Agreement
a) This Agreement, unless terminated pursuant to paragraph b or c below
or Section 2.2(c), shall continue in effect through May 31, 1999, and
thereafter shall continue in effect from year to year, provided its continued
applicability is specifically approved at least annually by the Trustees or by
a vote of the holders of a majority of the outstanding shares of the Fund. In
addition, such continuation shall be approved by vote of a majority of the
Trustees who are not parties to this Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on
such approval. As used in this paragraph, the term "interested person" shall
have the same meaning as set forth in the 1940 Act.
b) This Agreement may be terminated by sixty (60) days' written notice by
either VKAC or MSAM to the other party. The Agreement may also be terminated at
any time, without the payment of any penalty, by the Fund (by vote of the
Trustees or, by the vote of a majority of the outstanding voting securities of
such Fund), on sixty (60) days' written notice to both VKAC and MSAM. This
Agreement shall automatically terminate in the event of the termination of the
investment advisory agreement between VKAC and the Fund.
c) This Agreement shall terminate in the event of its assignment. The
term "assignment" for this purpose shall have the same meaning set forth in
Section 2(a)(4) of the 1940 Act.
d) Termination shall be without prejudice to the completion of any
transactions which MSAM shall have committed to on behalf of the Fund prior to
the time of termination. MSAM shall not effect and the Fund shall not be
entitled to instruct MSAM to effect any further transactions on behalf of the
Fund subsequent to the time termination takes effect.
e) This Agreement shall terminate forthwith by notice in writing on the
happening of any of the following events:
i) If VKAC or MSAM shall go into liquidation (except a voluntary
liquidation for the purpose of and followed by a bona fide reconstruction or
amalgamation upon terms previously approved in writing by the party not in
liquidation) or if a receiver or receiver and manager of any of the assets of
any of them is appointed; or
ii) If either of the parties hereto shall commit any breach of the
provisions hereof and shall not have remedied such breach within 30 days after
the service of notice by the party not in breach on the other requiring the
same to be remedied.
f) On the termination of this Agreement and completion of all matters
referred to in the foregoing paragraph (d) MSAM shall deliver or cause to be
delivered to the Fund copies of all documents, records and books of the Fund
required to be maintained pursuant to Rules 31a-1 or 31a-2 of the 1940 Act
which are in MSAM's possession, power or control and which are valid and in
force at the date of termination.
3.5 Notices
Any notice, request, instruction, or other document to be given under this
Agreement by any party hereto to the other parties shall be in writing and
delivered personally or sent by mail or telecopy (with a hard
<PAGE> 5
copy to follow),
If to MSAM, to:
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
attn: Warren J. Olsen
with a copy to:
Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
New York, New York 10020
attn: Harold J. Schaaff, Esq.
If to VKAC, to:
Van Kampen American Capital Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
attn: Dennis J. McDonnell
with a copy to:
Van Kampen American Capital Asset Management, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
attn: Ronald A. Nyberg, Esq.
or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party (or its agent for notices hereunder). Any notice that is
addressed and mailed in the manner herein provided shall be presumed to have
been duly given to the party to which it is addressed, on the date three (3)
days after mailing, and in the case of delivery by telecopy, on the date the
hard copy is received.
3.6 Choice of Law
This Agreement shall be construed according to, and the rights and
liabilities of the parties hereto shall be governed by, the laws of the United
States and the State of New York, without regard to the conflicts of laws
principles thereof.
3.7 Miscellaneous Provisions
The execution of this Agreement has been authorized by the Fund's Trustees
and by the shareholders. This Agreement is executed on behalf of the Fund or
the Trustees of the Fund as Trustees and not individually and that the
obligations of this Agreement are not binding upon any of the Trustees,
officers or shareholders of the Fund individually but are binding only upon the
assets and property of the Fund. A Certificate of Trust in respect of the Fund
is on file with the Secretary of State of Delaware.
<PAGE> 6
IN WITNESS WHEREOF, the Agreement has been executed as of the date first above
given.
VAN KAMPEN AMERICAN CAPITAL MORGAN STANLEY
ASSET MANAGEMENT, INC. ASSET MANAGEMENT INC.
By: /s/ Dennis J. McDonnell By: /s/ Harold J. Schaaff, Jr.
----------------------------------- ---------------------------------
Name: Dennis J. McDonnell Name: Harold J. Schaaff, Jr.
-------------------------------- -------------------------------
Its: President Its: General Counsel and Secretary
-------------------------------- -------------------------------
<PAGE> 1
EXHIBIT (5)(e)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this May 31, 1997, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust (hereinafter
referred to as the "TRUST"), and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation (hereinafter referred to as the "ADVISER").
The TRUST and the ADVISER agree as follows:
(1) APPOINTMENT
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST's Real Estate Securities Portfolio ("the Portfolio"), for the period and
on the terms set forth in this Agreement. The ADVISER accepts such appointment
and agrees to furnish the services herein set forth for the compensation herein
provided.
b. In the event that the TRUST establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the TRUST in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new portfolio to the ADVISER will be as agreed in writing at the time.
(2) SERVICES RENDERED AND EXPENSES PAID BY ADVISER
The ADVISER, subject to the control, direction and supervision of the
TRUST's Trustees and in conformity with applicable laws, the TRUST's Agreement
and Declaration of Trust ("Declaration of Trust"), 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 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
<PAGE> 2
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.
(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.
2
<PAGE> 3
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 the following annual rate: 1.00% of
average daily net assets.
