<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1995
FILE NOS. 33-8122
811-4805
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 22 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 23 /X/
</TABLE>
VAN KAMPEN MERRITT
EQUITY TRUST
(Exact Name of Registrant as Specified in the Agreement and Declaration of
Trust)
One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)
(708) 684-6000
(Registrant's Telephone Number)
Dennis J. McDonnell
President, Van Kampen Merritt Equity Trust
One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Wayne W. Whalen, Esq. Ronald A. Nyberg, Esq.
Thomas A. Hale, Esq. Executive Vice President,
Skadden, Arps, Slate, Meagher & Flom General Counsel and Director
333 W. Wacker Drive Van Kampen American Capital
Chicago, IL 60606 Investment Advisory Corp.
(312) 407-0700 One Parkview Plaza
Oakbrook Terrace, Illinois 60181
</TABLE>
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
_X_ on April 30, 1995 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of Rule 485.
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, 1995 ON OR BEFORE AUGUST 31, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Post-Effective Amendment No. 22 to the Registration Statement contains
three Prospectuses and three Statements of Additional Information describing
three sub-trusts of the Registrant. The Registration Statement is organized as
follows:
Facing Page
Cross Reference Sheet with respect to Van Kampen Merritt Growth and Income
Fund
Cross Reference Sheet with respect to Van Kampen Merritt Utility Fund
Cross Reference Sheet with respect to Van Kampen Merritt Balanced Fund
Prospectus Relating to Van Kampen Merritt Growth and Income Fund
Statement of Additional Information Relating to Van Kampen Merritt Growth
and Income Fund
Prospectus Relating to Van Kampen Merritt Utility Fund
Statement of Additional Information Relating to Van Kampen Merritt Utility
Fund
Prospectus Relating to Van Kampen Merritt Balanced Fund
Statement of Additional Information Relating to Van Kampen Merritt Balanced
Fund
Part C Information
Exhibits
------------------------
Van Kampen Merritt Total Return Fund and Van Kampen Merritt Growth Fund
(collectively, the "Funds") have not commenced investment operations. The
Prospectus and Statement of Additional Information with respect to each of the
Funds accordingly are not being distributed or otherwise used. The information
included in the Prospectus and Statement of Additional Information of each of
the Funds was contained in the Registrant's Post-Effective Amendment No. 7 filed
with the Commission on November 2, 1989 and, to the extent required to be
included herein, is hereby incorporated by reference.
<PAGE> 3
VAN KAMPEN MERRITT GROWTH AND 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
----------------------- ----------------------------------------------------------
PART A INFORMATION REQUIRED IN A PROSPECTUS
<S> <C> <C>
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.......... FINANCIAL HIGHLIGHTS; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; FUND
PERFORMANCE; SHAREHOLDER REPORTS AND INQUIRIES
Item 4. General Description of
Registrant........... PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; INVESTMENT PRACTICES; DESCRIPTION OF SHARES OF
THE FUND
Item 5. Management of the
Fund................. ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; PORTFOLIO
TRANSACTIONS AND BROKERAGE ALLOCATION; INVESTMENT ADVISORY
SERVICES; SHAREHOLDER SERVICES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
PROGRAMS; INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS;
DESCRIPTION OF SHARES OF THE FUND; SHAREHOLDER REPORTS
AND INQUIRIES
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF THE
FUND; THE DISTRIBUTION AND SERVICE PLANS; NET ASSET
VALUE; INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS;
SHAREHOLDER PROGRAMS; FUND PERFORMANCE
Item 8. Redemption or
Repurchase........... PURCHASING SHARES OF THE FUND; REDEMPTION OF SHARES;
SHAREHOLDER PROGRAMS; NET ASSET VALUE
Item 9. Pending Legal
Proceedings.......... Not Applicable
</TABLE>
i
<PAGE> 4
<TABLE>
<CAPTION>
ITEM NUMBER OF LOCATION OR CAPTION
FORM N-1A IN PROSPECTUS
----------------------- ----------------------------------------------------------
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C> <C>
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
Item 14. Management of the
Fund................. Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities........... Officers and Trustees
Item 16. Investment Advisory and
Other Services....... Contained in Prospectus under captions: PURCHASING SHARES
OF THE FUND; INVESTMENT ADVISORY SERVICES, THE
DISTRIBUTION AND SERVICE PLANS; Investment Advisory and
Other Services; Legal Counsel; Officers and Trustees; The
Distributor; Notes to Financial Statements
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
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered.............. Contained in the Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS; REDEMPTION OF
SHARES; NET ASSET VALUE
Item 20. Tax Status............. Contained in Prospectus under captions: TAX STATUS;
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS; Tax
Status of the Fund
Item 21. Underwriters........... The Distributor
Item 22. Calculation of
Performance Data..... Contained in the Prospectus under the caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditors' Report; Financial
Statements; Notes to Financial Statements; Officers and
Trustees
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
VAN KAMPEN MERRITT UTILITY FUND
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART A
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 REPORTS AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE
AND POLICIES; INVESTMENT PRACTICES; DESCRIPTION OF
SHARES OF THE FUND
Item 5. Management of the
Fund...................... ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; INVESTMENT
ADVISORY SERVICES; PORTFOLIO TRANSACTIONS AND BROKERAGE
ALLOCATION; SHAREHOLDER SERVICES
Item 6. Capital Stock and Other
Securities................ DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER PROGRAMS; INVESTMENTS BY TAX-SHELTERED
RETIREMENT PROGRAMS; DESCRIPTION OF SHARES OF THE
FUND; SHAREHOLDER REPORTS AND INQUIRIES
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUND; THE DISTRIBUTION AND SERVICE PLANS;
INVESTMENTS BY TAX-SHELTERED RETIREMENT PROGRAMS; NET
ASSET VALUE; SHAREHOLDER PROGRAMS;
FUND PERFORMANCE
Item 8. Redemption or
Repurchase................ PURCHASING SHARES OF THE FUND; REDEMPTION OF SHARES;
SHAREHOLDER PROGRAMS; NET ASSET VALUE
Item 9. Pending Legal
Proceedings............... Not Applicable
</TABLE>
iii
<PAGE> 6
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
---------------------------- ------------------------------------------------------
<S> <C> <C>
PART B
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................ Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; THE DISTRIBUTION AND SERVICE PLANS;
Legal Counsel; Investment Advisory and Other Services;
Officers and Trustees; The Distributor; Notes to
Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocation
Item 18. Capital Stock and
Other Securities.......... Contained in Prospectus under caption: DESCRIPTION OF
SHARES OF THE FUND
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered................... Contained in Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS; REDEMPTION
OF SHARES; NET ASSET VALUE
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS;
INVESTMENT BY TAX-SHELTERED INVESTMENTS; Tax Status of
the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of
Performance Data.......... Contained in Prospectus under caption: FUND PERFORM-
ANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditors' Report; Financial
Statements; Notes to Financial Statements; Officers
and Trustees
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.
iv
<PAGE> 7
VAN KAMPEN MERRITT BALANCED 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
----------------------- ----------------------------------------------------------
PART A INFORMATION REQUIRED IN A PROSPECTUS
<S> <C> <C>
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.......... FINANCIAL HIGHLIGHTS; SHAREHOLDER TRANSACTION EXPENSES;
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; FUND
PERFORMANCE; SHAREHOLDER REPORTS AND INQUIRIES
Item 4. General Description of
Registrant........... PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; INVESTMENT PRACTICES; DESCRIPTION OF SHARES OF
THE FUND
Item 5. Management of the
Fund................. ANNUAL FUND OPERATING EXPENSES AND EXAMPLE; PORTFOLIO
TRANSACTIONS AND BROKERAGE ALLOCATION; INVESTMENT ADVISORY
SERVICES; SHAREHOLDER SERVICES
Item 6. Capital Stock and Other
Securities........... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS; SHAREHOLDER
PROGRAMS; INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS;
DESCRIPTION OF SHARES OF THE FUND; SHAREHOLDER REPORTS AND
INQUIRIES
Item 7. Purchase of Securities
Being Offered........ SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF THE
FUND; THE DISTRIBUTION AND SERVICE PLANS; NET ASSET
VALUE; INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS;
SHAREHOLDER PROGRAMS; FUND PERFORMANCE
Item 8. Redemption or
Repurchase........... PURCHASING SHARES OF THE FUND; REDEMPTION OF SHARES;
SHAREHOLDER PROGRAMS; NET ASSET VALUE
Item 9. Pending Legal
Proceedings.......... Not Applicable
</TABLE>
v
<PAGE> 8
<TABLE>
<CAPTION>
ITEM NUMBER OF LOCATION OR CAPTION
FORM N-1A IN PROSPECTUS
----------------------- ----------------------------------------------------------
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C> <C>
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
Item 14. Management of the
Fund................. Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities........... Officers and Trustees
Item 16. Investment Advisory and
Other Services....... Contained in Prospectus under captions: PURCHASING SHARES
OF THE FUND; INVESTMENT ADVISORY SERVICES, THE
DISTRIBUTION AND SERVICE PLANS; Investment Advisory and
Other Services; Legal Counsel; Officers and Trustees; The
Distributor; Notes to Financial Statements
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
Item 19. Purchase, Redemption
and Pricing of
Securities Being
Offered.............. Contained in the Prospectus under captions: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS; REDEMPTION OF
SHARES; NET ASSET VALUE
Item 20. Tax Status............. Contained in Prospectus under captions: TAX STATUS;
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS; Tax
Status of the Fund
Item 21. Underwriters........... The Distributor
Item 22. Calculation of
Performance Data..... Contained in the Prospectus under the caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements... Contained in the Prospectus under caption: FINANCIAL
HIGHLIGHTS; Independent Auditors' Report; Financial
Statements; Notes to Financial Statements; Officers and
Trustees
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
vi
<PAGE> 9
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED APRIL 28, 1995
VAN KAMPEN MERRITT
GROWTH AND INCOME FUND
Van Kampen Merritt Growth and Income Fund (the "Fund") is a separate
diversified sub-trust of Van Kampen Merritt Equity Trust, an open-end management
investment company commonly known as a mutual fund. The Fund's investment
objective is to seek long-term growth of both capital and dividend income. The
Fund will attempt to achieve its investment objective by investing primarily in
a diversified portfolio of dividend paying common stocks. There is no assurance
that the Fund will achieve its investment objective.
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. 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 1-800-225-2222.
The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements") 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.
(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.
------------------
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 April 30, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference into this
prospectus. A copy of the Statement of Additional Information may be obtained
without charge by calling 1-800-225-2222, ext. 6504 or, for Telecommunication
Device For the Deaf, 1-800-772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL(SM)
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1995.
<PAGE> 10
(Continued from previous page.)
Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.30% of the Fund's
average daily net assets attributable to the Class A Shares, (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and the Class C Shares are the same as those of the initial sales
charge and the distribution and service fees with respect to the Class A Shares
below $1 million. Each share of the Fund represents an identical interest in the
investment portfolio of the Fund and has the same rights, except that (i) each
class of shares bears those distribution fees, service fees and administrative
expenses applicable to the respective class of shares as a result of its sales
arrangements, which will cause the different classes of shares to have different
expense ratios and to pay different rates of dividends, (ii) each class 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) the different
classes have different exchange privileges. Class B Shares automatically will
convert to Class A Shares six years after the end of the calendar month in which
the investor's order to purchase was accepted, in the circumstances and subject
to the qualifications described in this Prospectus. See "Purchasing Shares of
the Fund."
2
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 4
Shareholder Transaction Expenses..................................... 6
Annual Fund Operating Expenses and Example........................... 7
Financial Highlights................................................. 9
The Fund............................................................. 11
Investment Objective and Policies.................................... 11
Investment Practices................................................. 13
Purchasing Shares of the Fund........................................ 16
Distributions from the Fund.......................................... 26
Redemption of Shares................................................. 27
Net Asset Value...................................................... 30
Investment Advisory Services......................................... 31
Portfolio Transactions and Brokerage Allocation...................... 32
The Distribution and Service Plans................................... 33
Tax Status........................................................... 35
Shareholder Programs................................................. 37
Investments by Tax-Sheltered Retirement Plans........................ 41
Fund Performance..................................................... 42
Shareholder Services................................................. 43
Description of Shares of the Fund.................................... 43
Shareholder Reports and Inquiries.................................... 44
Additional Information............................................... 44
</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> 12
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
THE FUND Van Kampen Merritt Growth and Income Fund (the "Fund") is a separate
diversified sub-trust of Van Kampen Merritt Equity Trust, an open-end management
investment company which is a Massachusetts business trust. See "The Fund."
INVESTMENT OBJECTIVE AND POLICIES The investment objective of the Fund is to
seek long-term growth of both capital and dividend income. The Fund will attempt
to achieve its investment objective by investing primarily in a diversified
portfolio of dividend paying common stocks. There is no assurance that the Fund
will achieve its investment objective. The net asset value per share of the Fund
may increase or decrease depending on changes in the securities markets, and
other factors affecting the issuers of securities in which the Fund may invest.
See "Investment Objective and Policies."
INVESTMENT PRACTICES The Fund may hold cash and money market securities and
invest up to 35% of its assets in fixed income securities (and may temporarily
invest a greater portion of its assets in this manner for defensive purposes),
and may invest up to 35% of its assets in foreign securities of the same types
as its investment objective permits. Subject to certain limitations, the Fund
may sell covered call options, enter into strategic transactions, lend its
portfolio securities, and enter into repurchase agreements with selected
commercial banks and broker-dealers. These investment practices entail certain
risks. See "Investment Practices."
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 and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.
The Fund currently offers three classes of its 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 either (i) at the time of the
purchase ("Class A Shares") or (ii) on a contingent deferred basis (Class A
Share accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A
Share accounts over $1,000,000 or otherwise subject to a contingent deferred
sales charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred
to herein collectively as CDSC Shares.
The minimum initial investment with respect to each of the Class A Shares,
Class B Shares and Class C Shares is $1,000. The minimum subsequent investment
with respect to each class of shares is $100.
4
<PAGE> 13
Class A Shares. Class A Shares are subject to an initial sales charge equal to
5.75% of the public offering price (6.10% of the net amount invested), reduced
on investments of $50,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.30% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a contingent deferred sales charge.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a contingent deferred sales charge equal
to 4.00% of the lesser of the then current net asset value or the original
purchase price on Class B Shares redeemed during the first year after purchase,
which charge is reduced each year thereafter. Class B Shares are subject to
ongoing distribution and service fees at an aggregate annual rate of up to 1.00%
of the Fund's average daily net assets attributable to the Class B Shares. Class
B Shares automatically will convert to Class A Shares six years after the end of
the calendar month in which the investor's order to purchase was accepted, in
the circumstances and subject to the qualifications described in this
Prospectus.
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a contingent deferred sales charge
equal to 1.00% of the lesser of the then current net asset value or the original
purchase price on Class C Shares redeemed during the first year after purchase.
Class C Shares are subject to ongoing distribution and service fees at an
aggregate annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class C Shares.
INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the Fund's investment adviser. The annual
advisory fee for the Fund is 0.60% of average daily net assets, reduced on net
assets over $500 million. See "Investment Advisory Services."
DISTRIBUTIONS FROM THE FUND Distributions from net investment income are
declared and paid semi-annually. Capital gains, if any, are distributed
annually. 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 administrative expenses relating
to each class of shares will be borne exclusively by the respective class of
shares. See "Distributions from the Fund."
REDEMPTION Class A Shares may be redeemed at net asset value, without charge
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period, applicable
to the respective class of CDSC Shares, will not be subject to a deferred sales
charge. The Fund may require the redemption of shares if the value of an account
is $500 or less. See "Redemption of Shares."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 14
- --------------------------------------------------------------------------------
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)........... 5.75%(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 original purchase
price on redemption proceeds).... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
Redemption fees (as a percentage of
amount redeemed)................. None None None
Exchange fees...................... None None None
</TABLE>
- ----------------
(1) Reduced on investments of $50,000 or more.
(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 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."
6
<PAGE> 15
- --------------------------------------------------------------------------------
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)............................. 0.60% 0.60% 0.60%
12b-1 fees(1) (as a percentage of average daily
net assets)................................... 0.27%(2) 1.00% 1.00%
Other expenses (as a percentage of average daily
net assets)................................... 0.52% 0.58% 0.55%
Total expenses (as a percentage of average daily
net assets)................................... 1.39% 2.18% 2.15%
</TABLE>
- ----------------
(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund to the selling broker as compensation for ongoing services
rendered to investors. With respect to each class of shares, amounts in
excess of 0.25%, if any, represent an asset based sales charge. The asset
based sales charge with respect to Class C Shares includes 0.75% (as a
percentage of net asset value) paid to investors' broker-dealers as sales
compensation.
(2) The Fund's distribution and service plans with respect to Class A Shares
provide that 12b-1 and service fees are charged only with respect to Class A
Shares of the Fund sold after the implementation date of such plans. Due to
the incremental "phase-in" of the Fund's 12b-1 and service plans with
respect to Class A Shares, it is anticipated that 12b-1 and service fees
attributable to Class A Shares will increase in accordance with such plans
to a maximum aggregate amount of 0.30% of the net assets attributable to the
Fund's Class A Shares. Accordingly, it is unlikely that future expenses will
remain consistent with those disclosed in the fee table. See "The
Distribution and Service Plans."
7
<PAGE> 16
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 1.39% for Class A Shares, 2.18% for
Class B Shares and 2.15% for Class C Shares,
(ii) 5% annual return and (iii) redemption at
the end of each time period:
Class A Shares................................ $71 $ 99 $ 129 $ 215
Class B Shares................................ $62 $ 103 $ 132 $ 213
Class C Shares................................ $32 $ 67 $ 115 $ 248
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares................................ $71 $ 99 $ 129 $ 215
Class B Shares................................ $22 $ 68 $ 117 $ 213
Class C Shares................................ $22 $ 67 $ 115 $ 248
</TABLE>
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. Due to the
incremental "phase-in" of the Fund's 12b-1 plan, it is anticipated that 12b-1
expenses with respect to Class A Shares will increase in accordance with such
plan to a maximum amount of 0.30% of the Fund's net assets. Accordingly, it is
unlikely that future expenses as projected with respect to Class A Shares will
remain consistent with those determined based on the table of the "Annual Fund
Operating Expenses." 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 to 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."
8
<PAGE> 17
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(For one 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 throughout the periods
indicated. The financial highlights have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, for each of the periods unless
otherwise 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 Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------------------------------------------------------------------------
FROM
OCTOBER 29,
1986
(COMMENCEMENT
SIX MONTHS OF INVESTMENT
ENDED YEAR ENDED JUNE 30 OPERATIONS)
DECEMBER 31, ------------------------------------------------------------------- TO
1994 1994 1993 1992 1991 1990 1989 1988 JUNE 30, 1987
------------ ------- ------- ------- ------- ------- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period....................... $ 17.698 $21.286 $19.693 $17.937 $16.697 $16.545 $15.227 $16.750 $14.265
----- ------- ------- ------- ------- ------- ------- ------- -----
Net Investment Income........ .094 .199 .355 .367 .370 .586 .497 .459 .284
Net Realized and Unrealized
Gain/Loss on Investments... .432 (.455) 2.596 1.685 1.350 .146 1.461 (1.172) 2.301
----- ------- ------- ------- ------- ------- ------- ------- -----
Total from Investment
Operations................... .526 (.256) 2.951 2.052 1.720 .732 1.958 (.713) 2.585
----- ------- ------- ------- ------- ------- ------- ------- -----
Less:
Distributions from Net
Investment Income.......... .274 .175 .340 .199 .403 .580 .470 .587 .100
Distributions from Net
Realized Gain on
Investments................ .089 3.157 1.018 .097 --0-- --0-- .170 .026 --0--
Return of Capital
Distribution............... --0-- --0-- --0-- --0-- .077 --0-- --0-- .197 --0--
----- ------- ------- ------- ------- ------- ------- ------- -----
Total Distributions........... .363 3.332 1.358 .296 .480 .580 .640 .810 .100
----- ------- ------- ------- ------- ------- ------- ------- -----
Net Asset Value, End of
Period....................... $ 17.861 $17.698 $21.286 $19.693 $17.937 $16.697 $16.545 $15.227 $16.750
======== ======= ======= ======= ======= ======= ======= ======= =======
Total Investment Return
(Non-annualized)............. 2.98% (2.36%) 15.60% 11.42% 10.64% 4.37% 13.04% (4.01%) 18.13%
Net Assets at End of Period
(in millions)................ $49.9 $46.5 $34.4 $28.4 $25.6 $26.2 $36.0 $38.1 $31.0
Ratio of Expenses to Average
Net Assets (annualized)...... 1.39% 1.61% 1.47% 1.71% 1.84% 1.58% 1.50% 1.28% 1.40%
Ratio of Net Investment Income
to Average Net Assets
(annualized)................. 1.07% 1.32% 1.77% 1.93% 2.19% 3.08% 3.02% 3.13% 2.47%
Portfolio Turnover............ 81.80% 190.93% 111.39% 90.48% 48.38% 45.57% 29.46% 29.00% 1.43%
</TABLE>
See Financial Statements and Notes Thereto.
