<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1995
REGISTRATION NOS. 33-04410
811-4629
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 37 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 38 /X/
VAN KAMPEN AMERICAN CAPITAL TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)
(708) 684-6000
(Registrant's Telephone Number)
Ronald A. Nyberg, Esq.
Executive Vice President,
General Counsel and Secretary
Van Kampen American Capital, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)
Copies to:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Chicago, Illinois 60606
(312) 407-0700
------------------------
Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.
It is proposed that this filing will become effective: (check appropriate
box)
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1) of Rule 485.
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate check the following:
/ / this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Declaration Pursuant to Rule 24f-2
Registrant has registered an indefinite number of shares and will file with
the Securities and Exchange Commission a Rule 24f-2 notice for its fiscal year
ending June 30, 1996 on or before August 29, 1996.
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<PAGE> 2
EXPLANATORY NOTE
This Post-Effective Amendment No. 37 to the Registration Statement contains
one Prospectus and one Statement of Additional Information describing one of the
four series of the Registrant. The Registration Statement is organized as
follows:
Facing Page
Cross Reference Sheet with respect to Van Kampen American Capital Emerging
Markets Income Fund
Prospectus Relating to Van Kampen American Capital Emerging Markets Income
Fund
Statement of Additional Information Relating to Van Kampen American Capital
Emerging Markets Income Fund
Part C Information
Exhibits
The Prospectus and Statement of Additional Information with respect to Van
Kampen American Capital Short-Term Global Income Fund, a series of the
Registrant, included in Post-Effective Amendment No. 35 to the Registration
Statement are incorporated herein by reference in their entirety and no changes
to the Prospectus or Statement of Additional Information are effected by this
Post-Effective Amendment No. 37.
The Prospectuses and Statements of Additional Information with respect to
Van Kampen American Capital High Yield Fund and Van Kampen American Capital
Strategic Income Fund, each a series of the Registrant, included in
Post-Effective Amendment No. 36 to the Registration Statement are incorporated
herein by reference in their entirety and no changes to the Prospectus or
Statement of Additional Information are effected by this Post-Effective
Amendment No. 37.
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF LOCATION OR CAPTION
FORM N-1A IN PROSPECTUS
----------------------- -----------------------------------------------------------
<S> <C> <C>
PART A INFORMATION REQUIRED IN A PROSPECTUS
Item 1. Cover Page............. Cover Page
Item 2. Synopsis............... PROSPECTUS SUMMARY; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
Item 3. Condensed Financial
Information.......... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLE; FINANCIAL HIGHLIGHTS; FUND
PERFORMANCE; SHAREHOLDER SERVICES; ADDITIONAL INFORMATION
Item 4. General Description of
Registrant........... THE FUND; INVESTMENT OBJECTIVES AND POLICIES; RISK FACTORS
AND SPECIAL CONSIDERATIONS; INVESTMENT PRACTICES;
DESCRIPTION OF SHARES OF THE FUND; ADDITIONAL INFORMATION
Item 5. Management of the
Fund................. ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
ADVISORY SERVICES; SHAREHOLDER SERVICES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
SERVICES; DESCRIPTION OF SHARES OF THE FUND; ADDITIONAL
INFORMATION
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; FUND PERFORMANCE; SHAREHOLDER SERVICES;
ADDITIONAL INFORMATION
Item 8. Redemption or
Repurchase........... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
REDEMPTION OF SHARES; SHAREHOLDER SERVICES
Item 9. Pending Legal
Proceedings.......... Not Applicable
</TABLE>
i.
<PAGE> 4
<TABLE>
<CAPTION>
LOCATION OR CAPTION
ITEM NUMBER OF IN STATEMENT OF
FORM N-1A ADDITIONAL INFORMATION
----------------------- -----------------------------------------------------------
<S> <C> <C>
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page............. Cover Page
Item 11. Table of Contents...... Table of Contents
Item 12. General Information
and History.......... The Fund and the Trust
Item 13. Investment Objectives
and Policies......... Investment Policies and Restrictions; Additional Investment
Considerations
Item 14. Management of the
Fund................. Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities........... Shares of the Fund; Officers and Trustees
Item 16. Investment Advisory and
Other Services....... Investment Advisory and Other Services; Investment
Sub-Advisory Agreement; Legal Counsel
Item 17. Brokerage Allocation... Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities..... Contained in the Prospectus under the caption: DESCRIPTION
OF SHARES OF THE FUND; The Fund and the Trust
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered.............. Contained in the Prospectus under captions: SHAREHOLDER
TRANSACTION EXPENSES; ALTERNATIVE SALES ALTERNATIVES;
PURCHASE OF SHARES; SHAREHOLDER SERVICES; REDEMPTION OF
SHARES
Item 20. Tax Status............. Contained In the Prospectus under the caption: TAX STATUS;
Tax Status of the Fund
Item 21. Underwriters........... The Distributor; Notes to Financial Statements
Item 22. Calculations of
Performance Data..... Contained in the Prospectus under the caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under the caption: FINANCIAL
HIGHLIGHTS; Independent Auditors Report; Financial
Statements; Notes to Financial Statements
PART C
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
ii.
<PAGE> 5
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VAN KAMPEN AMERICAN CAPITAL
EMERGING MARKETS INCOME FUND
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Van Kampen American Capital Emerging Markets Income Fund, formerly known as
Van Kampen Merritt Emerging Markets Income Fund (the "Fund"), is a separate,
non-diversified series of Van Kampen American Capital Trust, an open-end
management investment company commonly known as a mutual fund. The Fund's
primary investment objective is to seek to provide its shareholders with high
current income. The Fund has a secondary investment objective of seeking capital
appreciation. The Fund will seek to achieve its investment objectives under
normal market conditions by investing primarily in emerging foreign market
income securities. Under normal market conditions, up to 35% of the Fund's
assets may be invested in developed foreign market income securities and
domestic lower grade income securities. The Fund may invest in investment grade,
lower grade and unrated securities. Under normal market conditions, at least 65%
of the Fund's total assets will be invested in U.S. dollar-denominated income
securities.
ALL OR A SUBSTANTIAL PORTION OF THE FUND'S ASSETS MAY BE INVESTED IN LOWER
GRADE INCOME SECURITIES, INCLUDING SECURITIES OF ISSUERS IN EMERGING MARKET
COUNTRIES AND SECURITIES RATED IN THE LOWEST RATING CATEGORY. LOWER GRADE
SECURITIES, COMMONLY REFERRED TO AS "JUNK BONDS," ARE REGARDED BY STANDARD &
POOR'S RATINGS GROUP AND MOODY'S INVESTORS SERVICE, INC. AS PREDOMINATELY
SPECULATIVE WITH RESPECT TO THE CAPACITY TO PAY INTEREST OR REPAY PRINCIPAL IN
ACCORDANCE WITH THEIR TERMS. THE FUND IS DESIGNED FOR AGGRESSIVE INVESTORS
WILLING TO ASSUME SIGNIFICANT RISKS IN RETURN FOR THE POTENTIAL FOR HIGH CURRENT
INCOME AND CAPITAL APPRECIATION. THERE CAN BE NO ASSURANCE THAT THE FUND WILL
ACHIEVE ITS INVESTMENT OBJECTIVES.
(Continued on next page)
------------------
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 PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
FOR ARIZONA INVESTORS: THESE SECURITIES ARE SPECULATIVE
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, 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 THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated October 27, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunication
Device For the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED OCTOBER 27, 1995.
<PAGE> 6
(Continued from previous page.)
This Prospectus sets forth certain information about the Fund 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 One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number is
(800) 421-5666.
The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements" and "Purchase of Shares") which may be purchased at a price
equal to their net asset value per share, plus sales charges which, at the
election of the investor, may be imposed (i) at the time of purchase (the "Class
A Shares") or (ii) on a contingent deferred basis (Class A Share accounts over
$1 million, "Class B Shares" and "Class C Shares"). The Alternative Sales
Arrangements permit an investor to choose the method of purchasing shares that
is more beneficial to the investor, taking into account the amount of the
purchase, the length of time the investor expects to hold the shares and other
circumstances.
2
<PAGE> 7
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 5
Annual Fund Operating Expenses and Example..................... 6
Financial Highlights........................................... 8
The Fund....................................................... 9
Investment Objectives and Policies............................. 9
Risk Factors and Special Considerations........................ 15
Investment Practices........................................... 18
Investment Advisory Services................................... 22
Alternative Sales Arrangements................................. 24
Purchase of Shares............................................. 26
Shareholder Services........................................... 35
Redemption of Shares........................................... 40
The Distribution and Service Plans............................. 43
Distributions from the Fund.................................... 45
Tax Status..................................................... 46
Fund Performance............................................... 47
Description of Shares of the Fund.............................. 48
Additional Information......................................... 49
</TABLE>
NO DEALER, SALESMAN 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.
3
<PAGE> 8
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PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Emerging Markets Income Fund (the "Fund")
is a separate, non-diversified series of Van Kampen American Capital Trust, an
open-end management investment company.
INVESTMENT OBJECTIVES. The Fund's primary investment objective is to seek to
provide its shareholders with high current income. The Fund has a secondary
investment objective of seeking capital appreciation.
INVESTMENT POLICIES. The Fund will seek to achieve its investment objectives
under normal market conditions by investing primarily in emerging foreign market
income securities. Under normal market conditions, up to 35% of the Fund's
assets may be invested in developed foreign market income securities and
domestic lower grade income securities. See "Investment Objectives and
Policies."
PURCHASE OF SHARES. Investors may elect to purchase Class A Shares, Class B
Shares or Class C Shares, each with different sales charges and expenses. There
is a $500 minimum initial investment for each class of shares and $25 minimum
for each subsequent investment for each class of shares (or less as described
under "Purchase of Shares"). The different classes of shares permit an investor
to choose the method of purchasing shares that is more beneficial to the
investor, taking into account the amount of the purchase, the length of time the
investor expects to hold the shares and other circumstances. See "Purchase of
Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. VKM Global Emerging Markets
Advisors, L.P. is the Fund's sub-adviser. See "Investment Advisory Services."
SPECIAL RISK FACTORS. All or a substantial portion of the Fund's assets may be
invested in lower grade income securities, including securities of issuers in
emerging market countries and securities rated in the lowest ratings category.
Lower grade income securities, commonly referred to as "junk bonds," are
regarded by Standard & Poor's Ratings Group and Moody's Investors Service, Inc.
as predominately speculative with respect to the capacity to pay interest or
repay principal in accordance with their terms. The Fund is designed for
aggressive investors willing to assume significant risks in return for the
potential for high current income and capital appreciation. There can be no
assurance that the Fund will achieve its investment objectives. See "Risk
Factors and Special Considerations."
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the
Statement of Additional Information.
4
<PAGE> 9
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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 the offering
price).................... 4.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)........... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................. None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................. None None None
Exchange fees............... None None None
</TABLE>
- ----------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase.
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1
distribution fee, a portion of which may indirectly pay for the initial
sales commission incurred on behalf of the investor. See "The Distribution
and Service Plans."
5
<PAGE> 10
- ------------------------------------------------------------------------------
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)............. 0.63% 0.63% 0.63%
12b-1 fees (as a percentage of average
daily net assets)(1).................. 0.00% 0.00% 0.00%
Other expenses (as a percentage of
average daily net assets)............. 1.48% 1.45% 1.45%
Total expenses (as a percentage of
average daily net assets)............. 2.11% 2.08% 2.08%
</TABLE>
- ----------------
(1) For the fiscal year ended June 30, 1995, the 12b-1 fees were 0.00% for each
class of shares and there was no distribution of the Fund's shares. However,
when distribution of the Fund's shares commences it is anticipated that
12b-1 fees will equal 0.25%, 1.00% and 1.00% for Class A Shares, Class B
Shares and Class C Shares, respectively. The anticipated amounts include a
service fee of up to 0.25% (as a percentage of net asset value) payable by
the Fund as compensation for ongoing services rendered to investors. With
respect to each class of shares, amounts in excess of 0.25%, if any, would
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares would include 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. See "The
Distribution and Service Plans."
6
<PAGE> 11
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
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 2.11% for Class
A Shares, 2.08% for Class B Shares and
2.08% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $68 $ 110 $ 156 $ 280
Class B Shares............................ $61 $ 100 $ 126 $ 242*
Class C Shares............................ $31 $ 65 $ 112 $ 241
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $68 $ 110 $ 156 $ 280
Class B Shares............................ $21 $ 65 $ 112 $ 242*
Class C Shares............................ $21 $ 65 $ 112 $ 241
</TABLE>
- ----------------
* Based on conversion to Class A Shares after seven years.
The purpose of the foregoing table 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. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion of
Class A Shares. 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 LESSER THAN THOSE SHOWN. For a more complete description of such
costs and expenses, see "Investment Advisory Services" and "The Distribution and
Service Plans."
7
<PAGE> 12
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FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their report thereon appears in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
---------------------------------- --------------
DECEMBER 31, 1993
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED OPERATIONS) TO YEAR ENDED
JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1995
-------------- ------------------ --------------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period.......................................... $ 12.806 $ 14.300 $ 12.760
------- ------- -------
Net Investment Income........................................................ 1.189 0.419 1.190
Net Realized and Unrealized Loss on Investments and Foreign Currency......... (0.376) (1.913) (0.330)
------- ------- -------
Total from Investment Operations.............................................. 0.813 (1.494) 0.860
------- ------- -------
Less Distributions from Net Investment Income................................. 0.780 0.000 0.780
------- ------- -------
Net Asset Value, End of Period................................................ $ 12.839 $ 12.806 $ 12.840
======= ======= =======
Total Return (non-annualized)(1).............................................. 6.82% -10.42% 7.24%
Net Assets at End of Period (in millions)..................................... $ 5.4 $ 5.4 $ 1.8
Ratio of Expenses to Average Net Assets (annualized)(1)....................... 2.11% 2.88% 2.08%
Ratio of Net Investment Income to Average Net Assets(1)(annualized)........... 9.64% 6.51% 9.67%
Portfolio Turnover............................................................ 260.21% 117.62% 260.21%
- ----------------
(1) If certain expenses had not been assumed by the Adviser the ratios would have been as follows:
Ratio of Expenses to Average Net Assets (annualized)....................... 2.46% N/A 2.43%
Ratio of Net Investment Income to Average Net Assets (annualized).......... 9.30% N/A 9.33%
Note: Certain per share amounts and the ratio of net investment income to average net assets have been restated to conform with
Statement of Position 93-4, "Foreign Currency Accounting and Financial Statement Presentation for Investment Companies."
<CAPTION>
CLASS C SHARES
--------------
DECEMBER 31, 1993
(COMMENCEMENT
OF INVESTMENT
OPERATIONS) TO YEAR ENDED
JUNE 30, 1994 JUNE 30, 1995
------------------ --------------
<S> <<C>
Net Asset Value, Beginning of Period.......................................... $ 14.300 $ 12.760
------- -------
Net Investment Income........................................................ 0.370 1.190
Net Realized and Unrealized Loss on Investments and Foreign Currency......... (1.910) (0.330)
------- -------
Total from Investment Operations.............................................. (1.540) 0.860
------- -------
Less Distributions from Net Investment Income................................. 0.000 0.780
------- -------
Net Asset Value, End of Period................................................ $ 12.760 $ 12.840
======= =======
Total Return (non-annualized)(1).............................................. -10.77% 7.24%
Net Assets at End of Period (in millions)..................................... $ 1.8 $ 1.8
Ratio of Expenses to Average Net Assets (annualized)(1)....................... 3.64% 2.08%
Ratio of Net Investment Income to Average Net Assets(1)(annualized)........... 5.76% 9.67%
Portfolio Turnover............................................................ 117.62% 260.21%
- ----------------
(1) If certain expenses had not been assumed by the Adviser the ratios would h
Ratio of Expenses to Average Net Assets (annualized)....................... N/A 2.43%
Ratio of Net Investment Income to Average Net Assets (annualized).......... N/A 9.33%
Note: Certain per share amounts and the ratio of net investment income to aver
Statement of Position 93-4, "Foreign Currency Accounting and Financial S
<CAPTION>
DECEMBER 31, 1993
(COMMENCEMENT
OF INVESTMENT
OPERATIONS) TO
JUNE 30, 1994
------------------
Net Asset Value, Beginning of Period.......................................... $ 14.300
-------
Net Investment Income........................................................ 0.370
Net Realized and Unrealized Loss on Investments and Foreign Currency......... (1.910)
-------
Total from Investment Operations.............................................. (1.540)
-------
Less Distributions from Net Investment Income................................. 0.000
-------
Net Asset Value, End of Period................................................ $ 12.760
=======
Total Return (non-annualized)(1).............................................. -10.77%
Net Assets at End of Period (in millions)..................................... $ 1.8
Ratio of Expenses to Average Net Assets (annualized)(1)....................... 3.64%
Ratio of Net Investment Income to Average Net Assets(1)(annualized)........... 5.76%
Portfolio Turnover............................................................ 117.62%
- ----------------
(1) If certain expenses had not been assumed by the Adviser the ratios would h
Ratio of Expenses to Average Net Assets (annualized)....................... N/A
Ratio of Net Investment Income to Average Net Assets (annualized).......... N/A
Note: Certain per share amounts and the ratio of net investment income to aver
Statement of Position 93-4, "Foreign Currency Accounting and Financial S
</TABLE>
See Financial Statements and Notes Thereto
8
<PAGE> 13
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Emerging Markets Income Fund (the "Fund") is a
separate, non-diversified series of Van Kampen American Capital Trust (the
"Trust"), which is an open-end management investment company organized as a
Delaware business trust.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- ------------------------------------------------------------------------------
The Fund's primary investment objective is to provide its shareholders with
high current income. The Fund has a secondary investment objective of seeking
capital appreciation. The Fund will seek to achieve its investment objectives
under normal market conditions by investing primarily in emerging foreign market
income securities. Under normal market conditions, up to 35% of the Fund's
assets may be invested in developed foreign market income securities and
domestic lower grade income securities. Under normal market conditions, at least
65% of the Fund's total assets will be invested in U.S. dollar-denominated
income securities. All or a substantial portion of the Fund's assets may be
invested in lower grade income securities, including securities of issuers
located in emerging market countries and securities rated in the lowest rating
category. See "Risk Factors and Special Considerations." The Fund does not
intend to invest more than 25% of its total assets in any one industry
(including for this purpose securities issued by any single foreign government),
and the Fund has no current intention to invest more than 25% of its total
assets in income securities of issuers located in any single country other than
the United States, although the Fund reserves the right to so invest in the
future. The Fund currently anticipates that under normal market conditions it
will invest in income securities of issuers located in at least eight different
countries, one of which may be the United States. The Fund is designed for
aggressive investors willing to assume significant risks in return for the
potential for high current income and capital appreciation. The Fund's
investment objectives are fundamental and may not be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). There can be no assurance that the Fund will achieve its investment
objectives. 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.
9
<PAGE> 14
An investment in the Fund is intended to be a long-term investment and should
not be used as a trading vehicle.
Lower grade income securities are income securities rated BB or below by
Standard & Poor's Ratings Group ("S&P"), Ba or below by Moody's Investors
Service, Inc. ("Moody's"), comparably rated by any other nationally recognized
statistical rating organization ("NRSRO") or, if not rated by any NRSRO,
determined by the Adviser to be of comparable quality to income securities so
rated. Lower grade income securities are commonly referred to as "junk bonds"
and are regarded by S&P and Moody's as predominately speculative with respect to
the capacity to pay interest or repay principal in accordance with their terms.
Lower grade income securities involve a greater degree of credit risk than
investment grade income securities. There is no minimum rating or comparable
quality standard imposed on the Fund's investments, and the Fund may purchase
income securities that are rated D by S&P and that are in default in the payment
of interest or repayment of principal. In S&P's view, the D rating category is
used when interest payments or principal payments are not made on the date due
even if an applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The D rating also is used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized. The Fund will not, however, invest in any security that does not
provide for, or that is not current in the payment of, periodic interest or
dividend distributions if as a result of such investment more than 20% of the
Fund's total assets would, at the time of investment, be invested in such
securities.
MARKET SECTORS
The Adviser selects the Fund's investments primarily from the following market
sectors based on the Adviser's assessment of the relative investment
opportunities and investment risks presented by individual income securities.
Accordingly, the Adviser will not necessarily invest in securities with the
highest yields available.
EMERGING FOREIGN MARKET INCOME SECURITIES. The Fund will invest primarily in
investment grade, lower grade and unrated income securities of issuers located
in emerging markets. Under normal market conditions, the Fund will invest at
least 65% of its total assets in emerging foreign market income securities. Such
securities may include income securities issued or guaranteed by foreign
governments or their agencies, central banks of foreign countries, supranational
entities, such as the International Bank for Reconstruction and Development, and
corporations or other business entities. Income securities of issuers located in
emerging markets may be denominated in any currency and include Brady Bonds
(discussed below). Investment in emerging market countries involves significant
risks. See "Risk Factors and Special Considerations." For this purpose,
"emerging foreign markets" includes any countries (i) having an "emerging stock
market" as defined by the International Finance Corporation; or (ii) with low-to
middle-income economies according to the International Bank for Reconstruction
and Development (the "World Bank");
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or (iii) listed in World Bank publications as developing. The Adviser determines
whether a particular issuer's principal activities are located in emerging
markets by looking at factors such as the location of its assets, personnel,
sales, and earnings.
DEVELOPED FOREIGN MARKET INCOME SECURITIES. The Fund may invest in investment
grade, lower grade and unrated income securities of issuers located in developed
foreign markets. Such securities may include income securities issued or
guaranteed by foreign governments or their agencies, central banks of foreign
countries, supranational entities, such as the International Bank for
Reconstruction and Development, and corporations or other business entities.
Income securities of issuers located in developed foreign markets may be
denominated in any currency and include U.S. dollar denominated income
securities sold in the United States (commonly known as "Yankee bonds") and
income securities denominated in U.S. dollars or other currencies and sold
outside the United States (commonly referred to as "Eurobonds"). Currently,
developed foreign markets include Ireland, Spain, New Zealand, Belgium, the
United Kingdom, Italy, Australia, the Netherlands, Austria, France, Canada, the
United States, Denmark, Germany, Norway, Sweden, Japan, Finland, Switzerland,
Hong Kong, Singapore, Taiwan and South Korea.
DOMESTIC LOWER GRADE INCOME SECURITIES. Domestic lower grade income securities
are income securities of domestic issuers rated below investment grade or, if
not rated, determined by the Adviser to be of comparable quality to securities
rated below investment grade. Such securities are issued primarily by domestic
corporations. Investment in lower grade income securities involves certain
risks. See "Risk Factors and Special Considerations."