Average daily net assets shall be determined by taking the average of the
net assets for each business day during a given calendar month calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4
shall be reduced by any commissions, tender solicitation and other fees,
brokerage or similar payments received by the ADVISER, or any other direct or
indirect majority owned subsidiary of VK/AC Holding, Inc., in connection with
the purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such commissions,
fees, brokerage or similar payments. The ADVISER shall use its best efforts to
recapture all available tender offer solicitation fees and exchange offer fees
in connection with 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.
(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
3
<PAGE> 4
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.
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
By: /s/ Dennis J. McDonnell By: /s/ Peter W. Hegel
---------------------------- ------------------------------
Name: Dennis J. McDonnell Name: Peter W. Hegel
Its: President Its: Executive Vice President
4
<PAGE> 1
EXHIBIT (5)(f)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this May 31, 1997, by and between VAN KAMPEN
AMERICAN CAPITAL LIFE INVESTMENT TRUST, a Delaware business trust (hereinafter
referred to as the "TRUST"), and VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT,
INC., a Delaware corporation (hereinafter referred to as the "ADVISER").
The TRUST and the ADVISER agree as follows:
(1) APPOINTMENT
a. The TRUST hereby appoints the ADVISER to act as investment adviser to the
TRUST's Growth and Income Portfolio ("the Portfolio"), for the period and on the
terms set forth in this Agreement. The ADVISER accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
b. In the event that the TRUST establishes one or more portfolios with respect
to which it desires to retain the ADVISER to act as investment adviser
hereunder, it shall notify the ADVISER in writing. If the ADVISER is willing to
render such services it shall notify the TRUST in writing whereupon such
portfolio shall become a Portfolio hereunder and the compensation payable by
such new portfolio to the ADVISER will be as agreed in writing at the time.
(2) SERVICES RENDERED AND EXPENSES PAID BY ADVISER
The ADVISER, subject to the control, direction and supervision of the TRUST's
Trustees and in conformity with applicable laws, the TRUST's Agreement and
Declaration of Trust ("Declaration of Trust"), 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 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
<PAGE> 2
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.
(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.
2
<PAGE> 3
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 the following annual rate:
0.60% on the first $500 million of the Portfolio's average daily net assets;
and 0.55% on any excess over $500 million.
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month calculated in the
manner provided in the TRUST's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the TRUST pursuant to this Section 4 shall
be reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the TRUST, less any direct
expenses incurred by such person, in connection with obtaining such commissions,
fees, brokerage or similar payments. The ADVISER shall use its best efforts to
recapture all available tender offer solicitation fees and exchange offer fees
in connection with 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.
(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 as to a particular Portfolio force
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
3
<PAGE> 4
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 as to any Portfolio 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.
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
By: /s/ Dennis J. McDonnell By: /s/ Peter W. Hegel
----------------------------- -----------------------------
Name: Dennis J. McDonnell Name: Peter W. Hegel
Its: President Its: Executive Vice President
4
<PAGE> 1
EXHIBIT (5)(g)
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this July 24, 1997, 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 Strategic Stock 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 0.50% on the first
$500 million of the Portfolio's average daily net assets and 0.45% 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
STRATEGIC STOCK 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
<PAGE> 1
EXHIBIT (6)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of May 31, 1997 (the
"Agreement") by and between VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
(the "Fund") and VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware
corporation (the "Distributor").
1. (a) Appointment of Distributor. The Fund appoints the Distributor
as a principal underwriter and exclusive distributor of each class of its shares
of beneficial interest (the "Shares") offered for sale from time to time
pursuant to the then current prospectus of the Fund, subject to different
combinations of front-end sales charges, distribution fees, service fees and
contingent deferred sales charges. Classes of shares, if any, subject to a
front-end sales charge and a distribution and/or service fee are referred to
herein as "FESC Classes" and the Shares of such classes are referred to herein
as "FESC Shares." Classes of shares, if any, subject to a contingent-deferred
sales charge and a distribution and/or a service fee are referred to herein as
"CDSC Classes" and Shares of such classes are referred to herein as "CDSC
Shares." Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
(b) Best Efforts. The Distributor shall use its best efforts to
sell, through its organization and through other dealers and agents, the Shares
which the Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares. Without
the prior approval of the Board of Trustees, the Distributor shall not, directly
or indirectly, distribute, sell or market, through its organization or other
brokers, dealers or agents, shares of any investment companies unless the Board
of Trustees of the Fund determines that such companies do not compete, or
potentially compete, with the Fund.
(c) Positions in the Shares. The Distributor agrees that it will
not take any long or short positions in the Shares, except for long positions in
those Shares purchased by the Distributor in accordance with any systematic
sales plan described in the then current Prospectus of the Fund and except as
permitted by Section 2 hereof, and that so far as it can control the situation,
it will prevent any of its trustees, officers or shareholders from taking any
long or short positions in the Shares, except for legitimate investment
purposes.