9
<PAGE> 18
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
(For one share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
----------------------------------------------- --------------------------------
FROM FROM
DECEMBER 1, AUGUST 13,
1992 1993
(COMMENCEMENT (COMMENCEMENT
SIX MONTHS YEAR OF SIX MONTHS OF
ENDED ENDED DISTRIBUTION) ENDED DISTRIBUTION)
DECEMBER 31, JUNE 30, TO JUNE 30, DECEMBER 31, TO JUNE 30,
1994 1994 1993 1994 1994
------------ -------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.............. $ 17.684 $ 21.331 $20.351 $ 17.691 $21.350
------ -------- ------ ------ ------
Net Investment Income............ .029 .095 .054 .031 .084
Net Realized and Unrealized
Gain/Loss on Investments....... .428 (.535) 1.955 .422 (.586)
----- -------- ----- ----- -----
Total from Investment
Operations....................... .457 (.440) 2.009 .453 (.502)
----- -------- ----- ----- -----
Less:
Distributions from Net
Investment Income.............. .136 .050 .011 .136 --0--
Distributions from Net Realized
Gain on Investments............ .089 3.157 1.018 .089 3.157
Return of Capital Distribution... --0-- --0-- --0-- --0-- --0--
----- -------- ----- ----- -----
Total Distributions............... .225 3.207 1.029 .225 3.157
----- -------- ----- ----- -----
Net Asset Value, End of Period.... $ 17.916 $ 17.684 $21.331 $ 17.919 $17.691
======== ======= ======= ======== =======
Total Investment Return
(Non-annualized)................. 2.64% (3.34%) 10.48% 2.58% (3.60%)
Net Assets at End of Period
(In millions).................... $30.2 $24.8 $2.8 $1.4 $0.5
Ratio of Expenses to Average Net
Assets (Annualized).............. 2.18% 2.46% 2.28% 2.15% 2.46%
Ratio of Net Investment Income
to Average Net Assets
(Annualized)..................... .28% 1.22% .83% .24% 1.70%
Portfolio Turnover................ 81.80% 190.93% 111.39% 81.80% 190.93%
</TABLE>
- ----------------
See Financial Statements and Notes Thereto.
10
<PAGE> 19
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
Van Kampen Merritt Growth and Income Fund (the "Fund") is a mutual fund, which
pools shareholders' money to seek to achieve a specified investment objective.
In technical terms, the Fund is a separate diversified sub-trust of Van Kampen
Merritt Equity Trust (the "Trust"), an open-end management investment company
organized as a Massachusetts business trust. Mutual funds sell their shares to
investors and invest the proceeds in a portfolio of securities. A mutual fund
allows investors to pool their money with that of other investors in order to
obtain professional investment management. Mutual funds generally make it
possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping.
Van Kampen Merritt American Capital 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 OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The investment objective of the Fund is to seek long-term growth of both
capital and dividend income. This objective is fundamental and cannot be changed
without approval of the shareholders of the Fund. There can be no assurance that
the Fund will achieve its investment objective.
The Fund seeks to achieve its investment objective by investing primarily in a
diversified portfolio of dividend paying common stocks of large established
companies which are considered by the Adviser, to have potential for both
capital appreciation and dividend growth. The stocks in the Fund's portfolio are
actively traded in U.S. domestic markets, primarily on national securities
exchanges, and are selected principally on the basis of fundamental investment
values as determined by the Adviser. The Fund's investments are normally viewed
by the Adviser as having comparatively low price-earning ratios and anticipated
dividends higher than the S & P 500 average and, at the time of purchase, are
considered by the Adviser to be undervalued in the marketplace. Except when the
Fund is in a temporary defensive posture, at least 65% of its net assets will be
invested in common stocks. The Fund may invest up to 35% (or a higher percentage
when in a temporary defensive posture) of its assets in fixed income securities
and money market securities described below and may invest up to 35% of its
assets in foreign securities of the same types as its investment objective
permits.
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,
including 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,
11
<PAGE> 20
the Fund will focus both on the security's potential for appreciation and on its
dividend paying capacity.
FIXED INCOME SECURITIES. Subject to the percentage limitations described
above, the Fund may invest its assets in fixed income securities, which include
preferred stocks and debt securities of various maturities. The Fund will make
these investments in investment grade securities, that is, securities which, at
the time of purchase, are rated at least BBB by Standard & Poor's Ratings Group
("S&P"), or at least Baa by Moody's Investors Services, Inc. ("Moody's"), or if
unrated, are considered by the Adviser to be of comparable quality to securities
having one of the above ratings. Securities in the top categories (e.g., AAA,
AA, and A by S&P or Aaa, Aa, and A by Moody's) are generally regarded as high
grade and have a strong to outstanding capacity to pay interest or dividends and
repay principal or capital. Medium grade securities (e.g., BBB by S&P or Baa by
Moody's) are regarded as having an adequate capacity to pay interest or
dividends, and repay principal, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make such
payments. Securities rated Baa are regarded by Moody's as having some
speculative characteristics. For a description of such ratings see the Statement
of Additional Information incorporated by reference into this Prospectus. The
Fund may invest in securities convertible into, or ultimately exchangeable for,
common stock (e.g., convertible debentures or convertible preferred stock)
consistent with its investment objective.
MONEY MARKET SECURITIES. Money Market securities include (a) obligations of or
guaranteed by the U.S. government, its agencies or instrumentalities
("Government Money Market Securities"), (b) obligations of banks subject to U.S.
government regulation as well as such other bank obligations as are insured by a
U.S. government agency ("Bank Obligations"), (c) commercial paper (including
variable amount master demand notes) rated at least A-2 by S&P or Prime-2 by
Moody's, or, if not so rated, issued by a corporation which has outstanding debt
obligations rated at least AA by S&P or Aa by Moody's and (d) debt obligations
(other than commercial paper) of corporate issuers which obligations are rated
at least AA by S&P or Aa by Moody's. Money Market Securities are subject,
however, to the limitation that they mature within one year of the date of their
purchase or are subject to repurchase agreements maturing within one year.
Government Money Market Securities include Treasury bills, notes and bonds
issued by the U.S. government and backed by the full faith and credit of the
United States, as well as securities issued or guaranteed as to principal and
interest by agencies and instrumentalities of the U.S. government. Bank
Obligations include certificates of deposit and banker's acceptances of domestic
banks (or Euro-dollar obligations of foreign branches of such domestic banks)
subject to U.S. government regulation and time deposits of federal and state
banks whose accounts are insured by a government agency as well as such accounts
themselves.
FOREIGN SECURITIES. Investments in foreign securities will generally be
limited to securities issued by foreign companies in developed countries with at
least three years of operations or by foreign governments. The Fund has no
current intention that these investments will exceed 20% of the Fund's assets,
although it may invest up to 35% of its
12
<PAGE> 21
assets in such securities. Investments in foreign securities present certain
risks not ordinarily found in investments in securities of U.S. issuers. These
risks include fluctuations in foreign exchange rates, political and economic
developments (including war or other instability, expropriation of assets,
nationalization, and confiscatory taxation), the imposition of foreign exchange
control regulation or a currency blockage which would prevent cash from being
brought back to the United States, withholding taxes on income or capital
transactions or other restrictions, higher transaction costs and difficulty in
taking judicial action. Generally, a significant factor affecting the
performance of the Fund's investments in foreign securities is fluctuation in
values of the currencies in which they are denominated relative to the U.S.
dollar. In addition, there is less publicly available information about many
foreign issuers and auditing, accounting and financial reporting requirements
are less stringent and less uniform in many foreign countries and their
securities markets are less liquid than those in the U.S. Because there is
usually less supervision and governmental regulation of exchanges, brokers, and
dealers than there is in the U.S., the Fund may experience settlement
difficulties or delays not usually encountered in the U.S.
- --------------------------------------------------------------------------------
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund may also
lend its portfolio securities, sell call options on portfolio securities, enter
into repurchase agreements and engage in strategic transactions, in each case
subject to the limitations set forth below. These investments entail risks. The
investment practices described below are not fundamental and can be changed
without a vote of the shareholders of the Fund.
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.
COVERED CALL OPTIONS. The Fund may sell options on up to 25% of the securities
the Fund owns or has the right to purchase without additional payments. A person
buying a
13
<PAGE> 22
call option on a security has the right to buy the security for a specified
period of time at a fixed price, which may limit the Fund's ability to dispose
of the underlying security during the term of the option. If the underlying
securities do not reach a price level that would make the exercise of the option
profitable to the holder of the option, the option will generally expire without
being exercised and the Fund will realize a gain equal to the premium received
on the expired option. Whenever an option is exercised, the Fund will not
participate in any increase in the price of the underlying securities beyond the
exercise price of that option. When the Fund sells covered call options, it
receives a cash premium. The Fund may use covered call option strategies as a
means of increasing the earnings on the portfolio and also as a means of
providing limited protection against decreases in market value, but the Fund
forgoes appreciation above the strike prices in doing so.
In order to avoid the sale of a security on which the Fund has sold a call
option, the Fund will generally seek to cancel its obligation under the call
option by entering into an offsetting transaction for the same security. The
premium which the Fund will pay in executing a closing purchase transaction may
be higher than the premium received when the option was written, depending in
large part upon the relative price of the underlying security at the time of
each transaction. The Fund may, however, not be able to enter into a closing
transaction. The Securities and Exchange Commission ("SEC") requires that the
obligations of mutual funds, such as the Fund, under option sale positions must
be "covered." The methods by which the Fund may cover its option sale positions
is more fully described in the Statement of Additional Information. To the
extent options sold by the Fund are exercised and the Fund delivers portfolio
securities to the holder of a call option, the Fund's portfolio turnover rate
may increase, resulting in a possible increase in short-term capital gains and a
possible decrease in long-term capital gains.
REPURCHASE AGREEMENTS. The Fund may use up to 25% 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
14
<PAGE> 23
restriction that limits the Fund's investment in "illiquid" securities,
including such repurchase agreements, to 10% of the Fund's net assets.
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. 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 resulting from securities
markets, to protect the Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of the Fund's portfolio, or to
establish a position 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 involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at 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 options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. To the extent that a futures contract or an option thereon is used to
protect against possible changes in the market value of securities that the Fund
anticipates acquiring and the Fund subsequently does not acquire such
securities, the Fund will have incurred the transactional expenses associated
with entering into such transaction and will be subject to the risks inherent in
an unhedged purchase of such futures contract or option. Finally, the daily
variation margin requirements for futures contracts would create
15
<PAGE> 24
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.
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."
In addition to the above described Strategic Transactions, when, in the
judgment of the Fund's Adviser, economic and market conditions warrant, the Fund
may invest temporarily for defensive purposes in high grade corporate and
government securities of various maturities, preferred stocks, convertible
bonds, banker's acceptances and certificates of deposit.
- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Fund has designated three classes of 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 also are offered through members
of the National Association of Securities Dealers, Inc. ("NASD") who are acting
as securities dealers ("dealers") and through NASD members or eligible non-NASD
members who are acting as brokers or agents for investors ("brokers"). The Fund
reserves the right to suspend or terminate the continuous public offering at any
time and without prior notice.
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 aggregate
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund currently 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 (the
"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 $1,000,000 or otherwise subject to a contingent deferred sales charge
("CDSC"), Class B Shares and Class C Shares sometimes are
16
<PAGE> 25
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 $1,000.
The minimum subsequent investment with respect to each class of shares is $100.
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 $1,000,000 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 Share
accounts under $1 million, a purchaser of such Class A Shares would not 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 period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares or Class C
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 (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 CDSC 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, service 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, service 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 "Net Asset Value."
17
<PAGE> 26
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) 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 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 Fund's shares are offered at net asset value per share next computed after
an investor places an order to purchase with the investor's securities broker,
dealer, or financial intermediary or directly with the Distributor, plus any
applicable sales charge. Sales personnel or 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 determines 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
Distributor 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 Distributor 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. See "Net Asset Value."
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. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered
18
<PAGE> 27
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation 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 are made by the Distributor
out of its own assets. These programs will not change the price an investor pays
for shares or the amount that the Fund will receive from such sale.
INITIAL SALES CHARGE ALTERNATIVE
Investors choosing the initial sales charge alternative purchase 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 an 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 more than 90% or more
of the sales charge may be deemed to be "underwriters" as that term is defined
in the Securities Act of 1933.
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
-------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- ------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Less than $50,000.......................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000............. 4.75 4.99 4.00
$100,000 but less than $250,000............ 3.75 3.90 3.00
$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
$1,000,000 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% 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 "Purchasing Shares Of The Fund --
Deferred Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
19
<PAGE> 28
QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a letter of intent (even if an investor currently is not making
an investment of a size that would normally qualify for a quantity discount).
Investors, or their dealer, broker or financial intermediary, 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 dealer,
broker, financial intermediary or the Distributor.
For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:
(i) an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned, either
alone or in combination, by any of the foregoing; or
(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit- sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code,
as amended); or
(iii) a "company" as defined in Section 2(a)(8) of the Investment Company
Act of 1940, as amended (the "Investment Company Act").
1. Combination of Investments. Purchases of Class A Shares of the Fund, or of
other Van Kampen Merritt funds distributed by the Distributor subject to an
initial sales charge ("ISC Shares"), which are made at any one time by "any
person" may be combined to receive a quantity discount.
2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares, "any
person" (as defined above) may combine their current purchase with the current
public offering price of Class A Shares of the Fund, or ISC Shares, which are
owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.
3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase an amount of Class
A Shares, during a 13 month period, that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent, applied
towards completion of an investor's Letter of Intent. In addition, if an
investor's broker, dealer or financial intermediary and the Distributor agree to
refund the appropriate portion of their respective concessions to the Fund, the
sales charge on an investor's
20
<PAGE> 29
previous purchases made within 90 days may be adjusted to the reduced sales
charge under the Letter of Intent, and the refunded concession will be used to
purchase Class A Shares of the Fund or ISC Shares at the public offering price
next determined after receipt of such monies. Each investment made after signing
the Letter of Intent will be entitled to the sales charge applicable to the
total investment indicated in the Letter of Intent. If an investor does not
complete the necessary purchases under the Letter of Intent within 13 months
from the date of the first purchase included thereunder, the sales charge will
be adjusted upward, corresponding to the amount actually purchased.
When an investor signs a Letter of Intent, Class A Shares of the Fund
purchased with a value of 5% of the amount specified in the Letter of Intent
will be restricted; that is, these Class A Shares cannot be sold or redeemed
until the Letter of Intent is satisfied or the additional sales charges have
been paid. If the total purchases made under the Letter of Intent, less
redemptions, equal or exceed the amount specified in the Letter of Intent, these
Class A Shares will no longer be restricted. If the total purchases, less
redemptions, exceed the amount so specified, and qualify an investor for a
further quantity discount, the Distributor and the investor's securities broker,
dealer or financial intermediary will, upon request, remit their respective
portions of the sales concession and with that amount, purchase additional Class
A Shares of the Fund for the investor's account at the next determined public
offering price. If an investor does not complete the necessary purchases under
the Letter of Intent, the sales charges will be adjusted upward and if, after
written notice, the investor does not pay the increased sales charge, sufficient
restricted Class A Shares will be redeemed to pay such charge.
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.
1. 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 and other ISC Shares 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 dealer or broker, if any, through which such participation in the qualifying
program was initiated 0.50% of the offering price as a dealer concession or
agency commission. Persons desiring more information with respect to this
program, including the applicable terms and conditions thereof, should contact
their securities broker or dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program
21
<PAGE> 30
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
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
2. NAV Purchase Options
The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:
(a) Current or retired Trustees/Directors of funds advised by Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management Inc. or John Govett & Co. Limited and such persons'
families and their beneficial accounts. The term "families" includes a
person's spouse, children and grandchildren, parents, and a person's
spouse's parents.
(b) 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 such fund or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(c) Directors, officers, employees and registered representatives of financial
institutions that have a selling 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.
(d) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
Class A Shares of the Fund and ISC Shares of other funds distributed by the
Distributor as described herein under "Purchasing Shares Of The Fund --
Initial Sales Charge Alternative -- Quantity Discounts," during the 13
month period commencing with the first investment pursuant hereto equals at
least $1 million. The Distributor may pay such entities through which
purchases are made an amount up to 0.50% of the amount invested, over a
twelve month period following such transaction.
(e) 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% for such purchases.
22
<PAGE> 31
(f) Accounts as to which a selling firm charges an account management fee
("wrap accounts") provided the selling firm has executed a supplemental
agreement to their existing selling agreement with the Distributor.
(g) 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.
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 Funds, 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 is equal to (i) 1.00% with respect to Class A Shares in an
amount of $1 million or more; (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. Sales compensation with respect to Class A Shares
subject to a CDSC is set forth under "Purchasing Shares of the Fund -- Initial
Sales Charge Alternative".
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 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 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
23
<PAGE> 32
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 such CDSC Shares. 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 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).
The contingent deferred sales charge is waived (i) on a redemption of shares
following the death of a shareholder, or (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or other retirement plan
to a shareholder who has attained the age of 70 1/2.
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1,000,000 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% 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.
24
<PAGE> 33
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 Program. See
"Shareholder Programs -- Systematic Withdrawal Program."
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.
CONVERSION FEATURE. Six years after the end of the month in which a
shareholder's order to purchase a Class B Share was accepted, such Class B Share
automatically will convert to Class A Shares and will no longer be subject to
the higher aggregate distribution and service fees applicable to Class B Shares.
The purpose of the conversion feature is to relieve the holders of Class B
Shares that have been outstanding for a period of time sufficient for the
Distributor to have been compensated for distribution expenses related to the
Class B Shares from most of the burden of such distribution and service
expenses. The Fund does not expect to issue any stock certificates upon
conversion.
For purposes of conversion of 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 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
25
<PAGE> 34
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 Internal Revenue
Code of 1986, as amended (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.
- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to semiannually declare dividends to holders of each class of
shares from net investment income and net short-term capital gains attributable
to each respective class. The Fund also presently intends to make distributions
of net long-term capital gains, if any, annually. Semiannual dividends are
composed of all or a portion of investment income earned by each class of shares
of the Fund plus all or a portion of net short-term capital gains by the Fund on
transactions in securities and futures and options hedging transactions, less
the expenses attributable to the respective class. Long-term capital gains
distributions consist of the Fund's gain on transactions in securities and
futures and options hedging transactions, net of any realized capital losses,
less any carryover capital losses from previous years.
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, service fee, or not subject to
the conversion feature.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Shareholders wishing to utilize this service
should complete the appropriate information under the "Distributions" section of
the Account Application accompanying this Prospectus or available from Van
Kampen Merritt Funds, State Street Bank and Trust Company, c/o National
Financial Data Services, Van Kampen Merritt Funds, P.O. Box 419001, Kansas City,
MO 64141-6001 (the "Transfer Agent"). After the Transfer Agent receives this
completed form, distribution checks will be sent to the bank or other person so
designated by such shareholder.
26
<PAGE> 35
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund automatically will
credit semi-annual 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 sales charge, unless a shareholder elects otherwise
to the Fund. This election may be made by telephone by calling 1-800-341-2911 or
in writing to the Transfer Agent. For inquiries through Telecommunications
Device for the Deaf (TDD) dial 1-800-772-8889. If a shareholder elects to change
the method of distribution, such change will be effective only with regard to
distributions for which the record date is seven or more business days after the
Transfer Agent has received the request.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the Class B Shares, any applicable contingent deferred
sales charge) at any time by mailing a written redemption request in proper form
to the Transfer Agent. This request should be sent to State Street Bank and
Trust Company, c/o National Financial Data Services, Van Kampen Merritt Funds,
P.O. Box 419001, Kansas City, MO 64141-6001. The request should indicate the
number of shares to be redeemed of a particular fund and the class designations
of such shares, identify the account number and be signed exactly as the shares
are registered. If the amount being redeemed is in excess of $50,000, or if the
redemption proceeds will be sent to an address other than the address of record,
signature(s) must be guaranteed by a member firm of a principal stock exchange
or by a commercial bank or trust company which is a member of the Federal
Deposit Insurance Corporation, a credit union or a savings association. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders should verify with the institution that it is
an eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Certificates should be sent by registered mail to National
Financial Data Services, 1004 Baltimore Avenue, Dwight Building, 6th Floor,
Kansas City, MO 64105-1807. Shareholders will receive the net asset value per
share next determined after the Transfer Agent receives the redemption request
and certificates (if any) in proper form. Any applicable contingent deferred
sales charge with respect to CDSC Shares redeemed will be deducted from the
redemption proceeds prior to transmittal of such proceeds to the shareholders.
TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption by
the Fund. For inquiries through Telecommunications Device for the Deaf (TDD),
dial 1-800-772-8889. There is a $500 minimum and a $1,000,000 maximum per
request if the redemption proceeds are to be mailed to the shareholder. If the
redemption proceeds are to be wired to a bank there is a minimum of $5,000 and a
$1,000,000 maximum per request. Prior to redeeming shares by telephone the
"Expedited Telephone Redemption" section of either the Account Application or
Expedited Telephone Redemption and Exchange Request Form (the "Authorization")
must be completed and on file with the
27
<PAGE> 36
Transfer Agent. The signature(s) on the Authorization must be guaranteed by a
member firm of a principal stock exchange or by a commercial bank or trust
company which is a member of the Federal Deposit Insurance Corporation, a credit
union or a savings association, unless the Authorization is completed at the
time an account is originally established. The guarantee must state the words
"Signature Guaranteed" along with the name of the granting institution.
Shareholders should verify with the institution that it is an eligible guarantor
prior to signing. A guarantee from a notary public is not acceptable. A
redemption requested by telephone will be processed at the net asset value next
determined after receipt of the request. Any applicable contingent deferred
sales charge with respect to CDSC Shares redeemed will be deducted from the
redemption proceeds prior to transmittal of such proceeds to the shareholder.
