<PAGE> 1
DEAR VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
SHAREHOLDER:
Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") for the Van Kampen American Capital Adjustable Rate U.S. Government
Fund (the "VK Fund"). The Reorganization calls for VK Fund shareholders to
become shareholders of the Van Kampen American Capital Limited Maturity
Government Fund (the "AC Fund"), a mutual fund which pursues a substantially
similar investment objective.
The enclosed materials include a combined Proxy Statement/Prospectus
containing information you need to make an informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to some
of the important questions you might have about the proposed reorganization. We
hope you find these explanations useful as you review your materials before
voting. For more detailed information about the reorganization plan, please
refer to the combined Proxy Statement/Prospectus.
HOW WILL THE REORGANIZATION AFFECT ME?
Assuming shareholders of the VK Fund approve the Reorganization, the assets
and liabilities of the VK Fund will be combined with those of the AC Fund and
you will become a shareholder of the AC Fund. You will receive shares of the AC
Fund approximately equal in value at the time of issuance to the shares of the
VK Fund that you hold immediately prior to the Reorganization. Class A
shareholders of the VK Fund will receive Class A Shares of the AC Fund; Class B
shareholders of the VK Fund will receive Class B Shares of the AC Fund; and
Class C shareholders of the VK Fund will receive Class C Shares of the AC Fund.
WHY IS THE REORGANIZATION BEING RECOMMENDED?
As we reported to you earlier, the parent company of Van Kampen American
Capital Asset Management, Inc. ("AC Adviser"), the investment adviser to the AC
Fund, was acquired in December 1994 by Van Kampen American Capital, Inc.
("VKAC"), and was subsequently merged into VKAC. VKAC, through its wholly owned
subsidiaries, distributes and manages the Van Kampen American Capital funds. AC
Adviser is an affiliate of Van Kampen American Capital Investment Advisory Corp.
("VK Adviser"), the investment adviser to the VK Fund. The primary purposes of
the proposed Reorganization are to seek to achieve future economies of scale and
eliminate certain costs associated with operating the VK Fund and the AC Fund
separately. The Reorganization will result in combining the assets and
liabilities of the VK Fund with the assets and liabilities of the AC Fund and
consolidating their operations.
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The Reorganization is intended to provide various benefits to shareholders of
the VK Fund who become shareholders of the AC Fund (as well as to existing and
future investors in the AC Fund). For example, higher net asset levels would
enable the AC Fund to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
potentially reducing per share expense levels. Higher net asset levels also may
benefit portfolio management by permitting larger individual portfolio
investment that may result in reduced transaction costs or more favorable
pricing and by providing the opportunity for greater portfolio diversity. These
benefits, in turn, should have a favorable effect on the relative performance of
the AC Fund.
The consummation of the Reorganization is subject to the satisfaction of a
number of conditions (including approval by the VK Fund's shareholders), which
are summarized below in "The Proposed Reorganization -- Terms of the Agreement"
section of the accompanying combined Proxy Statement/Prospectus. These
conditions are stated in the Agreement which is attached as Exhibit A to the
combined Proxy Statement/Prospectus.
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
No. The full value of your shares of the VK Fund will be exchanged for shares
of the corresponding class of the AC Fund without any sales load, commission or
other transactional fee being imposed. As more fully discussed in the combined
Proxy Statement/Prospectus, the holding period for shareholders acquiring Class
B or C shares of the AC Fund in the Reorganization subject to a contingent
deferred sales charge will be measured from the time (i) the holder purchased
Class B or C shares of the VK Fund or (ii) purchased Class B or C shares of any
other Van Kampen American Capital open-end fund and subsequently exchanged into
Class B or C shares of the VK Fund. If the Reorganization is completed, the AC
Fund will bear the costs associated with the Reorganization, such as printing
and mailing costs and other expenses associated with the Special Meeting. If the
Reorganization is not completed, VKAC will bear the costs associated with the
Reorganization.
HOW WILL THE FEES PAID BY THE AC FUND COMPARE TO THOSE PAYABLE BY THE VK FUND?
It is anticipated that, on a per share basis, the total of the various fees
and expenses incurred by the AC Fund will be less, upon completion of the
Reorganization, than the total of such fees and expenses applicable to the VK
Fund. The fees and expenses actually paid to date by the VK Fund have been less
than the total of such fees and expenses applicable to the VK Fund as a result
of voluntary fee waivers and expense reimbursements made by the VK Adviser.
However, if the Reorganization is not consummated, the VK Adviser does not
currently intend to continue such voluntary fee waivers and expense
reimbursements.
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WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE AC FUND? WHAT HAPPENS TO MY
ACCOUNT IF THE REORGANIZATION IS APPROVED?
If the Reorganization is approved, your interest in Class A, B or C shares of
the VK Fund will automatically be converted into the same class of shares of the
AC Fund and we will send you written confirmation that this change has taken
place. You will receive the same class of shares of the AC Fund approximately
equal in value to your Class A, B or C shares of the VK Fund. No certificates
for AC Fund Shares will be issued in connection with the Reorganization,
although such certificates will be available upon request. If you currently hold
certificates representing your shares in the VK Fund, it is not necessary to
surrender such certificates.
WHO WILL ADVISE THE AC FUND AND PROVIDE OTHER SERVICES?
The AC Adviser provides advisory services to the AC Fund under an arrangement
that is substantially similar to that currently in effect between the VK Fund
and the VK Adviser. The contractual advisory fees payable by the AC Fund are no
higher than the contractual advisory fees applicable to the VK Fund. Van Kampen
American Capital Distributors, Inc. serves as distributor of shares of both the
AC Fund and the VK Fund. In addition, State Street Bank & Trust Company, 225
Franklin Street, P.O. Box 1713, Boston, Massachusetts 02105-1713 is the
custodian of both the AC Fund and the VK Fund. ACCESS Investor Services, Inc.,
P.O. Box 418256, Kansas City, Missouri 64141-9256 serves as the transfer agent
for both the AC Fund and the VK Fund.
WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general, a shareholder of
the VK Fund will recognize no gain or loss upon its receipt of solely the shares
of the AC Fund in connection with the Reorganization. Additionally, the VK Fund
would not recognize any gain or loss as a result of the transfer of all of its
assets and liabilities solely in exchange for the shares of the AC Fund or as a
result of its liquidation. The AC Fund expects that it will not recognize any
gain or loss as a result of the Reorganization, that it will take a carryover
basis in the assets acquired from the VK Fund and that its holding period of
such assets will include the period during which the assets were held by the VK
Fund. See "The Proposed Reorganization -- Federal Income Tax Consequences" in
the combined Proxy Statement/Prospectus.
<PAGE> 4
WHAT IF I REDEEM MY VK FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE?
If you choose to redeem your shares of the VK Fund before the Reorganization
takes place, the redemption will be treated as a normal sale of shares and will
be a taxable transaction, unless your account is not subject to taxation, such
as an individual retirement account or other tax-qualified retirement plan.
We hope these answers help to clarify the Reorganization proposal for you. If
you still have questions, do not hesitate to call us at 1-800-341-2911. Please
give this matter your prompt attention. We need to receive your proxy before the
shareholder meeting scheduled for September 15, 1995. If shareholders approve
the Reorganization, it is expected to take effect on September 29, 1995.
Thank you for your investment in Van Kampen American Capital Adjustable Rate
U.S. Government Fund.
Very truly yours,
Van Kampen American Capital
Adjustable Rate U.S.
Government Fund
Dennis J. McDonnell
President, Chief Executive Officer
and Trustee
<PAGE> 5
VAN KAMPEN AMERICAN CAPITAL
ADJUSTABLE RATE U.S. GOVERNMENT FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 341-2911
NOTICE OF SPECIAL MEETING
SEPTEMBER 15, 1995
A Special Meeting of Shareholders of the Van Kampen American Capital
Adjustable Rate U.S. Government Fund (the "VK Fund") will be held at the Hyatt
Regency Oak Brook, 1909 Spring Road, Oak Brook, Illinois 60521, on September 15,
1995 at 2:00 p.m. (the "Special Meeting"), for the following purposes:
(1) To approve a plan of reorganization pursuant to which the VK Fund would
transfer all of its assets and liabilities to the Van Kampen American Capital
Limited Maturity Government Fund (the "AC Fund") in exchange for corresponding
Class A, B and C shares of beneficial interest of the AC Fund, the VK Fund
would distribute such Class A, B and C shares of the AC Fund to holders of
Class A, B and C shares of the VK Fund, respectively, and the VK Fund would be
dissolved.
(2) To transact such other business as may properly come before the Special
Meeting.
The Special Meeting is scheduled to be held jointly with the special meetings
of the respective shareholders of five other Van Kampen American Capital Funds
because the shareholders of each of such funds are expected to consider and vote
on similar matters. In the event that any shareholder of any Van Kampen American
Capital Fund present at the special meetings objects to the holding of a joint
meeting and moves for an adjournment of the meeting of such fund to a time
immediately after the other special meetings so that such fund's special meeting
may be held separately, the persons named as proxies will vote in favor of such
adjournment. Shareholders of each Van Kampen American Capital Fund will vote
separately on each of the proposals relating to their fund, and an unfavorable
vote on a proposal by the shareholders of one fund will not affect the
implementation of such a proposal by another fund if the proposal is approved by
the shareholders of that fund.
Shareholders of record as of the close of business on August 1, 1995 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Ronald A. Nyberg
Vice President and Secretary
August 8, 1995
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 6
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE
U.S. GOVERNMENT FUND
PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE
U.S. GOVERNMENT FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL
LIMITED MATURITY GOVERNMENT FUND
This Proxy Statement/Prospectus is being furnished to shareholders of the Van
Kampen American Capital Adjustable Rate U.S. Government Fund (the "VK Fund"), a
series of Van Kampen American Capital Trust, a Delaware business trust (the
"VKAC Trust"), and relates to the Special Meeting of Shareholders of the VK Fund
(the "Special Meeting") called for the purpose of approving the proposed
reorganization of the VK Fund (the "Reorganization") which would result in
shareholders of the VK Fund in effect exchanging their VK Fund shares for shares
of the Van Kampen American Capital Limited Maturity Government Fund, a Delaware
business trust (the "AC Fund"). The Reorganization would be accomplished as
follows: (1) the AC Fund would acquire all the then existing assets and
liabilities of the VK Fund in exchange for Class A, B and C shares of beneficial
interest of the AC Fund (the "Shares"); (2) the VK Fund would distribute the
Shares to the VK Fund's shareholders holding the same respective class of
shares; and (3) the VK Fund would dissolve and all shares of the VK Fund would
be cancelled.
The AC Fund is an open-end, diversified management investment company which is
authorized to issue an unlimited number of shares of beneficial interest, par
value $.01 per share. The investment objective of the AC Fund is to seek high
current return and relative safety of capital which is substantially similar to
that of the VK Fund. (See "Summary -- Comparisons of the AC Fund and VK Fund"
below.) There can be no assurance that the AC Fund will achieve its investment
objective. The address, principal executive office and telephone number of the
VK Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000
or (800) 225-2222. The address, principal executive office and telephone number
of the AC Fund is 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666.
The enclosed proxy and this Proxy Statement/Prospectus are first being sent to
VK Fund shareholders on or about August 8, 1995.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
<PAGE> 7
This Proxy Statement/Prospectus contains information shareholders of the VK
Fund should know before voting on the Reorganization and constitutes an offering
of Class A, B and C Shares of the AC Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated
August 7, 1995 relating to this Proxy Statement/Prospectus (the "Reorganization
SAI") has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated herein by reference. A Prospectus (the "AC Fund Prospectus") and
Statement of Additional Information containing additional information about the
AC Fund, each dated August 7, 1995, have been filed with the SEC and are
incorporated herein by reference. A copy of the AC Fund Prospectus accompanies
this Proxy Statement/Prospectus. A Prospectus and Statement of Additional
Information containing additional information about the VK Fund, each dated
August 1, 1995, have been filed with the SEC and are incorporated herein by
reference. Copies of any of the foregoing may be obtained without charge by
calling or writing to the VK Fund at the telephone number or address shown
above. If you wish to request the Reorganization SAI, please ask for the
"Reorganization SAI."
---------------------
No person has been authorized to give any information or make any
representation not contained in this Proxy Statement/Prospectus and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
The AC Fund is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as
amended (the "Act"), and in accordance therewith files reports and other
information with the SEC. Such reports, other information and proxy statements
filed by the AC Fund can be inspected and copied at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549 and at its Regional Office at 500 West Madison Street, Chicago, Illinois.
Copies of such material can also be obtained from the SEC's Public Reference
Branch, Office of Consumer Affairs and Information Services, Washington, D.C.
20549, at prescribed rates.
The date of this Proxy Statement/Prospectus is August 7, 1995.
2
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION........... 4
A. SUMMARY................................................... 4
The Reorganization........................................ 4
Comparisons of the AC Fund and the VK Fund................ 5
Investment Objectives and Policies...................... 7
Advisory and Other Fees................................. 9
Distribution, Purchase, Redemption and Exchange of
Shares................................................ 10
Federal Income Tax Consequences........................... 17
Reasons For The Proposed Reorganization................... 17
B. RISK FACTORS.............................................. 20
Nature of Investment...................................... 20
Changes in Certain Investment Practices................... 21
C. INFORMATION ABOUT THE FUNDS............................... 22
D. THE PROPOSED REORGANIZATION............................... 23
Terms of the Agreement.................................... 23
Description of Securities to be Issued.................... 24
Shares of Beneficial Interest........................... 24
Voting Rights of Shareholders........................... 25
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 25
Federal Income Tax Consequences........................... 26
Capitalization............................................ 27
Comparative Performance Information....................... 28
Ratification of Investment Objective, Policies and
Restrictions of the AC Fund............................. 28
Legal Matters............................................. 29
Expenses.................................................. 29
E. RECOMMENDATIONS OF VK BOARD............................... 29
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING...........
29
OTHER INFORMATION................................................ 30
A. SHAREHOLDINGS OF THE VK FUND AND THE AC FUND.............. 30
B. SHAREHOLDER PROPOSALS..................................... 31
VOTING INFORMATION AND REQUIREMENTS.............................. 31
EXHIBIT A
EXHIBIT B
</TABLE>
3
<PAGE> 9
APPROVAL OR DISAPPROVAL
OF THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Proxy Statement/Prospectus, including the
Agreement and Plan of Reorganization by and between the AC Fund and the VK Fund
attached hereto as Exhibit A (the "Agreement"), the prospectus of the VK Fund
dated August 1, 1995 (the "VK Fund Prospectus") incorporated herein by
reference, and the prospectus of the AC Fund dated August 1, 1995 (the "AC Fund
Prospectus") incorporated herein by reference and accompanying this Proxy
Statement/ Prospectus. This Proxy Statement/Prospectus constitutes an offering
of Class A, B and C Shares of the AC Fund only.
THE REORGANIZATION
On April 6-7, 1995, the Board of Trustees of the VK Fund (the "VK Board")
approved the Agreement. The Agreement provides that the VK Fund will transfer
all of its assets and liabilities to the AC Fund in exchange for Class A, B and
C Shares of the AC Fund. At the Closing (as defined herein), the AC Fund will
issue Shares of the AC Fund to the VK Fund which AC Fund Shares will have an
aggregate net asset value approximately equal in amount to the net asset value
of the VK Fund net assets as of the Closing. The Agreement provides that the VK
Fund will dissolve pursuant to a plan of liquidation and dissolution to be
adopted by the VK Board following the Closing, and as part of such dissolution,
will distribute to each shareholder of the VK Fund Shares of the respective
class of the AC Fund approximately equal in value to their existing shares in
the VK Fund. All members of the VK Board who are not affiliated with VK Adviser
were elected as trustees of the AC Fund on July 21, 1995.
The VK Board has unanimously determined that the Reorganization is in the best
interests of the shareholders of each class of shares of the VK Fund and that
the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the AC Fund (the "AC Board")
has unanimously determined that the Reorganization is in the best interests of
the AC Fund and that the interests of the shareholders of each class of shares
of the AC Fund will not be diluted as a result of the Reorganization. Management
of the respective funds believes that the proposed Reorganization of the VK Fund
into the AC Fund should allow the AC Fund to achieve future economies of scale
and eliminate certain costs of operating the VK Fund and the AC Fund separately.
The AC Fund has agreed to pay all of the costs of soliciting approval of the
Reorganization by the VK Fund's shareholders and related costs of the
Reorganization in the event the Reorganization is completed, including expenses
incurred by the VK Fund. Accordingly, if the Reorganization is completed,
4
<PAGE> 10
shareholders of the AC Fund after the Reorganization will bear a pro rata
portion of such expenses. If the Reorganization is not completed, VKAC will bear
the costs associated with the Reorganization.
The VK Board is asking shareholders of the VK Fund to approve the
Reorganization at the Special Meeting to be held on September 15, 1995. If
shareholders of the VK Fund approve the Reorganization, it is expected that the
Closing will be on September 29, 1995, but it may be at a different time, as
described herein.
THE VK BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF THE
REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND REQUIREMENTS."
COMPARISONS OF THE AC FUND AND THE VK FUND
The principal changes which would result from the Reorganization are listed
below:
(1) The holders of Class A, B and C shares of the VK Fund would become holders
of the same class of Shares, respectively, of the AC Fund. The VK Fund and
the AC Fund have substantially similar investment objectives and follow
similar investment strategies. Both funds invest principally in a
diversified portfolio of securities that are issued or guaranteed by the
U.S. Government or its agencies or instrumentalities ("U.S. Government
Securities") and both portfolios consist primarily of mortgage related
securities. The VK Fund may borrow money from banks or enter into reverse
repurchase agreements and dollar rolls in an amount up to 33 1/3% of the
VK Fund's total assets and may invest up to 35% of its total assets in
fixed rate U.S. government securities, income securities that are not U.S.
government securities, including not more than 10% of its total assets in
foreign securities. In contrast, the AC Fund may not borrow in excess of
5% of its total assets and shall only do so as a temporary measure for
extraordinary or emergency purposes. The AC Fund may invest up to 35% of
its assets in mortgage-related securities not guaranteed by an agency or
instrumentality of the U.S. Government, mortgage-backed securities,
asset-backed securities and U.S. Government Securities and does not invest
in foreign securities. The VK Fund may hold up to 15% of its total assets
in illiquid securities while the AC Fund limits holdings of illiquid
securities to 10% of its total assets.
(2) The AC Fund is managed by Van Kampen American Capital Asset Management,
Inc. ("AC Adviser"), an affiliate of the VK Fund's adviser, Van Kampen
American Capital Investment Advisory Corp. ("VK Adviser"). The advisory
fee for the AC Fund is a monthly fee computed on average daily net assets
at an annual rate of 0.50% on the first $1 billion of net assets; 0.475%
on the next $1 billion of net assets; 0.45% on the next
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<PAGE> 11
$1 billion of net assets; 0.40% on the next $1 billion of net assets; and
0.35% on net assets over $4 billion. The advisory fee for the VK Fund is a
monthly fee computed on average daily net assets at an annual rate of
0.60% on the first $500 million of net assets; 0.550% on the next $500
million of net assets; 0.500 % on the next $2 billion of net assets;
0.475% on the next $2 billion of net assets; 0.450% on the next $2 billion
of net assets; 0.425% on the next $2 billion of net assets and 0.400% on
net assets over $9 billion. As of March 31, 1995, the AC Fund's net assets
were approximately $66.1 million. As of March 31, 1995, the VK Fund's net
assets were approximately $28.8 million.
(3) The VK Fund offers three classes of shares. Similarly, the AC Fund has
three classes of shares, but currently offers only Class A and C shares
for purchase. Class B shares of the AC Fund are not currently offered for
purchase other than for dividend and capital gain reinvestments or
exchanges by current Class B shareholders of other Van Kampen American
Capital funds. Class A shares of the VK Fund and the AC Fund are subject
to an initial sales load of 3.25%. However, the initial sales charge
applicable to Class A shares of the AC Fund will be waived for Class A
Shares acquired in the Reorganization. Any subsequent purchases of Class A
shares of the AC Fund will be subject to a sales charge of up to 3.25%.
Class B shares of the VK Fund and the AC Fund do not incur a sales charge
when they are purchased, but generally are subject to a contingent
deferred sales charge of 3.00% if redeemed within the first year after
purchase, which charge is reduced to zero over a three year period in the
case of the VK Fund and a four year period in the case of the AC Fund.
However, Class B Shares of the AC Fund acquired in the Reorganization will
remain subject to the contingent deferred sales charge applicable to Class
B shares of the VK Fund. Subsequent to the Reorganization, holders of
Class B shares of the former VK Fund will be subject to the same Class B
share purchase limitations of the AC Fund (i.e. Class B shares of the AC
Fund are not offered for purchase other than for dividend and capital gain
reinvestments or exchanges by Class B shareholders of other Van Kampen
American Capital funds). Class C shares of the VK Fund and the AC Fund do
not incur a sales charge when they are purchased, but are subject to a
contingent deferred sales charge of 1.00% if redeemed within the first
year after purchase.
(4) Both the VK Fund and the AC Fund have adopted distribution plans (the
"Distribution Plans") pursuant to Rule 12b-1 under the Act and have
adopted service agreements or plans (the "Service Plans"). Both the AC
Fund and the VK Fund can charge up to 0.75% of their respective average
daily net assets attributable to Class B and C shares for reimbursement of
certain distribution-related expenses. In addition, both the VK Fund
6
<PAGE> 12
and the AC Fund can charge up to 0.25% of their respective average daily
net assets attributable to Class A, B and C shares for the provision of
ongoing services to shareholders. Class B shares of both the VK Fund and
the AC Fund automatically convert to Class A shares six years after the
end of the calendar month in which the shareholder's order to purchase a
Class B share was accepted. Unlike Class C shares of the VK Fund, Class C
shares of the AC Fund automatically convert to Class A shares after ten
years. Accordingly, Class C shares acquired in the Reorganization will not
automatically convert to Class A shares after ten years, but will remain
Class C shares. However, Class C shares of the AC Fund purchased
subsequently will automatically convert to Class A shares after ten years.
Certain other comparisons between the VK Fund and the AC Fund are discussed
below.
INVESTMENT OBJECTIVES AND POLICIES
The AC Fund and the VK Fund have substantially similar investment objectives
and also share similar investment practices, but there are also certain
differences in their investment policies, practices and restrictions. The
investment objectives of the AC Fund are to seek to provide investors with a
high current return and relative safety of capital. The VK Fund's investment
objective is to seek a high level of current income consistent with a relatively
stable net asset value.
Under normal market conditions, the VK Fund invests at least 65% of its
portfolio in U.S. Government Securities which have interest rates which reset at
periodic intervals. Under normal market conditions, substantially all of the
U.S. Government Securities in which the VK Fund invests consist of adjustable
rate mortgage-backed securities ("ARMS") or other securities collateralized by
or representing an interest in mortgages and which have interest rates which
reset at periodic intervals. Up to 35% of the VK Fund's assets may be invested
in fixed rate U.S. Government Securities, in adjustable rate or fixed rate
securities that are not U.S. Government Securities, corporate or other debt
obligations, including not more than 10% of its total assets in foreign
securities.
Securities purchased by the VK Fund ordinarily will be U.S. Government
Securities or will be rated at least Aa by Moody's Investors Services, Inc.
("Moody's") or AA by Standard & Poor's Ratings Group ("S&P") or comparably rated
by another nationally recognized rating agency or, if unrated, determined to be
of comparable quality by the VK Adviser. The VK Fund may, however, invest up to
10% of its total assets in securities rated A by Moody's or S&P. The VK Fund may
also engage in hedging and risk management transactions, sell call options,
invest in restricted or illiquid securities, make forward commitments, enter
into repurchase agreements, reverse repurchase agreements and dollar rolls,
invest in Eurodollar instruments, lend its portfolio securities and enter into
foreign currency transactions.
7
<PAGE> 13
The AC Fund invests primarily in mortgage-related U.S. Government Securities.
Under normal circumstances, at least 65% of the total assets of the AC Fund are
invested in such securities. The AC Fund may invest up to 35% of its assets in
mortgage-related securities which are not U.S. Government Securities, mortgage-
backed securities, asset-backed securities and U.S. Government Securities. The
AC Fund may purchase or write options and engage in transactions involving
interest rate futures contracts and options on such contracts. The AC Fund may
also purchase or sell debt securities on a forward commitment basis and enter
into interest rate swaps and may purchase or sell interest rate caps, floors and
collars. For temporary defensive purposes, the entire portfolio of the AC Fund
may be invested in U.S. Government Securities, its agencies and
instrumentalities and repurchase agreements secured by such obligations.
The AC Fund is not limited as to the maturities of the securities in which it
may invest and the market value of the debt securities owned by the AC Fund will
fluctuate depending upon market factors and with prevailing interest rate levels
and therefore the net asset value of the AC Fund will fluctuate. In order to
reduce fluctuation in net asset value, the AC Fund's current operating policy is
to maintain a portfolio duration within a range of six months to five years. The
AC Fund does not invest in foreign securities.
The VK Fund is authorized to borrow money from banks or enter into reverse
repurchase agreements and dollar rolls in an amount up to 33 1/3% of its total
assets. In contrast, the AC Fund may not borrow except as a temporary measure
for extraordinary or emergency purposes, and then only up to 5% of its total
assets.
The VK Fund may invest up to 15% percent of its total assets in securities
deemed to be illiquid, securities the disposition of which is subject to
substantial legal or contractual restrictions on resale and securities that are
not readily marketable. The AC Fund is limited to 10% of its total assets
invested in illiquid securities.
The AC Fund may not engage in short sales of securities, unless at the time of
the sale it owns an equal amount of such securities. The VK Fund may not sell
any securities "short", except in connection with hedging or risk management
transactions. Each of the AC Fund and the VK Fund may lend portfolio securities
to broker-dealers and other financial institutions provided the loans are
secured by collateral at least equal to the market value of the securities
loaned. The AC Fund may lend up to 10% of its net assets, while the VK Fund has
no specific limit.
The AC Fund is managed by the AC Adviser while the VK Fund is managed by the
VK Adviser. The VK Adviser and the AC Adviser are wholly owned subsidiaries of
Van Kampen American Capital, Inc. ("VKAC"), which has been developing investment
strategies and products for individuals, business and institutions since 1974.
The VK Adviser and the AC Adviser are the primary investment advisers to
8
<PAGE> 14
the Van Kampen American Capital funds. VKAC is a diversified asset
management company with more than two million retail investor accounts,
extensive capabilities for managing institutional portfolios, and over $50
billion under management or supervision. VKAC's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide. The business address of
VKAC Asset Management is 2800 Post Oak Boulevard, Houston, Texas 77056. VKAC
Asset Management and its investment advisory agreement with the VK Fund are more
fully described in the AC Fund Prospectus and Statement of Additional
Information.
ADVISORY AND OTHER FEES
The VK Fund pays the VK Adviser a monthly fee based on its average daily net
asset value at the annual rates of 0.600% of the first $500 million; 0.550% of
the next $500 million of net assets; 0.500% on the next $2 billion of net
assets; 0.475% on the next $2 billion of net assets; 0.450% on the next $2
billion of net assets; 0.425% on the next $2 billion of net assets and 0.400% on
the net assets over $9 billion. However, such fee has historically been reduced
to zero as a result of voluntary fee waivers and expense reimbursement by the VK
Adviser. In addition, the VK Fund bears most expenses associated with its
operations and the issuance and repurchase or redemption of its securities,
except for the compensation of trustees affiliated with VKAC, and officers of
the VK Fund who are interested persons of VKAC or its subsidiaries. The total
operating expenses for the VK Fund for the period ended December 31, 1994 were
0.71%, 1.45% and 1.46% with respect to Class A, B and C shares, respectively,
after giving effect to voluntary expense reimbursement by the VK Adviser. Absent
such voluntary expense reimbursement, such total operating expenses would have
been 1.62%, 2.36% and 2.37% for Class A, B and C shares, respectively. However,
if the Reorganization is not consummated, the VK Adviser does not currently
intend to continue the aforementioned voluntary fee waivers and expense
reimbursements.
The AC Fund pays the AC Adviser a monthly fee based on its average daily net
asset value at the annual rates of 0.50% of the first $1 billion; 0.475% of the
next $1 billion of net assets; 0.45% on the next $1 billion; 0.40% on the next
$1 billion and 0.35% on net assets over $4 billion. Similar to the VK Fund, the
AC Fund also bears most expenses associated with its operation and the issuance
and repurchase or redemption of its securities, except for the compensation of
trustees affiliated with VKAC, and officers of the AC Fund who are interested
persons of VKAC or its subsidiaries. The total operating expenses for the AC
Fund for the period ended December 31, 1994 were 1.15%, 1.91% and 1.90% of the
average daily net assets attributable to Class A, B and C shares, respectively,
after giving effect to voluntary fee waivers by AC Adviser. Absent such
voluntary fee waivers, such total operating expenses would have been 1.31%,
2.08% and 2.07% for Class A, B and C shares, respectively. For a complete
description of the VK Fund's advisory services, see the
9
<PAGE> 15
respective sections in the VK Fund's Prospectus and Statement of Additional
Information entitled "Investment Advisory Services" and "Investment Advisory and
Other Services -- Investment Advisory Agreement." For a complete description of
the AC Fund's advisory services, see the respective sections in the AC Fund's
Prospectus and Statement of Additional Information entitled "Investment Advisory
Services" and "Investment Advisory Agreement."
In addition, the AC Fund has adopted the Distribution Plan with respect to
each class of shares pursuant to Rule 12b-1 under the Act and has adopted the
Service Plan with respect to each class of its shares. The Distribution Plan and
the Service Plan provide that the AC Fund can charge up to 0.25%, 1.00% and
1.00% of the AC Fund's average daily net assets attributable to its Class A, B
and C shares, respectively, for reimbursement of certain distribution-related
expenses and for the provision of ongoing services to shareholders. The
Distribution Plan and the Service Plan are being implemented through an
agreement with Van Kampen American Capital Distributors, Inc. ("VKAC
Distributors"), the distributor of each class of the AC Fund's shares,
sub-agreements between VKAC Distributors and members of the National Association
of Securities Dealers, Inc. (the "NASD") who are acting as securities dealers
and NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the AC Fund and banks who are acting as brokers for
their customers that may provide their customers or clients certain services or
assistance. For a complete description of these arrangements with respect to the
AC Fund, see the respective sections in the AC Fund's Prospectus and Statement
of Additional Information entitled "Distribution Plans." For a complete
description of these arrangements with respect to the VK Fund, see the
respective sections in the VK Fund's Prospectus entitled "The Distribution and
Service Plans."
DISTRIBUTION, PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
Generally, Class A shares of the VK Fund and the AC Fund are sold at net asset
value applicable at the time of such sale, plus a sales charge of up to 3.25% of
the offering price (which percentage is reduced on investments of $25,000 or
more), and are redeemable at their net asset value applicable at the time of
redemption. Purchases of Class A shares of the VK Fund or the AC Fund in amounts
of $1,000,000 or more are not subject to an initial sales charge but a
contingent deferred sales charge of 1% may be imposed on certain redemptions
made within one year of purchase. Class A shares of the AC Fund acquired in the
Reorganization will not be subject to a sales charge.
Generally, Class B shares do not incur a sales charge when they are purchased,
but generally are subject to a contingent deferred sales charge if redeemed
within a specified period of time from the date of purchase. Class B shares of
the VK Fund are subject to a contingent deferred sales charge equal to 3.00% of
the lesser of the
10
<PAGE> 16
then current net asset value or the original purchase price on Class B shares
redeemed during the first year after purchase, which charge is reduced to zero
over a three year period. Class B shares of the AC Fund are subject to a
contingent deferred sales charge equal to 3.00% of the lesser of the then
current net asset value or the original purchase price on Class B shares
redeemed during the first year after purchase, which charge is reduced to zero
over a four year period. However, Class B Shares of the AC Fund acquired in the
Reorganization will remain subject to the contingent deferred sales charge
applicable to Class B shares of the VK Fund.
Generally, Class C shares do not incur a sales charge if redeemed after the
first year of purchase. Both Class C shares of the VK Fund and the AC Fund are
subject to a contingent deferred sales charge equal to 1.00% of the lesser of
the then current net asset value or the original purchase price on such shares
redeemed during the first year after purchase and do not incur a sales charge if
redeemed after the first year from the date of purchase. See "Fee Comparisons"
below.
The minimum initial investment with respect to each class of shares in the VK
Fund and the AC Fund is $500, although Class A Shares of the AC Fund acquired in
connection with the Reorganization will not be subject to the minimum investment
limitation. The minimum subsequent investment in the VK Fund and the AC Fund is
$25. For a complete description of these arrangements with respect to the AC
Fund, see the respective sections in the AC Fund's Prospectus and Statement of
Additional Information entitled "Purchase of Shares" and "Purchase and
Redemption of Shares."
Shares of either the VK Fund or the AC Fund may be purchased by check, by
electronic transfer or by bank wire and also offer exchange privileges among all
other Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors (except Van Kampen American Capital Government Target Fund).
11
<PAGE> 17
Shares of the AC Fund and the VK Fund properly presented for redemption may be
redeemed or exchanged at the next determined net asset value per share (subject
to any applicable deferred sales charge). Shares of either the VK Fund or the AC
Fund may be redeemed or exchanged by mail or by special redemption privileges
(telephone exchange, telephone redemption by check, or electronic transfer). If
a shareholder of either fund attempts to redeem shares within a short time after
they have been purchased by check, the respective funds may delay payment of the
redemption proceeds until such funds can verify that payment for the purchase of
the shares has been (or will be) received. No further purchases of the shares of
the VK Fund may be made after the date on which the shareholders of the VK Fund
approve the Reorganization, and the stock transfer books of the VK Fund will be
permanently closed as of the date of Closing. Only redemption requests and
transfer instructions received in proper form by the close of business on the
day prior to the date of Closing will be fulfilled by the VK Fund. Redemption
requests or transfer instructions received by the VK Fund after that date will
be treated by the VK Fund as requests for the redemption or instructions for
transfer of the shares of the AC Fund credited to the accounts of the
shareholders of the VK Fund. Redemption requests or transfer instructions
received by the VK Fund after the close of business on the day prior to the date
of Closing will be forwarded to the AC Fund. For a complete description of these
redemption arrangements, see the section in the VK Fund's Prospectus entitled
"Redemption of Shares," and the respective sections in the AC Fund's Prospectus
and Statement of Additional Information entitled "Redemption of Shares" and
"Purchase and Redemption of Shares."
The differences in the distribution, purchase and redemption procedures and
fee structure of the Shares of the AC Fund and the shares of the VK Fund are
highlighted in the table below.
FEE COMPARISONS
<TABLE>
<CAPTION>
AC VK
CLASS A SHARES(1) FUND** FUND* PRO FORMA
--------------------------------------------------- ------ ----- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. 3.25% (4) 3.25%(4) 3.25%
Maximum Deferred Sales Charge
(as a percentage of the lower of the original
purchase price or redemption proceeds)........... None None None
</TABLE>
12
<PAGE> 18
<TABLE>
<CAPTION>
AC VK
CLASS A SHARES(1) FUND** FUND* PRO FORMA
----------------- ------ ----- ---------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.50% (6) 0.60%(5) 0.50%
Rule 12b-1 Fees.................................... 0.24% 0.30%(7) 0.24%
Other Expenses..................................... 0.57% 0.72%(5) 0.39%
Total Fund Operating Expenses
(before waivers and reimbursements).............. 1.31% (6) 1.62%(5) 1.13%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(before waivers and reimbursements)(8)
One Year......................................... $ 45 $ 48 $ 44
Three Years...................................... $ 73 $ 82 $ 67
Five Years....................................... $ 102 $ 118 $ 93
Ten Years........................................ $ 185 $ 218 $ 165
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(before waivers and reimbursements)(8)
One Year......................................... $ 45 $ 48 $ 44
Three Years...................................... $ 73 $ 82 $ 67
Five Years....................................... $ 102 $ 118 $ 93
Ten Years........................................ $ 185 $ 218 $ 165
Total Fund Operating Expenses
(after waivers and reimbursements)............... 1.15% 0.71% 1.13%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(after waivers and reimbursements)(8)
One Year......................................... $ 44 $ 40 $ 44
Three Years...................................... $ 68 $ 54 $ 67
Five Years....................................... $ 94 $ 71 $ 93
Ten Years........................................ $ 168 $ 118 $ 165
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(after waivers and reimbursements)(8)
One Year......................................... $ 44 $ 40 $ 44
Three Years...................................... $ 68 $ 54 $ 67
Five Years....................................... $ 94 $ 71 $ 93
Ten Years........................................ $ 168 $ 118 $ 165
</TABLE>
13
<PAGE> 19
<TABLE>
<CAPTION>
AC VK
CLASS B SHARES(2) FUND** FUND* PRO FORMA
----------------- ------ ----- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge (as a percentage of
the lower of the original purchase price or
redemption proceeds)............................. 3.00% 3.00% 3.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.50% (6) 0.60%(5) 0.50%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.58% 0.76%(5) 0.39%
Total Fund Operating Expenses
(before waivers and reimbursements).............. 2.08% (6) 2.36%(5) 1.89%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(before waivers and reimbursements)(8)
One Year......................................... $ 51 $ 54 $ 49
Three Years...................................... $ 85 $ 84 $ 79
Five Years....................................... $ 112 $ 126 $ 102
Ten Years........................................ $ 203 $ 234 $ 183
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(before waivers and reimbursements)(8)
One Year......................................... $ 21 $ 24 $ 19
Three Years...................................... $ 65 $ 74 $ 59
Five Years....................................... $ 112 $ 126 $ 102
Ten Years........................................ $ 203 $ 234 $ 183
Total Fund Operating Expenses
(after waivers and reimbursements)............... 1.91% 1.45% 1.89%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(after waivers and reimbursements)(8)
One Year......................................... $ 49 $ 45 $ 49
Three Years...................................... $ 80 $ 56 $ 79
Five Years....................................... $ 103 $ 79 $ 102
Ten Years........................................ $ 185 $ 135 $ 183
</TABLE>
14
<PAGE> 20
<TABLE>
<CAPTION>
AC VK
CLASS B SHARES(2) FUND** FUND* PRO FORMA
----------------- ------ ----- ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(after waivers and reimbursements)(8)
One Year......................................... $ 19 $ 15 $ 19
Three Years...................................... $ 60 $ 46 $ 59
Five Years....................................... $ 103 $ 79 $ 102
Ten Years........................................ $ 185 $ 135 $ 183
CLASS C SHARES(3)
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge
(as a percentage of the lower of the original
purchase price or redemption proceeds)........... 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.50% (6) 0.60%(5) 0.50%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.57% 0.77%(5) 0.39%
Total Fund Operating Expenses
(before waivers and reimbursements).............. 2.07% (6) 2.37%(5) 1.89%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(before waivers and reimbursements)(8)
One Year......................................... $ 31 $ 34 $ 29
Three Years...................................... $ 65 $ 74 $ 59
Five Years....................................... $ 111 $ 127 $ 102
Ten Years........................................ $ 240 $ 271 $ 221
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(before waivers and reimbursements)(8)
One Year......................................... $ 21 $ 24 $ 19
Three Years...................................... $ 65 $ 74 $ 59
Five Years....................................... $ 111 $ 127 $ 102
Ten Years........................................ $ 240 $ 271 $ 221
Total Fund Operating Expenses
(after waivers and reimbursements)............... 1.90% 1.46% 1.89%
</TABLE>
15
<PAGE> 21
<TABLE>
<CAPTION>
AC VK
CLASS C SHARES(3) FUND** FUND* PRO FORMA
--------------------------------------------------- ------ ----- ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(after waivers and reimbursements)(8)
One Year......................................... $ 29 $ 25 $ 29
Three Years...................................... $ 60 $ 46 $ 59
Five Years....................................... $ 103 $ 80 $ 102
Ten Years........................................ $ 222 $ 175 $ 221
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(after waivers and reimbursements)(8)
One Year......................................... $ 19 $ 15 $ 19
Three Years...................................... $ 60 $ 46 $ 59
Five Years....................................... $ 103 $ 80 $ 102
Ten Years........................................ $ 222 $ 175 $ 221
</TABLE>
---------------
(1) Class A Shares of the AC Fund received pursuant to the Reorganization will
not be subject to a sales charge.
(2) Class B Shares of the VK Fund and the AC Fund are subject to a contingent
deferred sales charge equal to 3.00% of the lesser of the then current net
asset value or the original purchase price on Class B Shares redeemed during
the first year after purchase, which charge is reduced to zero in the case
of the VK Fund, over a three year period as follows: Year 1 -- 3%, Year
2 -- 2%, Year 3 -- 1% and Year 4 -- 0%; and in the case of the AC Fund, over
a four year period as follows: Year 1 -- 3%; Year 2 -- 3%; Year 3 -- 2%,
Year 4 -- 1% and Year 5 -- 0%.
(3) Class C shares of the VK Fund and the AC Fund are subject to a contingent
deferred sales charge equal to 1.00% of the then current net asset value on
the original purchase price for Class C shares redeemed during the first
year after purchase.
(4) Effective May 1, 1995, the maximum sales load for both funds is 3.25% (as a
percentage of initial offering price).
(5) Before voluntary expense waiver. After application of the expense waiver,
management fees would be zero for each class of shares, other expenses would
be 0.41%, 0.45% and 0.46% for Class A, B and C shares, respectively, and
total fund operating expenses would be 0.71%, 1.45% and 1.46% for Class A, B
and C shares, respectively.
(6) Before voluntary expense waiver. After application of the expense waiver,
management fees would be 0.34%, 0.33% and 0.33% for Class A, B and C shares,
respectively, and total fund operating expenses would be 1.15%, 1.91% and
1.90% for Class A, B and C shares, respectively.
16
<PAGE> 22
(7) In connection with the reorganization, the 12b-1 fee for the VK Fund will be
reduced from 0.30% to 0.25%.
(8) Expenses examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted in the above table. The Pro Forma column
reflects expenses estimated to be paid on new shares purchased from the
combined fund subsequent to the Reorganization. For those shares issued in
connection with the Reorganization, the following expenses would be incurred
based upon the purchase of the VK Fund immediately prior to the
Reorganization and the Pro Forma expense ratio:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
With Redemption at End of Period
Class A............................... $ 44 $ 67 $ 93 $ 165
Class B............................... $ 49 $ 79 $102 $ 183
Class C............................... $ 29 $ 59 $102 $ 221
Without Redemption at End of Period
Class A............................... $ 44 $ 67 $ 93 $ 165
Class B............................... $ 19 $ 59 $102 $ 183
Class C............................... $ 19 $ 59 $102 $ 221
</TABLE>
* For the semi-annual period ended December 31, 1994 on an annualized basis.
** For the fiscal year ended December 31, 1994.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general a shareholder of
the VK Fund will recognize no gain or loss upon the receipt of solely the shares
of the AC Fund pursuant to the Reorganization. Additionally, the VK Fund would
not recognize any gain or loss as a result of the exchange of all of its assets
for the shares of the AC Fund or as a result of its liquidation. The AC Fund
expects that it will not recognize any gain or loss as a result of the
Reorganization, that it will take a carryover basis in the assets acquired from
the VK Fund and that its holding period of such assets will include the period
during which the assets were held by the VK Fund. See "The Proposed
Reorganization -- Federal Income Tax Consequences."
The above information is only a summary of more complete information contained
in this Proxy Statement/Prospectus and the related Statement of Additional
Information.
REASONS FOR THE PROPOSED REORGANIZATION
On December 20, 1994, The Van Kampen Merritt Companies, Inc. acquired from The
Travelers Inc. all of the outstanding capital stock of American Capital
Management & Research, Inc., the parent company of the AC Adviser. Immedi-
17
<PAGE> 23
ately after the acquisition, American Capital Management & Research, Inc. was
merged into The Van Kampen Merritt Companies, Inc. and the combined entity was
renamed Van Kampen American Capital, Inc. ("VKAC"). The VK Adviser and the AC
Adviser currently are each wholly-owned subsidiaries of VKAC.
On February 10, 1995, the VK Board and the AC Board held a joint meeting to
discuss with management ("Management") of the VK Adviser and the AC Adviser the
costs and potential benefits to shareholders of, among other things, (i)
combining certain funds advised by the VK Adviser and the AC Adviser, including
the VK Fund and the AC Fund in order to seek to achieve certain economies of
scale and efficiencies, (ii) permitting exchangeability of shares between funds
advised by the VK Adviser and the AC Adviser, (iii) selecting a common transfer
agent to facilitate exchangeability and enhance shareholder services and (iv)
consolidating the VK Board and the AC Board into a combined board of trustees
(collectively, the "Consolidation").
The VK Board and the AC Board created a joint committee (the "Joint
Committee") to consider the possible costs and benefits to shareholders
associated with the proposed Consolidation, including the combination of the VK
Fund and the AC Fund. The Joint Committee held meetings on February 20, 1995,
March 27, 1995 and April 3, 1995 to consider issues relating to the
Consolidation, review information requested from and provided by Management and
review information requested from and provided by third-party analytical
services.
The VK Board and the AC Board held joint meetings on March 14, 1995 and April
6-7, 1995 to review the findings and recommendations of the Joint Committee. The
VK Board unanimously approved each element of the Consolidation, including the
combination of the VK Fund and the AC Fund, on April 7, 1995, subject to
approval of the Consolidation by the AC Board. The AC Board met May 11, 1995,
and unanimously approved each element of the Consolidation, including the
combination of the VK Fund and the AC Fund. Each of the VK Board and the AC
Board also approved submitting the necessary proposals to the respective
shareholders of the VK Fund and the AC Fund to effect the Consolidation.
At separate shareholder meetings held on July 21, 1995, shareholders of the VK
Fund and the AC Fund approved the reorganization of the VK Fund and the AC Fund
into Delaware business trusts (or series thereof) and the combination of the VK
Board and the AC Board. Shareholders of the VK Fund are now being asked to
approve its consolidation with the AC Fund in order to (i) eliminate the
duplication of services that currently exists as a result of the separate
operations of the funds, (ii) seek to achieve economies of scale by combining
the assets of the funds and (iii) potentially reduce transaction costs and
obtain greater portfolio diversity.
18
<PAGE> 24
In connection with approving the combination of the AC Fund with the VK Fund,
the VK Board considered the costs from the separate operations of the AC Fund
and the VK Fund in light of their substantially similar investment objectives,
policies and restrictions. The VK Board also considered the potential expense
savings, economies of scale, reduced per-share expenses and benefits to the
portfolio management process that could result from combining the assets and
operations of the AC Fund and the VK Fund. In this regard, the VK Board reviewed
information provided by the AC Adviser, VK Adviser and VKAC Distributors,
relating to the anticipated cost savings to the shareholders of the AC Fund and
the VK Fund as a result of the Reorganization.
In particular, the VK Board considered the probability that the elimination of
duplicative operations and the increase in asset levels of the AC Fund after the
Reorganization would result in the following potential benefits for investors,
although there can, of course, be no assurances in this regard:
(1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the VK Fund and the AC
Fund should eliminate the duplication of services that currently exists as
a result of their separate operations. For example, currently the VK Fund
and the AC Fund are managed separately by different affiliated investment
advisers. Consolidating the separate operations of the VK Fund with those
of the AC Fund should promote more efficient operations on a more cost-
effective basis.
(2) ACHIEVEMENT OF REDUCED PER SHARE EXPENSES AND ECONOMIES OF
SCALE. Combining the assets of the VK Fund with the assets of the AC Fund
also should lead to reduced expenses, on a per share basis, by allowing
fixed and relatively fixed costs, such as accounting, legal and printing
expenses, to be spread over a larger asset base. An increase in the net
asset levels of the AC Fund also could result in achieving future
economies of scale, which should also reduce per share expenses. Any
significant reductions in expenses on a per share basis should, in turn,
have a favorable effect on the relative total return of the AC Fund.
(3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset levels also
should enable the AC Fund to purchase larger individual portfolio
investments that may result in reduced transaction costs and/or other more
favorable pricing and provide the opportunity for greater portfolio
diversity.
In determining whether to recommend approval of the Reorganization to
shareholders of the VK Fund, the VK Board considered a number of factors,
including, but not limited to: (1) capabilities and resources of AC Adviser and
other service providers to the AC Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees applicable to the VK Fund
and the AC Fund before the Reorganization and the estimated expense ratios of
the
19
<PAGE> 25
AC Fund after the Reorganization; (3) the comparative investment performance of
the VK Fund and the AC Fund, as well as the performance of the AC Fund compared
to its peers; (4) the terms and conditions of the Agreement and whether the
Reorganization would result in dilution of VK Fund shareholder interests; (5)
the advantages of eliminating the competition and duplication of effort inherent
in marketing two funds having similar investment objectives, in addition to the
economies of scale realized through the combination of the two funds; (6) the
compatibility of the funds' service features available to shareholders,
including the retention of applicable holding periods and exchange privileges;
(7) the costs estimated to be incurred by the respective funds as a result of
the Reorganization; and (8) the anticipated tax consequences of the
Reorganization. Based upon these, as well as other factors, the VK Board
unanimously determined that the Reorganization is in the best interests of the
shareholders of the VK Fund.
B. RISK FACTORS
NATURE OF INVESTMENT
Each of VK Fund and the AC Fund invest primarily in securities that are issued
or guaranteed by the U.S. Government or its agencies or instrumentalities. The
VK Fund invests in securities that have interest rates which reset at periodic
intervals. The AC Fund currently has an operating policy of maintaining a
portfolio duration within a range of six months to five years. Investment in
either of the VK Fund or the AC Fund may not be appropriate for all investors.
Certain investment policies and practices of the AC Fund involve special
risks. Since the value of debt securities owned by the AC Fund will fluctuate
depending upon market factors and changes in prevailing interest rate levels,
the net asset value of shares of the AC Fund will fluctuate. The AC Fund may
invest in stripped mortgage-related and mortgage-backed securities, which may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans. Those securities that are
issued by private originators may involve greater risk than securities issued
directly by the U.S. Government, its agencies or instrumentalities. The AC Fund
may also invest in asset-backed securities, which may be unsecured, and
therefore entail certain risks not presented by mortgage-backed securities. The
AC Fund may also purchase or sell debt securities on a forward commitment basis,
engage in options, futures and interest rate transactions and may lend its
portfolio securities. Each of such activities may subject the AC Fund to risk.