(d) Essential Personnel. The Distributor and the Fund agree that
the retention of (i) the chief executive officer, president, treasurer and
secretary of the Distributor, and (ii) each director, officer and employee of
the Distributor 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 Fund
(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 Fund and the Fund's shareholders. In connection with the Distributor's
acceptance of employment hereunder, the Distributor hereby agrees and covenants
for itself and on behalf of its Affiliates that neither the Distributor nor any
of its Affiliates shall replace or seek to replace any Essential Person or cause
to be replaced any Essential Person, in each case without first consulting with
the Board of Trustees of the Fund in a timely manner. In addition, neither the
Distributor nor any Affiliate of the Distributor 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 consulting with the Board of
Trustees of the Fund in a timely manner.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding
1
<PAGE> 2
Shares of any investment company; (b) in connection with a pro rata distribution
directly to the holders of Shares in the nature of a stock dividend or stock
split or in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund, to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund, to
retirees of the Distributor that purchased shares of any mutual fund distributed
by the Distributor prior to retirement, to directors, officers and employees of
Van Kampen American Capital, Inc. (the parent company of the Distributor), VK/AC
Holding, Inc. (the parent company of The Van Kampen American Capital, Inc.),
Morgan Stanley, Dean Witter, Discover & Co. (the parent company of VK/AC
Holding, Inc.) and to the subsidiaries of Van Kampen American Capital, Inc.;
(f) to any trust, pension, profit-sharing or other benefit plan for any of the
aforesaid persons; and (g) to any group of persons as permitted by Rule 22d-1
under the 1940 Act approved from time to time by the Board of Trustees and set
forth in the then current Prospectus of the Fund.
The Distributor shall have the right to buy from the Fund the Shares
needed, but not more than the Shares needed (except for reasonable allowances
for clerical errors, delays and errors of transmission and cancellation of
orders) to fill unconditional orders for Shares received by the Distributor from
dealers, agents and investors during each period when particular net asset
values and public offering prices are in effect as provided in Section 3
hereof; and the price which the Distributor shall pay for the Shares so
purchased shall be the respective net asset value used in determining the
public offering price on which such orders were based. The Distributor shall
notify the Fund at the end of each such period, or as soon thereafter on that
business day as the orders received in such period have been compiled, of the
number of Shares of each class that the Distributor elects to purchase
hereunder.
3. (a) Public Offering Price. The public offering price per Share
shall be determined in accordance with the then current Prospectus of the Fund.
In no event shall the public offering price exceed the net asset value per
Share, plus, with respect to the FESC Shares, a front-end sales charge not in
excess of the applicable maximum sales charge permitted under the Rules
of Fair Practice of the National Association of Securities Dealers, Inc., as in
effect from time to time. The net asset value per share for each class of
Shares, respectively, shall be determined in the manner provided in the
Declaration of Trust and By-Laws of the Trust as then amended, the Certificate
of Designation with respect to the Fund, as amended, and in accordance with the
then current Prospectus of the Fund consistent with the terms and conditions of
the Fund's Multiple Class Plan adopted by the Board of Trustees in accordance
with Section 18 of the 1940 Act and Rule 18f-3 thereunder. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined.
(b) Discounts to Dealers. Discounts to dealers purchasing FESC
Shares from the Distributor for resale and to brokers and other eligible agents
making sales of FESC Shares to investors and compensation payable from the
Distributor to dealers, brokers and other eligible agents making sales of CDSC
Shares and Combination Shares shall be set forth in the selling agreements
between the Distributor and such dealers or agents, respectively, as from time
to time amended, and, if such discounts and compensation are described in the
then current Prospectus for the Fund, shall be as so set forth. In connection
with the Distributor's employment hereunder, the Distributor hereby agrees to
distribute the Shares through brokers, dealers and other agents of Dean Witter
Distributors, Inc. on a "proprietary basis" substantially identical to the
distribution of shares of proprietary open-end investment companies distributed
by Dean Witter Distributors, Inc.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund
Shares, the Distributor will in all respects duly comply with all state and
federal laws relating to the sale of such securities and with all applicable
rules and regulations of all regulatory bodies, including without limitation,
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and all applicable rules and regulations of the Securities and Exchange
Commission under the 1940 Act, and will indemnify and save the Fund harmless
from any damage or expense on account of any unlawful act by the Distributor or
its agents or
2
<PAGE> 3
employees. The Distributor is not, however, to be responsible for the acts of
other dealers or agents, except to the extent that they shall be acting for the
Distributor or under its direction or authority. None of the Distributor, any
dealer, any agent or any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus heretofore or hereafter filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "1933 Act") (as any such Registration Statement and Prospectus may have
been or may be amended from time to time), covering the Shares, and in any
supplemental information to any such Prospectus approved by the Fund in
connection with the offer or sale of Shares. None of the Distributor, any
dealer, any broker or any other person is authorized to act as agent for the
Fund in connection with the offering or sale of Shares to the public or
otherwise. All such sales shall be made by the Distributor as principal for its
own account.
In selling Shares to investors, the Distributor will adopt and comply
with certain standards, as set forth in Exhibit III attached hereto as to when
each respective class of Shares may appropriately be sold to particular
investors. The Distributor will require every broker, dealer and other eligible
agent participating in the offering of the Shares to agree to adopt and comply
with such standards as a condition precedent to their participation
in the offering.
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the
registration of Shares under the federal securities laws, and
the Fund will exercise its best efforts to obtain said
registration and qualification;
(ii) all expenses in connection with the
printing of any notices of shareholders' meetings, proxy and
proxy statements and enclosures therewith, as well as any
other notice or communication sent to shareholders in
connection with any meeting of the shareholders or otherwise,
any annual, semiannual or other reports or communications
sent to the shareholders, and the expenses of sending
prospectuses relating to the Shares to existing shareholders;
(iii) all expenses of any federal or state
original-issue tax or transfer tax payable upon the issuance,
transfer or delivery of Shares from the Fund to the
Distributor; and
(iv) the cost of preparing and issuing any
Share certificates which may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of
qualifying maintaining qualification of the Shares for sale under the
securities laws of the various states. The Distributor will also permit its
officers and employees to serve without compensation as trustees and officers of
the Fund if duly elected to such positions.