The proceeds will then be made payable to the registered shareowner(s) and
mailed to the address registered on the account or wired to a bank, as requested
on the Authorizations. Shareholders cannot redeem shares by telephone if
certificates are held for those shares. This service is not available with
respect to shares held in an Individual Retirement Account (IRA) for which State
Street Bank and Trust Company acts as custodian. In addition, this service is
not available with respect to shares purchased by check until 15 days after
purchase.
By establishing the telephone redemption service, a shareholder authorizes the
Fund or the Transfer Agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized to the address of record of such account or such other address as is
listed in the Authorization. The Fund, the Distributor, the Transfer Agent and
National Financial Data Services, Inc. ("NFDS") seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to redeem shares
by telephone to provide on a recorded line the name on the account, a social
security number or tax identification number and such additional information as
may be included in the Authorization. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine, including any fraudulent or
unauthorized request. This service may be amended or terminated at any time by
the Transfer Agent or the Fund. If an investor is unable to reach the Fund by
telephone, he or she may redeem shares pursuant to the procedures set forth
above under the caption "Written Redemption Request." During periods of extreme
economic or market changes, it may be difficult for investors to reach the Fund
by telephone and to effect telephone redemptions.
REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
transmit the request to the Distributor. Shareholders will receive the net asset
value next determined after such shareholder places the sell order. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholders. It is the responsibility of the shareholder's
broker, dealer or financial intermediary to transmit the redemption order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, sell orders placed through a
shareholder's broker, dealer, or financial intermediary must be transmitted to
the Distributor by such broker,
28
<PAGE> 37
dealer, or financial intermediary prior to such time in order for the
shareholder's order to be fulfilled on the basis of the net asset value to be
determined that day. Any change in the redemption price due to the failure of
the Distributor to receive a sell order prior to such time must be settled
between the shareholder and the broker, dealer, or financial intermediary
submitting the order. The Fund does not charge for this transaction (other than
any contingent deferred sales charge applicable to CDSC Shares). Shareholders
must submit a written redemption request in proper form to their securities
dealer within five business days after calling the dealer with the sell order.
The request should indicate the number of shares to be redeemed and the class
designation of such shares, identify the account number and the order or
confirmation number assigned to the trade, and be signed by the shareholder
exactly as the shares are registered. If the amount of the redemption exceeds
$50,000 or if the redemption will be sent to an address other than the address
of record, signature(s) must be guaranteed by a member firm of a principal stock
exchange or by a commercial bank or trust company which is a member of the
Federal Deposit Insurance Corporation, a credit union or a savings association.
The guarantee must state the words "Signature Guaranteed" along with the name of
the granting institution. Shareholders should verify with the institution that
it is an eligible guarantor prior to signing. A guarantee from a notary public
is not acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent endorsed for transfer or accompanied by an endorsed
stock power. Certificates should be sent by registered mail to State Street Bank
and Trust Company, c/o National Financial Data Services, Van Kampen Merritt
Funds, 1004 Baltimore Avenue, Dwight Building, 6th Floor, Kansas City, MO
64105-1807. Shareholders, whose shares are held in an Individual Retirement
Account (IRA) for which State Street Bank and Trust Company acts as custodian,
may not sell their shares through their securities dealer.
REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on Class B Share
redemptions following the disability of a Class B shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Internal Revenue Code (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 Fund will
require satisfactory proof of disability before it determines to waive the CDSC
on Class B Shares.
In cases of disability, the CDSC on Class B 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 CDSC on Class B
Shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.
29
<PAGE> 38
GENERAL. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to investors or their dealer as the case may be within
seven calendar days after a redemption request or repurchase order and share
certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,
which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.
The right of redemption or resale to the Fund may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the SEC, or during any period when the SEC
has by order permitted such suspension or postponement.
The Fund reserves the right to redeem any investment if the value of an
account falls below $500. Before the Fund makes such redemption it will provide
the shareholder with written notice and 30 days in which to make an additional
investment sufficient to increase the value of the account to at least $500.
- --------------------------------------------------------------------------------
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 of the Fund outstanding. The net asset value for the Fund
is computed once daily as of the close of the daily trading session of the New
York Stock Exchange, 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 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.
The securities of the Fund that are listed on a securities exchange are valued
at their closing sales price on the day of the valuation. Price valuations for
listed securities are based on market quotations where the security is primarily
traded or, if not available, on any valuation date are valued at the mean of the
bid and asked prices. Unlisted securities in the portfolio are primarily valued
based on their latest quoted bid price or, if not
30
<PAGE> 39
available, are valued by a method determined by or under the direction of the
Trustees to accurately reflect fair value.
- --------------------------------------------------------------------------------
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 nearly $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital, Inc. VK/AC Holding, Inc. 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. 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. 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. and its subsidiaries (some of whom are officers or
trustees of the Fund) own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of
options, approximately an additional 10% 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 address of the Adviser is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Trustees of the Trust, of which the Fund is a sub-trust.
Subject to the Trustees' authority, the Adviser and the 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 (accrued daily and paid monthly) 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....................................... 0.60 of 1%
Over $500 million........................................ 0.50 of 1%
</TABLE>
31
<PAGE> 40
Under its investment advisory agreement, the Adviser has agreed to furnish
without charge all offices, facilities, equipment and personnel necessary to
manage the Fund, and the Fund has agreed to assume and pay the charges and
expenses of the Fund's operations, including: the compensation of the Trustees
of the Trust (other than those who are affiliated persons, as defined in the
Investment Company Act, of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital); the charges and expenses of
independent accountants, counsel, transfer and dividend disbursing agents, 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; costs of 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 federal securities laws; miscellaneous
expenses and all taxes and fees to federal, state or other governmental
agencies, excluding state securities registration expenses.
The Fund and the Adviser have adopted Codes of Ethics designed to recognize
the fiduciary relationship between the Fund and the Adviser and its employees.
The Codes permit trustees/directors, officers and employees to buy and sell
securities for their personal accounts subject to procedures designed to prevent
conflicts of interest including, in some instances, preclearance of trades.
The Adviser may utilize at its own expense credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Asset Management, Inc.
PORTFOLIO MANAGEMENT. Daniel Smith is an Assistant Vice President of the
Adviser and has been primarily responsible for the day to day management of the
Fund's portfolio since 1992. Mr. Smith has been employed by the Adviser for the
past five years.
- --------------------------------------------------------------------------------
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 securities in which the
Fund invests 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.
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
32
<PAGE> 41
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,
the Distributor 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.
- --------------------------------------------------------------------------------
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 Investment
Company 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 the 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,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers, and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance. Brokers, dealers and
financial intermediaries that have entered into Selling Agreements with the
Distributor and sell shares of the Fund are referred to herein as "financial
intermediaries."
Class A Shares. The Fund may spend an aggregate amount of up to 0.30% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the 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 financial intermediaries and in connection with the
maintenance of such shareholders' accounts. The Fund pays the Distributor the
lesser of the balance of the 0.30% not paid to such financial intermediaries or
the amount of the Distributor's actual distribution related expense.
33
<PAGE> 42
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 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 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
financial intermediary's customers. The Fund pays the Distributor the lesser of
the balance of the 0.75% not paid to such financial 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 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
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. As of December 31, 1994, there were $27,924
and $72 of unreimbursed distribution expenses with respect to Class B Shares and
Class C Shares respectively, representing 0.03% and 0.00%, respectively of the
Fund's total net assets. If the Distribution Plan was terminated or not
continued, the Fund would not be contractually obligated
34
<PAGE> 43
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 sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts 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 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.
- --------------------------------------------------------------------------------
TAX STATUS
- --------------------------------------------------------------------------------
The Fund has qualified and intends to continue to qualify 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 the diversification of its assets. If the
Fund so qualifies and if it distributes 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), 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 required to satisfy the 90%
distribution requirement. The Fund will not be subject to federal income tax on
any net capital gains distributed to its shareholders. As a sub-trust of a
Massachusetts business trust, the Fund will not be subject to any excise or
income taxes in Massachusetts as long as it qualifies as a regulated investment
company for federal income tax purposes.
Distributions of the Fund's net investment income are taxable to shareholders
as ordinary income whether received in shares or cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each share equal to the value thereof on the distribution
date. Distributions of the Fund's net capital gains ("capital gain dividends"),
if any, are taxable to shareholders as long-term capital gains regardless of the
length of time the Fund shares have been held by such shareholders.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of the shares held by the shareholders and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
shareholder (assuming such shares are held as a capital asset). The Fund will
inform shareholders of the source and tax status of such distributions promptly
after the close of each calendar year. Some portion of the
35
<PAGE> 44
distributions made by the Fund generally 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.
Redemption or resale of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of the Fund 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 generally be long-term
if such shareholders have held their shares for more than one year. Any loss
realized upon a taxable disposition of shares held for six months or less will
be treated as long-term capital loss to the extent of any capital gain 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.
Some of the Fund's investment practices are subject to special provisions of
the Code that may, among other things, defer the use of losses of the Fund and
affect the holding period of 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 the cash with which to make distributions in amounts necessary
to satisfy the distribution requirements for avoiding federal income and, as
described below, 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.
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.
Income from investments in foreign securities may be subject to foreign
taxation imposed by withholding. Shareholders of the Fund will not be able to
claim any deduction or foreign tax credit with respect to such foreign taxes.
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 for such year and
at least 98% of its capital gain net income (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.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year, will be treated as
36
<PAGE> 45
having been distributed by the Fund (and received by the shareholders) on
December 31 of the year in which the dividend was declared. In addition, certain
other distributions made after the close of a taxable year of the Fund may be
"spilled back" and treated as having been 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 is actually made.
The Fund is required, in certain circumstances, to withhold 31% of 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) or who are otherwise subject
to backup withholding. Foreign shareholders, including shareholders who are
non-resident aliens, may be subject to U.S. withholding tax on certain
distributions (whether received in cash or in shares) at a rate of 30% or such
lower rate as prescribed by any applicable treaty.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own advisors regarding the
specific federal tax consequences of holding and disposing of shares, as well as
the effects of state, local and foreign tax laws and any proposed tax law
changes.
- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued for any or all of the full shares credited to a shareholder's account.
Share certificates which have been issued to a shareholder may be returned at
any time. If a shareholder requests share certificates to be issued, such
shareholder will be sent stock certificates representing shares (with the
exception of fractional shares) of the Fund and will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost, the shareholder must write to State Street Bank and Trust Company, c/o
National Financial Data Services, P.O. Box 419001, Kansas City, MO 64141-6001,
Attn: Van Kampen Merritt Funds, requesting an "affidavit of loss" and to obtain
a Surety Bond in form acceptable to the Transfer Agent. On the date the letter
is received the Transfer Agent will calculate no more than 2.00% of the net
asset value of the issued shares, and bill the party to whom the certificate was
mailed.
SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Shares account or
Class B Shares account is valued at $10,000 or more, such shareholder's
dividends are being reinvested, a requested dollar amount may be paid from such
account to any person monthly, quarterly, semiannually or annually. The minimum
amount that may be withdrawn each period is $50; withdrawals will be made on the
seventh business day of the month in which they are scheduled to occur.
Depending upon the size of the payments requested and the fluctuations in the
net asset value of the shares redeemed, redemptions for the purpose of making
such payments may reduce or even exhaust the amounts in such account. If an
investor acquires additional shares of the Fund after joining the Systematic
Withdrawal Program, the investor must inform the Fund if he or she wants the new
shares
37
<PAGE> 46
to be subject to the Systematic Withdrawal Program by telephoning the Fund at
1-800-341-2911.
With respect to redemptions of Class B Shares made pursuant to the Systematic
Withdrawal Program, an investor may annually redeem up to 12% of the net asset
value of the investor's initial investment in Class B Shares or, if the investor
does not join the program on the date of his or her initial investment, the net
asset value of the investor's Class B Shares on the date the investor elects to
participate in the Systematic Withdrawal Program. The Fund will waive the
contingent deferred sales charge applicable to Class B Shares redeemed pursuant
to the Fund's Systematic Withdrawal Program.
It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge, or will become
subject to a contingent deferred sales charge in order to purchase shares at the
same time that shares are being redeemed upon which a sales charge may already
have been paid. Therefore, the Fund will not knowingly permit a shareholder to
make additional investments in shares of less than $5,000 if at the same time
such shareholder is making systematic withdrawals at a rate greater than the
distribution being paid on such shareholder's shares. The Fund reserves the
right to amend or terminate the systematic withdrawal program on thirty days
notice, and a shareholder may withdraw from the program at any time.
EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for ISC Shares or
money market fund shares of other Van Kampen Merritt mutual funds distributed by
the Distributor that offer an exchange privilege. Under the exchange privilege,
the Fund offers to exchange its Class A Shares for ISC Shares or money market
fund shares, as the case may be, of such other funds on the basis of relative
net asset value per share. Any ISC Shares exchanged into the Fund that have been
charged a sales load lower than the sales load applicable to Class A Shares of
the Fund will be charged the applicable sales load differential upon exchange.
ISC Shares of the Van Kampen Merritt Money Market Fund and Van Kampen Merritt
Tax Free Money Fund which have not previously been charged a sales load (except
for shares purchased via the reinvestment option) will be charged the applicable
sales load upon exchange into the Fund.
Class B Shareholders of the Fund may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distributor ("New Class B Shares") on the basis of
relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of a fund acquired through use of
the exchange privilege will be subject to the contingent deferred sales charge
schedule relating to the Class B Shares of the fund from which the purchase of
Class B Shares was originally made.
Class C Shares of the Fund are exchangeable for Class C Shares of other Van
Kampen Merritt mutual funds distributed by the Distributor on the same terms set
forth in the preceding paragraph with respect to Class B Shares, except that
Class C Shares do not
38
<PAGE> 47
convert to Class A Shares. The exchange privilege with respect to any Van Kampen
Merritt money market fund sponsored by the Distributor is not available for
Class C Shareholders.
In order to qualify for the exchange privilege, it is required that the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the Fund). Shareholders will be able to effect an
exchange by telephone by calling the Fund at 1-800-341-2911 prior to 3:00 p.m.
Central Standard Time and requesting the exchange. For inquiries through
Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. The exchange
will be processed at the net asset value next determined after receipt of such
request. By utilizing the telephone exchange service, a shareholder authorizes
the Fund or the Transfer Agent to act upon the instructions of any person by
telephone to exchange shares from any account for which such service has been
authorized to any identically registered account(s) with any Van Kampen Merritt
fund distributed by the Distributor that offers an exchange privilege. The Fund,
the Distributor, the Transfer Agent and NFDS seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to exchange
shares by telephone to provide on a recorded line the name on the account, a
social security or tax identification number or such additional information as
may be deemed necessary or appropriate. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine, including any unauthorized or
fraudulent request. This service may be amended or terminated at any time by the
Transfer Agent or the Fund. If a shareholder has certificates for any shares
being exchanged, such certificates must be surrendered prior to the exchange in
the same manner as in redemption of such shares. See "Redemption of
Shares--Telephone Redemptions." Any shares exchanged between the Fund and any of
the other funds will begin earning dividends on the next business day after the
exchange is effected. 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 FOR SALE IN THEIR STATE.
An exchange between funds pursuant to the exchange privilege is treated as a
sale for federal income tax purposes, and depending upon the circumstances, a
short- or long-term capital gain or loss may be realized.
The exchange privilege may be modified or terminated at any time, subject to
the requirement that the Fund give prominent notice thereof at least 60 days
prior to the effective date of the modification or termination in certain
circumstances. The Fund reserves the right to limit the number of times a
shareholder may exercise the exchange privilege.
AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASS (SM)).
1. Automated Clearing House ("ACH") Deposits. Holders of Class A Shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts.
39
<PAGE> 48
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
the Transfer Agent has received the application and the voided check or deposit
slip, such shareholder's designated bank account, following any redemption, will
be credited with the proceeds of such redemption. Once enrolled in the ACH plan,
a shareholder may terminate participation at any time by writing the Transfer
Agent.
2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically deposit distributions from a shareholder's account
directly into a shareholder's bank account.
3. Dividend Diversification. In addition to the foregoing, semi-annual
distributions and any net long-term capital gain distributions to a
shareholder's account may be invested upon election by the shareholder in the
same class of shares of any other Van Kampen Merritt mutual fund distributed by
the Distributor at the then current net asset value, WITHOUT A SALES CHARGE.
This election may be made on the account application, by written notice to the
Transfer Agent or by calling the Fund directly at 1-800-341-2911 during the
hours of 7:00 a.m. to 7:00 p.m. Central Standard Time. For inquiries through
Telecommunications Device for the Deaf (TDD) dial 1-800-772-8889. In order to
qualify for this privilege, a shareholder must have established an account in
the other mutual fund prior to electing this privilege. This privilege may be
modified or terminated by the Fund at any time.
4. Easy Account Savings Enhancement Plan (EASE(SM)). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's Fund account. In order to utilize this option, a
shareholder must fill out and sign the appropriate section of the account
application or the EASE(SM) application which is available from the Transfer
Agent, the Fund, such shareholder's broker or dealer, or the Distributor. Once
the Transfer Agent has received this application, such shareholder's checking
account at his or her designated local bank will be debited each month in the
amount authorized by such shareholder to purchase shares of the Fund. Once
enrolled in the EASE(SM) program, a shareholder may change the monthly amount or
terminate participation at any time by writing the Transfer Agent. Shareholders
in the EASE(SM) program will receive a confirmation of these transactions from
the Fund monthly, and their regular bank account statements will show the debit
transaction each month.
By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the Application in performing such services by either
withdrawing funds for deposit in the Fund pursuant to the EASE(SM) Plan, or
depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election or by
depositing the shareholder's distributions in the Van Kampen
40
<PAGE> 49
Merritt fund account indicated. A shareholder also agrees that neither the Fund,
the Distributor, the Transfer Agent or NFDS will be liable for any loss,
liability, cost or expense arising out of any request, including any fraudulent
request. This service may be amended or terminated at any time by the Transfer
Agent or by the Fund.
REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, within 120 days, repurchase Class A Shares of the Fund, or
Shares of other Van Kampen Merritt mutual funds distributed by the Distributor,
in an amount of at least $500 and not exceeding the redemption proceeds
received, at a purchase price equal to the net asset value next determined after
the reinstatement request is received by the Transfer Agent or the Distributor.
A Class C Shareholder who has redeemed shares of the Fund may repurchase Class C
Shares of the Fund, or Shares of other Van Kampen Merritt mutual funds
distributed by the Distributor with credit given for any contingent deferred
sales charge paid upon such redemption.
Exercising the reinstatement privilege will not affect the character of any
gain or loss realized on the redemption for federal income tax purposes, except
that if the redemption resulted in a loss, the reinstatement may result in the
loss of being disallowed under the "wash sale" rules.
- --------------------------------------------------------------------------------
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS
- --------------------------------------------------------------------------------
Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including:
-- Individual Retirement Accounts (IRAs) for individuals.
-- Simplified Employee Pension Plans (SEPs) for employees.
-- Qualified plans for self-employed individuals.
-- Qualified corporate pension and profit sharing plans for employees.
The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. A reduced minimum initial investment,
available for purchase of Class A Shares, Class B Shares and Class C Shares only
in connection with a tax-sheltered retirement plan is $250.
IRAs are available for individuals under age 70 1/2 whether or not they are
active participants in any other tax-qualified employer plan. Generally,
individuals who are not active participants in a tax- qualified employer plan
may deduct from gross income their IRA contributions which do not exceed 100% of
compensation received during a year or $2,000 ($2,250 for a spousal account),
whichever is less. If an employee or the employee's spouse is an active
participant in a tax-qualified employer plan, the IRA deduction is phased out
above certain income levels. Individuals may, however, make non-deductible
contributions to their IRAs up to the lesser of 100% of annual compensation or
$2,000 ($2,250 for a spousal account) without being subject to an excise tax on
excessive contributions. Generally, earnings on investments held in an IRA are
not taxable until
41
<PAGE> 50
withdrawn. Subject to certain exceptions, substantial tax penalties apply to
withdrawals before age 59 1/2.
A SEP is a retirement program established by an employer (including
individuals) for the benefit of its eligible employees. Generally, any employee
who has attained age 21, worked for the employer during three of the past five
years and earned a specific amount from the employer in the current year will be
eligible to participate. Under a SEP, each participant establishes an IRA to
which the sponsoring employer makes annual calendar year contributions.
Generally, those contributions cannot exceed the lesser of $30,000 or 15% of the
participant's compensation for the year. A participating employee may also make
his or her IRA contribution to the same account. Generally, earnings on accounts
held in an IRA established pursuant to a SEP are not taxable until withdrawn.
Subject to certain exceptions, substantial tax penalties apply to withdrawals
before attainment of age 59 1/2.
All contributions to an IRA made to the Fund through a broker must be settled
by April 15 (or, in the event that the 15th is not a business day, the next
following business day) in any year in order to be deemed a valid contribution
for the preceding year. Contributions made directly to the Fund via the mail
must be postmarked by April 15 in any year in order to be deemed a valid
contribution for the preceding year. A request for distributions from an IRA for
which State Street Bank and Trust Company acts as custodian must be made in
writing.