PORTFOLIO SECURITIES
As used in this prospectus, the term "income securities" includes: fixed or
variable rate bonds, notes, bills or debentures; stripped income securities;
convertible securities; zero coupon or deferred payment securities; payment in
kind securities; preferred stock; dividend paying common stock; warrants and
other equity securities acquired as units together with other income securities;
bank debt obligations; short-term paper; loan participations and assignments;
and interests issued by entities organized and operated for the purpose of
restructuring the investment characteristics of other income securities and
securities whose principal or interest payments are indexed to changes in the
values of currencies, interest rates, commodities or a basket of securities. The
Fund may invest in investment grade, lower grade and unrated income securities.
The Fund may invest in income securities of any maturity and denominated in any
currency. At least 65% of the Fund's total assets will be invested in U.S.
dollar denominated income securities. Following is a brief description of some
of the portfolio securities in which the Fund may invest. See the Statement of
Additional Information for more information concerning these and other portfolio
securities in which the Fund may invest.
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BRADY BONDS. The Fund may invest in Brady Bonds and other sovereign debt of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
Brady Bonds may also be issued with respect to new money being advanced by
existing lenders in connection with the debt restructuring. Certain Brady Bonds
have been collateralized as to principal due at maturity by U.S. Treasury zero
coupon bonds with a maturity equal to the final maturity of such Brady Bonds.
Brady Bonds have been issued only recently, and accordingly do not have a long
payment history. In light of the risk of Brady Bonds including, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities of countries issuing Brady Bonds, investments in Brady
Bonds are to be viewed as speculative.
OTHER SOVEREIGN-RELATED DEBT. In addition to Brady Bonds, the Fund may invest
in sovereign or sovereign-related debt obligations, including obligations of
supranational entities. Such investments may include participations in and
assignments of sovereign bank debt, restructured external debt that has not
undergone a Brady-style debt exchange, and internal government debt.
STRUCTURED INVESTMENTS. The Fund may invest a portion of its assets in
interests in entities organized and operated for the purpose of restructuring
the investment characteristics of other income securities. This type of
restructuring involves the deposit with or purchase by an entity of income
securities (such as bank loans or Brady Bonds) and the issuance by that entity
of one or more classes of securities ("Structured Investments") backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities and interest rate provisions.
INDEXED INCOME SECURITIES. The Fund may invest in income securities that are
indexed to certain specific foreign currency exchange rates, interest rates or
other reference rates. The terms of such securities provide that their principal
amount is adjusted upwards or downwards (but ordinarily not below zero) at
maturity to reflect changes in the exchange rate between two currencies (or
other rates) while the obligations are outstanding.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between borrowers and
one or more financial institutions ("Lenders"). The Fund's investments in Loans
are expected in most instances to be in the form of participations in Loans
("Participations") and assignments of all or a portion of Loans ("Assignments")
from third parties. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is
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<PAGE> 17
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. The Fund generally has no direct
right to enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan ("Loan Agreement"), nor any rights of set-off against the
borrower, and the Fund may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a result, the Fund will
assume the credit risk of both the borrower and the Lender that is selling the
Participation. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
STRIPPED INCOME SECURITIES. Stripped income securities are derivative
securities representing an interest in all or a portion of the income or
principal components of an underlying or related security, a pool of securities
or other assets. 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 market values of
stripped income securities tend to be more volatile in response to changes in
interest rates than are conventional income securities.
FLOATING AND VARIABLE RATE INCOME SECURITIES. Income securities may provide
for floating or variable rate interest or dividend payments. The Fund may invest
in derivative floating and variable rate securities such as inverse floaters,
whose rates vary inversely with changes in market rates of interest, or range
floaters or capped floaters, whose rates are subject to periodic or lifetime
limits. Such securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of inverse floaters and the corresponding change to the net asset value of
the Fund generally will be larger than comparable changes in the value of an
equal principal amount of a fixed rate security having similar credit quality,
redemption provisions and maturity.
DISCOUNT, ZERO COUPON AND PAYMENT-IN-KIND SECURITIES. The Fund may invest in
securities sold at a substantial discount from their value at maturity. Such
securities include "zero coupon" and payment-in-kind securities of governmental
or private issuers. Zero coupon securities generally pay no cash interest (or
dividends in the case of preferred stock) to their holders prior to maturity.
Payment-in-kind securities allow the issuer, at its option, to make current
interest payments on such securities either in cash or in additional securities.
Accordingly, zero coupon and payment-in-kind securities usually trade at a deep
discount from their face or par value and generally are subject to greater
fluctuations of market value in response to changing interest rates than
securities of comparable maturities and credit quality that pay cash interest
(or dividends in the case of preferred stock) on a current basis. Even though
the holder of a zero coupon bond or a payment-in-kind security does not receive
cash interest payments prior to maturity, a portion of the purchase
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<PAGE> 18
price discount must be accrued as income each year under current federal tax
law. In order to generate sufficient cash to make distributions, the Fund may
have to dispose of securities that it would otherwise continue to hold, which,
in some cases, may be disadvantageous to the Fund.
PREMIUM SECURITIES. The fund may invest in income securities bearing coupon
rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amounts payable on
maturity. Although such securities bear coupon rates higher than prevailing
market rates, because they are purchased at a price in excess of par value, the
yield earned by the Fund on such investments may not exceed prevailing market
yields. If securities purchased by a Fund at a premium are called or sold prior
to maturity, the Fund may recognize a capital loss. Additionally, the Fund will
recognize a capital loss if it holds such securities to maturity.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes,
preferred stocks or other securities that may be converted into or exchanged for
a specified amount of common stock of the same or a different issuer within a
particular period of time and at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged.
EQUITY FEATURES. Income securities may involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
interest of other payments, often in addition to a fixed rate of return, that
are based on the borrower's attainment of specified levels of revenues, sales or
profits). At times, the Fund may also acquire warrants and other equity
securities in connection with the purchase of income securities.
PRIVATE PLACEMENTS. The Fund may invest in income securities that are sold in
private placement transactions between their issuers and their purchasers and
that are neither listed on an exchange nor traded in the OTC secondary market.
In many cases, privately placed securities will be subject to contractual or
legal restrictions on transfer. As a result of the absence of a public trading
market, privately placed securities may in turn be less liquid and more
difficult to value than publicly traded securities. In addition, issuers whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. Certain of the Fund's direct investments,
particularly in emerging foreign markets, may include investments in smaller,
less seasoned companies, which may involve greater risks. These companies may
have limited product lines, markets or financial resources, or they may be
dependent on a limited management group.
U.S. GOVERNMENT AND DOMESTIC INVESTMENT GRADE INCOME SECURITIES. The Fund may
invest up to 20% of its assets in U.S. government and domestic investment grade
income securities. U.S. government securities are obligations issued or
guaranteed by the U.S. government or its agencies, instrumentalities or
political
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<PAGE> 19
subdivisions (collectively "agencies"). These obligations may be either direct
obligations of the U.S. Treasury or obligations issued or guaranteed by U.S.
government agencies. Of the obligations issued or guaranteed by agencies, some
are backed by the full faith and credit of the U.S. government and others are
backed only by the right of the issuer to borrow from the U.S. Treasury. U.S.
government securities generally are not rated, but are generally considered to
be of at least the same credit quality as privately issued securities rated in
the highest investment grade rating categories. Domestic investment grade income
securities are income securities of domestic issuers rated investment grade or,
if not rated, determined by the Adviser to be of comparable quality to
investment grade rated securities. Such securities are issued primarily by
domestic corporations. Investments in U.S. government and domestic investment
grade securities generally involve less credit risk and less market risk, but
offer lower yields, than investment in the other types of income securities in
which the Fund may invest.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
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INVESTMENTS IN INCOME SECURITIES. The value of the income securities held by
the Fund, and thus the net asset value of the shares, generally will fluctuate
with (i) changes in the perceived creditworthiness of the issuers of those
securities, (ii) movements in interest rates, and (iii) changes in the relative
values of the currencies in which the Fund's investments are denominated with
respect to the U.S. dollar. Many of the income securities in which the Fund will
invest have long maturities. A longer average maturity generally is associated
with a higher level of volatility in market value in response to changes in
interest rates. In addition, securities issued at a discount, such as certain
types of Brady Bonds and zero coupon obligations, may be subject to greater
fluctuations in market value in response to changes in interest rates.
The Fund may invest in derivative income securities such as stripped income
securities, inverse floaters, range floaters and capped floaters. Investment in
such securities involves special risks as compared to investment in conventional
floating or variable rate income securities. The extent of increases and
decreases in the value of such securities and the corresponding changes to the
per share net asset value of the Fund in response to changes in market rates of
interest generally will be larger than comparable changes in the value of an
equal principal amount of a fixed rate income security having similar credit
quality, redemption provisions and maturity. The markets for such securities may
be less developed than the markets for conventional floating or variable rate
income securities.
INVESTMENT IN LOWER GRADE INCOME SECURITIES. A substantial portion of the
Fund's assets may be invested in lower grade securities. Debt securities rated
BB or below by S&P or Ba or below by Moody's are deemed by S&P and Moody's to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
The lower grade income securities in which the Fund may invest may include
securities
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having the lowest ratings assigned by S&P or Moody's and, together with
comparable unrated securities, may include securities in default or that face
the risk of default with respect to the payment of principal or interest or that
have filed for bankruptcy protection. These securities are considered to have
extremely poor prospects of ever attaining any real investment standing. See the
Statement of Additional Information for a more complete description of S&P and
Moody's ratings. Lower grade income securities are especially subject to adverse
changes in general economic conditions, the industries in which the issuers are
engaged, the financial condition of the issuers and prevailing interest rates.
Issuers of lower grade securities are often highly leveraged and may not have
available to them more traditional methods of financing. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of principal and interest and increase the possibility of default.
Lower grade income securities are generally unsecured and are often subordinated
to other income securities of the issuer. To the extent the Fund is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings, the Fund may incur additional expenses and, with respect to
foreign lower grade income securities, may have limited legal recourse in the
event of a default. Lower grade income securities frequently have call or buy-
back features which permit an issuer to call or repurchase the security prior to
its maturity. If an issuer exercises these provisions in a declining interest
rate environment, the Fund may have to reinvest in lower yielding securities,
resulting in a decrease in income earned by the Fund.
DEFAULTED SECURITIES. The Fund may invest in defaulted securities. Defaulted
securities are securities with respect to which payment of interest or repayment
of principal is in arrears. Any investment in defaulted securities primarily
would be intended to benefit the Fund's investment objective with respect to
capital appreciation and not its investment objective with respect to providing
a high level of current income. Defaulted securities may be less liquid than
investments in more highly rated securities and the Fund may be unable to
dispose of such securities in a timely fashion. Investment in defaulted
securities should be considered speculative. Defaulted securities may not resume
payment of interest or repayment of principal in accordance with the terms of
the original obligation, and the Fund may not recoup its investment in such
securities.
INVESTMENTS IN FOREIGN INCOME SECURITIES. Investment in foreign income
securities involves certain special risks not usually associated with investment
in domestic income securities. The magnitude of such risks is generally greater
with respect to investment in emerging market countries. Investments in foreign
income securities involve risks relating to political and economic developments
abroad. See "Additional Investment Considerations--Special Risk
Factors--Investments in Foreign Income Securities" in the Statement of
Additional Information. With respect to many foreign countries, there is the
possibility of nationalization, expropriation or confiscatory taxation,
political instability, increased governmental regulation, social instability or
diplomatic developments (including armed conflict) which could
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<PAGE> 21
adversely affect the economies of such countries or the value of the Fund's
investments in those countries. Foreign investment in certain countries is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging market income
securities and increase the costs and expenses of the Fund. Disclosure,
accounting and regulatory standards in many respects are less stringent in many
countries than in the U.S. and there may be less publicly available information
concerning foreign issuers than there is with respect to domestic issuers. In
addition, there may be less timely and accurate information with respect to
general economic conditions and trends in countries in which issuers of foreign
income securities are located, particularly in emerging market countries. There
also may be a lower level of monitoring and regulation of securities markets and
the activities of investors in such markets, and enforcement of existing
regulations has in many instances been limited. Foreign markets also have
different clearance and settlement procedures, and in certain markets settlement
may fail to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of the Fund are uninvested and no return is earned
thereon. Because the Fund may invest in non-U.S. dollar-denominated securities,
changes in foreign currency exchange rates will affect the Fund's net asset
value, the value of dividends and interest earned, gains and losses realized on
the sale of securities and net investment income to be distributed to
shareholders. The exchange rates between the U.S. dollar and other currencies
can be volatile. Investment income on certain foreign securities in which the
Fund may invest may be subject to foreign withholding or other government taxes.
SOVEREIGN DEBT. The issuer of sovereign debt or the governmental authorities
that control the repayment of sovereign debt may be unable or unwilling to repay
principal or interest when due in accordance with the terms of such debt.
Sovereign debt differs from debt obligations issued by private entities in that,
generally, remedies for defaults must be pursued in the courts of the defaulting
party. Legal recourse is therefore limited. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt; such moratoria are currently in effect in certain Latin American
countries. Holders of sovereign debt, including the Fund, may be requested to
participate in the rescheduling of such debt and to extend further loans to
sovereign debtors.
RESTRICTED AND ILLIQUID SECURITIES. Subject to limitations under state law,
the Fund may invest up to 15% of its net assets in illiquid securities including
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. The Fund may
find it difficult to sell such illiquid securities when the Adviser believes it
is advisable to do so or may be able to sell such securities only at prices
lower than if such securities were more liquid. The lack of a liquid secondary
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<PAGE> 22
market also may make it more difficult for the Fund to obtain accurate market
quotations for purposes of valuing the Fund's portfolio and calculating net
asset value. These risks may be intensified in the case of securities issued by
issuers located in, or traded in capital markets located in, emerging foreign
markets. Such securities may trade infrequently and such markets may be unable
to respond effectively to increases in trading volume, potentially making prompt
liquidation of substantial holdings impossible at times, particularly in times
of economic distress. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, as amended, that are determined to be liquid by the
Adviser under guidelines adopted by the Board of Trustees of the Trust will not
be treated as restricted securities by the Fund pursuant to such rules.
NON-DIVERSIFIED STATUS. The Fund has registered as a non-diversified
investment company, which means that the Fund may invest to a greater degree in
a relatively limited number of issuers than may a diversified investment
company. To the extent that the Fund so invests, the Fund will be more
susceptible to any single adverse economic, political or regulatory occurrence.
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INVESTMENT PRACTICES
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In connection with the investment policies described above, the Fund also may
engage in strategic transactions, enter currency transactions, purchase and sell
securities on a "when issued" and "delayed delivery" basis, borrow money from
banks, enter into repurchase and reverse repurchase agreements, sell securities
short and lend its portfolio securities, in each case subject to the limitations
set forth below. These investment practices entail risks. See the Statement of
Additional Information for a more complete discussion of these practices.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments and
purchase and sell financial futures contracts and enter into various interest
rate and currency transactions such as forward contracts, futures contracts,
swaps, caps, floors or collars or options on currencies or futures.
Collectively, all of the above are referred to as "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, 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 interest rate exposure of the Fund's
portfolio, to protect against changes in currency exchange rates, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Strategic Transactions also may be
used to enhance potential gain, although no more than 5% of the Fund's assets
will be committed to certain Strategic Transactions for non-hedging
transactions. The use of Strategic
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<PAGE> 23
Transactions for non-hedging purposes should be considered a speculative
technique. 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 Fund may also invest in income
securities the terms of which include elements of or are similar in effect to
Strategic Transactions in which the Fund may engage. 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 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 or purchase 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 use of
futures and options transactions for hedging 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. The Strategic Transactions that
the Fund may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.
REPURCHASE AGREEMENTS. The Fund may use up to 20% of its assets to enter into
repurchase agreements with selected commercial banks and broker-dealers, under
which the Fund acquires securities and agrees to resell the securities at an
agreed upon time and at an agreed upon price. The Fund accrues as interest the
difference
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<PAGE> 24
between the amount it pays for the securities and the amount it receives upon
resale.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell portfolio securities on a "when issued" and "delayed delivery" basis.
No income accrues to or is earned by the Fund on portfolio securities in
connection with such transactions prior to the date the Fund actually takes
delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher than yields on the such securities obtained
pursuant to such transactions.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. When the Fund makes a short
sale, it must borrow the security sold short and deliver it to the broker-dealer
through which it made the short sale in order to satisfy its obligation to
deliver the security upon conclusion of the sale. The Fund is obligated to
collateralize its obligation to replace the borrowed security with cash, U.S.
government securities or other highly liquid securities. The Fund may have to
pay a fee to borrow particular securities and is often obligated to pay over any
payments received on such borrowed securities. If the price of the security sold
short increases between the time of the short sale and the time the Fund
replaces the borrowed security, the Fund will incur a loss; conversely, if the
price declines, the Fund will realize a capital gain. Any gain will be
decreased, and any loss increased, by the transaction costs described above.
Although the Fund's gain is limited to the price at which it sold the security
short, its potential loss is theoretically unlimited. The short sale of a
security is considered a speculative investment technique.
The market value of the security sold short of any one issuer will not exceed
either 5% of the Fund's total assets or 5% of such issuer's voting securities.
The Fund will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its assets
or the Fund's aggregate short sales of a particular class of securities exceeds
25% of the outstanding securities of that class. The Fund may also make short
sales "against the box" without respect to such limitations. In this type of
short sale, at the time of the sale, the Fund owns or has the immediate and
unconditional right to acquire at no additional cost the identical security.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to selected commercial
banks or broker-dealers up to a maximum of 50% of the assets of the Fund. The
Fund is the beneficial owner of the loaned securities in that any gain or loss
in the market price during the loan inures to the Fund and its shareholders.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with the same parties with whom it may enter into repurchase
20
<PAGE> 25
agreements. Under a reverse repurchase agreement, the Fund sells securities and
agrees to repurchase them at a mutually agreed date and price. At the time the
Fund enters into a reverse repurchase agreement, an approved custodian will
segregate cash or liquid, high grade debt securities having a value not less
than the repurchase price (including accrued interest). Reverse repurchase
agreements will be considered borrowings and, accordingly, will be subject to
the Fund's 5% limitation on borrowings.
DEFENSIVE STRATEGIES. At times, conditions in the markets may, in the
Adviser's judgment, make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Adviser may use alternative strategies primarily designed to reduce fluctuations
in the value of the Fund's assets. In implementing these "defensive" strategies,
the Fund may invest to a substantial degree in high-quality, short-term
obligations.
PORTFOLIO TURNOVER. Other than for tax purposes, frequency of portfolio
turnover generally will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund does not anticipate having
annual portfolio turnover rates in excess of 200%. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses or
dealer costs than a lower rate, which expenses and costs must be borne by the
Fund and its shareholders.
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions set forth in the Statement of Additional Information which
constitute fundamental policies. These investment restrictions together with the
Fund's investment objectives are fundamental and cannot be changed without the
approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the 1940 Act. The Fund's other investment policies are
not fundamental and may be changed without shareholder approval. See "Investment
Policies and Restrictions" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The income securities in which the Fund may invest are
traded principally in the over-the-counter market. In the over-the-counter
market, securities generally are traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a mark-up to the dealer. Securities purchased
in underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
21
<PAGE> 26
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser,
Van Kampen Merritt or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. 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 over $50 billion under management or supervision.
Van Kampen American Capital's more than 40 open-end and 38 closed-end funds and
more than 2,700 unit investment trusts are professionally distributed by leading
financial advisers nationwide.
Van Kampen American Capital 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
22
<PAGE> 27
Capital 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.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed
under the direction of the Board of Trustees of the Trust, of which the Fund is
a separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will pay the Adviser a fee equal to a percentage of the
average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS PERCENTAGE PER ANNUM
- ---------------------------------------------------- --------------------
<S> <C>
First $500 million.................................. 1.00 of 1.00%
Over $500 million but less than $1 billion.......... 0.95 of 1.00%
Over $1 billion..................................... 0.90 of 1.00%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the 1940 Act of the Adviser, the Distributor
or Van Kampen American Capital), the charges and expenses of independent
accountants, legal counsel, any transfer or dividend disbursing agent and the
custodian (including fees for safekeeping of securities), costs of calculating
net asset value, costs of acquiring and disposing of portfolio securities,
interest (if any) on obligations incurred by the Fund, costs of share
certificates, membership dues in the Investment Company Institute or any similar
organization, reports and notices to shareholders, costs of registering shares
of the Fund under the federal securities laws, miscellaneous expenses and all
taxes and fees to federal, state or other governmental agencies.
SUB-ADVISORY AGREEMENT. VKM Global Emerging Markets Advisors, L.P., the Fund's
Sub-Adviser, will have the responsibility for supplying investment research and
portfolio management (including, without limitation, 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, in accordance with the policies
adopted by the Fund and its Board of Trustees). VKM Global Emerging Markets
Advisors, L.P. has not previously served as investment adviser to a registered
investment company.
PORTFOLIO MANAGEMENT. Frank A. Fernandez is the Chief Portfolio Manager for
VKM Global Emerging Markets Advisors, L.P. and is primarily responsible for
23
<PAGE> 28
supplying overall portfolio supervision and market allocations for the Fund,
together with individual security selection in the emerging markets sector.
Prior to 1994, Mr. Fernandez was First Vice President and Managing Director of
the Debt and Equity Markets Group of Merrill Lynch & Co. Mr. Fernandez also
served as an Investment Strategist in Merrill Lynch & Co's., Emerging Markets,
Corporate Strategy and Research Group. Prior to 1990, Mr. Fernandez was a Vice
President and Department Head of Manufacturers Hanover Trust Company's
International Economics Department.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and the
aggregate distribution and services fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor, not to accept any order for Class
B Shares or Class C Shares in an amount of $1 million or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Shares, a
purchaser of Class A Shares would not
24
<PAGE> 29
have all of his or her funds invested initially and, therefore, would initially
own fewer shares than if Class B Shares or Class C Shares had been purchased. On
the other hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC may wish to defer the sales charge and have
all his or her funds initially invested in Class B Shares. If such an investor
anticipates that he or she will redeem such shares prior to the expiration of
the CDSC period applicable to Class B Shares, the investor may wish to acquire
Class C Shares. Investors must weigh the benefits of deferring the sales charge
and having all of their funds invested against the higher aggregate distribution
and service fee applicable to Class B Shares and Class C Shares (discussed
below). Investors who intend to hold their shares for a significantly long time
may not wish to continue to bear the ongoing distribution and service expenses
of Class C Shares which, in the aggregate, eventually would exceed the aggregate
amount of the initial sales charge and distribution and service expenses
applicable to Class A Shares, irrespective of the fact that a contingent
deferred sales charge would eventually not apply to a redemption of such Class C
Shares.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Only the Class B Shares are subject to
a conversion feature (discussed below). Generally, a class of shares subject to
a higher ongoing distribution fee, services fee or, where applicable, the
conversion feature will have a higher expense ratio and pay lower dividends than
a class of shares subject to a lower ongoing distribution fee or services fee or
not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares that shall be
25
<PAGE> 30
approved by the SEC pursuant to an amended exemptive order. All such expenses
incurred by a class will be borne on a pro rata basis by the outstanding shares
of such class. All allocations of administrative expenses to a particular class
of shares will be limited to the extent necessary to preserve the Fund's
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers shares for sale to the public on a continuous basis through
Van Kampen American Capital Distributors, Inc. (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") acting as securities dealers ("dealers") and
through NASD members acting as brokers for investors ("brokers") or eligible
non-NASD members acting as agents for investors ("financial intermediaries").