(c) The Fund shall reimburse the Distributor for
out-of-pocket costs and expenses actually incurred by it in connection with
distribution of each class of Shares respectively in accordance with and
subject to the terms of a plan (the "12b-1 Plan") adopted by the Fund pursuant
to Rule 12b-1 under the 1940 Act as such 12b-1 Plan may be in effect from time
to time; provided, however, that no payments shall be due or paid to the
Distributor hereunder with respect to a class of Shares unless and until this
Agreement shall have been approved for each such class by a majority of the
Board of Trustees of the Fund and by a majority of the "Disinterested Trustees"
(as such term is defined in such 12b-1 Plan) by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
12b-1 Plan as in effect on the date of this Agreement is attached as Exhibit 1
hereto. The Fund reserves the right to terminate such 12b-1 Plan with respect
to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
12b-1
3
<PAGE> 4
Plan shall provide to the Fund's Board of Trustees, and the Trustees shall
review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts so paid, the purposes for which such
expenditures were made for each such class of Shares, comparing the amounts paid
by such class of Shares with amounts paid by classes of shares issued by
investment companies not governed by the Board of Trustees and distributed by
the Distributor or by direct or indirect Affiliates of the Distributor and such
other information as the Board of Trustees may from time to time request.
(d) The Fund shall compensate the Distributor for providing
services to, and the maintenance of, shareholder accounts in the Fund (including
prepaying service fees to eligible brokers, dealers and financial intermediaries
and expenses incurred in connection therewith) and the Distributor may pay as
agent for and on behalf of the Fund a service fee with respect to each class of
Shares to brokers, dealers and financial intermediaries for the provision of
shareholder services and the maintenance of shareholder accounts in the Fund in
the amount with respect to each class of Shares set forth from time to time in
the Fund's prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the "Service Plan"), as
such Service Plan may be in effect from time to time; provided, however, that no
service fee payments shall be due or paid to the Distributor hereunder with
respect to a class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of Trustees of the Fund
and by a majority of the Disinterested Trustees by vote cast in person at a
meeting called for the purpose of voting on this Agreement. A copy of such
Service Plan as in effect on the date of this Agreement is attached as Exhibit
II hereto. The Fund reserves the right to terminate such Service Plan with
respect to a class of Shares at any time, as specified in the Plan. The persons
authorized to direct the payment of funds pursuant to this Agreement and the
Service Plan shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect to each class of
Shares setting forth the amounts paid as service fees for each such class of
Shares comparing the amounts paid as service fees by such class of Shares with
amounts paid by classes of shares issued by investment companies not governed by
the Board of Trustees and distributed by the Distributor or by direct or
indirect Affiliates of the Distributor and such other information as the Board
of Trustees may from time to time request.
6. Redemption of Shares. In connection with the Fund's redemption of
its Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal
and state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times
as the Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the
foregoing authorization at any time; unless otherwise stated, any such
suspension or revocation shall be effective forthwith upon receipt of notice
thereof by telegraph or by written instrument from any of the Fund's officers.
In the event that the Distributor's authorization is, by the terms of such
notice, suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of the
Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares
made by the Distributor shall be made only as agent for the Fund's account and
pursuant to the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to
pay, for the Fund's account,
4
<PAGE> 5
the repurchase price (together with any applicable contingent deferred sales
charge) of any Shares so repurchased for the Fund against the authorized
transfer of book shares from an open account and against delivery of any other
documentation required by the Board of Trustees of the Fund or, in the case of
certificated Shares, against delivery of the certificates representing such
Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under the
foregoing authorization and appointment as agent. With respect to any repurchase
of CDSC Shares or Combination Shares, the Distributor shall receive the deferred
sales charge, if any, applicable to the respective class of Shares that have
been held for less than a specified period of time with respect to such class as
set forth from time to time in the Fund's Prospectus. The Distributor shall
receive no other commission or other compensation in respect of any repurchases
of CDSC Shares or Combination Shares for the Fund under the foregoing
authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the
terms of this Agreement are redeemed or repurchased by the Fund or by the
Distributor as agent or are tendered for redemption within seven business days
after the date of the Distributor's confirmation of the original purchase by the
Distributor, the Distributor shall forfeit the amount above the net asset value
received by it in respect of such Shares, provided that the portion, if any, of
such amount re-allowed by the Distributor to dealers or agents shall be
repayable to the Fund only to the extent recovered by the Distributor from the
dealer or agent concerned. The Distributor shall include in agreements with such
dealers and agents a corresponding provision for the forfeiture by them of their
concession with respect to FESC Shares purchased by them or their principals and
redeemed or repurchased by the Fund or by the Distributor as agent within seven
business days after the date of the Distributor's confirmation of such initial
purchases.
7. Indemnification. The Fund agrees to indemnify and hold harmless
the Distributor and each of its trustees and officers and each person, if any,
who controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground that
the registration statement, Prospectus, shareholder reports or other information
filed or made public by the Fund (as from time to time amended) included an
untrue statement of a material fact or omitted to state a material fact required
to be stated or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading under the 1933 Act
or any other statute or the common law.