Shares of the Fund may also be purchased by all types of employer sponsored
tax qualified retirement plans which allow for investments in mutual funds. A
standardized Van Kampen Merritt plan is available through securities brokers,
dealers, financial intermediaries, the Fund, or the Distributor for employers
(including individuals) who desire to start or amend a retirement plan. The form
of this standardized plan has been determined to be "qualified" under the
Internal Revenue Code. An employer may use this prototype to establish a profit
sharing plan, a money purchase pension plan or both for its eligible employees.
The cost for the use of the prototype is an initial fee of $50 and there are no
annual fees. The adopting employer determines within the prescribed limits the
eligibility standards, rate of contributions and other significant provisions of
the prototype plan. The Distributor, as sponsor of this prototype plan, reserves
the right to amend such plan from time to time to assure its continued
qualification under the Internal Revenue Code or for other reasons. Employers
adopting this prototype plan will be bound by such amendments.
Shareholders considering establishing a retirement plan or purchasing shares
of the Fund in connection with a retirement plan should consult with their
attorney or tax advisor with respect to plan requirements and tax aspects
pertaining to them.
- --------------------------------------------------------------------------------
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
42
<PAGE> 51
include the average total return of the Fund calculated on a compounded basis
for specified periods of time. Such total return 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 calculations, such
information may include performance rankings and similar information from
independent organizations such as Lipper Analytical Services, Inc., Business
Week, Forbes or other industry publications. In addition, from time to time the
Fund may compare its performance to certain securities and unmanaged indices
which may have different risk/reward characteristics than the Fund. Such
characteristics may include, but are not limited to, tax features, guarantees,
insurance and the fluctuation of principal and/or return. In addition, from time
to time sales materials and advertisements for the Fund may include hypothetical
information.
Please consult the Statement of Additional Information for more information
regarding the Fund's performance.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, c/o National Financial Data Services,
P.O. Box 419001, Kansas City MO 64141-6001, transfer agent for the Fund,
performs bookkeeping, data processing and administrative services related to the
maintenance of shareholder accounts. When an initial investment is made in the
Fund, an account will be opened for each shareholder on the Fund's books and
investors will receive a confirmation of the opening of the account.
Shareholders will receive quarterly statements giving details of all activity in
their account and will also receive a statement whenever an investment or
withdrawal is made in or from their account. Information for federal income tax
purposes will be provided at the end of the year. Such statements will present
separately information with respect to each class of the Fund's shares. It is
expected that the transfer agency costs attributable to the Class B Shares and
the Class C Shares will be higher than the transfer agency costs attributable to
the Class A Shares.
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Fund is a sub-trust of the Van Kampen Merritt Equity Trust, a
Massachusetts business trust organized March 26, 1987 (the "Trust"). Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each sub-trust on matters affecting an individual sub-trust.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, without 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 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,
43
<PAGE> 52
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 of the
shares of the Fund is entitled to its portion of all of the Fund's net assets
after all debt and expenses of the Fund have been paid. Since Class B Shares and
Class C Shares pay higher distribution expenses, the liquidation proceeds to
Class B Shareholders and Class C Shareholders are likely to be lower than to
other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the Investment Company Act.
More detailed information concerning the Trust is set forth in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------
The Fund's fiscal year ends on 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 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 Merritt Funds, One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn: Correspondence. Its
telephone number is 1-800-341-2911.
For inquiries through Telecommunications Device for the Deaf (TDD) dial
1-800-772-8889.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.
- --------------------------------------------------------------------------------
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.
44
<PAGE> 53
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344
VAN KAMPEN MERRITT
GROWTH AND 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
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001
Kansas City, MO 64141-6001
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105
Attn: Van Kampen Merritt 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> 54
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT
OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED APRIL 28, 1995
VAN KAMPEN MERRITT
GROWTH AND INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
The Van Kampen Merritt Growth and Income Fund (the "Fund") seeks long term
growth of both capital and dividend income. The Fund will attempt to achieve
this investment objective by investing primarily in a diversified portfolio of
dividend paying common stocks. There is no assurance that the Fund will achieve
its investment objective. The Fund is a mutual fund whose portfolio is advised
by Van Kampen American Capital Investment Advisory Corp. (the "Adviser").
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated April 30, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all of
the 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 1-800-341-2911, ext. 6504.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. These items may be obtained
from the Commission upon payment of the fee prescribed, or inspected at the
Commission's office at no charge.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-2
Additional Investment Considerations................................................. B-4
Description of Corporate Securities Ratings.......................................... B-9
Officers and Trustees................................................................ B-16
Legal Counsel........................................................................ B-19
Investment Advisory and Other Services............................................... B-19
Portfolio Transactions and Brokerage Allocation...................................... B-21
Tax Status of the Fund............................................................... B-22
The Distributor...................................................................... B-22
Performance Information.............................................................. B-23
Unaudited Financial Statements....................................................... B-25
Notes to Unaudited Financial Statements.............................................. B-32
Independent Auditors' Report......................................................... B-35
Audited Financial Statements......................................................... B-36
Notes to Audited Financial Statements................................................ B-43
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.
<PAGE> 55
THE FUND AND THE TRUST
The Fund is a separate diversified sub-trust of Van Kampen Merritt Equity
Trust (the "Trust"), an open-end management investment company. At present, the
Fund, Van Kampen Merritt Utility Fund, Van Kampen Merritt Balanced Fund, Van
Kampen Merritt Growth Fund (which has not commenced investment operations) and
Van Kampen Merritt Total Return Fund (which has not commenced investment
operations) are the only sub-trusts of the Trust, although other sub-trusts may
be organized and offered in the future. The Fund was originally organized in
1986 as a Massachusetts business trust, and reorganized into a sub-trust of the
Trust as of June 17, 1988.
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated March 26,
1987. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares in separate sub-trusts. Each share represents an
equal proportionate interest in the assets of the sub-trust with each other
share in such sub-trust and no interest in any other sub-trust. No sub-trust is
subject to the liabilities of any other sub-trust. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its sub-trusts, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its sub-trusts and indemnifies
shareholders against any such liability. Although shareholders of an
unincorporated business trust established under Massachusetts law may, under
certain limited circumstances, be held personally liable for the obligations of
the trust as though they were general partners, the provisions of the
Declaration of Trust described in the foregoing sentence make the likelihood of
such personal liability remote.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust involved. Shares do not have
cumulative voting rights, preemptive rights or any conversion or exchange
rights. The Trust does not contemplate holding regular meetings of shareholders
to elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the Investment Company Act of
1940 (the "1940 Act").
The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by the 1940 Act or other applicable law) and except that the Trustees
cannot amend the Declaration of Trust to impose any liability on shareholders,
make any assessment on shares or impose liabilities on the Trustees without
approval from each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its instrumentalities), if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or, if, as a
result, such Fund would hold more than 10% of the outstanding voting
securities of an issuer; except that up to 25% of the Fund's total assets
may be invested without regard to such limitations.
B-2
<PAGE> 56
2. Invest more than 25% of its assets in a single industry. (Neither the U.S.
Government nor any of its agencies or instrumentalities will be considered
an industry for purposes of this restriction.)
3. 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.
4. Make loans, except that the Fund may purchase or hold debt obligations in
accordance with the investment restrictions set forth in paragraph 1
above, may enter into repurchase agreements, and may lend its portfolio
securities against collateral 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.
5. Sell any securities "short," unless at all times when a short position is
open the Fund owns an equal amount of the securities or of securities
convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.
6. Write, purchase or sell puts, calls or combinations thereof, or purchase
or sell financial futures contracts or related options, except that the
Fund may write covered call options with respect to its portfolio
securities and enter into closing purchase transactions with respect to
such options, to a maximum of 25% of its net assets and except that the
Fund may engage in hedging transactions as described in the Prospectus and
the Statement of Additional Information from time to time.
7. 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.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition.
10. Invest in interests in oil, gas, or other mineral exploration or
development programs.
11. Purchase or sell real estate, commodities, or commodity contracts, except
for hedging transactions as described in the Prospectus and this Statement
of Additional Information from time to time.
The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
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.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. The Fund may,
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from time to time, adopt a more restrictive limitation with respect to
investment in illiquid and restricted securities in order to comply with the
most restrictive state securities law, currently 10%. This policy does not
include restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, as amended, which the Board of Trustees or the
Fund's investment adviser has determined under Board-approved guidelines to be
liquid. The Fund's policy with respect to investment in illiquid and restricted
securities is not a fundamental policy and may be changed by the Board of
Trustees, in consultation with the adviser, without obtaining shareholder
approval.
From time to time the Fund may commit to more stringent restrictions in order
to be able to offer its shares to residents in particular states. In this
regard, the Fund has committed that it (i) will not utilize the exception in
item 1 above, and (ii) will not invest assets of the Fund in securities of
companies which have a record of less than three years continuous operation.
However, such period of three years may include the operation of any predecessor
business if the company whose securities are proposed as an investment for funds
of the Fund has come into existence as the result of a merger, consolidation,
reorganization or the purchase of substantially all of the assets of such
predecessor business. The Fund may revoke any such commitments at any time so
long as it thereafter ceases to offer its shares in the state or states
involved.
ADDITIONAL INVESTMENT CONSIDERATIONS
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with selected commercial
banks or broker-dealers, under which the Fund sells securities and agrees to
repurchase them at an agreed upon time and at an agreed upon price. The
difference between the amount the Fund receives for the securities and the
amount it pays on repurchase is deemed to be a payment of interest by the Fund.
The Fund will maintain, in a segregated account with its custodian, cash,
Treasury bills, or other U.S. Government securities having an aggregate value
equal to the amount of such commitment to repurchase, including accrued
interest, until payment is made. Reverse repurchase agreements are treated as a
borrowing by the Fund and will be used by it as a source of funds on a
short-term basis, in an amount not exceeding 5% of the net assets of the Fund at
the time of entering into any such agreement. 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 may borrow up to 5% of the value of its assets from a bank, or
through reverse repurchase agreements with broker-dealers or banks meeting the
same qualifications as set forth above. The Fund will use such borrowings only
for temporary emergency purposes such as paying for unexpectedly heavy
redemptions.
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 and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. 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 derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments and purchase and sell financial futures contracts and options
thereon (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 fluctuations, to protect the
Fund's unrealized gains in the
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value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position 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 involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale 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 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" in the Prospectus.
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, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, 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
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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 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, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of 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 Standard &
Poor's Ratings Group ("S&P") or "P-1" from Moody's Investor Services, Inc.
("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 10% of its assets
in illiquid securities.
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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 and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. 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.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) 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 or fixed-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 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 and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 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) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
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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.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options 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 interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
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 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.
OTC options entered into by the Fund, including those on securities, 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, 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
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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. To the
extent such assets are other than cash or cash equivalents, such assets will be
marked to market on a daily basis. To the extent that the Fund segregates assets
other than cash or cash equivalents in connection with the purchase or sale of a
futures contract or the sale of an option thereon, the Fund will be subject to
market risks with respect to the open futures or option position as well as with
respect to the portfolio securities segregated against such position. To the
extent that the market value of such position and of such portfolio securities
have a high degree of positive correlation, market fluctuations may adversely
affect both the value of such position and the value of such portfolio
securities, which has the effect of leveraging the Fund's portfolio assets and
increasing the Fund's investment risk.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company. See "Tax Status" in the Prospectus.
DESCRIPTION OF CORPORATE 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 Standard & Poor's Ratings Group) follows:
1. DEBT
A Standard & Poor's 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.
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.
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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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.
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.
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 the 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.
B-10
<PAGE> 64
L: The letter "L" indicates that the rating pertains to the principal amount
of those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case 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.
2. COMMERCIAL PAPER
A Standard & Poor's 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, 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 S&P
believes that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sells or hold
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.
B-11
<PAGE> 65
3. VARIABLE RATE DEMAND BONDS
Standard & Poor's assigns "dual" ratings to all debt issues that have a put or
demand feature as part of their structure.
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 for the put option (for
example, "AAA/A-1+"). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, "SP-1+/A-1+").
4. NOTES
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three 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 the issue is to be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics will be given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
5. PREFERRED STOCK
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment--capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.
2. Nature of, and provisions of, the issue.
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements affecting creditors' rights.
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's 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.
</TABLE>
B-12
<PAGE> 66
<TABLE>
<S> <C>
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 preferred
CCC 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.
NR This indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred stock
quality, the rating 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.
</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.
MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service rating symbols and their meanings (as published by Moody's
Investor Service) follows:
1. 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
B-13
<PAGE> 67
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 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.
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.
2. 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. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
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.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization
B-14
<PAGE> 68
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternative liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
3. 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.
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 protections 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.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification
from "AA" through "BB" 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-15
<PAGE> 69
OFFICERS AND TRUSTEES
The officers and Trustees of the Trust (of which the Fund is a sub-trust),
their principal occupations for the last five years and their affiliations, if
any, with the Adviser, Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM
Asia Pacific Company, Limited, Van Kampen American Capital Distributors, Inc.,
Van Kampen American Capital, Inc. or VK/AC Holding, Inc., are as follows:
DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.
President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc., and Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.
R. CRAIG KENNEDY, Trustee
Dennis Trading Group, Inc., 250 S. Wacker Drive, Suite 650, Chicago, IL
60606
Advisor to the Dennis Trading Group Inc.
Prior to 1993, President and Chief Executive Officer, Director and member
of the Investment Committee of the Joyce Foundation, a private foundation.
PHILIP G. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February, 1989, former Managing Director and Manager of Municipal
Bond Department, W.H. Newbold's Son & Co.
DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.
JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President of Nelson Investment Planning Services, Inc., a financial
planning company.
JEROME L. ROBINSON, Trustee
115 River Road, Edgewater, New Jersey 07020
President of Robinson Technical Products Corporation, a processor and
distributor of welding alloys, supplies and equipment.
Director of Pacesetter Software, a software programming company
specializing in white collar productivity.
Director and majority shareholder Hilarius Haarlem B.V., Haarlem, Holland,
a manufacturer and distributor of welding alloys.
WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.
B-16
<PAGE> 70
PETER W. HEGEL,* Vice President
One Parkview Plaza, Oakbrook Terrace, IL 60181
Senior Vice President and Portfolio Manager of Van Kampen American Capital
Investment Advisory Corp.
Senior Vice President of Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.
RONALD A. NYBERG,* Vice President and Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc. and Van Kampen American Capital, Inc.
Executive Vice President, General Counsel and Director of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.
General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.
EDWARD C. WOOD III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.
SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc., and Van Kampen American Capital, Inc.
First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital, Inc.
Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.
WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Investment
Advisory Corp., Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc. and Van Kampen American Capital
Distributors, Inc.
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.
STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.
- ----------------
* Interested persons of the Fund as defined in the 1940 Act.
Each of the foregoing trustees acts as trustee for other investment companies
advised by the Adviser and each of the foregoing officers of the Fund holds the
same positions with each of the investment companies advised by the Adviser.
B-17
<PAGE> 71
The compensation of the officers and directors who are affiliated persons (as
defined in the 1940 Act) of the Adviser is paid by the Adviser and the
compensation of the officers and trustees who are affiliated persons of Van
Kampen American Capital Distributors, Inc. or Van Kampen American Capital, Inc.
is paid by the respective entity. The Fund pays the compensation of all other
officers and Trustees. During the next year, the Fund expects to pay Trustees
who are not affiliated persons of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. $2,500 annually plus
$250 per meeting of the Board of Trustees, plus expenses. Under the Fund's
retirement plan, trustees who are not affiliated with the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc., have
at least ten years of service and retire at or after attaining the age of 60,
are eligible to receive a retirement benefit equal to the annual retainer for
each of the ten years following such trustee's retirement. Under certain
conditions, reduced benefits are available for early retirement. Under the
Fund's deferred compensation plan, a trustee who is not affiliated with the
Adviser, Van Kampen American Capital Distributors, Inc. or Van Kampen American
Capital, Inc. can elect to defer receipt of all or a portion of the trustee's
fees earned by such trustee until such trustee's retirement. The deferred
compensation earns a rate of return determined by reference to the Fund or other
Van Kampen Merritt mutual funds advised by the Adviser as selected by the
trustee. To the extent permitted by the 1940 Act, the Fund may invest in
securities of other Van Kampen Merritt mutual funds advised by the Adviser in
order to match the deferred compensation obligation. The deferred compensation
plan is not funded and obligations thereunder represent general unsecured claims
against the general assets of the Fund.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME FROM REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
- ----------------------------- ------------------ ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............. $7,620 $0 $2,500 $62,362
Philip G. Gaughan............ 7,192 0 2,500 63,250
Donald C. Miller............. 9,841 0 2,500 62,178
Jack A. Nelson............... 9,875 0 2,500 62,362
Jerome L. Robinson........... 9,231 0 2,500 58,475
Wayne W. Whalen.............. 2,031 0 2,500 49,875
</TABLE>
- ---------------
(1) Messrs. Merritt and McDonnell, Trustees of the Registrant during fiscal
year 1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Registrant.
(2) The Registrant is Van Kampen Merritt Equity Trust (the "Trust") which
currently is comprised of 3 sub-trusts, including the Fund. The amounts
shown in this column are accumulated from the Aggregate Compensation of
each of these 3 sub-trusts during such sub-trusts' 1994 fiscal year.
Beginning in October 1994, each Trustee except Messrs. Gaughan and Whalen,
began deferring his entire aggregate compensation paid by the Registrant.
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 Registrant.
As of December 31, 1994, no amounts had been accrued for retirement
benefits because such amounts were considered to be immaterial to the net
assets of the Registrant at such time. The Registrant will accrue amounts
for retirement benefits by the end of fiscal year 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 the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund, retires at or after attaining the age of 60 and the annual retainer
in the year prior to the Trustee's retirement is $2,500. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.
B-18
<PAGE> 72
(5) The Fund Complex consists of 20 mutual funds advised by the Adviser that
have 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 Adviser also serves as investment adviser for other
investment companies; however, with the exception of Messrs. Merritt,
McDonnell and Whalen, the Trustees are not trustees of such investment
companies. Combining the Fund Complex with other investment companies
advised by the Adviser, Mr. Whalen received Total Compensation of $161,850
during the calendar year ended December 31, 1994.
As of April 13, 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.
To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.
As of April 13, 1995 the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Donaldson, Lufkin, Jenrette Securities
Corporation Inc., P.O. Box 2052, Jersey City, NJ, 07303-2052, 7%; Edward D.
Jones and Co. F/A/O International Guards Union, EDJ #790-02335-1-6, P.O. Box
2500, Maryland Heights, MO, 63043-8500, 5%; Parker Hunter Incorporated FBO,
Frank Esparraguera IRA, Parker/Hunter Custodian, 9 Glenview Avenue, Oil City, PA
16301-2137, 22%; Donaldson, Lufkin, Jenrette Securities Corporation Inc., P.O.
Box 2052, Jersey City, NJ 07303-2052, 5%; and Parker Hunter Incorporated FBO,
Dolores M. L. Esparraguera IRA, Parker/Hunter Custodian, 9 Glenview Avenue, Oil
City, PA 16301-2137, 19%.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The
Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc., which
in turn is a wholly-owned subsidiary of VK/AC Holding, Inc.
VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital, Inc. own, in the aggregate, not more than 6% of the common
stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise of
options, approximately an additional 10% of the common stock of VK/AC Holding,
Inc. Presently, and after giving effect to the exercise of such options, no
officer or trustee owns or would own 5% or more of VK/AC Holding, Inc.
The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will administer the business affairs of the Fund, supervise the
Fund's overall investment activities in the context of implementing the Fund's
investment objectives, furnish offices, necessary facilities and equipment,
provide
B-19
<PAGE> 73
administrative services, and permit its officers and employees to serve without
compensation as Trustees of the Trust and officers of the Fund if duly elected
to such positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Trustees to whom the Adviser renders periodic reports of the Fund's investment
activities.
The investment advisory agreement was approved by the shareholders of the Fund
at a shareholders meeting held on January 14, 1993. The agreement will remain in
effect from year to year if specifically approved by the Trustees (including the
independent Trustees) on behalf of the Fund or the Fund's shareholders 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 Adviser has undertaken to reimburse the Fund for annual expenses of the
Fund which exceed the most stringent limit prescribed by any state in which the
Fund's shares are offered for sale. Currently, the most stringent limit in any
state would require such reimbursement to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes and other expenses which may be
excludable under applicable state law) exceed in any fiscal year 2 1/2% of the
average annual net assets of the Fund up to $30 million, 2% of the average
annual net assets of the Fund of the next $70 million, and 1 1/2% of the
remaining average annual net assets of the Fund. In addition to making any
required reimbursements, the Adviser may in its discretion, but is not obligated
to, waive all or any portion of its fee or assume all or any portion of the
expenses of the Fund.
For the years ended June 30, 1994, 1993 and 1992, the Fund recognized advisory
expenses of $304,973, $188,428 and $164,191, respectively.
OTHER AGREEMENTS
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor, the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee which would have been paid
to the Transfer Agent if the Transfer Agent had provided such services. Payment
by the Fund for such services is 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 Merritt mutual funds distributed by the Distributor,
share such costs proportionately among themselves based upon their respective
net asset values.
For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $25,200, $2,400 and $12,200, 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 Merritt 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 with the remaining 75% of such cost being paid by the
Fund and such other funds based proportionally on their respective net assets.
For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $3,900, $1,900 and $2,900, respectively, representing the
Adviser's cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services
Agreement pursuant to which Van Kampen American Capital, Inc. provides legal
services, including without limitation: accurate maintenance of the Fund's
minute books and records, preparation and oversight of the Fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the Fund. It
B-20
<PAGE> 74
is expected that Van Kampen American Capital, Inc. can render such legal
services on a more cost effective basis than other providers of such services.