No assurance can be given as to the actual duration of a mortgage-related
security because the mortgage loans underlying the security may be prepaid by
the obligor. Depending on market conditions, the AC Fund may be able to reinvest
prepayments passed through to it only at a lower yielding investment rate.
Changes in prepayment rates may adversely affect the market value of mortgage
related securities. Shares of the AC Fund are not insured or
20
<PAGE> 26
guaranteed by the U.S. Government, its agencies or instrumentalities or by any
other person or entity. For a more complete discussion of the risks of an
investment in the AC Fund, see the sections of the AC Fund Prospectus entitled
"Prospectus Summary" and "Investment Objective and Policies."
Unlike the AC Fund, the VK Fund may invest up to 35% of its total assets in
corporate or other debt obligations, including not more than 10% of its total
assets in foreign securities. Securities purchased by the VK Fund will be U.S.
Government Securities or will be rated at least Aa by Moody's or AA by S&P (or
comparably rated by another nationally recognized rating agency), or if unrated,
determined to be of comparable quality by the VK Adviser, however, the VK Fund
may invest up to 10% of its total assets in securities rated A by Moody's or
S&P. The AC Fund may invest up to 35% of its total assets in mortgage-related
securities not guaranteed by the U.S. Government or its agencies or
instrumentalities, mortgage-backed securities, asset-backed securities and U.S.
Government Securities. The AC Fund intends to invest in these types of debt
securities only if they are rated at the time of purchase in the two highest
grades by a nationally-recognized rating agency (which would include S&P and
Moody's).
The VK Fund, unlike the AC Fund, may borrow money from banks (other than as a
temporary measure for extraordinary or emergency purposes) or enter into reverse
repurchase agreements and dollar rolls in an amount up to 33 1/3% of the VK
Fund's total assets. Such borrowing creates an opportunity for increased net
income but at the same time creates special risk considerations such as changes
in the net asset value of the VK Fund's Shares and in the yield on its
portfolio. In addition, borrowing will create interest expenses for the VK Fund
which can exceed the income from the assets retained.
The VK Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The AC Fund is limited to up to 10% of its total assets in illiquid
securities. For a complete description of the difference in the funds'
investment objectives and policies, see "Summary -- Investment Objectives and
Policies," the respective section in the AC Fund's Prospectus and Statement of
Additional Information entitled "Investment Objective and Policies" and the
respective section in the VK Fund's Prospectus and Statement of Additional
Information entitled "Investment Objective and Policies."
CHANGES IN CERTAIN INVESTMENT PRACTICES
Both the AC Fund and the VK Fund may engage in certain options and financial
futures transactions. However, the VK Fund has greater levels of flexibility in
pursuing its investment objectives through practices such as the ability to
engage in reverse repurchase agreements as well as by investing in corporate
debt and foreign
21
<PAGE> 27
securities. Such transactions involve special risks. For a complete description
of the VK Fund's investment practices, see the section in the VK Fund's
Prospectus entitled "Investment Practices" and "Investment Objective and
Policies" and the section of the AC Fund's Prospectus entitled "Investment
Practices" and in the section of the Statement of Additional Information
entitled "Investment Objective and Policies."
C. INFORMATION ABOUT THE FUNDS
AC Fund. Information about the AC Fund is included in its current Prospectus
dated August 7, 1995, which accompanies this Proxy Statement/Prospectus.
Additional information about the AC Fund is included in its Statement of
Additional Information dated the same date as the AC Fund Prospectus. Copies of
the AC Fund's Statement of Additional Information may be obtained without charge
by calling (800) 421-5666. The AC Fund files proxy material, reports and other
information with the SEC. These reports can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.
VK Fund. Information about the VK Fund is included in its current Prospectus
dated August 1, 1995. Additional information about the VK Fund is included in
its current Statement of Additional Information dated the same date as the VK
Fund Prospectus. Copies of the VK Fund's Statement of Additional Information may
be obtained without charge by calling (800) 341-2911. The VK Fund files proxy
material, reports and other information with the SEC. These reports can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.
Management's Discussion of AC Fund Performance as of the Annual Report dated
December 31, 1994 and Management's Discussion of VK Fund Performance as of the
Annual Report dated June 30, 1994 are attached hereto as Exhibit B.
AC Fund, as a Delaware business trust, and VK Fund, as a series of the VKAC
Trust, a Delaware business trust, are governed by their respective Agreements
and Declarations of Trust (each, a "Declaration"), their respective Bylaws and
applicable Delaware law.
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<PAGE> 28
D. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement, a copy of which
is attached hereto as Exhibit A. The affirmative vote of a majority of the
outstanding shares entitled to vote is required to approve the Agreement at a
meeting of shareholders at which a quorum is present.
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the AC Fund will acquire all of the assets and
liabilities of the VK Fund on the Closing Date in exchange for Class A, B and C
Shares, respectively, of the AC Fund.
Subject to VK Fund shareholder approval of the Reorganization, the closing
(the "Closing") will occur within 15 business days after the later of the
receipt of all necessary regulatory approvals and the final adjournment of the
Special Meeting or such later date as soon as practicable thereafter as the VK
Fund and the AC Fund may mutually agree.
On the date of Closing, the VK Fund will transfer to the AC Fund all of the
assets and liabilities of the VK Fund. The AC Fund will in turn transfer to the
VK Fund a number of Class A, B and C Shares, respectively, of the AC Fund equal
in value to the value of the net assets of the VK Fund transferred to the AC
Fund as of the date of Closing, as determined in accordance with the valuation
method described in the AC Fund's then current prospectus. In order to minimize
any potential for undesirable federal income and excise tax consequences in
connection with the Reorganization, the VK Fund and the AC Fund may distribute
on or before the Closing all or substantially all of their respective
undistributed net investment income (including net capital gains) as of such
date.
The VK Fund expects to distribute the Class A, B and C Shares, respectively,
of the AC Fund to the shareholders of the VK Fund promptly after the Closing and
then dissolve pursuant to a plan of liquidation and dissolution adopted by the
VK Board.
The VK Fund and the AC Fund have made certain representations and warranties
to each other regarding their capitalization, status and conduct of business.
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<PAGE> 29
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the VK Fund's shareholders;
2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
5. the effectiveness under applicable law of the registration statement of
the AC Fund of which this Proxy Statement/Prospectus forms a part and the
absence of any stop orders under the Securities Act pertaining thereto;
and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the VK
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse effect on the interests of VK Fund's shareholders.
The Agreement may also be terminated by the non-breaching party if there has
been a material misrepresentation, material breach of any representation or
warranty, material breach of contract or failure of any condition to Closing.
The VK Board recommends that you vote for approval of the Reorganization, as
it believes the Reorganization is in the best interests of the VK Fund's
shareholders and that the interests of the VK Fund's existing shareholders will
not be diluted as a result of consummation of the proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF BENEFICIAL INTEREST
Beneficial interests in the AC Fund being offered hereby are represented by
transferable Class A, B and C Shares, par value $.01 per share. The AC Fund's
Declaration of Trust permits the trustees, as they deem necessary or desirable,
to issue an unlimited number of shares, which may be divided into an unlimited
number of portfolios or series.
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<PAGE> 30
VOTING RIGHTS OF SHAREHOLDERS
Holders of shares of the AC Fund are entitled to one vote per share on matters
as to which they are entitled to vote; however, separate votes generally are
taken by each series on matters affecting an individual series. The AC Fund
Declaration and the VK Fund Declaration are substantially identical, except that
the VK Fund Declaration permits the VK Board or shareholders to remove a trustee
with or without cause by the act of two-thirds of such trustees or shareholders,
respectively. The Declaration of the AC Fund permits (i) the AC Fund to remove a
trustee with cause by the act of two-thirds of the trustees and (ii)
shareholders holding a majority of the shares of each series outstanding to
remove a trustee with or without cause. The AC Fund Declaration also requires
the approval of 80% of the trustees in office or a majority vote of the shares
of each series then outstanding to amend these provisions.
Each of the AC Fund and the VK Fund operates as a diversified, open-end
management investment company registered with the SEC under the Act. Therefore,
in addition to the specific voting rights described above, shareholders of the
AC Fund, as well as shareholders of the VK Fund, are entitled, under current
law, to vote with respect to certain other matters, including changes in
fundamental investment policies and restrictions and the ratification of the
selection of independent auditors. Moreover, under the Act, shareholders owning
not less than 10% of the outstanding shares of the AC Fund or the VK Fund may
request that the respective board of trustees call a shareholders' meeting for
the purpose of voting upon the removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the VK Fund will establish an account for
each AC Fund shareholder containing the appropriate number of Shares of the VK
Fund. The shareholder services and shareholder programs of the VK Fund and the
AC Fund have already been substantially conformed as part of the Consolidation.
Shareholders of the AC Fund who are accumulating AC Fund shares under the
dividend reinvestment plan, or who are receiving payment under the systematic
withdrawal plan with respect to AC Fund shares, will retain the same rights and
privileges after the Reorganization in connection with the VK Fund Class A, B
and C Shares, respectively, received in the Reorganization through substantially
similar plans maintained by the VK Fund. Van Kampen American Capital will
continue to serve as custodian for the assets of VK Fund shareholders held in
IRA accounts after the Reorganization. Such IRA investors will be sent
appropriate documents to confirm Van Kampen American Capital Trust Company's
custodianship.
It will not be necessary for shareholders of the AC Fund to whom certificates
have been issued to surrender their certificates. Upon liquidation of the AC
Fund, such certificates will become null and void.
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<PAGE> 31
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the VK Fund and
shareholders of the AC Fund. It is based upon Code, legislative history,
Treasury regulations, judicial authorities, published positions of the Internal
Revenue Service (the "Service") and other relevant authorities, all as in effect
on the date hereof and all of which are subject to change or different
interpretations (possibly on a retroactive basis). This summary is limited to
shareholders who hold their VK Fund shares as capital assets. No advance rulings
have been or will be sought from the Service regarding any matter discussed in
this Proxy Statement/Prospectus. Accordingly, no assurances can be given that
the Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisors to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
AC Fund and the VK Fund receive an opinion from Skadden, Arps, Slate, Meagher &
Flom substantially to the effect that, for federal income tax purposes:
1. The acquisition by the AC Fund of the assets of the VK Fund in exchange
solely for Class A, B and C Shares of the AC Fund and the assumption by the AC
Fund of the liabilities of the VK Fund will qualify as a tax-free reorganization
within the meaning of Section 368(a)(1) of the Code.
2. No gain or loss will be recognized by the VK Fund or the AC Fund upon the
transfer to the AC Fund of the assets of the VK Fund in exchange solely for the
Class A, B and C Shares of the AC Fund and the assumption by the AC Fund of the
liabilities of the VK Fund.
3. The AC Fund's basis in the VK Fund assets received in the Reorganization
will, in each instance, equal the basis in such assets in the hands of the VK
Fund immediately prior to the transfer, and the AC Fund's holding period of such
assets will, in each instance, include the period during which the assets were
held by the VK Fund.
4. No gain or loss will be recognized by the shareholders of the VK Fund upon
the exchange of their shares of the VK Fund for the Class A, B or C Shares,
respectively, of the AC Fund.
5. The aggregate tax basis of the Class A, B and C Shares of the AC Fund
received by the shareholders of the VK Fund will be the same as the tax
aggregate basis of the shares of the VK Fund surrendered in exchange therefor.
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<PAGE> 32
6. The holding period of the Class A, B and C Shares of the AC Fund received
by the shareholders of the VK Fund will include the holding period of the shares
of the VK Fund surrendered in exchange therefor if such surrendered shares of
the VK Fund are held as capital assets by such shareholder.
In rendering its opinion, Skadden, Arps, Slate, Meagher & Flom may rely upon
certain representations of the management of the VK Fund and the AC Fund and
assume that the Reorganization will be consummated as described in the Agreement
and that redemptions of shares of the VK Fund occurring prior to the Closing
will consist solely of redemptions in the ordinary course of business.
The AC Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the VK Fund and its shareholders.
CAPITALIZATION
The following table sets forth the capitalization of the VK Fund and the AC
Fund as of March 31, 1995 and the pro forma combined capitalization of both as
if the Reorganization had occurred on that date. These numbers may differ at the
time of Closing.
CAPITALIZATION TABLE AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
AC FUND VK FUND PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
NET ASSETS
Class A Shares................ $43,933,809 $ 5,768,618 $49,702,427
Class B Shares................ 16,049,037 20,239,539 36,288,576
Class C Shares................ 6,135,260 2,839,127 8,974,387
----------- ----------- -----------
Total.................. $66,118,106 $28,847,284 $94,965,390
============ ============ ============
NET ASSET VALUE PER SHARE
Class A Shares................ $12.10 $9.31 $12.10
Class B Shares................ 12.11 9.32 12.11
Class C Shares................ 12.10 9.31 12.10
SHARES OUTSTANDING
Class A Shares................ 3,631,251 619,631 4,108,043
Class B Shares................ 1,324,729 2,172,425 2,995,353
Class C Shares................ 507,055 304,967 741,698
----------- ----------- -----------
Total.................. 5,463,035 3,097,023 7,845,094
============ ============ ============
SHARES AUTHORIZED
Class A Shares................ Unlimited Unlimited Unlimited
Class B Shares................ Unlimited Unlimited Unlimited
Class C Shares................ Unlimited Unlimited Unlimited
</TABLE>
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<PAGE> 33
COMPARATIVE PERFORMANCE INFORMATION
The average annual total return for the VK Fund for the one-year period ended
March 31, 1995 and for the period beginning August 28, 1992 (the date Class A
and B shares of the VK Fund were first offered for sale to the public) through
March 31, 1995 were (0.37)% and 2.29%, in respect of its Class A shares; (1.01)%
and 2.46%, in respect of its Class B shares; and for the one-year period ended
March 31, 1995 and for the period beginning August 13, 1993 (the date the Class
C shares of the VK Fund were first offered for sale to the public) through March
31, 1995 were .84% and 1.19%, in respect of its Class C shares. The average
annual total return for Class A shares of the AC Fund for the one-year,
three-year, five-year periods ended March 31, 1995 and for the period beginning
June 16, 1986 (the date Class A shares of the AC Fund were first offered for
sale to the public) through March 31, 1995 were 1.09%, 2.09%, 5.29% and 5.51%,
respectively. The average annual total return for Class B shares of the AC Fund
for the one-year and three-year periods ended March 31, 1995, and for the period
beginning November 15, 1991 (the date Class B shares of the AC Fund were first
offered for sale to the public) through March 31, 1995, were (0.32)%, 1.50% and
2.01%, respectively. The average annual total return for Class C shares of the
AC Fund for the one-year period ended March 31, 1995 and for the period
beginning May 10, 1993 (the date Class C shares of the AC Fund were first
offered for sale to the public) through March 31, 1995 were 1.75% and 1.53%,
respectively. The total return figures include the effect of the maximum sales
charge applicable to purchases and sales of Shares of both the AC Fund and the
VK Fund, which is not being charged to Class A shareholders of the VK Fund in
connection with the Reorganization.
The total return figures above assume reinvestment of all dividends and
distributions. They are not necessarily indicative of future results. The
performance of a Fund is a result of conditions in the securities markets,
portfolio management and operating expenses. Although information such as that
shown above is useful in reviewing a Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE AC FUND
Approval of the Reorganization will constitute the ratification by VK Fund
shareholders of the investment objective, policies, restrictions, Distribution
Plan and Advisory Agreement of the AC Fund. For a discussion of the investment
objective, policies and restrictions of the AC Fund, see "Summary -- Comparisons
of the VK Fund and AC Fund" and the Prospectus of the AC Fund accompanying this
Proxy Statement/Prospectus. Approval of the Reorganization will constitute
approval of amendments to any of the fundamental investment restrictions of the
VK Fund that might otherwise be interpreted as impeding the Reorganization, but
28
<PAGE> 34
solely for the purpose of and to the extent necessary for, consummation of the
Reorganization.
LEGAL MATTERS
Certain legal matters concerning the issuance of Class A, B and C Shares of
the AC Fund will be passed on by O'Melveny & Myers, 400 South Hope Street, Los
Angeles, California 90071, counsel to the AC Fund. Lawrence J. Sheehan, a former
partner of, and currently of counsel to said firm, is a Trustee of the AC Fund.
On July 21, 1995, Mr. Sheehan was elected as a Trustee of the VK Fund.
Certain legal matters concerning the federal income tax consequences of the
Reorganization will be passed upon by Skadden, Arps, Slate, Meagher & Flom, 333
West Wacker Drive, Chicago, Illinois 60606 which serves as counsel to the VK
Fund. Wayne W. Whalen, a partner of Skadden, Arps, Slate, Meagher & Flom, is a
Trustee of the VK Fund. On July 21, 1995, Mr. Whalen was elected as a Trustee of
the AC Fund.
EXPENSES
The expenses of the Reorganization, including expenses incurred by the VK Fund
will be borne by the AC Fund after the Reorganization. Accordingly, if the
Reorganization is completed, the AC Fund and its shareholders after the
Reorganization will bear such expenses of the Reorganization. If the
Reorganization is not completed, VKAC will bear the costs associated with the
Reorganization. The VK Board has determined that the arrangements regarding the
payment of expenses and other charges relating to the Reorganization are fair
and equitable.
E. RECOMMENDATIONS OF VK BOARD
The VK Board has unanimously approved the Agreement and has determined that
participation in the Reorganization is in the best interests of the shareholders
of the VK Fund. THE VK BOARD RECOMMENDS VOTING FOR APPROVAL OF THE PROPOSED
REORGANIZATION.
OTHER MATTERS THAT MAY COME
BEFORE THE SPECIAL MEETING
It is not anticipated that any action will be asked of the shareholders of the
VK Fund other than as indicated above, but if other matters are properly brought
before the Special Meeting, it is intended that the persons named in the proxy
will vote in accordance with their judgment.
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<PAGE> 35
OTHER INFORMATION
A. SHAREHOLDINGS OF THE VK FUND AND THE AC FUND
At the close of business on July 21, 1995, there were 591,337 Class A shares,
1,995,526 Class B shares and 234,934 Class C shares, respectively, of the VK
Fund.
As of July 17, 1995, the trustees and officers as a group owned less than 1%
of the shares of the VK Fund.
No officer or trustee of the VK Fund owns or would be able to acquire 5% or
more of the common stock of VK/AC Holding, Inc.
As of July 17, 1995 the following persons owned of record or beneficially 5%
or more of the VK Fund's Class A shares: R&N Associates, c/o Glen Neubert, 4100
McEwen Road, Dallas, TX 75244-5107, 18%.
As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the VK Fund's Class B shares: Chicago Board of Education, Attn:
Treasury Dept. 6 West, 1918 W. Pershing Road, Chicago, IL 60609-2321, 14%.
As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the VK Fund's Class C shares: Putnam Savings Bank, A Corporation,
P.O. Box 151, Putnam, CT 06260-0151, 42%; and Chicago Board of Education, Attn.
Treasury Dept. 6 West, 1918 W. Pershing Rd., Chicago, IL 60609-2321, 22%.
At the close of business on July 21, 1995, there were 3,441,521 Class A
shares, 1,207,617 Class B shares and 425,465 Class C shares, respectively, of
the AC Fund.
Certain officers, directors and employees of VKAC own, in the aggregate, not
more than 7% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 11% of the
common stock of VK/AC Holding, Inc.
The Trustees and officers of the AC Fund as a group own less than 1% of the
outstanding shares of the AC Fund.
As of July 6, 1995, no person was known by the AC Fund to own beneficially or
to hold of record as much as 5% of the Outstanding Class A shares of the AC Fund
except as follows: 17.20% was owned by Van Kampen American Capital Trust
Company, 2800 Post Oak Boulevard, Houston, Texas 77056 and 5.75% was owned by
(2)Amalgamated Bank of NY Cust., NY Hotel Trades Council Pension Fund, Amivest
Discretionary Investment Manager, P.O. Box 0370, New York 10276-0370.
As of July 6, 1995, no person was known by the AC Fund to own beneficially or
to hold of record as much as 5% of the outstanding Class B shares of the AC Fund
except as follows: 12.91% was owned by First Union Brokerage Services, Inc.,
30
<PAGE> 36
5th Floor, 301 S. College St., Charlotte, North Carolina 28202-6000, 8.21% was
owned by National Financial Services, Inc., 200 Liberty One World Financial
Center, New York, New York 10281-1003, 5.41% was owned by Donaldson Lufkin, 1
Pershing Plaza, 5th Floor, Jersey City, New Jersey 07399-0001 and 12.05% was
owned by Van Kampen American Capital Trust Company, 280 Post Oak Boulevard,
Houston, Texas 77056.
As of July 6, 1995, no person was known by the AC Fund to own beneficially or
to hold of record as much as 5% of the outstanding Class C Shares of the AC Fund
except as follows: 10.85% was owned by Smith Barney Inc., 11th Floor, 388
Greenwich Street, New York, New York 10013-2375, 7.94% was owned by National
Financial Services, Inc., 200 Liberty One World Financial Center, New York, New
York 10281-1003, 29.19% was owned by (1)Bear Stearns & Co. Inc., One Metrotech
Center North, Brooklyn, New York 11201-3872 and 12.51% was owned by
(3)Prudential Securities Fund, Blackwell North America Inc., 6024 Jean Rd., Ste.
B, Lake Oswego, Oregon 97035-5396.
---------------
(1) Represents the aggregate of a number of accounts held of record by Bear
Stearns & Co. Inc. Certain Individual accounts also represent the beneficial
ownership of over 5% of the outstanding shares of the class.
(2) Such shares could also be deemed to be beneficially owned by the NY Hotel
Trades Counsel Pension Fund and its investment adviser, Amivest Corporation,
a Delaware Corporation, 767 5th Avenue, 50th Floor, New York, New York
10153.
(3) Such shares could also be deemed to be beneficially owned by Blackwell North
America, Inc.
B. SHAREHOLDER PROPOSALS
As a general matter, the AC Fund does not intend to hold future regular annual
or special meetings of shareholders unless required by the Act. Any shareholder
who wishes to submit proposals for consideration at a meeting of shareholders of
the VK Fund should send such proposal to the VK Fund at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. To be considered for presentation at a
shareholders' meeting rules promulgated by the SEC require that, among other
things, a shareholder's proposal must be received at the offices of the VK Fund
a reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.
VOTING INFORMATION AND REQUIREMENTS
Each valid proxy given by a shareholder of the AC Fund will be voted by the
persons named in the proxy in accordance with the designation on such proxy on
the
31
<PAGE> 37
Reorganization proposal and as the persons named in the proxy may determine on
such other business as may come before the Special Meeting on which shareholders
are entitled to vote. If no designation is made, the proxy will be voted by the
persons named in the proxy as recommended by the AC Board "FOR" approval of the
Reorganization.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the VK Fund a written notice of revocation, by delivering a
duly executed proxy bearing a later date, or by attending the Special Meeting
and voting in person.
The giving of a proxy will not affect your right to vote in person if you
attend the Special Meeting and wish to do so.
The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote is required to constitute a quorum at the
Special Meeting. APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE
OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF THE AC FUND ENTITLED
TO VOTE AT THE SPECIAL MEETING AT WHICH A QUORUM IS CONSTITUTED. Shares not
voted with respect to a proposal due to an abstention or broker non-vote will be
deemed votes not cast with respect to such proposal, but such shares will be
deemed present for quorum purposes.
In the event that sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Special Meeting, the persons named in the
proxy may propose and vote in favor of one or more adjournments of the Special
Meeting to permit further solicitation of proxies. If sufficient shares were
present to constitute a quorum, but insufficient votes had been cast in favor of
the Reorganization to approve it, proxies would be voted in favor of adjournment
only if the AC Board determined that adjournment and additional solicitation was
reasonable and in the best interest of the shareholders of the AC Fund, taking
into account the nature of the proposal, the percentage of the votes actually
cast, the percentage of negative votes, the nature of any further solicitation
that might be made and the information provided to shareholders about the
reasons for additional solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.
Proxies of shareholders of the AC Fund are solicited by the AC Board. The cost
of solicitation will be paid by the VK Fund after the Reorganization if the
Reorganization is completed. If the Reorganization is not completed, VKAC will
bear the costs associated with the Reorganization. In order to obtain the
necessary quorum at the Special Meeting, additional solicitation may be made by
mail, telephone, telegraph or personal interview by representatives of the VK
Fund, the VK Adviser or VKAC, or by dealers or their representatives. In
addition,
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such solicitation servicing may also be provided by Applied Mailing
Systems, a solicitation firm located in Boston, Massachusetts, at a cost
estimated to be approximately $1,900 plus reasonable expenses.
August 7, 1995
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as
of July 31, 1995, by and between the Van Kampen American Capital Limited
Maturity Government Fund, a Delaware business trust formed under the laws of
the State of Delaware (the "AC Fund") and the Van Kampen American Capital
Trust, a Delaware business trust created under the laws of the State of
Delaware (the "VKM Trust") on behalf of its series, the Van Kampen American
Capital Adjustable Rate U.S. Government Fund (the "VKM Fund").
W I T N E S S E T H:
WHEREAS, on December 20, 1994, (the "AC Acquisition Date") The Van
Kampen Merritt Companies, Inc. ("TVKMC") acquired all of the issued and
outstanding shares of American Capital Management & Research, Inc. ("American
Capital") and subsequently changed the combined entity's name to Van Kampen
American Capital, Inc.;
WHEREAS, American Capital and TVKMC, through their affiliated
companies, sponsor and manage a number of registered investment companies; and
WHEREAS, Van Kampen American Capital Distributors, Inc., successor by
merger between Van Kampen Merritt Inc. and American Capital Marketing, Inc.,
acts as the sponsor and principal underwriter for both the AC Fund and the VKM
Fund;
WHEREAS, the VKM Trust was organized as a Massachusetts business
trust, and subsequently reorganized as a Delaware business trust, pursuant to
an Agreement and Declaration of Trust (the "Declaration of Trust") dated May
10, 1995 pursuant to which it is authorized to issue an unlimited number of
shares of beneficial interest with par value of $0.01 per share, which at
present have been divided into different series, each series constituting a
separate and distinct entity of the VKM Trust, including the VKM Fund;
WHEREAS, Van Kampen American Capital Investment Advisory Corp.
(formerly, Van Kampen Merritt Investment Advisory Corp.) ("Advisory Corp.")
provides investment advisory and administrative services to the VKM Fund;
WHEREAS, the AC Fund was organized as a Massachusetts business trust,
and subsequently reorganized as a Delaware business trust, pursuant to an
Agreement and Declaration of Trust subsequently amended and restated as of June
20, 1995, pursuant to which it is authorized to issue an unlimited number of
shares of beneficial interest with par value of $0.01 per share;
WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("VKAC Asset Management") provides
investment advisory and administrative services to the AC Fund;
WHEREAS, the Board of Trustees of the VKM Trust and the AC Fund have
determined that entering into this Agreement for the AC Fund to acquire the
assets and liabilities of the VKM Fund is in the best interests of the
shareholders of each respective fund; and
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WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and intending to be legally bound hereby, the parties hereto agree as
follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent
set forth in Sections 7 and 8 hereof, the VKM Trust will convey, transfer and
deliver to the AC Fund at the closing, provided for in Section 2 hereof, all of
the existing assets of the VKM Fund (including accrued interest to the Closing
Date) consisting of nondefaulted, liquid, primarily mortgage-related securities
issued or guaranteed by an agency or instrumentality of the U.S. Government,
due bills, cash and other marketable securities acceptable to the AC Fund as
more fully set forth on Schedule 1 hereto, and as amended from time to time
prior to the Closing Date (as defined below), free and clear of all liens,
encumbrances and claims whatsoever (the assets so transferred collectively
being referred to as the "Assets").
B. CONSIDERATION. In consideration thereof, the AC Fund agrees that
on the Closing Date the AC Fund will (i) deliver to the VKM Trust full and
fractional Class A, Class B and Class C Shares of beneficial interest of the AC
Fund having a net asset value per share calculated as provided in Section 3A
hereof, in an amount equal to the aggregate dollar value of the Assets net of
the Liabilities determined pursuant to Section 3A of this Agreement net of any
liabilities of the VKM Fund described in Section 3E hereof (the "Liabilities")
(collectively, the "AC Fund Shares") and (ii) assume all of the VKM Fund's
Liabilities. All AC Fund Shares delivered to the VKM Trust in exchange for such
Assets shall be delivered at net asset value without sales load, commission or
other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business
days after the later of receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the VKM Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the AC Fund shall deliver to the VKM Trust the AC Fund
Shares in the amount determined pursuant to Section 1B hereof and the VKM Trust
thereafter shall, in order to effect the distribution of such shares to the VKM
Fund stockholders, instruct the AC Fund to register the pro rata interest in
the AC Fund Shares (in full and fractional shares) of each of the holders of
record of shares of the VKM Fund in accordance with their holdings of either
Class A, Class B or Class C Shares and shall provide as part of such
instruction a complete and updated list of such holders (including addresses
and taxpayer identification numbers), and the AC Fund agrees promptly to comply
with said instruction. The AC Fund shall have no obligation to inquire as to
the validity, propriety or correctness of such instruction, but shall assume
that such instruction is valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the VKM Fund
to be transferred and assumed, respectively, by the AC Fund shall be computed
as of the Closing Date, in the manner set forth in the most recent Prospectus
and Statement of Additional Information of the AC Fund (collectively, the "AC
Fund Prospectus"), copies of which have been delivered to the VKM Trust.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State
Street Bank and Trust Company, 225 Franklin Street, Post Office Box 1713,
Boston, Massachusetts 02105-1713, as custodian for the AC Fund (the
"Custodian") for the benefit of the AC Fund, duly endorsed in proper form for
transfer in such condition as to constitute a good delivery thereof, free and
clear of all liens, encumbrances and claims whatsoever, in accordance with the
custom of brokers, and shall be
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<PAGE> 41
accompanied by all necessary state stock transfer stamps, the cost of which
shall be borne by the VKM Fund.
C. FAILURE TO DELIVER SECURITIES. If the VKM Trust is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the VKM
Fund's securities for the reason that any of such securities purchased by the
AC Fund have not yet been delivered to it by the VKM Fund's broker or brokers,
then, in lieu of such delivery, the VKM Trust shall deliver to the Custodian,
with respect to said securities, executed copies of an agreement of assignment
and due bills executed on behalf of said broker or brokers, together with such
other documents as may be required by the AC Fund or Custodian, including
brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The AC Fund, in order to assist the VKM
Trust in the distribution of the AC Fund Shares to VKM Fund shareholders after
delivery of the AC Fund Shares to the VKM Trust, will establish pursuant to the
request of the VKM Trust an open account with the AC Fund for each shareholder
of the VKM Fund and, upon request by the VKM Trust, shall transfer to such
account the exact number of full and fractional shares of the AC Fund then held
by the VKM Trust specified in the instruction provided pursuant to Section 2
hereof. The AC Fund is not required to issue certificates representing AC Fund
Shares unless requested to do so by a shareholder. Upon liquidation or
dissolution of the VKM Fund, certificates representing shares of beneficial
interest of the VKM Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of VKM Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date
and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein
are consummated the AC Fund agrees to pay (i) for the reasonable outside
expenses for the transactions contemplated herein; including, but not by way of
limitation, the preparation of the AC Fund's Registration Statement on Form
N-14 (the "Registration Statement") and the solicitation of VKM Fund
shareholder proxies; (ii) VKM Trust's counsel's reasonable attorney's fees,
which fees shall be payable pursuant to receipt of an itemized statement, and
(iii) the cost of rendering the tax opinion, more fully referenced in Section
7F below. In the event that the transactions contemplated herein are not
consummated for any reason, then all reasonable outside expenses incurred to
the date of termination of this Agreement shall be borne by VKAC Asset
Management.
G. DISSOLUTION. As soon as practicable after the Closing Date but in
no event later than one year after the Closing Date, the VKM Trust shall
voluntarily dissolve and completely liquidate the VKM Fund, by taking, in
accordance with the Delaware Business Trust Law and Federal securities laws,
all steps as shall be necessary and proper to effect a complete liquidation and
dissolution of the VKM Fund. Immediately after the Closing Date, the stock
transfer books relating to the VKM Fund shall be closed and no transfer of
shares shall thereafter be made on such books.
4. VKM TRUST'S REPRESENTATIONS AND WARRANTIES.
The VKM Trust, on behalf of the VKM Fund, hereby represents and
warrants to the AC Fund which representations and warranties are true and
correct on the date hereof and agrees with the AC Fund that:
A. ORGANIZATION. The VKM Trust is a Delaware Business Trust duly
formed and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The VKM Fund is a
separate series of the VKM Trust duly designated in accordance with the
applicable provisions of the Declaration of Trust. The VKM Trust and the VKM
Fund are qualified to do business in all jurisdictions in which they are
required to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on either the VKM Trust or VKM
Fund.
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<PAGE> 42
The VKM Trust has all material federal, state and local authorizations necessary
to own on behalf of the VKM Fund all of the properties and assets allocated to
the VKM Fund and to carry on its business and the business of the VKM Fund as
now being conducted, except authorizations which the failure to so obtain would
not have a material adverse effect on the VKM Trust or the VKM Fund.
B. REGISTRATION. The VKM Fund is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as an open-end, diversified
management company and such registration has not been revoked or rescinded.
The VKM Trust is in compliance in all material respects with the 1940
Act and the rules and regulations thereunder with respect to its activities and
those undertaken on behalf of the VKM Fund. All of the outstanding shares of
beneficial interest of the VKM Fund have been duly authorized and are validly
issued, fully paid and non-assessable and not subject to pre-emptive or
dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the VKM Fund audited as of and for the
year ended June 30, 1994, and, as soon as reasonably available, the same for
the year ended June 30, 1995, true and complete copies of which have been
heretofore or will be furnished to the AC Fund, fairly represent the financial
condition and the results of operations of the VKM Fund as of and for their
respective dates and periods in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Fund
(i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the VKM Fund for the period ended June 30, 1995; and (ii) within five (5)
business days after the Closing Date an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments and the results of the VKM Fund's
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and the results of its operations
and changes in financial position for the periods then ended; and such
financial statements shall be certified by the Treasurer of the VKM Trust as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will
be, no contingent Liabilities of the VKM Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the VKM Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the VKM Trust or the VKM Fund which would, if adversely determined,
materially affect the VKM Fund's financial condition. All Liabilities were
incurred by the VKM Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The VKM Trust is in compliance as to the VKM
Fund with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting the VKM Fund's operations or its assets; and
except as referred to in the VKM Fund's Prospectus and Statement of Additional
Information, there are no material agreements outstanding relating to the VKM
Fund to which the VKM Trust is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any
case no later than 30 calendar days after the Closing Date, KPMG Peat Marwick
L.L.P., auditors for the VKM Trust, shall furnish the AC Fund with a statement
of the earnings and profits of the VKM Fund within the meaning of the Code as
of the Closing Date.
H. RESTRICTED SECURITIES. None of the securities comprising the
assets of the VKM Fund at the date hereof are, or on the Closing Date or any
subsequent delivery date will be, "restricted securities"
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<PAGE> 43
under the Securities Act of 1933, (the "Securities Act") or the rules and
regulations of the Securities and Exchange Commission (the "SEC") thereunder,
or will be securities for which market quotations are not readily available for
purposes of Section 2(a)(41) under the 1940 Act.
I. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other tax returns and reports of the VKM Fund required by law to
have been filed by such dates shall have been filed, and all Federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of VKM Trust's knowledge no
such return is currently under audit and no assessment has been asserted with
respect to any such return.
J. CORPORATE AUTHORITY. The VKM Trust has the necessary power under
its Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein
have been duly authorized by the VKM Trust's Board of Trustees, and except for
obtaining approval of the holders of the shares of beneficial interest of the
VKM Fund, no other corporate acts or proceedings by the VKM Trust or the VKM
Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by
VKM Trust and constitutes a legal, valid and binding obligation of VKM Trust
enforceable in accordance with its terms subject to bankruptcy laws and other
equitable remedies.
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VKM Trust does not and will not (i)
result in a material violation any provision of the Declaration of Trust of the
VKM Trust or the Designation of Series or any amendment thereto, as amended,
of the VKM Fund, (ii) result in a material violation any statute, law,
judgment, writ, decree, order, regulation or rule of any court or governmental
authority applicable to VKM Trust, (iii) result in a material violation
or breach of, or constitute a default under any material contract, indenture,
mortgage, loan agreement, note, lease or other instrument or obligation to
which the VKM Trust is subject, or (iv) result in the creation or imposition or
any lien, charge or encumbrance upon any property or assets of the VKM Trust.
Except as set forth in Schedule 2 to this Agreement, (i) no consent, approval,
authorization, order or filing with or notice to any court or governmental
authority or agency is required for the consummation by the VKM Trust of the
transactions contemplated by this Agreement and (ii) no consent of or notice to
any third party or entity is required for the consummation by the VKM Trust of
the transactions contemplated by this Agreement.
L. ABSENCE OF CHANGES. From the date of this Agreement through the
Closing Date, there shall not have been:
(1) any change in the business, results of operations, assets,
or financial condition or the manner of conducting the business of the VKM
Fund, other than changes in the ordinary course of its business, or any pending
or threatened litigation, which has had or may have a material adverse effect
on such business, results of operations, assets or financial condition;
(2) issued any option to purchase or other right to acquire
shares of the VKM Fund granted by the VKM Trust to any person other than
subscriptions to purchase shares at net asset value in accordance with terms in
the Prospectus for the VKM Fund;
(3) any entering into, amendment or termination of any
contract or agreement with respect to the VKM Fund by the VKM Trust, except as
otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary
course of business, by the VKM Fund for borrowed money or any commitment to
borrow money entered into by the VKM Fund or the VKM Trust on behalf of the VKM
Fund;
(5) any amendment of the Declaration of Trust of the VKM
Trust or of the Designation of Series of the VKM Fund; or
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<PAGE> 44
(6) any grant or imposition of any lien, claim, charge or
encumbrance (other than encumbrances arising in the ordinary course of business
with respect to covered options) upon any asset of the VKM Fund other than a
lien for taxes not yet due and payable.
M. TITLE. On the Closing Date, the VKM Fund will have good and
marketable title to the Assets, free and clear of all liens, mortgages,
pledges, encumbrances, charges, claims and equities whatsoever, other than a
lien for taxes not yet due and payable and full right, power and authority to
sell, assign, transfer and deliver such Assets; upon delivery of such Assets,
the AC Fund will receive good and marketable title to such Assets, free and
clear of all liens, mortgages, pledges, encumbrances, charges, claims and
equities other than a lien for taxes not yet due and payable.
N. PROXY STATEMENT. The VKM Trust's Proxy Statement, at the time of
delivery by the VKM Trust to its shareholders in connection with a special
meeting of shareholders to approve this transaction, and the VKM Trust's
Prospectus and Statement of Additional Information with respect to the VKM Fund
on the forms incorporated by reference into such Proxy Statement and as of
their respective dates (collectively, the "VKM Trust's Proxy
Statement/Prospectus"), and at the time the Registration Statement becomes
effective, the Registration Statement insofar as it relates to the VKM Trust
and the VKM Fund and each of them at all times subsequent thereto and including
the Closing Date, as amended or as supplemented if it shall have been amended
or supplemented, conform and will conform, in all material respects, to the
applicable requirements of the applicable Federal and state securities laws and
the rules and regulations of the SEC thereunder, and do not and will not
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading,
except that no representations or warranties in this Section 4N apply to
statements or omissions made in reliance upon and in conformity with written
information concerning the AC Fund or their affiliates furnished to VKM Trust
by the AC Fund.
O. BROKERS. There are no brokers or finders fees payable by VKM Trust
or VKM Fund in connection with the transactions provided for herein.
P. TAX QUALIFICATION. The VKM Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
Q. FAIR MARKET VALUE. The fair market value on a going concern basis
of the Assets will equal or exceed the Liabilities to be assumed by the AC Fund
and those to which the Assets are subject.
R. VKM TRUST'S LIABILITIES. Except as otherwise provided for herein,
the VKM Trust shall use reasonable efforts, consistent with its ordinary
operating procedures, to repay in full any indebtedness for borrowed money for
the account of the VKM Fund and have discharged or reserved against all
of the VKM Fund's known debts, liabilities and obligations including expenses,
costs and charges whether absolute or contingent, accrued or unaccrued.
5. THE AC FUND'S REPRESENTATIONS AND WARRANTIES.
The AC Fund, hereby represents and warrants to the VKM Trust which
representations and warranties are true and correct on the date hereof, and
agrees with the VKM Trust that:
A. ORGANIZATION. The AC Fund is a Delaware Business Trust duly
formed, and in good standing under the laws of the State of Delaware and is
duly authorized to transact business in the State of Delaware. The AC Fund is
qualified to do business in all jurisdictions in which it is required to be so
qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on the AC Fund. The AC Fund has all material
federal, state and local authorization necessary to own all of its properties
and assets and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have
a material adverse effect on the AC Fund.
B. REGISTRATION. The AC Fund is registered under the 1940 Act as an
open-end, non-diversified management company and; such registration has not
been revoked or rescinded. The AC Fund is in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder. All of
the outstanding shares of beneficial interest of the AC Fund have been duly
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<PAGE> 45
authorized and are validly issued, fully paid and non-assessable and not
subject to pre-emptive dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the AC Fund audited as of and for the
year ended December 31, 1994, true and complete copies of which have been
heretofore furnished to the VKM Trust fairly represent the financial condition
and the results of operations of the AC Fund as of and for their respective
dates and periods in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The AC Fund shall furnish to the VKM Trust
(i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the AC Fund for the period ended June 30, 1995, and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments of the AC Fund and the results of its
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a
consistent basis during the period involved and fairly present the financial
position of the AC Fund as at the dates thereof and the results of its
operations and changes in financial position for the periods then ended; and
such financial statements shall be certified by the Treasurer of the AC Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
AC Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the AC Fund's financial
condition, and there are no legal, administrative, or other proceedings
pending or, to its knowledge, threatened against the AC Fund which would, if
adversely determined, materially affect the AC Fund's financial condition.
F. MATERIAL AGREEMENTS. The AC Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
AC Fund Prospectus, there are no material agreements outstanding to which the
AC Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other material tax returns and reports of the AC Fund required by
laws to have been filed by such dates shall have been filed, and all Federal
and other taxes shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the AC Fund's knowledge
no such return is currently under audit and no assessment has been asserted
with respect to any such return.
H. CORPORATE AUTHORITY. The AC Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein.
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein have been duly authorized by the AC
Fund's Board of Trustees, no other corporate acts or proceedings by the AC Fund
are necessary to authorize this Agreement and the transactions contemplated
herein. This Agreement has been duly executed and delivered by the AC Fund and
constitutes a valid and binding obligation of the AC Fund enforceable in
accordance with its terms subject to bankruptcy laws and other equitable
remedies.
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the AC Fund does not and will not (i) result
in a material violation of any provision of the Declaration of Trust of the AC
Fund, or any amendment thereto, (ii) result in a material violation of any
statute, law, judgment, writ, decree, order, regulation or rule of any court
or governmental authority applicable to the AC Fund or (iii) result in a
violation or breach of, or constitute a default under, or result in the
creation or imposition or any lien, charge or encumbrance upon any property or
assets of the AC Fund pursuant to any material contract, indenture, mortgage,
loan agreement, note, lease or other instrument or obligation to which the AC
Fund is subject. Except as set forth in Schedule 3 to this Agreement, (i) no
consent, approval, authorization,
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<PAGE> 46
order of or filing with notice to any court or governmental authority or agency
is required for the consummation by the AC Fund of the transactions contemplated
by this Agreement and (ii) no consent of or notice to any third party or entity
is required for the consummation by the AC Fund of the transactions
contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or
other proceedings pending or, to its knowledge, threatened against the AC Fund
which would materially affect its financial condition.
K. SHARES OF THE AC FUND: REGISTRATION. The AC Fund Shares to be
issued pursuant to Section 1 hereof will be duly registered under the
Securities Act and all applicable state securities laws.
L. SHARES OF THE AC FUND: AUTHORIZATION. The shares of beneficial
interest of the AC Fund to be issued pursuant to Section 1 hereof have been
duly authorized and, when issued in accordance with this Agreement, will be
validly issued and fully paid and non-assessable by the AC Fund and conform in
all material respects to the description thereof contained in the AC Fund's
Prospectus furnished to the VKM Trust.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
AC Fund, other than changes in the ordinary course of its business, which has
had a material adverse effect on such business, results of operations, assets
or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus contained therein filed on Form N-14, the ("Registration
Statement"), as of the effective date of the Registration Statement, and at all
times subsequent thereto up to and including the Closing Date, as amended or as
supplemented if they shall have been amended or supplemented, will conform, in
all material respects, to the applicable requirements of the applicable Federal
securities laws and the rules and regulations of the SEC thereunder, and will
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representations or warranties in this Section apply
to statements or omissions made in reliance upon and in conformity with
written information concerning the VKM Trust or the VKM Fund furnished to the
AC Fund by the VKM Trust.
O. TAX QUALIFICATION. The AC Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years. For purposes of this
Section, any reference to the AC Fund shall include its predecessors, a
Massachusetts business trust organized and designated on August 9, 1985, and
subsequently reorganized by merger with and into the AC Fund.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the VKM Trust and AC Fund each agrees that (except as expressly
contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The VKM Fund shall operate only in the ordinary
course of business consistent with prior practice. No party shall take any
action that would, or reasonably would be expected to, result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The VKM Trust and the AC Fund shall
file all reports required to be filed by the VKM Trust and the AC Fund with the
SEC between the date of this Agreement and the Closing Date and shall deliver to
the other party copies of all such reports promptly after the same are filed.
Except where prohibited by applicable statutes and regulations, each party
shall promptly provide the other (or its counsel) with copies of all other
filings made by such party with any state, local
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or federal government agency or entity in connection with this Agreement or the
transactions contemplated hereby. Each of the VKM Trust and the AC Fund shall
use all reasonable efforts to obtain all consents, approvals, and
authorizations required in connection with the consummation of the transactions
contemplated by this Agreement and to make all necessary filings with the
Secretary of State of the State of Delaware.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT/PROSPECTUS. In connection with the Registration Statement and the
VKM Fund's Proxy Statement/Prospectus, each party hereto will cooperate with
the other and furnish to the other the information relating to the VKM Trust,
VKM Fund or the AC Fund, as the case may be, required by the Securities Act or
the Exchange Act and the rules and regulations thereunder, as the case may be,
to be set forth in the Registration Statement or the Proxy
Statement/Prospectus, as the case may be. The VKM Trust shall promptly prepare
and file with the SEC the Proxy Statement/Prospectus and the AC Fund shall
promptly prepare and file with the SEC the Registration Statement, in which the
Proxy Statement/Prospectus will be included as a prospectus. In connection
with the Registration Statement, insofar as it relates to the VKM Trust and its
affiliated persons, the AC Fund shall only include such information as is
approved by the VKM Trust for use in the Registration Statement. The AC Fund
shall not amend or supplement any such information regarding the VKM Trust and
such affiliates without the prior written consent of the VKM Trust which
consent shall not be unreasonably withheld. The AC Fund shall promptly notify
and provide the VKM Trust with copies of all amendments or supplements filed
with respect to the Registration Statement. The AC Fund shall use all
reasonable efforts to have the Registration Statement declared effective under
the Securities Act as promptly as practicable after such filing. The AC Fund
shall also take any action (other than qualifying to do business in any
jurisdiction in which it is now not so qualified) required to be taken under
any applicable state securities laws in connection with the issuance of the AC
Fund's shares of beneficial interest in the transactions contemplated by this
Agreement, and the AC Fund shall furnish all information concerning the VKM
Fund and the holders of the AC Fund's shares of beneficial interest as may be
reasonably requested in connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing
Date, the VKM Trust shall make available to the AC Fund a copy of each report,
schedule, registration statement and other document (the "Documents") filed or
received by it during such period pursuant to the requirements of Federal or
state securities laws or Federal or state banking laws (other than Documents
which such party is not permitted to disclose under applicable law or which are
not relevant to the VKM Fund). During the period prior to the Closing Date,
the AC Fund shall make available to the VKM Fund each Document pertaining to
the transactions contemplated hereby filed or received by it during such period
pursuant to Federal or state securities laws or Federal or state banking laws
(other than Documents which such party is not permitted to disclose under
applicable law).
E. SHAREHOLDERS MEETING. The VKM Trust shall call a meeting of the
VKM Fund shareholders to be held as promptly as practicable for the purpose of
voting upon the approval of this Agreement and the transactions contemplated
herein, and shall furnish a copy of the Proxy Statement/Prospectus and form of
proxy to each shareholder of the VKM Fund as of the record date for such
meeting of shareholders. The VKM Trust's Board of Trustees shall recommend to
the VKM Fund shareholders approval of this Agreement and the transactions
contemplated herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The VKM Trust and AC Fund covenant and
agree to coordinate the respective portfolios of the VKM Fund and AC Fund from
the date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the AC Fund's portfolio, the resulting
portfolio will meet the AC Fund's investment objectives, policies and
restrictions, as set forth in the AC Fund Prospectus, a copy of which has been
delivered to VKM Trust.
G. DISTRIBUTION OF THE SHARES. At Closing the VKM Trust covenants
that it shall cause to be distributed the AC Fund Shares in the proper pro rata
amount for the benefit of the VKM Fund's
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shareholders and such that neither the VKM Trust nor the VKM Fund shall
continue to hold amounts of said shares so as to cause a violation of Section
12(d)(1) of the 1940 Act. The VKM Trust covenants further that,
pursuant to Section 3G, it shall liquidate and dissolve the VKM Fund as
promptly as practicable after the Closing Date. The VKM Trust covenants to use
all reasonable efforts to cooperate with the AC Fund and the AC Fund's transfer
agent in the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other
party prior to the date hereof, each of the VKM Trust and the AC Fund
represents that no agent, broker, investment banker, financial advisor or other
firm or person is or will be entitled to any broker's or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and each party shall hold the other harmless
from and against any all claims, liabilities or obligations with respect to any
such fees, commissions or expenses asserted by any person to be due or payable
in connection with any of the transactions contemplated by this Agreement on
the basis of any act or statement alleged to have been made by such first party
or its affiliate.