The Fund reserves the right to suspend or terminate the continuous public
offering of its shares at any time and without prior notice.
The Fund's shares are offered at net asset value per share next computed after
an investor places an order to purchase directly with the investor's broker,
dealer or financial intermediary or with the Distributor, plus any applicable
sales charge. Sales personnel of brokers, dealers and financial intermediaries
distributing the Fund's shares may receive differing compensation for selling
different classes of shares. It is the responsibility of the investor's broker,
dealer or financial intermediary to transmit the order to the Distributor.
Because the Fund generally will determine net asset value once each business day
as of the close of business, purchase orders placed through an investor's
broker, dealer or financial intermediary must be transmitted to the Fund by such
broker, dealer or financial intermediary prior to such time in order for the
investor's order to be fulfilled on the basis of the net asset value to be
determined that day. Any change in the purchase price due to the failure of the
Fund to receive a purchase order prior to such time must be settled between the
investor and the broker, dealer or financial intermediary submitting the order.
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 intermediary at the public offering price during
such programs. Also, the Distributor in its discretion may from time to time,
pursuant to objective criteria established by it, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or
26
<PAGE> 31
financial intermediaries for certain services or activities which are primarily
intended to result in sales of shares of the Fund. 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 to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. Such payments to brokers, dealers and
financial intermediaries for sales contests, other programs and seminars 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 the Fund will
receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers and financial intermediaries who receive 90% or more of the
sales charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of the 1933.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
---------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
Less than $100,000................ 4.75% 4.99% 4.25%
$100,000 but less than $250,000... 3.75 3.90 3.25
$250,000 but less than $500,000... 2.75 2.83 2.25
$500,000 but less than
$1,000,000...................... 2.00 2.04 1.75
$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 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% 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. See "Purchase of Shares -- Deferred
Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
27
<PAGE> 32
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.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) 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
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") 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 at any one time in Class
A Shares of the Fund alone, or in combination with other 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 Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
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 amount being invested 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 includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 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
28
<PAGE> 33
the investment goal. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provision, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. If the goal is not achieved within the
13-month period, the investor must pay the difference between the charges
applicable to the purchases made and the charges previously paid. When an
investor signs a Letter of Intent, shares equal to at least 5% of the total
purchase amount of the level selected will be restricted from sale or redemption
by the investor until the Letter of Intent is satisfied or any additional sales
charges have been paid; if the Letter of Intent is not satisfied by the investor
and any additional sales charges are not paid, sufficient restricted shares will
be redeemed by the Fund to pay such charges. 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 firms 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 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 1.00% 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 broker, dealer or financial intermediary 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 the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
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
29
<PAGE> 34
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
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 Asset Management, Inc. 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 Class A Shares of 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 --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries 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 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(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
30
<PAGE> 35
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
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: 1.00% 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 brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary 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. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the Fund, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
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; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The
amount of the contingent deferred sales charge will vary depending on (i) the
class
31
<PAGE> 36
of CDSC Shares to which such shares belong and (ii) the number of years from the
time of payment for the purchase of the CDSC Shares until the time of their
redemption. The charge will be assessed on an amount equal to the lesser of the
then current market value or the original purchase price of the CDSC Shares
being redeemed. Accordingly, no sales charge will be imposed on increases in net
asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on CDSC Shares derived from reinvestment
of dividends or capital gains distributions. Solely for purposes of determining
the number of years from the time of any payment for the purchase of CDSC
Shares, all payments during a month will be aggregated and deemed to have been
made on the last day of the month.
Proceeds from the contingent deferred sales charge and the distribution fee
applicable to a class of CDSC Shares are paid to the Distributor and are used by
the Distributor to defray its expenses related to providing distribution related
services to the Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents for
selling such shares. The combination of the contingent deferred sales charge and
the distribution fee facilitates the ability of the Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of shares from a class of CDSC Shares, it will be assumed that the
redemption is made first of any CDSC Shares acquired pursuant to reinvestment of
dividends or distributions, second of CDSC Shares that have been held for a
sufficient period of time such that the contingent deferred sales charge no
longer is applicable to such shares, third of Class A Shares in the
shareholder's Fund account that have converted from Class B Shares, if any, and
fourth of CDSC Shares held longest during the period of time that a contingent
deferred sales charge is applicable to shares of the respective CDSC class. The
charge will not be applied to dollar amounts representing an increase in the net
asset value per share since the time of purchase.
To provide an example, assume an investor purchased 100 Class B Shares (as set
forth below) 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 10 additional Class B Shares upon dividend reinvestment.
If at such time the investor makes his first redemption of 50 shares (proceeds
of $600), 10 shares will not be subject to the 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 will be
charged at a rate of 3.75% (the applicable rate in the second year after
purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00%
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<PAGE> 37
on redemptions made within one year of the purchase. A commission will be paid
to dealers who initiate and are responsible for purchases of $1 million or more
as follows: 1.00% 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.
CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a contingent deferred sales charge at the rates set forth
below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ------------------- -------------------
<S> <C>
First................................................ 4.00%
Second............................................... 3.75%
Third................................................ 3.50%
Fourth............................................... 2.50%
Fifth................................................ 1.50%
Sixth................................................ 1.00%
Seventh and after.................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
Conversion Feature. Seven years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher distribution fee applicable to Class B Shares. The
purpose of the conversion feature is to relieve the holders of Class B Shares
after such seven year period from the higher aggregate distribution and service
fees applicable to Class B Shares. Proceeds received by the Distributor from the
distribution fee and the contingent deferred sales charge, if any, with respect
to a particular Class B Share may be more or less than the Distributor's actual
distribution related expense with respect to such Class B Share.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to a Class B Share acquired through the
use of the exchange privilege (discussed below) shall be the holding period
applicable to the Class B Shares of such Fund acquired other than through use of
the exchange privilege. For purposes of calculating the holding period
applicable to a Class B Share of the Fund prior to conversion, a Class B Share
of the Fund issued in connection with an exercise of the
33
<PAGE> 38
exchange privilege, or a series of exchanges, shall be deemed to have been
issued on the date on which the investor's order to purchase the exchanged Class
B Share was accepted or, in the case of a series of exchanges, when the
investor's order to purchase the original Class B Share was accepted.
The conversion of Class B 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 higher distribution and service fees and transfer agency costs
with respect to Class B Shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Code, and (ii)
that the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period, which period may extend beyond the period ending seven
years after the end of the month in which the shares were issued.
CLASS C SHARES. Class C Shares redeemed within the first twelve months of
purchase generally will be subject to a contingent deferred sales charge of
1.00% of the dollar amount subject thereto. Class C Shares redeemed thereafter
will not be subject to a contingent deferred sales charge. Class C Shares of the
Fund do not convert to Class A Shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares 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 as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset
34
<PAGE> 39
value per share might be materially affected. The Fund reserves the right to
calculate the net asset value and to adjust the public offering price based
thereon more frequently than once a day if deemed desirable. The net asset value
per share of the different classes of shares are expected to be substantially
the same; from time to time, however, the per share net asset value of the
different classes of shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values 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 of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees. See "Net Asset Value" in the Statement of Additional Information.
- ------------------------------------------------------------------------------
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. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. 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 will receive statements at least
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 brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be
35
<PAGE> 40
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 to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares and bill the party to
whom the replacement 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 of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 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. For further information, see
"Distributions from 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 brokers, dealers or financial
intermediaries.
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. 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.
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
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder.
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
36
<PAGE> 41
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 may be exchanged with shares of another
Participating Fund, the Tax Free Money Fund or the Reserve Fund, subject to
certain limitations herein or in such other fund's prospectus. Before effecting
an exchange, shareholders in the Fund should obtain and read a current
prospectus of the fund into which the exchange is to be made. SHAREHOLDERS MAY
ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE FOR SALE IN THEIR
STATE.
In general, shares of the Fund must have been registered in the shareholder's
name for at least 15 days prior to an exchange. Shares of the Fund registered in
a shareholder's name for less than 15 days may only be exchanged upon receipt of
prior approval of the Adviser; however, under normal circumstances, it is the
policy of the Adviser not to approve such requests. Upon 60 days after the date
of this prospectus, the Fund will increase the number of days shares must be
registered in a shareholder's name prior to an exchange to 30 days.
Exchanges of Class A Shares of the Fund that have been charged a sales charge
lower than the sales charge applicable to the other fund will have the sales
charge differential imposed upon the exchange into such fund. Similarly,
exchanges of any Class A Shares of other funds that have been charged a sales
charge lower than the sales charge applicable to the Fund will have the sales
charge differential imposed upon exchange into the Fund. Shares of other funds
which have not previously been charged a sales charge (except for shares
purchased via the reinvestment option) will be charged the sales charge
differential applicable to Class A Shares of the Fund upon exchange into the
Fund.
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. Upon redemption of Class B Shares and Class C Shares from the Van Kampen
American Capital family of funds, Class B Shares and Class C Shares which have
been exchanged are subject to the contingent deferred sales charge imposed by
the initial Van Kampen American Capital fund purchased by the investor prior to
any exchanges. The holding period requirements for the contingent deferred sales
charge, and the conversion privilege for Class B Shares of the Fund, are
determined by the date of purchase into the initial Van Kampen American Capital
fund purchased by the investor prior to any exchanges.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. 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 exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
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 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at
37
<PAGE> 42
the relative net asset values of the shares next determined after receipt of
such request with adjustment for any additional sales charge. Any shares
exchanged begin earning dividends on the next business day after the exchange is
affected. 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, a shareholder agrees that
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. 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 options) and broker, dealer or financial
intermediary 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 dividend diversification options for the
new account, 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.
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 taxable 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 investor purchasing shares for a retirement plan
established on a form made available by the Fund. See "Shareholder Services --
Retirement Plans."
Holders of Class B Shares and Class C Shares 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 -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
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
38
<PAGE> 43
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.
The Fund reserves the right to amend or terminate the systematic withdrawal
program on thirty days' notice to its shareholders.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. Holders of Class A 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 such shareholder. These checks may
be made payable by the holder of Class A Shares 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 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 Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not 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.
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
39
<PAGE> 44
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.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as 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. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with 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. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by check mailed within
three business 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 gain or loss realized on the redemption of shares
is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. 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
40
<PAGE> 45
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. Any change in the
redemption price due to failure of the Distributor to receive a sell order prior
to such time must be settled between the shareholder and dealer. Shareholders
must submit a written redemption request in proper form (as described above
under "Written Redemption Requests") to the dealer within three business days
after calling the dealer with the sell order. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by check mailed within
three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. 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
((800) 772-8889 for the hearing impaired) 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 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, a shareholder agrees that 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 other redemption
procedures 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 the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. 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 sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within
41
<PAGE> 46
three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. 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 Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares 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
Shares 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.
GENERAL REDEMPTION INFORMATION. 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 investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
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. Holders of Class C Shares who
have 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 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
42
<PAGE> 47
Contingent Deferred Sales Charge." 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.
- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
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 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 each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial
43
<PAGE> 48
intermediaries or the amount of the Distributor's actual distribution related
expense attributable to the Class C Shares. In addition, the Fund may spend up
to 0.25% per year of the Fund's average daily net assets attributable to the
Class C Shares pursuant to the Service Plan in connection with the ongoing
provision of services to holders of such shares by the Distributor and by
brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. The Fund will disclose in its prospectus from
time to time the then current amount of any such unreimbursed expenses with
respect to each class of CDSC Shares expressed as a dollar amount and as a
percent of the Fund's total net assets. As of June 30, 1995, there were no
unreimbursed distribution expenses with respect to Class B Shares and Class C
Shares. If the Distribution Plan was terminated or not continued, the Fund would
not be contractually obligated to pay the Distributor for any expenses not
previously reimbursed by the Fund or recovered through contingent deferred sales
charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of CDSC Shares to defray distribution related expenses
attributable to any
44
<PAGE> 49
other class of CDSC Shares. Various federal and state laws prohibit national
banks and some state-chartered commercial banks from underwriting or dealing in
the Fund's shares. In addition, state securities laws on this issue may differ
from the interpretations of federal law, and banks and financial institutions
may be required to register as dealers pursuant to state law. In the unlikely
event that a court were to find that these laws prevent such banks from
providing such services described above, the Fund would seek alternate providers
and expects that shareholders would not experience any disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare distributions on a daily basis and to pay such
distributions from net investment income and principal attributable to each
respective class of shares of the Fund on a monthly basis. The Fund may at times
pay out less than the entire amount of net investment income earned in any
particular period and may at times pay out such accumulated undistributed income
in addition to net investment income earned in other periods in order to permit
the Fund to maintain a more stable level of distributions to shareholders. As a
result, the distributions paid by the Fund for any particular period may be more
or less than the amount of net investment income earned by the Fund during such
period. Net investment income consists of all interest income, dividends, other
ordinary income earned by the Fund on its portfolio assets and net short-term
capital gains, less all expenses of the Fund (including any interest payments
required with respect to any borrowings by the Fund) attributable to the class
of shares in question. Expenses of the Fund are accrued each day. Net realized
long-term capital gains, if any, are expected to be distributed, to the extent
permitted by applicable law, to shareholders at least annually. Distributions
cannot be assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee or service fee or not subject to
the conversion feature.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement.
45
<PAGE> 50
Shares remain entitled to dividends through the day such shares are processed
for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus and is qualified by reference to the additional federal income
tax discussion included in the Statement of Additional Information.
FEDERAL INCOME TAXATION. The Fund intends to qualify each year and to elect to
be treated as a regulated investment company under Subchapter M of the Code. If
the Fund so qualifies and distributes each year to its shareholders at least 90%
of its net investment income (which includes net short-term capital gains, but
not net capital gains, which are the excess of net long-term capital gains over
net short-term capital losses) in each year, it will not be required to pay
federal income taxes on any income distributed to shareholders. The Fund will
not be subject to federal income tax on any net capital gains distributed to
shareholders.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. Some of the Fund's
investment practices are subject to special provisions of the Code that, among
other things, may affect the amount, timing and character of distributions to
shareholders.
DISTRIBUTIONS. Distributions of the Fund's net investment income are taxable
to shareholders as ordinary income whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gains ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains
46
<PAGE> 51
regardless of the length of time shares of the Fund have been held by such
shareholders. Distributions in excess of the Fund's earnings and profits will
first reduce the adjusted tax basis of a holder's shares and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
holder (assuming such shares are held as a capital asset). The Fund will inform
shareholders of the source and tax status of all distributions promptly after
the close of each calendar year. A portion of the distributions from the Fund
will be eligible for the dividends received deduction for corporations if the
Fund receives qualifying dividends during the year and if certain other
requirements of the Code are satisfied.
Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.
SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such shares
have been held for more than one year. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such shares. For purposes of determining whether shares have been held for
six months or less, the holding period is suspended for any periods during which
the Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of holding and disposing of shares, as
well as the effects of state, local and foreign tax law and any proposed tax law
changes.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. 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. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week,
47
<PAGE> 52
Forbes or other industry publications. From time to time, the Fund may compare
its overall performance to certain securities and unmanaged indices which may
have different risk/reward characteristics than the Fund and also may compare
its performance in certain sectors to the Lehman Non-Dollar Global Government
Index, J.P. Morgan Emerging Markets Bond Index and the Lehman High Yield
Corporate Index. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal or return. In
addition, from time to time, the Fund may utilize sales literature that includes
hypotheticals.
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. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same 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.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Trust, a Delaware
business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1993 under the name Van Kampen Merritt Emerging Markets
Income Fund as a sub-trust of Van Kampen Merritt Trust, a Massachusetts business
trust. The Fund was reorganized as a series of the Trust on 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.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into classes. 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 are identical in all respects except that each class bears
certain
48
<PAGE> 53
distribution expenses and has exclusive voting rights with respect to its
distribution fee. See "The Distribution and Service Plans."
Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of classes of shares. Each class of shares 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 into Class A Shares as described above. In the event of
liquidation, each share of the Fund is entitled to its pro rata 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 holders of Class B Shares and Class C Shares are likely
to be lower than to other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Trust is set forth in the
Statement of Additional Information.
- ------------------------------------------------------------------------------
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.
The fiscal year of the Fund ends June 30. The Fund sends to its shareholders,
at least semi-annually, reports showing the Fund's portfolio and other
information. An annual report, containing financial statements audited by the
Fund's independent auditors, is sent to shareholders each year. After the end of
each year, shareholders will receive federal income tax information regarding
dividends and capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital
Emerging Markets Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois
60181, Attn: Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
49
<PAGE> 54
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) 421-5666.
VAN KAMPEN AMERICAN CAPITAL
EMERGING MARKETS
INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Sub-Adviser
VKM GLOBAL EMERGING
MARKETS ADVISORS, L.P.
400 Madison Avenue
New York, NY 10017
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital Funds
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
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 55
EMERGING MARKETS
INCOME FUND
P R O S P E C T U S
OCTOBER 27, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
<PAGE> 56
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND
Van Kampen American Capital Emerging Markets Income Fund, formerly known as
Van Kampen Merritt Emerging Markets Income Fund (the "Fund"), is a separate,
non-diversified series of Van Kampen American Capital Trust, an open-end
management investment company organized as a Delaware business trust (the
"Trust"). The Fund's primary investment objective is to seek to provide its
shareholders with high current income. The Fund has a secondary investment
objective of seeking capital appreciation. The Fund will seek to achieve its
investment objectives under normal market conditions by investing primarily in
emerging foreign market income securities. Under normal market conditions, up to
35% of the Fund's assets may be invested in developed foreign market income
securities and domestic lower grade income securities. The Fund may invest in
investment grade, lower grade securities and unrated securities. The Adviser
will allocate the Fund's investments among these market sectors based on its
evaluation of the relative investment opportunities and investment risks
presented by such sectors from time to time. Under normal market conditions, at
least 65% of the Fund's total assets will be invested in U.S. dollar-denominated
income securities. All or substantial portion of the Fund's assets may be
invested in lower grade income securities and in income securities of issuers in
emerging market countries. There can be no assurance that the Fund will achieve
its investment objectives.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated October 27, 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 ((800) 772-8889 for the hearing impaired). 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. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund and the Trust........................................................... B-2
Investment Policies and Restrictions............................................. B-3
Additional Investment Considerations............................................. B-4
Description of Securities Ratings................................................ B-24
Officers and Trustees............................................................ B-32
Investment Advisory and Other Services........................................... B-38
Investment Sub-Advisory Agreement................................................ B-39
Net Asset Value.................................................................. B-41
Portfolio Transactions and Brokerage Allocation.................................. B-42
Tax Status of the Fund........................................................... B-43
The Distributor.................................................................. B-47
Legal Counsel.................................................................... B-48
Performance Information.......................................................... B-48
Independent Auditors' Report..................................................... B-51
Financial Statements............................................................. B-52
Notes to Financial Statements.................................................... B-57
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 27, 1995.
<PAGE> 57
THE FUND AND THE TRUST
The Fund is a separate, non-diversified series of the Trust. The Trust is an
unincorporated business trust established under the laws of the State of
Delaware by an Agreement and Declaration of Trust (the "Declaration of Trust")
dated as of May 10, 1995. At present, the Fund, Van Kampen American Capital
Short-Term Global Income Fund, Van Kampen American Capital High Yield Fund and
Van Kampen American Capital Strategic Income Fund are the only series of the
Trust, although other series may be organized and offered in the future. The
Fund was previously organized under the name Van Kampen Merritt Emerging Markets
Income Fund as a sub-trust of Van Kampen Merritt Trust, a Massachusetts business
trust. The Fund was reorganized as a series of the Trust as of July 31, 1995.
The Trust and each of its series, including the Fund, will be treated as
separate corporations for Federal income tax purposes.
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
Trustees 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.
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 two-thirds of the shares then outstanding cast in person or by proxy 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.
B-2
<PAGE> 58
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives of the Fund are set forth in the Prospectus under
the caption "Investment Objectives and Policies." There can be no assurance that
the Fund will achieve its investment objectives.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Invest 25% or more of the value of its total assets in any single
industry. (Neither the U.S. government nor any of its agencies or
instrumentalities will be considered an industry for purposes of this
restriction.)
2. Borrow money, except for temporary purposes from banks or in
reverse repurchase transactions as described in the Statement of Additional
Information and then in amounts not in excess of 5% of the total asset
value of the Fund, or mortgage, pledge, or hypothecate any assets except in
connection with a borrowing and in amounts not in excess of 10% of the
total asset value of the Fund. Borrowings may not be made for investment
leverage, but only to enable the Fund to satisfy redemption requests where
liquidation of portfolio securities is considered disadvantageous or
inconvenient. In this connection, the Fund will not purchase portfolio
securities during any period that such borrowings exceed 5% of the total
asset value of the Fund. Notwithstanding this investment restriction, the
Fund may enter into "when issued" and "delayed delivery" transactions as
described in the Prospectus.
3. Make loans of money or property to any person, except (i) to the
extent the securities in which the Fund may invest are considered to be
loans, (ii) through the loan of portfolio securities or the acquisition of
securities subject to repurchase agreements, and (iii) to the extent that
the Fund may lend money or property in connection with maintenance of the
value of, or the Fund's interest with respect to, the securities owned by
the Fund.
4. Buy securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions, short term
credits as may be necessary for the clearance of transactions nor
borrowing, entering into reverse repurchase agreements or dollar rolls
consistent with investment restriction 2 above is considered the purchase
of a security on margin.
5. Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
6. Make investments for the purpose of exercising control or
participation in management of any company other than a CMO issuer, except
to the extent that exercise by the Fund of its rights under agreements
related to portfolio securities would be deemed to constitute such control
or participation.