Payment by the Fund for such services is made on a cost basis for the employment
of personnel as well as the overhead and the equipment necessary to render such
services. The Fund, and the other Van Kampen Merritt mutual funds distributed by
the Distributor, share one half (50%) of such costs equally. The remaining one
half (50%) of such costs are allocated to specific funds based on specific time
allocations, or in the event services are attributable only to types of funds
(i.e. closed-end or open-end), the relative amount of time spent on each type of
fund and then further allocated between funds of that type based upon their
respective net asset values.
For the years ended June 30, 1994, 1993 and 1992, the Fund recognized expenses
of approximately $9,200, $8,500 and $0, respectively, representing Van Kampen
American Capital, Inc.'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.
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, its Adviser or its Distributor.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Fund's Adviser, the amount of
additional commission or increased cost is reasonable in relation to the value
of such services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Fund's 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 size 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
B-21
<PAGE> 75
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 on
behalf of the Fund.
The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the Securities and Exchange Commission under the 1940 Act which
requires that the commissions paid to the Distributor and other affiliates of
the Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the Trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the Trustees will consider from time to time whether the advisory fee
for the Fund will be reduced by all or a portion of the brokerage commission
given to affiliated brokers.
Portfolio turnover is 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 are excluded
from such calculation. The Fund anticipates that the annual portfolio turnover
rate of the Fund's portfolio will generally be less than 100%. If the turnover
rate for the Fund does reach or exceed this percentage, the Fund's brokerage
costs may increase and the Adviser will monitor the Fund's trading practices to
avoid potential adverse tax consequences.
TAX STATUS OF THE FUND
The Trust and any of its sub-trusts, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund will be subject
to tax if it fails to distribute net capital gains, or if its annual
distributions, as a percentage of its income, are less than the distributions
required by tax laws.
THE DISTRIBUTOR
Shares of the Fund are offered continuously through the Distributor, One
Parkview Plaza, Oakbrook Terrace, Illinois 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 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% of the common stock of VK/AC Holding, Inc. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement with the Fund, the Distributor will purchase shares of
the Fund for resale to the public, either directly or through securities dealers
and brokers, and is obligated to purchase only those shares for which it has
received purchase orders. A discussion of how to purchase and redeem shares of
the Fund and how such shares are priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor of each class of the
Fund's shares, sub-agreements between the Distributor and members of the NASD
who are acting as securities dealers and NASD members or eligible non-members
who are acting as brokers or agents
B-22
<PAGE> 76
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."
Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement and/or Selling Agreement. To
the extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a sub-trust, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.
PERFORMANCE INFORMATION
The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period; yield is computed by first 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 offering price) 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 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.
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
B-23
<PAGE> 77
over the specified period with respect to such initial investment and expressing
the result as a percentage. Average compounded total return will be computed
separately for each class of shares.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC imposed at the time of redemption were reflected, it would reduce the
performance quoted.
CLASS A SHARES
The average total return with respect to the Class A Shares for (i) the one
year period ended June 30, 1994 was (6.90%), (ii) the five year period ended
June 30, 1994 was 6.73% and (iii) the approximately 92 month period from October
29, 1986 (the commencement of investment operations of the Fund) through June
30, 1994 was 7.77%.
The Fund's cumulative non-standardized total return with respect to the Class
A Shares from their inception through June 30, 1994, (as calculated in the
Prospectus under the heading "Fund Performance") was 86.16%.
CLASS B SHARES
The average total return with respect to the Class B Shares for (i) the one
year period ended June 30, 1994 was (6.65%) and (ii) the approximately 19 month
period from December 1, 1992 (the commencement of operations of the Class B
Shares) through June 30, 1994 was 2.21%.
The Fund's cumulative non-standardized total return with respect to the Class
B Shares from their inception through June 30, 1994, (as calculated in the
Prospectus under the heading "Fund Performance") was 6.79%.
CLASS C SHARES
The average total return with respect to the Class C Shares for the
approximately 11 month period from August 13, 1994 (the commencement of
operations of the Class C Shares) through June 30, 1994 was (4.82%).
The Fund's cumulative non-standardized total return with respect to the Class
C Shares from their inception through June 30, 1994 (as calculated in the
Prospectus under the heading "Fund Performance") was (3.60%).
B-24
<PAGE> 78
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
<S> <C> <C>
Common and Preferred Stock 93.6%
Automobile 6.2%
Borg Warner Automotive Inc. ............ 35,000 $ 879,375
Chrysler Corp. .......................... 20,000 980,000
General Motors Corp. - Preferred ........ 25,000 1,434,375
Standard Products Co. ................... 35,600 854,400
Volvo Aktiebolaget - ADR (Sweden) ...... 50,000 937,500
------------
5,085,650
------------
Basic Industries 4.1%
Corning Inc. ............................ 43,475 1,298,816
Cyprus Amax Minerals Co. ................ 31,500 822,937
National Gypsum Co. <F2> ................. 30,000 1,222,500
------------
3,344,253
------------
Beverage, Food & Tobacco 2.3%
Pepsico Inc. ............................ 40,100 1,453,625
Sara Lee Corp. .......................... 16,200 409,050
------------
1,862,675
------------
Buildings & Real Estate 0.6%
Triangle Pacific Corp. <F2> .............. 42,330 518,543
------------
Chemical 2.7%
Hercules Inc. ........................... 10,000 1,153,750
IMC Global Inc. ......................... 24,000 1,038,000
------------
2,191,750
------------
Computers 4.6%
Compuware Corp. <F2> ..................... 26,000 936,000
Parametric Technology Corp. <F2> ......... 25,000 862,500
Platinum Technology Inc. <F2> ............ 32,400 733,050
Sybase Inc. <F2> ......................... 23,200 1,206,400
------------
3,737,950
------------
Consumer Non-Durables 3.0%
Mattel Inc. ............................. 40,000 1,005,000
Procter & Gamble Co. .................... 23,010 1,426,620
------------
2,431,620
------------
Consumer Services 3.2%
Automatic Data Processing Inc. .......... 23,700 1,386,450
Service Corp. International ............. 44,000 1,221,000
------------
2,607,450
------------
Diversified/Conglomerate Manufacturing 8.3%
Asea AB - ADR (Sweden) .................. 16,600 1,197,275
Eastman Kodak Co. ...................... 28,250 1,348,938
Electrolux - ADR (Sweden) ............... 14,950 760,581
</TABLE>
See Notes to Financial Statements
B-25
<PAGE> 79
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
<S> <C> <C>
Diversified/Conglomerate Manufacturing (Continued)
Hanson PLC - ADR (United Kingdom) .............................. 45,000 $ 810,000
Thermo Electron Corp. <F2> ...................................... 30,300 1,359,712
Trinity Inds Inc. ............................................. 42,000 1,323,000
------------
6,799,506
------------
Diversified/Conglomerate Service 1.8%
ITT Corp. ..................................................... 16,200 1,435,725
------------
Ecological 2.2%
Waste Management International PLC - ADR (United Kingdom) <F2> .. 45,000 511,875
WMX Technologies Inc. .......................................... 47,300 1,241,625
------------
1,753,500
------------
Electronics 2.7%
Avnet Inc. .................................................... 37,300 1,380,100
Intel Corp. .................................................... 12,900 823,988
------------
2,204,088
------------
Energy 7.3%
Burlington Resources Inc. ...................................... 35,000 1,225,000
Norsk Hydro A S - ADR (Norway) ................................. 30,000 1,173,750
Texaco Inc. .................................................... 22,210 1,329,824
Triton Energy Corp. <F2> ....................................... 30,000 1,020,000
Unocal Corp. ................................................... 42,600 1,160,850
------------
5,909,424
------------
Financial Services 2.4%
Capital One Financial Corp. <F2> ................................ 52,750 844,000
Federal Home Loan Mortgage Corp. ............................... 16,340 825,170
Morgan Stanley Group Inc. - Preferred .......................... 20,000 325,000
------------
1,994,170
------------
Healthcare 4.4%
Health & Retirement Property Trust ............................. 59,950 801,831
Healthcare Realty Trust Inc. ................................... 41,100 863,100
Living Centers of America Inc. <F2> ............................. 28,900 964,538
Sybron International Corp. <F2> ................................. 26,900 928,050
Theratx Inc. <F2> ............................................... 2,000 39,000
------------
3,596,519
------------
Insurance 3.7%
American International Group Inc. .............................. 14,400 1,411,200
Mid Ocean Ltd. <F2> ............................................ 50,750 1,382,938
Reliance Group Holdings Inc. ................................... 44,850 229,856
------------
3,023,994
------------
</TABLE>
See Notes to Financial Statements
B-26
<PAGE> 80
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
<S> <C> <C>
Leisure 2.5%
Carnival Corp. ............................ 71,500 $ 1,519,375
International Game Technology ............. 31,400 486,700
------------
2,006,075
------------
Machinery 1.6%
Case Equipment Corp. <F2> .................. 59,260 1,274,090
------------
Medical Supplies 2.3%
Hafslund Nycomed - ADR (Norway) ........... 40,000 825,000
Merck & Co. Inc. .......................... 27,000 1,029,375
------------
1,854,375
------------
Mining & Steel 1.7%
Bethleham Steel Corp. <F2> ................. 49,500 891,000
WHX Corp. ................................. 38,200 506,150
------------
1,397,150
------------
Paper 1.2%
James River Corp. ......................... 49,600 1,004,400
------------
Printing, Publishing & Broadcasting 1.2%
Time Warner Inc. .......................... 27,500 965,938
------------
Retail 5.5%
Barnes & Noble Inc. <F2> ................... 30,000 937,500
Dayton Hudson Corp. ....................... 14,000 990,500
Nordstrom Inc. ............................ 25,000 1,050,000
Tractor Supply Co. <F2> .................... 16,400 344,400
Wal Mart Stores Inc. ...................... 55,000 1,168,750
------------
4,491,150
------------
Technology 2.4%
Motorola Inc. ............................. 18,100 1,047,537
National Semiconductor Corp. <F2> .......... 48,625 948,188
------------
1,995,725
------------
Telecommunications 5.6%
AT & T Corp. .............................. 24,000 1,206,000
DSC Communications Corp. <F2> .............. 40,000 1,435,000
Tele Communications Inc. <F2> ............. 45,700 993,975
Vodafone Group PLC - ADR (United Kingdom) . 28,500 958,312
------------
4,593,287
------------
</TABLE>
See Notes to Financial Statements
B-27
<PAGE> 81
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
<S> <C> <C>
Transportation 3.3%
Burlington Northern Inc. .................................................... 10,650 $ 512,531
Burlington Northern Inc. - Preferred ........................................ 14,300 761,475
J B Hunt Transport Services Inc. ............................................ 49,700 757,925
Southern Pacific Rail Corp. <F2> ............................................. 37,570 680,956
----------
2,712,887
----------
Utilities 6.8%
Bellsouth Corp. ............................................................ 23,700 1,282,762
Enron Corp. ................................................................. 45,000 1,372,500
Georgia Power Co. - Preferred ............................................... 33,700 690,850
Nynex Corp. ................................................................. 25,000 918,750
Sonat Inc. ................................................................. 44,500 1,246,000
----------
5,510,862
----------
Total Common and Preferred Stock ....................................................... 76,302,756
Convertible Bonds 0.7%
AMR Corp. ($700,000 par, 6.125% coupon, 11/01/24 maturity, S&P Rating BB-) ............ 560,000
----------
Total Long-Term Investments 94.3%
(Cost $76,979,231) <F1> ................................................................ 76,862,756
----------
Short-Term Investments 9.1%
Mexican Tesobonos, $1,000,000 par, yielding 8.92%, 11/30/95 maturity .................. 899,600
Mexican Tesobonos, $500,000 par, yielding 8.39%, 07/13/95 maturity .................... 469,500
Mexican Tesobonos, $769,000 par, yielding 8.28%, 05/04/95 maturity .................... 738,240
Repurchase Agreement, J.P. Morgan Securities, US T-Note, $5,874,000 par, 5.125% coupon,
due 12/31/98, dated 12/30/94, to be sold on 01/03/95 at $5,373,133 .................... 5,370,000
----------
Total Short-Term Investments (Cost $7,522,071) <F1> .................................... 7,477,340
Liabilities in Excess of Other Assets -3.4%........................................... (2,806,286)
----------
Net Assets 100% ........................................................................ $81,533,810
-----------
<FN>
<F1>At December 31, 1994, cost for federal income tax purposes is $84,501,302;
the aggregate gross unrealized appreciation is $3,285,976 and the aggregate
gross unrealized depreciation is $3,447,182, resulting in net unrealized
depreciation of $161,206.
<F2>Non-income producing security as this stock currently does not declare
dividends.
</FN>
</TABLE>
See Notes to Financial Statements
B-28
<PAGE> 82
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at Market Value (Cost $76,979,231) <F1>......................................... $ 76,862,756
Short-Term Investments (Cost $7,522,071) <F1>................................................ 7,477,340
Cash......................................................................................... 88
Receivables:
Investments Sold............................................................................. 600,070
Fund Shares Sold............................................................................. 299,144
Dividends.................................................................................... 163,108
Interest..................................................................................... 9,152
Other........................................................................................ 3,894
--------------
Total Assets................................................................................. 85,415,552
--------------
Liabilities:
Payables:
Investments Purchased........................................................................ 3,458,900
Fund Shares Repurchased...................................................................... 102,569
Investment Advisory Fee <F2>................................................................. 40,854
Capital Gain Distributions................................................................... 29,493
Income Distributions......................................................................... 26,761
Accrued Expenses............................................................................. 223,165
--------------
Total Liabilities............................................................................ 3,881,742
--------------
Net Assets................................................................................... $ 81,533,810
--------------
Net Assets Consist of:
Paid in Surplus <F3> ........................................................................ $ 82,837,330
Accumulated Equalization Credits <F1>........................................................ 73,248
Accumulated Undistributed Net Investment Income.............................................. 28,366
Net Unrealized Depreciation on Investments................................................... (161,206)
Accumulated Net Realized Loss on Investments ................................................ (1,243,928)
--------------
Net Assets................................................................................... $ 81,533,810
--------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $49,878,068 and
2,792,551 shares of beneficial interest issued and outstanding) <F3>......................... $ 17.86
Maximum sales charge (4.65%* of offering price).............................................. .87
--------------
Maximum offering price to public ............................................................ $ 18.73
--------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $30,236,782 and
1,687,686 shares of beneficial interest issued and outstanding) <F3>......................... $ 17.92
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $1,416,984 and
79,077 shares of beneficial interest issued and outstanding) <F3>............................ $ 17.92
--------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,976 and
111 shares of beneficial interest issued and outstanding) <F3> .............................. $ 17.80
--------------
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced. Effective
January 16, 1995, the maximum sales charge was changed to 5.75%.
See Notes to Financial Statements
B-29
<PAGE> 83
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (Net of foreign withholding taxes of $3,837).......................................... $ 693,015
Interest........................................................................................ 276,661
---------------
Total Income.................................................................................... 969,676
---------------
Expenses:
Investment Advisory Fee <F2> ................................................................... 238,987
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $65,752, $145,392,
$3,749 and $3, respectively) <F6> .............................................................. 214,896
Shareholder Services ........................................................................... 94,862
Custody......................................................................................... 43,345
Legal <F2>...................................................................................... 19,800
Trustees Fees and Expenses <F2>................................................................. 11,200
Other........................................................................................... 41,734
---------------
Total Expenses.................................................................................. 664,824
---------------
Net Investment Income........................................................................... $ 304,852
---------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................. $ 56,727,845
Cost of Securities Sold......................................................................... (57,971,773)
---------------
Net Realized Loss on Investments (Including realized loss on closed and expired option
transactions of $646,125 and realized gain on futures transactions of $146,770)................. (1,243,928)
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................................... (3,053,822)
End of the Period .............................................................................. (161,206)
---------------
Net Unrealized Appreciation on Investments During the Period.................................... 2,892,616
---------------
Net Realized and Unrealized Gain on Investments................................................. $ 1,648,688
---------------
Net Increase in Net Assets from Operations...................................................... $ 1,953,540
---------------
</TABLE>
See Notes to Financial Statements
B-30
<PAGE> 84
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994
and the Year Ended June 30, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
December 31, 1994 June 30, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 304,852 $ 658,391
Net Realized Gain/Loss on Investments....................................... (1,243,928) 1,407,337
Net Unrealized Appreciation/Depreciation on Investments During the Period... 2,892,616 (5,640,097)
----------------- ---------------
Change in Net Assets from Operations ....................................... 1,953,540 (3,574,369)
----------------- ---------------
Distributions from Net Investment Income:
Class A Shares.............................................................. (733,571) (283,548)
Class B Shares.............................................................. (196,275) (6,360)
Class C Shares.............................................................. (5,002) -0-
Class D Shares.............................................................. (29) -0-
----------------- ---------------
(934,877) (289,908)
----------------- ---------------
Distributions from Net Realized Gain on Investments:
Class A Shares.............................................................. (244,299) (5,555,001)
Class B Shares.............................................................. (148,335) (761,009)
Class C Shares.............................................................. (6,866) (2,518)
Class D Shares.............................................................. (10) -0-
----------------- ---------------
(399,510) (6,318,528)
----------------- ---------------
Total Distributions......................................................... (1,334,387) (6,608,436)
----------------- ---------------
Net Change in Net Assets from Investment Activities......................... 619,153 (10,182,805)
----------------- ---------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 16,301,451 46,602,308
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 1,209,754 6,217,989
Cost of Shares Repurchased.................................................. (8,421,148) (8,165,855)
Net Equalization Credits.................................................... 11,051 75,488
----------------- ---------------
Net Change in Net Assets from Capital Transactions ......................... 9,101,108 44,729,930
----------------- ---------------
Total Increase in Net Assets................................................ 9,720,261 34,547,125
Net Assets:
Beginning of the Period..................................................... 71,813,549 37,266,424
----------------- ---------------
End of the Period (Including undistributed net investment income of
$28,366 and $658,391, respectively) ........................................ $ 81,533,810 $ 71,813,549
----------------- ---------------
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 85
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Growth and Income Fund (the "Fund") was organized as a
Massachusetts business trust on July 8, 1986, 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 October
29, 1986 and was reorganized as a subtrust of Van Kampen Merritt Equity Trust
(the "Trust"), a Massachusetts business trust, as of June 17, 1988. The Fund
commenced the distribution of Class B, C and D shares on December 1, 1992,
August 13, 1993, and March 14, 1994, respectively.
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 in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange.
Investments in securities not listed on a securities exchange are valued based
on their last quoted bid price or, if not available, their fair value as
determined by the Board of Trustees. Fixed income investments are stated at
values using market quotations or, if such valuations are not available,
estimates obtained from yield data relating to instruments or securities with
similar characteristics in accordance with procedures established in good faith
by the Board of Trustees. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. Investment Income-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis.
D. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
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.
E. Distribution of Income and Gains-The Fund declares and pays dividends
semi-annually from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and gains on option and futures
transactions. All short-term capital gains and a portion of option and futures
gains are included in ordinary income for tax purposes.
F. Equalization-The Fund utilizes an accounting practice known as equalization,
by which a portion of the proceeds from sales and costs of reacquisitions of
capital shares, equivalent on a per share basis to the amount of distributable
net investment income on the date of the transactions, is credited or charged
to an equalization account, which is a component of capital. As a result,
undistributed net investment income per share is unaffected by sales or
reacquisitions of capital shares.
2. Investment Advisory Agreement and Other Transactions with Affiliates Under
the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") will provide facilities and
investment advice to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
- ----------------------------------
<S> <C>
First $500 million... .60 of 1%
Over $500 million.... .50 of 1%
</TABLE>
Certain legal fees are paid to Skadden, Arps, Slate, Meagher & Flom, counsel to
the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $23,500 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' ("VKAC") 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 retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 122, 116 and 100 shares of beneficial interest
of Classes B, C and D, respectively.
B-32
<PAGE> 86
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized. At December 31, 1994, paid in surplus aggregated $48,959,102,
$32,422,278, $1,453,818 and $2,132, for Classes A, B, C and D, respectively.
For the six months ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 358,393 $ 6,488,957
Class B........................ 489,182 8,910,172
Class C........................ 49,779 902,322
Class D........................ -0- -0-
---------- ---------------
Total Sales ................... 897,354 $ 16,301,451
---------- ---------------
Dividend Reinvestment:
Class A........................ 50,517 $ 893,969
Class B........................ 17,224 306,574
Class C........................ 515 9,200
Class D........................ 1 11
---------- ---------------
Total Dividend Reinvestment ... 68,257 $ 1,209,754
---------- ---------------
Repurchases:
Class A........................ (242,721) $ (4,398,548)
Class B........................ (221,683) (4,012,567)
Class C........................ (549) (10,033)
Class D........................ -0- -0-
---------- ---------------
Total Repurchases.............. (464,953) $ (8,421,148)
---------- ---------------
</TABLE>
At June 30, 1994, paid in surplus aggregated $45,974,724, $27,218,099, $552,329
and $2,121, for Classes A , B, C and D, respectively. For the year ended June
30, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- -----------------------------------------------------------
<S> <C> <C>
Sales:
Class A ...................... 1,040,379 $ 20,367,239
Class B ...................... 1,332,246 25,683,130
Class C....................... 29,202 549,818
Class D....................... 110 2,121
---------- ---------------
Total Sales................... 2,401,937 $ 46,602,308
---------- ---------------
Dividend Reinvestment:
Class A ...................... 286,118 $ 5,506,728
Class B ...................... 36,659 708,750
Class C....................... 130 2,511
Class D....................... -0- -0-
---------- ---------------
Total Dividend Reinvestment... 322,907 $ 6,217,989
---------- ---------------
Repurchases:
Class A ...................... (318,421) $ (6,259,365)
Class B ...................... (98,138) (1,906,490)
Class C....................... -0- -0-
Class D....................... -0- -0-
- ------------------------------ ---------- ---------------
Total Repurchases............. (416,559) $ (8,165,855)
---------- ---------------
</TABLE>
Class B, C and D shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B, C
and D shares will be imposed on most redemptions made within six years of the
purchase for Class B and one year of the purchase for Classes C and D as
detailed in the following schedule. The Class B, C and D shares bear the
expense of their respective deferred sales arrangements, including higher
distribution and service fees and incremental transfer agency costs.