I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date
any further action is necessary or desirable in order to carry out the purposes
of this Agreement the proper officers and trustees of each party to this
Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the VKM Trust and the AC Fund will consult with
each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
herein and shall not issue any press release or make any public statement prior
to such consultation, except as may be required by law or the rules of any
national securities exchange on which such party's securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that
the transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the VKM Trust, the VKM Fund nor the AC Fund shall
take any action, or cause any action to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to
the Closing Date, the VKM Trust, the VKM Fund and the AC Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Skadden, Arps, Slate, Meagher & Flom, counsel to the VKM Trust and the VKM
Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the
Closing Date, the VKM Fund shall declare and pay to its stockholders a dividend
or other distribution in an amount large enough so that it will have
distributed in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE VKM TRUST
The obligations of the VKM Trust hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the VKM Trust, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the shares of beneficial interest of the VKM Fund
present in person or by proxy at a meeting of said shareholders in which a
quorum is constituted.
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<PAGE> 49
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the AC Fund contained herein shall be true in
all material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition, results
of operations, business properties or assets of the AC Fund since December 31,
1994, and the VKM Trust shall have received a certificate of the President or
Vice President of the AC Fund satisfactory in form and substance to the VKM
Trust so stating. The AC Fund shall have performed and complied in all
material respects with all agreements, obligations and covenants required by
this Agreement to be so performed or complied with by it on or prior to the
Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the transactions contemplated by
this Agreement shall be in effect, nor shall any proceeding by any state, local
or federal government agency or entity asking any of the foregoing be pending.
There shall not have been any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the
transactions contemplated by this Agreement illegal or which has a material
adverse affect on the business operations of the AC Fund.
F. TAX OPINION. The VKM Trust and the VKM Fund, shall have obtained
an opinion from Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM
Trust and the VKM Fund, dated as of the Closing Date, addressed to the VKM
Trust and the VKM Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a reorganization as described
in Section 368(a) of the Internal Revenue Code of 1986, as amended,
substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The VKM Trust shall have received the opinion
of O'Melveny & Myers, counsel for AC Fund, dated as of the Closing Date,
addressed to the VKM Trust and VKM Fund, substantially in the form of and to
the effect that: (i) the AC Fund is duly formed as a trust under the laws of
the State of Delaware; (ii) the AC Fund is registered as an open-end,
diversified management company under the 1940 Act; (iii) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized by all necessary trust action of the AC Fund and
this Agreement has been duly executed and delivered by the AC Fund and
(assuming the Agreement is a valid and binding obligation of the other parties
thereto) is a valid and binding obligation of the AC Fund; (iv) neither the
execution or delivery by the AC Fund of this Agreement nor the consummation by
the AC Fund of the transactions contemplated thereby contravene the AC Fund's
Declaration of Trust or, to their knowledge, violate any provision
of any statute, or any published regulation or any judgment or order disclosed
to them by the AC Fund as being applicable to the AC Fund; (v) to
their knowledge based solely on the certificate of an appropriate officer of
the AC Fund attached thereto, there is no pending or threatened litigation
involving the AC Fund except as disclosed therein; (vi) the AC Fund's Shares
being issued pursuant to this Agreement have been duly authorized
and upon issuance thereof in accordance with this Agreement will be validly
issued, fully paid and non-assessable; (vii) except as to financial statements
and schedules and other financial and statistical data included or incorporated
by reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to the AC Fund comply as to form in all material respects with their
requirements of the Securities Act, the Securities Exchange Act and the 1940
Act and the rules and regulations of the Commission thereunder and no
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<PAGE> 50
facts have come to counsel's attention which cause them to believe that as of
the effectiveness of the portions of the Registration Statement applicable to
the AC Fund, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (viii)
to their knowledge and subject to the qualifications set forth below, the
execution and delivery by the AC Fund of the Agreement and the
consummation of the transactions therein contemplated do not require, under the
laws of the State of Delaware, or the Federal laws of the United States, the
consent, approval, authorization, registration, qualification or order of, or
filing with, any court or governmental agency or body (except such as have been
obtained under the Securities Act, the 1940 Act or the rules and regulations
thereunder.) Counsel need express no opinion, however, as to any such
consent, approval, authorization, registration, qualification, order or filing
(a) which may be required as a result of the involvement of other parties to
the Agreement in the transactions contemplated by the Agreement because of
their legal or regulatory status or because of any other facts specifically
pertaining to them; (b) the absence of which does not deprive the VKM Trust or
VKM Fund of any material benefit under such agreements; or (c) which can be
readily obtained without significant delay or expense to the VKM Trust or VKM
Fund, without loss to the VKM Trust or VKM Fund of any material benefit under
the Agreement and without any material adverse effect on them during the period
such consent, approval authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or fillings under (a)
laws which are specifically referred to in the opinion, (b) laws of the State of
Delaware and the Federal laws of the United States of America which, in our
experience, are normally applicable to transactions of the type provided for in
the Agreement and (c) court orders and judgments disclosed to them by the AC
Fund in connection with the opinion. Counsel's opinion as to the validity and
binding nature of this Agreement may be limited to the present law of the State
of Delaware. Counsel's other opinions may be limited to the present Federal law
of the United States and the present general corporation and trust laws of the
State of Delaware.
H. OFFICER CERTIFICATES. The VKM Trust shall have received a
certificate of an authorized officer of the AC Fund, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 5
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees shall be furnished to the VKM
Trust.
8. CONDITIONS TO OBLIGATIONS OF THE AC FUND
The obligations of the AC Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the AC Fund of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the shares of beneficial interest of the VKM Fund
present in person or by proxy at a meeting of said shareholders in which a
quorum is constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the VKM Trust contained herein shall be true
in all material respects as of the Closing Date, and as of the Closing Date
there shall have been no material adverse change in the financial condition,
results of operations, business, properties or assets of the VKM Fund since
June 30, 1994 and the AC Fund shall have received a certificate of the
President or Vice President of VKM Trust satisfactory in form and substance to
the AC Fund so stating. The VKM Trust and the VKM Fund shall have performed
and complied in all material respects with all agreements, obligations and
covenants required by this Agreement to be so performed or complied with by
them on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
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D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity seeking any of the foregoing be pending. There
shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the
transactions contemplated by this Agreement illegal.
F. TAX OPINION. The AC Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust and the VKM
Fund, dated as of the Closing Date, addressed to the AC Fund, that the
consummation of the transactions set forth in this Agreement comply with
the requirements of a reorganization as described in Section 368(a) of the
Internal Revenue Code of 1986 substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The AC Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust and the VKM
Fund, dated as of the Closing Date, addressed to the AC Fund substantially in
the form of and to the effect that: (i) the VKM Trust is duly formed and in
good standing as a business trust under the laws of the State of Delaware; (ii)
the Board of Trustees of the VKM Trust has duly designated the VKM Fund as a
series of the VKM Trust pursuant to the terms of the Declaration of Trust of
the VKM Trust; (iii) the VKM Fund is registered as an open-end, diversified
management company under the 1940 Act; (iv) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized and approved by all requisite action of VKM Trust
and this Agreement has been duly executed and delivered by the VKM Trust and
(assuming the Agreement is a valid and binding obligation of the other parties
thereto) is a valid and binding obligation of the VKM Trust; (v) neither the
execution or delivery by the VKM Trust of this Agreement nor the consummation
by the VKM Trust or VKM Fund of the transactions contemplated thereby
contravene the VKM Trust's Declaration of Trust, or, to the best of their
knowledge, violate any provision of any statute or any published regulation or
any judgment or order disclosed to them by the VKM Trust as being applicable to
the VKM Trust or the VKM Fund; (vi) to the best of their knowledge based solely
on the certificate of an appropriate officer of the VKM Trust attached hereto,
there is no pending or threatened litigation which would have the effect of
prohibiting any material business practice or the acquisition of any material
property or the conduct of any material business of the VKM Fund or might have
a material adverse effect on the value of any assets of the VKM Fund; (vii)
except as to financial statements and schedules and other financial and
statistical data included or incorporated by reference therein and subject to
usual and customary qualifications with respect to Rule 10b-5 type opinions, as
of the effective date of the Registration Statement filed pursuant to the
Agreement, the portions thereof pertaining to VKM Trust and the VKM Fund comply
as to form in all material respects with the requirements of the Securities
Act, the Securities Exchange Act and the 1940 Act and the rules and regulations
of the Commission thereunder and no facts have come to counsel's attention
which would cause them to believe that as of the effectiveness of the portions
of the Registration Statement applicable to VKM Trust and VKM Fund, the
Registration Statement contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading; and (viii) to the best of their
knowledge and information and subject to the qualifications set forth below,
the execution and delivery by the VKM Trust of the Agreement and the
consummation of the transactions therein contemplated do not require, under the
laws of the States of Delaware or Illinois or the Federal laws of the United
States, the consent, approval, authorization, registration, qualification or
order of, or filing with, any court or governmental agency or body (except such
as have been obtained). Counsel need express no opinion, however, as to any
such consent, approval, authorization, registration, qualification, order or
filing (a) which may be required as a result of the involvement of other
parties to the Agreement in the transactions contemplated by the Agreement
because of their legal or regulatory status or because of any other facts
specifically pertaining to them; (b) the absence of which does not deprive the
AC Fund of any material benefit under the Agreement; or (c) which can be
readily obtained without significant delay or expense to the AC Fund, without
loss to the
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<PAGE> 52
AC Fund of any material benefit under the Agreement and without any material
adverse effect on the AC Fund during the period such consent, approval,
authorization, registration, qualification or order was obtained. The
foregoing opinion relates only to consents, approvals, authorizations,
registrations, qualifications, orders or filings under (a) laws which are
specifically referred to in this opinion, (b) laws of the States of Delaware
and Illinois and the Federal laws of the United States of America which, in
counsel's experience, are normally applicable to transactions of the type
provided for in the Agreement and (c) court orders and judgments disclosed to
them by the VKM Trust in connection with this opinion. In addition, although
counsel need not specifically considered the possible applicability to the VKM
Trust of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the VKM Trust and the VKM
Fund in this transaction that has caused them to conclude that any other
consent, approval, authorization, registration, qualification, order or filing
is required.
H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended,
shall consist solely of nondefaulted, liquid, primarily mortgage-related
securities issued or guaranteed by an agency or instrumentality of the U.S.
Government, cash and other marketable securities which are in conformity with
the VKM Fund's investment objective, policy and restrictions as set forth in
the AC Fund's prospectus and statement of additional information, copies of
which have been delivered to the VKM Trust.
I. SHAREHOLDER LIST. The VKM Trust shall have delivered to the AC
Fund an updated list of all shareholders of the VKM Fund, as reported by VKM
Trust's transfer agent, as of one (1) business day prior to the Closing Date
with each shareholder's respective holdings in the VKM Fund, taxpayer
identification numbers, Form W-9 and last known address.
J. OFFICER CERTIFICATES. The AC Fund shall have received a
certificate of an authorized officer of VKM Trust, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 4
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees and shareholders shall be
furnished to the VKM Trust.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing
authorized by their respective Boards of Trustees amend this Agreement at any
time before or after approval thereof by the shareholders of the VKM Fund;
provided, however, that after receipt of such VKM Fund shareholder approval,
no amendment shall be made by the parties hereto which substantially changes
the terms of Sections 1, 2 and 3 hereof without obtaining VKM Fund's
shareholder approval thereof or that affect any applications for exemptive
relief from the SEC or any orders with respect thereto without obtaining the
approval of the staff of the SEC.
(B) At any time prior to the Closing Date, either of the
parties may by written instrument signed by it (i) waive any inaccuracies in
the representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any waiver on the part of any party of any such right, power or
privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
(C) This Agreement may be terminated, and the transactions
contemplated herein may be abandoned at any time prior to the Closing Date:
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(i) by the mutual consents of the Board of Trustees
of the VKM Trust and the AC Fund;
(ii) by the VKM Trust, if the AC Fund breaches in
any material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iii) by the AC Fund, if the VKM Trust breaches in
any material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iv) by either the VKM Trust or the AC Fund, if the
Closing has not occurred on or prior to September 30, 1995 (provided that the
rights to terminate this Agreement pursuant to this subsection (C) (iv) shall
not be available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of the
Closing to occur on or before such date);
(v) by the AC Fund in the event that: (a) all
the conditions precedent to the VKM Trust's obligation to close, as set forth
in Section 7 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the AC Fund gives the VKM Trust written
assurance of its intent to close irrespective of the satisfaction or
non-satisfaction of all conditions precedent to the AC Fund's obligation to
close, as set forth in Section 8 of this Agreement; and (c) the VKM Trust then
fails or refuses to close within the earlier of five (5) business days or
September 30, 1995; or
(vi) by the VKM Trust in the event that: (a) all the
conditions precedent to the AC Fund's obligation to close, as set forth in
Section 8 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the VKM Trust gives the AC Fund written
assurance of its intent to close irrespective of the satisfaction or
non-satisfaction of all the conditions precedent to the VKM Trust's obligation
to close, as set forth in Section 7 of this Agreement; and (c) the AC Fund then
fails or refuses to close within the earlier of five (5) business days or
September 30, 1995.
10. REMEDIES
In the event of termination of this Agreement by either or both of the VKM
Trust and AC Fund pursuant to Section 9(C), written notice thereof shall
forthwith be given by the terminating party to the other party hereto, and this
Agreement shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without
further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
(A) SURVIVAL. The representations and warranties included or
provided for herein, or in the Schedules or other instruments delivered or to
be delivered pursuant hereto, shall survive the Closing Date for a three year
period except that any representation or warranty with respect to taxes shall
survive for the expiration of the statutory period of limitations for
assessments of tax deficiencies as the same may be extended from time to time
by the taxpayer. The covenants and agreements included or provided for herein
shall survive and be continuing obligations in accordance with their terms.
The period for which a representation, warranty, covenant or agreement survives
shall be referred to hereinafter as the "Survival Period." Notwithstanding
anything set forth in the immediately preceding sentence, the VKM Trust's and
the AC Fund's right to seek indemnity pursuant to this Agreement shall survive
for a period of ninety (90) days beyond the expiration of the Survival Period
of the representation, warranty, covenant or agreement upon which indemnity is
sought. In no event shall the VKM Trust or the AC Fund be obligated to
indemnify the other if indemnity is not sought within ninety (90) days of the
expiration of the applicable Survival Period.
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(B) INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify
and hold the other and its officers, directors, agents and persons controlled
by or controlling any of them (each an "Indemnified Party") harmless from and
against any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and counsel fees reasonably incurred by such Indemnified Party in
connection with the defense or disposition of any claim, action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
investigative body in which such Indemnified Party may be or may have been
involved as a party or otherwise or with which such Indemnified Party may be or
may have been threatened, (collectively, the "Losses") arising out of or
related to any claim of a breach of any representation, warranty or covenant
made herein by the Indemnitor; provided, however, that no Indemnified Party
shall be indemnified hereunder against any Losses arising directly from such
Indemnified Party's (i) willful misfeasance, (ii) bad faith, (iii) gross
negligence or (iv) reckless disregard of the duties involved in the conduct of
such Indemnified Party's position.
(C) INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its
best efforts to minimize any liabilities, damages, deficiencies, claims,
judgments, assessments, costs and expenses in respect of which indemnity may be
sought hereunder. The Indemnified Party shall given written notice to
Indemnitor within the earlier of ten (10) days of receipt of written notice to
Indemnitor or thirty (30) days from discovery by Indemnified Party of any
matters which may give rise to a claim for indemnification or reimbursement
under this Agreement. The failure to give such notice shall not affect the
right of Indemnified Party to indemnity hereunder unless such failure has
materially and adversely affected the rights of the Indemnitor; provided that
in any event such notice shall have been given prior to the expiration of the
Survival Period. At any time after ten (10) days from the giving of such
notice, Indemnified Party may, at its option, resist, settle or otherwise
compromise, or pay such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost and expense, to
assume the defense of any such matter, in which case Indemnified Party shall
have the right, at no cost or expense to Indemnitor, to participate in such
defense. If Indemnitor does not assume the defense of such matter, and in any
event until Indemnitor states in writing that it will assume the defense,
Indemnitor shall pay all costs of Indemnified Party arising out of the defense
until the defense is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain Indemnitor's consent to any payment or
settlement of any such claim. Indemnitor shall keep Indemnified Party fully
apprised at all times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided
for hereunder, Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations relating to the
matter for which indemnification has been made.
12. SURVIVAL
The provisions set forth in Sections 10, 11 and 16 hereof shall
survive the termination of this Agreement for any cause whatsoever.
16
<PAGE> 55
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the VKM Trust shall be addressed to
the VKM Trust c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel
or at such other address and to the attention of such other person as the VKM
Trust may designate by written notice to the AC Fund. Notice to AC Fund shall
be addressed to the AC Fund c/o Van Kampen American Capital Asset Management,
Inc., 2800 Post Oak Boulevard, Houston, Texas 77056, Attention: General
Counsel, with a copy to George M. Bartlett, O'Melveny & Myers, 400 South Hope
Street, Los Angeles, California 900710-2899, or at such other address as AC
Fund may designate by written notice to the VKM Trust. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.
15. BOOKS AND RECORDS.
The VKM Trust and the AC Fund agree that copies of the books and
records of the VKM Fund relating to the Assets including, but not limited to
all files, records, written materials; e.g., closing transcripts, surveillance
files and credit reports shall be delivered by the VKM Trust to the AC Fund at
the Closing Date. In addition to, and without limiting the foregoing, the VKM
Trust and the AC Fund agree to take such action as may be necessary in order
that the AC Fund shall have reasonable access to such other books and records
as may be reasonably requested, all for three years after the Closing Date for
the three tax years ending December 31, 1992, December 31, 1993 and December
31, 1994 namely, general ledger, journal entries, voucher registers;
distribution journal; payroll register; monthly balance owing report; income
tax returns; tax depreciation schedules; and investment tax credit basis
schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties
(written or oral), is intended as a complete and exclusive statement of the
terms of the Agreement between the parties and may not be amended, modified or
changed or terminated orally. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been executed by the
VKM Trust and the AC Fund and delivered to each of the parties hereto. The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. This
Agreement is for the sole benefit of the parties thereto, and nothing in this
Agreement, expressed or implied, is intended to confer upon any other person
any rights or remedies under or by reason of this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Delaware without regard to principles of conflicts or choice of law.
17
<PAGE> 56
17. LIMITATION OF LIABILITY.
Copies of the Declarations of Trust of the VKM Trust and the AC Fund
are on file with the Secretary of State of the State of Delaware, and notice,
is hereby given and the parties hereto acknowledge and agree that this
instrument is executed on behalf of the Trustees of the VKM Trust and the AC
Fund, respectively, as Trustees and not individually and that the obligations
of this instrument are not binding upon any of the Trustees or shareholders of
the VKM Trust or the AC Fund individually but binding only upon the assets and
property of this VKM Trust or the AC Fund as the case may be.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first written above.
VAN KAMPEN AMERICAN CAPITAL LIMITED
MATURITY GOVERNMENT FUND, a
Delaware business trust
By:__________________________________
Title:_______________________________
Attest:_______________________
Title:________________________
VAN KAMPEN AMERICAN CAPITAL TRUST, a
Delaware business trust
By:__________________________________
Title:_______________________________
Attest:_______________________
Title:________________________
18
<PAGE> 57
SCHEDULE 1 [LIST OF MARKETABLE SECURITIES] [AS AMENDED AT CLOSING]
<PAGE> 58
SCHEDULE 2 [VKM TRUST CONSENTS]
<PAGE> 59
ANNEX A [TAX FREE OPINION: SKADDEN, ARPS, SLATE, MEAGHER & FLOM]
<PAGE> 60
ANNEX B [OPINION OF COUNSEL - O'MELVENY & MYERS FOR THE AC FUND]
<PAGE> 61
ANNEX C [OPINION OF COUNSEL - SKADDEEN, ARPS, SLATE, MEAGHER & FLOM FOR
THE VKM TRUST]
<PAGE> 62
EXHIBIT B
MANAGEMENT'S DISCUSSION OF AC FUND AND VK FUND PERFORMANCE
Management's Discussion of AC Fund Performance as of the Annual Report dated
December 31, 1994.
During 1994, the AC Fund's performance was negatively impacted by repeated
increases in short-term interest rates. In response, the AC Fund's management
team increased the percentage of the portfolio invested in adjustable-rate
securities.
The Federal Reserve Board (the "Fed") last year decided the economy was
growing too quickly, which could cause an increase in the inflation rate. As
part of its effort to slow economic growth to a rate that is more sustainable,
the Fed raised short-term interest rates six times in 1994, from 3% to 5.50%. As
a result, the yield on two-year Treasury notes rose almost 4 percentage points
to 7.70%. Although yields increased, the inverse relationship between yield and
price meant that bond prices dropped significantly. The result was mostly
negative total returns for the year.
The AC Fund increased its exposure to issues with variable interest rates to
capture the additional yields that became available with each subsequent
increase. At December 31, about 33% of the AC Fund's portfolio was invested in
variable-rate securities. In addition, the average duration of the AC Fund was
reduced from 2.1 years at the beginning of the year to 1.8 years on November 30,
1994. Duration is a measure of the impact any change in interest rates will have
on the value of a bond; the lower the duration, the less a bond's price should
change in value as rates change.
In the fourth quarter of 1994, the AC Fund increased its exposure to
adjustable-rate mortgages, with the view that this sector had been under-valued
by the market.
Class A shares of the AC Fund achieved a total return at net asset value
(without a sales charge) of 0.16%, including reinvestment of dividends totalling
$.5383 per share. Class B shares of the AC Fund achieved a total return at net
asset value of -0.62%, including reinvestment of dividends totalling $.4423 per
share. Class C shares of the AC Fund achieved a total return at net asset value
of -0.55%, including reinvestment of dividends totalling $.4423 per share.
During the period covered by this report, AC Adviser subsidized a portion of the
AC Fund's expenses. Without this subsidy, the total returns would have been
lower.
The Lehman Brothers Mutual Fund U.S. Government Index -- 1&2 Year achieved a
total return of 1.39%. The Index is a broad-based, unmanaged index that
B-1
<PAGE> 63
reflects the general performance of U.S. Government agency and Treasury
securities. It does not reflect any commissions or fees that would be paid by an
investor purchasing the securities it represents.
PERFORMANCE RESULTS FOR THE PERIOD
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- 5 SINCE INCEPTION
CLASS A (AS OF 12/31/94) 1 YEAR YEARS(1) (6/16/86)(1)
------ --------- ---------------
<S> <C> <C> <C>
At Net Asset Value.............. 0.16% 5.08% 5.65%
With Maximum 5.75% Sales
Charge........................ -2.12% 4.59% 5.36%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- SINCE INCEPTION
CLASS B (AS OF 12/31/94) 1 YEAR (11/15/91)(1)
------ ---------------
<S> <C> <C>
At Net Asset Value....................... -0.62% 1.68%
With Applicable Contingent Deferred Sales
Charge Upon Redemption (Maximum 5%).... -3.50% 1.40%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN -- SINCE INCEPTION
CLASS C (AS OF 12/31/94) 1 YEAR (5/10/93)(1)
------ ---------------
<S> <C> <C>
At Net Asset Value....................... -0.55% 0.29%
With Applicable Contingent Deferred Sales
Charge Upon Redemption (Maximum 1%).... -1.50% 0.29%
</TABLE>
---------------
(1) Net of fee waivers and reimbursements.
B-2
<PAGE> 64
Change in Value of a $10,000 Investment in AC Fund (Class A)
vs.
Lehman Brothers Mutual Fund
U.S. Government Index -- 1 & 2 Year
6/16/86 -- 12/31/94
The following graph compares the value of an investment in the AC Fund's Class
A shares with the value of an investment in Lehman Brothers Municipal Bond Index
from June 1986 through December 30, 1994, the last trading day of fiscal year
1994, based upon a $10,000 investment in Class A shares of the AC Fund and in
the securities comprising such index as of June 1986. The approximate values of
such an investment at the end of each fiscal year were: 1986: Class A shares of
AC Fund, -- $10,100, Lehman Index -- $10,600; 1987: Class A shares of AC Fund
-- $10,500, Lehman Index -- $11,200; 1988: Class A shares of AC Fund -- $11,200,
Lehman Index -- $12,000; 1989: Class A shares of AC Fund -- $12,500, Lehman
Index -- $13,000; 1990: Class A shares of AC Fund -- $13,500, Lehman Index
-- $15,000; 1991: Class A shares of AC Fund -- $15,000, Lehman Index -- $16,000;
1992: Class A shares of AC Fund -- $15,900, Lehman Index -- $17,000; 1993: Class
A shares of AC Fund -- $15,950, Lehman Index -- $17,500; 1994: Class A shares of
AC Fund -- $16,000, Lehman Index -- $17,675.
---------------
Past performance is not indicative of future performance. Performance of other
classes of the AC Fund will be greater or less than the lines shown based on the
differences in loads or fees paid by shareholders investing in the different
classes.
The Lehman Brothers Mutual Fund U.S. Government Index -- 1 & 2 Year is a
broad-based unmanaged index of U.S. Government agency and Treasury securities
with maturities of one to two years. The Index does not reflect any commissions
or fees which would be incurred by an investor purchasing the bonds it
represents. All sales charges and all other fees and expenses are included in
the performance shown for AC Fund Class A shares with ending value of $15,618.
In addition, since investors purchase shares of the AC Fund with varying sales
charges depending primarily on volume purchased, the AC Fund's Class A
performance at net asset value also is shown.
B-3
<PAGE> 65
Management's Discussion of VK Fund Performance as of the Annual Report dated
June 30, 1994.
The past twelve months have been difficult ones for the VK Fund. A steady rise
in interest rates, which drove the value of the benchmark 30-year Treasury bond
down by nearly 20 percent at one point, led to poor performance for virtually
all fixed-income investments. The Federal Reserve's efforts to control the pace
of the economy, combined with the market's apprehension over inflation, proved
detrimental on other fronts, as stocks mirrored the sub-par performance of the
bond market.
MARKET OVERVIEW
Most experts would agree that inflation, or more accurately the fear of
inflation, is largely responsible for the abrupt upturn in interest rates. Up
until the end of 1993, inflation was of little concern as our nation struggled
to recover from the recession that welcomed us into the '90s. But as the economy
rebounded with conspicuous flare during the final quarter of 1993, advancing at
a 6.3 percent pace as measured by the gross domestic product ("GDP"),
inflationary concerns reemerged.
For nearly five years, the Federal Reserve (the "Fed") worked to nurture the
economy to a sustainable level of moderate economic growth by reducing short-
term interest rates to the lowest levels in decades. Suddenly, confronted with
the prospect that the economy might overheat, the Fed reversed its monetary
policy and began to increase short-term rates in February of 1994. The central
bank feared that a booming economy would lead to higher inflation which could
prematurely stifle the sustained expansion it hoped to promote. Between February
4th and May 16th, the Fed Funds rate was increased four separate times, rising
in total from 3 percent to 4.25 percent.
Many believe that the Fed reacted in haste, increasing rates too aggressively
in response to a threat that was illusory. To date, inflation has yet to surface
as a formidable risk to an economic expansion that continues to send mixed
signals. For example, GDP growth retreated sharply to 3.3 percent in the first
quarter of 1994, from 6.3 percent the quarter prior, before rising slightly to
3.7 percent in second quarter 1994. Others would contend that the economy was
showing legitimate signs of strength and by enduring higher rates now, we have
established a foundation for sustainable economic growth and a lower, more
stable rate environment in the longer term. Regardless of the validity of the
cause or the reasonableness of the market's reaction, one thing is certain -- we
find ourselves in a much higher rate environment than just a few months ago.
B-4
<PAGE> 66
PERFORMANCE RESULTS FOR THE YEAR
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Wall Street Journal
Abbreviations
Fund Group................... VANKAMPEN MER
Fund Name.................... N/A ADRTGVB N/A
Quotron Symbol................. VKRAX VKGVX VKRCX
One-year total return based on
NAV1......................... .97% .15% N/A
One-year total return2......... (2.06%) (2.73%) N/A
Life of Fund average annual
total return2................ 1.66% 1.62% (1.34%)
Life of Fund cumulative total
return based on NAV1......... 6.25% 4.93% (.27%)
Commencement Date.............. 08/28/92 08/28/92 08/13/93
N/A = Not Applicable
</TABLE>
---------------
(1) Assumes reinvestment of all distributions for the period ended June 30,
1994, and does not include payment of the maximum sales charge (3% for A
shares) or contingent deferred sales charge (3% for B shares; 1% for C
shares). Had certain expenses of the VK Fund not been assumed by the VK
Adviser, the total returns would have been lower.
(2) Standardized total return to the period ended June 30, 1994.
Past performance does not guarantee future results. Investment return and net
asset value will fluctuate with market conditions. Investor's shares, when
redeemed, may be worth more or less than their original cost.
Standardized Total Return Comparison
VKM Adjustable Rate U.S. Government Fund
vs.
Lehman Brothers Adjustable Rate Mortgage Index
(August 1992 through June 1994)
The following graph compares the value of an investment in the VK Fund's Class
A shares with the value of an investment in the Lehman Brothers Adjustable Rate
Mortgage Index from August 1992 through June 1994, based upon a $10,000
investment in Class A shares of the VK Fund and in the securities comprising
such index as of August 1992. The approximate values of such an investment at
the end of each fiscal year were: 1993: Class A shares of VK Fund -- $10,200,
Lehman Index -- $10,500; 1994: Class A shares of VK Fund -- $10,300, Lehman
Index -- $10,600.
B-5
<PAGE> 67
--------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
LIMITED MATURITY GOVERNMENT FUND
--------------------------------------------------------------------------------
Van Kampen American Capital Limited Maturity Government Fund, formerly known
as American Capital Federal Mortgage Trust (the "Fund"), is a mutual fund whose
investment objective is to seek to provide investors with a high current return
and relative safety of capital. The Fund invests primarily in mortgage-related
securities issued or guaranteed by an agency or instrumentality of the U.S.
Government. In order to hedge against changes in interest rates, the Fund may
purchase or write options on such securities and engage in transactions
involving interest rate futures contracts and options on such contracts. There
is no assurance that the Fund will achieve its investment objective.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is 2800
Post Oak Blvd., Houston, Texas 77056, and its telephone number is (800)421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated August 7, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission ("SEC") and is hereby incorporated by reference 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, (800)772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED AUGUST 7, 1995.
<PAGE> 68
------------------------------------------------------------------------------
TABLE OF CONTENTS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Shareholder Transaction Expenses................................. 6
Annual Fund Operating Expense and Example........................ 7
Financial Highlights............................................. 9
The Fund......................................................... 11
Investment Objective and Policies................................ 11
Investment Practices............................................. 18
Investment Advisory Services..................................... 23
Alternative Sales Arrangements................................... 25
Purchase of Shares............................................... 28
Shareholder Services............................................. 38
Redemption of Shares............................................. 43
Distribution Plans............................................... 46
Distributions from the Fund...................................... 48
Tax Status....................................................... 49
Fund Performance................................................. 51
Description of Shares of the Fund................................ 53
Additional Information........................................... 54
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
<PAGE> 69
------------------------------------------------------------------------------
PROSPECTUS SUMMARY
------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Limited Maturity Government Fund (the
"Fund") is a diversified open-end management investment company organized as a
Delaware business trust.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
INVESTMENT OBJECTIVE. The Fund seeks to provide a high current return and
relative safety of capital.
INVESTMENT POLICY. Invests primarily in mortgage-related securities issued or
guaranteed by an agency or instrumentality of the U.S. Government. In order to
hedge against changes in interest rates, the Fund may purchase or write options
on such securities and engage in transactions involving interest rate futures
contracts and options on such contracts. The Fund may also purchase or sell debt
securities on a forward commitment basis and enter into interest rate swaps and
may purchase or sell interest rate caps, floors and collars.
INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers two classes of shares to the
general public, each with its own sales charge structure: Class A shares and
Class C shares. At this time, the Fund offers Class B shares only to current
Fund Class B shareholders who have elected or may elect the option to reinvest
dividends and/or capital gains distributions in shares of the Fund (other share
purchases by such shareholders must be of Class A or Class C shares), and Class
B shareholders of other Van Kampen American Capital funds exchanging their Class
B shares for Class B shares of the Fund. See "Purchase of Shares" and
"Shareholder Services." Each class of shares represents interest in the same
portfolio of investments of the Fund. The per share dividends on Class B and
Class C shares will be lower than the per share dividends on Class A shares. See
"Alternative Sales Arrangements." For information on redeeming shares see
"Redemption of Shares."
Class A Shares. These shares are offered at net asset value per share plus a
maximum initial sales charge of 3.25% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. The Fund pays an annual
service fee of up to 0.25% of its average daily net assets attributable to such
class of shares. See "Purchase of Shares -- Class A Shares" and "Distribution
Plans."
Class B Shares. The Fund has suspended sales to the public of Class B shares,
which are now available only to a limited group of investors. See "Purchase of
3
<PAGE> 70
Shares -- Class B Shares." These shares are offered to the persons described
above at net asset value per share and are subject to a maximum contingent
deferred sales charge of three percent of redemption proceeds during the first
and second year, declining each year thereafter to zero after the fourth year.
See "Redemption of Shares." The Fund pays a combined annual distribution fee and
service fee of up to one percent of its average daily net assets attributable to
such class of shares. See "Purchase of Shares -- Class B Shares" and
"Distribution Plans." Class B shares will convert automatically to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
Class C Shares. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of one percent on redemptions made
within one year of purchase. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent of its
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class C Shares" and "Distribution Plans." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
DISTRIBUTIONS FROM THE FUND. Income dividends are declared each business day,
and paid monthly; any net short-term or long-term capital gains are distributed
at least annually. All dividends and distributions are automatically reinvested
in shares of the Fund at net asset value per share (without sales charge) unless
payment in cash is requested. A portion of the dividends and distributions paid
may constitute a return of capital for federal income tax purposes. See
"Distributions from the Fund" and "Tax Status."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser for the Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor").
RISK FACTORS. Since the value of debt securities owned by the Fund will
fluctuate depending upon market factors and inversely with prevailing interest
rate levels, the net asset value of shares of the Fund will fluctuate. 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 Adviser seeks to
moderate market risk by maintaining a weighted average maturity of the portfolio
of ten years or less. In calculating the weighted average maturity of the
portfolio, the Adviser considers the expected average life, rather than the
nominal maturity, for principal amortizing securities such as mortgage
pass-though securities and the effect on portfolio average maturity caused
4
<PAGE> 71
by certain derivative securities. The Adviser also seeks to moderate market risk
by maintaining a portfolio duration within a range of six months to five years.
See "Investment Objective and Policies -- General." The Fund may invest in
stripped mortgage-related and mortgage-backed securities, which may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans. Those securities that are issued by private
originators may involve greater risk than securities issued directly by the U.S.
Government, its agencies or instrumentalities. See "Investment Objective and
Policies -- Zero Coupon and Other Stripped Securities." The Fund may also invest
in asset-backed securities, which may be unsecured, and therefore entail certain
risks not presented by mortgage-backed securities. See "Investment Objective and
Policies -- Asset-Backed Securities." The Fund may also purchase or sell debt
securities on a forward commitment basis, purchase or sell options and engage in
transactions involving interest rate futures contracts and options on such
contracts and may lend its portfolio securities. The Fund may enter into
interest rate swaps and may purchase or sell interest rate caps, floors and
collars. Each of such activities may subject the Fund to additional risks. See
"Investment Practices -- Forward Commitments, Lending of Securities, Options,
Futures Contracts and Related Options and Interest Rate Transactions." No
assurance can be given as to the actual maturity of a mortgage-related security
because the mortgage loans underlying the security may be prepaid by the
obligor. Depending on market conditions, the Fund may be able to reinvest
prepayments passed through to it only at a lower yielding investment rate. See
"Investment Objective and Policies -- Federal Mortgage-Related Securities."
Shares of the Fund are not insured or guaranteed by the U.S. Government, its
agencies or instrumentalities or by any other person or entity.
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in the Prospectus.
5
<PAGE> 72
------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)............... 3.25%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering
price)........................ None None None
Deferred sales charge (as a
percentage of the lesser of
the original purchase price or
redemption proceeds).......... None(2) Year 1--3.00% Year 1--1.00%
Year 2--3.00%
Year 3--2.00%
Year 4--1.00%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fee.................... None None None
</TABLE>
---------------
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of 1% may be
imposed on certain redemptions made within one year of the purchase.
6
<PAGE> 73
------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management fees (as a percentage of
average daily net assets)............. .50% .50% .50%
12b-1 Fees (as a percentage of average
daily net assets)(3).................. .24% 1.00% (5) 1.00%(5)
Other Expenses (as a percentage of
average daily net assets)(4).......... .57% .58% .57%
Total fund operating expenses (as a
percentage of average daily net
assets)............................... 1.31% 2.08% 2.07%
</TABLE>
---------------
(3) Up to .25% for Class A shares and one percent for Class B and C shares. See
"Distribution Plans."
(4) See "Investment Advisory Services."
(5) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
7
<PAGE> 74
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (i) an
operating expense ratio of 1.31% for
Class A shares, 2.08% for Class B shares
and 2.07% for Class C shares, (ii) a 5%
annual return and (iii) redemption at
the end of each time period:
Class A............................... $ 45 $ 73 $102 $185
Class B............................... $ 51 $ 85 $112 $203*
Class C............................... $ 31 $ 65 $111 $240
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $ 45 $ 73 $102 $185
Class B............................... $ 21 $ 65 $112 $203*
Class C............................... $ 21 $ 65 $111 $240
</TABLE>
------------------------------------------------------------------------------
* Based on conversion to Class A shares after six years.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required to utilize a five percent annual return
assumption. Class B shares acquired through the exchange privilege are subject
to the deferred sales charge schedule relating to the Class B shares of the fund
from which the purchase of Class B shares was originally made. Accordingly,
future expenses as projected could be higher than those determined in the above
table if the investor's Class B shares were exchanged from a fund with a higher
contingent deferred sales charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services" and "Redemption of Shares."
8
<PAGE> 75
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
(Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated)
The following information for each of the five most recent years has been
audited by Price Waterhouse LLP, independent accountants, whose report thereon
was unqualified. This information should be read in conjunction with the related
financial statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------
1994 1993 1992 1991 1990 1989
--------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......................... $12.42 $12.63 $ 12.99 $12.85 $12.88 $12.39
--------- --------- --------- -------- -------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................. .62 .64 .93 1.15 1.32 1.29
Expenses...................................................... (.14) (.11) (.14) (.17) (.173) (.165)
Expense waiver................................................ .02 .01 .025 .025 -- --
--------- --------- --------- -------- -------- ---------
Net investment income......................................... .50 .54 .815 1.005 1.147 1.125
Net realized and unrealized gains or losses on securities..... (.4817) (.1485)(4) (.417) .206 (.004) .4955
--------- --------- --------- -------- -------- ---------
Total from investment operations.............................. .0183 .3915 .398 1.211 1.143 1.6205
--------- --------- --------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income.......................... (.5383) (.6015) (.758) (1.071) (1.173) (1.1305)
Distributions from net realized gain on securities............ -- -- -- -- -- --
--------- --------- --------- -------- -------- ---------
Total distributions........................................... (.5383) (.6015) (.758) (1.071) (1.173) (1.1305)
--------- --------- --------- -------- -------- ---------
Net asset value, end of period................................ $11.90 $12.42 $12.63 $12.99 $12.85 $12.88
========== ========== ========== ========= ========= ==========
<CAPTION>
EIGHT MAY 14,
MONTHS 1986 (1)
ENDED THROUGH
DECEMBER APRIL
31, 30,
1988 1987 1987
-------- -------- --------
<S> <<C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......................... $12.82 $13.24 $13.99
-------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................. 1.32 .78 .94
Expenses...................................................... (.16) (.10) (.15)
Expense waiver................................................ -- -- --
-------- -------- --------
Net investment income......................................... 1.16 .68 .79
Net realized and unrealized gains or losses on securities..... (.495) (.365) (.375)
-------- -------- --------
Total from investment operations.............................. .665 .315 .415
-------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.......................... (1.095) (.70) (.76)
Distributions from net realized gain on securities............ -- (.035) (.405)
-------- -------- --------
Total distributions........................................... (1.095) (.735) (1.165)
-------- -------- --------
Net asset value, end of period................................ $12.39 $ 12.82 $13.24
========= ========= =========
TOTAL RETURN(3)............................................... .16% 3.15%(4) 3.15% 9.78% 9.50% 13.72%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).......................... $41.2 $64.3 $103.7 $95.8 $32.3 $37.3
Ratios to average net assets
Expenses..................................................... 1.15% 1.03% 0.91% 1.16% 1.38% 1.32%
Expenses, without waiver..................................... 1.31% 1.15% 1.12% 1.36% -- --
Net investment income........................................ 4.75% 5.49% 6.36% 7.96% 9.11% 8.97%
Net investment income, without waiver........................ 4.58% 5.37% 6.15% 7.66% -- --
Portfolio turnover rate....................................... 161% 102% 254% 293% 341% 314%
<CAPTION>
TOTAL RETURN(3)............................................... 5.14% 2.49% 1.82%
<S> <<C> <C> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).......................... $48.3 $66.2 $88.8
Ratios to average net assets
Expenses..................................................... 1.22% 1.15%(2) 1.02%(2)
Expenses, without waiver..................................... -- -- --
Net investment income........................................ 9.00% 7.96%(2) 5.28%(2)
Net investment income, without waiver........................ -- -- --
Portfolio turnover rate....................................... 506% 38% 254%
</TABLE>
(Table continued on following page)
9
<PAGE> 76
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------- CLASS C
NOVEMBER -----------------------
5, MAY 10,
1991 (1) 1993 (1)
YEAR ENDED THROUGH YEAR THROUGH
DECEMBER 31 DECEMBER ENDED DECEMBER
------------------------------------ 31, DECEMBER 31, 31,
1994 1993 1992 1991 (5) 1994 1993 (5)
--------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............. $12.43 $12.64 $12.99 $12.99 $12.41 $12.60
--------- --------- -------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................ .62 .67 .935 .12 .67 .44
Expenses......................................... (.22) (.20) (.24) (.03) (.24) (.14)
Expense waiver................................... .02 .01 .03 .02 .02 .02
--------- --------- -------- --------- --------- ---------
Net investment income............................ .42 .48 .725 .11 .45 .32
Net realized and unrealized gains or losses on
securities..................................... (.4977) (.1845)(4) (.413) .036 (.5177) (.1914)(4)
--------- --------- -------- --------- --------- ---------
Total from investment operations................. (.0777) .2955 .312 .146 (.0677) .1286
--------- --------- -------- --------- --------- ---------
DIVIDENDS FROM NET INVESTMENT INCOME............. (.4423) (.5055) (.662) (.146) (.4423) (.3186)
--------- --------- -------- --------- --------- ---------
Net asset value, end of period................... $11.91 $12.43 $12.64 $12.99 $11.90 $12.41
========= ========= ======== ========= ========= =========
TOTAL RETURN(3).................................. (.62%) 2.37%(4) 2.46% 1.13% (.55%) 1.03%(4)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............. $18.4 $26.9 $38.4 $9.4 $5.8 $7.1
Ratios to average net assets
Expenses....................................... 1.91% 1.79% 1.60% 0.59%(2) 1.90% 1.47%(2)
Expenses, without waiver....................... 2.08% 1.91% 1.81% 1.84%(2) 2.07% 1.64%(2)
Net investment income.......................... 3.99% 4.70% 5.44% 5.73%(2) 3.98% 3.79%(2)
Net investment income, without waiver.......... 3.82% 4.58% 5.23% 4.48%(2) 3.81% 3.62%(2)
Portfolio turnover rate.......................... 161% 102% 254% 293% 161% 102%
</TABLE>
------------
(1) Commencement of the offering of sales.
(2) Annualized.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) During 1993, certain securities held by the Fund were mispriced. The Adviser
reimbursed the Fund to eliminate any loss to shareholders. Without the
reimbursement, the total return would have been lower by approximately 6.25
percentage points.
(5) Based on average month-end shares outstanding.
10
<PAGE> 77
------------------------------------------------------------------------------
THE FUND
------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company. This type
of company is 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.
Fourteen Trustees have the responsibility for overseeing the affairs of the
Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines the
investment of the Fund's assets, provides administrative services and manages
the Fund's business and affairs. The Adviser together with its predecessors, has
been in the investment advisory business since 1926.
------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
------------------------------------------------------------------------------
GENERAL. The investment objective of the Fund is to seek to provide high
current return and relative safety of capital. The Fund invests primarily in
mortgage-related securities issued or guaranteed by an agency or instrumentality
of the U.S. Government. See "Federal Mortgage-Related Securities" below. Under
normal circumstances, at least 65% of the total assets of the Fund are invested
in such securities. The Fund may invest up to 35% of its assets in
mortgage-related securities which are not so guaranteed, mortgage-backed
securities, asset-backed securities, and U.S. Government securities. In order to
hedge against changes in interest rates, the Fund may purchase or write options
on debt securities, and engage in transactions involving interest rate futures
contracts and options on such contracts. See "Investment Practices -- Options,
Futures Contracts and Related Options" and the Statement of Additional
Information for discussion of options, futures contracts and related options.
The Fund may also purchase or sell debt securities on a forward commitment basis
and enter into interest rate swaps and may purchase or sell interest rate caps,
floors and collars. See "Investment Practices -- Forward Commitments and
Interest Rate Transactions." There can be no assurance that the Fund's
investment objective will be achieved. The Fund is not designed for investors
seeking capital appreciation. Shares of the Fund are not insured or guaranteed
by the U.S. Government, its agencies or instrumentalities or by any other person
or entity.
For temporary defensive purposes, the entire portfolio of the Fund may be
invested in obligations of the U.S. Government, its agencies and
instrumentalities and repurchase agreements secured by such obligations. For a
description of repurchase agreements, see "Investment Practices -- Repurchase
Agreements."
11
<PAGE> 78
Since the value of debt securities owned by the Fund will fluctuate depending
upon market factors and inversely with prevailing interest rate levels, the net
asset value of shares of the Fund will fluctuate. 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 potential for such fluctuation may be reduced
however to the extent that the Fund invests in adjustable rate mortgage
securities. See "Adjustable Rate Mortgage Securities." The Adviser seeks to
moderate market risk by maintaining a weighted average maturity of the portfolio
of ten years or less. In calculating the weighted average maturity of the
portfolio, the Adviser considers the expected average life, rather than the
nominal maturity, for principal amortizing securities such as mortgage
pass-through securities and the effect on portfolio average maturity caused by
certain derivative securities. The Adviser also seeks to moderate market risk by
maintaining a portfolio duration within a range of six months to five years.
Duration is a measure of the expected life of a debt security that was developed
as a more precise alternative to the concept of "term to maturity." Duration
incorporates a debt security's yield, coupon interest payments, final maturity
and call features into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest the shorter the
maturity or the higher the yield to maturity of a debt security, the shorter its
duration.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon resets. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more
12
<PAGE> 79
critical in determining the securities' interest rate exposure. In these and
other similar situations, the Adviser will use more sophisticated analytical
techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. At December 31, 1994, the average
maturity of the securities owned by the Fund was approximately 2.49 years and
the duration of the portfolio was approximately 2.13 years.
The Fund generally purchases debt securities at a premium over the principal
or face value in order to obtain higher current income. The amount of any
premium declines during the term of the security to zero at maturity. Such
decline generally is reflected in the market price of the security and thus in
the Fund's net asset value. Any such decline is realized for accounting purposes
as a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
FEDERAL MORTGAGE-RELATED SECURITIES. 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. Interest in such pools are
what this Prospectus calls "federal mortgage-related securities."
Federal mortgage-related securities include, but are not limited to,
obligations issued or guaranteed by the Government National Mortgage Association
("GNMA"), the Federal National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). GNMA is a wholly owned corporate
instrumentality of the United States whose securities and guarantees are backed
by the full faith and credit of the United States. FNMA, a federally chartered
and privately-owned corporation, and FHLMC, a federal corporation, are
instrumentalities of the United States. The securities and guarantees of FNMA
and FHLMC are not backed, directly or indirectly, by the full faith and credit
of the United States. Although the Secretary of the Treasury of the United
States has discretionary authority to lend FNMA up to $2.25 billion outstanding
at any time, neither the United States nor any agency thereof is obligated to
finance FNMA's or FHLMC's operations or to assist FNMA or FHLMC in any other
manner.
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 security holders (such as the
Fund), like the payments on the underlying loans, represent both principal and
interest. Although the underlying mortgage loans are for specified periods of
time, such as 20 or 30 years, the borrowers can, and typically do, pay them off
sooner. Thus, the security holders 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
13
<PAGE> 80
times of declining interest rates, some of the Fund's higher yielding securities
might be converted to cash, and the Fund will be forced to accept lower interest
rates when that cash is used to purchase additional securities. The increased
likelihood of prepayment when interest rates decline also limits market price
appreciation of mortgage-related securities. If the Fund buys mortgage-related
securities at a premium, mortgage foreclosures or mortgage prepayments may
result in a loss to the Fund of up to the amount of the premium paid since only
timely payment of principal and interest is guaranteed.
ADJUSTABLE RATE MORTGAGE SECURITIES. Adjustable rate mortgage securities
("ARMS") are federal mortgage-related securities collateralized by mortgages
with adjustable, rather than fixed, interest rates. The ARMS in which the Fund
invests are issued primarily by GNMA, FNMA and FHLMC, and are actively traded in
the secondary market. The underlying mortgages which collateralize ARMS issued
by GNMA are fully guaranteed by the Federal Housing Administration or the
Veterans Administration. The underlying mortgages which collateralize ARMS
issued by FHLMC or FNMA are typically conventional residential mortgages
conforming to standard underwriting size and maturity constraints.