However, the Fund does not agree to indemnify the Distributor or hold it
harmless to the extent that the statement or omission was made in reliance upon,
and in conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor or
any person against any liability to the Fund or its securityholders to which the
Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the Distributor
or any person indemnified unless the Distributor or any such person shall have
notified the Fund in writing of the claim within a reasonable time after the
summons or other first written notification giving information of the nature of
the claim shall have been served upon the Distributor or any such person (or
after the Distributor or the person shall have received notice of service on any
designated agent). However, failure to notify the Fund of any claim shall not
relieve the Fund from any liability which it may have to the Distributor or any
person against whom such action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. The Fund shall be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense, of any suit brought to enforce any claims, but if the Fund elects
to assume the defense, the defense shall be conducted by counsel chosen by it
and satisfactory to the Distributor or person or persons, defendant or
defendants in the suit. In the event the Fund elects to assume the defense of
any suit and retain counsel, the Distributor, officers or trustees or
controlling person or persons, defendant or defendants in the suit, shall bear
the fees and expenses of any additional counsel retained by them. If the Fund
does not elect to assume the defense
5
<PAGE> 6
of any suit, it will reimburse the Distributor, officers or trustees or
controlling person or persons, defendant or defendants in the suit for the
reasonable fees and expenses of any counsel retained by them. The Fund agrees
to notify the Distributor promptly of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with
the issuance or sale of any of the Shares.
The Distributor also covenants and agrees that it will indemnify and
hold harmless the Fund and each of its trustees and officers and each person, if
any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim or
expense and reasonable counsel fees incurred in connection therewith) arising by
reason of any person acquiring any Shares, based upon the 1933 Act or any other
statute or common law, alleging any wrongful act of the Distributor or any of
its employees or alleging that the registration statement, Prospectus,
shareholder reports or other information filed or made public by the Fund (as
from time to time amended) included an untrue statement of a material fact or
omitted to state a material fact required to be stated or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, insofar as the statement or omission was made in reliance
upon, and in conformity with, information furnished to the Fund by or on behalf
of the Distributor. In no case (i) is the indemnity of the Distributor in favor
of the Fund or any person indemnified to be deemed to protect the Fund or
any such person against any liability to which the Fund or such person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligation and duties under this Amended Agreement, or (ii) is
the Distributor to be liable under its indemnity agreement contained in this
paragraph with respect to any claim made against the Fund or any person
indemnified unless the Fund or person, as the case may be, shall have notified
the Distributor in writing of the claim within a reasonable time after the
summons or other first written notification giving information of the nature of
the claim shall have been served upon the Fund or person (or after the Fund or
such person shall have received notice of service on any designated agent).
However, failure to notify the Distributor of any claim shall not relieve the
Distributor from any liability which it may have to the Fund or any person
against whom the action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. In the case of any notice to the
Distributor, it shall be entitled to participate, at its own expense, in the
defense, or, if it so elects, to assume the defense, of any suit brought to
enforce the claim, but if the Distributor elects to assume the defense, the
defense shall be conducted by counsel chosen by it and satisfactory to the
Fund, to its officers and trustees and to any controlling person or persons,
defendant or defendants in the suit. In the event that the Distributor elects
to assume the defense of any suit and retain counsel, the Fund or
controlling persons, defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them. If the Distributor does not elect
to assume the defense of any suit, it will reimburse the Fund, officers and
trustees or controlling person or persons, defendant or defendants in the suit,
for the reasonable fees and expenses of any counsel retained by them. The
Distributor agrees to notify the Fund promptly of the commencement of any
litigation or proceedings against it in connection with the issue and sale of
any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the Fund,
on written notice to the Distributor; (b) this Agreement shall immediately
terminate in the event of its assignment; and (c) this Agreement may be
terminated by the Distributor on ninety (90) days' written notice to the Fund.
Upon termination of this Agreement with respect to either class of Shares of the
Fund, the obligations of the parties hereunder shall cease and terminate with
respect to such class of Shares as of the date of such termination, except for
any obligation to respond for a breach of this Agreement committed prior to such
termination.
6
<PAGE> 7
This Agreement may be amended with respect to either class of Shares
at any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall have
the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the
Trust, this Agreement is executed by the Trustees of the Trust and/or Officers
of the Fund by them not individually but as such Trustees and/or Officers, and
the obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed postpaid, to the other party at any
office of such party or at such other address as such party shall have
designated in writing.