7. Invest in securities of other investment companies, except as part
of a merger, consolidation or other acquisition and except as permitted
under the 1940 Act.
8. Invest in oil, gas or mineral leases or in equity interests in oil,
gas, or other mineral exploration or development programs except pursuant
to the exercise by the Fund of its rights under agreements relating to
portfolio securities.
9. Purchase or sell real estate, commodities or commodity contracts,
except to the extent that the securities that the Fund may invest in are
considered to be interests in real estate, commodities
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or commodity contracts or to the extent the Fund exercises its rights under
agreements relating to portfolio securities (in which case the Fund may
liquidate real estate acquired as a result of a default on a mortgage), and
except to the extent that Strategic Transactions the Fund may engage in are
considered to be commodities or commodities contracts.
The Fund may not change any of these investment restrictions as they apply to
the Fund or the Fund's fundamental investment objectives without 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.
In addition, to comply with federal tax requirements for qualifications as a
"regulated investment company," the Fund's investments will be limited in a
manner such that at the close of each quarter of each fiscal year, (a) no more
than 25% of the Fund's total assets are invested in the securities of a single
issuer, and (b) with regard to at least 50% of the Fund's total assets, no more
than 5% of its total assets are invested in the securities of a single issuer.
These tax-related limitations may be changed by the Trustees to the extent
necessary to comply with changes to applicable tax requirements.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Other than
for tax purposes, frequency of portfolio turnover will not be a limiting factor
if the Fund considers it advantageous to purchase or sell securities. The Fund
anticipates that its annual portfolio turnover rate will normally be less than
200%. Portfolio turnover will be calculated by dividing the lesser of purchases
or sales of portfolio securities by the monthly average value of the securities
in the portfolio during the year. Securities, including options, whose maturity
or expiration date at the time of acquisition were one year or less will be
excluded from such calculation. A high rate of portfolio turnover involves
correspondingly higher brokerage commissions and transaction expenses than a
lower rate, which expenses must be borne by the Fund and its Shareholders.
ADDITIONAL INVESTMENT CONSIDERATIONS
The following information supplements the information provided in the
Prospectus under the headings "Investment Objective and Policies" and
"Investment Practices."
PORTFOLIO SECURITIES
BRADY BONDS. The Fund may invest in Brady Bonds and other sovereign debt of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. "Brady Bonds" are debt securities
issuer under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external commercial bank indebtedness.
The Brady Plan framework contemplates the exchange of commercial bank debt for
newly issued Brady Bonds. Brady Bonds may also be issued in respect of new money
being advanced by existing lenders in connection with the debt
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restructuring. Certain Brady Bonds have been collateralized as to principal due
at maturity by U.S. Treasury zero coupon bonds with a maturity equal to the
final maturity of such Brady Bonds.
Brady Plan debt restructurings totalling more than $127 billion have been
implemented to date in Mexico, Costa Rica, Venezuela, Uruguay, Nigeria,
Argentina, the Philippines and Brazil and, in addition, The Dominican Republic
and Poland have announced intentions to issue Brady Bonds. Brady Bonds have been
issued only recently, and accordingly do not have a long payment history.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. Brady Bonds issued to date include bonds issued at 100% of face
value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest rate
which increases over time, bonds issued in exchange for the advancement of new
money by existing lenders and pass-through interest bonds.
In light of the risk of Brady Bonds including, among other factors, the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with terms of the Brady Bonds. Many of the Brady Bonds and other income
securities in which the Fund invests are likely to be acquired at a discount.
See "Tax Status" in the Prospectus.
OTHER SOVEREIGN-RELATED DEBT. In addition to Brady Bonds, the Fund may invest
in sovereign or sovereign-related income securities. Such obligations may
include, but are limited to, participations and assignments in sovereign bank
loans, restructured external debt that has not undergone a Brady-style debt
exchange, and internal government debt such as Mexican Treasury Bills known as
Certificados de la Tesoreira ("CETES"), Argentine Bonos del Tesoro ("BOTE"),
Bonos de Inversion y Crecimiento-Quinta Serie ("BIC V") and Venezuelan zero
coupon notes.
The sovereign related income securities in which the Fund may invest generally
consist of obligations issued or backed by national, state or provincial
governments or similar political subdivisions or central banks in foreign
countries. Sovereign related income securities also include debt obligations of
supranational entities, which include international organizations designated or
backed by governmental entities to promote economic reconstruction or
development, international banking institutions and related government agencies.
Examples include the International Bank for Reconstruction and Development (the
World Bank), the European Coal and Steel Community, the Asian Development Bank
and the InterAmerican Development Bank.
Sovereign related income securities also include income securities of
"quasi-governmental agencies" and income securities denominated in multinational
currency units of an issuer (including supranational issuers). An example of a
multinational currency unit is the European Currency Unit ("ECU"). An ECU
represents specified amounts of the currencies of certain member states of the
European Economic Community. The specific amounts of currencies comprising the
ECU may be adjusted by the Council of Ministers of the European Community to
reflect changes in relative values of the underlying currencies. European
supranational entities, in particular, issue ECU-denominated obligations. Income
securities of quasi-governmental agencies are issued by entities owned by either
a national, state or equivalent
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government or are obligations of a political unit that is not backed by the
national government's full faith and credit and general taxing powers.
STRUCTURED INVESTMENTS. The Fund may invest a portion of its assets in
interests in entities organized and operated solely for the purpose of
restructuring the investment characteristics of other income securities,
including income securities issued by foreign governments. This type of
restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans or
Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or representing interests in,
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash
flow on the underlying instruments. The Fund may invest in a class of Structured
Investments that is subordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments.
INDEXED INCOME SECURITIES. The Fund may invest in income securities issued by
banks and other business entities that are indexed to certain specific foreign
currency exchange rates, interest rates or other reference rates. The terms of
such securities provide that their principal amount is adjusted upwards or
downwards (but ordinarily not below zero) at maturity to reflect changes in the
exchange rate between two currencies (or other rates) while the obligations are
outstanding. While such securities offer the potential for an attractive rate of
return, they also entail the risk of loss of principal.
LOAN PARTICIPATIONS AND ASSIGNMENTS. The Fund may invest in fixed and floating
rate loans ("Loans") arranged through private negotiations between foreign
borrowers and one or more financial institutions ("Lenders"). The Fund's
investments in Loans are expected in most instances to be in the form of
participations in Loans ("Participations") and assignments of all or a portion
of Loans ("Assignments") from third parties. Participations typically will
result in the Fund having a contractual relationship only with the Lender, not
with the borrower. The Fund will have the right to receive payments of
principal, interest and any fees to which it is entitled only from the Lender
selling the Participation and only upon receipt by the Lender of the payments
from the borrower. The Fund generally has no direct right to enforce compliance
by the borrower with the terms of the loan agreement relating to the Loan ("Loan
Agreement"), nor any rights of set-off against the borrower, and the Fund may
not directly benefit from any collateral supporting the Loan in which it has
purchased the Participation. As a result, the Fund will assume the credit risk
of both the borrower and the Lender that is selling the Participation. When the
Fund purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan. However, since Assignments are arranged
through private negotiations between potential assignees and assignors, the
rights and obligations acquired by the Fund as the purchaser of an Assignment
may differ from, and be more limited than, those held by the assigning Lender.
STRIPPED INCOME SECURITIES. Stripped income securities are derivative
securities representing an interest in all or a portion of the income or
principal components of an underlying or related security, a pool of securities
or other assets. 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 market values of
stripped income securities tend to be more volatile in response to changes in
interest rates than are conventional income securities.
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FLOATING AND VARIABLE RATE INCOME SECURITIES. Income securities may provide
for floating or variable rate interest or dividend payments. The floating or
variable rate may be determined by reference to a known lending rate, such as a
bank's prime rate, a certificate of deposit rate or the London Inter Bank
Offered Rate (LIBOR). Alternatively, the rate may be determined through an
auction or remarketing process. The rate may also be indexed to changes in the
values of interest rate or securities indexes, currency exchange rates or other
commodities. The Fund may invest in derivative floating and variable rate
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters, whose rates are
subject to periodic or lifetime limits. Such securities may pay a rate of
interest determined by applying a multiple to the variable rate. The extent of
increases and decreases in the value of inverse floaters and the corresponding
change to the net asset value of the Fund generally will be larger than
comparable changes in the value of an equal principal amount of a fixed rate
security having similar credit quality, redemption provisions and maturity.
DISCOUNT, ZERO COUPON AND PAYMENT-IN-KIND SECURITIES. The Fund may invest in
securities sold at a substantial discount from their value at maturity. Such
securities include "zero coupon" and payment-in-kind securities of governmental
or private issuers. Zero coupon securities generally pay no cash interest (or
dividends in the case of preferred stock) to their holders prior to maturity.
Payment-in-kind securities allow the issuer, at its option, to make current
interest payments on such securities either in cash or in additional securities.
Accordingly, such securities usually are issued and traded at a deep discount
from their face or par value and generally are subject to greater fluctuations
of market value in response to changing interest rates than securities of
comparable maturities and credit quality that pay cash interest (or dividends in
the case of preferred stock) on a current basis.
Federal tax law requires that a holder of a zero coupon security accrue a
portion of the original issue discount on the security and to include the
"interest" on payment-in-kind securities as income each year, even though the
holder receives no interest payment on the security during the year. Federal tax
law also requires that entities such as the Fund which seek to qualify for
pass-through federal income tax treatment as regulated investment companies
distribute substantially all of their net investment income each year, including
non-cash income. Accordingly, although the Fund will receive no payments on its
zero coupon or payment-in-kind securities prior to their maturity or
disposition, it will have income attributable to such securities, and it will be
required, in order to maintain the desired tax treatment, to include in its
dividends an amount equal to the income attributable to its zero coupon and
payment-in-kind securities. Such dividends will be paid from the cash assets of
the Fund, from borrowings or by liquidation of portfolio securities, if
necessary, at a time that the Fund otherwise might not have done so. To the
extent the proceeds from any such dispositions are used by the Fund to pay
distributions, the Fund will not be able to purchase additional income-producing
securities with such proceeds, and as a result the Fund's current income
ultimately may be reduced. See "Taxation."
PREMIUM SECURITIES. The fund may invest in income securities bearing coupon
rates higher than prevailing market rates. Such "premium" securities are
typically purchased at prices greater than the principal amounts payable on
maturity. The Fund will not amortize the premium paid for such securities in
calculating its net investment income. As a result, in such cases the purchase
of such securities provides the Fund a higher level of investment income
distributable to shareholders on a current basis than if the Fund purchased
securities bearing current market rates of interest. Although such securities
bear coupon rates higher than prevailing market rates, because they are
purchased at a price in excess of par value, the yield earned by the Fund on
such investments may not exceed prevailing market yields. If an issuer were to
redeem securities held by a Fund during a time of declining interest rates, the
Fund
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may not be able to reinvest the proceeds in securities providing the same
investment return as the securities redeemed. If securities purchased by a Fund
at a premium are called or sold prior to maturity, the Fund will recognize a
capital loss to the extent the call or sale price is less than the purchase
price. Additionally, the Fund will recognize a capital loss if it holds such
securities to maturity.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes,
preferred stocks or other securities that may be converted into or exchanged for
a specified amount of common stock of the same or a different issuer within a
particular period of time and at a specified price or formula. A convertible
security entitles the holder to receive interest generally paid or accrued on
debt or the dividend paid on preferred stock until the convertible security
matures or is redeemed, converted or exchanged. Convertible securities have
unique investment characteristics in that they generally (i) have higher yields
than common stocks, but lower yields than comparable non-convertible income
securities, (ii) are less subject to fluctuation in value than the underlying
stock since they have fixed income characteristics, and (iii) provide the
potential for capital appreciation if the market price of the underlying common
stock increases. Most convertible securities currently are issued by domestic
companies, although a substantial Eurodollar convertible securities market has
developed, and the markets for convertible securities denominated in local
currencies are increasing.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
EQUITY FEATURES. Income securities may involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
interest of other payments, often in addition to a fixed rate of return, that
are based on the borrower's attainment of specified levels of revenues, sales or
profits). At times, the Fund may also acquire warrants and other equity
securities in connection with the purchase of income securities. Warrants are
securities permitting, but not obligating, their holder to subscribe for other
securities or commodities. Warrants do not carry with them the right to
dividends or voting rights with respect to the securities that they entitle
their holder to purchase, and they do not represent any rights in the assets of
the issuer. As a result, warrants may be considered more speculative than
certain other types of investments.
PREFERRED STOCK. Preferred stock generally has a preference as to dividends
and upon liquidation over an issuer's common stock but ranks junior to debt
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on debt securities, preferred stock dividends are
payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event
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the issuer fails to make one or more dividend payments on the preferred stock,
no dividends may be paid on the issuer's common stock until all unpaid preferred
stock dividends have been paid. Preferred stock also may provide that, in the
event the issuer fails to make a specified number of dividend payments, the
holders of the preferred stock will have the right to elect a specified number
of directors to the issuer's board. Preferred stock also may be subject to
optional or mandatory redemption provisions.
COMMON STOCK. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
after making required payments to holders of such entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so. In selecting common stocks for
investment, the Fund will focus both on the security's dividend paying capacity
and on its potential for appreciation.
DEPOSITORY RECEIPTS. Some of the securities in the Fund may be in the form of
depository receipts. Depository receipts usually represent common stock or other
equity securities of foreign issuers deposited with a custodian in a depository.
The underlying securities are usually withdrawable at any time by surrendering
the depository receipt. Depository receipts are usually denominated in U.S.
dollars and dividends and other payments from the issuer are converted by the
custodian into U.S. dollars before payment to receipt holders. In other respects
depository receipts for foreign securities have the same characteristics as the
underlying securities. Depository receipts that are not sponsored by the issuer
may be less liquid and there may be less readily available public information
about the issuer.
PRIVATE PLACEMENTS. The Fund may invest in income securities that are sold in
private placement transactions between their issuers and their purchasers and
that are neither listed on an exchange nor traded in the OTC secondary market.
In many cases, privately placed securities will be subject to contractual or
legal restrictions on transfer. As a result of the absence of a public trading
market, privately placed securities may in turn be less liquid and more
difficult to value than publicly traded securities. In addition, issuers whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements that may be applicable if their
securities were publicly traded. Certain of the Fund's direct investments,
particularly in emerging foreign markets, may include investments in smaller,
less seasoned companies, which may involve greater risks. These companies may
have limited product lines, markets or financial resources, or they may be
dependent on a limited management group. If any privately placed securities held
by the Fund were required to be registered under the securities laws of any
jurisdiction prior to being resold, the Fund may be required to bear the
expenses of registration.
INVESTMENT IN OTHER INVESTMENT COMPANIES. The Fund may invest in other
investment companies whose investment objectives and policies are consistent
with those of the Fund. In accordance with the 1940 Act, the Fund may invest up
to 10% of its total assets in securities of other investment companies. In
addition, under the 1940 Act the Fund may not own more than 3% of the total
outstanding voting stock of any investment company and not more than 5% of the
value of the Fund's total assets may be invested in the securities of any
investment company. If the Fund acquires shares in investment companies,
stockholders would bear both their proportionate share of expenses in the Fund
(including investment advisory and administrative fees) and, indirectly, the
expenses of such investment companies (including investment advisory and
administrative fees).
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SPECIAL RISK FACTORS
INVESTMENT IN LOWER GRADE INCOME SECURITIES. A substantial portion or all of
the Fund's assets may be invested in lower grade securities. Debt securities
rated BB or lower by Standard & Poor's Ratings Group ("S&P") or Ba or lower by
Moody's Investors Service, Inc. ("Moody's") are deemed by S&P and Moody's to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal and may involve major risk exposure to adverse conditions.
The lower grade income securities in which the Fund may invest may include
securities having the lowest ratings assigned by S&P or Moody's and, together
with comparable unrated securities, may include securities in default or that
face the risk of default with respect to the payment of principal or interest.
The Fund may invest in income securities rated in the lowest rating categories.
These securities are considered to have extremely poor prospects of ever
attaining any real investment standing.
Lower grade income securities generally offer a higher yield than that
available from higher grade income securities. However, lower grade income
securities involve higher risks, in that they are especially subject to adverse
changes in general economic conditions, the industries in which the issuers are
engaged, the financial condition of the issuers and prevailing interest rates.
Issuers of lower grade securities are often highly leveraged and may not have
available to them more traditional methods of financing. During periods of
economic downturn or rising interest rates, highly leveraged issuers may
experience financial stress which could adversely affect their ability to make
payments of principal and interest and increase the possibility of default. The
issuer's ability to service its debt obligations may also be adversely affected
by specific developments affecting the issuer, such as the issuer's inability to
meet specific projected business or revenue forecasts. Similarly, certain
emerging market governments that issue lower grade income securities are among
the largest debtors to commercial banks, foreign governments and supranational
organizations and may not be able or willing to obtain additional financing.
Lower grade income securities frequently have call or buy-back features which
permit an issuer to call or repurchase the security prior to maturity. If an
issuer exercises these provisions in a declining interest rate environment, the
Fund may have to reinvest in lower yielding securities, resulting in a decrease
in income earned by the Fund. The risk of loss due to default by the issuer is
also significantly greater for the holders of lower grade securities because
such securities are generally unsecured and are often subordinated to other
income securities of the issuer. To the extent the Fund is required to seek
recovery upon a default in the payment of principal or interest on its portfolio
holdings, the Fund may incur additional expenses and, with respect to foreign
lower grade income securities, may have limited legal recourse in the event of a
default.
INVESTMENTS IN FOREIGN INCOME SECURITIES. Investment in foreign income
securities involves certain special risks not usually associated with investment
in domestic income securities. The magnitude of such risks is generally greater
with respect to investment in emerging market countries. Investments in foreign
income securities involve risks relating to political and economic developments
abroad. The economies of individual foreign emerging market countries may differ
unfavorably from the U.S. economy in such respects as growth of gross domestic
product, rate of inflation, currency depreciation, capital reinvestment,
resource self-sufficiency and balance of payments position. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been and may continue to be adversely
affected by trade barriers, exchange controls, managed adjustments in relative
currency values and other protectionist measures imposed or negotiated by the
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countries with which they trade. These economies also have been and may continue
to be adversely affected by changes in the economic conditions in the countries
with which they trade.
With respect to many foreign countries, there is the possibility of
nationalization, expropriation or confiscatory taxation, political instability,
increased governmental regulation, social instability or diplomatic developments
(including armed conflict) which could adversely affect the economies of such
countries or the value of the Fund's investments in those countries.
Foreign investment in certain countries is restricted or controlled to varying
degrees. These restrictions or controls may at times limit or preclude foreign
investment in certain emerging income securities and increase the costs and
expenses of the Fund. Certain countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than the classes available for purchase by domiciliaries of the countries
and/or impose additional taxes on foreign investors. Certain countries may also
restrict investment opportunities in industries deemed important to national
interests. In addition, certain countries may require governmental approval for
the repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. If a deterioration occurs in an emerging market
country's balance of payments, the country might impose temporary restrictions
on foreign capital remittances. Investing in local markets in certain countries
may require the Fund to adopt special procedures, seek local government
approvals or take other actions, each of which may involve additional costs to
the Fund.
Disclosure and regulatory standards in many respects are less stringent in
many countries than in the U.S. There also may be a lower level of monitoring
and regulation of securities markets and the activities of investors in such
markets, and enforcement of existing regulations has in many instances been
limited. Many of the foreign income securities held by the Fund will not be
registered with the SEC, nor will the issuers thereof be subject to SEC
reporting requirements. Accordingly, there may be less publicly available
information concerning foreign issuers than is available concerning domestic
companies. Foreign companies, and in particular, companies in emerging market
countries are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory requirements comparable to
those applicable to domestic companies. In addition, there may be less timely
and accurate information with respect to general economic conditions and trends
in countries in which issuers of foreign income securities are located,
particularly in emerging market countries.
Because the Fund may invest in non-U.S. dollar-denominated securities, changes
in foreign currency exchange rates will affect the Fund's net asset value, the
value of dividends and interest earned, gains and losses realized on the sale of
securities and net investment income to be distributed to shareholders. If the
value of a foreign currency rises against the U.S. dollar, the value of Fund
assets denominated in such currency will increase; correspondingly, if the value
of a foreign currency declines against the U.S. dollar, the value of Fund assets
denominated in such currency will decrease. The exchange rates between the U.S.
dollar and other currencies can be volatile.
The costs associated with investing in foreign income securities frequently
are higher than those attributable to domestic investing. Investment income on
certain foreign securities in which the Fund may invest may be subject to
foreign withholding or other government taxes.
Foreign markets also have different clearance and settlement procedures, and
in certain markets settlement may fail to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when assets of the Fund
are
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uninvested and no return is earned thereon. The inability of the Fund to make
intended security purchases due to settlement problems could cause the Fund to
miss attractive investment opportunities. Inability to dispose of a portfolio
security due to settlement problems could result in losses to the Fund due to
subsequent declines in the value of such portfolio security.
SOVEREIGN DEBT. Certain countries have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate fluctuations, large amounts of external debt, balance of payment and trade
difficulties and extreme poverty and unemployment. The issuer of sovereign debt
or the governmental authorities that control the repayment of sovereign debt may
be unable or unwilling to repay principal or interest when due in accordance
with the terms of such debt. Sovereign debt differs from debt obligations issued
by private entities in that, generally, remedies for defaults must be pursued in
the courts of the defaulting party. Legal recourse is therefore limited.
Certain emerging market countries are among the largest debtors to commercial
banks and foreign governments. At times certain emerging market countries have
declared moratoria on the payment of principal and interest on external debt;
such moratoria are currently in effect in certain Latin American countries.
Since 1982, certain emerging market countries have experienced difficulty in
servicing their sovereign debt on a timely basis which led to defaults on
certain obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. Holders of sovereign debt,
including the Fund, may be requested to participate in the rescheduling of such
debt and to extend further loans to sovereign debtors. The interests of holders
of sovereign debt could be adversely affected in the course of restructuring
arrangements. Furthermore, some of the participants in the secondary market for
sovereign debt may also be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.
INVESTMENT PRACTICES
STRATEGIC TRANSACTIONS. 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, currency exchange rates and broad or specific market
movements) or to manage the effective maturity or duration of the Fund's income
securities 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.
In the course of pursuing these investment strategies, the Fund may purchase
and sell exchange-listed and over-the-counter put and call options on
securities, equity and income indices and other financial instruments, purchase
and sell financial futures contracts and options thereon, 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 currencies 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 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,
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or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
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 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 or purchase 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 use of
futures and options transactions for hedging 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. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status."
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
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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, by which 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, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund 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.