For certain types of ARMS in which the Fund may invest, the rate of
amortization of principal and interest payments changes in accordance with
movements in a predetermined interest rate index. The interest rates paid on
ARMS are generally readjusted at intervals of one year or less to an increment
over this predetermined interest rate index. The amount of interest due is
calculated by adding a specified additional amount (margin) to the index,
subject to limitations (caps and floors) on the maximum and minimum interest
charged to the mortgagor during the life of the mortgage or to the maximum and
minimum changes to that interest rate during a given period.
ARMS allow the Fund to participate in increases in interest rates through
periodic adjustments in the coupons of the underlying mortgages, resulting in
higher current yields and lower price fluctuations. The Fund, however, will not
benefit from increases in interest rates if they rise to the point where they
cause the current coupon to exceed the maximum allowable cap rates for a
particular mortgage. The resetting of the interest rates should cause the net
asset value of the Fund to fluctuate less dramatically than it would with
investments in long-term fixed-rate debt securities. However, during periods of
rising interest rates, changes in the coupon rate lag behind changes in the
market rate resulting in possibly a slightly lower net asset value until the
coupon resets to market rates. In addition, while there is less risk of decline
in the market value of ARMS during periods when interest rates rise, there may
be less potential for capital appreciation than other investments of similar
maturities due to the likelihood of increased prepayments.
The Fund currently seeks to maintain a more consistent and less volatile net
asset value than funds investing primarily in longer duration fixed rate
mortgage securi-
14
<PAGE> 81
ties by investing a significant portion of its assets in ARMS and in shorter
duration fixed rate mortgage-related securities. See "Investment Objective and
Policies -- General" above.
OTHER MORTGAGE-RELATED AND MORTGAGE-BACKED SECURITIES. The Fund may also
invest in securities issued by certain private, nongovernment corporations, such
as financial institutions, if the securities are fully collateralized at the
time of issuance by securities or certificates issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. Two principal types of
mortgage-backed securities are 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, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. The Fund 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.
The Fund may also invest in private mortgage pass-through securities ("Private
Pass-Throughs") which are structured similarly to the GNMA, FNMA, and FHLMC
mortgage-related securities described above and are issued by originators of and
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Private Pass-Throughs are usually backed by a pool of
conventional fixed rate or adjustable rate mortgage loans. The Fund intends to
invest in such debt securities only if they are rated at the time of purchase in
the two highest grades by a nationally-recognized rating agency.
The Fund may also invest in mortgage-backed securities. A mortgage-backed
security is a general obligation of the issuer, which is additionally secured by
mortgage collateral. Such securities have a known maturity date and a pre-
determined cash flow. This category may include debt securities issued by a
public
15
<PAGE> 82
utility secured by mortgages on properties owned by the public utility. The Fund
intends to invest in such debt securities only if at the time of purchase they
are rated in the two highest grades by a nationally-recognized rating agency.
U.S. GOVERNMENT SECURITIES. U.S. Government securities include U.S. Treasury
obligations, which differ only in their interest rates, maturities and times of
issuance and consist of U.S. Treasury bills (maturities of one year or less),
U.S. Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years).
ZERO COUPON AND OTHER STRIPPED SECURITIES. The Fund may also invest in the
interest only or principal only components of debt securities described above.
This includes "zero coupon" Treasury securities and stripped securities.
The Fund may invest in "zero coupon" Treasury securities which are U.S.
Treasury bills, notes, and bonds which have been stripped of their unmatured
interest coupons and receipts or certificates representing interests in such
stripped debt obligations. A zero coupon security pays no interest in cash to
its holder during its life although interest is accrued for federal income tax
purposes. Its value to an investor consists of the difference between its face
value at the time of maturity and the price for which it was acquired, which is
generally an amount significantly less than its face value (sometimes referred
to as a "deep discount" price). Investing in "zero coupon" Treasury securities
may help to preserve capital during periods of declining interest rates. For
example, if interest rates decline, GNMA Certificates owned by the Fund which
were purchased at greater than par are more likely to be prepaid, which would
cause a loss of principal. In anticipation of this, the Fund might purchase zero
coupon Treasury securities, the value of which would be expected to increase
when interest rates decline.
Currently the principal U.S. Treasury security issued without coupons is the
Treasury bill. The Treasury has also recently made wire transferable zero coupon
Treasury securities available. However, in the last few years a number of banks
and brokerage firms have separated ("stripped") the principal portions
("corpus") from the coupon portions of the U.S. Treasury bonds and notes and
sold them separately in the form of receipts or certificates representing
undivided interests in these instruments (which instruments are generally held
by a bank in a custodial or trust account).
Zero coupon Treasury securities do not entitle the holder 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 will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, zero coupon securities eliminate the
reinvestment risk and lock in
16
<PAGE> 83
a rate of return to maturity. Current federal tax law requires that a holder
(such as the Fund) of a zero coupon security accrue a portion of the discount at
which the security was purchased as income each year even though the Fund
received no interest payment in cash on the security during the year. For
additional discussion of the tax treatment of zero coupon Treasury securities,
see "Tax Status."
Stripped mortgage-related and mortgage-backed 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. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the security is rated AAA or Aaa.
Holders of PO securities are not entitled to any periodic payments of interest
prior to maturity. Accordingly, such securities usually trade at a deep discount
from their face or par value and are subject to greater fluctuations of market
value in response to changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. Current federal tax law
requires that a holder (such as the Fund) of such securities accrue a portion of
the discount at which the security was purchased as income each year even though
the holder receives no interest payment in cash on the certificate during the
year. Such securities may involve greater risk than securities issued directly
by the U.S. Government, its agencies or instrumentalities.
Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The Trustees of the Fund 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
17
<PAGE> 84
course of business at a value reasonably close to that used in the calculation
of the net asset value per share. Stripped Mortgage Securities, other than
government-issued IO and PO securities backed by fixed-rate mortgages, are
presently considered by the staff of the SEC to be illiquid securities and thus
subject to the Fund's limitation on investment in illiquid securities.
ASSET-BACKED SECURITIES. Asset-backed securities are similar to mortgage-
backed securities. However, the underlying assets include assets such as
automobile and credit card receivables. The assets are securitized either in a
pass-through structure (similar to a mortgage pass-through structure) or in a
pay-through structure (similar to the CMO structure). The Fund may invest in
these and other types of asset-backed securities that may be developed in the
future. Although the collateral supporting asset-backed securities generally is
of a shorter maturity than mortgage loans and historically has been less likely
to experience substantial prepayments, no assurance can be given as to the
actual maturity of an asset-backed security because prepayments of principal may
be made at any time.
Asset-backed securities entail certain risks not presented by mortgage-backed
securities. Asset-backed securities do not have the benefit of the same type of
security interest in the related collateral. Credit card receivables are
generally unsecured and a number of state and federal consumer credit laws give
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the outstanding balance. In the case of automobile receivables, there
is a risk that the holders may not have either a proper or first security
interest in all of the obligations backing such receivables due to the large
number of vehicles involved in a typical issuance, and technical requirements
under state laws. Therefore, recoveries on repossessed collateral may not always
be available to support payments on the securities. For a further discussion of
the risks of investing in asset-backed securities, see the Statement of
Additional Information.
The Fund will invest in asset-backed securities only if they are rated at the
time of purchase in the two highest grades by a nationally-recognized rating
agency. The Fund does not presently propose to invest more than ten percent of
its assets in asset-backed securities.
------------------------------------------------------------------------------
INVESTMENT PRACTICES
------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (e.g., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of a default by the other party. The Fund will not
invest in repurchase
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agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by the Fund, exceeds ten percent of the
value of its net assets. In the event of the bankruptcy of the seller of a
repurchase agreement, the Fund 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 the Fund seeks to enforce its
rights thereto, (b) possible lack of access to income on the underlying security
during this period, and (c) expenses of enforcing its rights. See the Statement
of Additional Information.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
FORWARD COMMITMENTS. The Fund may purchase or sell mortgage-related securities
and U.S. Government securities on a "when-issued" or "delayed delivery" basis
("Forward Commitments"). These transactions occur when securities are purchased
or sold by the Fund with payment and delivery taking place in the future,
frequently a month or more after such transaction. The price is fixed on the
date of the commitment, and the seller continues to accrue interest on the
securities covered by the Forward Commitment until delivery and payment takes
place. At the time of settlement, the market value of the securities may be more
or less than the purchase or sale price.
The Fund may either settle a Forward Commitment by taking delivery of the
securities or resell or repurchase a Forward Commitment on or before the
settlement date, in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure. Forward Commitments are not traded on
an exchange and thus may be less liquid than exchange traded contracts.
The Fund maintains a segregated account (which is marked to market daily) of
cash, U.S. Government securities or the security covered by the Forward Commit-
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ment with the Fund's custodian in an aggregate amount equal to the amount of its
commitment as long as the obligation to purchase or sell continues.
LENDING OF SECURITIES. The Fund may lend its portfolio securities to broker-
dealers and other financial institutions in an amount up to ten percent of the
net assets, provided that such loans are callable at any time by the Fund, and
are at all times secured by cash collateral that is at least equal to the market
value, determined daily, of the loaned securities. During the period of the
loan, the Fund receives the income on both the loaned securities and the
collateral and thereby increases its yield after payment of lending fees.
Lending portfolio securities involves risks of delay in recovery of the loaned
securities or in some cases loss of rights in the collateral should the borrower
fail financially. Accordingly, loans of portfolio securities will only be made
to borrowers considered by the Adviser to be creditworthy.
PORTFOLIO TURNOVER. The Fund generally experiences a high rate of portfolio
turnover, which may vary from year to year. A 100% turnover rate would occur,
for example, if all the securities held by the Fund were replaced in a period of
one year. Higher portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund.
The higher portfolio turnover may also increase the recognition of short-term,
rather than long-term, capital gains. The rate of portfolio turnover 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
related options.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of the
Fund permit the Fund to invest in or write options, futures contracts and
related options.
The Fund presently expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of the Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of options, futures
contracts and related options.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in securities. While utilization of
options, futures contracts and similar instruments may be advantageous to the
Fund, if the Adviser is not successful in employing such instruments in managing
the Fund's investments, the Fund's performance will be worse than if the Fund
did not make such investments. In addition, the Fund pays commissions and other
costs in connection with such investments, which may increase the Fund's
expenses and reduce its return. The Fund may write or purchase options in
privately negotiated transactions ("OTC Options") as well as listed options. OTC
Options can be closed out only by
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<PAGE> 87
agreement with the other party to the transaction. Any OTC Options purchased by
the Fund will be considered an illiquid security. Any OTC Option written by the
Fund will be with a qualified dealer pursuant to an agreement under which the
Fund may repurchase the option at a formula price. Such options will be
considered illiquid to the extent that the formula price exceeds the intrinsic
value of the option. The Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value of the Fund's assets. In order to prevent
leverage in connection with the purchase of futures contracts by the Fund, an
amount of cash, cash equivalents or liquid high grade debt securities equal to
the market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the Custodian.
The Fund may not invest more than ten percent of its net assets in illiquid
securities and repurchase agreements which have a maturity of longer than seven
days. See "Investment Restrictions" below.
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and
may purchase or sell interest rate caps, floors and collars. The Fund expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Fund may also enter into
these transactions to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date. The Fund does not intend to use
these transactions as speculative investments and will not enter into interest
rate swaps or sell interest rate caps or floors where it does not own or have
the right to acquire the underlying securities or other instruments providing
the income stream the Fund may be obligated to pay. Interest rate swaps involve
the exchange by the Fund with another party of their respective commitments to
pay or receive interest, i.e., an exchange of floating rate payments for
fixed-rate payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
floor. An interest rate collar combines the elements of purchasing a cap and
selling a floor. The collar protects against an interest rate rise above the
maximum amount but foregoes the benefit of an interest rate decline below the
minimum amount. Interest rate swaps, caps, floors and collars will be treated as
illiquid securities and will, therefore, be subject to the Fund's investment
restriction limiting investment in illiquid securities. See the Statement of
Additional Information for further discussion on such interest rate
transactions.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid debt securities having an
aggregate net
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<PAGE> 88
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian. If the Fund enters into an interest
rate swap on other than a net basis, the Fund would maintain a segregated
account in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund. The debt securities in which the Fund invests are traded in the
over-the-counter market. Such securities are generally traded on a net basis
with dealers acting as principal for their own accounts without a stated
commission, although the prices of the securities usually include a profit to
the dealers. It is the policy of the Fund to seek to obtain the best net result
taking into account such factors as price (including the applicable dealer
spread), the size, type and difficulty of the transaction involved, the firm's
general execution and operational facilities, the firm's risk in positioning the
securities involved, and the provision of supplemental investment research by
the firm. While the Fund seeks reasonably competitive dealer spreads, the Fund
will not necessarily be paying the lowest spread available. Brokerage
commissions are paid on transactions in listed options, futures contracts and
options thereon. The Adviser is authorized to place portfolio transactions with
broker-dealers participating in the distribution of shares of the Fund and other
Van Kampen American Capital mutual funds if it reasonably believes that the
quality of the execution and any commissions 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 Fund.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:
1. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the U.S.
Government, its agencies or instrumentalities) or purchase more than ten
percent of the outstanding voting securities of any one issuer.
2. Borrow in excess of five percent of the market or other fair value of its
total assets, or pledge its assets to an extent greater than five percent
of the market or other fair value of its total assets. Any such borrowings
shall be from banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Deposits in escrow in connection with
the writing of covered or fully collateralized call or secured put options,
or in connection
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<PAGE> 89
with the purchase or sale of futures contracts and related options, are not
deemed to be a pledge or other encumbrance.
3. Purchase an illiquid security if, as a result of such purchase, more than
ten percent of the Fund's net assets would be invested in such securities.
Illiquid securities are securities subject to legal or contractual
restrictions on resale, which include repurchase agreements maturing in
more than seven days and any over-the-counter options or other restricted
securities purchased by the Fund.
4. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (a) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (b) purchase and sell options to
the extent that the premiums paid for all such options owned at any time do
not exceed ten percent of its total assets and (c) engage in transactions
in interest rate futures contracts and related options provided that such
transactions are entered into for bona fide hedging purposes (or that the
underlying commodity value of the Fund's long positions do not exceed the
sum of certain identified liquid investments as specified in CFTC
regulations), provided further that the aggregate initial margin and
premiums do not exceed five percent of the fair market value of the Fund's
total assets, and provided further that the Fund may not purchase futures
contracts or related options if more than 30% of the Fund's total assets
would be so invested.
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INVESTMENT ADVISORY SERVICES
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THE ADVISER. The Adviser is a wholly owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and
nearly $50 billion under management or supervision. Van Kampen American
Capital's more than 40 open-end and 38 closed-end funds and more than 2,700 unit
investment trust are professionally distributed by leading financial advisers
nationwide.
Van Kampen American Capital Distributors, Inc., the Distributor of the Fund
and the sponsor of the Funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital. Van Kampen American Capital is a wholly owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the
ownership of a substantial majority of its common stock, by the Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
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<PAGE> 90
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital own, in the aggregate, not more than seven percent
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. Presently and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own five percent or
more of the common stock of VK/AC Holding, Inc.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed on average daily net assets of the Fund at an annual rate of 0.50% of
the first $1 billion of net assets; 0.475% of the next $1 billion of net assets;
0.45% of the next $1 billion of net assets; 0.40% of the next $1 billion of net
assets; and 0.35% of net assets in excess of $4 billion. Under the Advisory
Agreement the Fund also reimburses the Adviser for the costs of the Fund's
accounting services, which include maintaining its financial books and records
and calculating its daily net asset value. Operating expenses paid by the Fund
include shareholder service agency fees, distribution fees, service fees,
custodial fees, legal and accounting fees, the cost of reports and proxies to
shareholders, Trustees' fees, and all other business expenses not specifically
assumed by the Adviser. Advisory (management) fee, and total operating expense
ratios are shown under the caption "Annual Fund Operating Expenses and Example"
herein.
From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors/trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interest.
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<PAGE> 91
PORTFOLIO MANAGEMENT. Ted Mundy is primarily responsible for the day-to-day
management of the Fund's investment portfolio. Mr. Mundy is Vice President of
the Fund and has been primarily responsible for managing the Fund's investment
portfolio since June 30, 1994. From September, 1990 to June, 1994, Mr. Mundy was
a portfolio manager with AMR Investment Services, Inc. Prior to that he was a
trader with Howard, Weil, Labouisse and Friedrichs.
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ALTERNATIVE SALES ARRANGEMENTS
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The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 3.25% at the time of purchase. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. Class A shares are subject to
an ongoing service fee at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Certain purchases
of Class A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. The Fund has suspended sales of Class B shares to the general
public. Class B shares are now available only in connection with the
reinvestment of dividends and/or distributions by existing Class B shareholders
of the Fund and exchanges into the Fund by Class B shareholders of other
American Capital funds. See "Purchase of Shares." Class B shares are sold at net
asset value and are subject to a deferred sales charge if they are redeemed
within four years of purchase. Class B shares are subject to an ongoing service
fee at an annual rate of up to 0.25% of the Fund's aggregate average daily net
assets attributable to the Class B shares and an ongoing distribution fee at an
annual rate of up to 0.75% of the Fund's aggregate average daily net assets
attributable to the Class B shares. Class B shares enjoy the benefit of
permitting all of the investor's dollars to work from the time the investment is
made. The ongoing distribution fee paid by Class B shares will cause such shares
to have a higher expense ratio and to pay lower dividends than those related to
Class A shares. See "Purchase of Shares -- Class B Shares." Class B shares will
automatically convert to Class A shares six years after the end of the calendar
month in which the shareholder's order to purchase was accepted. See "Conversion
Feature" herein for discussion on applicability of the conversion feature to
Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase, Class C shares
are
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<PAGE> 92
subject to an ongoing service fee at an annual rate of up to 0.25% of the Fund's
aggregate average daily net assets attributable to the Class C shares and an
ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will automatically convert to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of Class B shares and Class C shares that have been outstanding for a
period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares and Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares and Class C shares would occur, and shares might continue to be subject
to the distribution fee for an indefinite period which may extend beyond the
period ending six years or ten years, respectively, after the end of the
calendar month in which the shareholder's order to purchase was accepted.
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<PAGE> 93
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
C shares prior to conversion would be less than the initial sales charge on
Class A shares purchased at the same time, and to what extent such differential
would be offset by the higher dividends per share on Class A shares. To assist
investors in making this determination, the table under the caption "Annual Fund
Operating Expenses and Example" sets forth examples of the charges applicable to
each class of shares. In this regard, Class A shares may be more beneficial to
the investor who qualifies for reduced initial sales charges or purchases shares
at net asset value, as described herein under "Purchase of Shares -- Class A
Shares." For these reasons, the Distributor will reject any order of $1 million
or more for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase Class C shares and have
all their funds invested initially, although remaining subject to ongoing
distribution fees and, for a four-year or one-year period, respectively, being
subject to a contingent deferred sales charge. Ongoing distribution fees on
Class C shares will be offset to the extent of the additional funds originally
invested and any return realized on these funds. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. For investments held for ten years or more, the relative value upon
liquidation of the three classes tends to favor Class A, rather than Class C
shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class C shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class C shares, from
the proceeds of the ongoing distribution fee and any contingent deferred sales
charge incurred upon redemption within one year of purchase. Sales personnel of
broker-dealers distributing the Fund's shares and other persons entitled to
receive compensation for selling
27
<PAGE> 94
such shares may receive differing compensation for selling such shares.
INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION OF THE CONTINGENT
DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH RESPECT TO THE CLASS C
SHARES ARE THE SAME AS THOSE OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A
SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and
Class C shares will be calculated in the same manner at the same time on the
same day, except that the distribution fees and any incremental transfer agency
costs relating to Class B or Class C shares will be borne by the respective
class. See "Distributions from the Fund." Shares of the Fund may be exchanged,
subject to certain limitations, for shares of the same class of other mutual
funds advised by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Trustees
of the Fund, pursuant to their fiduciary duties under the Investment Company Act
of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
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PURCHASE OF SHARES
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GENERAL
The Fund offers two classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers." Class A shares are sold with an initial sales charge and Class C
shares are sold without an initial sales charge and are subject to a contingent
deferred sales charge upon certain redemptions. See "Alternative Sales
Arrangements" for a discussion of factors to consider in selecting which class
of shares to purchase. Contact the Investor Services Department at (800)
421-5666 for further information and appropriate forms. At this time, the Fund
offers Class B shares only to current Fund Class B shareholders who have elected
or may elect the option to reinvest dividends and/or capital gains distributions
in shares of the Fund (other share purchases by such shareholders must be of
Class A or Class C shares), and Class B shareholders of other Van Kampen
American Capital funds exchanging their Class B shares for shares of the Fund.
See "Shareholder Services."
Initial investments must be at least $500 and subsequent investments must be
at least $25. Both minimums may be waived by the Distributor for plans involving
28
<PAGE> 95
periodic investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application accompanying this Prospectus
and forwarding the application, through the designated dealer, to the
shareholder service agent, ACCESS Investor Services, Inc., a wholly owned
subsidiary of Van Kampen American Capital ("ACCESS"). When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A or Class C
shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge which will vary depending on the
method of purchasing shares chosen by the investor, as shown in the tables
herein. Net asset value per share is determined once daily as of the close of
trading on the New York Stock Exchange (the "Exchange") (currently 4:00 p.m.,
New York time) each day the Exchange is open. Net asset value per share for each
class is determined by dividing the value of the Fund'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. U.S. Government and agency
obligations are valued at the last reported bid price. Listed options are valued
at the last reported sale price on the Exchange on which such option is traded,
or, if no 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 under a method approved by the Trustees. Short-term
investments are valued in the manner described in the Notes to Financial
Statements in the Statement of Additional Information.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value (plus applicable Class A sales charges) after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be
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<PAGE> 96
received prior to such time. Orders of less than $500 are mailed by the dealer
and processed at the offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
generally, each class has exclusive voting rights with respect to approvals of
the Rule 12b-1 distribution plan pursuant to which its distribution fee and/or
service fee is paid which relate to a specific class, and (iii) Class B and
Class C shares are subject to a conversion feature. Each class has different
exchange privileges and certain different shareholder service options available.
See "Distribution Plans" and "Shareholder Services -- Exchange Privilege." The
net income attributable to Class B and Class C shares and the dividends payable
on Class B and Class C shares will be reduced by the amount of the distribution
fee and incremental expenses associated with such distribution fee. Sales
personnel of broker-dealers distributing the Fund's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediaries at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediaries
for certain services or activities which are primarily intended to result in
sales of shares of the Fund. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation
30
<PAGE> 97
to Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. All of the foregoing
payments are made by the Distributor out of its own assets. These programs will
not change the price an investor will pay for shares or the amount that a Fund
will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED
TO DEALERS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE PRICE)
<S> <C> <C> <C>
------------------------------------------------------------------------------
Less than $25,000........................ 3.36% 3.25% 3.00%
$25,000 but less than $249,999........... 2.83% 2.75% 2.50%
$250,000 but less than $499,999.......... 1.78% 1.75% 1.50%
$500,000 to $999,999..................... 1.52% 1.50% 1.25%
$1,000,000 or more....................... * * *
------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of certain redemptions
within one year of the purchase. The contingent deferred sales charge incurred
upon redemption is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for purchases of $1 million or more as follows:
one percent on sales to $2 million, plus 0.80% on the next million, plus 0.20%
on the next $2 million and 0.08% on the excess over $5 million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of
31
<PAGE> 98
banks and other financial institutions may differ from the interpretations of
federal law expressed herein, and banks and other financial institutions may be
required to register as dealers pursuant to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children and any corporation, partnership, or sole
proprietorship which is 100% owned, either alone or in combination, by any of
the foregoing; a trustee or other fiduciary purchasing for a single fiduciary
account; or a "company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("VK Money Market"), Van Kampen American Capital Tax Free
Money Fund ("VK Tax Free"), Van Kampen American Capital Reserve Fund ("Reserve")
and The Govett Funds, Inc.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
Cumulative Purchase Discount. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the Funds over a 13-month period based on the total amount of intended
purchases plus the value of all shares of the Participating Funds previously
purchased and still owned. An investor may elect to compute the 13-month period
starting up to 90
32
<PAGE> 99
days before the date of execution of a Letter of Intent. Each investment made
during the period receives the reduced sales charge applicable to the total
amount of the investment goal. If the goal is not achieved within the period,
the investor must pay the difference between the charges applicable to the
purchases made and the charges previously paid. The initial purchase must be for
an amount equal to at least five percent of the minimum total purchase amount of
the level selected. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provisions, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. Such adjustment in sales charge will be used
to purchase additional shares for the shareholder at the applicable discount
category. Additional information is contained in the application accompanying
this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling or purchases by persons affiliated with the Fund or
the Distributor. The Fund reserves the right to modify or terminate these
arrangements at any time.
Unit Trust Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A shares
of the Fund, other Participating Funds, VK Money Market, VK Tax Free or Reserve
with no minimum initial or subsequent investment requirement, and with a lower
sales charge if the administrator of an investor's unit investment trust program
meets certain uniform criteria relating to cost savings by the Fund and the
Distributor. The total sales charge for all investments made from unit trust
distributions will be one percent of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their securities broker or dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS's processing system.
33
<PAGE> 100
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts,"
during the 13-month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to one percent for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
34
<PAGE> 101
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in
Participating Funds, VK Money Market, VK Tax Free, or Reserve. For such
investments the Fund imposes a contingent deferred sales charge of one
percent in the event of redemptions within one year of the purchase other
than redemptions required to make payments to participants under the terms
of the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: one percent on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
CLASS B SHARES
At this time, Class B shares are offered only in connection with the
reinvestment of dividends and/or distributions by current Class B shareholders
of the Fund or exchanges into the Fund by Class B shareholders of other Van
Kampen American Capital funds.
Class B shares are offered to the limited group of investors described above
at the next determined net asset value. Class B shares which are redeemed within
four years of purchase are subject to a contingent deferred sales charge at the
rates set
35
<PAGE> 102
forth in the following table charged as a percentage of the dollar amount
subject thereto. The charge is assessed on an amount equal to the lesser of the
then current market value or the cost of the shares being redeemed. Accordingly,
no sales charge is imposed on increases in net asset value above the initial
purchase price. In addition, no charge is assessed on shares derived from
reinvestment of dividends or capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchases
of shares, all payments during a month are aggregated and deemed to have been
made on the last day of the month.
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
<S> <C>
--------------------------------------------------------------------------
First................................................................. 3%
Second................................................................ 3%
Third................................................................. 2%
Fourth................................................................ 1%
Fifth.................................................................None
</TABLE>
------------------------------------------------------------------------------
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, second, of shares held for over four years or shares acquired pursuant
to reinvestment of dividends or distributions and third, of shares held longest
during the four-year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of three percent (the applicable rate in the second year after purchase).
A commission or transaction fee of three percent of the purchase amount will
be paid to broker-dealers and other Service Organizations at the time of
purchase.
36
<PAGE> 103
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. The charge is assessed on an
amount equal to the lower of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.25% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares and as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
37
<PAGE> 104
------------------------------------------------------------------------------
SHAREHOLDER SERVICES
------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Except as described herein, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in certain of the
Participating Funds or Reserve, may receive statements quarterly from ACCESS
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate no more than two percent of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. This instruction may be made by telephone by calling (800)
421-5666 ((800) 772-8989 for the hearing impaired) or in writing to ACCESS. The
investor may, on the initial application or prior to any declaration, instruct
that dividends be paid in cash and capital gains distributions be reinvested at
net asset value, or that both dividends and capital gains distributions be paid
in cash. The Fund has suspended sales of Class B shares to the public; however
current Fund Class B shareholders who have elected the option to reinvest
dividends and/or capital gains
38
<PAGE> 105
distributions in shares of the Fund may continue to do so. Current Fund Class B
shareholders who have elected the option to be paid dividends and/or capital
gains distributions in cash may elect to reinvest such dividends and
distributions in Class B shares of the Fund.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP, and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class
A, Class B or Class C account in the Fund invested into a pre-existing Class A,
Class B or Class C account in any of the Participating Funds, VK Money Market,
VK Tax Free or Reserve.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the
39
<PAGE> 106
selected fund at its net asset value as of the payable date of the distribution
only if shares of such selected fund have been registered for sale in the
investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of any other fund without sales
charge, provided that shares of the Fund and certain other Van Kampen American
Capital fixed-income funds may not be exchanged within 30 days of acquisition
without Adviser approval. Shares of Government Target may be exchanged for Class
A shares of the Fund without sales charge. Class A shares of VK Money Market, VK
Tax Free or Reserve that were not acquired in exchange for Class B or Class C
shares of a Participating Fund may be exchanged for Class A shares of the Fund
upon payment of the excess, if any, of the sales charge rate applicable to the
shares being acquired over the sales charge rate previously paid. Shares of VK
Money Market, VK Tax Free or Reserve acquired through an exchange of Class B or
Class C shares may be exchanged only for the same class of shares of a
Participating Fund without incurring a contingent deferred sales charge. Shares
of any Participating Fund, VK Money Market, VK Tax Free or Reserve may be
exchanged for shares of any other Participating Fund if shares of that
Participating Fund are available for sale; however, during periods of suspension
of sales, shares of a Participating Fund may be available for sale only to
existing shareholders of a Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other Van
Kampen American Capital fund that offers such class of shares ("new shares") in
an amount equal to the aggregate net asset value of the original shares, without
the payment of any contingent deferred sales charge otherwise due upon
redemption of the original shares. For purposes of computing the contingent
deferred sales charge payable upon a disposition of the new shares, the holding
period for the original shares is added to the holding period of the new shares.
Class B or Class C shareholders would remain subject to the contingent deferred
sales charge imposed by the original fund upon their redemption from the Van
Kampen American Capital complex of funds. The contingent deferred sales charge
is based on the holding period requirements of the original fund.
The Fund has suspended sales of Class B shares, however Class B shareholders
of other Van Kampen American Capital funds may exchange their Class B shares of
such other funds for Class B shares of the Fund.
Shares of the Fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the
40
<PAGE> 107
exchanged shares, but is carried over and included in the tax basis of the
shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanied by this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See "Purchase of
Shares" and "Redemption of Shares." If the exchanging shareholder does not have
an account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification) and dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
file a specific written request. The Fund reserves the right to reject any order
to acquire its shares through exchange. In addition, the Fund may restrict or
terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25. Such a systematic withdrawal plan
may also be maintained by an
41
<PAGE> 108
investor purchasing shares for a retirement plan established on a form made
available by the Fund. See "Shareholder Services -- Retirement Plans."
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY CHECK
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A shares. Any
gain or loss realized on the sale of Class A shares is a taxable event. See
"Redemption of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not
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liquidate the entire account by means of a check. The check writing privilege
may be terminated or suspended at any time by the Fund or State Street Bank.
Retirement Plans and accounts that are subject to backup withholding are not
eligible for the privilege. A "stop payment" system is not available on these
checks. See the Statement of Additional Information for further information
regarding the establishment of the privilege.
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REDEMPTION OF SHARES
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REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized dealer.
Orders received from dealers must be at least $500 unless transmitted via the
FUNDSERV network. The redemption price for such shares is the net asset value
next calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain
redemptions of Class A shares made within one year of purchase for investments
of $1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for the distribution-related expenses. See
"Purchase of Shares." A custodian of a retirement plan account may charge fees
based on the custodian's fee schedule.
The request for redemption must be signed by persons in whose names the shares
are registered. Signatures must conform exactly to the account registration. If
the proceeds of the redemption would exceed $50,000, or if the proceeds are not
to be paid to the record owner at the record address, or if the record address
has changed within the previous 30 days, signature(s) must be guaranteed by one
of the following: a bank or trust company; a broker-dealer; a credit union; a
national securities exchange, registered securities association or clearing
agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it does so if a special request is made to
ACCESS. In the case of shareholders holding certificates, the certificates for
the shares being
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<PAGE> 110
redeemed must accompany the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. IRA
redemption requests should be sent to the IRA custodian to be forwarded to the
shareholder service agent. Where Van Kampen American Capital Trust Company
serves as IRA custodian, special IRA, 403(b)(7), or Keogh distribution forms
must be obtained from and be forwarded to Van Kampen American Capital Trust
Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian for
information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payments may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum investment as specified by the
Trustees. At least 60 days advance written notice of any such involuntary
redemption is required and the shareholder is given an opportunity to purchase
the required value of additional shares at the next determined net asset value
without sales charge. Any applicable contingent deferred sales charge will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application form
accompanying this Prospectus or call the Fund at (800) 421-5666 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. VKAC and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures requiring certain personal identification information prior to
acting upon telephone
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<PAGE> 111
instructions, tape recording telephone communications, and providing written
confirmation of instructions communicated by telephone. If reasonable procedures
are employed, neither VKAC nor the Fund will be liable for following
instructions which it reasonably believes to be genuine. VKAC and the Fund may
be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's regular redemption procedure previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If an account has multiple owners, ACCESS
may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual retirement account (IRA) for which Van Kampen American Capital
Trust Company acts as custodian. To establish such privilege, a shareholder must
complete the appropriate section of the application form accompanying this
Prospectus or call the Fund at (800) 421-5666. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B and Class C shares.
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<PAGE> 112
In cases of disability, the contingent deferred sales charges on Class B and
Class C shares will be waived where the disabled person is either an individual
shareholder or owns the shares as a joint tenant with right of survivorship or
is the beneficial owner of a custodial or fiduciary account, and where the
redemption is made within one year of the initial determination of disability.
This waiver of the contingent deferred sales charge on Class B and Class C
shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by Van
Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.
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DISTRIBUTION PLANS
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Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Trustees of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
limit the annual distribution charges that a mutual fund may impose on a class
of shares. The NASD Rules also limit the aggregate amount which the Fund may pay
for such distribution costs. Under the Class A Plan the Fund pays a service fee
to the Distributor at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Under the Class B
Plan and the Class C Plan, the Fund pays a service fee to the Distributor at an
annual rate of up to 0.25% and a distribution fee at an annual rate of up to
0.75% of the Fund's aggregate average daily net assets attributable to the Class
B or Class C shares to
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<PAGE> 113
reimburse the Distributor for service fees paid by it to Service Organizations
and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to three
percent of the purchase price for Class B shares purchased by the clients of
broker/dealers and other Service Organizations and (ii) other distribution
expenses as described in the Statement of Additional Information. Under the
Class C Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class C shares as reimbursement for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.25% of the average daily net
assets of the Fund's Class C shares and (ii) other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
Plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plans. In their review of the Distribution
Plans, the Trustees are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-end
sales load and at the same time permit the Distributor to compensate Service
Organizations with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect to the Class A
shares of the Fund in that in both cases such charges provide for the financing
of the distribution of the Fund's shares.
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<PAGE> 114
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward and may
be reimbursed by the Fund or its shareholders from payments received through
contingent deferred sales charges in future years and from payments under the
Class B Plan and Class C Plan so long as such Plans are in effect. For example,
if in a fiscal year the Distributor incurred distribution expenses under the
Class C Plan of $1 million, of which $500,000 was recovered in the form of
contingent deferred sales charges paid by investors and $400,000 was reimbursed
in the form of payments made by the Fund to the Distributor under the Class C
Plan, the balance of $100,000 would be subject to recovery in future fiscal
years from such sources. For the plan year ended June 30, 1994, the unreimbursed
expenses incurred by the Distributor and carried forward were approximately $1.3
million or 5.7% of average daily net assets of the class under the Class B Plan
and $155,000 or 1.7% of average daily net assets of the class under the Class C
Plan.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
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DISTRIBUTIONS FROM THE FUND
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DIVIDENDS AND DISTRIBUTIONS. Income dividends are paid each business day, and
distributed monthly. The daily dividend is a fixed amount determined at least
monthly which is expected not to exceed the net income of the Fund for the month
divided by the number of business days in the month. Shares (other than shares
acquired through an exchange) become entitled to dividends on the day ACCESS
receives payment for the shares, and remain entitled to dividends through the
day such shares are processed for payment on redemption. With respect to shares
acquired through an exchange, such shares become entitled to dividends on the
day after ACCESS receives payment for the shares, and remain entitled to
dividends through the day such shares are processed for payment on redemption.
Therefore, if a dealer delays forwarding to ACCESS payment for shares which an
investor has made to the dealer, this will in effect cost the investor money
because it will delay the date upon which he becomes entitled to dividends.
Unless the shareholder instructs otherwise, dividends and capital gains
distributions are automatically applied to purchase additional shares of the
Fund at the next determined net asset value. See "Shareholder
Services -- Reinvestment Plan."
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<PAGE> 115
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
higher incremental transfer agency fees applicable to such classes of shares.
Any taxable net realized short-term or long-term capital gains will be
distributed to shareholders at least annually. Since the capital loss carry
forward and unrealized depreciation of securities totaled about $2.96 per share
at December 31, 1994, no capital gain distributions are presently anticipated.
In computing interest income the Fund does not amortize premiums paid on the
purchase of debt securities. Thus in the case of mortgage-related and other U.S.
Government securities purchased at a premium, interest income is greater than it
would be if the premiums were amortized.
Dividends and distributions paid by the Fund 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 of record shortly after the purchase of
shares by an investor represents, in substance, a return of capital to the
investor even though subject to income taxes as discussed below.
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TAX STATUS
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The Fund has qualified and intends to continue to qualify as a regulated
investment company under the Code. By qualifying as a regulated investment
company, the Fund is not subject to federal income taxes to the extent it
distributes its net investment income and net realized capital gains.
Shareholders not subject to tax on their income will not, however, be required
to pay tax on amounts distributed to them. However, shareholders normally are
subject to federal income tax, and any applicable state or local income taxes,
on the dividends and distributions received from the Fund.
There are differences between federal income tax regulations and the generally
accepted accounting principles adopted by the Fund. For example, year-end
marking to market on certain options and futures contracts generally are
recognized for tax purposes but not for accounting purposes and certain
adjustments are made for tax purposes for repayments on mortgage-related
securities. Since dividends and distributions may, from time to time, be paid by
the Fund based on earnings recognized for accounting purposes, a portion of such
dividends and distributions may constitute a return of capital for federal
income tax purposes. If the amount of distributions paid by the Fund for any
fiscal year exceeds its investment company taxable income plus net realized
capital gains for the year, the excess is treated as a return of capital. Each
distribution paid for that year would be treated, in the same proportion, in
part as a distribution of taxable income and in part as a return of capital.
Shareholders are not subject to a current federal income tax on the part
49
<PAGE> 116
which is treated as a return of capital, but their basis in Fund shares would be
reduced by that amount. This reduction of basis would operate to increase
capital gain (or decrease capital loss) upon subsequent sale or redemption of
shares.
Current federal tax law requires that a holder, such as the Fund, of a
stripped security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. As an investment company, the Fund must
pay out substantially all of its net investment income each year. Accordingly,
the Fund may be required to pay out as an income distribution each year an
amount which is greater than the total amount of cash interest the Fund actually
received. Such distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Adviser will select
which securities to sell. The Fund may realize a gain or loss from such sales.
In the event the Fund realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
Shareholders are notified annually of the federal tax status of dividends and
any capital gains distributions. Long-term capital gains distributions
constitute long-term capital gains for federal income tax purposes.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked to market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the Fund
from writing over-the-counter options constitute short-term capital gains or
losses, unless the option is exercised, in which case the character of the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent the Fund has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents and
U.S. corporations. Investors should consult their tax advisers for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or
50
<PAGE> 117
citizenship tax consequences of receipt of dividends and distributions from the
Fund.
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FUND PERFORMANCE
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From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five years and for the life of the Fund. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 3.25%); that all income dividends or
capital gains distributions during the period are reinvested in Fund shares at
net asset value; and that any applicable contingent deferred sales charge has
been paid. The Fund's total return will vary depending on market conditions, the
securities comprising the Fund's portfolio, the Fund's operating expenses and
unrealized net capital gains or losses during the period. Since Class A shares
of the Fund were offered at a maximum sales charge at four percent prior to May
10, 1993, and 2.25% from such date to April 28, 1995, actual Fund total return
would fluctuate during those periods, being somewhat less when higher sales
charges were in effect. Total return is based on historical earnings and asset
value fluctuations and is not intended to indicate future performance. No
adjustments are made to reflect any income taxes payable by shareholders on
dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, the Fund 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
Fund'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.
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
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<PAGE> 118
net income reported by the Fund in accordance with generally accepted accounting
principles and from net income computed for federal income tax reporting
purposes. Thus the yield computed for a period may be greater or less than the
Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
To increase the yield of the Fund, the Adviser, may from time to time, limit
its management fee. A yield quotation which reflects an expense reimbursement or
subsidization by the Adviser will be higher than a yield quotation without such
expense reimbursement or subsidization. The Adviser may stop limiting its
management fees at any time without prior notice.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
3.25% and Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. It differs from yield, which is a measure of the income
actually earned by the Fund's investments, and from total return, which is a
measure of the income actually earned by, plus the effect of any realized and
unrealized appreciation or depreciation of, such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Fund's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Fund. Distribution rates will be
computed separately for each class of the Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, the Dow Jones
Industrial Average
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<PAGE> 119
Index, Standard & Poor's, NASDAQ, other appropriate indices of investment
securities, or with investment or savings vehicles. The performance information
may also include evaluations of the Fund published by nationally recognized
ranking services and by financial publications that are nationally recognized,
such as Business Week, Forbes, Fortune, Institutional Investor, Investor's
Business Daily, Kiplinger's Personal Finance Magazine, Money, Mutual Fund
Forecaster, Stanger's Investment Adviser, U.S. News and World Report, USA Today
and The Wall Street Journal. Such comparative performance information will be
stated in the same terms in which the comparative data or indices are stated.
Such advertisements and sales material may also include a yield quotation as of
a current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for Class A, Class B and
Class C shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover of this
Prospectus.
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DESCRIPTION OF SHARES OF THE FUND
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The Fund was originally organized on September 9, 1985, under the laws of the
Commonwealth of Massachusetts as a business entity commonly known as a
"Massachusetts business trust" and reorganized on July 31, 1995, under the laws
of the State of Delaware as a business entity commonly known as a "Delaware
business trust." It is authorized to issue an unlimited number of Class A, Class
B and Class C shares of beneficial interest of $0.01 par value. Other classes of
shares may be established from time to time in accordance with provisions of the
Fund's Declaration of Trust. Shares issued by the Fund are fully paid,
non-assessable and have no preemptive or conversion rights.
The Fund currently offers three classes, designated Class A Shares, Class B
Shares and Class C Shares. Each class of shares represents an interest in the
same assets of the Fund and generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. See "Distribution Plans."
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<PAGE> 120
The Fund is permitted to issue an unlimited number of classes. Each class of
share is equal as to earnings, assets and voting privileges, except as noted
above, and each class bears the expenses related to the distribution of its
shares. There are no conversion, preemptive or other subscription rights, except
with respect to the conversion of Class B Shares and Class C Shares into Class A
Shares as described above. In the event of liquidation, each of the shares of
the Fund is entitled to its portion of all of the Fund's net assets after all
debt and expenses of the Fund have been paid. Since Class B Shares and Class C
Shares pay higher distribution expenses, the liquidation proceeds to Class B
Shareholders and Class C Shareholders are likely to be lower than to other
shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
------------------------------------------------------------------------------
ADDITIONAL INFORMATION
------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
An investment in the Fund may not be appropriate for all investors.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund.
An investment in the Fund is intended to be a long-term investment, and should
not be used as a trading vehicle.
54
<PAGE> 121
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424
VAN KAMPEN AMERICAN CAPITAL
LIMITED MATURITY GOVERNMENT FUND
------------------
2800 Post Oak Blvd.
Houston, TX 77056
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
Houston, TX 77056
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds
Legal Counsel
O'MELVENY & MYERS
400 South Hope Street
Los Angeles, CA 90071
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana, Suite 2900
Houston, TX 77002
<PAGE> 122
LIMITED MATURITY GOVERNMENT FUND
------------------------------------------------------------------------------
P R O S P E C T U S
AUGUST 7, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 123
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE
U.S. GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE
U.S. GOVERNMENT FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL
LIMITED MATURITY GOVERNMENT FUND
------------------------------
DATED AUGUST 7, 1995
------------------------------
This Statement of Additional Information provides information about the Van
Kampen American Capital Limited Maturity Government Fund ("AC Fund") an open-end
management investment company, in addition to information contained in the Proxy
Statement/Prospectus of the AC Fund, dated August 7, 1995, which also serves as
the Proxy Statement of the Van Kampen American Capital Trust and its series, the
Van Kampen American Capital Adjustable Rate U.S. Government Fund (the "VK Fund")
in connection with the issuance of Class A, B and C Shares of the AC Fund series
to shareholders of the VK Fund. This Statement of Additional Information is not
a prospectus. It should be read in conjunction with the Proxy
Statement/Prospectus, into which it has been incorporated by reference and which
may be obtained by contacting the AC Fund located at 2800 Post Oak Boulevard,
Houston, TX 77056, telephone no. (713) 993-0500 or (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the VK Fund.................................. 2
Additional Information About the AC Fund................................ 2
Additional Information About the VK Fund................................ 2
Financial Statements.................................................... 2
Pro Forma Financial Statements.......................................... 2
</TABLE>
The AC Fund will provide, without charge, upon the written or oral request
of any person to whom this Statement of Additional Information is delivered, a
copy of any and all documents that have been incorporated by reference in the
registration statement of which this Statement of Additional Information is a
part.
1
<PAGE> 124
PROPOSED REORGANIZATION OF THE VK FUND
The shareholders of the VK Fund are being asked to approve an acquisition
of all the assets and liabilities of the VK Fund in exchange for Class A, B and
C Shares of the AC Fund (the "Reorganization").
For detailed information about the Reorganization, shareholders should
refer to the Proxy Statement/Prospectus.
ADDITIONAL INFORMATION ABOUT THE AC FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the AC Fund, dated August 7, 1995, attached as
Appendix A to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE VK FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VK Fund, dated August 1, 1995, attached as
Appendix B to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the AC Fund for fiscal year ended December 31,
1994, attached as Appendix C to this Statement of Additional Information, (ii)
the audited financial statements of the VK Fund for fiscal year ended June 30,
1994, attached as Appendix D to this Statement of Additional Information and
(iii) the unaudited semi-annual financial statements of the VK Fund for the six
months ended December 31, 1994, attached as Appendix E to this Statement of
Additional Information.
The unaudited semi-annual financial statements of the VK Fund reflect all
adjustments which are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature.
PRO FORMA FINANCIAL STATEMENTS
Set forth below are unaudited pro forma financial statements of the AC Fund
giving effect to the Reorganization which include (i) Pro Forma Condensed
Statement of Assets and Liabilities at December 31, 1994; (ii) Pro Forma
Condensed Statement of Operations for the twelve months ended December 31, 1994;
and (iii) Pro Forma Portfolio of Investments at December 31, 1994.
2
<PAGE> 125
VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST AND
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
AC VK
FUND FUND PRO FORMA
----------- ----------- ------------
<S> <C> <C> <C>
Investments at market value (Cost $73,543,751,
$34,613,565 and $108,157,316, respectively)...... $72,637,521 $33,195,172 $105,832,693
Other Assets and Liabilities (Net)................. (7,204,502) 173,538 (7,030,964)
----------- ----------- ------------
Net Assets......................................... $65,433,019 $33,368,710 $ 98,801,729
=========== =========== ============
NET ASSETS WERE COMPRISED OF:
Capital............................................ $82,675,171 $35,473,115 $118,148,286
Accumulated net realized loss on securities........ (16,372,918) (715,827) (17,088,745)
Net unrealized depreciation of securities.......... (918,740) (1,418,393) (2,337,133)
Undistributed net investment income................ 49,506 29,815 79,321
----------- ----------- ------------
Net Assets......................................... $65,433,019 $33,368,710 $ 98,801,729
=========== =========== ============
Class A:
Net asset value and redemption price per share... $11.90 $9.18 $11.90
Maximum sales charge (2.25%, 3.00% and 2.25% of
offering price, respectively)................. 0.27 0.28 0.27
----------- ----------- ------------
Maximum offering price to public................. $12.17 $9.46 $12.17
=========== =========== ============
Class B:
Net asset value and offering price per share..... $11.91 $9.19 $11.91
=========== =========== ============
Class C:
Net asset value and offering price per share..... $11.90 $9.18 $11.90
=========== =========== ============
Shares of Beneficial Interest
Class A............................................ 3,465,620 710,220 4,013,933
Class B............................................ 1,541,528 2,492,656 3,464,683
Class C............................................ 491,408 429,040 822,614
</TABLE>
---------------
(1) The pro forma statements are presented as if the Reorganization was
effective December 31, 1994. The pro forma statements give effect to the
proposed exchange of stock for assets with the AC Fund being the surviving
entity. The proposed transaction will be accounted for in accordance with
generally accepted accounting principles as a tax-free Reorganization. The
historical cost basis of the investments is carried over to the surviving
entity.
(2) The pro forma statement presumes the issuance by the AC Fund of 548,313
Class A shares, 1,923,155 Class B shares, and 331,206 Class C shares in
exchange for the assets and liabilities of the VK Fund.
(3) In connection with this transaction, the combined Fund immediately after the
Reorganization will incur a non-recurring cost associated with the merger
of approximately $104,000 or $0.013 per share.