11. Name. In connection with its employment hereunder, the
Distributor hereby agrees and covenants not to change its name without the prior
consent of the Board of Trustees.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their officers designated below on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
By: /s/ DENNIS J. McDONNELL
-------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
By: /s/ RONALD A. NYBERG
------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
8
<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. 24 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, and to the incorporation by
reference of our report into the Prospectuses which constitute part of this
Registration Statement. We also consent to the references to us under the
headings "Financial Highlights" and "Independent Accountants" in such
Prospectuses and to the reference to us under the heading "Independent
Accountants" in such Statement of Additional Information.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Chicago, Illinois
April 30, 1998
<PAGE> 1
EXHIBIT (16)
LIT ASSET ALLOCATION PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $11.91
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,218.14 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 21.81% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $11.91
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,890.72 = ERV
One year period ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 13.59% = T
TOTAL RETURN CALCULATION TEN YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $11.91
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,329.29 = ERV
One year period ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 12.78% = T
1
<PAGE> 2
LIT ASSET ALLOCATION PORTFOLIO
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
Formula P(1+T)n = ERV
Excluding Payment of the Sales Charge
Net Asset Value $11.91
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,241.12 = ERV
Inception through 12/31/97 10.51 = n
TOTAL RETURN FOR THE PERIOD 11.84% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------
P = T
Excluding Payment of the Sales Charge
Net Asset Value $11.35
Initial Investment $1,000.00 = P
Ending Redeemable Value $3,241.12 = ERV
TOTAL RETURN FOR THE PERIOD 224.11% = T
2
<PAGE> 3
LIT DOMESTIC INCOME PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
Formula P(1+T)n = ERV
Including Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,119.05 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 11.90% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,119.05 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 11.90% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1997
Formula P(1+T)n = ERV
Including Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,612.32 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 10.02% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,612.32 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 10.02% = T
3
<PAGE> 4
LIT DOMESTIC INCOME PORTFOLIO
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1997
Formula P(1+T)n = ERV
Including Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,217.58 = ERV
Five years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 8.29% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,217.58 = ERV
Five years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 8.29% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
Formula P(1+T)n = ERV
Including Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,250.87 = ERV
Inception through 12/31/97 10.16 = n
TOTAL RETURN FOR THE PERIOD 8.31% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,250.87 = ERV
Inception through 12/31/97 10.16 = n
TOTAL RETURN FOR THE PERIOD 8.31% = T
4
<PAGE> 5
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Including Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,250.87 = ERV
TOTAL RETURN FOR THE PERIOD 125.09% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,250.87 = ERV
TOTAL RETURN FOR THE PERIOD 125.09% = T
CALCULATION OF YIELD
The Portfolio calculates its yield quotations based on a 30-day period
ended on the date of the most recent balance sheet included in the registration
statement, by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period,
according to the following formula:
a - b
YIELD (y) = 2[( -------- + 1)6 - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
a = 103,577
b = 8.506
c = 1,955,992
d = 7.175%
5
<PAGE> 6
LIFE INVESTMENT TRUST EMERGING GROWTH PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Net Asset Value $16.45
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,204.24 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 20.42% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Net Asset Value $16.45
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,645.00 = ERV
Inception through 12/31/97 2.50 = n
TOTAL RETURN FOR THE PERIOD 22.03% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
-------------
P = T
Net Asset Value $16.45
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,645.00 = ERV
TOTAL RETURN FOR THE PERIOD 64.50% = T
6
<PAGE> 7
LIT ENTERPRISE PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $18.11
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,306.58 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 30.66% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $18.11
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,351.62 = ERV
One year period ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 18.65% = T
TOTAL RETURN CALCULATION TEN YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $18.11
Initial Investment $1,000.00 = P
Ending Redeemable Value $4,901.69 = ERV
One year period ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 17.23% = T
7
<PAGE> 8
LIT ENTERPRISE PORTFOLIO
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $18.11
Initial Investment $1,000.00 = P
Ending Redeemable Value $4,064.48 = ERV
Inception through 12/31/97 11.74 = n
TOTAL RETURN FOR THE PERIOD 12.69% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Excluding Payment of the Sales Charge
Net Asset Value $18.11
Initial Investment $1,000.00 = P
Ending Redeemable Value $4,064.48 = ERV
TOTAL RETURN FOR THE PERIOD 306.45% = T
8
<PAGE> 9
LIFE INVESTMENT TRUST GLOBAL EQUITY PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $11.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,158.48 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 15.85% = T
Excluding Payment of the Sales Charge
Net Asset Value $11.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,158.48 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 15.85% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $11.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,394.14 = ERV
Inception through 12/31/97 2.5 = n
TOTAL RETURN FOR THE PERIOD 14.21% = T
Excluding Payment of the Sales Charge
Net Asset Value $11.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,394.14 = ERV
Inception through 12/31/97 2.5 = n
TOTAL RETURN FOR THE PERIOD 14.21% = T
9
<PAGE> 10
LIFE INVESTMENT TRUST GLOBAL EQUITY PORTFOLIO
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Including Payment of the Sales Charge
Net Asset Value $11.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,394.14 = ERV
TOTAL RETURN FOR THE PERIOD 39.41% = T
Excluding Payment of the Sales Charge