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
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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 that 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 of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of "A-1" from S&P or "P-1" from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO"). The staff
of the SEC currently takes the position that, in general, OTC options on
securities other than U.S. Government securities purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its assets in illiquid securities.
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 securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on domestic and foreign
securities exchanges and in the over-the-counter markets and on securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. 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 or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold. In selling calls on securities not owned by the Fund, the Fund may be
required to acquire the underlying security at a disadvantageous price in order
to satisfy its obligations with respect to the call.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices, currencies and futures
contracts other than futures or 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 such put options 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 enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency, equity or income 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 purchase of a futures
contract creates a firm obligation by
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the Fund, as purchaser, to take delivery from the seller 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). The sale of a futures contract creates a firm obligation
by the Fund, as seller, to deliver to the buyer 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 and
obligates the seller to deliver such option.
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. 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 10% 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
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 can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than bona fide hedging purposes 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. Certain state securities laws to which the Fund
may be subject may further restrict the Fund's ability to engage in transactions
in futures contracts and related options. The segregation requirements with
respect to futures contracts 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.
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Currency Transactions. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holding denominated in
particular 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 which have received (or the guarantors of the obligations of such
Counterparties have received) a credit rating of 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
currency 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 or the
receipt of income therefrom. 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 cross hedging and proxy hedging as described below.
The Fund may 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 the Fund expects to have
portfolio exposure.
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. For example, if the Adviser
considers the Austrian schilling is linked to the German deutschemark (the
"D-mark"), the Fund holds securities denominated in schillings and the Adviser
believes that 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. Currency
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.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio 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), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate 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 interest 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 cashflows on a notional amount of two or more currencies based on
the relative value differential among them. 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. 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 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
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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 equity 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 may 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
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 income
instruments are linked.
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 guarantee, 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, subject to
any regulatory restrictions, 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 securities 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
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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.
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,
currencies, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it 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 non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or 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. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
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 of the Fund."
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REPURCHASE AGREEMENTS. The Fund may use up to 20% of its assets to enter into
repurchase agreements with selected commercial banks and broker-dealers, under
which the Fund acquires securities and agrees to resell the securities at an
agreed upon time and at an agreed upon price. The Fund accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Fund enters into a repurchase agreement,
the value of the underlying security including accrued interest will be equal to
or exceed the value of the repurchase agreement and, for repurchase agreements
that mature in more than one day, the seller will agree that the value of the
underlying security including accrued interest will continue to be at least
equal to the value of the repurchase agreement. The Adviser will monitor the
value of the underlying security in this regard. The Fund will enter into
repurchase agreements only with commercial banks whose deposits are insured by
the Federal Deposit Insurance Corporation and whose assets exceed $500 million
or broker-dealers who are registered with the SEC. In determining whether to
enter into a repurchase agreement with a bank or broker-dealer, the Fund will
take into account the credit-worthiness of such party and will monitor its
credit-worthiness on an ongoing basis. In the event of default by such party,
the delays and expenses potentially involved in establishing the Fund's rights
to, and in liquidating, the security may result in loss to the Fund. The Fund's
ability to invest in repurchase agreements that mature in more than seven days
is subject to an investment policy that limits the Fund's investments in
"illiquid" securities, including such repurchase agreements, to 15% of the
Fund's net assets.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell portfolio securities on a "when issued" and "delayed delivery" basis.
No income accrues to or is earned by the Fund on portfolio securities in
connection with such transactions prior to the date the Fund actually takes
delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher than yields on the such securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made.
The Fund will make commitments to purchase securities on such basis only with
the intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purposes of investment leverage. No specific limitation
exists as to the percentage of the Fund's assets which may be used to acquire
securities on a "when issued" or "delayed delivery" basis.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
short sales both to obtain capital gains from anticipated declines in securities
and as a form of hedging to offset potential declines in long positions in the
same or similar securities. The short sale of a security is considered a
speculative investment technique.
When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon
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conclusion of the sale. The Fund may have to pay a fee to borrow particular
securities and is often obligated to pay over any payments received on such
borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral deposited with the broker-dealer, usually cash, U.S. government
securities or other highly liquid securities. The Fund will also be required to
deposit similar collateral with its Custodian to the extent, if any, necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to the greater of the price at which the security is sold short or 100% of
the current market value of the security sold short. Depending on arrangements
made with the broker-dealer from which it borrowed the security regarding
payment over of any payments received by the Fund on such security, the Fund may
not receive any payments (including interest) on its collateral deposited with
such broker-dealer. If the price of the security sold short increases between
the time of the short sale and the time the Fund replaces the borrowed security,
the Fund will incur a loss; conversely, if the price declines, the Fund will
realize a capital gain. Any gain will be decreased, and any loss increased, by
the transaction costs described above. Although the Fund's gain is limited to
the price at which it sold the security short, its potential loss is
theoretically unlimited.
The market value of the securities sold short of any one issuer will not
exceed either 5% of the Fund's total assets or 5% of such issuer's voting
securities. The Fund will not make a short sale, if, after giving effect to such
sale, the market value of all securities sold short exceeds 25% of the value of
its assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to selected commercial
banks or broker-dealers up to a maximum of 50% of the assets of the Fund. Such
loans must be callable at any time and be continuously secured by collateral
deposited by the borrower in a segregated account with the Fund's custodian
consisting of cash or of securities issued or guaranteed by the U.S. government
or its agencies, which collateral is equal at all times to at least 100% of the
value of the securities loaned, including accrued interest. The Fund will
receive amounts equal to earned income for having made the loan. Any cash
collateral pursuant to these loans will be invested in short-term instruments.
The Fund is the beneficial owner of the loaned securities in that any gain or
loss in the market price during the loan inures to the Fund and its
shareholders. Thus, when the loan is terminated, the value of the securities may
be more or less than their value at the beginning of the loan. In determining
whether to lend its portfolio securities to a bank or broker-dealer, the Fund
will take into account the credit-worthiness of such borrower and will monitor
such credit-worthiness on an ongoing basis in as much as default by the other
party may cause delays or other collection difficulties. The Fund may pay
finders' fees in connection with loans of its portfolio securities.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with respect to securities which could otherwise be sold by the Fund.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price which is greater than the sales price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities. Reverse repurchase agreements involve the
risk that the market value of the securities retained by the Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement files for
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bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
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 treated as borrowings for the purposes
of the Fund's investment restriction on borrowings. The Fund will enter into
reverse repurchase agreements only with commercial banks whose deposits are
insured by the Federal Deposit Insurance Corporation and whose assets exceed
$500 million or broker-dealers who are registered with the SEC. In determining
whether to enter into a reverse repurchase agreement with a bank or
broker-dealer, the Fund will take into account the credit-worthiness of such
party and will monitor such credit-worthiness on an ongoing basis.
BORROWING. The Fund is authorized to borrow up to 5% of its total assets from
a bank, or through reverse repurchase agreements with broker-dealers on banks
meeting the same qualifications as set forth above under "Repurchase
Agreements." The Fund will use such borrowings only for temporary emergency
purposes such as clearance of portfolio transactions, the payment of dividends
and paying for unexpectedly heavy share redemptions.
DEFENSIVE STRATEGIES. At times conditions in the markets may, in the Adviser's
judgment, make pursuing the Fund's basic investment strategy inconsistent with
the best interests of its shareholders. At such times, the Adviser may use
alternative strategies primarily designed to reduce fluctuations in the value of
the Fund's assets. In implementing these "defensive" strategies, the Fund may
invest to a substantial degree in high-quality, short-term obligations. Such
obligations may include: obligations of the U.S. Government, its agencies or
instrumentalities; other debt securities rated within the four highest grades by
either S&P or Moody's (or comparably rated by any other NRSROs); commercial
paper rated in the highest grade by either rating service (or comparably rated
by any other nationally recognized statistical rating organization);
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other income securities that
the Adviser considers consistent with such strategy. The yield on these
securities generally is lower than the yield on the types of income securities
in which the Fund will invest under normal market conditions.
CREDIT QUALITY. The Fund's policies with respect to credit quality of
portfolio investments will apply only at the time of purchase of a security, and
the Fund will not be required to dispose of a security in the event that S&P or
Moody's (or any other nationally recognized statistical rating organization) or,
in the case of unrated income securities, the Adviser, downgrades its assessment
of the credit characteristics of a particular issuer. In determining whether the
Fund will retain or sell such a security, the Adviser may consider such factors
as the Adviser's assessment of the credit quality of the issuer of such
security, the price at which such security could be sold and the rating, if any,
assigned to such security by other NRSROs.
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LIQUIDITY. 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. 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%.
The Fund may invest in income securities not registered under the Securities
Act of 1933 (the "Securities Act"), but eligible for resale pursuant to Rule
144A under the Securities Act. The Fund's limitations with respect to investment
in illiquid and restricted securities Rule 144A establishes a "safe harbor" from
the registration requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. Institutional markets for
restricted securities have developed as a result of Rule 144A, providing both
readily ascertainable values for restricted securities and the ability to
liquidate an investment. Such markets include automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. ("NASD"). An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by the
Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices. 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.
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group ("S&P") rating symbols and their meanings (as
published by S&P) follows:
A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
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The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default--capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
LONG-TERM DEBT--INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in the higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
LONG-TERM DEBT--SPECULATIVE GRADE
BB, B, CCC, CC, C: Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal . "BB" indicates the least degree of speculation
and "C" the highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The 'CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
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CC: The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.
C: The rating 'C' typically is applied to debt subordinated to senior debt
which is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
C: The letter 'c' indicates that the holder's option to tender this security
for purchase may be canceled under certain prestated conditions enumerated in
the tender option documents.
I: The letter "i" indicates the rating is implied. Such ratings are assigned
only on request to entities that do not have specific debt issues to be rated.
In addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L: The letter 'L' indicates that the rating pertains to the principal amount
of these bonds in the extent that the undersigning deposit collateral is
federally insured and interest is adequately collateralized. In the cast of
certificates of deposit, the letter 'L' indicates that the deposit, combined
with other deposits being held in the same right and capacity, will be honored
for principal and accrued pre-default interest up to the federal insurance
limits within 30 days after closing of the insured institution or, in the event
that the deposit is assumed by a successor insured institution, upon maturity.
P: The letter 'p' indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project being financed by the
debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or the risk of
default upon failure of such completion. The investor should exercise his own
judgement with respect to such likelihood and risk. The rating is contingent
upon S&P's receipt of an executed copy of the escrow agreement or closing
documents.
NR: Not rated.
Debt Obligations of Issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Bond Investment Quality Standards: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ('AAA', 'AA', 'A,' 'BBB', commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
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COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period.
A commercial paper rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
Standard & Poor's by the issuer or obtained from other sources it considers
reliable. S&P does not perform an audit in connection with any rating and may,
on occasion, rely on unaudited financial information. The ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information.
VARIABLE RATE DEMAND BONDS
S&P assigns "dual" ratings to all long-term debt issues that have as part of
their provisions a variable rate demand or double feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating of
'SP-1+/AAA' is assigned.
NOTES
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes due in 3 years or less will likely receive a note rating.
Notes maturing beyond 3 years will most likely receive a long-term debt rating.
The following criteria will be used in making that assignment:
-- Amortization schedule (the longer the final maturity relative to other
maturities the more likely it will be treated as a note).
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-- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK
<TABLE>
<CAPTION>
<S> <C>
AAA This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the 'A' category.
BB Preferred stock rated 'BB', 'B', and 'CCC' are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay
CCC preferred stock obligations. 'BB' indicates the lowest degree of speculation
and 'CCC' the highest degree of speculation. While such issues will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears on dividends
or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer in default on
debt instruments.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred stock
quality, the ratings from 'AA' to 'B' may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
NR: This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
A preferred stock rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
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MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
LONG-TERM DEBT
AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may by lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies the numerical modifiers 1, 2, and 3 in each generic
rating classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
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Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial paper, bank
deposits, banker's acceptances and obligations to deliver foreign exchange.
Obligations relying upon support mechanisms such as letters-of-credit and bonds
of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
AAA: An issue which is rated 'AAA' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
AA: An issue which is rated 'AA' is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the
earnings and asset protection will remain relatively well maintained in the
foreseeable future.
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A: An issue which is rated 'A' is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than
in the 'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA: An issue which is rated 'BAA' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over
any great length of time.
BA: An issue which is rated 'BA' is considered to have speculative
elements and its future cannot be considered well assured. Earnings and
asset protection may be very moderate and not well safeguarded during
adverse periods. Uncertainty of position characterizes preferred stocks in
this class.
B: An issue which is rated 'B' generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
CAA: An issue which is rated 'CAA' is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
CA: An issue which is rated 'CA' is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payment.
C: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Beginning May 3, 1982, Moody's began applying numerical
modifiers 1, 2 and 3 in each rating classification from "AA" through "B" in
its preferred stock rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
B-31
<PAGE> 87
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
Torrance, CA 90501 develops manufactures, markets and services medical
Age: 63 and scientific equipment. Trustee of each of the Van
Kampen American Capital Funds.
Linda H. Heagy..................... Managing Partner with Paul Ray Berndtson, an
10 South Riverside Plaza Executive Recruiting and Management Consulting Firm.
Suite 720 Prior to 1995, Executive Vice President of ABN AMPO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Age: 46 Executive Vice President with LaSalle National Bank,
within the Banking Services Division, all Cash
Management Sales Operations. Trustee on The
University of Chicago Hospitals Board, The
International House Board and the Women's Board of
the University of Chicago. Trustee of each of the
Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and
9615 Torresdale Avenue Manager of Municipal Bond Department, W. H.
Philadelphia, PA 19114 Newbold's Sons & Co. Trustee of each of the Van
Age: 66 Kampen American Capital Funds.
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of
Lyme, CT 06371 the Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis
Chicago, IL 60615 Trading Group Inc. Prior to 1992, President and
Age: 43 Chief Executive 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.
</TABLE>
B-32
<PAGE> 88
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ----------------------------------------------------
<S> <C>
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of
One Parkview Plaza the VK Adviser, the AC Adviser and Van Kampen
Oakbrook Terrace, IL 60181 American Capital Management, Inc. Director of VK/AC
Age: 53 Holding, Inc, 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
415 North Adams company in insurance related businesses. Formerly
Hinsdale, IL 60521 Vice Chairman and Director of Continental Illinois
Age: 75 National Bank and 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,
423 Country Club Drive Inc., a financial planning company and registered
Winter Park, FL 32789 investment adviser. President of Nelson Investment
Age: 59 Brokerage 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
Age: 55 the 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 Ad-
viser. 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>
B-33
<PAGE> 89
<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
1601 Country Club Drive Editor of Los Angeles Business Journal. A director
Glendale, CA 91208 of Source Capital, Inc., a closed-end investment
Age: 71 company 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
115 River Road Corporation, a manufacturer and processor of welding
Edgewater, NJ 07020 alloys, supplies and equipment. Director of
Age: 72 Pacesetter Software, a 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
1999 Avenue of the Stars 1994) of the law firm of O'Melveny & Myers, legal
Suite 700 counsel to the funds advised by the AC Adviser.
Los Angeles, CA 90067 Director, FPA Capital Fund, Inc.; FPA New Income
Age: 63 Fund, Inc.; FPA Perennial 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,
Stevens Institute Dean of Graduate School and Chairman, Department of
of Technology Mechanical Engineering, Stevens Institute of
Castle Point Station Technology. Director of Dynalysis of Princeton, a
Hoboken, NJ 07030 firm engaged in engineering research. Trustee of
Age: 70 each of the Van Kampen American 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,
333 West Wacker Drive Meagher & Flom, legal counsel to funds advised by
Chicago, IL 60606 the VK Adviser. Trustee of each of the Van Kampen
Age: 55 American Capital Funds. 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
40th Floor Primerica Corporation (currently known as The
New York, NY 10019 Traveler's Inc.). Formerly, Director of James River
Age: 73 Corporation, a producer of paper products. Trustee,
and former President of Whitney Museum of American
Art. Formerly, Chairman of Institute for Educational
Leadership, Inc., Board of Visitors, Graduate School
of The City University of New York, Academy of
Political Science. Trustee of Committee for Economic
Development. Director of Public Education Fund
Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's
Council, Harvard School of Public Health. Member of
Mental Health Task Force, Carter Center. Trustee of
each of the Van Kampen American Capital Funds.
</TABLE>
B-34
<PAGE> 90
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
Age: 41 Secretary Counsel and 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.
Age: 39 and Chief Financial Vice President, Treasurer and Chief
Officer Financial 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
Age: 30 Van 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
Age: 38 Counsel 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.
</TABLE>
B-35
<PAGE> 91
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
- --------------------- -------------------------- ----------------------------------------
<S> <C> <C>
Weston B. Assistant Secretary Vice President, Associate General
Wetherell.......... Counsel and Assistant Secretary of Van
Age: 39 Kampen American 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.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK
Age: 30 Adviser. 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.
B-36
<PAGE> 92
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID TO
NAME FROM REGISTRANT(2) FUND EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
- -------------------------- -------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
R. Craig Kennedy.......... $ 12,330 $0 $2,500 $62,362
Philip G. Gaughan......... 15,476 0 2,500 63,250
Donald C. Miller.......... 12,018 0 2,500 62,178
Jack A. Nelson............ 12,330 0 2,500 62,362
Jerome L. Robinson........ 12,096 0 2,500 58,475
Wayne W. Whalen........... 15,252 0 2,500 49,875
</TABLE>
- ---------------
(1) Messrs. McDonnell and Powell, trustees of the Trust, are affiliated persons
of the VK Adviser and are not eligible for compensation or retirement
benefits from the Trust. Messrs. Branagan, 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 Trust during its last fiscal year ended June 30, 1995. Ms. Heagy
was appointed as a trustee of the Trust at a meeting of the Board of
Trustees on September 7, 1995 and thus received no compensation or
retirement benefits from the Trust during its last fiscal year ended June
30, 1995.
(2) The Registrant is Van Kampen American Capital Trust (the "Trust") which
currently is comprised of 4 operating series, including the Fund. During the
fiscal year ended June 30, 1995, the Trust had 5 operating series. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 5 series during such series' fiscal year ended June 30,
1995. 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 Retirement Plan commenced as of August 1, 1994 for the Fund. The amounts
in this column are the retirement benefits accrued during the Fund's fiscal
year ended June 30, 1995.
(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 a 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 for the Fund
may receive reduced retirement benefits from such Fund.
(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which 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, such investment companies
do not have the same trustees as the Fund Complex. Combining the Fund
Complex with other investment companies advised by the VK Adviser, Mr.
Whalen received Total Compensation of $161,850.
As of October 24, 1995, the trustees and officers as a group own 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.
B-37
<PAGE> 93
To the knowledge of the Fund, as of October 24, 1995, Van Kampen American
Capital Distributors, Inc. owned of record or beneficially 100% of the Fund's
Class A Shares, Class B Shares or Class C Shares.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. 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 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 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, 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
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The Adviser will utilize at its own expense, credit analysis and research
services provided by its affiliate, McCarthy, Crisanti and Maffei, Inc. ("MCM"),
as well as those of Duff and Phelps/MCM Investment Research Co. MCM and Fintrend
S.A. ("Fintrend"), a wholly-owned subsidiary of MCM, are providers of
specialized on-line Financial Information and analysis relating to domestic and
international debt and currency markets. MCM's services include
CorporateWatch(R), which is the leading provider of up-to-the-minute information
regarding the new issue corporate securities market;
B-38
<PAGE> 94
MoneyWatch(C), which provides on-going analysis of developments in the U.S.
Treasury, agency and money markets; CurrencyWatch(R), which provides analysis of
intraday developments in currency markets; and YieldWatch(R) , which analyzes
intraday developments in the global bond markets. MCM and its subsidiaries
produce and distribute electronic information services worldwide with offices in
New York, Boston, London, and Tokyo. Duff and Phelps/MCM Investment Research
Co., a unit of Duff & Phelps, Inc., issues research reports on a wide array of
corporate issuers and securities.
The investment advisory agreement for the Fund will continue 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, 1995 and 1994, the Fund recognized advisory
expenses of $54,724 and $33,968, respectively.
INVESTMENT SUB-ADVISORY AGREEMENT
VKM Global Emerging Markets Advisors, L.P. (the "Sub-Adviser") acts as
sub-adviser to the Fund. The Sub-Adviser was organized as a Delaware limited
partnership on July 1, 1994. The Sub-Adviser's principal office is located at
400 Madison Avenue, New York, New York 10017.
VCJ Inc., a wholly-owned subsidiary of Van Kampen American Capital, Inc., owns
a 59% limited partnership interest in the Sub-Adviser and Frank Fernandez
Associates, which is controlled by Frank Fernandez, Inc., has a 40% limited
partnership interest in the Sub-Adviser. VSM, Inc., a wholly-owned subsidiary of
Van Kampen American Capital, Inc., owns a 1% general partnership interest in the
Sub-Adviser.
The investment sub-advisory agreement between the Adviser and Sub-Adviser
provides that the Sub-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 agreement provides that the Sub-Adviser shall not be liable for any error
of judgment or of law, or for any loss suffered by the Fund in connection with
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Sub-Adviser in
the performance of its obligations and duties or by reason of its reckless
disregard of its obligations and duties under the investment sub-advisory
agreement.
B-39
<PAGE> 95
The Sub-Adviser's activities are subject to review and supervision of the
Adviser and the Fund's Trustees to whom the Sub-Adviser renders periodic reports
of the Fund's investment activities.
The investment sub-advisory agreement will continue in effect from year to
year if specifically approved by the trustees of the Trust, of which the Fund is
a separate series (or the Fund's shareholders), and by the disinterested
trustees in compliance with the requirements of the 1940 Act. The investment
sub-advisory agreement may be terminated without penalty upon 60 days written
notice by either party or by a majority of the Fund's Trustees, except that the
agreement will not be terminable by the Adviser without the consent of a
majority of the Trustees, and will automatically terminate in the event of
assignment.
OTHER AGREEMENTS
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 distributed by the
Distributor, shared such costs proportionately among themselves based upon their
respective net asset values.
For the years ended June 30, 1995 and 1994, the Fund recognized expenses of
approximately $1,450 and $0, respectively, representing the Distributor's cost
of providing certain support services.
FUND ACCOUNTING AGREEMENT. The Fund has also entered into an accounting
services agreement 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
distributed by 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 the remaining 75% of such cost based proportionally
on their respective net assets per fund.
For the years ended June 30, 1995 and 1994, the Fund recognized expenses of
approximately $1,650 and $1,425, respectively, representing the Adviser's cost
of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital 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 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 salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the 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
B-40
<PAGE> 96
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, 1995 and 1994, the Fund recognized expenses of
approximately $12,000 and $6,300, respectively, representing the 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, MA 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.