3
<PAGE> 126
VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
AC FUND VK FUND ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME....................... $ 4,960,588 $ 2,005,841 $ 0 $ 6,966,429
----------- ----------- ----------- -----------
EXPENSES
Management fees......................... 420,713 218,455 (38,668)(1) 600,500
Service fees -- Class A................. 132,613 19,626 (3,239)(2) 149,000
Distribution and service
fees -- Class B....................... 222,471 250,293 472,764
Distribution and service
fees -- Class C....................... 76,165 38,054 114,219
Other expenses.......................... 479,852 262,623 (132,617)(3) 609,858
----------- ----------- ---------- -----------
Total expenses........................ 1,331,814 789,051 (174,524) 1,946,341
Less fees deferred and expenses
reimbursed......................... (140,000) (406,965) 546,965 (4) 0
----------- ----------- ---------- -----------
Net Expenses.......................... 1,191,814 382,086 372,441 1,946,341
----------- ----------- ---------- -----------
Net investment income................. $ 3,768,774 $ 1,623,755 $ (372,441) $ 5,020,088
=========== =========== ========== ===========
REALIZED AND UNREALIZED LOSS ON
SECURITIES
Net realized loss on securities......... $(2,511,545) $ (617,736) $ 0 $(3,129,281)
Net unrealized depreciation during the
year.................................. (1,405,244) (1,219,958) 0 (2,625,202)
----------- ----------- ---------- -----------
Net realized and unrealized loss on
securities......................... (3,916,789) (1,837,694) 0 (5,754,483)
----------- ----------- ---------- -----------
Net Decrease in net assets resulting
from operations.................... $ (148,015) $ (213,939) $ (372,441) $ (734,395)
=========== =========== ========== ===========
Average net assets (millions) -- Class A $ 54.3 $ 7.5 $ 61.8
Class B 22.2 24.8 47.0
Class C 7.6 3.7 11.3
----------- ----------- -----------
$ 84.1 $ 36.0 $ 120.1
</TABLE>
---------------
(1) Reflects the results of a breakpoint differential in the advisory fee
schedule in effect for the AC Fund.
(2) In connection with this transaction, the Class A Shares Distribution and
Service Plan of the VK Fund will be reduced from a maximum of .30% of
average net assets to .25%.
(3) Reflects the reduction of other operating expenses as a result of the
elimination of certain duplicative expenses and the results of operating a
larger, more efficient Fund rather than two smaller Funds.
(4) It is anticipated that, subsequent to this transaction, there will be no
waiver of management fees or assumption of other expenses by the investment
adviser.
4
<PAGE> 127
VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
PRO FORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT DESCRIPTION VALUE
---------- ------------------------------------------------------------------------------- -----------
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES 46.73%
Federal Home Loan Mortgage Corp.
$ 247,899 5.38% Pool, 11/1/17............................................................ $ 250,225
3,754,317 5.47% Pool, 7/1/24............................................................. 3,702,095
1,723,000 5.635% Pool, 3/1/18............................................................ 1,703,658
1,266,000 6.095% Pool 10/1/23............................................................ 1,239,309
3,884,792 6.11% Pool, 6/1/24............................................................. 3,873,876
1,316,779 6.13% Pool, 8/1/20............................................................. 1,318,425
275,279 6.14% Pool, 5/1/19............................................................. 272,441
348,447 6.28% Pool, 3/1/16............................................................. 345,071
2,834,000 6.522% Pool, 8/1/20............................................................ 2,854,220
882,000 6.625% Pool, 7/1/14............................................................ 871,541
872,000 7.29% Pool, 7/1/22............................................................. 878,405
310,407 7.50% Pool, 9/1/18............................................................. 307,399
194,402 8.35% Pool, 2/1/18............................................................. 191,183
Federal National Mortgage Association
1,789,000 4.371% Pool, 1/1/24............................................................ 1,777,357
1,833,000 5.124% Pool, 2/1/21............................................................ 1,779,585
614,000 5.19% Pool, 11/1/26............................................................ 593,819
490,000 5.289% Pool, 3/1/29............................................................ 474,098
933,709 5.38% Pool, 2/1/15............................................................. 910,366
499,130 5.84% Pool, 10/1/19............................................................ 443,516
2,021,664 6.86% Pool, 12/1/24............................................................ 1,980,604
1,606,000 8.896% Pool, 10/1/23........................................................... 1,581,831
3,500,000 6.25% Pool, 1/1/25............................................................. 3,456,250
1,642,000 6.347% Pool, 3/1/19............................................................ 1,629,226
934,491 6.47% Pool, 8/1/19............................................................. 941,500
3,825,693 6.64% Pool, 9/1/19............................................................. 3,838,853
899,000 6.741% Pool, 3/1/19............................................................ 906,915
1,742,000 6.809% Pool, 1/1/16............................................................ 1,762,037
2,345,000 7.013% Pool, 11/1/18........................................................... 2,347,593
2,229,000 7.161% Pool, 10/1/22........................................................... 2,234,043
Government National Mortgage Association
1,753,000 6.75% Pool, 6/20/23............................................................ 1,704,097
-----------
46,169,538
-----------
COLLATERALIZED MORTGAGE OBLIGATIONS 30.80%
Federal Home Loan Mortgage Corp.
2,531,962 5.00%, 6/15/99 (PAC)........................................................... 2,486,082
3,911,926 5.88%, 4/15/20................................................................. 3,892,366
2,897,537 6.18%, 2/15/16................................................................. 2,897,537
5,000,000 6.50%, 8/15/97 (PAC)........................................................... 4,932,050
Federal National Mortgage Association
3,237,300 4.75%, 1/25/05 (PAC)........................................................... 3,160,414
3,136,000 5.50%, 3/25/03 (PAC)........................................................... 2,909,612
940,233 6.05%, 2/25/16................................................................. 935,532
848,015 6.08%, 3/25/22................................................................. 839,798
7,684,628 6.33%, 6/25/18 to 2/25/21...................................................... 7,665,878
737,092 6.75%, 8/25/20................................................................. 712,215
-----------
30,431,484
-----------
</TABLE>
5
<PAGE> 128
VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
PRO FORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION MARKET VALUE
---------- -------------------------------------------------------------------- ------------
<S> <C> <C>
FIXED RATE MORTGAGE BACKED SECURITIES 4.50%
Federal National Mortgage Association
$ 909,615 9.50% Pools, 7/1/11 to 8/1/21....................................... $ 934,630
780,884 10.00% Pool, 5/1/21................................................. 819,194
Government National Mortgage Association
220,366 8.50% Pools, 12/15/16 to 1/15/17.................................... 216,441
514,313 9.50% Pools, 3/15/16 to 1/15/19..................................... 530,710
956,921 10.00% Pools, 4/15/16 to 4/15/19.................................... 1,005,963
494,314 10.50% Pools, 5/15/13 to 2/15/18.................................... 527,833
381,751 11.00% Pool, 11/15/18............................................... 413,363
------------
4,448,134
------------
UNITED STATES TREASURY OBLIGATIONS 7.20%
United States Treasury Notes
3,500,000 7.50%, 12/31/96..................................................... 3,487,435
3,500,000 8.875%, 2/15/99..................................................... 3,621,415
------------
7,108,850
------------
ASSET BACKED SECURITIES 8.40%
4,000,000 ITT, 5.58%, 2/15/01................................................. 3,998,760
3,447,388 Premier Auto. 4.95%, 2/2/99......................................... 3,323,489
955,000 Nomura Asset Securities Corporation 7.265%, 7/7/03.................. 978,875
------------
8,301,124
------------
MORTGAGE BACKED SECURITIES 3.87%
793,000 AFC Mortgage #93-4B2A1, 6.936%, 12/25/23............................ 793,905
954,000 Citicorp Mortgage Securities Inc. #94-11A2, 6.25%, 8/25/24.......... 911,300
1,808,000 DLJ Mortgage Acceptance Corporation #94-Q1, 4.883%, 3/25/24......... 1,743,292
6,808,000 Salomon Brothers Mortgage Securities VII Inc. -- Interest Only
2.283%, 2/25/24..................................................... 370,180
------------
3,818,677
------------
CORPORATE SECURITIES 1.37%
1,200,000 Greenwich Capital Acceptance Inc. 6.594%, 7/25/22................... 1,171,500
4,300,000 Greenwich Capital Acceptance Inc. -- Interest Only, 2.514%
10/25/22............................................................ 180,623
------------
1,352,123
------------
SHORT-TERM INVESTMENTS AT AMORTIZED COST 4.25%
1,000,000 Mexican Tesobonos 7.07%, 1/12/95.................................... 997,763
1,770,000 Repurchase Agreement, J.P. Morgan Securities, U.S. T-Notes, dated
12/30/94, 3.875%, due 9/30/95 to be sold on 1/3/95 at $1,710,998.... 1,710,000
</TABLE>
6
<PAGE> 129
VAN KAMPEN AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
PRO FORMA PORTFOLIO OF INVESTMENTS--CONTINUED
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION MARKET VALUE
---------- -------------------------------------------------------------------- ------------
<S> <C> <C>
$1,495,000 Repurchase Agreement, Salomon Brothers, Inc. dated 12/30/94, 5.75%,
due 1/3/95 repurchase proceeds $1,495,955........................... $ 1,495,000
------------
4,202,763
------------
Total Investments 107.12%........................................... 105,832,693
Other Assets and Securities, net (7.12)%............................ (7,030,964)
------------
NET ASSETS 100.00%.................................................. $ 98,801,729
============
</TABLE>
7
<PAGE> 130
APPENDIX A
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL
LIMITED MATURITY GOVERNMENT FUND
AUGUST 7, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 7,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL INFORMATION.................................................................. A-2
INVESTMENT OBJECTIVE AND POLICIES.................................................... A-3
INVESTMENT RESTRICTIONS.............................................................. A-14
TRUSTEES AND EXECUTIVE OFFICERS...................................................... A-16
INVESTMENT ADVISORY AGREEMENT........................................................ A-21
DISTRIBUTOR.......................................................................... A-22
DISTRIBUTION PLANS................................................................... A-22
TRANSFER AGENT....................................................................... A-24
PORTFOLIO TURNOVER................................................................... A-24
PORTFOLIO TRANSACTIONS AND BROKERAGE................................................. A-25
DETERMINATION OF NET ASSET VALUE..................................................... A-26
PURCHASE AND REDEMPTION OF SHARES.................................................... A-27
EXCHANGE PRIVILEGE................................................................... A-31
CHECK WRITING PRIVILEGE.............................................................. A-32
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES........................................... A-32
FUND PERFORMANCE..................................................................... A-35
OTHER INFORMATION.................................................................... A-36
FINANCIAL STATEMENTS................................................................. A-36
</TABLE>
A-1
<PAGE> 131
GENERAL INFORMATION
Van Kampen American Capital Limited Maturity Government Fund (the "Fund")
was originally organized as a trust under the laws of Massachusetts on September
9, 1985 and reorganized as a trust under the laws of Delaware July 31, 1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC's roots in money
management extend back to 1926. Today, VKAC manages or supervises more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations.
As of July 10, 1995, no person was known to hold of record or beneficially
five percent or more of the outstanding Class A, Class B or Class C shares of
the Fund except the following:
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS CLASS OF AMOUNT OF RECORD OF
OF HOLDER SHARES OWNERSHIP OWNERSHIP
------------------------------------------------- -------- ---------------- ------------
<S> <C> <C> <C>
Smith Barney Inc. Class C 44,392 10.85%
11th Floor
388 Greenwich Street
New York, NY 10013-2375
First Union Brokerage Class B 154,829 12.91%
Services, Inc.
5th Floor
301 S. College St.
Charlotte, NC 28202-6000
National Financial Services, Inc. Class B 102,286 8.21%
200 Liberty One World Financial Center Class C 32,515 7.94%
New York, NY 10281-1003
</TABLE>
A-2
<PAGE> 132
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS CLASS OF AMOUNT OF RECORD OF
OF HOLDER SHARES OWNERSHIP OWNERSHIP
------------------------------------------------- -------- ---------------- ------------
<S> <C> <C> <C>
(1)Bear Stearns & Co. Inc. Class C 119,484 29.19%
One Metrotech Center North
Brooklyn, NY 11201-3872
Donaldson Lufkin Class B 64,865 5.41%
1 Pershing Plaza, 5th Floor
Jersey City, NJ 07399-0001
Van Kampen American Capital Trust Company Class A 586,452 17.20%
2800 Post Oak Blvd.
Houston, TX 77056 Class B 144,545 12.05%
(2)Amalgamated Bank of NY Cust.
NY Hotel Trades Council Pension Fund
Amivest Discretionary Investment Manager Class A 196,078 5.75%
P.O. Box 0370
New York, NY 10276-0370
(3)Prudential Securities Fund
Blackwell North America, Inc. Class C 51,222 12.51%
6024 Jean Rd, Ste B
Lake Oswego, OR 97035-5396
</TABLE>
---------------
(1) Represents the aggregate of a number of accounts held of record by Bear
Stearns & Co. Inc. Certain individual accounts also represent the beneficial
ownership of over five percent of the outstanding shares of the class.
(2) Such shares could also be deemed to be beneficially owned by the NY Hotel
Trades Counsel Pension Fund and its investment adviser, Amivest Corporation,
a Delaware corporation, 767 5th Avenue, 50th Floor, New York, New York
10153.
(3) Such shares could also be deemed to be beneficially owned by Blackwell North
America, Inc.
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
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 discussed.
One type of mortgage-related securities in which the Fund invests are those
which are issued or guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. One such type
of mortgage-related security is a Government National Mortgage Association
("GNMA") Certificate. GNMA Certificates are backed as to principal and interest
by the full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association ("FNMA") Certificate. Principal and interest
payments of FNMA Certificates are guaranteed only by FNMA itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-related
security in which the Fund may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is backed
by 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.
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The Fund will seek to obtain return from the following sources:
- interest paid on the Fund's portfolio securities;
- premiums received from expired call and put options;
- net profits from closing transactions; and
- net gains from the sale of portfolio securities on the exercise of
options or otherwise.
The Fund is not designed for investors seeking capital appreciation.
Moreover, varying economic and market conditions may affect the value of and
yields on mortgage-related securities and opportunities for gains from an option
writing program. Accordingly, there is no assurance that the Fund's investment
objective will be achieved.
GNMA Certificates
Government National Mortgage Association. The Government National Mortgage
Association is a wholly-owned corporate instrumentality of the United States
within the U.S. Department of Housing and Urban Development. GNMA's principal
programs involve its guarantees of privately issued securities backed by pools
of mortgages.
Nature of GNMA Certificates. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Fund purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or not
the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan rather
than in a lump sum at maturity. Principal payments received by the Fund will be
reinvested in additional GNMA Certificates or in other permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by the Federal Housing Administration ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administration ("VA"). The
GNMA guarantee is backed by the full faith and credit of the United States. GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee.
Life of GNMA Certificates. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will result in the return of a portion of principal invested before
the maturity of the mortgages in the pool.
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.
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Yield Characteristics of GNMA Certificates. The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the GNMA Certificate issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent for assembling the mortgage pool and for passing through
monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than at
par.
2. After issuance, Certificates usually trade in the secondary market at a
premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate.
If mortgagors prepay their mortgages, the principal returned to
Certificate holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly one-quarter of one
percent more than high grade corporate bonds and one-half of one percent more
than U.S. Government and U.S. Government agency bonds. As the life of individual
pools may vary widely, however, the actual yield earned on any issue of GNMA
Certificates may differ significantly from the yield estimated on the assumption
of a twelve-year life.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.
FNMA Securities
The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
FHLMC Securities
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): mortgage participation certificates
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("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA
Certificates in that each PC represents a pro rata share of all interest and
principal payments made and owned on the underlying pool. The FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages. However, these
instruments pay interest semi-annually 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 funds and other collateral. Scheduled
distributions on the mortgage-backed certificates pledged to secure the
collateralized mortgage obligations, together with certain funds 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 (e.g., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-backed certificates since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium or
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and are not insured or guaranteed
by GNMA, FHLMC, FNMA or any other governmental agency or instrumentality, or by
any other person or entity. The issuers of collateralized mortgage obligations
typically have no significant assets other than those pledged as collateral for
the obligations.
ASSET-BACKED SECURITIES
The Fund may invest a portion of its assets in asset-backed securities
rated at the time of purchase in the two highest grades by a
nationally-recognized rating agency. The rate of principal payment generally
depends on the rate of principal payments received on the underlying assets.
Such rate of payments may be affected by economic and various other factors.
Therefore, the yield may be difficult to predict and actual yield to maturity
may be more or less than the anticipated yield to maturity. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the
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security is insulated from the credit risk of the originator or affiliated
entities, and the amount of credit support provided to the securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligors on underlying assets to make payments, such securities may
contain elements of credit support. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
due on the underlying pool is timely. Protection against losses resulting from
ultimate default enhances the likelihood of payment of the obligations on at
least some of the assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring the transaction
or through a combination of such approaches. The Fund will not pay any
additional fees for such credit support, although the existence of credit
support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "over-collateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to broker-dealers and other financial institutions provided
that such loans are callable at any time by the Fund, and are at all times
secured by cash collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest on the loaned securities, while at
the same time earning interest on the collateral which will be invested in
short-term obligations. The Fund pays lending fees and custodial fees in
connection with loans of its securities. There is no assurance as to the extent
to which securities loans can be effected.
A loan may be terminated by the borrower on one business day's notice, or
by the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the consideration which can be
earned from such loans is believed to justify the attendant risks. The Fund
would not lend any portfolio securities to brokers affiliated with the Adviser.
On termination of the loan, the borrower is required to return the securities to
the Fund; any gain or loss in the market price during the loan would inure to
the Fund.
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When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, whole or in part
as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (e.g., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940 as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities marked to market daily at not less than the repurchase
price. The underlying securities (securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See "Investment
Practices -- Repurchase Agreements" in the Prospectus for further information.
FORWARD COMMITMENTS
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase continues. Since the
market value of both the securities subject to the Forward Commitment and the
securities held in the segregated account may fluctuate, the use of Forward
Commitments may magnify the impact of interest rate changes on the Fund's net
asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against or decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash or U.S. Government securities
(which may have maturities which are longer than the term of the Forward
Commitment) with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to sell continues. By entering into
a Forward Commitment sale transaction, the Fund forgoes or reduces the potential
for both gain and loss in the security which is being hedged by the Forward
Commitment sale.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis and will usually enter into
interest rate swaps on a net basis, e.g., the two payment streams are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or high-quality liquid debt
securities
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having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Fund enters
into an interest rate swap on other than a net basis, the Fund would maintain a
segregated account in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap. Interest rate transactions do not
constitute senior securities under the 1940 Act when the Fund segregates assets
to cover the obligations under the transactions. The Fund will enter into
interest rate swap, cap or floor transactions only with counterparties approved
by the Trustees. The Adviser will monitor the creditworthiness of counterparties
to its interest rate swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction. To the extent the Fund sells (e.g., writes) caps, floors and
collars, it will maintain in a segregated account cash or high-quality liquid
debt securities having an aggregate net asset value at least equal to the full
amount, accrued on a daily basis, of the Fund's net obligations with respect to
the caps, floors or collars. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Adviser is incorrect in its forecasts of the market values, interest rates and
other applicable factors, the investment performance of the Fund would diminish
compared with what it would have been if these investment techniques were not
used. The use of interest rate swaps, caps, collars and floors may also have the
effect of shifting the recognition of income between current and future periods.
These transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
CALL AND PUT OPTIONS
Call and put options on various U.S. Treasury notes and U.S. Treasury bonds
are listed and traded on Exchanges, and are written in over-the-counter
transactions. Call and put options on mortgage-related securities are currently
written or purchased only in over-the-counter transactions.
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and interest income
yields on portfolio securities vary as economic and market conditions change.
Actively writing options on portfolio securities is likely to result in a
substantially higher portfolio turnover rate than that of most other investment
companies. Higher portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund.
Writing Options. The purchaser of a call option pays a premium to the
writer (e.g., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund writes call
options either on a covered basis, or for cross-hedging purposes. A call option
is covered if the Fund owns or has the right to acquire the underlying
securities subject to the call option at all times during the option period.
Thus the Fund may write options on forward commitments or on mortgage-related or
other
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U.S. Government securities. An option is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a security which the Fund
owns or has the right to acquire. In such circumstances, the Fund collateralized
the option by maintaining in a segregated account with the Fund's Custodian,
cash or U.S. Government securities in an amount not less than the market value
of the underlying security, marked to market daily, while the option is
outstanding.
The purchaser of a put option pays a premium to the writer (e.g., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or high grade debt securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out its position as a writer, but would provide an asset of equal value to
its obligation under the option written. If the Fund is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has written, it will be required to maintain the securities subject
to the call or the collateral securing the option 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, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (e.g., hedge) against
anticipated increases in the prices of securities it wishes to acquire. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the
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Fund would bear a significant risk of losing the entire premium if the price of
the underlying security did not rise sufficiently, or if it did not do so before
the option expired.
Conversely, put options could be purchased to protect (e.g., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. The Fund will not purchase call or put
options on securities if as a result, more than ten percent of its net assets
would be invested in premiums on such options.
The Fund may purchase either listed or over-the-counter options.
INTEREST RATE FUTURES CONTRACTS
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool."
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, or LIBOR.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with its Custodian in
an account in the brokers' name an amount of cash, cash equivalents or liquid
high-grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, will be made on a daily basis as the price of the underlying
security fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as marking to market.
For example, when the Fund has purchased a futures contract and the price
of the underlying security has risen, that position will have increased in
value, and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the value of the underlying security has declined, the
position would be less valuable, and the Fund would be required to make a
variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract would serve
as a temporary substitute for the purchase of individual securities, which may
be purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market
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or market sector decline that may adversely affect the market value of the
Fund's securities ("defensive hedge"). To the extent that the Fund's portfolio
of securities changes in value in correlation with the underlying security, the
sale of futures contracts would substantially reduce the risk to the Fund of a
market decline and, by so doing, provide an alternative to the liquidation of
securities positions in the Fund. Ordinarily commissions on futures transactions
are lower than transaction costs incurred in the purchase and sale of
mortgage-related and U.S. Government securities.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets 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 the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a
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futures position and, in the event of adverse price movement, the Fund would
continue to be required to make daily payments of variation margin. Since the
securities being hedged would not be sold until the related futures contract is
sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed five percent of the fair market value of the Fund's assets. In
order to minimize leverage in connection with the purchase of futures contracts
by the Fund, an amount of cash, cash equivalents or liquid high grade debt
securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as it could sell, a futures contract. The purchase of call
options on futures contracts would be 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 Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security, when the use of an
option on a future would result in a loss to the Fund when the use of a future
would not.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single
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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 limits. An Exchange may order the liquidation of positions found to
be in violation of these limits and it may impose other sanctions or
restrictions. These position limits may restrict the number of listed options
which the Fund may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, 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.
Certain additional risks relate to the fact that the Fund will purchase and
sell options on mortgage-related securities. Since the remaining principal
balance of mortgage-related securities declines each month as a result of
mortgage payments, if the Fund has written a call and is holding such securities
as "cover" to satisfy its delivery obligation in the event of exercise, it may
find that the securities it holds no longer have a sufficient remaining
principal balance for this purpose. Should this occur, the Fund would purchase
additional mortgage-related securities from the same pool (if obtainable) or
replacements in the cash market in order to maintain its cover. A
mortgage-related security held by the Fund 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 decrease in the coupon rate at which new pools are originated. If
this should occur, the option would no longer be covered, and the Fund would
either enter into a closing purchase transaction or replace the mortgage-related
security with one which represents cover. In either case, the Fund may realize
an unanticipated loss and incur additional transaction costs.
INVESTMENT RESTRICTIONS
The Fund's investment objective and the following restrictions may not be
changed without the approval of the holders of a majority of its outstanding
shares. Such majority is defined as the lesser of (i) 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy;
or (ii) more than 50% of the Fund's outstanding voting securities. The
percentage limitations need only be met at the time the investment is made or
other relevant action taken. In addition to the fundamental investment
limitations set forth in the Fund's Prospectus, the Fund shall not:
1. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition.
2. Make any investment in real estate, commodities or commodities
contracts, except that the Fund will invest in mortgage-related and
mortgage-backed securities and engage in transactions in futures
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contracts and related options, as described in the Prospectus and
elsewhere in this Statement of Additional Information.
3. Make any investment which would cause more than 25% of the market or
other fair value of its total assets to be invested in the securities of
issuers all of which conduct their principal business activities in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
4. Make loans of money or securities, except (a) by investment in
repurchase agreements in accordance with applicable requirements set
forth in the Fund's Prospectus or (b) by lending its portfolio
securities in amounts not to exceed ten percent of the Fund's total
assets, provided that such loans are secured by cash collateral that is
at least equal to the market value. See "Repurchase Agreements" and
"Lending of Securities" herein and "Investment Practices" in the
Prospectus.
5. Make short sales of securities, unless at the time of the sale the Fund
owns an equal amount of such securities. Notwithstanding the foregoing,
the Fund may make short sales by entering into forward commitments for
hedging or cross-hedging purpose and engage in transactions in options,
futures contracts and related options.
6. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. Transactions in forward commitments, options,
interest rate futures contracts and options on such contracts, including
deposits or payments of initial or maintenance margin in connection with
any such transaction, are not considered to be purchases of securities
on margin within the meaning of this limitation.
7. Invest in securities of any company if, to the knowledge of the Fund,
any of its officers or trustees, or any officer or director of the
Adviser, owns more than one-half of one percent of the outstanding
securities of such company, and such officers, trustees, and directors
who individually own more than such amount together own more than five
percent of the outstanding securities of such issuer.
8. Invest in interests in oil, gas, or other mineral exploration or
development programs.
9. Underwrite securities of other companies, except insofar as the Fund
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Fund.
10. With respect to 75% of its assets, invest more than five percent of its
assets in the securities of any one issuer (except obligations of the
U.S. Government, its agencies or instrumentalities) or purchase more
than ten percent of the outstanding voting securities of any one
issuer.
11. Borrow in excess of five percent of the market or other fair value of
its total assets, or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Deposits in
escrow in connection with the writing of covered or fully
collateralized call or secured put 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.
12. Purchase an illiquid security if, as a result of such purchase, more
than ten percent of the Fund's net assets would be invested in such
securities. Illiquid securities are securities subject to legal or
contractual restrictions on resale, which include repurchase agreements
maturing in more than seven days and any over-the-counter options or
other restricted securities purchased by the Fund.
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<PAGE> 145
13. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or
offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all
such options owned at the time do not exceed ten percent of its total
assets and (c) engage in transactions in interest rate futures
contracts and related options provided that such transactions are
entered into for bona fide hedging purposes (or that the underlying
commodity value of the Fund's long positions do not exceed the sum of
certain identified liquid investments as specified in CFTC
regulations), provided further that the aggregate initial margin and
premiums do not exceed five percent of the fair market value of the
Fund's total assets, and provided further that the Fund may not
purchase futures contracts or related options if more than 30% of the
Fund's total assets would be so invested.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and executive officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall, Suite 200 President of MDT Corporation, a company which develops,
1009 Slater Road manufactures, markets and services medical and scientific
Harrisville, NC 27560 equipment. A Trustee of each of the Van Kampen American
Age: 63 Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by Van Kampen American Capital
Investment Advisory Corp.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital Services
and Van Kampen American Capital Trust Company. Director,
Trustee or Managing General Partner of each of the Van
Kampen American Capital Funds and other open-end
investment companies and closed-end investment companies
advised by the Adviser and its affiliates.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital. A Director and the Second
Vice President of International Institute of Los Angeles.
A trustee of each of the Van Kampen American Capital
Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
</TABLE>
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<PAGE> 147
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A trustee of each of the Van Kampen American Capital
Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of its position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
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<PAGE> 148
The Fund's officers other than Messrs. McDonnell and Nyberg are located at
2800 Post Oak Blvd., Houston, TX 77056. Messrs. McDonnell and Nyberg are located
at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS DURING
NAME AND AGE OFFICES WITH FUND PAST 5 YEARS
--------------------- -------------------- --------------------------------------------------
<S> <C> <C>
Nori L. Gabert....... Vice President and Vice President, Associate General Counsel and
Age: 41 Secretary Corporate Secretary of the Adviser.
Tanya M. Loden....... Vice President and Vice President and Controller of most of the
Age: 35 Controller investment companies advised by the Adviser,
formerly Tax Manager/Assistant Controller.
Dennis J. President, Chief Operating Officer and a Director
McDonnell.......... Vice President of the Adviser and Director of VK/AC Holding, Inc.
Age: 53 and Van Kampen American Capital.
Curtis W. Morell..... Vice President and Vice President and Treasurer of most of the
Age: 49 Treasurer investment companies advised by the Adviser.
Ted Mundy............ Vice President Portfolio Manager of the Adviser, formerly,
Age: 35 Portfolio Manager, AMR Investment Services, Inc.
and Trader, Howard, Weil, Labouisse and
Friedrichs.
Ronald A. Nyberg..... Vice President Executive Vice President, General Counsel and
Age: 42 Secretary of Van Kampen American Capital.
Executive Vice President and a Director of the
Distributor. Executive Vice President of the
Adviser. Director of ICI Mutual Insurance Co., a
provider of insurance to members of the Investment
Company Institute.
Robert C. Peck,
Jr................. Vice President Senior Vice President and Director of the Adviser.
Age: 48
Alan T. Sachtleben... Vice President Executive Vice President and Director of the
Age: 53 Adviser; Executive Vice President of VK/AC
Holding, Inc. and Van Kampen American Capital.
J. David Wise........ Vice President and Vice President, Associate General Counsel and
Age: 51 Assistant Secretary Assistant Corporate Secretary of the Adviser.
Paul R. Wolkenberg... Vice President Senior Vice President of the Adviser. President,
Age: 50 Chief Operating Officer and Director of Van Kampen
American Capital Services, Inc. Executive Vice
President, Chief Operating Officer and Director of
Van Kampen American Capital Trust Company.
Executive Vice President and Director of ACCESS.
</TABLE>
The Trustees and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto, and Woodside served as
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<PAGE> 149
Trustees of the Fund during its last fiscal year. During the last fiscal year,
the Trustees who were not affiliated with the Adviser or its parent received as
a group $9,556 in trustees' fees from the Fund in addition to certain
out-of-pocket expenses. Such Trustees also received compensation for serving as
trustees or directors of other investment companies advised by the Adviser. For
legal services rendered during the fiscal year, the Fund paid legal fees of
$7,034 to the law firm of O'Melveny & Myers, of which Mr. Sheehan is Of Counsel.
The firm also serves as legal counsel to the American Capital Funds.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as directors or trustees is
set forth below. The compensation shown for the Fund and the total compensation
shown for the Fund and other related mutual funds are for the year ended
December 31, 1994, is set forth below. Mr. Powell is not compensated for his
service as Trustee because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM REGISTRANT
COMPENSATION BENEFITS ACCRUED AND FUND COMMENT
FROM AS PART OF FUND COMPLEX PAID TO
NAME OF PERSON REGISTRANT EXPENSES DIRECTORS(1)(5)
----------------------------------------------- ------------ ---------------- ----------------
<S> <C> <C> <C>
J. Miles Branagan.............................. $1,410 -0- $ 64,000
Dr. Richard E. Caruso(3)....................... 1,410(2) -0- 64,000
Dr. Roger Hilsman.............................. 1,460 -0- 66,000
David Rees(3).................................. 1,410 -0- 64,000
Lawrence J. Sheehan............................ 1,480 -0- 67,000
Dr. Fernando Sisto(3).......................... 1,820(2) -0- 82,000
William S. Woodside(4)......................... 340 -0- 18,000
</TABLE>
---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $1,370 for Dr. Caruso and $960 for
Dr. Sisto.
(3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Fund is as follows: Dr. Caruso,
$4,312; Mr. Rees, $5,378; and Dr. Sisto, $4,236.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, with respect to the second and fourth columns, $860
and $36,000, respectively, was paid by the Adviser directly.
(5) Includes the following amounts for which the various funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in footnote 4 above).
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $682 and a
meeting fee of $19 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate
any additional expense that might be caused by the new compensation arrangement,
the trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for
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<PAGE> 150
serving as a trustee of such funds). In addition, the Adviser has agreed to
reimburse the Fund through December 31, 1996 for any increase in the aggregate
trustees' compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate and
implement the Fund's investment programs.
The Adviser also furnishes the services of the Fund's President and such
other executive and clerical personnel as are necessary to prepare the various
reports and statements and conduct the Fund's day-to-day operations. The Fund,
however, bears the cost of its accounting services, which include maintaining
its financial books and records and calculating its net asset value. The costs
of such accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts were paid to the Adviser or its parent in reimbursement
of personnel, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services provided by the Adviser are at
cost. The Fund also pays shareholder service agency fees, distribution fees,
service fees, custodian fees, legal and auditing fees, the costs of reports to
shareholders, and all other ordinary business expenses not specifically assumed
by the Adviser. The Agreement also provides that the Adviser shall not be liable
to the Fund for any actions or omissions if it acted without bad faith,
negligence or reckless disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a fee
payable monthly, computed at the following annual rates: (a) 0.50% of the first
$1 billion of average daily net assets; (b) 0.475% of the next $1 billion of
average daily net assets; (c) 0.45% of the next $1 billion of average daily net
assets; (d) 0.40% of the next $1 billion of average daily net assets; and (e)
0.35% of the average daily net assets in excess of $4 billion.
The Fund's average net assets are determined by taking the average of all
determinations of the net assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser will 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
less any direct expenses incurred by such subsidiary of VK/AC Holding, Inc., in
connection with obtaining such commissions, fees, brokerage or similar payments.
The Adviser agrees to use its best efforts to recapture tender solicitation fees
and exchange offer fees for the Fund's benefit and to advise the Trustees of the
Fund of any other commissions, fees, brokerage or similar payments which may be
possible for the Adviser or any other direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. to receive in connection with the Fund's
portfolio transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed 1.5% of the first $30
million of the Fund's average net assets, plus one percent of any excess over
$30 million, the Adviser's monthly compensation will be reduced by the amount of
such excess and that, if the amount of such excess exceeds the Adviser's monthly
compensation, the Adviser will pay the Fund an amount sufficient to make up the
deficiency, subject to readjustment during the Fund's fiscal year.
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<PAGE> 151
Ordinary business expenses do not include (1) interest and taxes, (2) brokerage
commissions, (3) certain litigation and indemnification expenses as described in
the Advisory Agreement, and (4) payments made by the Fund pursuant to the
distribution plans (described herein). The Advisory Agreement also limits the
extent to which the Adviser shall be liable to the Fund for acts or omissions.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Trustees, or (ii) by vote of a majority
of the Fund's outstanding voting securities; and (b) by the 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'
notice.
During the fiscal years ended December 31, 1992, 1993 and 1994 the Adviser
received $424,048, $463,588 and $280,713 respectively, in advisory fees from the
Fund. For such periods the Fund paid $66,713, $91,249 and $75,309 respectively,
for accounting services.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through dealers. The
Distributor's obligation is an agency or "best efforts" arrangement under which
the Distributor is required to take and pay for only such shares of the Fund as
may be sold to the public. The Distributor is not obligated to sell any stated
number of shares. The Distributor bears the cost of printing (but not
typesetting) prospectuses used in connection with this offering and certain
other costs, including the cost of sales literature and advertising. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Trustees or by a vote of a majority of the Fund's outstanding voting securities,
and (b) by the affirmative vote of a majority of the Trustees who are not
parties to the Underwriting Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Underwriting
Agreement provides that it will terminate if assigned, and that it may be
terminated without penalty by either party on 60 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal periods are shown in the chart below. Advantage Capital Corporation is an
affiliated dealer of the Distributor.
<TABLE>
<CAPTION>
DEALER REALLOWANCES
RECEIVED BY
TOTAL UNDERWRITING AMOUNT RETAINED ADVANTAGE CAPITAL
CAPITAL COMMISSIONS BY DISTRIBUTOR CORPORATION
------------------------------------------ ------------------ --------------- -------------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1992 $ 557,607 $18,203 $ 76,019
Fiscal Year Ended December 31, 1993 $ 132,779 $16,515 $ 27,511
Fiscal Year Ended December 31, 1994 $ 55,691 $ 2,321 $ 6,301
</TABLE>
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" or "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
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The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to three percent of the purchase price of Class B
shares purchased by the clients of broker-dealers and other Service
Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, (5) advertising and promotion expenses, including conducting and
organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses and (6) interest expense at the three month LIBOR rate
plus 1 1/2% compounded quarterly on the unreimbursed distribution expenses. With
respect to the Class C Plan, authorized payments by the Fund also include
payments at an annual rate of up to 0.75% of the net assets of the Class C
shares to reimburse the Distributor for (1) upfront commissions and transaction
fees of up to 0.75% of the purchase price of Class C shares purchased by the
clients of broker-dealers and other Service Organizations and ongoing
commissions and transaction fees paid to broker-dealers and other Service
Organizations in an amount up to 0.25% of the average daily net assets of the
Fund's Class C shares, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, (5) advertising and promotion expenses, including conducting and
organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses and (6) interest expense at the three month LIBOR rate
plus 1 1/2% compounded quarterly on the unreimbursed distribution expenses. Such
reimbursements are subject to the maximum sales charge limits specified by the
NASD for asset-based charges.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the forms of
servicing agreements were approved by the Trustees, including a majority of the
Trustees who are not affiliated persons (as defined in the 1940 Act) of the Fund
and who have no direct or indirect financial interest in the operation of any of
the Plans or in any agreements related to each Plan ("Independent Trustees"). In
approving each Plan in accordance with the requirements of Rule 12b-1, the
Trustees determined that there is a reasonable likelihood that each Plan will
benefit the Fund and its shareholders.
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Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting securities of the
Fund. Any change in any of the Plans that would materially increase the
distribution or service expenses borne by the Fund requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as the Plans are in effect, the selection or nomination of the Independent
Trustees is committed to the discretion of the Independent Trustees.
For the fiscal year ended December 31, 1994, the Fund's aggregate expenses
under the Class A Plan were $132,613 or 0.24% of the Class A shares' average
daily net assets. Such expenses were paid to reimburse the Distributor for
payments to Service Organizations for servicing Fund shareholders and for
administering the Class A Plan. For the fiscal year ended December 31, 1994, the
Fund's aggregate expenses under the Class B Plan were $222,471 or 1.00% of the
Class B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $166,853 for commissions and transaction
fees paid to broker-dealers and other Service Organizations in respect of sales
of Class B shares of the Fund and $55,618 for fees paid to Service Organizations
for servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended December 31, 1994, the Fund's aggregate expenses under the
Class C Plan were $76,165 or 1.00% of the Class C shares' average net assets.
Such expenses were paid to reimburse the Distributor for the following payments:
$57,124 for commissions and transaction fees paid to broker-dealers and other
Service Organizations in respect of sales of Class C shares of the Fund and
$19,041 for fees paid to Service Organizations for servicing Class C
shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended December 31, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$150,547 for these services. These services are provided at cost plus a profit.
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 the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The Fund's portfolio turnover rate for prior
years is shown under "Financial Highlights" in the Prospectus. The annual
turnover rate is expected to exceed 100%, which is higher than that of many
other investment companies. A 100% turnover rate would occur if all the Fund's
portfolio securities were replaced during one year.
The Fund's portfolio turnover rate increased significantly from 1993 to
1994 because of increased trading activity resulting from a sharp increase in
short-term interest rates. This heightened volatility created additional trading
opportunities to manage treasury curve exposure. Additionally, late in the year,
dislocations
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among sectors (prices of adjustable rate mortgages were especially favorable)
presented opportunities which led to increased turnover.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund, as well as for the placement of its portfolio business and the negotiation
of any 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 the Adviser believes that a better price and
execution can be obtained by using a broker. Except to the extent that the Fund
may pay higher brokerage commissions for brokerage and research services, as
described below, on a portion of its transactions executed on securities
exchanges, the Adviser seeks the best security price at the most favorable
commission rate. In selecting broker-dealers and in negotiating commissions, the
Adviser considers the firm's reliability, the quality of its execution services
on a continuing basis and its financial condition. When more than one firm is
believed to meet these criteria, preference may be given to firms which also
provide research services to the Fund or the Adviser. Consistent with the Rules
of Fair Practice of the National Association of Securities Dealers, Inc. and
subject to seeking best execution and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund as a factor in
the selection of firms to execute portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the Advisory Agreement, the Trustees have
authorized the Adviser to cause the Fund to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Adviser. The Adviser intends that such higher commissions will
not be paid by the Fund unless (a) the Adviser determines in good faith that the
amount is reasonable in relation to the services in terms of the particular
transaction or in terms of the Adviser's overall responsibilities with respect
to the accounts as to which it exercises investment discretion, (b) such payment
is made in compliance with the provisions of Section 28(e) and other applicable
state and federal laws, and (c) in the opinion of the Adviser, the total
commissions paid by the Fund are reasonable in relation to the expected benefits
to the Fund over the long term. The investment advisory fee paid by the Fund
under the Advisory Agreement 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 mutual funds. Research services furnished by firms through which
the Fund effects its securities transactions may be used by the Adviser in
servicing all of their accounts; not all of such services may be used by the
Adviser in connection with the Fund. In the opinion of the Adviser, the benefits
from research services to each of the accounts, including the Fund, managed by
the Adviser cannot be measured separately. Because the volume and nature of the
trading activities of the accounts are not uniform, the amount of commissions in
excess of the lowest available rate paid by each account for brokerage and
research services may vary. In the opinion of the
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<PAGE> 155
Adviser, however, such costs to the Fund will not be disproportionate to the
benefits received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended December 31, 1992, 1993 and 1994 totalled $54,143, $12,080
and $-0-, respectively. No commissions were paid for research services during
the last fiscal year and no commissions were paid to affiliated brokers during
the last three years.
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The types of mortgage-related and asset-backed securities in which the Fund
invests, as well as 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. Listed
options and options on futures contracts are valued at the last reported sale
price as of the close of the exchange 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 costs basis, which
approximates market value.
Securities (as well as over-the-counter options) and any other assets for
which market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees. Such
valuations and procedures are reviewed periodically by the Trustees.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
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PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Class A shares and Class C shares of the Fund are sold in a continuous
offering and may be purchased on any business day through authorized dealers,
including Advantage Capital Corporation.
At this time, the Fund offers Class B shares only to current Fund Class B
shareholders who have elected or may elect the option to reinvest dividends
and/or capital gains distributions in shares of the Fund (other share purchases
by such shareholders must be of Class A or Class C shares), and Class B
shareholders of other American Capital funds exchanging their Class B shares for
Class B shares of the Fund.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B and Class C shares are sold at net asset value and
are subject to a contingent deferred sales charge. The three classes of shares
each represent interests in the same portfolio of investments of the Fund, have
the same rights and are identical in all respects, except that Class B and Class
C shares bear the expenses of the deferred sales arrangements, distribution
fees, and any expenses (including higher transfer agency costs) resulting from
such sales arrangements, and have exclusive voting rights with respect to the
Rule 12b-1 distribution plan pursuant to which the distribution fee is paid. As
set forth above, Class B shares are not currently being offered for sale to the
general public.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charge reflected in the sales charge table as shown in
the Prospectus under "Purchase of Shares -- Sales Charge Table" apply to
purchases of Class A shares of the Fund where the aggregate
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investment is $25,000 or more. For purposes of determining eligibility for
volume discounts, spouses and their minor children are treated as a single
purchaser, as is a director or other fiduciary purchasing for a single fiduciary
account. An aggregate investment includes all shares of the Fund and all shares
of certain other participating Van Kampen American Capital mutual funds
described in the Prospectus (the "Participating Funds"), which have been
previously purchased and are still owned, plus the shares being purchased. The
current offering price is used to determine the value of all such shares. If,
for example, an investor has previously purchased and still holds shares of the
Fund and shares of other Participating Funds having a current offering price of
$40,000, and that person purchases $65,000 of additional Class A shares of the
Fund, the charge applicable to the $65,000 purchase would be 2.75% of the
offering price. The same reduction is applicable to purchases under a Letter of
Intent as described in the next paragraph. THE DEALER MUST NOTIFY THE
DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY
FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION
MUST BE GIVEN IN WRITING WHEN SUCH AN ORDER IS PLACED BY MAIL. The reduced sales
charge may not be applied if such notification is not furnished at the time of
the order. The reduced sales charge will also not be applied should a review of
the records of the Distributor or ACCESS fail to confirm the investor's
representations concerning his holdings.
LETTER OF INTENT
Purchases of Class A shares of the funds described above under "Cumulative
Purchase Discount" made pursuant to the Letter of Intent and the value of all
shares of such Participating Funds previously purchased and still owned are also
included in determining the applicable quantity discount. A Letter of Intent
permits an investor to establish a total investment goal to be achieved by any
number of investments over a 13-month period. Each investment made during the
period receives the reduced sales charge applicable to the amount represented by
the goal as if it were a single investment. Escrowed shares totaling five
percent of the dollar amount of the Letter of Intent are held by ACCESS in the
name of the shareholder. A Letter of Intent may be back-dated up to 90 days in
order that any investments made during this 90-day period, valued at the
investor's cost, can become subject to the Letter of Intent. The Letter of
Intent does not obligate the investor to purchase the indicated amount. In the
event the Letter of Intent goal is not achieved within the 13-month period, the
investor is required to pay the difference between sales charges otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge, a
price adjustment is made by refunding to the investor in shares of the Fund, the
amount of excess sales charges, if any, paid during the 13-month period.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC--Class A") of one percent is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC--Class A is imposed upon
redemption, the amount of the CDSC--Class A will be equal to the lesser of one
percent of the net asset value of the shares at the time of purchase, or one
percent of the net asset value of the shares at the time of redemption.
The CDSC--Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified
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Purchaser without an initial sales charge during the one-year period prior to
the redemption. The CDSC--Class A will be waived in connection with redemptions
by certain Qualified Purchasers (e.g., in retirement plans qualified under
Section 401(a) of the Code and deferred compensation plans under Section 457 of
the Code) required to obtain funds to pay distributions to beneficiaries
pursuant to the terms of the plans. Such payments include, but are not limited
to, death, disability, retirement, or separation from service. No CDSC--Class A
will be imposed on exchanges between funds. For purposes of the CDSC--Class A,
when shares of one fund are exchanged for shares of another fund, the purchase
date for the shares of the fund exchanged into will be assumed to be the date on
which shares were purchased in the fund from which the exchange was made. If the
exchanged shares themselves are acquired through an exchange, the purchase date
is assumed to carry over from the date of the original election to purchase
shares subject to a CDSC--Class A rather than a front-end load sales charge. In
determining whether a CDSC--Class A is payable, it is assumed that shares held
the longest are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent will apply to the net
asset value privilege. Also, in order to establish an amount of $1,000,000 or
more, a Qualified Purchaser may aggregate shares of Van Kampen American Capital
Reserve Fund, Van Kampen American Capital Money Market Fund and Van Kampen
American Capital Tax Free Money Fund with shares of other participating funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC--CLASS B
AND C")
The CDSC--Class B and C may be waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC--Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC--Class B and C.
In cases of death or disability, the CDSC--Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC--Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC--Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge may be waived upon the tax-free rollover or transfer of assets
to another Retirement Plan invested in one or more of Van Kampen American
Capital
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Funds; in such event, as described below, the Fund will "tack" the period for
which the original shares were held onto the holding period of the shares
acquired in the transfer or rollover for purposes of determining what, if any,
CDSC--Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also may be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC--Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC--Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC--Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. Any involuntary redemption may only occur if
the shareholder account is less than the amount specified in the Prospectus due
to shareholder redemptions. The Fund will waive the CDSC--Class B and C upon
such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC--Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the Fund, provided that the reinvestment is effected
within 120 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the
CDSC--Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC--Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
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REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practical for the Fund to fairly determine the value of its net assets; or (d)
the Securities and Exchange Commission, by order, so permits.
The Fund may amend the signature guarantee procedures set forth in the
Prospectus under "Redemption of Shares" if a viable signature guarantee program
is established.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
A-31
<PAGE> 161
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signatures are persons not referenced in the account registration or if more
than 30 days have elapsed since the shareholder service agent established the
account on its records. Moreover, if the shareholder is a corporation,
partnership, trust, fiduciary, executor or administrator, the appropriate
documents appointing authorized signers (corporate resolutions, partnerships or
trust agreements) must accompany the authorization card. The documents must be
certified in original form, and the certificates must be dated within 60 days of
their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends each business day on Class A shares, Class B
shares and Class C shares and distributes monthly substantially all of its net
investment income to shareholders of Class A shares, Class B shares and Class C
shares. The daily dividends are a fixed amount determined for each class at
least monthly. The per share dividends on Class B and Class C shares will be
lower than the per share dividends on Class A shares as a result of the
distribution fees and higher transfer agency fees applicable to the Class B and
Class C shares. The total of the Class A, Class B and Class C dividends is
expected not to exceed the net income of the Fund for the month divided by the
number of business days in the month. Net investment income for dividend
purposes consists of interest earned less expenses of the Fund accrued for that
dividend period. Dividends and distributions are automatically reinvested in
shares of the Fund at the next determined net asset value without sales charge,
except that any shareholder may elect in writing to receive any such dividends
or distributions, or both, in cash. Dividends and distributions are taxable to
shareholders as discussed below whether they are reinvested in shares of the
Fund or received in cash.
As described below under "Tax Treatment of Option and Futures
Transactions," 60% of any gain or loss realized by the Fund from transactions in
listed options, futures, and options on futures generally constitutes long-term
capital gains or losses and the balance constitutes short-term capital gains or
losses. The Fund may designate up to the entire amount of any net long-term
capital gains realized during the Fund's fiscal year as being paid in the last
quarterly distribution of gains during such fiscal year or in the first
quarterly distribution of gains after the close of such fiscal year.
Dividends and distributions declared to shareholders of record after
September 30 of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even though paid in
the next year.
TAX STATUS OF THE FUND
Through payment of all or substantially all of its taxable net investment
income and net realized capital gains to shareholders and by meeting certain
diversification of assets and other requirements of the Code, the Fund expects
to qualify as a regulated investment company under Sections 851-855 of the Code.
This enables
A-32
<PAGE> 162
the Fund to be relieved from payment of income taxes on that portion of its
taxable net investment income and net realized capital gains distributed to
shareholders.
If for any taxable year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income,
including any net realized capital gains, would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders).
Dividends paid by the Fund from its net investment income, and
distributions of the Fund's net realized short-term capital gains, are taxable
to shareholders as ordinary income. Any distributions designated as being made
from the Fund's net realized long-term capital gains are taxable to shareholders
as long-term capital gains, regardless of the length of the period that a
shareholder has held his shares. Not later than 60 days after the end of each
fiscal year, the Fund will send to its shareholders a written notice required by
the Code designating the amount of any distributions made during such year which
are long-term capital gains distributions. Such notice may be included in the
annual report to shareholders. A dividend or capital gains distribution received
after the purchase of the Fund's shares reduces the net asset value of the
shares by the amount of the dividend or distribution and will be subject to
income taxes. A loss on the sale of shares held for less than six months
attributable to a long-term capital gains distribution is treated as a long-term
capital loss for federal income tax purposes.