Net Asset Value $11.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,394.14 = ERV
TOTAL RETURN FOR THE PERIOD 39.41% = T
10
<PAGE> 11
LIFE INVESTMENT TRUST GOVERNMENT PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,096.13 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 9.61% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,096.13 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 9.61% = T
TOTAL RETURN CALCULATION FIVE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,349.13 = ERV
Inception through 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 6.17% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,349.13 = ERV
Inception through 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 6.17% = T
11
<PAGE> 12
LIFE INVESTMENT TRUST GOVERNMENT PORTFOLIO
TOTAL RETURN CALCULATION TEN YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,194.01 = ERV
Inception through 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 8.17% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,194.01 = ERV
Inception through 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 8.17% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,238.43 = ERV
Inception through 12/31/97 11.74 = n
TOTAL RETURN FOR THE PERIOD 7.10% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,238.43 = ERV
Inception through 12/31/97 11.74 = n
TOTAL RETURN FOR THE PERIOD 7.10% = T
12
<PAGE> 13
LIFE INVESTMENT TRUST GOVERNMENT PORTFOLIO
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Including Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,238.43 = ERV
TOTAL RETURN FOR THE PERIOD 123.84% = T
Excluding Payment of the Sales Charge
Net Asset Value $8.92
Initial Investment $1,000.00 = P
Ending Redeemable Value $2,238.43 = ERV
TOTAL RETURN FOR THE PERIOD 123.84% = T
13
<PAGE> 14
LIFE INVESTMENT TRUST GROWTH AND INCOME PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $12.12
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,239.03 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 23.90% = T
Excluding Payment of the Sales Charge
Net Asset Value $12.12
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,239.03 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 23.90% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $12.12
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,235.31 = ERV
Inception through 12/31/97 1.02 = n
TOTAL RETURN FOR THE PERIOD 23.02% = T
Excluding Payment of the Sales Charge
Net Asset Value $12.12
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,235.31 = ERV
Inception through 12/31/97 1.02 = n
TOTAL RETURN FOR THE PERIOD 23.02% = T
14
<PAGE> 15
LIFE INVESTMENT TRUST GROWTH AND INCOME PORTFOLIO
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Including Payment of the Sales Charge
Net Asset Value $12.12
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,235.31 = ERV
TOTAL RETURN FOR THE PERIOD 23.53% = T
Excluding Payment of the Sales Charge
Net Asset Value $12.12
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,235.31 = ERV
TOTAL RETURN FOR THE PERIOD 23.53% = T
15
<PAGE> 16
LIT MONEY MARKET PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $1.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,050.60 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 5.06% = T
TOTAL RETURN CALCULATION FIVE YEARS ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $1.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,237.21 = ERV
Five years ended 12/31/97 5 = n
TOTAL RETURN FOR THE PERIOD 4.35% = T
TOTAL RETURN CALCULATION TEN YEARS ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $1.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,706.26 = ERV
Five years ended 12/31/97 10 = n
TOTAL RETURN FOR THE PERIOD 5.49% = T
16
<PAGE> 17
LIT MONEY MARKET PORTFOLIO
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $1.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,893.20 = ERV
Inception through 12/31/97 11.74 = n
TOTAL RETURN FOR THE PERIOD 5.59% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Excluding Payment of the Sales Charge
Net Asset Value $1.00
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,893.20 = ERV
TOTAL RETURN FOR THE PERIOD 89.32% = T
CALCULATION OF YIELD
The Fund calculates its annualized current yield quotations based on
the seven days ended on the date of the most recent balance sheet included in
the registration statement, computed by determining the net change, exclusive of
capital charges, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then multiplying the base period by (365/7).
The Fund calculates its effective yield based on the seven days ended
on the date of the most recent balance sheet included in the registration
statement, computed by determining the net change, exclusive of capital charges,
in the value of a hypothetical pre-existing account having a balance of one
share at the beginning of the period, according to the following formula:
Effective Yield = [(Base Period Return + 1) 365/7]-1
17
<PAGE> 18
LIT STRATEGIC STOCK PORTFOLIO
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $10.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,025.00 = ERV
Inception through 12/31/97 .16 = n
TOTAL RETURN FOR THE PERIOD 16.69% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Excluding Payment of the Sales Charge
Net Asset Value $10.25
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,025.00 = ERV
TOTAL RETURN FOR THE PERIOD 2.50% = T
18
<PAGE> 19
LIT MORGAN STANLEY REAL ESTATE SECURITIES PORTFOLIO
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $15.85
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,214.73 = ERV
One year period ended 12/31/97 1 = n
TOTAL RETURN FOR THE PERIOD 21.47% = T
TOTAL RETURN CALCULATION INCEPTION THROUGH DECEMBER 31, 1997
n
Formula P(1+T) = ERV
Excluding Payment of the Sales Charge
Net Asset Value $15.85
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,849.57 = ERV
Inception through 12/31/97 2.50 = n
TOTAL RETURN FOR THE PERIOD 27.89% = T
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH DECEMBER 31, 1997
Formula ERV - P
---------
P = T
Excluding Payment of the Sales Charge
Net Asset Value $15.85
Initial Investment $1,000.00 = P
Ending Redeemable Value $1,849.57 = ERV
TOTAL RETURN FOR THE PERIOD 84.96% = T
19
<PAGE> 1
EXHIBIT (24)
POWER OF ATTORNEY
The undersigned, being officers and trustees of each of the Van Kampen
American Capital Open End Trusts (individually, a "Trust") as indicated on
Schedule 1 attached hereto and incorporated by reference, each a Delaware
business trust except for the Van Kampen American Capital Pennsylvania Tax Free
Income Fund being a Pennsylvania business trust, and being officers and
directors of the Morgan Stanley Fund, Inc. (the "Corporation"), a Maryland
corporation, do hereby, in the capacities shown below, individually appoint
Dennis J. McDonnell and Ronald A. Nyberg, each of Oakbrook Terrace, Illinois,
and each of them, as the agents and attorneys-in-fact with full power of
substitution and resubstitution, for each of the undersigned, to execute and
deliver, for and on behalf of the undersigned, any and all amendments to the
Registration Statement filed by each Trust or the Corporation with the
Securities and Exchange Commission pursuant to the provisions of the Securities
Act of 1933 and the Investment Company Act of 1940.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall constitute
one instrument.