NET ASSET VALUE
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values 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 of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees.
Interests in Loans will be valued by the Adviser on behalf of the Fund on the
basis of market quotations and transactions in instruments which the Adviser
believes may be comparable to Loan interests with respect to the following
characteristics: credit quality, interest rate, interest rate redetermination
period and maturity. Such instruments may include commercial paper, negotiable
certificates of deposit and short-term variable rate securities which have
adjustment periods comparable to the Loan interests in the Fund's portfolio. In
determining the relationship between such instruments and the Loan interests in
the Fund's portfolio, the Adviser will consider on an ongoing basis, among other
factors, (i) the credit worthiness of the Borrower and (ii) the current interest
rate, the period until next interest rate redetermination and maturity of such
Loan interests. It is expected that the Fund's net asset value will fluctuate as
a function of interest rate and credit factors. The Adviser believes that
Lenders selling Loan interests or otherwise involved in a Loan transaction may
tend, in valuing Loan interests for their own account, to be less sensitive to
interest rate and credit quality changes and, accordingly, the Adviser does not
intend to rely solely on such valuations in valuing the Loan interests for the
Fund's account. In addition, because a secondary trading market in Loans has not
yet fully developed in valuing Loans, the Adviser may not rely solely on but may
consider, to the extent the Adviser believes such information to be reliable,
prices or quotations provided by banks, dealers or pricing services with respect
to secondary market transactions in Loans. To the extent that an active
secondary market in Loan interests develops to a reliable degree, the Adviser
may rely to an increasing
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extent on such market prices and quotations in valuing the Senior Loan interests
in the Fund's portfolio. In light of the senior nature of Loan interests
included in the Fund's portfolio and taking into account the Fund's access to
non-public information with respect to Borrowers relating to such Loan
interests, the Adviser does not currently believe that consideration on a
systematic basis of ratings provided by any nationally recognized statistical
rating organization or price fluctuations with respect to long- or short-term
debt of such Borrowers subordinate to the Loans of such Borrowers is necessary
for the determination of the value of such Loan interests. Accordingly, the
Adviser generally does not systematically consider (but may consider in certain
instances) and, in any event, does not rely upon such ratings or price
fluctuations in determining the value of Loan interests in the Fund's portfolio.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
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. In selecting among the firms believed to meet the criteria for
handling a particular transaction, the Fund's Adviser may take into
consideration that certain firms have sold or are selling shares of the Fund and
that certain firms provide market, statistical or other research information to
the Fund and the Adviser, and may select firms that are affiliated with the
Fund, the Adviser, or its distributor and other principal underwriters.
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 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 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 the
services.
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.
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
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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 affiliated
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 following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Statement of Additional Information.
FEDERAL INCOME TAXATION. The Fund intends to qualify each year and to elect to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify as a regulated
investment company, the Fund must comply with certain requirements of the Code
relating to, among other things, the source of its income and diversification of
its assets. Included among such requirements is the requirement that the Fund
must derive at least 90% of its gross income from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
stocks, securities or foreign currencies or other income (including but not
limited to gains from options, futures or forward contracts) derived with
respect to its business of investing in such stocks, securities or currencies.
For purposes of this requirement, the Treasury Department is authorized to issue
(but has not yet issued) regulations excluding from qualifying income foreign
currency gains that are not directly related to a regulated investment company's
principal business of investing in stocks or securities (or options and futures
with respect to stocks or securities). The Fund expects that all of its foreign
currency gains will be directly related to its principal business of investing
in securities.
If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (which includes net short-term capital
gains, but not net capital gains, which are the excess of net long-term capital
gains over net short-term capital losses) in each year, it will not be required
to pay federal income taxes on any income distributed to Shareholders. The Fund
intends to distribute at least the minimum amount of net investment income
necessary to satisfy the 90% distribution requirement. The Fund will not be
subject to federal income tax on any net capital gains distributed to
Shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its Shareholders) and all distributions out of
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earnings and profits would be taxed to Shareholders as ordinary income. To
qualify again as a regulated investment company in a subsequent year, the Fund
may be required to pay an interest charge on 50% of its earnings and profits
attributable to non-regulated investment company years and would be required to
distribute such earnings and profits to Shareholders (less any interest charge).
In addition, if the Fund failed to qualify as a regulated investment company for
its first taxable year or, if immediately after qualifying as a regulated
investment company for any taxable year, it failed to qualify for a period
greater than one taxable year, the Fund would be required to recognize any net
built-in gains (the excess of aggregate gains, including items of income, over
aggregate losses that would have been realized if it had been liquidated) in
order to qualify as a regulated investment company in a subsequent year.
Some of the Fund's investment practices (including those involving certain
risk management transactions and foreign currency transactions) may be subject
to special provisions of the Code that, among other things, defer the use of
certain losses of the Fund and affect the holding period of the securities held
by the Fund and the character of the gains or losses realized by the Fund. These
provisions may also require the Fund to mark-to-market some of the positions in
its portfolio (i.e., treat them as if they were closed out), which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the 90% distribution requirement and the
distribution requirements for avoiding income and excise taxes. The Fund will
monitor its transactions and may make certain tax elections in order to mitigate
the effect of these rules and prevent disqualification of the Fund as a
regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
Shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to secure as income each year a portion of this discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Fund may invest in the stock of
"passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (1) at least
75% of its gross income is passive or (2) an average of at least 50% of its
assets produced, or are held for the production of passive income. Under certain
circumstances, a regulated investment company that holds stock of a PFIC will be
subject to federal income tax, on a portion of any "excess distribution"
received on the stock or of any gain or disposition of the stock (collectively
"PFIC income"), plus interest thereon, even if the regulated investment company
distributes the PFIC income as a taxable dividend to its stockholders. The
balance of the PFIC income will be included in the regulated investment
company's investment company taxable income and, accordingly, will not be
taxable to it to the extent that income is distributed to its shareholders. If
the Fund invests in a PFIC and elects to treat the PFIC as a "qualified electing
fund," then in lieu of the foregoing tax and interest obligation, the Fund would
be required to include in income each year its pro rata share of the qualified
electing fund's annual ordinary earnings and net capital gain, which most likely
would have to be distributed to satisfy the 90% distribution requirement and the
distribution
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requirement for avoiding income and excise taxes. In most instances it will be
very difficult to make this election due to certain requirements imposed with
respect to the election.
Pursuant to proposed regulations, the Fund would be entitled to elect to
"mark-to-market" its stock in certain PFICs. "Marking-to-market," in this
context, means recognizing as gain for each taxable year the excess as of the
end of that year, of the fair market value of the PFIC's stock over the owner's
adjusted basis in that stock (including mark-to-market gain for each prior year
for which an election was in effect). These regulations, if adopted, would be
effective for taxable years ending after their promulgation as final
regulations.
DISTRIBUTIONS. Distribution of the Fund's net investment income are taxable to
Shareholders as ordinary income whether paid in cash or reinvested in additional
Shares. Distributions of the Fund's net capital gains ("capital gains
dividends"), if any, are taxable to Shareholders at the rates applicable to
long-term capital gains regardless of the length of time Shares of the Fund have
been held by such Shareholders. Distributions in excess of the Fund's earnings
and profits will first reduce the adjusted tax basis of a holder's Shares and,
after such adjusted tax basis is reduced to zero, will constitute capital gains
to such holder (assuming such Shares are held as a capital asset). The Fund will
inform Shareholders of the source and tax status of all distributions promptly
after the close of each calendar year. A portion of the distributions from the
Fund will be eligible for the dividends received deduction for corporations if
the Fund receives qualifying dividends during the year and if certain other
requirements of the Code are satisfied.
Shareholders receiving distributions in the form of additional Shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the Shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value on the distribution date.
Although dividends generally will be treated as distribution when paid,
dividends declared in October, November, or December, payable to Shareholders of
record on a specified date in such a month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
Shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
The Fund is required, is certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
Shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
FOREIGN TAXES. It is expected that a portion of the interest earned by the
Fund from non-U.S. resident issuers and in certain circumstances gains realized
by the Fund will be subject to foreign withholding taxes. The tax rate to which
such interest and gains will be subject will vary depending on the country or
countries having taxing jurisdiction over a particular non-U.S. resident issuer
and may be affected by the existence of an income tax treaty with the United
States. If more than 50% of the value of the Fund's total assets at the close of
any taxable year consists of stocks or securities of "foreign corporations," the
Fund may elect and currently intends to elect, for United States federal income
tax purposes, to treat any foreign taxes paid by the Fund that can be treated as
foreign income taxes under United States
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federal income tax principles as paid by its Shareholders. The Fund expects that
it will be able to treat some, but not necessarily all, of the foreign taxes it
will have to pay as foreign income taxes for United States federal income tax
purposes. In addition, the Fund currently intends to treat investments in
securities that are issued by, or that are treated under relevant United States
federal income tax principles as issued by, foreign governments as not
constituting securities of "foreign corporations" for purposes of meeting the
50% test described above. Accordingly, the Fund may not qualify for this
election in all of its taxable years. For any year that the Fund so qualifies
and makes such an election, the amount of foreign taxes paid by the Fund that
can be treated as foreign income taxes for United States federal income tax
purposes would be included in the income of its Shareholders (in addition to
other taxable dividends received) and (subject to certain limitations)
Shareholders would be entitled to credit their portions of these amounts against
their United States federal income tax due, if any, or to deduct their portions
from their United States taxable income, if any. A Shareholder who does not
itemize deductions may not claim a deduction for foreign taxes. The Fund will
notify each Shareholder within 60 days after the close of the Fund's taxable
year as to whether the foreign income taxes paid by the Fund will qualify for
"pass-through" treatment for that year and, if so, such notification will
designate (i) each Shareholder's pro rata portion of the foreign income taxes
paid and (ii) the portion of distributions that represents income derived from
foreign sources.
Generally, a foreign tax credit is subject to the limitation that it may not
exceed the Shareholder's United States tax (before the credit) attributable to
the Shareholder's total taxable income from foreign sources. For this purpose,
the Shareholder's proportionate share of dividends paid by the Fund that
represent income derived from foreign sources will be treated as foreign source
income. The Fund's gains and losses from the sale of securities and certain
currency gains and losses generally will be treated as derived from United
States sources. The limitation on the foreign tax credit applies separately to
specific categories of foreign source income, including "passive income," a
category that includes the portion of dividends received from the Fund that
qualifies as foreign source income. The foregoing limitation may prevent a
Shareholder from claiming a credit for the full amount of his proportionate
share of the foreign income taxes paid by the Fund.
SALES OF SHARES. The sale of Shares (including transfers in connection with a
redemption or repurchase of Shares) will be a taxable transaction for federal
income tax purposes. Selling Shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
Shares and the amount received. If such Shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such Shares
have been held for more than one year. Any loss realized upon a taxable
disposition of Shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such Shares. For purposes of determining whether Shares have been held for
six months or less, the holding period is suspended for any periods during which
the Shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of holding and disposing of Shares, as
well as the effects of state, local and foreign tax law and any proposed tax law
changes.
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THE DISTRIBUTOR
Shares of the Fund are offered on a continuous basis through the Distributor,
One Parkview Plaza, Oakbrook Terrace, IL 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, Inc., 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, Inc., 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, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
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.
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 and 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 banks who are acting as 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 banks that have entered into sub-agreements with the Distributor and
sell shares of the Fund are referred to herein as "financial intermediaries."
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 Distribution Plan provides
that it will continue in full
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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. 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 of the Plans must be approved by the
Trustees and also by the disinterested Trustees. 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 period ended June 30, 1994, the Fund has recognized expenses under the
Plans of $8,156, $9,051 and $9,051 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $0, $0 and $0 represent payments to
financial intermediaries under the Selling Agreements for Class A Shares, Class
B Shares and Class C Shares, respectively. For the year ended June 30, 1994, the
Fund has reimbursed the Distributor $0 for advertising expenses, and $0 for
compensation of the Distributor's sales personnel.
For the year ended June 30, 1995, the Fund has recognized expenses under the
Plans of $0, $0 and $0 for the Class A Shares, Class B Shares and Class C
Shares, respectively, of which $0, $0 and $0 represent payments to financial
intermediaries under the Selling Agreements for Class A Shares, Class B Shares
and Class C Shares, respectively. For the year ended June 30, 1995, the Fund has
reimbursed the Distributor $0 for advertising expenses, and $0 for compensation
of the Distributor's sales personnel.
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 4.00% and 1.00%, respectively, 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.
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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.
The Fund may calculate non-standardized total return both reflecting and not
reflecting the imposition of sales charges applicable to the respective class of
shares. 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 or not deducting, as the case may be, the sales charge
applicable to the respective class of shares, 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.
CLASS A SHARES
The average total return, including payment of maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended June 30, 1995
was 1.75%; (ii) the approximately one year, six month period from December 31,
1993 (the commencement of investment operations of the Fund) through June 30,
1995 was (5.98%).
The Fund's yield with respect to the Class A Shares for the 30 day period
ending June 30, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 9.52%. The Fund's current distribution rate
with respect to the Class A Shares for the month ending June 30, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 5.79%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was (8.84%).
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was (4.31%).
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CLASS B SHARES
The average total return, including payment of the CDSC, with respect to the
Class B Shares for (i) the one year period ended June 30, 1995 was 3.24% and
(ii) the approximately one year, six month period of December 31, 1993
(commencement of distribution) through June 30, 1995 was (5.19%).
The Fund's yield with respect to the Class B Shares for the 30 day period
ending June 30, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 9.17%. The Fund's current distribution rate
with respect to the Class B Shares for the month ending June 30, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 6.07%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was (7.68%).
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was (4.31%).
CLASS C SHARES
The average total return, including payment of the CDSC, with respect to the
Class C Shares for (i) the one year period ended June 30, 1995 was 6.24% and
(ii) the approximately one year, six month period of December 31, 1993,
(commencement of distribution) through June 30, 1995 was (2.89%).
The Fund's yield with respect to the Class C Shares for the 30 day period
ending June 30, 1995 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 9.17%. The Fund's current distribution rate
with respect to the Class C Shares for the month ending June 30, 1995
(calculated in the manner described in the Prospectus under the heading "Fund
Performance") was 6.07%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.31%).
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.31%).
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INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholder of
Van Kampen Merritt Emerging Markets Income Fund:
We have audited the accompanying statement of assets and
liabilities of Van Kampen Merritt Emerging Markets Income Fund
(the "Fund"), including the portfolio of investments, as of June
30, 1995, and the related statement of operations for the year
then ended, and the statement of changes in net assets and the
financial highlights for the year then ended, and for the period from
December 31, 1993 (commencement of investment operations) through
June 30, 1994. 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, 1995, by correspondence with the custodian
and brokers. 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 Emerging Markets Income Fund as of June 30, 1995, the
results of its operations for the year then ended, the changes in its net
assets and financial highlights for the year then ended and for the period from
December 31, 1993 (commencement of investment operations) through June 30,
1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
August 4, 1995
B-51
<PAGE> 107
Van Kampen Merritt Emerging Market Income Fund
Portfolio of Investments
June 30, 1995
<TABLE>
<CAPTION>
Local
Currency
Par US$
Amount S&P Moody's Maturity Market
(000) Description Rating Rating Coupon Date Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Foreign Bonds - 72.9%
Argentina - 7.3%
500 Argentina Bocon Pre2 (Var Rate Coupon)- US$ <F2> NR NR * % 04/01/01 $ 377,500
400 Banco De Galicia - US$ BB- B1 9.000 11/01/03 282,000
------------
659,500
------------
Brazil- 17.7%
2,081 Republic of Brazil (Var Rate Coupon) - US$ NR NR 8.000 04/15/14 1,022,193
1,000 Republic of Brazil (Var Rate Coupon) - US$ NR NR 7.250 04/15/24 570,000
------------
1,592,193
------------
Bulgaria - 5.5%
1,000 Republic of Bulgaria (Var Rate Coupon) - US$ NR NR 7.563 07/28/24 496,250
------------
Costa Rica - 5.8%
382 Banco Central Costa Rica (Var Rate Coupon) - US$ NR NR 6.938 05/21/05 274,925
500 Banco Central Costa Rica - US$ NR NR 6.250 05/21/10 245,000
------------
519,925
------------
Ecuador- 5.5%
1,000 Republic of Ecuador (Var Rate Coupon) - US$ NR NR 7.250 02/28/25 497,500
------------
Hungary- 4.2%
500 National Bank of Hungary - US$ BB+ Ba1 8.875 11/01/13 374,060
------------
Nigeria - 4.9%
1,000 Nigeria Par Bond with Warrants - US$ NR NR 6.250 11/15/20 441,000
------------
Panama - 2.9%
500 Panama Loan Agreement - US$ <F3><F4> NR NR 01/30/15 255,000
------------
Philippines - 4.2%
500 Philippines Government - US$ NR NR 5.000 06/01/08 376,850
------------
Poland- 3.9%
500 Poland Debt Conversion Bond (Var Rate Coupon) - US$ NR NR 4.500 10/27/19 242,500
175 Poland New Money Bond (Var Rate Coupon)- US$ NR NR 7.125 10/27/09 108,500
------------
351,000
------------
Venezuela - 11.0%
1,000 Venezuelan Debt Conversion Bond (Var Rate Coupon) - US$ NR Ba2 6.813 12/18/07 487,500
1,000 Venezuelan Par Bond Series A with Warrants - US$ B+ Ba3 6.750 3/31/20 502,500
------------
990,000
------------
Total Long-Term Investments - 72.9%
(Cost $6,719,277) <F1> $ 6,553,278
------------
</TABLE>
See Notes to the Financial Statements
B-52
<PAGE> 108
Van Kampen Merritt Emerging Markets Income Fund
Portfolio of Investments (Continued)
June 30,1995
<TABLE>
<CAPTION>
Local
Currency
Par US$
Amount S&P Moody's Maturity Market
(000) Description Rating Rating Coupon Date Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Short-Term Investments at Amortized Cost - 22.6%
Federal Farm Credit ($300,000 par, yielding 5.98%,maturing 07/17/95) $ 299,216
Farmer Mac Disc Note ($350,000 par, yielding 5.99%, maturing 07/05/95) 349,770
Federal Mortgage Credit Disc Note ($330,000 par, yielding 5.99%, maturing 07/05/95) 329,784
Federal National Mortgage Association Disc Note ($350,000 par, yielding 5.99%, maturing 07/05/95) 349,771
Repurchase Agreement (State Street Bank and Trust, U.S. T-Note, $365,000 par, 5.125% coupon,
due 06/30/98, dated 06/30/95, to be sold on 07/03/95 at $350,146) 350,000
Repurchase Agreement (UBS Securities, U.S. T-Note, $350,000 par, 6.625% coupon,
due 03/31/97, dated 06/30/95, to be sold on 07/03/95 at $350,178) 350,000
-------------
Total Short-Term Investments at Amortized Cost 2,028,541
Other Assets in Excess of Liabilities - 4.5% 409,522
-------------
Net Assets - 100.0% $ 8,991,341
-------------
</TABLE>
*Zero Coupon Bond
[FN]
<F1> At June 30,1995, cost for federal income tax purposes is $6,719,277;
the aggregate gross unrealized appreciation is $475,647 and the
aggregate gross unrealized depreciation is $504,846, resulting in
net unrealized depreciation including open option transactions of
$29,199.
<F2> Currently is a zero coupon bond which will convert to a variable
rate coupon paying bond at a predetermined date.
<F3> Securities purchased on a when issued or delayed delivery basis.
<F4> Item represents a bank loan participation currently being
restructured. At June 30, 1995, item is a
non-income producing security.
See Notes to the Financial Statements
B-53
<PAGE> 109
VAN KAMPEN MERRITT EMERGING MARKETS INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $6,719,277) (Note 1) $ 6,553,278
Short-Term Investments (Note 1) 2,028,541
Cash 312,987
Options at Market Value (Net premiums paid of $67,000) (Note 5) 203,800
Interest Receivable 152,419
Unamortized Organizational Expenses and Initial Registration Costs (Note 1) 84,445
-------------
Total Assets 9,335,470
-------------
LIABILITIES:
Payables:
Investments Purchased 195,000
Organizational Expenses and Initial Registration Costs 58,870
Foreign Currency Contracts (Note 5) 21,066
Investment Advisory Fee (Note 2) 4,350
Accrued Expenses 64,843
-------------
Total Liabilities 344,129
-------------
NET ASSETS $ 8,991,341
=============
NET ASSETS CONSIST OF:
Paid in Surplus (Note 3) $ 10,014,290
Accumulated Undistributed Net Investment Income 524,175
Net Unrealized Depreciation on Investments (29,199)
Accumulated Net Realized Loss on Investments (1,517,925)
-------------
NET ASSETS $ 8,991,341
=============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$5,393,595 and 420,100 shares of beneficial interest issued and outstanding)
(Note 3) $12.84
Maximum sales charge (4.75%* of offering price) 0.64
-------------
Maximum offering price to public $13.48
=============
Class B Shares:
Net asset value and offering price per share (Based on net assets of $1,798,873
and 140,100 shares of beneficial interest issued and outstanding)(Note 3) $12.84
=============
Class C Shares:
Net asset value and offering price per share (Based on net assets of $1,798,873
and 140,100 shares of beneficial interest issued and outstanding)(Note 3) $12.84
=============
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-54
<PAGE> 110
VAN KAMPEN MERRITT EMERGING MARKETS INCOME FUND
STATEMENT OF OPERATIONS
For the Year Ended June 30,1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (Net of foreign withholding tax of $571) $ 1,013,885
--------------
EXPENSES:
Investment Advisory Fee (Note 2) 84,584
Custody 50,244
Audit 27,400
Amortization of Organizational Expenses and Initial Registration Costs (Note 1) 23,988
Legal (Note 2) 10,250
Trustees Fees and Expenses (Note 2) 8,256
Other 6,179
--------------
Total Expenses 210,901
Less Fees Waived 29,860
--------------
Net Expenses 181,041
--------------
NET INVESTMENT INCOME $ 832,844
==============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS AND
FOREIGN CURRENCY:
Net Realized Loss on Investments and Foreign Currency (Including realized gain on
foreign currency transactions of $11,867 and realized loss on option transactions
of $251,560) $ (864,621)
---------------
Unrealized Appreciation/Depreciation on Investments and Foreign Currency:
Beginning of the Period (643,513)
End of the Period (Including unrealized appreciation on open option transactions
of $136,800) (29,199)
--------------
Net Unrealized Appreciation on Investments and Foreign
Currency During the Period 614,314
--------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND
FOREIGN CURRENCY $ (250,307)
==============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 582,537
==============
</TABLE>
See Notes to Financial Statements
B-55
<PAGE> 111
VAN KAMPEN MERRITT EMERGING MARKETS INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended June 30,1995
and the Period December 31,1993 (Commencement of Investment
Operations) through June 30,1994
<TABLE>
<CAPTION>
Year Ended Period Ended
June 30, 1995 June 30, 1994
------------------ ------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 832,844 $ 279,634
Net Realized Loss on Investments and Foreign Currency (864,621) (695,373)
Net Unrealized Appreciation/Depreciation on
Investments and Foreign Currency During the Period 614,314 (643,513)
------------------ ------------------
Change in Net Assets from Operations 582,537 (1,059,252)
------------------ ------------------
Distributions from Net Investment Income:
Class A Shares (327,678) 0
Class B Shares (109,278) 0
Class C Shares (109,278) 0
------------------ ------------------
Total Distributions (546,234) 0
------------------ ------------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT A ACTIVITIES 36,303 (1,059,252)
------------------ ------------------
FROM CAPITAL TRANSACTIONS (Note 3):
Proceeds from Shares Sold 0 10,010,000
------------------ ------------------
TOTAL INCREASE IN NET ASSETS 36,303 8,950,748
NET ASSETS:
Beginning of the Period 8,955,038 4,290
------------------ ------------------
End of the Period (Including undistributed net
investment income of $524,175 and $225,698,
respectively) $ 8,991,341 $ 8,955,038
================= ==================
</TABLE>
See Notes to Financial Statements
B-56
<PAGE> 112
VAN KAMPEN MERRITT
EMERGING MARKETS INCOME FUND
Notes to Financial Statements
June 30, 1995
1. Significant Accounting Policies
Van Kampen Merritt Emerging Markets Income Fund (the
"Fund") was organized as a sub-trust of Van Kampen
Merritt Trust, a Massachusetts business trust (the "Trust"),
on October 14,1993, 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 December 31,1993,
with three classes of common shares, Class A, Class B and
Class C.