If for any fiscal year of the Fund, the amount of distributions paid or
deemed paid for such year exceeds its net investment income plus net realized
capital gains for such year, the amount of such excess is expected to be treated
as a return of capital to all those shareholders who held shares of the Fund
during the year. In such case, each distribution paid or deemed paid for that
year would be treated, in the same proportion, in part as a distribution of
taxable income and in part as a return of capital. Shareholders would incur no
current federal income tax on the portion of such distributions which are
treated as a return of capital, but each shareholder's basis in the Fund's
shares would be reduced by that amount. This reduction of basis would operate to
increase the shareholder's capital gain, or decrease its capital loss, upon
redemption of Fund shares.
One of the requirements for qualification as a regulated investment company
is that less than 30% of the Fund's gross income be derived from gains from the
sale or other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in the writing of options on securities
which have been held less than three months, in the writing of options which
expire in less than three months, in effecting closing purchase transactions
with respect to options which have been written less than three months prior to
such transactions and in effecting closing transactions in futures contracts
which have been open for less than three months. Another requirement for
qualification is that at least 90% of the Fund's gross income in each fiscal
year be derived from dividends, interest and gains from the sale or other
disposition of securities.
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable income for
the twelve-months ended December 31, plus 98% of its capital gain net income for
the twelve-months ended October 31 of such year. The Fund intends to distribute
sufficient amounts to avoid liability for the excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
the basis of the subsequent shares.
A-33
<PAGE> 163
Since none of the Fund's net investment income arises from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction for corporations.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTION AND FUTURES TRANSACTIONS
The Code includes special rules applicable to listed options, futures
contracts, and options on futures contracts which the Fund may write, purchase
or sell. Such options and contracts are classified as Section 1256 contracts
under the Code. The character of gain or loss resulting from the sale,
disposition, closing out, expiration or other terminations of Section 1256
contracts is generally treated as long-term capital gain or loss to the extent
of 60% thereof and short-term capital gain or loss to the extent of 40% thereof
("60/40 gain or loss"). Such contracts, when held by the Fund at the end of a
fiscal year, generally are required to be treated as sold at market value on the
last day of such fiscal year for federal income tax purposes
("marked-to-market"). Over-the-counter options are not classified as Section
1256 contracts and are not subject to the mark-to-market rule or to 60/40 gain
or loss treatment. Any gains or losses recognized by the Fund from transactions
in over-the-counter options generally constitute short-term capital gains or
losses. If over-the-counter call options written, or over-the-counter put
options purchased, by the Fund are exercised, the gain or loss realized on the
sale of the underlying securities may be either short-term or long-term,
depending on the holding period of the securities. In determining the amount of
gain or loss, the sales proceeds are reduced by the premium paid for
over-the-counter puts or increased by the premium received for over-the-counter
calls.
A substantial portion of the Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
A-34
<PAGE> 164
offsetting positions with respect to personal property. A straddle in which at
least one, but not all, of the positions are Section 1256 contracts is a "mixed
straddle" under the Code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and, (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
FUND PERFORMANCE
The Fund's average annual total return, computed in the manner described in
the Prospectus, for Class A shares of the Fund for the one-year, five-year, and
eight-and-one-half year (period since initial public offering of Fund) periods
ended December 31, 1994 was -2.12%, 4.59% and 5.36%, respectively. The average
annual total return, computed in the manner described in the Prospectus, for
Class B shares of the Fund for the one-year, and three-years-and-one month (the
initial offering of Class B shares) period ended December 31, 1994 was -3.50%
and 1.40%, respectively. The average annual total return, computed in the manner
described in the Prospectus, for Class C shares of the Fund for the one-year,
and seventeen-=month (the initial offering of Class C shares) period ended
December 31, 1994, was -1.50% and 0.29%, respectively. These results are based
on historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objective and policies as well as the risks incurred in
the Fund's investment practices.
The annualized current yield, both subsidized and non-subsidized, for Class
A, Class B and Class C shares of the Fund for the 30 day period ending December
31, 1994 is listed below.
<TABLE>
<CAPTION>
NON-SUBSIDIZED
--------------
<S> <C>
Class A 4.75%
Class B 4.04%
Class C 4.04%
</TABLE>
The yield for any class of shares of the Fund 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
Fund, portfolio maturity and the Fund's expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time VKAC will announce the results of their monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
Intentions and the Van Kampen American Capital Mutual Fund Index -- which polls
measure how Americans plan to use their money.
A-35
<PAGE> 165
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 Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return. Such illustrations may be in the
form of charts or graphs and will not be based on historical returns experienced
by the Funds.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual Report to Shareholders including the related report of Independent
Accountants on such financial statements are included in the Statement of
Additional Information.
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund.
<TABLE>
<CAPTION>
DECEMBER 31,
1994
------------
<S> <C>
Net Asset Value per Class A Share $11.90
Class A Per Share Sales Charge -- 3.25% of offering price
(2.30% of net asset value per share) $ .27
------------
Class A Per Share Offering Price to the Public $12.17
</TABLE>
A-36
<PAGE> 166
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Agency and Government Obligations 97.5%
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES 33.3%
Federal Home Loan Mortgage Corp.
$ 247,899 5.38% Pool, 11/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,225
*3,754,317 5.47% Pool, 7/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,702,095
3,884,792 6.11% Pool, 6/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,873,876
1,316,779 6.13% Pool, 8/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,318,425
275,279 6.14% Pool, 5/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,441
348,447 6.28% Pool, 3/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345,071
310,407 7.50% Pool, 9/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,399
194,402 8.35% Pool, 2/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,183
Federal National Mortgage Association
933,709 5.83% Pool, 2/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910,366
449,130 5.84% Pool, 10/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443,516
2,021,664 5.86% Pool, 12/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,980,604
3,500,000 6.25% Pool, 1/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,456,250
934,491 6.47% Pool, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 941,500
3,825,693 6.64% Pool, 9/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,838,853
----------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost $22,343,917) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,831,804
----------------
COLLATERALIZED MORTGAGE OBLIGATIONS 46.5%
Federal Home Loan Mortgage Corp.
2,531,962 5.00%, 5/15/99 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,486,082
3,911,926 5.88%, 4/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,892,366
2,897,537 6.18%, 2/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,897,537
5,000,000 6.50%, 6/15/97 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,932,050
Federal National Mortgage Association
3,237,300 4.75%, 1/25/05 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,160,414
*3,136,000 5.50%, 3/25/03 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,909,612
940,233 6.05%, 2/25/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,532
848,015 6.08%, 3/25/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 839,798
7,684,628 6.33%, 6/25/18 to 2/25/21 . . . . . . . . . . . . . . . . . . . . . . . . . 7,665,878
737,092 6.75%, 8/25/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712,215
----------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $30,824,257) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,431,484
----------------
FIXED-RATE MORTGAGE-BACKED SECURITIES 6.8%
Federal National Mortgage Association
*909,615 9.50% Pools, 7/1/11 to 8/1/21 . . . . . . . . . . . . . . . . . . . . . . . 934,630
*780,884 10.00% Pool, 5/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 819,194
Government National Mortgage Association
220,366 8.50% Pools, 12/15/16 to 1/15/17 . . . . . . . . . . . . . . . . . . . . . . 216,441
514,313 9.50% Pools, 3/15/16 to 1/15/19 . . . . . . . . . . . . . . . . . . . . . . 530,710
956,921 10.00% Pools, 4/15/16 to 4/15/19 . . . . . . . . . . . . . . . . . . . . . . 1,005,963
494,314 10.50% Pools, 5/15/13 to 2/15/18 . . . . . . . . . . . . . . . . . . . . . . 527,833
381,751 11.00% Pool, 11/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,363
----------------
TOTAL FIXED-RATE MORTGAGE-BACKED SECURITIES
(Cost $4,370,127) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,448,134
----------------
</TABLE>
F-1
<PAGE> 167
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES TREASURY OBLIGATIONS 10.9%
United States Treasury Notes
$ 3,500,000 7.50%, 12/31/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,487,435
3,500,000 8.875%, 2/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,621,415
---------------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $7,131,578) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,108,850
---------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS
(Cost $64,669,879) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,820,272
---------------
ASSET BACKED SECURITIES 11.2%
4,000,000 ITT, 5.58%, 2/15/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,998,760
3,447,388 Premier Auto, 4.95%, 2/2/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,323,489
---------------
TOTAL ASSET BACKED SECURITIES (Cost $7,378,872) . . . . . . . . . . . . . . . . 7,322,249
---------------
REPURCHASE AGREEMENT 2.3%
1,495,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due 1/3/95
(Collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $1,495,955 (Cost $1,495,000) . . . . . . . . . 1,495,000
---------------
TOTAL INVESTMENTS (Cost $73,543,751) 111.0% . . . . . . . . . . . . . . . . . . 72,637,521
Other assets and liabilities, net (11.0%) . . . . . . . . . . . . . . . . . . . (7,204,502)
---------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
===============
</TABLE>
* SECURITIES WITH A MARKET VALUE OF APPROXIMATELY $7.4 MILLION WERE
PLACED AS COLLATERAL FOR FORWARD COMMITMENTS (SEE NOTE 1B).
PAC -- Planned Amortization Class
SEE NOTES TO FINANCIAL STATEMENTS
F-2
<PAGE> 168
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $73,543,751) . . . . . . . . . . . . . . . . . . . . . . $ 72,637,521
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,698
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,370
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,978
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,647
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,100,214
------------
LIABILITIES
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,026,257
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355,460
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,981
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,424
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,515
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,830
Unrealized depreciation of forward purchase commitment . . . . . . . . . . . . . . . . . . 12,510
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 58,218
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,667,195
------------
NET ASSETS, equivalent to $11.90 per share for Class A shares,
$11.91 per share for Class B shares and $11.90 per share
for Class C shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 3,465,620 Class A,
1,541,528 Class B and 491,408 Class C shares outstanding . . . . . . . . . . . . . . . . $ 54,986
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,620,185
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . (16,372,918)
Net unrealized depreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (906,230)
Forward purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,510)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,506
------------
NET ASSETS at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 169
STATEMENTS OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,960,588
-----------
EXPENSES
Management fees (net of waiver of $140,000 -- see Note 2) . . . . . . . . . . . . . . . . . 280,713
Service fees -- Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,613
Distribution and service fees -- Class B . . . . . . . . . . . . . . . . . . . . . . . . . 222,471
Distribution and service fees -- Class C . . . . . . . . . . . . . . . . . . . . . . . . . 76,165
Shareholder services agent's fees and expenses . . . . . . . . . . . . . . . . . . . . . . 191,813
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,736
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,309
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,115
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,522
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,185
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,084
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,565
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,523
-----------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,191,814
-----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768,774
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,162,092)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (349,453)
Net unrealized appreciation (depreciation) during the year
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,409,115)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,871
-----------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . . . . (3,916,789)
-----------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . $ (148,015)
===========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE> 170
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . $ 98,293,251 $ 142,091,079
--------------- ---------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768,774 6,362,397
Net realized loss on securities (net of
reimbursement -- see Note 2). . . . . . . . . . . . . . . . . . . . . . . (2,511,545) (1,880,081)
Net unrealized depreciation of securities
during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,405,244) (868,537)
---------------- ----------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148,015) 3,613,779
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM NET
INVESTMENT INCOME
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,394,001) (4,123,348)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (806,734) (1,347,132)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (276,067) (91,349)
--------------- ---------------
(3,476,802) (5,561,829)
--------------- ---------------
NET EQUALIZATION DEBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . (169,962) (620,002)
--------------- ---------------
FUND SHARES TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,201,023 32,894,798
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,104,254 5,703,339
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,694,179 7,970,180
--------------- ---------------
28,999,456 46,568,317
--------------- ---------------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,576,391 2,898,790
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547,208 863,542
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,460 46,435
--------------- ---------------
2,246,059 3,808,767
--------------- ---------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,385,868) (73,362,626)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,217,467) (17,349,831)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,707,633) (894,403)
--------------- ---------------
(60,310,968) (91,606,860)
--------------- ---------------
Decrease in net assets resulting from Fund
shares transactions . . . . . . . . . . . . . . . . . . . . . . . . . . (29,065,453) (41,229,776)
--------------- ---------------
DECREASE IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,860,232) (43,797,828)
--------------- ---------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019 $ 98,293,251
=============== ===============
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE> 171
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
American Capital Federal Mortgage Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. Investment Valuations
U.S. Agency and Government obligations and related forward commitments
are valued at the last reported bid price. Listed options are valued
at the last reported sale price on the exchange on which such option
is traded, or, if no sales are reported, at the mean between the last
reported bid and asked prices. Securities for which market quotations
are not readily available are valued at a fair value under a method
approved by the Board of Trustees.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days
when purchased are valued based on market quotations, until the
remaining days to maturity become less than 61 days. From such time,
until maturity, such investments are valued at amortized cost.
B. Forward Commitments
The fund trades certain securities under the terms of forward
commitments, whereby the settlement for payment and delivery occurs at
a specified future date. Forward commitments are privately negotiated
transactions between the Fund and dealers. Transactions in forward
commitments are utilized in strategies to manage the market risk of
the Fund's investments. Investing in such instruments increases the
impact on net asset value of changes in the market price of
investments. Forward commitments have a risk of loss due to
nonperformance of counterparties. There is also a risk that the
market movement of such instruments may not be in the direction
forecasted. Upon executing a forward commitment and during the period
of obligation, the Fund maintains collateral of cash or securities in
a segregated account with its custodian in an amount sufficient to
relieve the obligation. If the intent of the Fund is to accept
delivery of a security traded under a forward purchase commitment, the
commitment is recorded as a ling-term purchase. For forward purchase
commitments and for forward sale commitments, which security
settlement is not intended by the Fund, changes in the value of the
commitment are recognized by marking the commitment to market on a
daily basis. During the period of the commitment, the Fund may either
resell or repurchase the forward commitment and enter into a new
forward commitment, the effect of which is to extend the settlement
date. In addition, the Fund may occasionally close such forward
commitments prior to delivery. Gains or losses are realized upon the
ultimate closing or cash settlement of forward commitments. Note 3 -
Investment activity contains additional information.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The
Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised or subadvised by the Van Kampen American
Capital Asset Management, Inc. (the "Adviser"), the daily aggregate of
which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Fund will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not
less than the repurchase proceeds due the Fund.
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of capital gains will be made until
tax basis capital loss carryforwards expire or are offset by net
realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.
F-6
<PAGE> 172
F. Dividends and Distributions
The Fund declares dividends on each business day. Dividends and
distributions are recorded on the record dates. The Fund distributes
tax basis earnings in accordance with the minimum distribution
requirements of the Internal Revenue Code, which may differ from
generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
G. Equalization
At December 31, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is
a practice whereby a portion of the proceeds from sales and costs of
redemptions of Fund shares, equivalent on a per-share basis to the
amount of the undistributed net investment income, is charged or
credited to undistributed net investment income.
The balance of equalization included in undistributed net investment
income at the date of change, which was $311,791, was reclassified to
capital surplus. Such reclassification had no effect on net assets,
results of operations, or net asset value per share of the Fund.
H. Debt Discount and Premium
For financial reporting purposes, debt discounts and premiums are
accounted for on the same basis as is followed for federal income tax
reporting. Accordingly, original issue discounts on debt securities
purchased are amortized over the life of the security. Premiums on
debt securities are not amortized. Market discounts are recognized at
the time of sale as realized gains for book purposes and ordinary
income for tax purposes.
Note 2 - Management Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.50% of the first $1 billion, .475% of the next $1 billion, .45% of the next $1
billion, .40% of the next $1 billion and .35% of the amount in excess of $4
billion. From time to time, the Adviser may elect to waive a portion of its
management fee. The waiver is voluntary and may be discontinued at any time
without prior notice.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or subadvised by the Adviser.
For the year ended December 31, 1994, these charges included $6,936 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended December 31, 1994, the fees
for such services aggregated $150,547.
The Fund was advised that Van Kampen American Capital Distributor, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $2,321 and $6,301, respectively, as their
portion of the commissions charged on sales of Fund shares during the year.
Under the Distribution Plans, each class of shares pays up to .25% per annum of
its average net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts
reimbursed to the Distributor by the Fund. At December 31, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B and Class C
plans aggregated approximately $1.1 million and $130,000, respectively, and may
be carried forward and reimbursed through either the collection of the
contingent deferred sales charges from share redemptions or, subject to the
annual renewal of the plans, future Fund reimbursements of distribution fees.
F-7
<PAGE> 173
Legal fees of $7,034 were for services rendered by O'Melveny & Myers, counsel
for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of
the Fund.
Certain officers and trustees of the Fund are officers and trustees or
directors of the Adviser, the Distributor, the Retail Dealer and the
shareholder service agent.
During 1993, certain securities held by the Fund were mispriced. The Adviser
reimbursed the Fund approximately $6.9 million to eliminate any loss to
shareholders incurred during the year of mispricing of such securities. The
reimbursement has been recorded as a reduction of the realized loss recognized
on the sale of the related securities. Without the reimbursement, the Adviser
estimates that the total return for the year ended December 31, 1993 would have
been lower by approximately 6.25 percentage points.
Note 3 -- Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments and forward commitments, were $129,178,297 and
$151,188,189, respectively.
The identified cost of investments owned at December 31, 1994 was the same for
federal income tax and financial reporting purposes. Net unrealized
depreciation of investments aggregated $906,230, gross unrealized appreciation
of investments aggregated $108,819 and gross unrealized depreciation of
investments aggregated $1,015,049.
The net realized capital loss carryforward of approximately $15.4 million for
federal income tax purposes at December 31, 1994 may be utilized to offset
future capital gains until expiration in 1995 through 2002, of which
approximately 21% will expire in 1995. Additionally, approximately $900,000 in
realized losses are being deferred for tax purposes to the 1995 fiscal year.
At December 31, 1994, the Fund held the following forward purchase commitment
settling January 1995.
<TABLE>
<CAPTION>
VALUE AT
PRINCIPAL DECEMBER 31, UNREALIZED
AMOUNT SECURITY 1994 DEPRECIATION
---------- ----------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
$4,000,000 Federal National Mortgage Association,
8.00% Pools . . . . . . . . . . . . . . . . . . . . $ 3,831,240 $ 12,510
=========== ============
</TABLE>
Note 4 -- Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $810 plus a fee of $20 per day for Board and Committee
meetings attended. The Chairman receives additional fees from the Fund at an
annual rate of $310. During the year, such fees aggregated $9,556.
The trustees may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At December 31, 1994, the liability for the Plan aggregated
$16,118. Each trustee covered under the Plan elects to be credited with an
earning component on amounts deferred equal to the income earned by the Fund on
its short-term investments or equal to the total return of the Fund.
Note 5 -- Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or looses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets or paid shares of each class. Class B shares
and Class C shares automatically convert to Class A shares six years and ten
years after purchase, respectively, subject to certain conditions. The Fund
has suspended sales of Class B shares to the public, and these shares are now
available only to a limited group of investors.
F-8
<PAGE> 174
The Fund has an unlimited number of shares of $.01 par value beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1994 1993
--------- ---------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589,204 2,652,339
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,243 454,922
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469,667 636,387
---------- ----------
2,399,114 3,743,648
---------- ----------
Shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,048 230,580
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,121 68,673
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,116 3,723
---------- ----------
185,285 302,976
---------- ----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,431,958) (5,915,573)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,010,900) (1,391,506)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . (556,549) (71,936)
---------- ----------
(4,999,407) (7,379,015)
---------- ----------
Decrease in shares outstanding . . . . . . . . . . . . . . . . . . (2,415,008) (3,332,391)
========== ==========
</TABLE>
F-9
<PAGE> 175
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of year ........... $ 12.42 $ 12.63 $ 12.99 $ 12.85 $ 12.88
---------- ---------- -------- --------- ---------
INCOME FROM OPERATIONS
Investment income ............................ .62 .64 .93 1.15 1.32
Expenses ..................................... (.14) (.11) (.14) (.17) (.173)
Expense waiver(2) ............................ .02 .01 .025 .025 --
---------- ---------- -------- --------- ---------
Net investment income ........................ .50 .54 .815 1.005 1.147
Net realized and unrealized gains or
losses on securities ....................... (.4817) (.1485)(1) (.417) .206 (.004)
---------- ---------- -------- --------- ---------
Total from investment operations ............. .0183 .3915 .398 1.211 1.143
---------- ---------- -------- --------- ---------
DIVIDENDS FROM NET INVESTMENT INCOME ......... (.5383) (.6015) (.758) (1.071) (1.173)
---------- ---------- -------- --------- ---------
Net asset value, end of year ................. $ 11.90 $ 12.42 $ 12.63 $ 12.99 $ 12.85
========== ========== ======== ========= =========
TOTAL RETURN(3) .............................. .16% 3.15%(1) 3.15% 9.78% 9.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) ........... $ 41.2 $ 64.3 $103.7 $ 95.8 $ 32.3
Average net assets (millions) ................ $ 54.3 $ 85.7 $112.7 $ 47.5 $ 33.4
Ratios to average net assets(2)
Expenses ............................... 1.15% 1.03% 0.91% 1.16% 1.38%
Expenses, without waiver ............... 1.31% 1.15% 1.12% 1.36% --
Net investment income .................. 4.75% 5.49% 6.36% 7.96% 9.11%
Net investment income,
without waiver ....................... 4.58% 5.37% 6.15% 7.66% --
Portfolio turnover rate ...................... 161% 102% 254% 293% 341%
</TABLE>
(1) NET OF REIMBURSEMENT-- SEE NOTE 2.
(2) SEE NOTE 2.
(3) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
SEE NOTES TO FINANCIAL STATEMENTS.
F-10
<PAGE> 176
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of beneficial interest outstanding throughout
each of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------------- --------------------------
NOVEMBER 5 MAY 10,
1991(2) YEAR 1993(2)
YEAR ENDED DECEMBER 31 THROUGH ENDED THROUGH
------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991(3) 1994 1993(3)
--------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period ........ $ 12.43 $ 12.64 $ 12.99 $ 12.99 $ 12.41 $ 12.60
--------- ---------- -------- --------- ---------- ----------
INCOME FROM OPERATIONS
Investment income ........................... .62 .67 .935 .12 .67 .44
Expenses .................................... (.22) (.20) (.24) (.03) (.24) (.14)
Expense waiver(6) ........................... .02 .01 .03 .02 .02 .02
--------- ---------- -------- --------- ---------- ----------
Net investment income ....................... .42 .48 .725 .11 .45 .32
Net realized and unrealized gains or
losses on securities ...................... (.4977) (.1845)(1) (.413) .036 (.5177) (.1914)(1)
--------- ---------- -------- --------- ---------- ----------
Total from investment operations ............ (.0777) .2955 .312 .146 (.0677) .1286
--------- ---------- -------- --------- ---------- ----------
DIVIDENDS FROM NET INVESTMENT
INCOME .................................... (.4423) (.5055) (.662) (.146) (.4423) (.3186)
--------- ---------- -------- --------- ---------- ----------
Net asset value, end of period .............. $ 11.91 $ 12.43 $ 12.64 $ 12.99 $ 11.90 $ 12.41
========= ========== ======== ========= ========== ==========
TOTAL RETURN(4) ............................. (.62%) 2.37% (1) 2.46% 1.13% (.55%) 1.03%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) ........ $18.4 $26.9 $38.4 $9.4 $5.8 $7.1
Average net assets (millions) ............... $22.2 $33.3 $32.3 $4.1 $7.6 $4.0
Ratios to average net assets(6)
Expenses .............................. 1.91% 1.79% 1.60% .59%(5) 1.90% 1.47%(5)
Expenses, without waiver .............. 2.08% 1.91% 1.81% 1.84%(5) 2.07% 1.64%(5)
Net investment income ................. 3.99% 4.70% 5.44% 5.73%(5) 3.98% 3.79%(5)
Net investment income,
without waiver ...................... 3.82% 4.58% 5.23% 4.48%(5) 3.81% 3.62%(5)
Portfolio turnover rate ..................... 161% 102% 254% 293% 161% 102%
</TABLE>
(1) NET OF REIMBURSEMENT -- SEE NOTE 2.
(2) COMMENCEMENT OF OFFERING OF SALES
(3) BASED ON AVERAGE MONTH-END SHARES OUTSTANDING
(4) TOTAL RETURN FOR PERIODS OF LESS THAN ONE FULL YEAR ARE NOT
ANNUALIZED. TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES
CHARGES.
(5) ANNUALIZED
(6) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 American Capital Federal Mortgage
Trust at December 31, 1994, and the results of its operations, the changes in
its net assets and the selected per share data and ratios for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and selected per share data and ratios
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
February 16, 1995
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<PAGE> 178
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL ADJUSTABLE RATE U.S. GOVERNMENT FUND
Van Kampen American Capital Adjustable Rate U.S. Government Fund, formerly
known as Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund"),
is a diversified separate series of the Van Kampen American Capital Trust, a
Delaware business trust (the "Trust"), an open-end management investment
company. The Fund's investment objective is to seek a high level of current
income consistent with a relatively stable net asset value. The Fund will seek
to achieve its investment objective by investing primarily in securities that
are issued or guaranteed by the U.S. Government or its agencies or
instrumentalities ("U.S. Government Securities") and which have interest rates
which are reset at periodic intervals. In current market conditions, the Fund
expects that substantially all of the U.S. Government Securities in which the
Fund will invest consist of adjustable rate mortgage-backed securities ("ARMS")
or other securities collateralized by or representing an interest in mortgages
and which have interest rates which reset at periodic intervals. The net asset
value and yield of the Fund will fluctuate depending on market conditions and
other factors. However, by investing primarily in adjustable rate securities the
Fund seeks to achieve less fluctuation in net asset value than a portfolio that
invests in fixed rate securities. There is no assurance that the Fund will
achieve its investment objective.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated August 1, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling (800) 421-5666. This Statement of Additional Information incorporates by
reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. These items may be obtained
from the Commission upon payment of the fee prescribed, or inspected at the
Commission's office at no charge.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-4
Officers and Trustees................................................................. B-16
Investment Advisory and Other Services................................................ B-21
Portfolio Transactions and Brokerage Transactions..................................... B-23
Tax Status of the Fund................................................................ B-24
The Distributor....................................................................... B-24
Legal Counsel......................................................................... B-25
Performance Information............................................................... B-25
Unaudited Financial Statements........................................................ B-28
Notes to the Unaudited Financial Statements........................................... B-32
Independent Auditors' Report.......................................................... B-35
Audited Financial Statements.......................................................... B-36
Notes to Audited Financial Statements................................................. B-40
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED AUGUST 1, 1995.
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THE FUND AND THE TRUST
The Fund is a separate diversified series of the Trust, an open-end management
investment company. At present, the Fund, Van Kampen American Capital Short-Term
Global Income Fund, Van Kampen American Capital High Yield Fund, Van Kampen
American Capital Strategic Income Fund and Van Kampen American Capital Emerging
Markets Income Fund are the only other series of the Trust, although other
series may be organized and offered in the future.
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by a Declaration of Trust dated May 10, 1995 (the
"Declaration of Trust"). The Declaration of Trust permits the Trustees to create
one or more separate investment portfolios and issue a series of shares for each
portfolio. The Trustee can further sub-divide each series of shares into one or
more classes of shares for each portfolio. Each share represents an equal
proportionate interest in the assets of the series with each other share in such
series and no interest in any other series. No series is subject to the
liabilities of any other series. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Trust or any of its
series, requires inclusion of a clause to that effect in every agreement entered
into by the Trust or any of its series and indemnifies shareholders against any
such liability. The Fund was originally organized as a sub-trust of a
Massachusetts business trust by a Declaration of Trust dated March 14, 1986,
under the name of Van Kampen Merritt Adjustable Rate U.S. Government Fund, and
was reorganized as a series of the Trust as of July 31, 1995.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange 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 a majority of the shares present and voting at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the Investment Company Act of 1940, as amended (the "1940 Act"), or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares or
impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objectives and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. With respect to 75% of its total assets, purchase any security (other than
obligations of the U.S. Government or its agencies or instrumentalities)
if, as a result more than 5% of the Fund's total assets (determined at the
time of investment) would then be invested in securities of a single
issuer or, if as a result, the Fund would own more than 10% of the
outstanding voting securities of any one issuer.
2. Issue senior securities, borrow money or enter into reverse repurchase
agreements or dollar rolls in the aggregate in excess of 33 1/3% of the
Fund's total assets (after giving effect to any such borrowing); provided,
however, that with respect to such amount no more than 5% may be invested
in bank borrowings and reverse repurchase agreements. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.
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3. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except in connection with hedging or risk management transactions.
4. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions). Neither
the deposit nor the payment by the Fund of initial or variation margin in
connection with hedging or risk management transaction is considered the
purchase of a security on margin.
5. Act as underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the disposition of
portfolio securities under certain federal securities laws.
6. Buy or sell real estate or interests in real estate, except that the Fund
may purchase and sell mortgaged-backed securities, securities
collateralized by or representing an interest in mortgages, securities
which are secured by real estate, securities of companies which invest or
deal in real estate and publicly traded securities of real estate
investment trusts.
7. Buy or sell commodities or commodity contracts, except that the Fund may
purchase and sell futures contracts and options thereon in connection with
hedging or risk management transactions.
8. Make loans, except through the purchase of securities consistent with the
Fund's investment objective and policies, the acquisition of securities
subject to repurchase agreement or loans of portfolio securities.
9. Make investments for the purpose of exercising control or management of
any company other than a CMO issuer.
10. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage
commissions and investment in such securities will not be in excess of the
amount permitted by the 1940 Act, (determined at the time of investment),
or except as part of a merger, consolidation or other acquisition.
11. Invest in equity interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
12. Invest more than 25% of its assets in a single industry. (Neither the U.S.
Government nor any of its agencies or instrumentalities will be considered
an industry for purposes of this restriction).
The foregoing fundamental policies may not be changed without the approval of
a majority of the Fund's voting securities which requires the approval of the
lesser of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the
Fund's outstanding Shares present at a meeting at which the holders of more than
50% of the outstanding shares are present in person or by proxy. As long as the
percentage restrictions described above are satisfied at the time of the
investment or borrowing, the Fund will be considered to have abided by those
restrictions even if, at a later time, a change in values or net assets causes
an increase or decrease in percentage beyond that allowed.
Whenever any fundamental investment policy or investment restriction states a
maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price
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quotations), will not be treated as restricted securities by the Fund pursuant
to such rules. The Fund may, from time to time, adopt a more restrictive
limitation with respect to investment in illiquid and restricted securities in
order to comply with the most restrictive state securities law, currently 10%.
This policy does not include restricted securities eligible for resale pursuant
to Rule 144A under the Securities Act of 1933, as amended, which the Board of
Trustees or the Fund's investment adviser has determined under Board-approved
guidelines to be liquid. The Fund's policy with respect to investment in
illiquid and restricted securities is not a fundamental policy and may be
changed by the Board of Trustees, in consultation with the adviser, without
obtaining shareholder approval.
ADDITIONAL INVESTMENT CONSIDERATIONS
The following information supplements the information provided in the
Prospectus under the headings "Investment Objective and Policies" and
"Investment Practices."
MORTGAGE-BACKED SECURITIES
U.S. Government Agency Mortgage-Backed Securities. The Fund may invest in
Mortgage-Backed Securities which are issued or guaranteed by the U.S. Government
or its agencies and instrumentalities such as Government National Mortgage
Association (GNMA), Federal National Mortgage Association (FNMA) or Federal Home
Loan Mortgage Corporation (FHLMC). Mortgage-Backed Securities may represent an
undivided ownership interests in pools of mortgages. The mortgages backing these
securities may include conventional 30-year fixed rate mortgages, 15-year fixed
rate mortgages, graduated payment mortgages and adjustable rate mortgages. The
U.S. Government or the issuing agency guarantees the payment of the interest on
and principal of these securities. However, the guarantees do not extend to the
securities' yield or value, which are likely to vary inversely with fluctuations
in interest rates, nor do the guarantees extend to the yield or value of the
Fund's shares. These securities are in most cases "pass-through" instruments,
through which the holders receive a share of all interest and principal payments
from the mortgages underlying the securities, net of certain fees. Because the
principal amounts of such underlying mortgages may generally be prepaid in whole
or in part by the mortgagees at any time without penalty and the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through securities.
Mortgage-Backed Securities are subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments of
principal on the underlying mortgage obligations. The remaining maturity of a
Mortgage-Backed Security will be deemed to be equal to the average maturity of
the mortgages underlying such security determined by the Adviser on the basis of
assumed prepayment rates with respect to such mortgages. The remaining expected
average life of a pool of mortgages underlying a Mortgage-Backed Security is a
prediction of when the mortgages will be repaid and is based upon a variety of
factors such as the demographic and geographic characteristics of the borrowers
and the mortgaged properties, the length of time that each of the mortgages has
been outstanding, the interest rates payable on the mortgages and the current
interest rate environment. While the timing of prepayments of graduated payment
mortgages differs somewhat from that of conventional mortgages, the prepayment
experience of graduated payment mortgages is basically the same as that of the
conventional mortgages of the same maturity dates over the life of the pool.
During periods of declining interest rates, prepayment of mortgages underlying
Mortgage-Backed Securities can be expected to accelerate. When the mortgage
obligations are prepaid, the Fund reinvests the prepaid amounts in other income
producing securities, the yields of which reflect interest rates prevailing at
the time. Therefore, the Fund's ability to maintain a portfolio of high-yielding
Mortgage-Backed Securities will be adversely affected to the extent that
prepayments of mortgages must be reinvested in securities which have lower
yields than the prepaid Mortgage-Backed Securities. Moreover, prepayments of
mortgages which underlie securities purchased by the Fund at a premium would
result in capital losses.
U.S. Government Securities are considered among the most creditworthy of fixed
income investments. The yields available from U.S. Government Securities are
generally lower than the yields available from corporate debt securities. The
values of U.S. Government Securities will change as interest rates fluctuate. To
the extent U.S. Government Securities are not adjustable rate securities, these
changes in value in response to changes in
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interest rates generally will be more pronounced. During periods of falling
interest rates, the values of outstanding long-term fixed rate U.S. Government
Securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. The magnitude of these
fluctuations will generally be greater for securities with longer maturities.
Although changes in the value of U.S. Government securities will not affect
investment income from those securities, they may affect the net asset value of
the Fund.
At a time when the Fund has written call options on a portion of its U.S.
Government Securities, its ability to profit from declining interest rates will
be limited. Any appreciation in the value of the securities held in the
portfolio above the strike price would likely be partially or wholly offset by
unrealized losses on call options written by the Fund. The termination of option
positions under these conditions would generally result in the realization of
capital losses, which would reduce the Fund's capital gains distribution.
Accordingly, the Fund would generally seek to realize capital gains to offset
realized losses by selling portfolio securities. In such circumstances, however,
it is likely that the proceeds of such sales would be reinvested in lower
yielding securities. See "--Other Investment Strategies--Options Transactions
and Related Risks."
GNMA Certificates. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Veteran's Administration under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
GNMA Certificates will represent a pro rata interest in one or more pools of
the following types of mortgage loans: (i) fixed rate level payment mortgage
loans, (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-
to four-family housing units.
FNMA Certificates. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to purchase
home mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly, thereby expanding the total amount of funds
available for housing.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. government.
Each FNMA Certificate will represent a pro rata interest in one or more pools
of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage loans that
are not insured or guaranteed by any governmental
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<PAGE> 183
agency) of the following types: (i) fixed rate level payment mortgage loans;
(ii) fixed rate growing equity mortgage loans; (iii) fixed rate graduated
payment mortgage loans; (iv) variable rate California mortgage loans; (v) other
adjustable rate mortgage loans; and (vi) fixed rate loans secured by multifamily
projects.
FHLMC Certificates. FHLMC is a corporate instrumentality of the United States
created pursuant to the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily Freddie Mac Certificates.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest at the rate provided for by such FHLMC Certificate, whether
or not received. Freddie Mac also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of a claim by any mortgage insurer, or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal. The obligation of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by the full faith and credit of
the U.S. government.
FHLMC Certificates represent a pro rata interest in a group of mortgage loans
(a "FHLMC Certificate group") purchased by FHLMC. The mortgage loans underlying
the FHLMC Certificates will consist of fixed rate or adjustable rate mortgage
loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
Collateralized Mortgage Obligations. In reliance on an SEC interpretation, the
Fund's investment in certain qualifying collateralized mortgage obligations
(CMOs), including CMOs that have elected to be treated as Real Estate Mortgage
Investment Conduits (REMICs), are not subject to the 1940 Act's limitation on
acquiring interests in other investment companies. In order to be able to rely
on the SEC's interpretation, the CMOs and REMICs must be unmanaged, fixed-asset
issuers that (a) invest primarily in mortgage-backed securities, (b) do not
issue redeemable securities, (c) operate under general exemptive orders
exempting them from all provisions of the 1940 Act, and (d) are not registered
or regulated under the 1940 Act as investment companies. To the extent that the
Fund selects CMOs or REMICs that do not meet the above requirements, the Fund
may not invest more than 10% of its assets in all such entities and may not
acquire more than 3% of the voting securities of any single such entity.
ADJUSTABLE RATE SECURITIES
Interest Rate Indices. The interest rates on adjustable rate securities are
generally reset periodically in accordance with rates determined by reference to
specific indices.
The One Year Constant Maturity Treasury Index is the figure derived from the
average weekly quoted yield on U.S. Treasury Securities adjusted to a constant
maturity of one year.
The Cost of Funds Index reflects the monthly weighted average cost of funds of
savings and loan associations and savings banks whose home offices are located
in Arizona, California and Nevada (the "FHLB Eleventh District") that are member
institutions of the Federal Home Loan Bank of San Francisco (the "FHLB of San
Francisco"), as computed from statistics tabulated and published by the FHLB of
San Francisco. The FHLB of San Francisco normally announces the Cost of Funds
Index on the last working day of the month following the month in which the cost
of funds was incurred.
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A number of factors affect the performance of the Cost of Funds Index and may
cause the Cost of Funds Index to move in a manner different from indices based
upon specific rates, such as the One Year Constant Maturity Treasury Index.
Because of the various origination dates and maturities of the liabilities of
member institutions of the FHLB Eleventh District upon which the Cost of Funds
Index is based, among other things, at any time the Cost of Funds Index may not
reflect the average prevailing market interest rates on new liabilities of
similar maturities. There can be no assurance that the Cost of Funds Index will
necessarily move in the same direction as prevailing interest rates since as
longer term deposits or borrowings mature and are renewed at market interest
rates, the Cost of Funds Index will rise or fall depending upon the differential
between the prior rates and the new rates on such deposits and borrowings. In
addition, dislocations in the thrift industry in recent years have caused and
may continue to cause the cost of funds of thrift institutions to change for
reasons unrelated to changes in general interest rate levels. Furthermore, any
movement in the Cost of Funds Index as compared to other indices based upon
specific interest rates may be affected by changes instituted by the FHLB of San
Francisco in the method used to calculate the Cost of Funds Index. To the extent
that the Cost of Funds Index may reflect interest changes on a more delayed
basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield to holders later than would be produced by such other
indices, and in a period of declining interest rates, the Cost of Funds Index
may remain higher than other market interest rates. This Cost of Funds Index may
result in a higher level of principal prepayments on mortgage loans which adjust
in accordance with the Cost of Funds Index than mortgage loans which adjust in
accordance with other indices.
The London Interbank Offered Rate Index ("LIBOR") is the rate at which banks
in London offer Eurodollars in trades between banks. LIBOR has become a key rate
in the U.S. domestic money market because it is perceived as reflecting the true
global cost of money.
FOREIGN SECURITIES
The Fund may invest up to 10% of its total assets in securities principally
traded in markets outside the United States. Foreign investments can be affected
favorably or unfavorably by changes in currency exchange rates and in exchange
control regulations. There may be less publicly available information about a
foreign company than about a U.S. company, and foreign companies may not be
subject to accounting, auditing and financial reporting standards and
requirements comparable to those applicable to U.S. companies. Securities of
some foreign companies are less liquid or more volatile than securities of U.S.
companies, and foreign brokerage commissions and custodian fees are generally
higher than in the United States. Investments in foreign securities can involve
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets
and imposition of withholding taxes on dividend or interest payments. To hedge
against possible variations in foreign exchange rates, the Fund may purchase and
sell forward foreign currency contracts. These represent agreements to purchase
or sell specified currencies at specified dates and prices. The Fund will only
purchase and sell forward foreign currency contracts in amounts the Adviser
deems appropriate to hedge existing or anticipated portfolio positions and will
not use such forward contracts for speculative purposes. Foreign securities,
like other assets of the Fund, will be held by the Fund's custodian or by a
subcustodian. The Fund's investment in foreign securities also may include
commercial paper and certificates of deposit which are indexed to certain
specific foreign currency exchange rates. The staff of the Securities and
Exchange Commission (the "SEC") currently is considering whether the Fund's
purchase of this type of commercial paper and certificates of deposit would
result in the issuance of a "senior security" within the meeting of the 1940
Act. The Fund believes that such investments do not involve the creation of such
a senior security, but nevertheless undertakes, pending the resolution of this
issue by the staff, to establish a segregated account with respect to its
investments in this type of commercial paper and certificates of deposit and to
maintain in such account cash not available for investment in U.S. government
securities or other liquid high quality debt securities having a value equal to
the aggregate principal amount of outstanding commercial paper and certificates
of deposit of this type. See "--Other Investment Strategies--Strategic
Transactions" for additional information.
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OTHER INVESTMENT STRATEGIES
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and currency exchange rates), to manage the effective maturity or duration
of securities or portfolios or to enhance potential gain. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
STRATEGIC TRANSACTIONS. In the course of pursuing these investment strategies,
the Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
interest rate indices and other financial instruments, purchase and sell
financial futures contracts, enter into various interest rate transactions such
as swaps, caps, floors or collars, and enter into various currency transactions
such as currency forward contracts, currency futures contracts, currency swaps
or options on currency or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position as a temporary substitute for
purchasing or selling particular securities. Some Strategic Transactions may
also be used to enhance potential gain although no more than 5% of the Fund's
assets will be committed to Strategic Transactions generated into for
non-hedging or risk management purposes.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than current market values, limit the amount of appreciation the Fund can
realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.
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General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, to the extent the
option is "in-the-money" (i.e., where the value of the underlying instrument
exceeds, in the case of a call option, or is less than, in the case of a put
option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guaranties and security, are set by negotiation of the parties. The
Fund will only enter into OTC options that have a buy-back provision permitting
the Fund to require the Counterparty to buy back the option at a formula price
within seven days. The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
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Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of the option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank in
New York as "primary dealers", broker dealers, domestic or foreign banks or
other financial institutions which have received a short-term credit rating of
A-1 from Standard & Poor's Ratings Group ("S&P") or P-1 from Moody's Investor
Services, Inc. ("Moody's") or any equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that the amount of the Fund's obligation pursuant
to an OTC option is illiquid, and is subject to the Fund's limitation on
investing no more than 15% of its assets in illiquid instruments.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on U.S. Treasury and agency
securities, foreign sovereign debt, mortgage-backed securities, corporate debt
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and related futures on
such securities other than futures on individual corporate debt securities. All
calls sold by the Fund must be "covered" or must meet the asset segregation
requirements described below as long as the call is outstanding (i.e., the Fund
must own the securities or futures contract subject to the call). Even though
the Fund will receive the option premium to help protect it against loss, a call
sold by the Fund exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security and may require the Fund to hold a security which it might otherwise
have sold.
The Fund may purchase and sell put options that relate to U.S. Government
Securities, Mortgage-Backed Securities, foreign sovereign debt, corporate debt
securities and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) or futures on such securities other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under its hedging,
duration management, risk management, and other Strategic Transactions other
than those with respect to futures and options thereon. In selling put options,
there is a risk that the Fund may be required to buy the underlying security at
a disadvantageous price above the market price.
General Characteristics of Futures. The Fund may purchase and sell financial
futures contracts or purchase put and call options on such futures as a hedge
against anticipated interest rate, currency market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that 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.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 5% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the
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contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position will be
offset prior to settlement and that delivery will not occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon 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. The
segregation requirements with respect to futures and options thereon are
described below.
Options on Securities Indices and Other Financial Indices. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and, in so doing can achieve many of the same objectives it would
achieve through the sale or purchase of options on individual securities or
other instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
exchange listed currency futures, exchange listed and OTC options on currencies,
and currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional difference among two or more currencies and operates similarly to an
interest rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties rated A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
options) are determined to be of equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which Fund expects to
have portfolio exposure.
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To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling is
linked to the German deutschemark (the "D-mark"), the Fund holds securities
denominated in Austrian schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars, hedging involves some of the same
risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from other transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts) and any combination
of futures, options and currency transactions ("component" transactions),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions are normally entered into based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
the Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cash flows on a notional amount of two or more currencies based on
the relative value differential among them and an index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount.
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A collar is a combination of a cap and a floor that preserves a certain return
within a predetermined range of interest rates or values.
The Fund may enter into swaps, caps, floors or collars on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and fixed
income instruments are linked. The staff of the SEC currently considers
Eurodollar instruments to be foreign securities. Although the Fund does not
believe that Eurodollar securities are foreign securities, the Fund's investment
in Eurodollar securities will be subject to the 10% limitation in foreign
securities.
Risks of Strategic Transactions Outside the United States. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business 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) lower trading volume
and liquidity.
Use of Segregated and Other Special Accounts. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid high
grade assets with its custodian to the extent Fund obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or an amount of
cash or liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by the Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade assets sufficient to purchase
and deliver the securities if the call is exercised. A call option sold by the
Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by the Fund requires the Fund to segregate liquid, high grade
assets equal to the exercise price.
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Except when the Fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate liquid high grade assets equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities, currency,
financial instruments or indices, OCC issued and exchange listed index options,
swaps, caps, floors and collars will generally provide for cash settlement. As a
result, with respect to these instruments the Fund will only segregate an amount
of assets equal to its accrued net obligations, as there is no requirement for
payment or delivery of amounts in excess of the net amount. These amounts will
equal 100% of the exercise price in the case of a put, or the in-the-money
amount in the case of a call. In addition, when the Fund sells a call option on
an index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out, cash or cash
equivalents equal in value to such excess. Other OCC issued and exchange listed
options sold by the Fund other than those above generally settle with physical
delivery, and the Fund will segregate an amount of assets equal to the full
value of the option. OTC options settling with physical delivery, if any, will
be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company. See "Tax Status" in the Prospectus.
REPURCHASE AGREEMENTS
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved the Fund's Board of Trustees. The Adviser
will monitor the creditworthiness of such parties, under the general supervision
of the Board of Trustees. In the event of a default or a bankruptcy by a seller,
the Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligation to
repurchase are less than the repurchase price, the Fund will suffer the loss.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with respect to debt
obligations which could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund may sell an underlying debt
instrument and simultaneously obtain the commitment of the purchaser (a
commercial bank or a broker or dealer) to sell the security back to the Fund at
an agreed upon price on an agreed upon
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date. The value of underlying securities will be at least equal at all times to
the total amount of the resale obligation, including the interest factor. The
Fund receives payment for such securities only upon physical delivery or
evidence of book entry transfer by its custodian. Regulations of the SEC require
either that securities sold by the Fund under a reverse repurchase agreement be
segregated pending repurchase or that the proceeds be segregated on the Fund's
books and records pending repurchase. Reverse repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. An additional risk is that the market value of
securities sold by the Fund under a reverse repurchase agreement could decline
below the price at which the Fund is obligated to repurchase them.
During the time a reverse repurchase agreement is outstanding, the Fund will
maintain a segregated custodial account containing cash or U.S. Government
obligations having a value equal to the repurchase price under such reverse
repurchase agreement. Any investment gains made by the Fund with monies borrowed
through reverse repurchase agreements will cause the net asset value of the
Fund's shares to rise faster than would be the case if the Fund had not engaged
in such borrowings. On the other hand, if the investment performance resulting
from the investment of borrowings obtained through reverse repurchase agreements
fails to cover the cost of such borrowings to the Fund, the net asset value of
the Fund will decrease faster than would otherwise be the case.
Reverse repurchase agreements will be considered borrowings by the Fund and as
such would be subject to the restrictions on borrowings described under
"Investment Policies and Restrictions" in this Statement of Additional
Information.
SECURITIES LENDING
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund, and are at all
times secured by cash or cash equivalents, which are maintained in a segregated
account pursuant to applicable regulations that are equal to at least the market
value, determined daily, of the loaned securities. The advantage of such loans
is that the Fund continues to receive the income on the loaned securities while
at the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or by
the Fund on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, the Fund could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost over collateral. As with any extensions of
credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, these loans of portfolio securities will only be made to firms deemed
by the Adviser to be creditworthy and when the income which can be earned from
such loans justifies the attendant risks. Upon termination of the loan, the
borrower is required to return the securities to the Fund. Any gain or loss in
the market price during the loan period would inure to the Fund. The
creditworthiness of firms to which the Fund lends its portfolio securities will
be monitored on an ongoing basis by the investment adviser pursuant to
procedures adopted and reviewed, on an ongoing basis, by the Board of Trustees
of the Trust.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan of its securities.
"WHEN-ISSUED" AND "DELAYED DELIVERY" SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis--i.e., delivery and
payment can take place a month or more after the date of the transactions. The
securities so purchased are subject to market fluctuation and no interest
accrues to the
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<PAGE> 193
purchaser during this period. While the Fund will only purchase securities on a
when-issued, delayed delivery or forward commitment basis with the intention of
acquiring the securities, the Fund may sell the securities before the settlement
date, if it is deemed advisable. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, the Fund will
record the transaction and thereafter reflect the value, each day, of such
security in determining the net asset value of the Fund. At the time of delivery
of the securities, the value may be more or less than the purchase price. The
Fund will also establish a segregated account with the Fund's custodian bank in
which it will continuously maintain cash, U.S. Government Securities or other
liquid high-grade debt portfolio securities equal in value to commitments for
such when-issued or delayed delivery securities; subject to this requirement,
the Fund may purchase securities on such basis without limit. An increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed delivery basis may increase the volatility of the Fund's
net asset value. The investment adviser does not believe that the Fund's net
asset value or income will be adversely affected by the Fund's purchase of
securities on such basis.