Dated: April 24, 1998
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ DENNIS J. MCDONNELL President and Trustee/Director
----------------------------------
Dennis J. McDonnell
/s/ EDWARD C. WOOD III Vice President and Chief Financial Officer
----------------------------------
Edward C. Wood III
/s/ J. MILES BRANAGAN Trustee/Director
----------------------------------
J. Miles Branagan
/s/ RICHARD M. DEMARTINI Trustee/Director
----------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY Trustee/Director
----------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY Trustee/Director
----------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON Trustee/Director
----------------------------------
Jack E. Nelson
/s/ DON G. POWELL Trustee/Director
----------------------------------
Don G. Powell
/s/ PHILLIP B. ROONEY Trustee/Director
----------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO, SC.D. Trustee/Director
----------------------------------
Fernando Sisto, Sc. D.
/s/ WAYNE W. WHALEN Trustee/Director and Chairman
----------------------------------
Wayne W. Whalen
</TABLE>
<PAGE> 2
SCHEDULE 1
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
VAN KAMPEN AMERICAN CAPITAL TRUST
VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST
VAN KAMPEN AMERICAN CAPITAL PENNSYLVANIA TAX FREE INCOME FUND
VAN KAMPEN AMERICAN CAPITAL TAX FREE MONEY FUND
VAN KAMPEN AMERICAN CAPITAL COMSTOCK FUND
VAN KAMPEN AMERICAN CAPITAL CORPORATE BOND FUND
VAN KAMPEN AMERICAN CAPITAL EMERGING GROWTH FUND
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE FUND
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
VAN KAMPEN AMERICAN CAPITAL LIMITED MATURITY GOVERNMENT FUND
VAN KAMPEN AMERICAN CAPITAL GLOBAL MANAGED ASSETS FUND
VAN KAMPEN AMERICAN CAPITAL GOVERNMENT SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL GROWTH AND INCOME FUND
VAN KAMPEN AMERICAN CAPITAL HARBOR FUND
VAN KAMPEN AMERICAN CAPITAL HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN AMERICAN CAPITAL LIFE INVESTMENT TRUST
VAN KAMPEN AMERICAN CAPITAL PACE FUND
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
VAN KAMPEN AMERICAN CAPITAL RESERVE FUND
VAN KAMPEN AMERICAN CAPITAL SMALL CAPITALIZATION FUND
VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
VAN KAMPEN AMERICAN CAPITAL U.S. GOVERNMENT TRUST FOR INCOME
VAN KAMPEN AMERICAN CAPITAL WORLD PORTFOLIO SERIES TRUST
VAN KAMPEN AMERICAN CAPITAL FOREIGN SECURITIES FUND
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> LIT ASSET ALLOCATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 54,998,971
<INVESTMENTS-AT-VALUE> 62,612,813
<RECEIVABLES> 848,569
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 44,316
<TOTAL-ASSETS> 63,505,698
<PAYABLE-FOR-SECURITIES> 69,740
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 138,246
<TOTAL-LIABILITIES> 207,986
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,888,909
<SHARES-COMMON-STOCK> 5,314,563
<SHARES-COMMON-PRIOR> 5,633,242
<ACCUMULATED-NII-CURRENT> 17,750
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,777,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,613,842
<NET-ASSETS> 63,297,712
<DIVIDEND-INCOME> 764,885
<INTEREST-INCOME> 2,015,818
<OTHER-INCOME> 0
<EXPENSES-NET> (373,770)
<NET-INVESTMENT-INCOME> 2,406,933
<REALIZED-GAINS-CURRENT> 7,064,899
<APPREC-INCREASE-CURRENT> 2,697,375
<NET-CHANGE-FROM-OPS> 12,169,207
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,436,414)
<DISTRIBUTIONS-OF-GAINS> (6,406,916)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 223,088
<NUMBER-OF-SHARES-REDEEMED> (1,296,455)
<SHARES-REINVESTED> 754,688
<NET-CHANGE-IN-ASSETS> (651,353)
<ACCUMULATED-NII-PRIOR> 47,231
<ACCUMULATED-GAINS-PRIOR> 1,119,228
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 311,514
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 442,550
<AVERAGE-NET-ASSETS> 62,295,068
<PER-SHARE-NAV-BEGIN> 11.352
<PER-SHARE-NII> 0.513
<PER-SHARE-GAIN-APPREC> 1.897
<PER-SHARE-DIVIDEND> (0.518)
<PER-SHARE-DISTRIBUTIONS> (1.334)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 11.910
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 002
<NAME> LIT DOMESTIC INCOME
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 16,140,299
<INVESTMENTS-AT-VALUE> 16,990,352
<RECEIVABLES> 334,526
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 47,953
<TOTAL-ASSETS> 17,372,831
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 003
<NAME> LIT EMG
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 004
<NAME> LIT ENTP
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<NUMBER-OF-SHARES-SOLD> 869,947
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 005
<NAME> LIT GLOBAL EQUITY
<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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<ACCUMULATED-NII-PRIOR> (9,730)
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<PER-SHARE-DIVIDEND> (0.106)
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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>
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<SERIES>
<NUMBER> 007
<NAME> LIT GROWTH & INC
<S> <C>
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 008
<NAME> LIT MONEY MARKET
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 009
<NAME> LIT REAL ESTATE
<S> <C>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 010
<NAME> LIT STRATEGIC STOCK
<S> <C>
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 6,383
<AVERAGE-NET-ASSETS> 1,524,599
<PER-SHARE-NAV-BEGIN> 10.000
<PER-SHARE-NII> 0.027
<PER-SHARE-GAIN-APPREC> 0.218
<PER-SHARE-DIVIDEND> 0.000
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 10.245
<EXPENSE-RATIO> 0.61
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>