B-33
<PAGE> 87
Van Kampen Merritt Growth And Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- ---------------------------------------------------
<S> <C> <C> <C>
First ................. 4.00% 1.00% 0.75%
Second ................. 3.75% None None
Third .................. 3.50% None None
Fourth ................. 2.50% None None
Fifth ................. 1.50% None None
Sixth .................. 1.00% None None
Seventh and Thereafter . None None None
</TABLE>
For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$10,000 and CDSC on the redeemed shares of Classes B, C and D of approximately
$83,300. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $68,721,003
and $57,250,464, 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 or 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 provide the return of an index without purchasing all of the securities
underlying the index or as a substitute for purchasing specific securities.
Transactions in options for the six months ended December 31, 1994,
were as follows:
<TABLE>
<CAPTION>
Contracts Premium
- -----------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1994....... 972 $ (127,572)
Options Written and
Purchased (Net).................... 14,995 (2,443,748)
Options Terminated in Closing
Transactions (Net)................. (13,577) 2,070,774
Options Expired (Net)............. (2,390) 500,546
--------- -----------
Outstanding at December 31, 1994... -0- $ -0-
--------- -----------
</TABLE>
B. Futures Contracts A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in stock index futures. These contracts are generally
used to provide the return of an index without purchasing all of the
securities underlying the index or as a substitute for purchasing specific
securities.
The fluctuation in market value of the contracts is settled daily through a
cash margin account. Realized gains and losses are recognized when the
contracts are closed or expire.
Transactions in futures contracts for the six months ended December 31, 1994,
were as follows:
<TABLE>
<CAPTION>
Contracts
- ----------------------------------------------
<S> <C>
Outstanding at June 30, 1994....... 36
Futures Opened..................... 341
Futures Closed .................... (377)
------
Outstanding at December 31, 1994... -0-
------
</TABLE>
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each of Class A and Class D shares
and 1.00% each of Class B and Class C shares are accrued daily. Included in
these fees for the six months ended December 31, 1994, are payments to VKAC of
approximately $111,300.
B-34
<PAGE> 88
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Independent Auditors' Report
- ----------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen Merritt Growth and Income Fund:
We have audited the accompanying statement of assets and liabilities
of Van Kampen Merritt Growth and Income Fund (the "Fund"),
including the portfolio of investments, as of June 30,1994, and the
related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods presented.
These financial statements and financial highlights are the responsibil-
ity of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of June 30,1994, by
correspondence with the custodian 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 Growth and Income Fund as of
June 30,1994, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods
presented, in conformity with generally accepted accounting principles.
KPMG Peat Marwick
Chicago, Illinois
August 9,1994
B-35
<PAGE> 89
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Portfolio of Investments
June 30, 1994
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Common and Preferred Stock 85.3%
Automobile 8.0%
Borg Warner Automotive Inc............................ 35,000 $ 791,875
Chrysler Corp......................................... 25,800 1,215,825
General Motors Corp................................... 24,000 1,206,000
General Motors Corp. Preferred........................ 20,000 1,127,500
Mascotech Inc......................................... 50,000 662,500
Standard Products Co.................................. 25,000 731,250
------------------
5,734,950
------------------
Basic Industries 3.9%
Corning Inc........................................... 39,000 1,272,375
National Gypsum Co <F2>............................... 30,000 922,500
Wheeling Pittsburgh Corp. <F2>........................ 36,200 633,500
------------------
2,828,375
------------------
Beverage, Food & Tobacco 1.8%
Pepsico Inc........................................... 34,700 1,062,688
RJR Nabisco Holdings Corp. Preferred.................. 35,700 223,125
------------------
1,285,813
------------------
Buildings & Real Estate 3.8%
Masco Corp............................................ 36,000 990,000
Pulte Corp............................................ 32,800 754,400
Toll Brothers Inc..................................... 36,500 465,375
Triangle Pacific Corp. <F2>........................... 42,330 497,377
------------------
2,707,152
------------------
Chemical 6.1%
Dow Chemical Co....................................... 18,700 1,222,512
Goodrich B.F. Co...................................... 21,490 934,815
Methanex Corp. <F2>................................... 40,000 470,000
Praxair Inc........................................... 49,600 967,200
Union Carbide Corp.................................... 29,200 781,100
------------------
4,375,627
------------------
Computers 2.3%
MB Communications Inc................................. 13,000 133,250
Micom Communications <F2>............................. 8,666 97,493
Novell Inc............................................ 27,700 463,975
Oracle Systems Corp................................... 24,700 926,250
------------------
1,620,968
------------------
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 90
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Durables 1.6%
Whirlpool Corp........................................ 21,600 $ 1,134,000
------------------
Consumer Non-Durables 4.4%
Mattel Inc............................................ 40,000 1,015,000
Newell Co............................................. 22,600 1,045,250
Procter & Gamble Co................................... 20,000 1,067,500
------------------
3,127,750
------------------
Consumer Services 1.4%
Service Corp. International........................... 38,200 983,650
------------------
Diversified/Conglomerate Manufacturing 3.2%
Eastman Kodak Co...................................... 24,610 1,184,356
Thermo Electron Corp.................................. 30,300 1,128,675
------------------
2,313,031
------------------
Diversified/Conglomerate Service 1.4%
ITT Corp.............................................. 12,000 979,500
------------------
Ecological 1.7%
WMX Technologies Inc.................................. 47,300 1,253,450
------------------
Electrical Supply 1.4%
Avnet Inc............................................. 33,000 1,039,500
------------------
Electronics 4.0%
AMP Inc............................................... 21,000 1,454,250
Cerplex Group Inc. <F2>............................... 24,300 303,750
Polaroid Corp......................................... 17,400 554,625
Westinghouse Electric Corp. Preferred <F4>............ 43,500 554,625
------------------
2,867,250
------------------
Energy 7.2%
Burlington Resources Inc.............................. 25,000 1,034,375
Chevron Corp.......................................... 26,400 1,105,500
Enron Corp............................................ 30,000 982,500
Triton Energy Corp.................................... 26,000 861,250
Unocal Corp........................................... 42,600 1,219,425
------------------
5,203,050
------------------
Financial Services 6.3%
Ahmanson H.F. & Co.................................... 38,300 722,912
American International Group Inc. <F3>................ 14,400 1,247,400
Chubb Corp............................................ 14,000 1,072,750
General Reinsurance Corp.............................. 9,510 1,036,590
MGlC Investment Corp.................................. 10,000 265,000
Morgan Stanley Group Inc. Preferred................... 9,500 180,500
------------------
4,525,152
------------------
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 91
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Healthcare 4.6%
Healthcare Realty Trust............................... 34,200 $ 731,025
Healthtrust Inc. <F2>................................. 36,000 999,000
Living Centers of America Inc. <F2>................... 28,900 830,875
National Health Labs Holdings Inc..................... 60,000 727,500
------------------
3,288,400
------------------
Leisure 1.3%
International Game Technology......................... 50,100 945,638
------------------
Machinery 1.6%
Case Equipment Corp. <F2>............................. 22,000 415,250
Cyprus Amax Minerals Co............................... 25,000 743,750
------------------
1,159,000
------------------
Medical Supplies 1.1%
Merck & Co. Inc. <F2>................................. 27,000 803,250
Packaging & Container 0.7%
Jefferson Smurfit Corp. <F2>.......................... 30,000 483,750
------------------
Printing, Publishing & Broadcasting 2.8%
Comcast Corp.......................................... 60,000 1,080,000
Time Warner Inc....................................... 27,500 965,937
------------------
2,045,937
------------------
Retail 2.3%
TJX Companies Inc..................................... 25,500 557,813
Wal Mart Stores Inc................................... 43,900 1,064,575
------------------
1,622,388
------------------
Technology 2.6%
Motorola Inc.......................................... 23,800 1,059,100
U.S. Robotics Inc. <F2>............................... 30,000 810,000
------------------
1,869,100
------------------
Telecommunications 4.6%
Alcatel Alsthom Compagnie
Generale d' Electricite ADR (France)................ 30,500 663,375
Antec Corp. <F2>...................................... 30,900 726,150
DSC Communications Corp............................... 60,000 1,173,750
Vodafone Group PLC ADR (United Kingdom)............... 9,500 719,625
------------------
3,282,900
------------------
Transportation 4.7%
AMR Corp. <F2>........................................ 14,700 872,812
GATX.................................................. 27,000 1,093,500
Santa Fe Pacific Corp................................. 32,800 684,700
Southern Pacific Rail Corp. <F2>...................... 37,400 733,975
------------------
3,384,987
------------------
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 92
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities 0.5%
Georgia Power Co. Preferred........................... 14,500 $ 349,813
------------------
Total Common and Preferred Stock...................... 61,214,381
------------------
Convertible Bonds 1.4%
Airborne Freight Corp. ($450,000 par, 6.75%
coupon, 08/15/01 maturity, S&P rating BBB)......... 472,500
Champion International Corp. ($500,000 par, 6.50%
coupon, 04/15/11 maturity, S&P rating BBB-).......... 524,375
------------------
Total Convertible Bonds............................... 996,875
------------------
Other 0.3%
Morgan Stanley Group Inc, 42,500 Japan Index
Callable Warrants Expiring 05/28/96................ 244,375
------------------
Total Long-Term Investments 87.0%
(Cost $65,508,969) <F1>............................. 62,455,631
------------------
Short-Term Investments at Amortized Cost 14.3%
Repurchase Agreement, UBS Securities, U.S. T-Note,
$8,430,000 par, 6.50% coupon, due 05/15/97,
dated 06/30/94, be sold on 07/01/94 at $8,336,973 8,336,000
Other.............................................. 1,939,247
------------------
Total Short-Term Investments at Amortized Cost........ 10,275,247
Liabililies in Excess of Other Assets (1.3%)......... (917,329)
------------------
Net Assets 100%....................................... $ 71,813,549
------------------
<FN>
<F1> At June 30,1994, cost for federal income tax purposes is
$65,508,969: the aggregate gross unrealized appreciation is
$1,765,839 and the aggregate gross unrealized depreciation
is $4,819,661, resulting in net unrealized depreciation
including open option and futures transactions of $3,053,822.
<F2> Non-income producing security as this stock currently does
not declare dividends.
<F3> Assets segregated as collateral for open option and futures
transactions.
<F4> Restricted security.
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 93
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $65,508,969) (Note 1)............................................. $ 62,455,631
Short-Term Investments (Note 1)...................................................................... 10,275,247
Cash................................................................................................. 478
Receivables:
Investments Sold.................................................................................... 4,653,092
Dividends........................................................................................... 500,271
Fund Shares Sold.................................................................................... 305,608
Margin on Futures................................................................................... 67,500
Interest............................................................................................ 19,525
Options at Market Value (Net premiums paid of $127,572).............................................. 413
Other................................................................................................ 4,324
------------
Total Assets........................................................................................ 78,282,089
------------
Liabilities:
Payables:
Investments Purchased............................................................................... 6,077,363
Fund Shares Repurchased............................................................................. 160,223
Investment Advisory Fee (Note 2).................................................................... 35,942
Accrued Expenses..................................................................................... 195,012
------------
Total Liabilities................................................................................... 6,468,540
------------
Net Assets........................................................................................... $ 71,813,549
------------
Net Assets Consist of:
Paid in Surplus (Note 3)............................................................................. $ 73,747,273
Accumulated Undistributed Net Investment Income...................................................... 658,391
Accumulated Net Realized Gain on Investments......................................................... 399,510
Accumulated Equalization Credits (Note 1)............................................................ 62,197
Net Unrealized Depreciation on Investments........................................................... (3,053,822)
------------
Net Assets........................................................................................... $ 71,813,549
------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (based on net assets of $46,482,036 and
2,626,362 shares of beneficial interest issued and outstanding) (Note 3)............................ $ 17.70
------------
Maximum sales charge (4.65% of offering price)...................................................... .86
Maximum offering price to public.................................................................... $ 18.56
------------
Class B Shares:
Net asset value and offering price per share (based on net assets of $24,810,677 and
1,402,963 shares of beneficial interest issued and outstanding) (Note 3)............................ $ 17.68
------------
Class C Shares:
Net asset value and offering price per share (based on net assets of $518,898 and
29,332 shares of beneficial interest issued and outstanoing) (Note 3)............................ $ 17.69
------------
Class D Shares:
Net asset value and offering price per share (based on net assets of $1,938 and
110 shares of beneficial interest issued and outstanding) (Note 3)............................... $ 17.62
------------
*0n sales of $100,000 or more, the offering price will be reduced.
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 94
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1994
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Investment Income:
Dividends (Net of foreign withholding taxes of $7,508)............................................... $ 1,360,648
Interest............................................................................................. 200,390
------------
Total Income........................................................................................ 1,561,038
------------
Expenses:
Investment Advisory Fee (Note 2)..................................................................... 304,973
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $113,468, $99,797,
$1,426 and $2, respectively) (Note 5).............................................................. 214,693
Shareholder Services................................................................................. 122,798
Custody.............................................................................................. 90,042
Printing............................................................................................. 61,600
Legal (Note 2)....................................................................................... 27,720
Trustees Fees and Expenses (Note 2).................................................................. 27,182
Other................................................................................................ 53,639
------------
Total Expenses...................................................................................... 902,647
------------
Net Investment Income................................................................................ $ 658,391
------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales................................................................................. $ 90,944,864
Cost of Securities Sold............................................................................. (89,537,527)
------------
Net Realized Gain on Investments (Including realized loss on closed and expired option
transactions of $1,243,287 and realized gain on futures transactions of $255,523).................. 1,407,337
------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period............................................................................ 2,586,275
End of the Period (Including unrealized depreciation on open option transactions of $127,159
and unrealized appreciation on open futures transactions of $126,675)............................. (3,053,822)
------------
Net Unrealized Depreciation on Investments During the Period......................................... (5,640,097)
------------
Net Realized and Unrealized Loss on Investments...................................................... $(4,232,760)
------------
Net Decrease in Net Assets from Operations........................................................... $(3,574,369)
------------
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 95
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended June 30, 1994 and 1993
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1994 June 30, 1993
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income............................................................................. $ 658,391 $ 550,320
Net Realized Gain on Investments.................................................................. 1,407,337 5,545,152
Net Unrealized Depreciation on Investments During the Period...................................... (5,640,097) (1,456,804)
------------ -----------
Change in Net Assets from Operations.............................................................. (3,574,369) 4,638,668
------------ -----------
Distributions from Net Investment Income:
Class A Shares................................................................................... (283,548) (491,270)
Class B Shares................................................................................... (6,360) (139)
------------ -----------
(289,908) (491,409)
------------ -----------
Distributions from Net Realized Gain on Investments:
Class A Shares................................................................................... (5,555,001) (1,497,079)
Class B Shares................................................................................... (761,009) (12,763)
Class C Shares................................................................................... (2,518) -0-
------------ -----------
(6,318,528) (1,509,842)
------------ -----------
Total Distributions.............................................................................. (6,608,436) (2,001,251)
------------ -----------
Net Change in Net Assets from Investment Activities...............................................(10,182,805) 2,637,417
------------ -----------
From Capital Transactions (Note 3):
Proceeds from Shares Sold......................................................................... 46,602,308 10,281,518
Net Asset Value of Shares Issued Through Dividend Reinvestment.................................... 6,217,989 1,880,352
Cost of Shares Repurchased........................................................................ (8,165,855) (5,933,712)
Net Equalization Credits.......................................................................... 75,488 16,785
------------ -----------
Net Change in Net Assets from Capital Transactions................................................ 44,729,930 6,244,943
------------ -----------
Total Increase in Net Assets...................................................................... 34,547,125 8,882,360
Net Assets:
Beginning of the Period........................................................................... 37,266,424 28,384,064
------------ -----------
End of the Period (Including undistributed net investment income
of $658,391 and $301,180, respectively).........................................................$ 71,813,549 $ 37,266,424
------------ -----------
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 96
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1994
- ----------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Growth and Income Fund (the "Fund") was
organized as a Massachusetts business trust on July 8,1986, 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 October 29,1986 and was
reorganized as a subtrust of Van Kampen Merritt Equity Trust (the
"Trust"), a Massachusetts business trust, as of June 17,1988. On
December 1,1992, the Fund commenced the distribution of Class B
shares. The distribution of the Fund's Class C shares, which were
initially introduced as Class D shares and subsequently renamed
Class C shares on March 7,1994, commenced on August 13,1993.
The distribution of the Fund's fourth class of shares, Class D shares,
commenced on March 14,1994.
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 in securities listed on a
securities exchange are valued at their sale price as of the close of
such securities exchange. Investments in securities not listed on a
securities exchange are valued based on their last quoted bid price
or, if not available, their fair value as determined by the Board of
Trustees. Fixed income investments are stated at values using market
quotations or, if such valuations are not available, estimates obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good
faith by the Board of Trustees. Short-term securities with remaining
maturities of less than 60 days are valued at amortized cost.
B. Security Transactions-Security transactions are recorded on
a trade date basis. Realized gains and losses are determined on an
identified cost basis.
C. Investment Income-Dividend income is recorded on the
ex-dividend date and interest income is recorded on an accrual basis.
D. Federal Income Taxes-It is the Fund's policy to comply
with the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute substantially all of
its taxable income to its shareholders. Therefore, no provision for
federal income taxes is required.
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.
E. Distribution of Income and Gains-The Fund declares
and pays dividends semi-annually from net investment income. Net
realized gains, if any, are distributed annually. Distributions from net
realized gains for book purposes may include short-term capital gains
and gains on option and futures transactions. All short-term capital
gains and a portion of option and futures gains are included in
ordinary income for tax purposes.
During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distribu-
tions by Investment Companies." Accordingly, cumulative permanent
book and tax basis differences relating to shareholder distributions
totaling ($11,272), ($498,780) and $510,052 have been reclassified
between accumulated undistributed net investment income, accumu-
lated net realized gain/loss on investments and Class A share paid in
surplus, respectively. Net investment income, net realized gains, and
net assets were not affected by this change.
F. Equalization-The Fund utilizes an accounting practice known
as equalization, by which a portion of the proceeds from sales and
costs of reacquisitions of capital shares, equivalent on a per share
basis to the amount of distributable net investment income on the date
of the transactions, is credited or charged to an equalization account, which
is a component of capital. As a result, undistributed net investment income
per share is unaffected by sales or reacquisitions of capital shares.
G. Option and Futures Transactions-Premiums received
from call options written are recorded as deferred credits. The posi-
tion is marked to market daily with any difference between the
options' current market value and premiums received recorded as an
unrealized gain or loss. If the options are not exercised, premiums
received are realized as a gain at expiration date. If the position is
closed prior to expiration, a gain or loss is realized based on
premiums received less the cost of the closing transaction. When
options are exercised, premiums received are added to the proceeds
from the sale of the underlying securities and a gain or loss is
realized accordingly. These same principles apply to the sale of put
options.
B-43
<PAGE> 97
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
- ----------------------------------------------------------------------------
Put and call options purchased are accounted for in the same
manner as portfolio securities. The cost of securities acquired through
the exercise of call options is increased by premiums paid. The pro-
ceeds from securities sold through the exercise of put options are
decreased by premiums paid.
Futures contracts are marked to market daily with fluctuations in
value settled daily in cash through a margin account. Gains or losses
are realized at the time the position is closed out or the contract
expires.
2. Investment Advisory Agreement and Other Transactions
with Affiliates
Under the terms of the Fund's Investment Advisory Agreement,
Van Kampen Merritt Investment Advisory Corp. (the "Adviser") will
provide facilities and investment advice to the Fund for an annual fee
payable monthly as follows:
Average Net Assets % Per Annum
- ----------------------------------------------------------------------------
First $500 million................................... .60 of 1%
Over $500 million.................................... .50 of 1%
Certain legal fees are paid to Skadden, Arps, Slate, Meagher &
Flom, counsel to the Fund, of which a trustee of the Fund is an
affiliated person.
For the year ended June 30,1994, the Fund recognized expenses
of approximately $38,300, representing Van Kampen Merritt's or the
Adviser'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 the Adviser and Van Kampen Merritt. The Fund does not
compensate its officers or trustees who are officers of the Adviser or
Van Kampen Merritt.
At June 30,1994, Van Kampen Merritt owned 122,116 and
100 shares of beneficial interest of Classes B, C and D, respectively.