MONEY MARKET INSTRUMENTS
The Fund may invest in high quality money market instruments, including
commercial paper of a U.S. or foreign company or foreign government;
certificates of deposit, bankers' acceptances and time deposits of domestic and
foreign banks; and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. These obligations will be U.S. dollar
denominated. Commercial paper will be rated, at the time of purchase, at least
A-2 by S&P or Prime-2 by Moody's, or, if not rated, issued by an entity having
an outstanding unsecured debt issue rated at least A or A-2 by S&P or A or
Prime-2 by Moody's.
OFFICERS AND TRUSTEES
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series), and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
</TABLE>
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<PAGE> 194
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
</TABLE>
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<PAGE> 195
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
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<PAGE> 196
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.
Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Vice
Age: 39 and Chief Financial President, Treasurer and Chief Financial
Officer Officer of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
</TABLE>
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<PAGE> 197
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Sheehan is an interested person of the VK Adviser and the Fund by reason of
his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an
interested person of the Fund by reason of his firm acting as legal counsel
for the Fund.
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of Van Kampen
American Capital, and have entered into employment contracts (for a term of five
years) with Van Kampen American Capital.
The Fund will pay trustees who are not affiliated persons of the VK Adviser,
the Distributor or Van Kampen American Capital an annual retainer of $2,500 per
year and $125 per regular quarterly meeting of the Fund, plus expenses. No
additional fees are proposed at the present time to be paid for special
meetings, committee meetings or to the chairman of the board. The trustees have
approved an aggregate annual compensation cap from the combined fund complex of
$84,000 per trustee (excluding any retirement benefits) until December 31, 1996,
based upon the current net assets and the current number of Van Kampen American
Capital funds (except that Mr. Whalen, who is also a trustee of the closed-end
funds advised by the VK Adviser would receive additional compensation for
serving as a trustee of such funds). In addition, the VK Adviser has agreed to
reimburse the Fund through December 31, 1996, for any increase in the aggregate
trustees' compensation over the aggregate compensation paid by the Fund in its
1994 fiscal year.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME FROM REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
------------------------------- ------------------ ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 14,849 $0 $2,500 $62,362
Philip G. Gaughan.............. 13,757 0 2,500 63,250
Donald C. Miller............... 18,172 0 2,500 62,178
Jack A. Nelson................. 18,228 0 2,500 62,362
Jerome L. Robinson............. 18,198 0 2,500 58,475
Wayne W. Whalen................ 4,078 0 2,500 49,875
</TABLE>
---------------
(1) Messrs. Powell and McDonnell, Trustees of the Registrant (as defined below),
are affiliated persons of the Adviser and are not eligible for compensation
or retirement benefits from the Registrant. Messrs. Branagan, Caruso,
Hilsman, Rees, Sheehan, Sisto and Woodside were elected as trustees of the
Trust at a shareholders meeting held July 21, 1995 and thus received no
compensation or retirement benefits from the Registrant during its 1994
fiscal year.
(2) The Registrant is Van Kampen American Capital Trust (the "Trust") which
currently is comprised of 5 series, including the Fund. The amounts shown in
this column are accumulated from the Aggregate Compensation of each of these
5 series during such series' 1994 fiscal year. Beginning in October 1994,
each Trustee, except Messrs. Gaughan and Whalen, began deferring his entire
aggregate compensation. The total combined amount of deferred compensation
(including interest) accrued with respect to each Trustee from the Fund
Complex (as defined herein) as of December 31, 1994 is as follows: Mr.
Kennedy $14,737; Mr. Miller $14,553; Mr. Nelson $14,737 and Mr. Robinson
$13,725.
(3) The Registrant's last completed fiscal year end for which audited financial
statements are available ended June 30, 1994. The Retirement Plan commenced
as of August 1, 1994 for the Registrant.
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<PAGE> 198
(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.
(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser that had the same members on each funds' Board of
Trustees. The amounts shown in this column are accumulated from the
Aggregate Compensation of each of these 20 mutual funds in the Fund Complex
during the calendar year ended December 31, 1994. The VK Adviser also serves
as investment adviser for other investment companies; however, with the
exception of Messrs. Powell, McDonnell and Whalen, the Trustees are not
trustees of such investment companies. Combining the Fund Complex with other
investment companies advised by the VK Adviser, Mr. Whalen received Total
Compensation of $161,850 during the calendar year ended December 31, 1994.
As of July 17, 1995, the trustees and officers as a group owned less than 1%
of the shares of the Fund.
No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.
As of July 17, 1995 the following persons owned of record or beneficially 5%
or more of the Fund's Class A Shares: R&N Associates, c/o Glen Neubert, 4100
McEwen Road, Dallas, TX 75244-5107, 18%.
As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class B Shares: Chicago Board of Education, Attn: Treasury
Dept. 6 West, 1918 W. Pershing Road, Chicago, IL 60609-2321, 14%.
As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C shares: Putnam Savings Bank, A Corporation, P.O.
Box 151, Putnam, CT 06260-0151, 42%; and Chicago Board of Education, Attn.
Treasury Dept. 6 West, 1918 W. Pershing Rd., Chicago, IL 60609-2321, 22%.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P.
are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore,
Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson,
each of whom is a principal of Clayton, Dubilier & Rice, Inc. In addition,
certain officers, directors and employees of Van Kampen American Capital, Inc.
own, in the aggregate, not more than 7% of the common stock of VK/AC Holding,
Inc. and have the right to acquire, upon exercise of options, approximately an
additional 11% of the common stock of VK/AC Holding, Inc. Presently, and after
giving effect to the exercise of stock options, no officer or trustee of the
Fund owns or would own 5% or more of the common stock of VK/AC Holding, Inc.
The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment,
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<PAGE> 199
provides administrative services, and permits its officers and employees to
serve without compensation as trustees of the Trust and officers of the Fund if
duly elected to such positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
trustees to whom the Adviser renders periodic reports of the Fund's investment
activities.
The investment advisory agreement will remain in effect from year to year if
specifically approved by the trustees of the Trust, of which the Fund is a
separate series (or by the Fund's shareholders), and by the disinterested
trustees in compliance with the requirements of the 1940 Act. The agreement may
be terminated without penalty upon 60 days' written notice by either party
thereto and will automatically terminate in the event of assignment.
The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.
For the years ended June 30, 1994 and 1993, the Fund recognized advisory
expenses of $183,973 and $77,810, respectively. The Adviser has waived such
expenses.
OTHER AGREEMENTS
FUND ACCOUNTING AGREEMENT. The Fund has entered into an accounting services
agreement with the Adviser pursuant to which the Adviser provides accounting
services supplementary to those provided by the Custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund shares together with the other Van Kampen American Capital
mutual funds advised by the VK Adviser and distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor") in the cost of providing such
services, with 25% of such costs shared proportionately based on the number of
outstanding classes of securities per fund and with the remaining 75% of such
cost being paid by the Fund and such other funds proportionally based on their
respective net assets.
For the years ended June 30, 1994 and 1993, the Fund recognized expenses of
approximately $2,700 and $0, respectively, representing the Adviser's cost of
providing accounting services.
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. The Fund,
and the other Van Kampen American Capital mutual funds advised by the VK Adviser
and distributed by the Distributor, share such costs proportionately among
themselves based upon their respective net asset values.
For the years ended June 30, 1994 and 1993, the Fund recognized expenses of
approximately $6,000 and $0, respectively, representing the Distributor's cost
of providing certain support services.
LEGAL SERVICES AGREEMENT. The Fund and other funds advised by the VK Adviser
and distributed by the Distributor have entered into Legal Services Agreements
pursuant to which Van Kampen American Capital provides legal services, including
without limitation: accurate maintenance of the funds' minute books and records,
preparation and oversight of the funds' regulatory reports, and other
information provided to
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<PAGE> 200
shareholders, as well as responding to day-to-day legal issues on behalf of the
funds. Payment by the Fund for such services is made on a cost basis for the
employment of personnel as well as the overhead and equipment necessary to
render the legal services. Other Funds distributed by the Distributor also
receive legal services from Van Kampen American Capital. Of the total costs for
legal services provided to funds distributed by the Distributor, one half of
such costs are allocated equally to each fund and the remaining one half of such
costs are allocated to specific funds based on monthly time records.
For the years ended June 30, 1994 and 1993, the Fund recognized expenses of
approximately $8,300 and $1,300, respectively, representing Van Kampen American
Capital's cost of providing legal services.
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, Massachusetts 02105-1713, is the custodian of the Fund and has custody
of all securities and cash of the Fund. The custodian, among other things,
attends to the collection of principal and income, and payment for and
collection of proceeds of securities bought and sold by the Fund.
The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE TRANSACTIONS
The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund, or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security), than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Fund's Adviser, the amount
of additional commission or increased cost is reasonable in relation to the
value of such services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth in the Fund and the Adviser, (ii) have sold or are selling shares of
the Fund and (iii) may select firms that are affiliated with the Fund, its
investment adviser or its distributor or other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.
B-23
<PAGE> 201
The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to brokers.
State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund will be subject
to tax if 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.
THE DISTRIBUTOR
DISTRIBUTION AGREEMENT
The Distributor offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight. Van Kampen American Capital's roots in
money management extend back to 1926. Today, Van Kampen American Capital manages
or supervises more than $50 billion in mutual funds, closed-end funds and unit
investment trusts -- assets which have been entrusted to Van Kampen American
Capital in more than 2 million investor accounts. Van Kampen American Capital
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations.
Shares of the Fund are offered through the Distributor, One Parkview Plaza,
Oakbrook, Terrace, Illinois 60181. The Distributor is a wholly owned subsidiary
of Van Kampen American Capital, which is a subsidiary of VK/AC Holding, Inc., a
Delaware corporation that is controlled through an ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C & D L.P."), a Connecticut limited partnership. In
addition, certain officers, directors and employees of Van Kampen American
Capital, and its subsidiaries own, in the aggregate not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. C & D L.P. is managed by Clayton, Dubilier & Rice, Inc.
Clayton & Dubilier Associates IV Limited Partnership ("C & D Associates L.P.")
is the general partner of C & D L.P. Pursuant to a distribution agreement with
the Fund, the Distributor will purchase shares of the Fund for resale to the
public, either directly or through securities dealers, brokers or other
financial intermediaries, and is obligated to purchase only those shares for
which it has received purchase orders. A discussion of how to purchase and
redeem shares of the Fund and how such shares are priced is contained in the
Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and financial intermediaries who are acting as
B-24
<PAGE> 202
brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement and/or Selling Agreement. To
the extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.
For the year ended June 30, 1994, the Fund has recognized expenses under the
Plans of $21,250, $207,242 and $22,482 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $17,091 and $51,087 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares and Class B Shares, respectively. For the year ended June 30, 1994, the
Fund has reimbursed the Distributor $1,096 and $2,249 for advertising expenses,
and $3,603 and $8,389 for compensation of the Distributor's sales personnel for
the Class A Shares and Class B Shares, respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge in a
maximum amount equal to 3.00% and 1.00%, respectively,
B-25
<PAGE> 203
of the lesser of the then current net asset value of the shares redeemed or
their initial purchase price from the Fund. Yield quotations do not reflect the
imposition of a contingent deferred sales charge, and if any such contingent
deferred sales charge imposed at the time of redemption were reflected, it would
reduce the performance quoted.
The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends and other
distributions made during the period) of a $1,000 investment in a given class of
shares of the Fund (less the maximum sales charge, if any) at the beginning of
the period, annualizing the increase or decrease over the specified period with
respect to such initial investment and expressing the result as a percentage.
Average compounded total return will be computed separately for each class of
shares.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC Shares imposed at the time of redemption were reflected, it would
reduce the performance quoted.
CLASS A SHARES
The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class A Shares was 3.73%. In determining the Fund's net investment income for a
stated 30 day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class A Shares was 4.77%.
The Fund's average total return with respect to the Class A Shares for (i) the
one year period ended June 30, 1994 was (2.06%) and (ii) the approximately 22
month period from August 28, 1992, the commencement of investment operations for
Class A Shares of the Fund, through June 30, 1994 was 1.66%.
The Fund's cumulative non-standardized total return for Class A Shares from
inception through June 30, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 6.25%.
CLASS B SHARES
The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class B Shares was 3.14%. In determining the Fund's net investment income for a
stated 30-day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class B Shares was 4.14%.
The Fund's average total return with respect to the Class B Shares for (i) the
one year period ended June 30, 1994 was (2.73%) and (ii) for the approximately
22 month period from August 28, 1992, the commencement of investment operations
for Class B Shares of the Fund, through June 30, 1994 was 1.62%.
B-26
<PAGE> 204
The Fund's cumulative non-standardized total return for Class B Shares from
inception through June 30, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance") was 4.93%.
CLASS C SHARES
The Fund's yield for the 30-day period ending June 30, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") for
Class C Shares was 3.14%. In determining the Fund's net investment income for a
stated 30 day period, the Fund calculates yield to maturity on each portfolio
security on a daily basis. The Fund's distribution rate for the 30-day period
ending June 30, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") for Class C Shares was 4.14%.
The Fund's average annual total return for the approximately 11 month period
from August 13, 1993, the commencement of distribution for Class C Shares of the
Fund, through June 30, 1994 was (1.34%).
The Fund's cumulative non-standardized total return for Class C Shares from
inception through June 30, 1994 (as calculated in the manner described in the
Prospectus under the heading "Fund Performance was (0.27%).
B-27
<PAGE> 205
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Portfolio of Investments
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Securities 2.9%
$ 955 Nomura Asset Securities Corporation .............................. 7.265% 7/07/03 $ 978,875
------------
Mortgage-Backed Securities 84.4%
793 AFC Mortgage #93-4B2A1 ........................................... 6.936 12/25/23 793,905
954 Citicorp Mortgage Securities Inc #94-11A2 ........................ 6.250 8/25/24 911,300
1,808 DLJ Mortgage Acceptance Corporation #94-Q1 ....................... 4.883 3/25/24 1,743,292
882 Federal Home Loan Mortgage Corporation ........................... 6.625 7/01/14 871,541
1,723 Federal Home Loan Mortgage Corporation ........................... 5.635 3/01/18 1,703,658
2,834 Federal Home Loan Mortgage Corporation ........................... 6.522 8/01/20 2,854,220
872 Federal Home Loan Mortgage Corporation ........................... 7.290 7/01/22 878,405
1,266 Federal Home Loan Mortgage Corporation ........................... 6.095 10/01/23 1,239,309
1,742 Federal National Mortgage Association ............................ 6.809 1/01/16 1,762,037
2,345 Federal National Mortgage Association ............................ 7.013 11/01/18 2,347,593
1,642 Federal National Mortgage Association ............................ 6.347 3/01/19 1,629,226
899 Federal National Mortgage Association ............................ 6.741 3/01/19 906,915
1,833 Federal National Mortgage Association ............................ 5.124 2/01/21 1,779,585
2,229 Federal National Mortgage Association ............................ 7.161 10/01/22 2,234,043
1,606 Federal National Mortgage Association ............................ 5.896 10/01/23 1,581,831
1,789 Federal National Mortgage Association ............................ 4.371 1/01/24 1,777,357
614 Federal National Mortgage Association ............................ 5.190 11/01/26 593,819
490 Federal National Mortgage Association ............................ 5.289 3/01/29 474,098
1,753 Government National Mortgage Association ......................... 6.750 6/20/23 1,704,097
6,808 Salomon Brothers Mortgage Securities VII Inc - Interest Only ..... 2.283 2/25/24 370,180
------------
28,156,411
------------
Corporate Securities 4.1%
1,200 Greenwich Capital Acceptance Inc ................................. 6.594 7/25/22 1,171,500
4,300 Greenwich Capital Acceptance Inc - Interest Only ................ 2.514 10/25/22 180,623
------------
1,352,123
------------
Total Long-Term Investments 91.4%
(Cost $31,905,802) <F1> ................................................................... 30,487,409
-------------
Short-Term Investments at Amortized Cost 8.1%
Mexican Tesobonos ($1,000,000 par, yielding 7.07%, maturing 01/12/95) ................... 997,763
Repurchase Agreement, J.P. Morgan Securities, U.S. T-Note, $1,770,000 par, 3.875% coupon,
due 09/30/95, dated 12/30/94, to be sold on 01/03/95 at $1,710,998 ...................... 1,710,000
-------------
Total Short-Term Investments at Amortized Cost ............................................ 2,707,763
Other Assets in Excess of Liabilities 0.5% ................................................ 173,538
-------------
Net Assets 100% ........................................................................... $ 33,368,710
-------------
<FN>
<F1> At December 31, 1994, cost for federal income tax purposes is $31,905,802;
the aggregate gross unrealized appreciation is $-0- and the aggregate gross
unrealized depreciation is $1,418,393, resulting in net unrealized depreciation
of $1,418,393.
</FN>
</TABLE>
See Notes to Financial Statements
B-28
<PAGE> 206
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Statement of Assets and Liabilities
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $31,905,802) <F1>................................. $ 30,487,409
Short-Term Investments <F1>.......................................................... 2,707,763
Cash................................................................................. 821
Receivables:
Interest............................................................................. 392,441
Fund Shares Sold..................................................................... 5,189
Unamortized Organizational Expenses <F1>............................................. 21,245
Other ............................................................................... 119
-------------
Total Assets ........................................................................ 33,614,987
-------------
Liabilities:
Payables:
Fund Shares Repurchased.............................................................. 107,791
Income Distributions ................................................................ 33,872
Accrued Expenses..................................................................... 104,614
-------------
Total Liabilities.................................................................... 246,277
-------------
Net Assets........................................................................... $ 33,368,710
-------------
Net Assets Consist of:
Paid in Surplus <F3> ................................................................ $ 35,473,115
Accumulated Undistributed Net Investment Income...................................... 29,815
Accumulated Net Realized Loss on Investments ........................................ (715,827)
Net Unrealized Depreciation on Investments........................................... (1,418,393)
-------------
Net Assets........................................................................... $ 33,368,710
-------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $6,522,682 and
710,220 shares of beneficial interest issued and outstanding) <F3>................... $ 9.18
Maximum sales charge (3.00%* of offering price)...................................... .28
-------------
Maximum offering price to public .................................................... $ 9.46
-------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $22,906,032 and
2,492,656 shares of beneficial interest issued and outstanding) <F3> ................ $ 9.19
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,939,996 and
429,040 shares of beneficial interest issued and outstanding) <F3>................... $ 9.18
--------------
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
B-29
<PAGE> 207
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest......................................................................................... $ 1,068,395
------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $9,221, $128,534 and
$20,402, respectively) <F6> .................................................................. 158,157
Investment Advisory Fee <F2> .................................................................... 110,360
Shareholder Services ............................................................................ 40,065
Custody ......................................................................................... 29,555
Trustees Fees and Expenses <F2>.................................................................. 18,200
Legal <F2>....................................................................................... 8,960
Amortization of Organizational Expenses <F1>..................................................... 4,032
Other ........................................................................................... 34,638
------------
Total Expenses................................................................................... 403,967
Less Fees Deferred and Expenses Reimbursed ($110,360 and $55,180, respectively).................. 165,540
------------
Net Expenses..................................................................................... 238,427
------------
Net Investment Income ........................................................................... $ 829,968
------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.............................................................................. $ 5,888,524
Cost of Securities Sold.......................................................................... (6,209,719)
------------
Net Realized Loss on Investments ................................................................ (321,195)
------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.......................................................................... (879,553)
End of the Period ............................................................................... (1,418,393)
------------
Net Unrealized Depreciation on Investments During the Period..................................... (538,840)
------------
Net Realized and Unrealized Loss on Investments.................................................. $ (860,035)
------------
Net Decrease in Net Assets from Operations....................................................... $ (30,067)
------------
</TABLE>
See Notes to Financial Statements
B-30
<PAGE> 208
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994
and the Year Ended June 30, 1994 (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1994 June 30, 1994
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income ............................................. $ 829,968 $ 1,301,126
Net Realized Loss on Investments .................................. (321,195) (362,674)
Net Unrealized Depreciation on Investments During the Period....... (538,840) (985,777)
------------- -------------
Change in Net Assets from Operations ............................. (30,067) (47,235)
------------- -------------
Distributions from Net Investment Income:
Class A Shares..................................................... (174,010) (384,334)
Class B Shares..................................................... (541,377) (879,036)
Class C Shares..................................................... (86,659) (91,263)
------------- -------------
Total Distributions................................................ (802,046) (1,354,633)
------------- -------------
Net Change in Net Assets from Investment Activities................ (832,113) (1,401,868)
------------- -------------
From Capital Transactions <F3>:
Proceeds from Shares Sold.......................................... 5,151,481 35,960,141
Net Asset Value of Shares Issued Through Dividend Reinvestment .... 558,565 959,832
Cost of Shares Repurchased ........................................ (10,245,053) (15,553,274)
------------- -------------
Net Change in Net Assets from Capital Transactions................. (4,535,007) 21,366,699
------------- -------------
Total Increase/Decrease in Net Assets ............................. (5,367,120) 19,964,831
Net Assets:
Beginning of the Period............................................ 38,735,830 18,770,999
------------- -------------
End of the Period (Including undistributed net investment income of
$29,815 and $1,893, respectively).................................. $ 33,368,710 $ 38,735,830
------------- -------------
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 209
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Notes to Financial Statements
December 31, 1994 (Unaudited)
1. Significant Accounting Policies
Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August 28,
1992, with two classes of common shares, Class A and Class B shares. The Fund
commenced the distribution of Class C shares on August 13, 1993.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitment until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.
C. Investment Income-Interest income is recorded on an accrual basis. Original
issue discount is amortized over the expected life of each applicable security.
D. Organizational Expenses-The Fund has reimbursed
Van Kampen American Capital Distributors, Inc. or its affiliates ("VKAC") for
costs incurred in connection with the Fund's organization in the amount of
$40,000. These costs are being amortized on a straight line basis over the 60
month period ending August 28, 1997. Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") has agreed that in the event any of the initial
shares of the Fund originally purchased by VKAC are redeemed during the
amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it 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. At June 30, 1994, the Fund had an accumulated capital loss carryforward
for tax purposes of $61,584. Of this amount, $12,348 and $49,236 will expire on
June 30, 2001, and 2002, respectively. Net realized gains or losses may differ
for financial and tax reporting purposes primarily as a result of post October
31 losses which are not recognized for tax purposes until the first day of the
following fiscal year.
F. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide facilities and investment advice to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
-----------------------------------
<S> <C>
First $500 million ... .600 of 1%
Next $500 million .... .550 of 1%
Next $2 billion....... .500 of 1%
Next $2 billion....... .475 of 1%
Next $2 billion....... .450 of 1%
Next $2 billion....... .425 of 1%
Over $9 billion....... .400 of 1%
</TABLE>
B-32
<PAGE> 210
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $16,100, representing VKAC's cost of providing accounting, legal,
portfolio pricing and certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.
The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 10,050, 103 and 100 shares of beneficial
interest of Classes A, B and C, respectively.
3. Capital Transactions
The Fund has outstanding three classes of capital stock, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized. At December 31, 1994, paid in surplus aggregated $6,997,376,
$24,312,356 and $4,163,383 for Classes A, B and C, respectively. For the six
months ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
--------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 77,270 $ 721,562
Class B....................... 353,120 3,297,140
Class C....................... 121,041 1,132,779
--------- ------------
Total Sales................... 551,431 $ 5,151,481
--------- ------------
Dividend Reinvestment:
Class A....................... 14,012 $ 130,363
Class B....................... 39,002 362,968
Class C....................... 7,010 65,234
--------- ------------
Total Dividend Reinvestment... 60,024 $ 558,565
--------- ------------
Repurchases:
Class A....................... (134,285) $ (1,249,138)
Class B....................... (836,917) (7,799,308)
Class C....................... (128,101) (1,196,607)
--------- ------------
Total Repurchases ............ (1,099,303) $(10,245,053)
--------- ------------
</TABLE>
At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556 and
$4,161,977 for Classes A, B and C, respectively. For the period ended June 30,
1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
---------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ....................... 902,396 $ 8,731,126
Class B ....................... 2,364,040 22,736,081
Class C ....................... 464,005 4,492,934
--------- -------------
Total Sales ................... 3,730,441 $ 35,960,141
--------- -------------
Dividend Reinvestment:
Class A ....................... 26,263 $ 252,576
Class B ....................... 64,882 623,837
Class C ....................... 8,729 83,419
--------- -------------
Total Dividend Reinvestment ... 99,874 $ 959,832
--------- -------------
Repurchases:
Class A ....................... (656,490) $ (6,285,280)
Class B ....................... (926,283) (8,853,618)
Class C ....................... (43,644) (414,376)
--------- -------------
Total Repurchases.............. (1,626,417) $ (15,553,274)
--------- -------------
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C shares will be imposed on most redemptions made within three years of
the purchase for Class B and one year of the purchase for Class C as detailed
in the following schedule. The Class B and Class C shares bear the expense of
their respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
------------------------------------------
<S> <C> <C>
First ................. 3.00% 1.00%
Second ................. 2.00% None
Third .................. 1.00% None
Fourth and Thereafter .. None None
</TABLE>
For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of $10 and CDSC
on the redeemed shares of Classes B and C of approximately $76,300. Sales
charges do not represent expenses of the Fund.
B-33
<PAGE> 211
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $2,015,000
and $6,209,719, respectively.
5. Mortgage and Asset Backed Securities
A Mortgage Backed Security (MBS) is a pass-through security created by pooling
mortgages and selling participations in the principal and interest payments
received from borrowers. Most of these securities are guaranteed by federally
sponsored agencies--Government National Mortgage Association (GNMA), Federal
National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation
(FHLMC).
An Interest Only security is another class of MBS representing ownership in the
cash flows of the interest payments made from a specified pool of MBS. The cash
flow on this instrument decreases as the mortgage principal balance is repaid by
the borrower.
Asset Backed Securities are similar to MBS but made up of pools of
other assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on these securities are
made from the cash flows from the group of assets.
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts. Annual fees under
the Plans of up to .30% for Class A shares and 1.00% each for Class B and Class
C shares are accrued daily. Included in these fees for the six months ended
December 31, 1994, are payments to VKAC of approximately $111,600.
B-34
<PAGE> 212
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Independent Auditors' Report
-------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen Merritt Adjustable Rate U.S. Government Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund"), including the
portfolio of investments, as of June 30,1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year then ended and for the period from August 28,1992 (commencement of
investment operations) through June 30,1993, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
June 30,1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Van Kampen Merritt Adjustable Rate U.S. Government Fund as of June
30,1994, the results of its operations for the year then ended, the changes in
its net assets for the year then ended and for the period from August 28,1992
(commencement of investment operations) through June 30,1993, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick
Chicago, Illinois
August 4, 1994
B-35
<PAGE> 213
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Portfolio of Investments
June 30, 1994
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities 87.0%
$ 938 AFC Mortgage................................................... 5.735% 03/25/25 $ 945,076
1,949 DLJ Mortgage Acceptance Corporation............................ 3.945 03/25/24 1,931,543
953 Federal Home Loan Mortgage Corporation......................... 4.625 07/01/14 954,012
1,855 Federal Home Loan Mortgage Corporation......................... 5.634 03/01/18 1,904,730
3,071 Federal Home Loan Mortgage Corporation......................... 5.569 08/01/20 3,158,327
1,000 Federal Home Loan Mortgage Corporation......................... 5.507 07/01/22 1,020,161
1,372 Federal Home Loan Mortgage Corporation......................... 4.105 10/01/23 1,369,590
2,732 Federal Home Loan Mortgage Corporation......................... 3.733 01/01/24 2,697,822
1,848 Federal National Mortgage Association.......................... 5.493 01/01/16 1,914,516
2,815 Federal National Mortgage Association.......................... 5.445 11/01/18 2,905,691
1,943 Federal National Mortgage Association.......................... 5.323 03/01/19 1,996,782
1,034 Federal National Mortgage Association.......................... 5.593 03/01/19 1,063,721
1,849 Federal National Mortgage Association.......................... 5.124 02/01/21 1,830,494
2,504 Federal National Mortgage Association.......................... 5.586 10/01/22 2,509,816
1,794 Federal National Mortgage Association.......................... 4.245 10/01/23 1,818,427
1,954 Federal National Mortgage Association.......................... 3.386 01/01/24 1,917,684
702 Federal National Mortgage Association.......................... 4.960 11/01/26 706,116
556 Federal National Mortgage Association.......................... 4.937 03/01/29 550,329
262 Federal National Mortgage Association Interest Only............ 7.000 02/25/98 656
1,792 Federal National Mortgage Association Interest Only............ 5.206 12/25/08 164,666
1,843 Government National Mortgage Association....................... 6.000 06/20/23 1,840,678
7,359 Salomon Brothers Mortgage Securities VII Inc Interest Only..... 2.290 03/25/24 478,354
-----------
33,679,191
-----------
Corporate Securities 3.9%
1,200 Greenwich Capital Acceptance Inc............................... 6.087 07/25/22 1,218,000
5,059 Greenwich Capital Acceptance Inc Interest Only................. 2.528 10/25/22 303,562
-----------
1,521,562
-----------
Total Long-Term Investments 90.9%
(Cost $36,080,306) <F1>........................................................................................... 35,200,753
Repurchase Agreement 8.6%
UBS Securities, U S. T-Note, $3,225,000 par, 9.50% coupon,
due 11/15/95, dated 06/30/94, to be sold on 07/01/94 at $3,351,391................................................ 3,351,000
Other Assets in Excess of Liabilities 0.5%......................................................................... 184,077
-----------
Net Assets 100%.................................................................................................... $38,735,830
-----------
<FN>
<F1> At June 30,1994, cost for federal income tax purposes is $36,080,306;
the aggregate gross unrealized appreciation is $33,022 and the aggregate
gross unrealized depreciation is $912,575, resulting in net unrealized
depreciation of $879,553.
</FN>
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 214
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
-------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at Market Value (Cost $36,080,306) (Note 1)................................. $ 35,200,753
Short-Term Investments (Note 1).......................................................... 3,351,000
Cash..................................................................................... 730
Receivables:
Interest................................................................................ 254,896
Investments Sold........................................................................ 121,663
Fund Shares Sold........................................................................ 8,705
Unamortized Organizational Expenses (Note 1)............................................. 25,276
Other.................................................................................... 485
-----------------
Total Assets............................................................................ 38,963,508
-----------------
Liabilities:
Payables:
Fund Shares Repurchased................................................................. 145,827
Income Distributions.................................................................... 42,635
Accrued Expenses......................................................................... 39,216
-----------------
Total Liabilities....................................................................... 227,678
-----------------
Net Assets............................................................................... $ 38,735,830
-----------------
Net Assets Consist of:
Paid in Surplus.......................................................................... $ 40,008,122
Accumulated Undistributed Net Investment Income.......................................... 1,893
Accumulated Net Realized Loss on Investments............................................. (394,632)
Net Unrealized Depreciation on Investments............................................... (879,553)
-----------------
Net Assets............................................................................... $ 38,735,830
-----------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (based on net assets of $7,079,499 and
753,223 shares of beneficial interest issued and outstanding) (Note 3)...... ....... $ 9.40
Maximum sales charge (3.00%* of offering price)..................................... .29
-----------------
Maximum offering price to public........................................................ $ 9.69
-----------------
Class B Shares:
Net asset value and offering price per share (based on net assets of $27,621,738 and
2,937,451 shares of beneficial interest issued and outstanding) (Note 3)............ $ 9.40
-----------------
Class C Shares:
Net asset value and offering price per share (based on net assets of $4,034,593 and
429,090 shares of beneficial interest issued and outstanding) (Note 3).............. $ 9.40
-----------------
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-37
<PAGE> 215
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1994
-------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income:
Interest......................................................................... $ 1,646,183
--------------
Expenses:
Distribution (12b-1) and Service Fees Allocated to Classes A, B and C of
$21,250, $207,242 and $22,482, respectively) (Note 5).......................... 250,974
Investment Advisory Fee (Note 2)................................................. 183,973
Shareholder Services............................................................. 59,481
Custody.......................................................................... 51,910
Legal (Note 2)................................................................... 19,290
Trustees Fees and Expenses (Note 2).............................................. 16,300
Amortization of Organizational Expenses (Note 1)................................. 7,997
Other............................................................................ 72,345
--------------
Total Expenses.................................................................. 662,270
Less Fees Waived and Expenses Reimbursed ($183,973 and $133,330, respectively).. 317,303
--------------
Net Expenses.................................................................... 344,967
--------------
Net Investment Income............................................................ $ 1,301,216
--------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................. $ 23,282,526
Cost of Securities Sold......................................................... (23,645,200)
--------------
Net Realized Loss on Investments................................................. (362,674)
--------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................... 106,224
End of the Period............................................................... (879,553)
--------------
Net Unrealized Depreciation on Investments During the Period..................... (985,777)
--------------
Net Realized and Unrealized Loss on Investments.................................. $ (1,348,451)
--------------
Net Decrease in Net Assets from Operations....................................... $ (47,235)
--------------
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 216
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Year Ended June 30, 1994 and the Period August 28, 1992
(Commencement of Investment Operations) through June 30, 1993
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Period Ended
June 30, 1994 June 30, 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income.......................................................... $ 1,301,216 $ 645,443
Net Realized Loss on Investments............................................... (362,674) (30,385)
Net Unrealized Appreciation/Depreciation on Investments During the Period...... (985,777) 106,224
------------ ------------
Change in Net Assets from Operations........................................... (47,235) 721,282
------------ ------------
Distributions from Net Investment Income:
Class A Shares................................................................ (384,334) (225,135)
Class B Shares................................................................ (879,036) (366,571)
Class C Shares................................................................ (91,263) -0-
------------ ------------
Total Distributions........................................................... (1,354,633) (591,706)
------------ ------------
Net Change in Net Assets from Investment Activities............................ (1,401,868) 129,576
------------ ------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold...................................................... 35,960,141 27,153,714
Net Asset Value of Shares Issued Through Dividend Reinvestment................. 959,832 427,880
Cost of Shares Repurchased..................................................... (15,553,274) (8,950,841)
------------ ------------
Net Change in Net Assets from Capital Transactions............................. 21,366,699 18,630,753
------------ ------------
Total Increase in Net Assets................................................... 19,964,831 18,760,329
------------ ------------
Net Assets:
Beginning of the Period........................................................ 18,770,999 10,670
------------ ------------
End of the Period (Including undistributed net investment income
of $1,893 and $53,737, respectively).......................................... $ 38,735,830 $ 18,770,999
------------ ------------
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 217
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1994
-------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August
28, 1992 with two classes of common shares, Class A and Class B shares. The
distribution of the Fund's Class C shares, which were initially introduced as
Class D shares and subsequently renamed Class C shares on March 7, 1994,
commenced on August 13, 1993.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are valued
at amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" and "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund will maintain, in a segregated account with its custodian, assets having
an aggregate value at least equal to the amount of the when issued or delayed
delivery purchase commitment until payment is made. At June 30, 1994, there
were no when issued or delayed delivery purchase commitments.
C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.
D. Organizational Expenses-The Fund will reimburse Van Kampen Merritt Inc.
("Van Kampen Merritt") for costs incurred in connection with the Fund's
organization in the amount of $40,000.
These costs are being amortized on a straight line basis over the 60 month
period ending August 28, 1997. Van Kampen Merritt Investment Advisory Corp.
(the "Adviser") has agreed that in the event any of the initial shares of the
Fund originally purchased by Van Kampen Merritt are redeemed during the
amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws
which allow it 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. At June 30, 1994, the Fund had an accumulated capital
loss carry forward for tax purposes of $61,564. Of this amount, $12,348 and
$49,236 will expire on June 30, 2001, and 2002, respectively. Net realized gains
or losses may differ for financial and tax reporting purposes primarily as a
result of post October 31 losses which are not recognized for tax purposes until
the first day of the following fiscal year.
F. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies." Accordingly, permanent book and tax basis differences relating to
shareholder distributions totaling $1,573 have been reclassified from
accumulated net realized gain/loss on investments to accumulated undistributed
net investment income. Net investment income, net realized gain/loss, and net
assets were not affected by this change.
B-40
<PAGE> 218
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
-------------------------------------------------------------------------
G. Options and Futures Transactions-Premiums received from call options written
are recorded as deferred credits. The position is marked to market daily with
any difference between the options' current market value and premiums received
recorded as an unrealized gain or loss. If the options are not exercised,
premiums received are realized as a gain at expiration date. If the position is
closed prior to expiration, a gain or loss is realized based on premiums
received less the cost of the closing transaction. When options are exercised,
premiums received are added to the proceeds from the sale of the underlying
securities and a gain or loss is realized accordingly. These same principles
apply to the sale of put options.
Put and call options purchased are accounted for in the same manner as
portfolio securities. The cost of securities acquired through the exercise of
call options is increased by premiums paid. The proceeds from securities sold
through the exercise of put options are decreased by premiums paid.
Futures contracts are marked to market daily with fluctuations in value
settled daily in cash through a margin account. Gains or losses are realized at
the time the position is closed out or the contract expires.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser
will provide facilities and investment advice to the Fund for an annual fee
payable monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
----------------------------------------------------------------
<S> <C>
First $500 million................................... .600 of 1%
Next $500 million.................................... .550 of 1%
Next $2 billion...................................... .500 of 1%
Next $2 billion...................................... .475 of 1%
Next $2 billion...................................... .450 of 1%
Next $2 billion...................................... .425 of 1%
Over $9 billion...................................... .400 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
For the year ended June 30, 1994, the Fund recognized expenses of
approximately $17,600, representing Van Kampen Merritt's or the Adviser's cost
of providing accounting, legal, portfolio pricing and certain shareholder
services to the Fund.
Certain officers and trustees of the Fund are also officers and directors of the
Adviser and Van Kampen Merritt. The Fund does not compensate its officers or
trustees who are officers of the Adviser or Van Kampen Merritt.
At June 30, 1994, Van Kampen Merritt owned 20,850,103 and 100 shares of
beneficial interest of Classes A, B and C, respectively.
3. Capital Transactions
The Fund has outstanding three classes of capital stock, Classes A, B and C.
There are an unlimited number of shares of each class without par value
authorized. At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556
and $4,161,977 for Classes A, B and C, respectively. For the year ended June
30, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
----------------------------------------------------------
<S> <C> <C>
Sales:
Class A......................... 902,396 $ 8,731,126
Class B......................... 2,364,040 22,736,081
Class C......................... 464,005 4,492,934
----------- -------------
Total Sales..................... 3,730,441 $ 35,960,141
----------- -------------
Dividend Reinvestment:
Class A......................... 26,263 $ 252,576
Class B......................... 64,882 623,837
Class C......................... 8,729 83,419
----------- -------------
Total Dividend Reinvestment..... 99,874 $ 959,832
----------- -------------
Repurchases:
Class A......................... (656,490) $ (6,285,280)
Class B......................... (926,283) (8,853,618)
Class C......................... (43,644) (414,376)
----------- -------------
Total Repurchases...............(1,626,417) $(15,553,274)
----------- -------------
</TABLE>
B-41
<PAGE> 219
Van Kampen Merritt Adjustable Rate U.S. Government Fund
-------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
-------------------------------------------------------------------------
At June 30, 1993, paid in surplus aggregated $4,696,167 and $13,945,256 for
Classes A and B, respectively. For the period ended June 30, 1993, transactions
were as follows:
<TABLE>
<CAPTION>
Shares Value
----------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 1,212,488 $ 11,769,304
Class B....................... 1,582,925 15,384,410
----------- -------------
Total Sales.................... 2,795,413 $ 27,153,714
----------- -------------
Dividend Reinvestment:
Class A....................... 18,325 $ 177,867
Class B....................... 25,646 250,013
----------- -------------
Total Dividend Reinvestment.... 43,971 $ 427,880
----------- -------------
Repurchases:
Class A....................... (749,759) $ (7,260,704)
Class B....................... (173,759) (1,690,137)
----------- -------------
Total Repurchases.............. (923,518) $ (8,950,841)
----------- -------------
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C shares will be imposed on most redemptions made within three years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule. The Class B and Class C shares bear the expense of their
respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
---------------------------------------------------------------
<S> <C> <C>
First...................................... 3.00% 1.00%
Second..................................... 2.00% None
Third...................................... 1.00% None
Fourth and Thereafter...................... None None
</TABLE>
For the year ended June 30, 1994, Van Kampen Merritt, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of $22 and
CDSC on the redeemed shares of Classes B and C of approximately $91,000. Sales
charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended June 30, 1994, were $41,367,854 and
$23,485,307, respectively.
5. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% for Class A shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for the
year ended June 30, 1994, are payments to Van Kampen Merritt of approximately
$183,000.
B-42
<PAGE> 220
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
APPENDIX C
INVESTMENT PORTFOLIO
December 31, 1994
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Agency and Government Obligations 97.5%
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES 33.3%
Federal Home Loan Mortgage Corp.
$ 247,899 5.38% Pool, 11/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,225
*3,754,317 5.47% Pool, 7/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,702,095
3,884,792 6.11% Pool, 6/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,873,876
1,316,779 6.13% Pool, 8/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,318,425
275,279 6.14% Pool, 5/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,441
348,447 6.28% Pool, 3/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345,071
310,407 7.50% Pool, 9/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,399
194,402 8.35% Pool, 2/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,183
Federal National Mortgage Association
933,709 5.83% Pool, 2/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910,366
449,130 5.84% Pool, 10/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443,516
2,021,664 5.86% Pool, 12/1/24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,980,604
3,500,000 6.25% Pool, 1/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,456,250
934,491 6.47% Pool, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 941,500
3,825,693 6.64% Pool, 9/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,838,853
----------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost $22,343,917) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,831,804
----------------
COLLATERALIZED MORTGAGE OBLIGATIONS 46.5%
Federal Home Loan Mortgage Corp.
2,531,962 5.00%, 5/15/99 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,486,082
3,911,926 5.88%, 4/15/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,892,366
2,897,537 6.18%, 2/15/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,897,537
5,000,000 6.50%, 6/15/97 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,932,050
Federal National Mortgage Association
3,237,300 4.75%, 1/25/05 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,160,414
*3,136,000 5.50%, 3/25/03 (PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,909,612
940,233 6.05%, 2/25/16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,532
848,015 6.08%, 3/25/22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 839,798
7,684,628 6.33%, 6/25/18 to 2/25/21 . . . . . . . . . . . . . . . . . . . . . . . . . 7,665,878
737,092 6.75%, 8/25/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 712,215
----------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $30,824,257) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,431,484
----------------
FIXED-RATE MORTGAGE-BACKED SECURITIES 6.8%
Federal National Mortgage Association
*909,615 9.50% Pools, 7/1/11 to 8/1/21 . . . . . . . . . . . . . . . . . . . . . . . 934,630
*780,884 10.00% Pool, 5/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 819,194
Government National Mortgage Association
220,366 8.50% Pools, 12/15/16 to 1/15/17 . . . . . . . . . . . . . . . . . . . . . . 216,441
514,313 9.50% Pools, 3/15/16 to 1/15/19 . . . . . . . . . . . . . . . . . . . . . . 530,710
956,921 10.00% Pools, 4/15/16 to 4/15/19 . . . . . . . . . . . . . . . . . . . . . . 1,005,963
494,314 10.50% Pools, 5/15/13 to 2/15/18 . . . . . . . . . . . . . . . . . . . . . . 527,833
381,751 11.00% Pool, 11/15/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,363
----------------
TOTAL FIXED-RATE MORTGAGE-BACKED SECURITIES
(Cost $4,370,127) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,448,134
----------------
</TABLE>
C-1
<PAGE> 221
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
PRINCIPAL MARKET
AMOUNT VALUE
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES TREASURY OBLIGATIONS 10.9%
United States Treasury Notes
$ 3,500,000 7.50%, 12/31/96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,487,435
3,500,000 8.875%, 2/15/99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,621,415
---------------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $7,131,578) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,108,850
---------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS
(Cost $64,669,879) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,820,272
---------------
ASSET BACKED SECURITIES 11.2%
4,000,000 ITT, 5.58%, 2/15/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,998,760
3,447,388 Premier Auto, 4.95%, 2/2/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,323,489
---------------
TOTAL ASSET BACKED SECURITIES (Cost $7,378,872) . . . . . . . . . . . . . . . . 7,322,249
---------------
REPURCHASE AGREEMENT 2.3%
1,495,000 Salomon Brothers, Inc., dated 12/30/94, 5.75%, due 1/3/95
(Collateralized by U.S. Government obligations in a pooled cash
account) repurchase proceeds $1,495,955 (Cost $1,495,000) . . . . . . . . . 1,495,000
---------------
TOTAL INVESTMENTS (Cost $73,543,751) 111.0% . . . . . . . . . . . . . . . . . . 72,637,521
Other assets and liabilities, net (11.0%) . . . . . . . . . . . . . . . . . . . (7,204,502)
---------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
===============
</TABLE>
* SECURITIES WITH A MARKET VALUE OF APPROXIMATELY $7.4 MILLION WERE
PLACED AS COLLATERAL FOR FORWARD COMMITMENTS (SEE NOTE 1B).
PAC -- Planned Amortization Class
SEE NOTES TO FINANCIAL STATEMENTS
C-2
<PAGE> 222
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $73,543,751) . . . . . . . . . . . . . . . . . . . . . . $ 72,637,521
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,698
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444,370
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,978
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,647
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,100,214
------------
LIABILITIES
Investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,026,257
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355,460
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,981
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,424
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,515
Due to shareholder service agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,830
Unrealized depreciation of forward purchase commitment . . . . . . . . . . . . . . . . . . 12,510
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 58,218
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,667,195
------------
NET ASSETS, equivalent to $11.90 per share for Class A shares,
$11.91 per share for Class B shares and $11.90 per share
for Class C shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 3,465,620 Class A,
1,541,528 Class B and 491,408 Class C shares outstanding . . . . . . . . . . . . . . . . $ 54,986
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,620,185
Accumulated net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . (16,372,918)
Net unrealized depreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (906,230)
Forward purchase commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,510)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,506
------------
NET ASSETS at December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019
============
</TABLE>
See Notes to Financial Statements.
C-3
<PAGE> 223
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
STATEMENTS OF OPERATIONS
Year Ended December 31, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,960,588
-----------
EXPENSES
Management fees (net of waiver of $140,000 -- see Note 2) . . . . . . . . . . . . . . . . . 280,713
Service fees -- Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,613
Distribution and service fees -- Class B . . . . . . . . . . . . . . . . . . . . . . . . . 222,471
Distribution and service fees -- Class C . . . . . . . . . . . . . . . . . . . . . . . . . 76,165
Shareholder services agent's fees and expenses . . . . . . . . . . . . . . . . . . . . . . 191,813
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,736
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,309
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,115
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,522
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,185
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,084
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,565
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,523
-----------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,191,814
-----------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768,774
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,162,092)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (349,453)
Net unrealized appreciation (depreciation) during the year
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,409,115)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,871
-----------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . . . . . (3,916,789)
-----------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . . . . . $ (148,015)
===========
</TABLE>
See Notes to Financial Statements.
C-4
<PAGE> 224
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . $ 98,293,251 $ 142,091,079
--------------- ---------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,768,774 6,362,397
Net realized loss on securities (net of
reimbursement -- see Note 2). . . . . . . . . . . . . . . . . . . . . . . (2,511,545) (1,880,081)
Net unrealized depreciation of securities
during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,405,244) (868,537)
---------------- ----------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148,015) 3,613,779
--------------- ---------------
DIVIDENDS TO SHAREHOLDERS FROM NET
INVESTMENT INCOME
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,394,001) (4,123,348)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (806,734) (1,347,132)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (276,067) (91,349)
--------------- ---------------
(3,476,802) (5,561,829)
--------------- ---------------
NET EQUALIZATION DEBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . (169,962) (620,002)
--------------- ---------------
FUND SHARES TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,201,023 32,894,798
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,104,254 5,703,339
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,694,179 7,970,180
--------------- ---------------
28,999,456 46,568,317
--------------- ---------------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,576,391 2,898,790
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547,208 863,542
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,460 46,435
--------------- ---------------
2,246,059 3,808,767
--------------- ---------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,385,868) (73,362,626)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,217,467) (17,349,831)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,707,633) (894,403)
--------------- ---------------
(60,310,968) (91,606,860)
--------------- ---------------
Decrease in net assets resulting from Fund
shares transactions . . . . . . . . . . . . . . . . . . . . . . . . . . (29,065,453) (41,229,776)
--------------- ---------------
DECREASE IN NET ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,860,232) (43,797,828)
--------------- ---------------
NET ASSETS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,433,019 $ 98,293,251
=============== ===============
</TABLE>
See Notes to Financial Statements.
C-5
<PAGE> 225
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
NOTES TO FINANCIAL STATEMENTS
Note 1 - Significant Accounting Policies
American Capital Federal Mortgage Trust (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. Investment Valuations
U.S. Agency and Government obligations and related forward commitments
are valued at the last reported bid price. Listed options are valued
at the last reported sale price on the exchange on which such option
is traded, or, if no sales are reported, at the mean between the last
reported bid and asked prices. Securities for which market quotations
are not readily available are valued at a fair value under a method
approved by the Board of Trustees.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days
when purchased are valued based on market quotations, until the
remaining days to maturity become less than 61 days. From such time,
until maturity, such investments are valued at amortized cost.