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, prices provided by market makers
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. Foreign
investments are stated at value using the last available bid
price or yield equivalents obtained from dealers in the OTC
or interbank market. 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" or "delayed
delivery" basis, with settlement to occur at a later date. The
value of the security so purchased is subject to market
fluctuations during this period. The Fund will maintain, in a
segregated account with its custodian, assets having an
aggregate value at least equal to the amount of the when
issued or delayed delivery purchase commitments until
payment is made.
C. Investment Income - Interest income is recorded on an
accrual basis. Dividend income is recorded on the
ex-dividend date. Original issue discount is amortized over
the expected life of each applicable security.
D. Currency Translation - During the current period, the
Fund adopted Statement of Position 93-4, "Foreign
Currency Accounting and Financial Statement Presentation
for Investment Companies." Accordingly, the 1994
statement of changes in net assets and financial highlights
were restated to reflect reclassification of net realized
gain/loss on foreign currency and forward currency
contracts from net investment income to net realized
gain/loss on investments and foreign currency.
Assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the mean of
the quoted bid and asked prices of such currencies against
the U.S. dollar. Purchases and sales of portfolio securities
are translated at the rate of exchange prevailing when such
securities were acquired or sold. Income and expenses are
translated at rates of exchange prevailing when accrued.
E. Organizational Expenses and Initial Registration
Costs - The Fund will reimburse Van Kampen American
Capital Distributors Inc. ("VKAC") for costs incurred in
connection with the Fund's organization and initial
registration in the amount of $120,000. These costs are
being amortized on a straight Line basis over the 60 month
period ending December 31,1998. 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 and initial registration
costs in the same proportion as the number of shares
redeemed bears to the number of initial shares held at the
time of redemption.
F. 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 and gains 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 30,1995, the Fund had an accumulated
capital loss carryforward for tax purposes of $769,051
which will expire on June 30,2003. 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.
G. Distribution of Income and Gains - Dividends from net
investment income and net realized gains, if any, are
distributed annually. Net investment income for federal
income tax purposes includes gains and losses realized on
transactions in foreign currencies. These gains and losses
are included as net realized gains or losses for financial
reporting purposes. Permanent book and tax basis
differences relating to these items totaling $11,867 were
reclassified from accumulated net realized gain/Loss on
investment to accumulated undistributed net investment
income.
H. Bank Loan Participations - The Fund invests in
participation interests of loans to foreign entities. When the
Fund purchases a participation of a foreign loan interest,
the Fund typically enters into a contractual agreement with
the lender or other third party selling the participation, but
not with the borrower directly. As such, the Fund assumes
credit risk for the borrower, selling participant or other
persons positioned between the Fund and the borrower.
B-57
<PAGE> 113
VAN KAMPEN MERRITT
EMERGING MARKETS INCOME FUND
Notes to Financial Statements (Continued)
June 30, 1995
2. Investment Advisory Agreement and Other
Transactions with Affiliates
Under the terms of the Fund's Investment Advisory
Agreement, the Adviser will provide investment advice and
facilities to the Fund for an annual fee payable monthly as
follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ------------------------ ------------
<S> <C>
First $500 million 1.00%
Next $500 million .95%
Over $1 billion .90%
</TABLE>
Prior to July 21,1994, the investment advisory fee was
.75% of average net assets.
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 30,1995, the Fund
recognized expenses of approximately $15,100
representing VKAC's cost of providing accounting, legal 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 Fund's
liability under the deferred compensation and retirement
plans at June 30,1995, was approximately $4,400.
At June 30, 1995, VKAC owned 420,100, 140,100 and
140,100 shares of Classes A, B and C, respectively.
3. Capital Transactions
The Fund has outstanding three classes of common
shares, Classes A, B and C. There are an unlimited
number of shares of each class without par value
authorized. At June 30,1995 and 1994, paid in surplus
aggregated $6,007,430, $2,003,430 and $2,003,430 for
Classes A, B and C, respectively. For the period ended
June 30,1994, transactions in common shares were as
follows:
<TABLE>
<CAPTION>
Shares Value
--------- ------------
<S> <C> <C>
Sales:
Class A 420,000 $6,006,000
Class B 140,000 2,002,000
Class C 140,000 2,002,000
------- -----------
Total Sales 700,000 $10,010,000
======= ===========
</TABLE>
Class B and Class C shares are offered without a front end
sales charge, but are subject to a contingent deferred sales
charge (CDSC). The CDSC will be imposed on most
redemptions made within six 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
Class B Class C
Year of Redemption Shares Shares
- --------------------------- --------- ---------
<S> <C> <C>
First 4.00% 1.00%
Second 3.75% None
Third 3.50% None
Fourth 2.50% None
Fifth 1.50% None
Sixth 1.00% None
Seventh and Thereafter None None
</TABLE>
4. Investment Transactions
Aggregate purchases and cost of sales of investment
securities, excluding short-term investments, for the year
ended June 30,1995 were $17,923,205 and $19,154,735,
respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers
to a security whose value is "derived" from the value of an
underlying asset, reference rate or index.
The Fund has a variety of reasons to use derivative
instruments, such as to attempt to protect the Fund against
possible changes in the market value of its portfolio,
manage the portfolio's effective yield, maturity, duration and
foreign currency exposure or to generate potential gain. All
of the Fund's portfolio holdings, including derivative
instruments, are marked to market each day with the
change in value reflected in the unrealized
appreciation/depreciation on investments. Upon
disposition, a realized gain or loss is recognized
accordingly, except for exercised option contracts where the
recognition of gain or loss is postponed until the disposal of
the security underlying the option contract.
Summarized below are the specific types of derivative
financial instruments used by the Fund.
A. Option Contracts - An option contract gives the buyer
the right, but not the obligation to buy (call) or sell (put) an
underlying item at a fixed exercise price during a specified
period. These contracts are generally used by the fund to
manage the portfolio's effective maturity and duration.
Transactions in options for the year ended June 30,
1995, were as follows:
B-58
<PAGE> 114
VAN KAMPEN MERRITT
EMERGING MARKETS INCOME FUND
Notes to Financial Statements (Continued)
June 30, 1995
<TABLE>
<CAPTION>
Contracts Premium
--------- ----------
<S> <C> <C>
Outstanding at June 30,1994 0 $0
Options Written and Purchased
(Net) 12 (294,236)
Options Terminated in Closing
Transaction (Net) (2) 32,000
Options Expired (Net) (4) 238,160
Options Exercised (Net) (3) (42,924)
-- --------
Outstanding at June 30,1995 3 $(67,000)
== ========
</TABLE>
The descriptions and market values of the option contracts
outstanding at June 30,1995 were as follows:
<TABLE>
<CAPTION>
Opening Expiration Strike Market
Description Transaction Date Price Value
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Vnesheconom
Bank Loan Sell 07/20/95 26.25 $(800)
Vnesheconom
Bank Loan Buy 05/08/96 22.375 205,400
Argentina
FRB Sell 07/24/95 53.75 (800)
--------
$203,800
========
</TABLE>
B. Forward Currency Contracts - These instruments are
commitments to purchase or sell a foreign currency at a
future date at a negotiated forward rate. The gain or loss
arising from the difference between the original value of the
contract and the closing value of such contract is included
as a component of realized gain/loss on investments and
foreign currency.
At June 30,1995 the Fund had realized gains on
closed but unsettled forward contracts of $21,066
scheduled to settle on August 16, 1995.
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.
Since the Fund is not currently offering its shares to
the public, no fees related to the Plans are being accrued
and no payments under the Plan have been made to VKAC.
B-59
<PAGE> 115
PART C: OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
List all financial statements and exhibits as part of the Registration
Statement.
(A) FINANCIAL STATEMENTS:
For Van Kampen American Capital Short-Term Global Income Fund:
included in Post-Effective Amendment No. 35 to the Registration Statement
of the Registrant.
For each of Van Kampen American Capital High Yield Fund and Van Kampen
American Capital Strategic Income Fund included in Post-Effective Amendment
No. 36 to the Registration Statement of the Registrant.
For Van Kampen American Capital Emerging Markets Income Fund:
Included in the Prospectus:
Financial Highlights
Included in the Statement of Additional Information:
Independent Auditors' Report
Financial Statements
Notes to Financial Statements.
(B) EXHIBITS:
(1)(a) Form of Agreement and Declaration of Trust(32)
(b) Form of Certificate of Designation for:
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
(2) Form of By-Laws(32)
(4) Form of Specimen of Share Certificates
(i) Van Kampen American Capital High Yield Fund
(a) Class A Shares(36)
(b) Class B Shares(36)
(c) Class C Shares(36)
(ii) Van Kampen American Capital Short-Term Global Income
Fund
(a) Class A Shares(35)
(b) Class B Shares(35)
(c) Class C Shares(35)
(iii) Van Kampen American Capital Strategic Income Fund
(a) Class A Shares(36)
(b) Class B Shares(36)
(c) Class C Shares(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund
(a) Class A Shares+
(b) Class B Shares+
(c) Class C Shares+
(5)(a) Form of Investment Advisory Agreement
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
C-1
<PAGE> 116
(b) Form of Investment Sub-Advisory Agreement
(i) Van Kampen American Capital Emerging Markets Income
Fund(27)
(6)(a) Form of Distribution and Service Agreement(32)
(b) Form of Dealer Agreement(32)
(c) Form of Broker Agreement(32)
(d) Form of Bank Agreement(32)
(e) Form of Underwriting Agreement(1)
(f) Form of Selected Dealer Agreement(1)
(g) Form of Agreement Between Underwriters(1)
(8)(a) Form of Custodian Agreement
(i) Van Kampen American Capital High Yield Fund*
(ii) Van Kampen American Capital Short-Term Global Income
Fund(6)
(iii) Van Kampen American Capital Strategic Income
Fund(20)
(iv) Van Kampen American Capital Emerging Markets Income
Fund, as amended and restated(24)
(b) Form of Transfer Agency Agreement(32)
(9)(a) Form of Accounting Service Agreement(32)
(b) Form of Legal Services Agreement(32)
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(a) Van Kampen American Capital High Yield Fund(36)
(b) Van Kampen American Capital Short-Term Global Income
Fund(35)
(c) Van Kampen American Capital Strategic Income Fund(36)
(d) Van Kampen American Capital Emerging Markets Income Fund+
(11) Consent of KPMG Peat Marwick LLP
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
(13) Letter of Understanding relating to initial capital(1)
(15)(a) Form of Distribution Plan Pursuant to Rule 12b-1(32)
(b) Form of Shareholder Assistance Agreement(32)
(c) Form of Administrative Services Agreement(32)
(d) Form of Service Plan(32)
(16)(a) Computation of Performance Quotations
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
(17)(a) List of certain investment companies in response to Item
29(a)(35)
(b) List of officers and directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)(35)
(24) Power of attorney(35)
(27) Financial Data Schedules+
- ---------------
* Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-4410.
(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(9) Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
C-2
<PAGE> 117
(12) Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(16) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(17) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(20) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(21) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(23) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(24) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(25) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(27) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(28) Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(30) Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(31) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(32) Incorporated herein by reference to Post-Effective Amendment No. 32 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(35) Incorporated herein by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(36) Incorporated herein by reference to Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
- ---------------
+ Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
To the best knowledge of Registrant, no person is controlled by or under
common control with the Registrant.
C-3
<PAGE> 118
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 24, 1995:
<TABLE>
<CAPTION>
(2)
NUMBER
(1) OF
RECORD
TITLE OF CLASS HOLDERS
---------------------------------------------------------- ------
<S> <C>
Shares of Beneficial Interest, $0.01 par value
(i) Van Kampen American Capital High Yield Fund*:
Class A Shares.................................... 14,895
Class B Shares.................................... 3,033
Class C Shares.................................... 134
(ii) Van Kampen American Capital Short-Term Global
Income Fund*:
Class A Shares.................................... 3,807
Class B Shares.................................... 7,948
Class C Shares.................................... 18
(iii) Van Kampen American Capital Strategic Income Fund:
Class A Shares.................................... 1,906
Class B Shares.................................... 3,158
Class C Shares.................................... 70
(iv) Van Kampen American Capital Emerging Markets
Income Fund*:
Class A Shares.................................... 5
Class B Shares.................................... 3
Class C Shares.................................... 2
</TABLE>
- ---------------
* Prior to May 1, 1995, the Fund offered Class D Shares.
ITEM 27. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8; Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides a security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the
C-4
<PAGE> 119
Registrant's disinterested, non-party trustees, or an independent legal counsel
in a written opinion, shall determine, based upon a review of readily available
facts, that a recipient of the advance ultimately will be found entitled to
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefor unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Investment
Advisory and Other Services" and "Officers and Trustees" in the Statement of
Additional Information for information regarding the business of the Adviser.
For information as to the business, profession, vocation and employment of a
substantial nature of directors and officers of the Adviser, reference is made
to the Adviser's current Form ADV (File No. 801-18161) filed under the
Investment Advisers Act of 1940, as amended, incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc., which acts as principal underwriter for certain investment
companies and unit investment trusts set forth in Exhibit 17(a) incorporated by
reference herein.
(b) Van Kampen American Capital Distributors, Inc. is an affiliated person
of an affiliated person of Registrant and is the only principal underwriter for
Registrant. The name, principal business address and positions and offices with
Van Kampen American Capital Distributors, Inc. of each of the directors and
officers thereof are set forth in Exhibit 17(b). Except as disclosed under the
heading, "Officers and Trustees" in Part B of this Registration Statement, none
of such persons has any position or office with Registrant.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by the
Registrant by Section 31 (a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained at the offices of the Registrant located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Access Investors Services,
Inc., 7501 Tiffany Springs Parkway, Kansas City, Missouri, 64153, or at the
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts. All such accounts, books and other documents required to be
maintained by the principal underwriter will be maintained at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
C-5
<PAGE> 120
ITEM 32. UNDERTAKINGS.
(a) Not Applicable.
(b) Not Applicable.
Registrant undertakes, if requested to do so by the holders of at least 10%
of the shareholders of the Van Kampen American Capital Emerging Markets Income
Fund, a series of the Registrant, to call a meeting of such shareholders for the
purpose of voting upon the question of removal of a trustee or trustees, and to
assist in communications with other shareholders to the extent required by
Section 16(c) of the Investment Company Act of 1940, as amended.
C-6
<PAGE> 121
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, VAN KAMPEN AMERICAN CAPITAL
TRUST, CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS OF THIS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1933
AND HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF
OAKBROOK TERRACE, AND THE STATE OF ILLINOIS, ON THE 27TH DAY OF OCTOBER, 1995.
VAN KAMPEN AMERICAN CAPITAL TRUST
By: /s/ RONALD A. NYBERG
Ronald A. Nyberg
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON OCTOBER 27, 1995 BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ DONALD C. MILLER * Chairman of the Board and Trustee
- ---------------------------------------------
Donald C. Miller
Chief Executive Officer:
/s/ DENNIS J. McDONNELL* President and Trustee
- ---------------------------------------------
Dennis J. McDonnell
Chief Financial and Accounting Officer:
/s/ EDWARD C. WOOD, III * Vice President and Treasurer
- ---------------------------------------------
Edward C. Wood, III
Trustees:
/s/ J. MILES BRANAGAN * Trustee
- ---------------------------------------------
J. Miles Branagan
/s/ PHILIP P. GAUGHAN * Trustee
- ---------------------------------------------
Philip P. Gaughan
Trustee
- ---------------------------------------------
Linda H. Heagy
/s/ ROGER HILSMAN * Trustee
- ---------------------------------------------
Roger Hilsman
/s/ R. CRAIG KENNEDY * Trustee
- ---------------------------------------------
R. Craig Kennedy
</TABLE>
C-7
<PAGE> 122
<TABLE>
<CAPTION>
SIGNATURES TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
/s/ JACK E. NELSON * Trustee
- ---------------------------------------------
Jack E. Nelson
/s/ DON G. POWELL * Trustee
- ---------------------------------------------
Don G. Powell
/s/ DAVID REES * Trustee
- ---------------------------------------------
David Rees
/s/ JEROME L. ROBINSON * Trustee
- ---------------------------------------------
Jerome L. Robinson
/s/ LAWRENCE J. SHEEHAN * Trustee
- ---------------------------------------------
Lawrence J. Sheehan
/s/ FERNANDO SISTO * Trustee
- ---------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN * Trustee
- ---------------------------------------------
Wayne W. Whalen
/s/ WILLIAM S. WOODSIDE* Trustee
- ---------------------------------------------
William S. Woodside
- ---------------
*Signed by Ronald A. Nyberg pursuant to a power of attorney previously filed.
/s/ RONALD A. NYBERG
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
October 27, 1995
C-8
<PAGE> 123
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 37 TO FORM N-1A
SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON OCTOBER 27, 1995
(B) EXHIBITS:
(1)(a) Form of Agreement and Declaration of Trust(32)
(b) Form of Certificate of Designation for:
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
(2) Form of By-Laws(32)
(4) Form of Specimen of Share Certificates
(i) Van Kampen American Capital High Yield Fund
(a) Class A Shares(36)
(b) Class B Shares(36)
(c) Class C Shares(36)
(ii) Van Kampen American Capital Short-Term Global Income
Fund
(a) Class A Shares(35)
(b) Class B Shares(35)
(c) Class C Shares(35)
(iii) Van Kampen American Capital Strategic Income Fund
(a) Class A Shares(36)
(b) Class B Shares(36)
(c) Class C Shares(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund
(a) Class A Shares+
(b) Class B Shares+
(c) Class C Shares+
(5)(a) Form of Investment Advisory Agreement
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global Income
Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
(b) Form of Investment Sub-Advisory Agreement
(i) Van Kampen American Capital Emerging Markets Income
Fund(27)
(6)(a) Form of Distribution and Service Agreement(32)
(b) Form of Dealer Agreement(32)
(c) Form of Broker Agreement(32)
(d) Form of Bank Agreement(32)
(e) Form of Underwriting Agreement(1)
(f) Form of Selected Dealer Agreement(1)
(g) Form of Agreement Between Underwriters(1)
(8)(a) Form of Custodian Agreement
(i) Van Kampen American Capital High Yield Fund*
(ii) Van Kampen American Capital Short-Term Global Income
Fund(6)
(iii) Van Kampen American Capital Strategic Income
Fund(20)
(iv) Van Kampen American Capital Emerging Markets Income
Fund, as amended and restated(24)
(b) Form of Transfer Agency Agreement(32)
(9)(a) Form of Accounting Service Agreement(32)
(b) Form of Legal Services Agreement(32)
<PAGE> 124
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(a) Van Kampen American Capital High Yield Fund(36)
(b) Van Kampen American Capital Short-Term Global Income
Fund(35)
(c) Van Kampen American Capital Strategic Income Fund(36)
(d) Van Kampen American Capital Emerging Markets Income Fund+
(11) Consent of KPMG Peat Marwick LLP
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
(13) Letter of Understanding relating to initial capital(1)
(15)(a) Form of Distribution Plan Pursuant to Rule 12b-1(32)
(b) Form of Shareholder Assistance Agreement(32)
(c) Form of Administrative Services Agreement(32)
(d) Form of Service Plan(32)
(16)(a) Computation of Performance Quotations
(i) Van Kampen American Capital High Yield Fund(36)
(ii) Van Kampen American Capital Short-Term Global
Income Fund(35)
(iii) Van Kampen American Capital Strategic Income
Fund(36)
(iv) Van Kampen American Capital Emerging Markets Income
Fund+
(17)(a) List of certain investment companies in response to Item
29(a)(35)
(b) List of officers and directors of Van Kampen American
Capital Distributors, Inc. in response to Item 29(b)(35)
(24) Power of attorney(35)
(27) Financial Data Schedules+
- ---------------
* Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-4410.
(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(9) Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(12) Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(16) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(17) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(20) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(21) Incorporated herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(23) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(24) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(25) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
<PAGE> 125
(27) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(28) Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(30) Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(31) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(32) Incorporated herein by reference to Post-Effective Amendment No. 32 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(35) Incorporated herein by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
(36) Incorporated herein by reference to Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410.
- ---------------
+ Filed herewith.