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes
A, B, C and D. There are an unlimited number of shares of each
class without par value authorizcd. At June 30,1994. paid in surplus
aggregated $45,974,724, $27,218,099, $552,329 and $2,121, for
Classes A, B, C and D, respectively. For the year ended June 30,
1994, transactions were as follows:
Shares Value
- ----------------------------------------------------------------------------
Sales:
Class A..................... 1,040,379 $ 20,367,239
Class B..................... 1,332,246 25,683,130
Class C..................... 29,202 549,818
Class D..................... 110 2,121
---------- -------------
Total Sales 2,401,937 $ 46,602,308
---------- -------------
Dividend Reinvestment:
Class A..................... 286,118 $ 5,506,728
Class B..................... 36,659 708,750
Class C..................... 130 2,511
Class D..................... 0 0
---------- -------------
Total Dividend Reinvestment 322,907 $ 6,217,989
---------- -------------
Repurchases:
Class A..................... (318,421) $ (6,259,365)
Class B..................... (98,138) (1,906,490)
Class C..................... 0 0
Class D..................... 0 0
---------- -------------
Total Repurchases (416,559) $ (8,165,855)
---------- -------------
At June 30,1993, paid in surplus aggregated $25,850,070 and
$2,732,709 for Classes A and B, respectively. For the year ended
June 30,1993, transactions were as follows:
Shares Value
- ----------------------------------------------------------------------------
Sales:
Class A...................... 366,085 $ 7,355,797
Class B...................... 141,339 2,925.721
---------- -------------
Total Sales 507,424 $ 10,281,518
---------- -------------
Dividend Reinvestment:
Class A...................... 95,297 $ 1,870,438
Class B...................... 500 9,914
---------- -------------
Total Dividend Reinvestment 95,797 $ 1,880,352
---------- -------------
Repurchases:
Class A...................... (284,423) $ (5,730,786)
Class B...................... (9,643) (202,926)
---------- -------------
Total Repurchases (294,066) $ (5,933,712)
---------- -------------
B-44
<PAGE> 98
Van Kampen Merritt Growth And Income Fund
- ----------------------------------------------------------------------------
Notes to Financial Statements (Continued)
June 30, 1994
- ----------------------------------------------------------------------------
Class B, C and D shares are offered without a front end sales
charge, but are subject to a contingent deferred sales charge (CDSC).
The CDSC for Class B, C and D shares will be imposed on most
redemptions made within six years of the purchase for Class B and
one year of the purchase for Classes C and D as detailed in the
following schedule. The Class B, C and D shares bear the expense
of their respective deferred sales arrangements, including higher
distribution and service fees and incremental transfer agency costs.
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- ----------------------------------------------------------------------------
First........................... 4.00% 1.00% 0.75%
Second.......................... 3.75% None None
Third........................... 3.50% None None
Fourth.......................... 2.50% None None
Fifth........................... 1.50% None None
Sixth........................... 1.00% None None
Seventh and Thereafter.......... None None None
For the year ended June 30, 1994, Van Kampen Merritt, as
Distributor for the Fund, received net commissions on sales of the
Fund's Class A shares of $132 and CDSC on the redeemed shares
of Classes B, C and D of approximately $25,000. Sales charges do
not represent expenses of the Fund.
4. Inveqtment Transactions
Aggregate purchases and cost of sales of investment securities,
excluding short-term notes, for the year ended June 30,1994, were
$120,943,402 and $89,537,527, respectively.
Transactions in options for the year ended June 30,1994, were
as follows:
Contracts Premium
- ----------------------------------------------------------------------------
Outstanding at June 30,1993...... 600 $ (89,821)
Options Written and
Purchased (Net)................ 12,182 (2,423,651)
Options Expired (Net)............ (745) 224,360
Options Terminated in
Closing Transactions (Net)....... (11,065) 2,161,540
---------- -------------
Outstanding at June 30,1994...... 972 $ (127,572)
---------- -------------
The related futures contracts of the outstanding option trans-
actions at June 30,1994, and the descriptions and market values are
as follows:
Expiration
Month/ Market
Exercise Value of
Contracts Price Option
- ----------------------------------------------------------------------------
S&P 500 Index
Purchased Call........................ 300 July/455 $ 24,375
Purchased Call........................ 136 July/445 57,800
S&P 500 Index
Written Put........................... 136 July/445 (65,450)
Novel Inc.
Written Call.......................... 10 July/17-1/2 (375)
Written Call.......................... 250 July/17-1/2 (9,375)
Merck & Co.
Written Call.......................... 140 July/30 (6,562)
----- --------
972 $ 413
----- --------
The futures contracts outstanding at June 30,1994, and the
description and unrealized appreciation is as follows:
Unrealized
Contracts Appreciation
- ----------------------------------------------------------------------------
S&P 500 Index Futures
Sept 1994-Sell to Open............... 36 $126,675
---- ----------
5. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment
Company Act of 1940 and a service plan (the "Service Plan," collec-
tively the "Plans"). The Plans govern payments for the distribution of
the Fund's shares, ongoing shareholder services and maintenance of
shareholder accounts.
Annual fees under the Plans of up to .30% each of Class A and
Class D shares and 1.00% each of Class B and Class C shares are
accrued daily. Included in these fees for the year ended June 30,
1994, are payments to Van Kampen Merritt of approximately $94,000.
B-45
<PAGE> 99
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED APRIL 28, 1995
VAN KAMPEN MERRITT
UTILITY FUND
Van Kampen Merritt Utility Fund (the "Fund") is a separate diversified
sub-trust of Van Kampen Merritt Equity Trust, an open-end management investment
company, commonly known as a mutual fund. The Fund's investment objective is to
seek to provide its shareholders with capital appreciation and current income.
The Fund will seek to achieve its investment objective by investing in a
diversified portfolio of common stocks and income securities (as described in
the Prospectus) issued by companies engaged in the utilities industry ("Utility
Securities"). Companies engaged in the utilities industry include those involved
in the production, transmission, or distribution of electric energy, gas,
telecommunications services or the provision of other utility or utility related
goods or services. Under normal market conditions, at least 80% of the Fund's
assets will be invested in Utility Securities. The Fund may invest up to 35% of
its assets in securities issued by non-U.S. issuers. There can be no assurance
that the Fund will achieve its investment objective.
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp (the "Adviser"). 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 1-800-225-2222.
(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.
------------------
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 April 30, 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 1-800-225-2222, ext. 6504 or, for
Telecommunication Device For the Deaf, 1-800-772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL(SM)
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1995.
<PAGE> 100
(Continued from previous page.)
The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements") 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.
Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.30% of the Fund's
average daily net assets attributable to the Class A Shares (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and the Class C Shares are the same as those of the initial sales
charge and distribution and service fees with respect to the Class A Share
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangements, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class 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) the
classes have different exchange privileges. Class B Shares automatically will
convert to Class A Shares seven years after the end of the calendar month in
which the investor's order to purchase was accepted, in the circumstances and
subject to the qualifications described in this Prospectus. See "Purchasing
Shares of the Fund."
2
<PAGE> 101
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 4
Shareholder Transaction Expenses..................................... 7
Annual Fund Operating Expenses and Example........................... 8
Financial Highlights................................................. 10
The Fund............................................................. 11
Investment Objective and Policies.................................... 11
Investment Practices................................................. 17
Purchasing Shares of the Fund........................................ 21
Alternative Sales Arrangements..................................... 21
Initial Sales Charge Alternative................................... 24
Deferred Sales Charge Alternatives................................. 28
Distributions from the Fund.......................................... 31
Purchase of Additional Shares with Distributions................... 32
Redemption of Shares................................................. 32
Net Asset Value...................................................... 35
Investment Advisory Services......................................... 36
Portfolio Transactions and Brokerage Allocation...................... 37
The Distribution and Service Plans................................... 38
Tax Status........................................................... 40
Shareholder Programs................................................. 43
Investments by Tax-Sheltered Retirement Plans........................ 47
Fund Performance..................................................... 48
Shareholder Services................................................. 49
Description of Shares of the Fund.................................... 50
Shareholder Reports and Inquiries.................................... 50
Additional Information............................................... 51
</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 EITHER OF THE FUNDS, THE ADVISER, OR THE
DISTRIBUTORS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE
DISTRIBUTORS 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> 102
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
THE FUND Van Kampen Merritt Utility Fund (the "Fund") is a separate diversified
sub-trust of Van Kampen Merritt Equity Trust, which is an open-end management
investment company organized as a Massachusetts business trust. See "The Fund."
INVESTMENT OBJECTIVE, POLICIES AND RISKS The Fund's investment objective is to
provide its shareholders with capital appreciation and current income. There can
be no assurance that the Fund will achieve its investment objective.
Utility Securities. The Fund will seek to achieve its investment objective by
investing in a diversified portfolio of common stocks and income securities (as
described herein) issued by companies engaged in the utilities industry
("Utility Securities"). Companies engaged in the utilities industry include
those involved in the production, transmission, or distribution of electric
energy, gas, telecommunications services or the provision of other utility or
utility related goods or services. Under normal market conditions, at least 80%
of the Fund's assets will be invested in Utility Securities. Because of the
Fund's policy of concentrating its investments in Utility Securities, the Fund
may be more susceptible than an investment company without such a policy to any
single economic, political or regulatory occurrence affecting the public
utilities industry. Under normal market conditions, the Fund may invest up to
20% of its assets in other than Utility Securities, including common stocks and
income securities of issuers not engaged in the utilities industry, cash and
money market instruments.
Income Securities and Lower Grade Income Securities. The Fund's investments in
income securities will be rated, at the time of investment, at least BBB by
Standard & Poor's Ratings Group ("S&P"), or at least Baa by Moody's Investors
Service ("Moody's") or comparably rated by any other nationally recognized
statistical rating organization; provided, however, the Fund may invest up to
20% of its assets in income securities that are rated BB or B by S&P or Ba or B
by Moody's (or comparably rated by any other nationally recognized statistical
rating service) or in unrated income securities considered by the Fund's
investment adviser to be of comparable or higher quality. Such lower rated or
unrated 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. The
Fund will not invest in securities rated below B by S&P and below B by Moody's.
While offering opportunities for higher yields, lower-grade securities are
considered below "investment grade" and involve a greater degree of credit risk
than investment grade income securities; although the lower-grade income
securities of an issuer generally involve a lower degree of credit risk than its
common stock. For a discussion of lower grade securities, please see the section
of the prospectus captioned "Investment Objective and Policies -- Income
Securities and Risks of Lower Grade Income Securities."
Foreign Securities. The Fund may invest up to 35% of its assets in securities
issued by non-U.S. issuers. Investments in foreign securities involve certain
risks not ordinarily associated with investments in securities of domestic
issuers, including fluctuations in foreign exchange rates, future political and
economic developments, confiscatory taxation
4
<PAGE> 103
and the possible imposition of exchange controls or other foreign governmental
laws or restrictions.
The Fund's net asset value per share will fluctuate depending on market
conditions and other factors. See "Investment Objective and Policies."
INVESTMENT PRACTICES The Fund also may use various investment techniques
including engaging in Strategic Transactions, as herein defined, entering into
when-issued or delayed delivery transactions, lending portfolio securities,
repurchase agreements and reverse repurchase agreements. Such transactions
entail certain risks. See "Investment Practices."
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 and other circumstances. Investors
should consider such factors together with the amount of sales charges and the
aggregate distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.
The Fund currently offers three classes of its 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 either (i) at the time of the
purchase ("Class A Shares") or (ii) on a contingent deferred basis (Class A
Share accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A
Share accounts over $1,000,000 or otherwise subject to a contingent deferred
sales charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred
to herein collectively as CDSC Shares.
The minimum initial investment with respect to each of the Class A Shares,
Class B Shares and Class C Shares is $1,000. The minimum subsequent investment
with respect to each class of shares is $100.
Class A Shares. Class A Shares are subject to an initial sales charge equal to
5.75% of the public offering price (6.10% of the net amount invested), reduced
on investments of $50,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.30% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a contingent deferred sales charge.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but generally are subject to a sales charge if redeemed within six
years of purchase. Class B Shares are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or the
original purchase price on Class B Shares redeemed during the first year after
purchase, which charge is reduced each year thereafter. Class B Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's average daily net assets attributable to
5
<PAGE> 104
the Class B Shares. Class B Shares automatically will convert to Class A Shares
seven years after the end of the calendar month in which the investor's order to
purchase was accepted.
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a contingent deferred sales charge
equal to 1.00% of the lesser of the then current net asset value or the original
purchase price on Class C Shares redeemed during the first year after purchase.
Class C Shares are subject to ongoing distribution and service fees at an
aggregate annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class C Shares.
INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the investment adviser for the Fund. The
annual advisory fee for the Fund is 0.65% of its average daily net assets,
reduced on net assets over certain amounts. See "Investment Advisory Services."
DISTRIBUTIONS FROM THE FUND Distributions from net investment income are
declared and paid quarterly; net realized capital gains, if any, are distributed
annually. 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 administrative expenses relating
to each class of shares will be borne exclusively by the respective class of
shares. See "Distributions from the Fund."
REDEMPTION Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. The Fund may require the redemption of shares if the value of an account
is $500 or less. See "Redemption of Shares."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 105
- --------------------------------------------------------------------------------
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).................... 5.75%(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 original purchase
price on redemption proceeds)...... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
Redemption fees (as a percentage of
amount redeemed)................... None None None
Exchange fees........................ None None None
</TABLE>
- ----------------
(1) Reduced on investments of $50,000 or more.
(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."
7
<PAGE> 106
- --------------------------------------------------------------------------------
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)....................................... 0.65% 0.65% 0.65%
12b-1 Fees(1) (as a percentage of average
daily net assets)................................. 0.30% 1.00% 1.00%
Other Expenses (as a percentage of average daily net
assets)........................................... 0.43% 0.44% 0.49%
Total Expenses (as a percentage of average daily
net assets)....................................... 1.38% 2.09% 2.14%
</TABLE>
- ----------------
(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid 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,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation.
8
<PAGE> 107
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 1.38% for Class A Shares,
2.09% for Class B Shares and 2.14% for Class C
Shares, (ii) 5% annual return and (iii)
redemption at the end of each time period:
Class A Shares............................... $ 71 $ 99 $ 129 $ 214
Class B Shares............................... $ 61 $ 100 $ 127 $ 207
Class C Shares............................... $ 32 $ 67 $ 115 $ 247
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................... $ 71 $ 99 $ 129 $ 214
Class B Shares............................... $ 21 $ 65 $ 112 $ 207
Class C Shares............................... $ 22 $ 67 $ 115 $ 247
</TABLE>
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 to
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."
9
<PAGE> 108
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(for one 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 throughout the periods
indicated. The financial highlights have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, for each of the periods unless
otherwise 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 Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------------- --------------------------- ------------------------------
FROM FROM
JULY 28, 1993 JULY 28, 1993
(COMMENCEMENT (COMMENCEMENT FROM
SIX MONTHS OF INVESTMENT SIX MONTHS OF INVESTMENT SIX MONTHS AUGUST 13, 1993
ENDED OPERATIONS) ENDED OPERATIONS) ENDED (COMMENCEMENT OF
DECEMBER 31, TO DECEMBER 31, TO DECEMBER 31, DISTRIBUTION) TO
1994 JUNE 30, 1994 1994 JUNE 30, 1994 1994 JUNE 30, 1994
------------ ------------- ------------ ------------- ------------ ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of
Period............... $ 12.906 $14.300 $ 12.880 $14.300 $ 12.868 $ 14.460
------ ---------- ------ ---------- ------ -------
Net Investment
Income............. .300 .479 .257 .394 .237 .330
Net Realized and
Unrealized Loss on
Investments........ (.281) (1.513) (.271) (1.519) (.244) (1.627)
------- ---------- ------ ---------- ------ -------
Total from Investment
Operations........... .019 (1.034) (.014) (1.125) (.007) (1.297)
------- ---------- ------ ---------- ------ -------
Less:
Distributions from
Net Investment
Income............. .450 .323 .369 .258 .369 .258
Distributions in
Excess of Net
Realized Gain on
Investments........ --0-- .037 --0-- .037 --0-- .037
------ ---------- ------ ---------- ------ -------
Total Distributions... .450 .360 .369 .295 .369 .295
------- ---------- ------ ---------- ------ -------
Net Asset Value, End
of Period............ $ 12.475 $12.906 $ 12.497 $12.880 $ 12.492 $ 12.868
========= ========== ========== ========== ========== ============
Total Return (Non-
annualized).......... .13% (7.38%) (.10%) (8.02%) (.10%) (9.11%)
Net Assets at End of
Period (in
millions)............ $49.7 $51.5 $78.6 $83.7 $1.3 $1.1
Ratio of Expenses to
Average Net Assets
(annualized)......... 1.38% 1.34% 2.09% 2.06% 2.14% 2.05%
Ratio of Net
Investment Income to
Average Net Assets
(annualized)......... 4.63% 4.10% 3.92% 3.36% 3.87% 3.38%
Portfolio Turnover.... 45.87% 101.54% 45.87% 101.54% 45.87% 101.54%
</TABLE>
See Financial Statements and Notes Thereto.
10
<PAGE> 109
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
Van Kampen Merritt Utility Fund (the "Fund") is a mutual fund, which pools
shareholders' money to seek to achieve a specified investment objective. In
technical terms, the Fund is a separate diversified sub-trust of Van Kampen
Merritt Equity Trust (the "Trust"), which is an open-end management investment
company, organized as a Massachusetts business trust. Mutual funds sell their
shares to investors and invest the proceeds in a portfolio of securities. A
mutual fund allows investors to pool their money with that of other investors in
order to obtain professional investment management. Mutual funds generally make
it possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping. Investment in the Fund involves special
considerations as the Fund is a newly organized investment company with no
history of investment operations.
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 OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide its shareholders with capital
appreciation and current income. The Fund will seek to achieve its investment
objective by investing in a diversified portfolio of common stock and income
securities issued by companies engaged in the utilities industry ("Utility
Securities"). Companies engaged in the utilities industry include those engaged
in the production, transmission, or distribution of electric energy, gas,
telecommunications services or the provision of other utility or utility related
goods or services. Under normal market conditions, at least 80% of the Fund's
assets will be invested in Utility Securities. Under normal market conditions,
the Fund may invest up to 20% of its assets in other than Utility Securities,
including common stock and income securities of issuers not engaged in the
utilities industry, cash and money market instruments. Income securities include
preferred stock and debt securities of various maturities. The Fund's
investments in income securities will be rated, at the time of investment, at
least BBB by Standard & Poor's Ratings Group ("S&P"), or at least Baa by Moody's
Investors Services, Inc. ("Moody's") or comparably rated by any other nationally
recognized statistical rating organization ("NRSRO"); provided, however, the
Fund may invest up to 20% of its assets in income securities that are rated BB
or B by S&P or Ba or B by Moody's (or comparably rated by any other NRSRO) or
unrated income securities determined by the Fund's investment adviser to be of
comparable or higher quality. Such lower rated or unrated 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 and/or
repay principal in accordance with their terms. While offering opportunities for
higher yields, lower-grade securities are considered
11
<PAGE> 110
below "investment grade" and involve a greater degree of credit risk that
investment grade income securities; although the lower-grade income securities
of an issuer generally involve a lower degree of credit risk than its common
stock. Such securities are regarded by the rating agencies, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation; assurance of interest
and principal payments or maintenance of other terms of the securities over any
long period of time may be small. The Fund may invest up to 35% of its assets in
securities issued by non-U.S. issuers. The foregoing policies are fundamental
and cannot be changed without approval of the Shareholders. There can be no
assurance that the Fund will achieve its investment objective.
The Adviser believes that the historical performance of Utility Securities,
together with ongoing developments in the utilities industry, indicate the
potential for achieving both capital appreciation and current income from
investment in a diversified portfolio of Utility Securities. The Adviser
believes that the historical characteristics of Utility Securities which are
common stocks indicate potential for capital appreciation. The Adviser also
believes that many companies engaged in the utilities industry have established
a reputation for paying regular quarterly dividends and for increasing their
common stock dividends over time, despite fluctuations in interest rates over
time. The annual dividends per share of the Utility Securities comprising the
S&P Utilities Index, for the 10 year period 1982 through 1992, have increased
while interest rates during such period, as measured by the six month U.S.
Treasury rate, have fluctuated widely. The Adviser believes that the historical
characteristics of Utility Securities which are income securities indicate the
potential for current income.
In evaluating particular issuers of Utility Securities, the Adviser will
consider a number of factors, including historical growth rates, rates of return
on capital, financial condition and resources, geographic location and service
area, management skills and such utilities industry factors as regulatory
environment, energy sources, the costs of alternative fuels and, in the case of
electric energy utilities, the extent and nature of their involvement with
nuclear powers. The Adviser will place special emphasis on the potential for
capital appreciation, current and projected yields, prospective growth in
earnings and dividends in relation to price/earnings ratios and risk. The
Adviser believes that Utility Securities provide above-average dividend returns
and below-average price/earnings ratios which in the view of the Adviser are
factors that not only provide current income but also generally tend to moderate
risk. The Adviser will buy and sell securities for the Fund's portfolio with a
view toward seeking capital appreciation together with current income and will
select securities which the Adviser believes entail reasonable credit risk
considered in relation to the investment policies of the Fund. As a result, the
Fund will not necessarily invest in the highest yielding Utility Securities
permitted by the investment policies if the Adviser determines that market risks
or credit risks associated with such investments would subject the Fund's
portfolio to excessive risk. 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. A high rate of portfolio turnover
involves correspondingly greater brokerage commission expenses or dealer costs
than a lower rate,
12
<PAGE> 111
which expenses and costs must be borne by the Fund and its shareholders. See
"Investment Policies and Restrictions" in the Statement of Additional
Information.