B. Forward Commitments
The fund trades certain securities under the terms of forward
commitments, whereby the settlement for payment and delivery occurs at
a specified future date. Forward commitments are privately negotiated
transactions between the Fund and dealers. Transactions in forward
commitments are utilized in strategies to manage the market risk of
the Fund's investments. Investing in such instruments increases the
impact on net asset value of changes in the market price of
investments. Forward commitments have a risk of loss due to
nonperformance of counterparties. There is also a risk that the
market movement of such instruments may not be in the direction
forecasted. Upon executing a forward commitment and during the period
of obligation, the Fund maintains collateral of cash or securities in
a segregated account with its custodian in an amount sufficient to
relieve the obligation. If the intent of the Fund is to accept
delivery of a security traded under a forward purchase commitment, the
commitment is recorded as a ling-term purchase. For forward purchase
commitments and for forward sale commitments, which security
settlement is not intended by the Fund, changes in the value of the
commitment are recognized by marking the commitment to market on a
daily basis. During the period of the commitment, the Fund may either
resell or repurchase the forward commitment and enter into a new
forward commitment, the effect of which is to extend the settlement
date. In addition, the Fund may occasionally close such forward
commitments prior to delivery. Gains or losses are realized upon the
ultimate closing or cash settlement of forward commitments. Note 3 -
Investment activity contains additional information.
C. Repurchase Agreements
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The
Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised or subadvised by the Van Kampen American
Capital Asset Management, Inc. (the "Adviser"), the daily aggregate of
which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Fund will make
payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not
less than the repurchase proceeds due the Fund.
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of capital gains will be made until
tax basis capital loss carryforwards expire or are offset by net
realized capital gains.
E. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of
identified cost. Interest income is accrued daily.
C-6
<PAGE> 226
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
F. Dividends and Distributions
The Fund declares dividends on each business day. Dividends and
distributions are recorded on the record dates. The Fund distributes
tax basis earnings in accordance with the minimum distribution
requirements of the Internal Revenue Code, which may differ from
generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
G. Equalization
At December 31, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is
a practice whereby a portion of the proceeds from sales and costs of
redemptions of Fund shares, equivalent on a per-share basis to the
amount of the undistributed net investment income, is charged or
credited to undistributed net investment income.
The balance of equalization included in undistributed net investment
income at the date of change, which was $311,791, was reclassified to
capital surplus. Such reclassification had no effect on net assets,
results of operations, or net asset value per share of the Fund.
H. Debt Discount and Premium
For financial reporting purposes, debt discounts and premiums are
accounted for on the same basis as is followed for federal income tax
reporting. Accordingly, original issue discounts on debt securities
purchased are amortized over the life of the security. Premiums on
debt securities are not amortized. Market discounts are recognized at
the time of sale as realized gains for book purposes and ordinary
income for tax purposes.
Note 2 - Management Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.50% of the first $1 billion, .475% of the next $1 billion, .45% of the next $1
billion, .40% of the next $1 billion and .35% of the amount in excess of $4
billion. From time to time, the Adviser may elect to waive a portion of its
management fee. The waiver is voluntary and may be discontinued at any time
without prior notice.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or subadvised by the Adviser.
For the year ended December 31, 1994, these charges included $6,936 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended December 31, 1994, the fees
for such services aggregated $150,547.
The Fund was advised that Van Kampen American Capital Distributor, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $2,321 and $6,301, respectively, as their
portion of the commissions charged on sales of Fund shares during the year.
Under the Distribution Plans, each class of shares pays up to .25% per annum of
its average net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts
reimbursed to the Distributor by the Fund. At December 31, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B and Class C
plans aggregated approximately $1.1 million and $130,000, respectively, and may
be carried forward and reimbursed through either the collection of the
contingent deferred sales charges from share redemptions or, subject to the
annual renewal of the plans, future Fund reimbursements of distribution fees.
C-7
<PAGE> 227
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
Legal fees of $7,034 were for services rendered by O'Melveny & Myers, counsel
for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of
the Fund.
Certain officers and trustees of the Fund are officers and trustees or
directors of the Adviser, the Distributor, the Retail Dealer and the
shareholder service agent.
During 1993, certain securities held by the Fund were mispriced. The Adviser
reimbursed the Fund approximately $6.9 million to eliminate any loss to
shareholders incurred during the year of mispricing of such securities. The
reimbursement has been recorded as a reduction of the realized loss recognized
on the sale of the related securities. Without the reimbursement, the Adviser
estimates that the total return for the year ended December 31, 1993 would have
been lower by approximately 6.25 percentage points.
Note 3 -- Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments and forward commitments, were $129,178,297 and
$151,188,189, respectively.
The identified cost of investments owned at December 31, 1994 was the same for
federal income tax and financial reporting purposes. Net unrealized
depreciation of investments aggregated $906,230, gross unrealized appreciation
of investments aggregated $108,819 and gross unrealized depreciation of
investments aggregated $1,015,049.
The net realized capital loss carryforward of approximately $15.4 million for
federal income tax purposes at December 31, 1994 may be utilized to offset
future capital gains until expiration in 1995 through 2002, of which
approximately 21% will expire in 1995. Additionally, approximately $900,000 in
realized losses are being deferred for tax purposes to the 1995 fiscal year.
At December 31, 1994, the Fund held the following forward purchase commitment
settling January 1995.
<TABLE>
<CAPTION>
VALUE AT
PRINCIPAL DECEMBER 31, UNREALIZED
AMOUNT SECURITY 1994 DEPRECIATION
---------- ----------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
$4,000,000 Federal National Mortgage Association,
8.00% Pools . . . . . . . . . . . . . . . . . . . . $ 3,831,240 $ 12,510
=========== ============
</TABLE>
Note 4 -- Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $810 plus a fee of $20 per day for Board and Committee
meetings attended. The Chairman receives additional fees from the Fund at an
annual rate of $310. During the year, such fees aggregated $9,556.
The trustees may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At December 31, 1994, the liability for the Plan aggregated
$16,118. Each trustee covered under the Plan elects to be credited with an
earning component on amounts deferred equal to the income earned by the Fund on
its short-term investments or equal to the total return of the Fund.
Note 5 -- Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or looses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets or paid shares of each class. Class B shares
and Class C shares automatically convert to Class A shares six years and ten
years after purchase, respectively, subject to certain conditions. The Fund
has suspended sales of Class B shares to the public, and these shares are now
available only to a limited group of investors.
C-8
<PAGE> 228
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
The Fund has an unlimited number of shares of $.01 par value beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1994 1993
--------- ---------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589,204 2,652,339
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340,243 454,922
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469,667 636,387
---------- ----------
2,399,114 3,743,648
---------- ----------
Shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,048 230,580
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,121 68,673
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,116 3,723
---------- ----------
185,285 302,976
---------- ----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,431,958) (5,915,573)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,010,900) (1,391,506)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . (556,549) (71,936)
---------- ----------
(4,999,407) (7,379,015)
---------- ----------
Decrease in shares outstanding . . . . . . . . . . . . . . . . . . (2,415,008) (3,332,391)
========== ==========
</TABLE>
C-9
<PAGE> 229
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of year ........... $ 12.42 $ 12.63 $ 12.99 $ 12.85 $ 12.88
---------- ---------- -------- --------- ---------
INCOME FROM OPERATIONS
Investment income ............................ .62 .64 .93 1.15 1.32
Expenses ..................................... (.14) (.11) (.14) (.17) (.173)
Expense waiver(2) ............................ .02 .01 .025 .025 --
---------- ---------- -------- --------- ---------
Net investment income ........................ .50 .54 .815 1.005 1.147
Net realized and unrealized gains or
losses on securities ....................... (.4817) (.1485)(1) (.417) .206 (.004)
---------- ---------- -------- --------- ---------
Total from investment operations ............. .0183 .3915 .398 1.211 1.143
---------- ---------- -------- --------- ---------
DIVIDENDS FROM NET INVESTMENT INCOME ......... (.5383) (.6015) (.758) (1.071) (1.173)
---------- ---------- -------- --------- ---------
Net asset value, end of year ................. $ 11.90 $ 12.42 $ 12.63 $ 12.99 $ 12.85
========== ========== ======== ========= =========
TOTAL RETURN(3) .............................. .16% 3.15%(1) 3.15% 9.78% 9.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions) ........... $ 41.2 $ 64.3 $103.7 $ 95.8 $ 32.3
Average net assets (millions) ................ $ 54.3 $ 85.7 $112.7 $ 47.5 $ 33.4
Ratios to average net assets(2)
Expenses ............................... 1.15% 1.03% 0.91% 1.16% 1.38%
Expenses, without waiver ............... 1.31% 1.15% 1.12% 1.36% --
Net investment income .................. 4.75% 5.49% 6.36% 7.96% 9.11%
Net investment income,
without waiver ....................... 4.58% 5.37% 6.15% 7.66% --
Portfolio turnover rate ...................... 161% 102% 254% 293% 341%
</TABLE>
(1) NET OF REIMBURSEMENT-- SEE NOTE 2.
(2) SEE NOTE 2.
(3) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
SEE NOTES TO FINANCIAL STATEMENTS.
C-10
<PAGE> 230
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
FINANCIAL HIGHLIGHTS, CONTINUED
Selected data for a share of beneficial interest outstanding throughout
each of the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
-------------------------------------------------- --------------------------
NOVEMBER 5 MAY 10,
1991(2) YEAR 1993(2)
YEAR ENDED DECEMBER 31 THROUGH ENDED THROUGH
------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991(3) 1994 1993(3)
--------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period ........ $ 12.43 $ 12.64 $ 12.99 $ 12.99 $ 12.41 $ 12.60
--------- ---------- -------- --------- ---------- ----------
INCOME FROM OPERATIONS
Investment income ........................... .62 .67 .935 .12 .67 .44
Expenses .................................... (.22) (.20) (.24) (.03) (.24) (.14)
Expense waiver(6) ........................... .02 .01 .03 .02 .02 .02
--------- ---------- -------- --------- ---------- ----------
Net investment income ....................... .42 .48 .725 .11 .45 .32
Net realized and unrealized gains or
losses on securities ...................... (.4977) (.1845)(1) (.413) .036 (.5177) (.1914)(1)
--------- ---------- -------- --------- ---------- ----------
Total from investment operations ............ (.0777) .2955 .312 .146 (.0677) .1286
--------- ---------- -------- --------- ---------- ----------
DIVIDENDS FROM NET INVESTMENT
INCOME .................................... (.4423) (.5055) (.662) (.146) (.4423) (.3186)
--------- ---------- -------- --------- ---------- ----------
Net asset value, end of period .............. $ 11.91 $ 12.43 $ 12.64 $ 12.99 $ 11.90 $ 12.41
========= ========== ======== ========= ========== ==========
TOTAL RETURN(4) ............................. (.62%) 2.37% (1) 2.46% 1.13% (.55%) 1.03%(1)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) ........ $18.4 $26.9 $38.4 $9.4 $5.8 $7.1
Average net assets (millions) ............... $22.2 $33.3 $32.3 $4.1 $7.6 $4.0
Ratios to average net assets(6)
Expenses .............................. 1.91% 1.79% 1.60% .59%(5) 1.90% 1.47%(5)
Expenses, without waiver .............. 2.08% 1.91% 1.81% 1.84%(5) 2.07% 1.64%(5)
Net investment income ................. 3.99% 4.70% 5.44% 5.73%(5) 3.98% 3.79%(5)
Net investment income,
without waiver ...................... 3.82% 4.58% 5.23% 4.48%(5) 3.81% 3.62%(5)
Portfolio turnover rate ..................... 161% 102% 254% 293% 161% 102%
</TABLE>
(1) NET OF REIMBURSEMENT -- SEE NOTE 2.
(2) COMMENCEMENT OF OFFERING OF SALES
(3) BASED ON AVERAGE MONTH-END SHARES OUTSTANDING
(4) TOTAL RETURN FOR PERIODS OF LESS THAN ONE FULL YEAR ARE NOT
ANNUALIZED. TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES
CHARGES.
(5) ANNUALIZED
(6) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
C-11
<PAGE> 231
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
AMERICAN CAPITAL FEDERAL MORTGAGE TRUST
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, 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 American Capital Federal Mortgage
Trust at December 31, 1994, and the results of its operations, the changes in
its net assets and the selected per share data and ratios for each of the
fiscal periods presented, in conformity with generally accepted accounting
principles. These financial statements and selected per share data and ratios
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1994 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
February 16, 1995
C-12
<PAGE> 232
APPENDIX D
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS
June 30, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION VALUE
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
MORTGAGE-BACKED SECURITIES 87.0%
$ 938 AFC Mortgage, 5.735%, 03/25/25..................................................... $ 945,076
1,949 DLJ Mortgage Acceptance Corporation, 3.945%, 03/25/24.............................. 1,931,543
Federal Home Loan Mortgage Corporation
953 4.625%, 07/01/14................................................................. 954,012
1,855 5.634%, 03/01/18................................................................. 1,904,730
3,071 5.569%, 08/01/20................................................................. 3,158,327
1,000 5.507%, 07/01/22................................................................. 1,020,161
1,372 4.105%, 10/01/23................................................................. 1,369,590
2,732 3.733%, 01/01/24................................................................. 2,697,822
Federal National Mortgage Association
1,848 5.493%, 01/01/16................................................................. 1,914,516
2,815 5.445%, 11/01/18................................................................. 2,905,691
1,943 5.323%, 03/01/19................................................................. 1,996,782
1,034 5.593%, 03/01/19................................................................. 1,063,721
1,849 5.124%, 02/01/21................................................................. 1,830,494
2,504 5.586%, 10/01/22................................................................. 2,509,816
1,794 4.245%, 10/01/23................................................................. 1,818,427
1,954 3.386%, 01/01/24................................................................. 1,917,684
702 4.960%, 11/01/26................................................................. 706,116
556 4.937%, 03/01/29................................................................. 550,329
Federal National Mortgage Association Interest Only
262 7.000%, 02/25/98................................................................ 656
1,792 5.206%, 12/25/08................................................................ 164,666
1,843 Government National Mortgage Association, 6.000%, 06/20/23........................ 1,840,678
7,359 Salomon Brothers Mortgage Securities VII Inc Interest Only, 2.290%, 03/25/24...... 478,354
-----------
33,679,191
-----------
CORPORATE SECURITIES 3.9%
1,200 Greenwich Capital Acceptance Inc, 6.087%, 07/25/22................................ 1,218,000
5,059 Greenwich Capital Acceptance Inc Interest Only, 2.528%, 10/25/22.................. 303,562
-----------
1,521,562
-----------
TOTAL LONG-TERM INVESTMENTS 90.9% (Cost $36,080,306).............................. 35,200,753
-----------
REPURCHASE AGREEMENT 8.6%
UBS Securities, U S. T-Note, $3,225,000 par, 9.50% coupon, due 11/15/95, dated
06/30/94, to be sold on 07/01/94 at $3,351,391.................................... 3,351,000
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%........................................ 184,077
-----------
NET ASSETS 100%................................................................... $38,735,830
===========
</TABLE>
At June 30, 1994, cost for federal income tax purposes is $36,080,306; the
aggregate gross unrealized appreciation is $33,022 and the aggregate gross
unrealized depreciation is $912,575, resulting in net unrealized depreciation of
$879,553.
See Notes to Financial Statements.
D-1
<PAGE> 233
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1994
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $36,080,306) (Note 1)........................ $35,200,753
Short-Term Investments (Note 1)................................................. 3,351,000
Cash............................................................................ 730
RECEIVABLES:
Interest........................................................................ 254,896
Investments Sold................................................................ 121,663
Fund Shares Sold................................................................ 8,705
Unamortized Organizational Expenses (Note 1).................................... 25,276
Other........................................................................... 485
-----------
Total Assets.................................................................... 38,963,508
-----------
LIABILITIES:
PAYABLES:
Fund Shares Repurchased......................................................... 145,827
Income Distributions............................................................ 42,635
Accrued Expenses................................................................ 39,216
-----------
Total Liabilities............................................................... 227,678
-----------
NET ASSETS...................................................................... $38,735,830
===========
NET ASSETS CONSIST OF:
Paid in Surplus................................................................. $40,008,122
Accumulated Undistributed Net Investment Income................................. 1,893
Accumulated Net Realized Loss on Investments.................................... (394,632)
Net Unrealized Depreciation on Investments...................................... (879,553)
-----------
NET ASSETS...................................................................... $38,735,830
-----------
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (based on net assets of
$7,079,499 and 753,223 shares of beneficial interest issued and outstanding)
(Note 3)...................................................................... $ 9.40
Maximum sales charge (3.00%* of offering price)............................... .29
-----------
Maximum offering price to public................................................ $ 9.69
===========
CLASS B SHARES:
Net asset value and offering price per share (based on net assets of $27,621,738
and 2,937,451 shares of beneficial interest issued and outstanding)
(Note3)...................................................................... $ 9.40
===========
CLASS C SHARES:
Net asset value and offering price per share (based on net assets of $4,034,593
and 429,090 shares of beneficial interest issued and outstanding)
(Note 3).................................................................... $ 9.40
===========
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements.
D-2
<PAGE> 234
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest....................................................................... $ 1,646,183
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$21,250, $207,242 and $22,482, respectively) (Note 5)........................ 250,974
Investment Advisory Fee (Note 2)............................................... 183,973
Shareholder Services........................................................... 59,481
Custody........................................................................ 51,910
Legal (Note 2)................................................................. 19,290
Trustees Fees and Expenses (Note 2)............................................ 16,300
Amortization of Organizational Expenses (Note 1)............................... 7,997
Other.......................................................................... 72,345
------------
Total Expenses................................................................. 662,270
Less Fees Waived and Expenses Reimbursed ($183,973 and $133,330,
respectively)................................................................ 317,303
------------
Net Expenses................................................................... 344,967
------------
Net Investment Income.......................................................... $ 1,301,216
============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
REALIZED GAIN/LOSS ON INVESTMENTS:
Proceeds from Sales............................................................ $ 23,282,526
Cost of Securities Sold........................................................ (23,645,200)
------------
NET REALIZED LOSS ON INVESTMENTS............................................... (362,674)
------------
NET UNREALIZED APPRECIATION/DEPRECIATION ON INVESTMENTS:
Beginning of the Period........................................................ 106,224
End of the Period.............................................................. (879,553)
------------
Net Unrealized Depreciation on Investments During the Period................... (985,777)
------------
Net Realized and Unrealized Loss on Investments................................ $ (1,348,451)
============
Net Decrease in Net Assets from Operations..................................... $ (47,235)
============
</TABLE>
See Notes to Financial Statements.
D-3
<PAGE> 235
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended June 30, 1994 and the Period August 28, 1992
(Commencement of Investment Operations) through June 30, 1993
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
YEAR ENDED PERIOD ENDED
JUNE 30, 1994 JUNE 30, 1993
--------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net Investment Income............................................ $ 1,301,216 $ 645,443
Net Realized Loss on Investments................................. (362,674) (30,385)
Net Unrealized Appreciation/Depreciation on Investments During
the Period.................................................... (985,777) 106,224
------------- -------------
Change in Net Assets from Operations............................. (47,235) 721,282
------------- -------------
DISTRIBUTIONS FROM NET INVESTMENT INCOME:
Class A Shares................................................... (384,334) (225,135)
Class B Shares................................................... (879,036) (366,571)
Class C Shares................................................... (91,263) -0-
------------- -------------
Total Distributions.............................................. (1,354,633) (591,706)
------------- -------------
Net Change in Net Assets from Investment Activities................ (1,401,868) 129,576
------------- -------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold........................................ 35,960,141 27,153,714
Net Asset Value of Shares Issued Through Dividend Reinvestment... 959,832 427,880
Cost of Shares Repurchased....................................... (15,553,274) (8,950,841)
------------- -------------
Net Change in Net Assets from Capital Transactions................. 21,366,699 18,630,753
------------- -------------
TOTAL INCREASE IN NET ASSETS....................................... 19,964,831 18,760,329
------------- -------------
NET ASSETS:
Beginning of the Period.......................................... 18,770,999 10,670
------------- -------------
End of the Period (Including undistributed net investment income
of $1,893 and $53,737, respectively).......................... $ 38,735,830 $ 18,770,999
============= ============
</TABLE>
See Notes to Financial Statements.
D-4
<PAGE> 236
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
AUGUST 28, 1992
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS)
JUNE 30, 1994 TO JUNE 30, 1993
------------- ----------------------
<S> <C> <C>
CLASS A SHARES
Net Asset Value, Beginning of Period........................... $ 9.793 $ 9.700
------- -------
Net Investment Income........................................ .452 .451
Net Realized and Unrealized Gain/Loss on Investments......... (.360) .049
------- -------
Total from Investment Operations............................... .092 .500
Less: Distributions from Net Investment Income................. .486 .407
------- -------
Net Asset Value, End of Period................................. $ 9.399 $ 9.793
======= =======
Total Return*.................................................. .97% 6.30%
Net Assets at End of Period (in millions)...................... $ 7.1 $ 4.7
Ratio of Expenses to Average Net Assets* (annualized).......... .61% .95%
Ratio of Net Investment Income to Average Net Assets*
(annualized)................................................. 4.73% 5.29%
Portfolio Turnover............................................. 81.70% 76.62%
*If certain expenses had not been assumed by the investment
adviser, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets (annualized)........... 1.62% 1.86%
Ratio of Net Investment Income to Average Net Assets
(annualized)................................................. 3.72% 4.37%
</TABLE>
See Notes to Financial Statements
D-5
<PAGE> 237
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS--CONTINUED
The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
AUGUST 28, 1992
(COMMENCEMENT OF
YEAR ENDED INVESTMENT OPERATIONS)
JUNE 30, 1994 TO JUNE 30, 1993
------------- ----------------------
<S> <C> <C>
CLASS B SHARES
Net Asset Value, Beginning of Period........................... $ 9.799 $ 9.700
------- -------
Net Investment Income........................................ .391 .378
Net Realized and Unrealized Gain/Loss on Investments......... (.370) .076
------- -------
Total from Investment Operations............................... .021 .454
Less: Distributions from Net Investment Income................. .417 .355
------- -------
Net Asset Value, End of Period................................. $ 9.403 $ 9.799
======= =======
Total Return*.................................................. .15% 5.76%
Net Assets at End of Period (in millions)...................... $ 27.6 $ 14.1
Ratio of Expenses to Average Net Assets* (annualized).......... 1.31% 1.63%
Ratio of Net Investment Income to Average Net Assets*
(annualized)................................................. 4.14% 4.78%
Portfolio Turnover............................................. 81.70% 76.62%
* If certain expenses had not been assumed by the investment
adviser, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets (annualized)........... 2.36% 2.55%
Ratio of Net Investment Income to Average Net Assets
(annualized)................................................. 3.09% 3.86%
</TABLE>
See Notes to Financial Statements
D-6
<PAGE> 238
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS--CONTINUED
The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
AUGUST 13, 1993
(COMMENCEMENT OF
INVESTMENT OPERATIONS)
TO JUNE 30, 1994
----------------------
<S> <C>
CLASS C SHARES
Net Asset Value, Beginning of Period..................................... $9.790
-------
Net Investment Income.................................................. .366
Net Realized and Unrealized Loss on Investments........................ (.387)
-------
Total from Investment Operations......................................... (.021)
Less: Distributions from Net Investment Income........................... .366
-------
Net Asset Value, End of Period........................................... $9.403
======
Total Return* (annualized)............................................... (.30%)
Net Assets at End of Period (in millions)................................ $ 4.0
Ratio of Expenses to Average Net Assets* (annualized).................... 1.31%
Ratio of Net Investment Income to Average Net Asset* (annualized)........ 4.05%
Portfolio Turnover....................................................... 81.70%
* If certain expenses had not been assumed by the investment adviser,
total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net Assets (annualized)..................... 2.37%
Ratio of Net Investment Income to Average Net Assets (annualized)........ 2.98%
</TABLE>
See Notes to Financial Statements
D-7
<PAGE> 239
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August 28,
1992 with two classes of common shares, Class A and Class B shares. The
distribution of the Fund's Class C shares, which were initially introduced as
Class D shares and subsequently renamed Class C shares on March 7, 1994,
commenced on August 13, 1993.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation
Investments are stated at value using market quotations or, if such
valuations are not available, estimates obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions
Security transactions are recorded on a trade date basis. Realized gains
and losses are determined on an identified cost basis. The Fund may purchase and
sell securities on a "when issued" and "delayed delivery" basis, with settlement
to occur at a later date. The value of the security so purchased is subject to
market fluctuations during this period. The Fund will maintain, in a segregated
account with its custodian, assets having an aggregate value at least equal to
the amount of the when issued or delayed delivery purchase commitment until
payment is made. At June 30, 1994, there were no when issued or delayed delivery
purchase commitments.
C. Investment Income
Interest income is recorded on an accrual basis. Bond premium and original
issue discount are amortized over the expected life of each applicable security.
D. Organizational Expenses
The Fund will reimburse Van Kampen Merritt Inc. ("Van Kampen Merritt") for
costs incurred in connection with the Fund's organization in the amount of
$40,000.
These costs are being amortized on a straight line basis over the 60 month
period ending August 28, 1997. Van Kampen Merritt Investment Advisory Corp. (the
"Adviser") has agreed that in the event any of the initial shares of the Fund
originally purchased by Van Kampen Merritt are redeemed during the amortization
period, the Fund will be reimbursed for any unamortized organizational expenses
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
E. Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is required.
D-8
<PAGE> 240
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1994
The Fund intends to utilize provisions of the federal income tax laws which
allow it 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. At June 30, 1994, the Fund had an accumulated capital loss carry forward
for tax purposes of $61,584. Of this amount, $12,348 and $49,236 will expire on
June 30, 2001, and 2002, respectively. Net realized gains or losses may differ
for financial and tax reporting purposes primarily as a result of post October
31 losses which are not recognized for tax purposes until the first day of the
following fiscal year.
F. Distribution of Income and Gains
The Fund declares daily and pays monthly dividends from net investment
income. Net realized gains, if any, are distributed annually. During the current
period, the Fund adopted Statement of Position 93-2 "Determination, Disclosure,
and Financial Statement Presentation of Income, Capital Gain, and Return of
Capital Distributions by Investment Companies." Accordingly, permanent book and
tax basis differences relating to shareholder distributions totaling $1,573 have
been reclassified from accumulated net realized gain/loss on investments to
accumulated undistributed net investment income. Net investment income, net
realized gain/loss, and net assets were not affected by this change.
G. Options and Futures Transactions
Premiums received from call options written are recorded as deferred
credits. The position is marked to market daily with any difference between the
options' current market value and premiums received recorded as an unrealized
gain or loss. If the options are not exercised, premiums received are realized
as a gain at expiration date. If the position is closed prior to expiration, a
gain or loss is realized based on premiums received less the cost of the closing
transaction. When options are exercised, premiums received are added to the
proceeds from the sale of the underlying securities and a gain or loss is
realized accordingly. These same principles apply to the sale of put options.
Put and call options purchased are accounted for in the same manner as
portfolio securities. The cost of securities acquired through the exercise of
call options is increased by premiums paid. The proceeds from securities sold
through the exercise of put options are decreased by premiums paid.
Futures contracts are marked to market daily with fluctuations in value
settled daily in cash through a margin account. Gains or losses are realized at
the time the position is closed out or the contract expires.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser
will provide facilities and investment advice to the Fund for an annual fee
payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
----------------------------------------------------- -----------
<S> <C>
First $500 million................................... .600 of 1%
Next $500 million.................................... .550 of 1%
Next $2 billion...................................... .500 of 1%
Next $2 billion...................................... .475 of 1%
Next $2 billion...................................... .450 of 1%
Next $2 billion...................................... .425 of 1%
Over $9 billion...................................... .400 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
D-9
<PAGE> 241
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1994
For the year ended June 30, 1994, the Fund recognized expenses of
approximately $17,600, representing Van Kampen Merritt's or the Adviser's cost
of providing accounting, legal, portfolio pricing and certain shareholder
services to the Fund.
Certain officers and trustees of the Fund are also officers and directors
of the Adviser and Van Kampen Merritt. The Fund does not compensate its officers
or trustees who are officers of the Adviser or Van Kampen Merritt.
At June 30, 1994, Van Kampen Merritt owned 20,850, 103 and 100 shares of
beneficial interest of Classes A, B and C, respectively.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of capital stock, Classes A, B and
C. There are an unlimited number of shares of each class without par value
authorized. At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556
and $4,161,977 for Classes A, B and C, respectively. For the year ended June 30,
1994, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Sales:
Class A........................................................... 902,396 $ 8,731,126
Class B........................................................... 2,364,040 22,736,081
Class C........................................................... 464,005 4,492,934
---------- ------------
Total Sales.................................................... 3,730,441 $ 35,960,141
========== ============
Dividend Reinvestment:
Class A........................................................... 26,263 $ 252,576
Class B........................................................... 64,882 623,837
Class C........................................................... 8,729 83,419
---------- ------------
Total Dividend Reinvestment.................................... 99,874 $ 959,832
========== ============
Repurchases:
Class A........................................................... (656,490) $ (6,285,280)
Class B........................................................... (926,283) (8,853,618)
Class C........................................................... (43,644) (414,376)
---------- ------------
Total Repurchases.............................................. (1,626,417) $(15,553,274)
========== ============
</TABLE>
D-10
<PAGE> 242
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
June 30, 1994
At June 30, 1993, paid in surplus aggregated $4,696,167 and $13,945,256 for
Classes A and B, respectively. For the period ended June 30, 1993, transactions
were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
Sales:
Class A............................................................. 1,212,488 $11,769,304
Class B............................................................. 1,582,925 15,384,410
--------- -----------
Total Sales...................................................... 2,795,413 $27,153,714
========= ===========
Dividend Reinvestment:
Class A............................................................. 18,325 $ 177,867
Class B............................................................. 25,646 250,013
--------- -----------
Total Dividend Reinvestment...................................... 43,971 $ 427,880
========= ===========
Repurchases:
Class A............................................................. (749,759) $(7,260,704)
Class B............................................................. (173,759) (1,690,137)
--------- -----------
Total Repurchases................................................ (923,518) $(8,950,841)
========= ===========
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C shares will be imposed on most redemptions made within three years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule. The Class B and Class C shares bear the expense of their
respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
---------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------------------------------------------------------------- ------- -------
<S> <C> <C>
First.................................................................... 3.00% 1.00%
Second................................................................... 2.00% None
Third.................................................................... 1.00% None
Fourth and Thereafter.................................................... None None
</TABLE>
For the year ended June 30, 1994, Van Kampen Merritt, as Distributor for
the Fund, received net commissions on sales of the Fund's Class A shares of $22
and CDSC on the redeemed shares of Classes B and C of approximately $91,000.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended June 30, 1994, were $41,367,854 and
$23,485,307, respectively.
5. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% for Class A shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for the
year ended June 30, 1994, are payments to Van Kampen Merritt of approximately
$183,000.
D-11
<PAGE> 243
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of
Van Kampen Merritt Adjustable Rate U.S. Government Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund"), including the
portfolio of investments, as of June 30, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
the year then ended and for the period from August 28, 1992 (commencement of
investment operations) through June 30, 1993, and the financial highlights for
each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1994, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Merritt Adjustable Rate U.S. Government Fund as of June 30, 1994, the
results of its operations for the year then ended, the changes in its net assets
for the year then ended and for the period from August 28, 1992 (commencement of
investment operations) through June 30, 1993, and the financial highlights for
each of the periods presented, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
August 4, 1994
D-12
<PAGE> 244
APPENDIX E
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
PORTFOLIO OF INVESTMENTS
December 31, 1994 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES 2.9%
$ 955 Nomura Asset Securities Corporation, 7.265%, 07/07/03............................. $ 978,875
-----------
MORTGAGE-BACKED SECURITIES 84.4%
793 AFC Mortgage #93-4B2A1, 6.936%, 12/25/23.......................................... 793,905
954 Citicorp Mortgage Securities Inc #94-11A2, 6.250%, 08/25/24....................... 911,300
1,808 DLJ Mortgage Acceptance Corporation #94-Q1, 4.883%, 03/25/24 1,743,292
Federal Home Loan Mortgage Corporation
882 6.625%, 07/01/14................................................................ 871,541
1,723 5.635%, 03/01/18................................................................ 1,703,658
2,834 6.522%, 08/01/20................................................................ 2,854,220
872 7.290%, 07/01/22................................................................ 878,405
1,266 6.095%, 10/01/23................................................................ 1,239,309
Federal National Mortgage Association
1,742 6.809%, 01/01/16................................................................ 1,762,037
2,345 7.013%, 11/01/18................................................................ 2,347,593
1,642 6.347%, 03/01/19................................................................ 1,629,226
899 6.741%, 03/01/19................................................................ 906,915
1,833 5.124%, 02/01/21................................................................ 1,779,585
2,229 7.161%, 10/01/22................................................................ 2,234,043
1,606 5.896%, 10/01/23................................................................ 1,581,831
1,789 4.371%, 01/01/24................................................................ 1,777,357
614 5.190%, 11/01/26................................................................ 593,819
490 5.289%, 03/01/29................................................................ 474,098
1,753 Government National Mortgage Association, 6.750%, 06/20/23........................ 1,704,097
6,808 Salomon Brothers Mortgage Securities VII Inc -- Interest Only, 2.283%, 02/25/24... 370,180
-----------
28,156,411
-----------
CORPORATE SECURITIES 4.1%
1,200 Greenwich Capital Acceptance Inc, 6.594%, 07/25/22................................ 1,171,500
4,300 Greenwich Capital Acceptance Inc -- Interest Only, 2.514%, 10/25/22............... 180,623
-----------
1,352,123
-----------
TOTAL LONG-TERM INVESTMENTS 91.4% (Cost $31,905,802).............................. $30,487,409
-----------
SHORT-TERM INVESTMENTS AT AMORTIZED COST 8.1%
Mexican Tesobonos ($1,000,000 par, yielding 7.07%, maturing 01/12/95)............. 997,763
Repurchase Agreement, J.P. Morgan Securities, U.S. T-Note, $1,770,000 par, 3.875% 1,710,000
coupon, due 09/30/95, dated 12/30/94, to be sold on 01/03/95 at $1,710,998......
-----------
TOTAL SHORT-TERM INVESTMENTS AT AMORTIZED COST.................................... 2,707,763
OTHER ASSETS IN EXCESS OF LIABILITIES 0.5%........................................ 173,538
-----------
NET ASSETS 100%................................................................... $33,368,710
===========
</TABLE>
At December 31, 1994, cost for federal income tax purposes is $31,905,802; the
aggregate gross unrealized appreciation is $-0-and the aggregate gross
unrealized depreciation is $1,418,393, resulting in net unrealized depreciation
of $1,418,393.
See Notes to Financial Statements
E-1
<PAGE> 245
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994 (Unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $31,905,802)................................ $30,487,409
Short-Term Investments......................................................... 2,707,763
Cash........................................................................... 821
RECEIVABLES:
Interest....................................................................... 392,441
Fund Shares Sold............................................................... 5,189
Unamortized Organizational Expenses............................................ 21,245
Other.......................................................................... 119
-----------
Total Assets................................................................... 33,614,987
-----------
LIABILITIES:
PAYABLES:
Fund Shares Repurchased........................................................ 107,791
Income Distributions........................................................... 33,872
Accrued Expenses............................................................... 104,614
-----------
Total Liabilities.............................................................. 246,277
-----------
NET ASSETS..................................................................... $33,368,710
===========
NET ASSETS CONSIST OF:
Paid in Surplus................................................................ $35,473,115
Accumulated Undistributed Net Investment Income................................ 29,815
Accumulated Net Realized Loss on Investments................................... (715,827)
Net Unrealized Depreciation on Investments..................................... (1,418,393)
-----------
NET ASSETS..................................................................... $33,368,710
===========
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of
$6,522,682 and 710,220 shares of beneficial interest issued and
outstanding)................................................................. $ 9.18
Maximum sales charge (3.00%* of offering price)................................ .28
-----------
Maximum offering price to public............................................... $ 9.46
===========
CLASS B SHARES:
Net asset value and offering price per share (Based on net assets of
$22,906,032 and 2,492,656 shares of beneficial interest issued and
outstanding)................................................................. $ 9.19
===========
CLASS C SHARES:
Net asset value and offering price per share (Based on net assets of $3,939,996
and 429,040 shares of beneficial interest issued and outstanding)............ $ 9.18
===========
* On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
E-2
<PAGE> 246
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 1994 (Unaudited)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................................ $ 1,068,395
-----------
EXPENSES:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$9,221, $128,534 and $20,402, respectively)................................... 158,157
Investment Advisory Fee......................................................... 110,360
Shareholder Services............................................................ 40,065
Custody......................................................................... 29,555
Trustees Fees and Expenses...................................................... 18,200
Legal........................................................................... 8,960
Amortization of Organizational Expenses......................................... 4,032
Other........................................................................... 34,638
-----------
Total Expenses.................................................................. 403,967
Less Fees Deferred and Expenses Reimbursed ($110,360 and $55,180,
respectively)................................................................. 165,540
-----------
Net Expenses.................................................................... 238,427
-----------
Net Investment Income........................................................... $ 829,968
===========
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
REALIZED GAIN/LOSS ON INVESTMENTS:
Proceeds from Sales............................................................. $ 5,888,524
Cost of Securities Sold......................................................... (6,209,719)
-----------
Net Realized Loss on Investments................................................ (321,195)
-----------
UNREALIZED APPRECIATION/DEPRECIATION ON INVESTMENTS:
Beginning of the Period......................................................... (879,553)
End of the Period............................................................... (1,418,393)
-----------
Net Unrealized Depreciation on Investments During the Period.................... (538,840)
-----------
Net Realized and Unrealized Loss on Investments................................. $ (860,035)
===========
Net Decrease in Net Assets from Operations...................................... $ (30,067)
===========
</TABLE>
See Notes to Financial Statements
E-3
<PAGE> 247
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended December 31, 1994 and the Year Ended June 30, 1994
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
DECEMBER 31, 1994 JUNE 30, 1994
---------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net Investment Income....................................... $ 829,968 $ 1,301,126
Net Realized Loss on Investments............................ (321,195) (362,674)
Net Unrealized Depreciation on Investments During the
Period................................................... (538,840) (985,777)
------------- -------------
Change in Net Assets from Operations........................ (30,067) (47,235)
------------- -------------
DISTRIBUTIONS FROM NET INVESTMENT INCOME:
Class A Shares.............................................. (174,010) (384,334)
Class B Shares.............................................. (541,377) (879,036)
Class C Shares.............................................. (86,659) (91,263)
------------- -------------
Total Distributions......................................... (802,046) (1,354,633)
------------- -------------
Net Change in Net Assets from Investment Activities........... (832,113) (1,401,868)
------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................... 5,151,481 35,960,141
Net Asset Value of Shares Issued Through Dividend
Reinvestment............................................. 558,565 959,832
Cost of Shares Repurchased.................................. (10,245,053) (15,553,274)
------------- -------------
Net Change in Net Assets from Capital Transactions............ (4,535,007) 21,366,699
------------- -------------
TOTAL INCREASE/DECREASE IN NET ASSETS......................... (5,367,120) 19,964,831
------------- -------------
NET ASSETS:
Beginning of the Period..................................... 38,735,830 18,770,999
------------- -------------
End of the Period (Including undistributed net investment
income of $29,815 and $1,893, respectively).............. $ 33,368,710 $ 38,735,830
============= =============
</TABLE>
See Notes to Financial Statements
E-4
<PAGE> 248
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
CLASS A SHARES
-------------------------------------------
AUGUST 28, 1992
(COMMENCEMENT
SIX MONTHS YEAR OF INVESTMENT
ENDED ENDED OPERATIONS) TO
DECEMBER 31, JUNE 30, JUNE 30,
1994 1994 1993
------------ -------- ---------------
<S> <C> <C> <C>
Net asset value, beginning of period...................... $ 9.399 $ 9.793 $ 9.700
------- ------- -------
Net investment income..................................... .241 .452 .451
Net realized and unrealized gain/loss on investments...... (.223) (.360) .049
------- ------- -------
Total from investment operations.......................... .018 .092 .500
Less distributions from net investment income............. .233 .486 .407
------- ------- -------
Net asset value, end of period............................ $ 9.184 $ 9.399 $ 9.793
======= ======= =======
Total return* (non-annualized)............................ .14% .97% 5.22%
Net assets at end of period (in millions)................. $ 6.5 $ 7.1 $ 4.7
Ratio of expenses to average net assets* (annualized)..... .71% .61% .95%
Ratio of net investment income to average net assets*
(annualized)............................................ 5.17% 4.73% 5.29%
Portfolio turnover........................................ 5.94% 81.70% 76.62%
</TABLE>
-------------------------
* If certain expenses had not been assumed by the Adviser, total return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C>
Ratio of expenses to average net assets (annualized)...... 1.62% 1.62% 1.86%
Ratio of net investment income to average net assets
(annualized)............................................ 4.26% 3.72% 4.37%
</TABLE>
See Notes to Financial Statements
E-5
<PAGE> 249
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS--CONTINUED
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
CLASS B SHARES
----------------------------------------------
AUGUST 28, 1992
(COMMENCEMENT
SIX MONTHS YEAR OF INVESTMENT
ENDED ENDED OPERATIONS) TO
DECEMBER 31, JUNE 30, JUNE 30,
1994 1994 1993
------------ -------- ----------------
<S> <C> <C> <C>
Net asset value, beginning of period................. $ 9.403 $ 9.799 $ 9.700
-------- -------- --------
Net investment income................................ .209 .391 .378
Net realized and unrealized gain/loss on
investments........................................ (.226) (.370) .076
-------- -------- --------
Total from investment operations..................... (.017) .021 .454
Less distributions from net investment income........ .197 .417 .355
-------- -------- --------
Net asset value, end of period....................... $ 9.189 $ 9.403 $ 9.799
======== ======== ========
Total return* (non-annualized)....................... (.14%) .15% 4.78%
Net assets at end of period (in millions)............ $ 22.9 $ 27.6 $ 14.1
Ratio of expenses to average net assets*
(annualized)....................................... 1.45% 1.31% 1.63%
Ratio of net investment income to average net assets*
(annualized)....................................... 4.42% 4.14% 4.78%
Portfolio Turnover................................... 5.94% 81.70% 76.62%
</TABLE>
-------------------------
* If certain expenses had not been assumed by the Adviser, total return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C>
Ratio of expenses to average net assets
(annualized)....................................... 2.36% 2.36% 2.55%
Ratio of net investment income to average net assets
(annualized)....................................... 3.51% 3.09% 3.86%
</TABLE>
See Notes to Financial Statements
E-6
<PAGE> 250
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
FINANCIAL HIGHLIGHTS--CONTINUED
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------------------
AUGUST 13, 1993
SIX MONTHS (COMMENCEMENT OF
ENDED DISTRIBUTION) TO
DECEMBER 31, JUNE 30,
1994 1994
------------ ----------------
<S> <C> <C>
Net asset value, beginning of period............................ $9.403 $9.790
------ ------
Net investment income........................................... .185 .366
Net realized and unrealized loss on investments................. (.208) (.387)
------ ------
Total from investment operations................................ (.023) (.021)
Less distributions from net investment income................... .197 .366
------ ------
Net asset value, end of period.................................. $9.183 $9.403
====== ======
Total return* (non-annualized).................................. (.25%) (.27%)
Net assets at end of period (in millions)....................... $3.9 $4.0
Ratio of expenses to average net assets* (annualized)........... 1.46% 1.31%
Ratio of net investment income to average net assets*
(annualized).................................................. 4.38% 4.05%
Portfolio turnover.............................................. 5.94% 81.70%
</TABLE>
-------------------------
* If certain expenses had not been assumed by the Adviser, total return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets (annualized)............ 2.37% 2.37%
Ratio of net investment income to average net assets
(annualized).................................................. 3.47% 2.98%
</TABLE>
See Notes to Financial Statements
E-7
<PAGE> 251
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1994 (Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Merritt Adjustable Rate U.S. Government Fund (the "Fund") was
organized as a sub-trust of Van Kampen Merritt Trust (the "Trust"), a
Massachusetts business trust, as of May 28, 1992, and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund commenced investment operations on August 28,
1992, with two classes of common shares, Class A and Class B shares. The Fund
commenced the distribution of Class C shares on August 13, 1993.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation
Investments are stated at value using market quotations or, if such
valuations are not available, estimates obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions
Security transactions are recorded on a trade date basis. Realized gains
and losses are determined on an identified cost basis. The Fund may purchase and
sell securities on a "when issued" and "delayed delivery" basis, with settlement
to occur at a later date. The value of the security so purchased is subject to
market fluctuations during this period. The Fund will maintain, in a segregated
account with its custodian, assets having an aggregate value at least equal to
the amount of the when issued or delayed delivery purchase commitment until
payment is made. At December 31, 1994, there were no when issued or delayed
delivery purchase commitments.
C. Investment Income
Interest income is recorded on an accrual basis. Original issue discount is
amortized over the expected life of each applicable security.
D. Organizational Expenses
The Fund has reimbursed Van Kampen American Capital Distributors, Inc. or
its affiliates ("VKAC") for costs incurred in connection with the Fund's
organization in the amount of $40,000. These costs are being amortized on a
straight line basis over the 60 month period ending August 28, 1997. Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") has agreed that in
the event any of the initial shares of the Fund originally purchased by VKAC are
redeemed during the amortization period, the Fund will be reimbursed for any
unamortized organizational expenses in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.
E-8
<PAGE> 252
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 (Unaudited)
E. Federal Income Taxes
It is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders. Therefore, no
provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it 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. At June 30, 1994, the Fund had an accumulated capital loss carryforward
for tax purposes of $61,584. Of this amount, $12,348 and $49,236 will expire on
June 30, 2001, and 2002, respectively. Net realized gains or losses may differ
for financial and tax reporting purposes primarily as a result of post October
31 losses which are not recognized for tax purposes until the first day of the
following fiscal year.
F. Distribution of Income and Gains
The Fund declares daily and pays monthly dividends from net investment
income. Net realized gains, if any, are distributed annually.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser
will provide facilities and investment advice to the Fund for an annual fee
payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
------------------------------------------------------ -----------
<S> <C>
First $500 million.................................... .600 of 1%
Next $500 million..................................... .550 of 1%
Next $2 billion....................................... .500 of 1%
Next $2 billion....................................... .475 of 1%
Next $2 billion....................................... .450 of 1%
Next $2 billion....................................... .425 of 1%
Over $9 billion....................................... .400 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $16,100, representing VKAC's cost of providing accounting, legal,
portfolio pricing and certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors
of VKAC. The Fund does not compensate its officers or trustees who are officers
of VKAC.
The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
E-9
<PAGE> 253
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 (Unaudited)
At December 31, 1994, VKAC owned 10,050, 103 and 100 shares of beneficial
interest of Classes A, B and C, respectively.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of capital stock, Classes A, B and
C. There are an unlimited number of shares of each class without par value
authorized. At December 31, 1994, paid in surplus aggregated $6,997,376,
$24,312,356 and $4,163,383 for Classes A, B and C, respectively. For the six
months ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Sales:
Class A........................................................... 77,270 $ 721,562
Class B........................................................... 353,120 3,297,140
Class C........................................................... 121,041 1,132,779
---------- ------------
Total Sales.................................................... 551,431 $ 5,151,481
========== ============
Dividend Reinvestment:
Class A........................................................... 14,012 $ 130,363
Class B........................................................... 39,002 362,968
Class C........................................................... 7,010 65,234
---------- ------------
Total Dividend Reinvestment.................................... 60,024 $ 558,565
========== ============
Repurchases:
Class A........................................................... (134,285) $ (1,249,138)
Class B........................................................... (836,917) (7,799,308)
Class C........................................................... (128,101) (1,196,607)
---------- ------------
Total Repurchases.............................................. (1,099,303) $(10,245,053)
========== ============
</TABLE>
E-10
<PAGE> 254
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 (Unaudited)
At June 30, 1994, paid in surplus aggregated $7,394,589, $28,451,556 and
$4,161,977 for Classes A, B and C, respectively. For the period ended June 30,
1994, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
Sales:
Class A........................................................... 902,396 $ 8,731,126
Class B........................................................... 2,364,040 22,736,081
Class C........................................................... 464,005 4,492,934
---------- ------------
Total Sales.................................................... 3,730,441 $ 35,960,141
========== ============
Dividend Reinvestment:
Class A........................................................... 26,263 $ 252,576
Class B........................................................... 64,882 623,837
Class C........................................................... 8,729 83,419
---------- ------------
Total Dividend Reinvestment.................................... 99,874 $ 959,832
========== ============
Repurchases:
Class A........................................................... (656,490) $ (6,285,280)
Class B........................................................... (926,283) (8,853,618)
Class C........................................................... (43,644) (414,376)
---------- ------------
Total Repurchases.............................................. (1,626,417) $(15,553,274)
========== ============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and
Class C shares will be imposed on most redemptions made within three years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule. The Class B and Class C shares bear the expense of their
respective deferred sales arrangements, including higher distribution and
service fees and incremental transfer agency costs.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
---------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------------------------------------------------------------ ------- -------
<S> <C> <C>
First................................................................... 3.00% 1.00%
Second.................................................................. 2.00% None
Third................................................................... 1.00% None
Fourth and Thereafter................................................... None None
</TABLE>
For the six months ended December 31, 1994, VKAC, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of $10 and
CDSC on the redeemed shares of Classes B and C of approximately $76,300. Sales
charges do not represent expenses of the Fund.
E-11
<PAGE> 255
VAN KAMPEN MERRITT ADJUSTABLE RATE U.S. GOVERNMENT FUND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1994 (Unaudited)
4. INVESTMENT TRANSACTIONS
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $2,015,000
and $6,209,719, respectively.
5. MORTGAGE AND ASSET BACKED SECURITIES
A Mortgage Backed Security (MBS) is a pass-through security created by
pooling mortgages and selling participations in the principal and interest
payments received from borrowers. Most of these securities are guaranteed by
federally sponsored agencies--Government National Mortgage Association (GNMA),
Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage
Corporation (FHLMC).
An Interest Only security is another class of MBS representing ownership in
the cash flows of the interest payments made from a specified pool of MBS. The
cash flow on this instrument decreases as the mortgage principal balance is
repaid by the borrower.
Asset Backed Securities are similar to MBS but made up of pools of other
assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on these securities are
made from the cash flows from the group of assets.
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% for Class A shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for the
six months ended December 31, 1994, are payments to VKAC of approximately
$111,600.
E-12