<PAGE> 1
EXHIBIT 1(b)(iv)
VAN KAMPEN AMERICAN CAPITAL TRUST
Certificate of Designation
of Van Kampen American Capital Emerging Markets Income Fund
The undersigned, being the Secretary of Van Kampen American Capital
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital Emerging Markets Income Fund (the
"Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class
1
<PAGE> 2
at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
- ----------------------
Ronald A. Nyberg,
Secretary
2
<PAGE> 1
EXHIBIT 4(iv)(a)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Emerging Markets Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
EMERGING MARKETS INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iv)(b)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Emerging Markets Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
EMERGING MARKETS INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iv)(c)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Emerging Markets Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
EMERGING MARKETS INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 5(a)(iv)
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of _________, 199_, by and
between VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME FUND (the "Fund"),
a series of VAN KAMPEN AMERICAN CAPITAL TRUST, a Delaware business trust (the
"Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. (the
"Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs
the Adviser to act as the investment adviser for and to manage
the investment and reinvestment of the assets of the Fund in
accordance with the Fund's investment objective and policies and
limitations, and to administer its affairs to the extent
requested by, and subject to the review and supervision of, the
Board of Trustees of the Fund for the period and upon the terms
herein set forth. The investment of funds shall be subject to
all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as may from time to time be
in force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts
such employment and agrees during such period to render such
services, to supply investment research and portfolio management
(including without limitation 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, in
accordance with the policies adopted by the Fund and its Board
of Trustees), to administer the business affairs of the Fund, to
furnish offices and necessary facilities and equipment to the
Fund, to provide administrative services for the Fund, to render
periodic reports to the Board of Trustees of the Fund, and to
permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to
such positions.
(c) Independent Contractor. The Adviser shall be deemed
to be an independent contractor under this Agreement and, unless
otherwise expressly provided or authorized, shall have no
authority to act for or represent the Fund in any way or
otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to
the Fund under this Agreement are not to be deemed exclusive,
and the Adviser shall be free to render similar services or
other services to others so long as its services hereunder are
not impaired thereby.
1
<PAGE> 2
2. (a) Fee. For the services and facilities described in
Section 1, the Fund will accrue daily and pay to the Adviser at
the end of each calendar month an investment management fee
equal to a percentage of the average daily net assets of the
Fund as follows:
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
____________________ ____________________
____________________ ____________________
(b) Expense Limitation. The Adviser's compensation for any
fiscal year of the Fund shall be reduced by the amount, if any,
by which the Fund's expense for such fiscal year exceeds the
most restrictive applicable expense jurisdiction in which the
Fund's shares are qualified for offer and sale, as such
limitations set forth in the most recent notice thereof
furnished by the Adviser to the Fund. For purposes of this
paragraph there shall be excluded from computation of the Fund's
expenses any amount borne directly or indirectly by the Fund
which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any
month expenses of the Fund properly included in such calculation
exceed 1/12 of the amount permitted annually by the most
restrictive applicable expense limitation, the payment to the
Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the
total net expense for the month will not exceed 1/12 of such
amount. As of the end of the Fund's fiscal year, however, the
computations and payments shall be readjusted so that the
aggregate compensation payable to the Adviser for the year is
equal to the fee set forth in subsection (a) of this Section 2,
diminished to the extent necessary so that the expenses for the
year do not exceed those permitted by the applicable expense
limitation.
(c) Determination of Net Asset Value. The net asset value of
the Fund shall be calculated as of the close of the New York
Stock Exchange on each day the Exchange is open for trading or
such other time or times as the trustees may determine in
accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as from time to time in
force. For the purpose of the foregoing computations, on each
such day when net asset value is not calculated, the net asset
value of a share of beneficial interest of the Fund shall be
deemed to be the net asset value of such share as of the close
of business of the last day on which such calculation was made.
2
<PAGE> 3
(d) Proration. For the month and year in which this Agreement
becomes effective or terminates, there shall be an appropriate
proration of the Adviser's fee on the basis of the number of
days that the Agreement is in effect during such month and year,
respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund
shall assume and pay any expenses for services rendered by a
custodian for the safekeeping of the Fund's securities or other
property, for keeping its books of account, for any other
charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be
required to pay, and the Fund shall assume and pay, the charges
and expenses of its operations, including compensation of the
trustees (other than those who are interested persons of the
Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the
distributor has agreed to pay such compensation), charges and
expenses of independent accountants, of legal counsel and of any
transfer or dividend disbursing agent, costs of acquiring and
disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on
obligations incurred by the Fund, costs of share certificates,
membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to
shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes
and fees to federal, state or other governmental agencies on
account of the registration of securities issued by the Fund,
filing of corporate documents or otherwise. The Fund shall not
pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from
the Adviser without first obtaining the written approval of the
Adviser. The Adviser shall arrange, if desired by the Fund, for
officers or employees of the Adviser to serve, without
compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and
subject to their individual consent and to any limitations
imposed by law.
4. Interested Persons. Subject to applicable statutes and
regulations, it is understood that trustees, officers,
shareholders and agents of the Fund are or may be interested in
the Adviser as directors, officers, shareholders, agents or
otherwise and that the directors, officers, shareholders and
agents of the Adviser may be interest in the Fund as trustees,
officers, shareholders, agents or otherwise.
5. Liability. 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 this 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 this Agreement.
6. (a) Term. This Agreement shall become effective on the
date hereof and shall remain in full force until the second
anniversary of the date hereof unless sooner terminated as
hereinafter provided. This Agreement shall continue in force
3
<PAGE> 4
from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the
manner required by the Investment Company Act of 1940, as
amended.
(b) Termination. This Agreement shall automatically
terminate in the event of its assignment. This Agreement may be
terminated at any time without the payment of any penalty by the
Fund or by the Adviser on sixty (60) days written notice to the
other party. The Fund may effect termination by action of the
Board of Trustees or by vote of a majority of the outstanding
shares of stock of the Fund, accompanied by appropriate notice.
This Agreement may be terminated at any time without the payment
of any penalty and without advance notice by the Board of
Trustees or by vote of a majority of the outstanding shares of
the Fund in the event that it shall have been established by a
court of competent jurisdiction that the Adviser or any officer
or director of the Adviser has taken any action which results in
a breach of the covenants of the Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement
shall not affect the right of the Adviser to receive payment on
any unpaid balance of the compensation described in Section 2
earned prior to such termination.
7. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder shall not thereby affected.
8. Notices. Any notice under this Agreement shall be in
writing, addressed and delivered or mailed, postage prepaid, to
the other party at such address as such other party may
designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as
provided by Article 8, Section 8.1 of the Agreement and Declaration of Trust of
the Trust, the shareholders, trustees, officers, employees and other agents of
the Trust and the Fund shall not personally be bound by or liable hereunder,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder.
10. Governing Law. All questions concerning the validity,
meaning and effect of this Agreement shall be determined in
accordance with the laws (without giving effect to the
conflict-of-law principles thereof) of the State of Delaware
applicable to contracts made and to be performed in that state.
4
<PAGE> 5
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Agreement to be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By:_____________________________________________
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL EMERGING MARKETS INCOME
FUND, a series of VAN KAMPEN AMERICAN CAPITAL
TRUST
By:_____________________________________________
Dennis J. McDonnell, President
5
<PAGE> 1
EXHIBIT 10(d)
October 27, 1995
Van Kampen American Capital
Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Re: Van Kampen American Capital
Trust --
Registration Statement on Form N-1A
(File Nos. 33-4410 and 811-4629)
Ladies and Gentlemen:
We have acted as counsel to Van Kampen American Capital Emerging
Markets Income Fund (the "Fund"), a series of Van Kampen American Capital Trust
(the "Trust"), a voluntary association with transferable shares formed and
existing under and by virtue of the laws of the State of Delaware, in
connection with the preparation of Post-Effective Amendment No. 37 to the
Trust's Registration Statement on Form N-1A (as so amended, the "Registration
Statement") to be filed under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the "1940 Act") with
the Securities and Exchange Commission (the "Commission") on October 27, 1995.
The Registration Statement relates to the registration under the 1933 Act and
1940 Act of an indefinite number of each of Class A Shares of beneficial
interest, $.01 par value per share, Class B Shares of beneficial interest, $.01
par value per share, and Class C Shares of beneficial interest, $.01 par value
per share, of the Fund (collectively, the "Shares"). The Trust stated in
Post-Effective Amendment No. 32 to the Registration Statement that it was
thereby adopting the Registration Statement of Van Kampen Merritt Trust, a
Massachusetts business trust (the "Old Trust"), reorganized into the Trust as of
July 31, 1995.
<PAGE> 2
Van Kampen American Capital
Trust
October 27, 1995
Page 2
The Shares will be sold pursuant to a distribution and service
agreement to be entered into among the Trust, on behalf of the Fund, and Van
Kampen American Capital Distributors, Inc. (the "Distribution Agreement").
The Old Trust is a party to an "Order Pursuant to Section 6(c) of the
Investment Company Act for an Exemption from the Provisions of Sections
2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c) and 22(d) of such Act and Rule
22c-1 thereunder" (the "Exemptive Order"), issued by the Commission on July 28,
1993, allowing registered investment companies party thereto to issue an
unlimited number of classes of securities (including the Class A Shares,
Class B Shares and Class C Shares) with varying combinations of sales charges,
distribution fees and service fees, the application for which Exemptive Order
requested that such order apply to entities organized for the purpose of
changing the state of domicile of the original parties to such order.
This opinion is delivered in accordance with the requirements of Item
24(b)(10) of Form N-1A under the 1933 Act and the 1940 Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement, (ii) the Agreement and Declaration of Trust and By-Laws of the
Trust, each as amended to date (the "Declaration of Trust" and "By-Laws",
respectively), (iii) the designations of series with respect to the Fund,
(iv) copies of the resolutions adopted by the Board of Trustees of the Trust
relating to the authorization, issuance and sale of the Shares, the filing of
the Registration Statement and any amendments or supplements thereto and
related matters, (v) the form of Distribution Agreement, which is included as
an exhibit to the Registration Statement, (vi) the Exemptive Order and (vii)
such other documents as we have deemed necessary or appropriate as a basis for
the opinions set forth herein. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified, conformed or
<PAGE> 3
Van Kampen American Capital
Trust
October 27, 1995
Page 3
photostatic copies and the authenticity of the originals of such copies. We
have also assumed that the Distribution Agreement, when executed and delivered
by the parties thereto, will be in the form reviewed by us in connection with
this opinion and that the Fund will be entitled to rely on the Exemptive Order
as if it were a party thereto. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Trust and others.
Members of our firm are admitted to the practice of law in the State of
Delaware, and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement (and such other Post-Effective Amendments,
if any, to the Registration Statement relating to the public offering of the
Shares) shall have become effective under the 1933 Act and shall be deemed to
be the Registration Statement of the Trust pursuant to the rules and
regulations of the Commission under the 1933 Act, (ii) the Distribution
Agreement is duly executed and delivered by the Trust and the other respective
parties thereto and (iii) certificates representing the Shares are duly
executed, countersigned, registered and duly delivered and paid for in
accordance with the Distribution Agreement, the Shares will be validly issued,
fully paid and nonassessable.
<PAGE> 4
Van Kampen American Capital
Trust
October 27, 1995
Page 4
We hereby consent to the filing of this opinion with the Commission as
Exhibit 10(d) to the Registration Statement. We also consent to the
reference to our firm under the heading "Legal Counsel" in the Registration
Statement. In giving this consent, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom
<PAGE> 1
EXHIBIT 11(iv)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Emerging Markets Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
October 26, 1995
<PAGE> 1
EXHIBIT 16(a)(iv)
EMERGING MARKETS INCOME FUND
30 DAY SEC YIELD WORKSHEET
FOR PERIOD ENDING JUNE 30, 1995
<TABLE>
<S> <C>
Class A Shares
Formula Total Income - Total Expenses 6
Class A Shares [(((( ________________________ ___ _________________________ ) + 1) ) - 1) * 2)] = SEC Yield
Average Dividend Shares x Public Offering Price
$56,316.75 - $10,782.85 6
Class A Shares [(((( ________________________ ___ _________________________ ) + 1) ) - 1) * 2)] = 9.84%
420,100,000 x $13.48
Waived Expense Adjustment (9.84% - 9.52%) 0.32%
===========
</TABLE>
<TABLE>
<S> <C>
Class B Shares
Formula
Class A Share Yield + Sales Charge Effect - Expense Differential
Class A Share Yield 9.84%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 9.84% .47%
- Expense Differential between Class A Shares and Class B Shares .82%
-----
Class B Share SEC Yield 9.49%
=====
- Waived Expense Adjustment .32%
-----
Class B Share SEC Yield (Without Expense Waiver) 9.17%
=====
Class C Shares
Formula
Class A Share Yield + Sales Charge Effect - Effect Differential
Class A Share Yield 9.84%
+ Sales Charge Effect (Maximum Sales Charge x Class A Share SEC Yield)
4.75% x 9.84% .47%
- Expense Differential between Class A Shares and Class C Shares .82%
-----
Class C Share SEC Yield 9.49%
=====
- Waived Expense Adjustment .32%
-----
Class C Share SEC Yield (Without Expense Waiver) 9.17%
=====
</TABLE>
<PAGE> 2
EMERGING MARKETS INCOME FUND
CALCULATION OF DISTRIBUTION RATE
PERIOD ENDED JUNE 30, 1995
Current Annual Income Per Share
Current Offering Price
<TABLE>
<S> <C> <C>
Class A Shares
$.7800
------
$13.48 = 5.79%
Class B Shares
$.7800
------
$12.84 = 6.07%
Class C Shares
$.7800
------
$12.84 = 6.07%
</TABLE>
<PAGE> 3
EMERGING MARKETS INCOME FUND - CLASS A SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED JUNE 30, 1995
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $12.84
Initial Investment $895.99 = P
Ending Redeemable Value $911.64 = ERV
n
One year period ended 06/30/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 1.75% = T
Excluding Payment of the Sales Charge
Net Asset Value $12.84
Initial Investment $853.43 = P
Ending Redeemable Value $911.64 = ERV
n
One year period ended 06/30/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 6.82% = T
<CAPTION>
TOTAL RETURN CALCULATION INCEPTION THROUGH JUNE 30, 1995
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the Sales Charge
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $911.64 = ERV
n
Inception through 06/30/95 = (18 Mos.) 1.50000 =
TOTAL RETURN FOR THE PERIOD (5.98%) = T
Excluding Payment of the Sales Charge
Net Asset Value $12.84
Initial Investment $952.69 = P
Ending Redeemable Value $911.64 = ERV
n
Inception through 06/30/95=(18 Mos.) 1.50000 =
TOTAL RETURN FOR THE PERIOD (2.89%) = T
</TABLE>
<PAGE> 4
EMERGING MARKETS INCOME FUND -- CLASS A SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH JUNE 30, 1995
Formula ERV - P
--------- = T
P
<TABLE>
<S> <C>
Including Payment of the Sales Charge
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $911.64 = ERV
TOTAL RETURN FOR THE PERIOD (8.84%) = T
Excluding Payment of the Sales Charge
Net Asset Value $ 12.84
Initial Investment $952.69 = P
Ending Redeemable Value $911.64 = ERV
TOTAL RETURN FOR THE PERIOD (4.31%) = T
</TABLE>
<PAGE> 5
EMERGING MARKETS INCOME FUND - CLASS B SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED JUNE 30, 1995
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $12.84
Initial Investment $892.31 = P
Ending Redeemable Value $921.21 = ERV
n
One year period ended 06/30/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 3.24% = T
Excluding Payment of the CDSC
Net Asset Value $12.84
Initial Investment $892.31 = P
Ending Redeemable Value $956.90 = ERV
n
One year period ended 06/30/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 7.24% = T
<CAPTION>
TOTAL RETURN CALCULATION INCEPTION THROUGH JUNE 30, 1995
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $923.23 = ERV
n
Inception through 06/30/95 = (18 Mos.) 1.50000 =
TOTAL RETURN FOR THE PERIOD (5.19%) = T
Excluding Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $956.90 = ERV
n
Inception through 06/30/95 = (18 Mos.) 1.50000 =
TOTAL RETURN FOR THE PERIOD (2.89%) = T
</TABLE>
<PAGE> 6
EMERGING MARKETS INCOME FUND - CLASS B SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH JUNE 30, 1995
Formula ERV - P
--------- = T
P
<TABLE>
<S> <C>
Including Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $923.23 = ERV
TOTAL RETURN FOR THE PERIOD (7.68%) = T
Excluding Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $956.90 = ERV
TOTAL RETURN FOR THE PERIOD (4.31%) = T
</TABLE>
<PAGE> 7
EMERGING MARKETS INCOME FUND - CLASS C SHARES
TOTAL RETURN CALCULATION ONE YEAR PERIOD ENDED JUNE 30, 1995
<TABLE>
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $12.84
Initial Investment $892.31 = P
Ending Redeemable Value $947.98 = ERV
n
One year period ended 06/30/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 6.24% = T
Excluding Payment of the CDSC
Net Asset Value $12.84
Initial Investment $892.31 = P
Ending Redeemable Value $956.90 = ERV
n
One year period ended 06/30/95 = (12 Mos.) 1 =
TOTAL RETURN FOR THE PERIOD 7.24% = T
<CAPTION>
TOTAL RETURN CALCULATION INCEPTION THROUGH JUNE 30, 1995
<S> <C>
n
Formula P(1+T) = ERV
Including Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $956.90 = ERV
n
Inception through 06/30/95 = (18 Mos.) 1.50000 =
TOTAL RETURN FOR THE PERIOD (2.89%) = T
Excluding Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $956.90 = ERV
n
Inception through 06/30/95 = (18 Mos.) 1.50000 =
TOTAL RETURN FOR THE PERIOD (2.89%) = T
</TABLE>
<PAGE> 8
EMERGING MARKETS INCOME FUND - CLASS C SHARES
NON-STANDARDIZED CUMULATIVE TOTAL RETURN CALCULATION
INCEPTION THROUGH JUNE 30, 1995
<TABLE>
<S> <C>
Formula ERV - P
-------
P = T
Including Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $956.90 = ERV
TOTAL RETURN FOR THE PERIOD (4.31%) = T
Excluding Payment of the CDSC
Net Asset Value $12.84
Initial Investment $1,000.00 = P
Ending Redeemable Value $956.90 = ERV
TOTAL RETURN FOR THE PERIOD (4.31%) = T
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> EMERGING MARKETS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 6,719,277<F1>
<INVESTMENTS-AT-VALUE> 8,581,819<F1>
<RECEIVABLES> 152,419<F1>
<ASSETS-OTHER> 84,445<F1>
<OTHER-ITEMS-ASSETS> 516,787<F1>
<TOTAL-ASSETS> 9,335,470<F1>
<PAYABLE-FOR-SECURITIES> 195,000<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 149,129<F1>
<TOTAL-LIABILITIES> 344,129<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 6,007,430
<SHARES-COMMON-STOCK> 420,000
<SHARES-COMMON-PRIOR> 420,000
<ACCUMULATED-NII-CURRENT> 524,175<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 1,517,925<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (29,199)<F1>
<NET-ASSETS> 5,393,595
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,013,885<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 181,040<F1>
<NET-INVESTMENT-INCOME> 832,844<F1>
<REALIZED-GAINS-CURRENT> (864,621)<F1>
<APPREC-INCREASE-CURRENT> 614,314<F1>
<NET-CHANGE-FROM-OPS> 582,537<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (327,678)
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 13,817
<ACCUMULATED-NII-PRIOR> 225,698<F1>
<ACCUMULATED-GAINS-PRIOR> (641,437)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 84,584<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 210,901<F1>
<AVERAGE-NET-ASSETS> 5,180,387
<PER-SHARE-NAV-BEGIN> 12.806
<PER-SHARE-NII> 1.189
<PER-SHARE-GAIN-APPREC> (.376)
<PER-SHARE-DIVIDEND> (.78)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.839
<EXPENSE-RATIO> 2.11
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> EMERGING MARKETS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 6,719,277<F1>
<INVESTMENTS-AT-VALUE> 8,581,819<F1>
<RECEIVABLES> 152,419<F1>
<ASSETS-OTHER> 84,445<F1>
<OTHER-ITEMS-ASSETS> 516,787<F1>
<TOTAL-ASSETS> 9,335,470<F1>
<PAYABLE-FOR-SECURITIES> 195,000<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 149,129<F1>
<TOTAL-LIABILITIES> 344,129<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 2,003,430
<SHARES-COMMON-STOCK> 140,000
<SHARES-COMMON-PRIOR> 140,000
<ACCUMULATED-NII-CURRENT> 524,175<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 1,517,925<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (29,199)<F1>
<NET-ASSETS> 1,798,873
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,013,885<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 181,041<F1>
<NET-INVESTMENT-INCOME> 832,844<F1>
<REALIZED-GAINS-CURRENT> (864,621)<F1>
<APPREC-INCREASE-CURRENT> 614,314<F1>
<NET-CHANGE-FROM-OPS> 582,537<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (109,278)
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11,243
<ACCUMULATED-NII-PRIOR> 225,698<F1>
<ACCUMULATED-GAINS-PRIOR> (641,437)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 84,584<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 210,901<F1>
<AVERAGE-NET-ASSETS> 1,723,126
<PER-SHARE-NAV-BEGIN> 12.760
<PER-SHARE-NII> 1.190
<PER-SHARE-GAIN-APPREC> (.330)
<PER-SHARE-DIVIDEND> (.78)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.840
<EXPENSE-RATIO> 2.08
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> EMERGING MARKETS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 6,719,277<F1>
<INVESTMENTS-AT-VALUE> 8,581,819<F1>
<RECEIVABLES> 152,419<F1>
<ASSETS-OTHER> 84,445<F1>
<OTHER-ITEMS-ASSETS> 516,787<F1>
<TOTAL-ASSETS> 9,335,470<F1>
<PAYABLE-FOR-SECURITIES> 195,000<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 149,129<F1>
<TOTAL-LIABILITIES> 344,129<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 2,003,430
<SHARES-COMMON-STOCK> 140,100
<SHARES-COMMON-PRIOR> 140,100
<ACCUMULATED-NII-CURRENT> 524,175<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 1,517,925<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (29,199)<F1>
<NET-ASSETS> 1,798,873
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 1,013,885<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 181,041<F1>
<NET-INVESTMENT-INCOME> 832,844<F1>
<REALIZED-GAINS-CURRENT> (864,621)<F1>
<APPREC-INCREASE-CURRENT> 614,314<F1>
<NET-CHANGE-FROM-OPS> 582,537<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (109,278)
<DISTRIBUTIONS-OF-GAINS> 0<F1>
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 11,243
<ACCUMULATED-NII-PRIOR> 225,698<F1>
<ACCUMULATED-GAINS-PRIOR> (641,437)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 84,584<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 210,901<F1>
<AVERAGE-NET-ASSETS> 1,723,126
<PER-SHARE-NAV-BEGIN> 12.760
<PER-SHARE-NII> 1.190
<PER-SHARE-GAIN-APPREC> (.330)
<PER-SHARE-DIVIDEND> (.78)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.840
<EXPENSE-RATIO> 2.08
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