PORTFOLIO SECURITIES
UTILITY SECURITIES. Utility Securities are common stocks and income securities
of companies engaged in the utilities industry. Companies engaged in the
utilities industry include a variety of entities involved in (i) production,
transmission or distribution of electric energy, (ii) the provision of natural
gas, (iii) the provision of telephone, mobile communication and other
telecommunications services or (iv) the provision of other utility or utility
related goods or services, including entities engaged in cogeneration, waste
disposal system provision, solid waste electric generation, independent power
producers and non-utility generators.
The public utilities industry has experienced significant changes in recent
years. Many issuers of Utility Securities have been favorably effected by lower
fuel and financing costs, deregulation, the full or near completion of major
construction programs and an increasing customer base. In addition, many utility
companies have generated cash flows in excess of current operating expenses and
construction expenditures, permitting some degree of diversification into
unregulated businesses. Some electric utilities have also taken advantage of the
right to sell power outside of their historical territories.
The rate of return of issuers of Utility Securities generally are subject to
review and limitation by state public utilities commissions and tend to
fluctuate with marginal financing costs. Rate changes generally lag changes in
financing costs, and thus can favorably or unfavorably affect the earnings or
dividend payments on Utility Securities depending upon whether such rates and
costs are declining or rising.
Companies engaged in the public utilities industry historically have been
subject to a variety of risks depending, in part, on such factors as the type of
utility company involved and its geographic location. Such risks include
increases in fuel and other operating costs, high interest expenses for capital
construction programs, costs associated with compliance with environmental and
nuclear safety regulations, service interruption due to environmental,
operational or other mishaps, the effects of economic slowdowns, surplus
capacity, competition and changes in the overall regulatory climate. In
particular, regulatory changes with respect to nuclear and conventionally fueled
generating facilities could increase costs or impair the ability of utility
companies to operate such facilities, thus reducing utility companies' earnings
or resulting in losses. There can be no assurance that regulatory policies or
accounting standard changes will not negatively affect utility companies'
earnings or dividends. Companies engaged in the public utilities industry are
subject to regulation by various authorities and may be affected by the
imposition of special tariffs and changes in tax laws. To the extent that rates
are established or reviewed by governmental authorities, companies engaged in
the public utilities industry are subject to the risk that such authority will
not authorize increased rates. In addition, because of the Fund's policy of
concentrating its investments in Utility Securities, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting the public utilities
industry. Under
13
<PAGE> 112
market conditions that are unfavorable to the utilities industry, the Adviser
may significantly reduce the Fund's investment in that industry.
Gas and Telecommunications Utilities. Gas transmission companies, gas
distribution companies and telecommunications companies are undergoing
significant changes. Gas utilities have been adversely affected by declines in
the prices of alternative fuels, oversupply conditions and competition.
Telephone utilities are still experiencing the effects of the break-up of
American Telephone & Telegraph Company, including increased competition and
rapidly developing technologies with which traditional telephone companies now
compete. Potential sources of competition and new products are cable television
systems, shared tenant services and other noncarrier systems which are capable
of by-passing traditional telephone services providers' local plant, either
completely or partially, through substitutions of special access for switched
access or through concentration of telecommunications traffic on fewer of the
traditional telephone services providers' lines. Although there can be no
assurance that increased competition and other structural changes will not
adversely affect the profitability of such utilities, or that other negative
factors will not develop in the future, in the Adviser's opinion, competition
and technological advances may over time result in provide better-positioned
utility companies with opportunities for enhanced profitability.
Electric Utilities. Electric utility companies in general have been favorably
affected by lower fuel costs, the full or near completion of major construction
programs and lower financing costs. Some electric utilities have also taken
advantage of the right to sell power outside of their historical territories.
Certain electric utilities with uncompleted nuclear power facilities may have
problems completing and licensing such facilities, and there is increasing
public, regulatory and governmental concern with the cost and safety of nuclear
power facilities in general. At this time, there are certain institutional
impediments to the wide-scale deregulation of electric utilities including among
other things, limitations on the redistribution of power.
Other Utilities. Other issuers of Utility Securities are emerging as new
technologies develop and as old technologies are refined. Such issuers include
entities engaged in cogeneration, waste disposal system provision, solid waste
electric generation, independent power producers and non-utility generators.
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 potential for
appreciation and on its dividend paying capacity.
The average dividend yield of Utility Securities which are common stocks
historically has exceeded the average dividend yield of common stocks of
industrial issuers by a significant amount. For example, the common stocks
comprising the S&P Utilities Index for calendar 1992 had an average dividend
yield of 5.72%, or more than twice the 2.63%
14
<PAGE> 113
average dividend yield for the common stocks comprising the S&P 400 Industrials
Index. However, the Fund's portfolio will not necessarily reflect the securities
which comprise the S&P Utilities Index and there can be no assurance that the
historical investment performance for any industry (including the public
utilities industry) is indicative of future performance.
INCOME SECURITIES AND RISKS OF LOWER GRADE INCOME SECURITIES. The Fund may
invest its assets in income securities, which include preferred stocks, debt
securities of various maturities and securities convertible into, or ultimately
exchangeable for, Utility Securities. The Fund's investments in income
securities will be rated, at the time of investment, at least BBB by S&P, or at
least Baa by Moody's or comparably rated by any other NRSRO; provided, however,
the Fund may invest up to 20% of its assets in income securities that are rated
BB or B by S&P or Ba or B by Moody's (or comparably rated by any other NRSRO) or
unrated income securities determined by the Fund's investment adviser to be of
comparable or higher quality. In normal circumstances, the Fund may invest up to
20% of its assets in lower grade income securities (including downgraded
securities) or in unrated income securities considered by the Adviser to be of
comparable or higher quality to such lower grade securities or of comparable
quality to investment grade securities. Lower grade income securities in which
the Fund may invest are rated between BB and B by S&P or between Ba and B by
Moody's. Income securities with such ratings from S&P and Moody's 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 and/or repay principal
in accordance with their terms. Investment in lower grade securities involves
special risks as compared with investment in higher grade securities. The market
for lower grade securities is considered to be less liquid than the market for
investment grade securities which may adversely affect the ability of the Fund
to dispose of such securities in a timely manner at a price which reflects the
value of such security in the Adviser's judgment. Because issuers of lower grade
securities frequently choose not to seek a rating of their securities, the Fund
will rely more heavily on the Adviser's ability to determine the relative
investment quality of such securities than if the Fund invested exclusively in
higher grade securities. For a description of the ratings assigned to income
securities, including lower grade income securities, please see "Description of
Securities Ratings" in the Statement of Additional Information.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. The values of income securities may change as interest
rate levels fluctuate. To the extent that the Fund invests in income securities,
the net asset value of the Fund can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in income securities generally can be expected to rise. Conversely,
when interest rates rise, the value of a portfolio invested in income securities
generally can be expected to decline. Volatility may be greater during periods
of general economic uncertainty.
The foregoing 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
NRSRO) or, in the case of
15
<PAGE> 114
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, in addition to the factors described above, 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 nationally
recognized statistical rating organizations.
FOREIGN SECURITIES. The Fund may invest up to 35% of its assets in securities
issued by non-U.S. issuers of similar quality as the securities described above
as determined by the Adviser. Investments in securities of foreign entities and
securities denominated in foreign currencies involve risks not typically
involved in domestic investment, including fluctuations in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or United States governmental
laws or restrictions applicable to such investments. Since the Fund may invest
in securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the accrued income and unrealized appreciation
or depreciation of investments. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Fund's
assets denominated in that currency and the Fund's yield on such assets. With
respect to certain foreign countries, there is the possibility of expropriation
of assets, confiscatory taxation, political or social instability or diplomatic
developments which could affect investment in those countries. There may be less
publicly available information about a foreign security than about a United
States security, and foreign entities may not be subject to accounting, auditing
and financial reporting standards and requirements comparable to those of United
States entities. In addition, certain foreign investments made by the Fund may
be subject to foreign withholding taxes, which would reduce the Fund's total
return on such investments and the amounts available for distributions by the
Fund to its shareholders. See "Tax Status." Foreign financial markets, while
growing in volume, have, for the most part, substantially less volume than
United States markets, and securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable domestic companies.
The foreign markets also have different clearance and settlement procedures and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions making it difficult to
conduct such transactions. Delays in settlement could result in temporary
periods when assets of the Fund are not invested 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 portfolio securities due to settlement
problems could result either in losses to the Fund due to subsequent declines in
value of the portfolio security or, if the Fund has entered into a contract to
sell the security, could result in possible liability to the purchaser. Costs
associated with transactions in foreign securities, including custodial costs
and foreign brokerage commissions, are generally higher than with transactions
in United States securities. In addition, the Fund will incur costs in
connection with conversions between various currencies. There is generally less
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<PAGE> 115
government supervision and regulation of exchanges, financial institutions and
issuers in foreign countries than there is in the United States.
The Adviser believes that many foreign issuers of Utility Securities have yet
to experience the growth that certain issuers of Utility Securities located in
the United States have experienced and that as such foreign issuers develop
their domestic markets, they may become attractive investments. In addition, the
Adviser believes that certain foreign governments may engage in programs of
privatization of issuers of Utility Securities and that the Utility Securities
issued by privatized companies may offer attractive investment opportunities
with the potential for long-term growth. However it is not possible to predict
the terms of offerings by privatized companies or the effect of privatizations
in the domestic securities market of such privatized companies. There can be no
assurance that securities of privatized companies will be offered to the public
or to foreign companies such as the Fund.
DEFENSIVE STRATEGIES. At times conditions in the markets for Utility
Securities 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 taxable 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 NRSRO); commercial paper rated in the highest
grade by either rating service (or comparably rated by any other NRSRO);
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategy.
- --------------------------------------------------------------------------------
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions, enter into currency transactions, purchase and
sell securities on a "when issued" and "delayed delivery" basis enter into
repurchase and reverse repurchase agreements and lend its portfolio securities
in each case, subject to the limitations set forth below. These investments
entail risks.
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 currency
transactions such as currency forward contracts, currency futures contracts,
currency swaps or options on currencies or currency 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
17
<PAGE> 116
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. 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 of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. 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.
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."
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
18
<PAGE> 117
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 restriction 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 purchase 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 or lower 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.
RESTRICTED AND ILLIQUID SECURITIES. 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
19
<PAGE> 118
securities eligible for trading on national securities exchanges or in the
over-the-counter markets. Restricted securities may sell at a price lower than
similar securities that are not subject to restrictions on resale. Restricted
securities salable among qualified institutional buyers without restriction
pursuant to Rule 144A under the Securities Act of 1933 that are determined to be
liquid by the Adviser under guidelines adopted by the Board of Trustees of the
Trust (under which guidelines the Adviser will consider factors such as trading
activities and the availability of price quotations), will not be treated as
restricted securities by the Fund pursuant to such rules.
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 AND BORROWINGS. 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 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. Reverse
repurchase agreements create leverage and will be treated as borrowings for the
purposes of the Fund's investment restriction on borrowings.
The Fund is authorized to borrow money from banks or enter into reverse
repurchase agreements with banks in an amount up to 33 1/3% of the Fund's total
assets (after giving effect to any such borrowing) which amount includes no more
than 5% in borrowings and reverse repurchase agreements from any entity for
temporary purposes, such as clearances
20
<PAGE> 119
of portfolio transactions, share repurchases and payment of dividends and
distributions. The Fund has no current intention to borrow money other than for
such temporary purposes. Accordingly, the Fund will not acquire additional
Utility Securities during any period in which its borrowings exceed 5% of the
Fund's total assets. The Fund will borrow only when the Adviser believes that
such borrowings will benefit the Fund.
Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations such as changes in the net
asset value of the Shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Fund which can exceed the income from the assets
retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Fund will be less than if borrowing
were not used, and therefore the amount available for distribution to
stockholders as dividends will be reduced.
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
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
(the "Investment Company Act"). See "Investment Policies and Restrictions" in
the Statement of Additional Information.
- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Fund has designated three classes of 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") who are acting
as securities dealers ("dealers") and through NASD members or eligible non-NASD
members who are acting as brokers or agents for investors ("brokers"). The Fund
reserves the right to suspend or terminate the continuous public offering of its
shares at any time and without prior notice.
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.
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<PAGE> 120
The Fund currently 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 of
$1,000,000 or more, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1,000,000 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 $1,000.
The minimum subsequent investment with respect to each class of shares is $100.
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 $1,000,000 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 Share
accounts under $1 million, a purchaser of such Class A Shares would not 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 period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares or Class C
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 (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 CDSC 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
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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 "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 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 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 securities
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
Distributor 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 Distributor 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. See "Net Asset Value."
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. Other programs provide, among other things and subject to certain
23
<PAGE> 122
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminar of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. In addition, the Distributor is sponsoring
a sales contest for INVEST Financial Corporation ("INVEST") relating to the Fund
and other funds distributed by the Distributor, pursuant to which the
Distributor may provide an INVEST broker an award valued up to $750.00 for sales
of such funds during the period April 1, 1995, through May 31, 1995. Such
payments are made by the Distributor out of its own assets. These programs will
not change the price an investor will pay for shares or the amount that the Fund
will receive from such sale.
INITIAL SALES CHARGE ALTERNATIVE
Investors choosing the initial sales charge alternative purchase 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. See "Alternative Sales Arrangements" above. The staff
of the SEC has taken the position that brokers, dealers or financial
intermediaries who receive more than 90% or more of the sales charge may be
deemed to be "underwriters" as that term is defined in the Securities Act of
1933.
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
-------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Less than $50,000............................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000............... 4.75 4.99 4.00
$100,000 but less than $250,000.............. 3.75 3.90 3.00
$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
$1,000,000 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
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<PAGE> 123
will be paid to dealers who initiate and are responsible for purchases of $1
million or more as follows: 1% 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 "Purchasing Shares Of The Fund -- Deferred Sales Charge
Alternatives" for additional information with respect to contingent deferred
sales charges.
QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a letter of intent (even if investors are not currently making
an investment of a size that would normally qualify for a quantity discount).
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, financial intermediary or the Distributor.
For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:
(i) an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned,
either alone or in combination, by any of the foregoing; or
(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal
Revenue Code, as amended); or
(iii) a "company" as defined in Section 2(a)(8) of the Investment Company
Act.
1. Combination of Investments. Purchases of Class A Shares of the Fund, or of
other Van Kampen Merritt funds distributed by the Distributor subject to an
initial sales charge ("ISC Shares"), which are made at any one time by "any
person" may be combined to receive a quantity discount.
2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares "any
person" (as defined above) may combine their current purchase with the current
public offering price of Class A Shares of the Fund or ISC Shares, which are
owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.
3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase an amount of Class
A Shares, during a 13 month period, that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above
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<PAGE> 124
(including investments in ISC Shares) may be, at the time of the signing of the
Letter of Intent, applied towards completion of an investor's Letter of Intent.
In addition, if an investor's broker, dealer or financial intermediary and the
Distributor, agree to refund the appropriate portion of their respective
concessions to the Fund, the sales charge on an investor's previous purchases
made within 90 days may be adjusted to the reduced sales charge under the Letter
of Intent, and the refunded concession will be used to purchase Class A Shares
of the Fund at the public offering price next determined after receipt of such
monies. Each investment made after signing the Letter of Intent will be entitled
to the sales charge applicable to the total investment indicated in the Letter
of Intent. If an investor does not complete the necessary purchases under the
Letter of Intent within 13 months from the date of the first purchase included
thereunder, the sales charge will be adjusted upward, corresponding to the
amount actually purchased.
When an investor signs a Letter of Intent, Class A Shares purchased with a
value of 5% of the amount specified in the Letter of Intent will be restricted;
that is, these Class A Shares cannot be sold or redeemed until the Letter of
Intent is satisfied or the additional sales charges have been paid. If the total
purchases made under the Letter of Intent, less redemptions, equal or exceed the
amount specified in the Letter of Intent, these Class A Shares will no longer be
restricted. If the total purchases, less redemptions, exceed the amount so
specified, and qualify an investor for a further quantity discount, the
Distributor and the investor's securities broker, dealer or financial
intermediary will, upon request, remit their respective portions of the sales
concession and with that amount, purchase additional Class A Shares of the Fund
for the investor's account at the next computed offering price. If an investor
does not complete the necessary purchases under the Letter of Intent, the sales
charges will be adjusted upward and if, after written notice, the investor does
not pay the increased sales charge, sufficient restricted Class A Shares will be
redeemed to pay such charge.
OTHER PURCHASE PROGRAMS. Purchasers of Class A Shares may be entitled to
reduced 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.
1. Unit Trust Reinvestment Programs. The Fund will permit unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund and ISC Shares 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 established 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 securities broker, dealer, financial
intermediary or the Distributor.
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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
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
2. NAV Purchase Options
The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:
(a) Current or retired Trustees/Directors of funds advised by Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc. or John Govett & Co. Limited and such persons'
families and their beneficial accounts. The term "families" includes a
person's spouse, children and grandchildren, parents, and a person's
spouse's parents.
(b) 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 such fund or an affiliate of
such subadviser; and such persons' families and their beneficial accounts.
(c) Directors, officers, employees and registered representatives of financial
institutions that have a selling 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.
(d) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
Class A Shares of the Fund and ISC Shares of other funds distributed by
the Distributor as described herein under "Purchasing Shares Of The Fund
-- Initial Sales Charge Alternative -- Quantity Discounts," during the 13
month period commencing with the first investment pursuant hereto equals
at least $1 million. The Distributor may pay such entities through which
purchases are made an amount up to 0.50% of the amount invested, over a
twelve month period following such transaction.
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<PAGE> 126
(e) 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% for such purchases.
(f) Accounts as to which a selling firm charges an account management fee
("wrap accounts"), provided the selling firm has executed a supplemental
agreement to their existing selling agreement with the Distributor.
(g) 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.
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) 1.00% with respect to Class A Shares
in an amount of $1 million or more; (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. Sales compensation with respect to Class A
Shares subject to a CDSC is set forth under "Purchasing Shares of the Fund --
Initial Sales Charge Alternative".
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 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 applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses
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<PAGE> 127
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 and
services fees 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).
The contingent deferred sales charge is waived (i) on a redemption of shares
following the death of a shareholder, or (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or other retirement plan
to a shareholder who has attained the age of 70 1/2.
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1,000,000 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% 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.
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<PAGE> 128
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 Program. See
"Shareholder Programs -- Systematic Withdrawal Program."
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.
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
for 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 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 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
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<PAGE> 129
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 Internal Revenue
Code of 1986, as amended, 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.
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DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare and pay quarterly to holders of each class of shares
distributions of all or substantially all net investment income of the Fund
attributable to the respective class. 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
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
quarterly 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.
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 information under the "Distributions" section of the
Account Application accompanying this Prospectus or available from State Street
Bank and Trust Company, c/o National Financial Data Services, Van Kampen Merritt
Funds, P.O. Box 419001, Kansas City, MO 64141-6001 (the "Transfer Agent"). After
the Transfer Agent receives this completed form, distribution checks will be
sent to the bank or other person so designated by such shareholder.
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<PAGE> 130
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit quarterly 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 elects
otherwise to the Transfer Agent. This election may be made by telephone by
calling 1-800-341-2911 or in writing to the Transfer Agent. For inquiries
through Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. If a
shareholder elects to change the method of distribution, such change will be
effective only with regard to distributions for which the record date is seven
or more business days after the Transfer Agent has received the request.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001. The request should indicate the number
of shares to be redeemed of a particular fund and the class designations of such
shares, identify the account number and be signed exactly as the shares are
registered. If the amount being redeemed is in excess of $50,000 or if the
redemption proceeds will be sent to an address other than the address of record,
the signature(s) must be guaranteed by a member firm of a principal stock
exchange, a commercial bank or trust company which is a member of the Federal
Deposit Insurance Corporation, a credit union or a savings association. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders should verify with the institution that it is
an eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Share certificates should be sent by registered mail to
National Financial Data Services, 1004 Baltimore Avenue, Dwight Building, Sixth
Floor, Kansas City, MO 64105-1807. Shareholders will receive the net asset value
per share next computed after the Transfer Agent receives the redemption request
and certificates (if any) in proper form. Any applicable contingent deferred
sales charge with respect to CDSC Shares redeemed will be deducted from the
redemption proceeds prior to transmittal of such proceeds to the shareholder.
TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption by
the Fund. For inquiries through Telecommunications Device for the Deaf (TDD),
dial 1-800-772-8889. There is a $500 minimum and a $1,000,000 maximum per
request if the redemption proceeds are to be mailed to the shareholder. If the
redemption proceeds are to be wired to a bank there is a minimum of $5,000 and a
$1,000,000 maximum per request. Prior to redeeming shares by telephone the
"Expedited Telephone Redemption" section of either the Account Application or
Expedited Telephone Redemption and Exchange Request Form (the "Authorization")
must be completed and on file with the Transfer Agent. The
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<PAGE> 131
signature(s) on the Authorization must be guaranteed by a member firm of a
principal stock exchange, a commercial bank or trust company which is a member
of the Federal Deposit Insurance Corporation, a credit union or a savings
association unless the Authorization is completed at the time an account is
originally established. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. A redemption requested by
telephone will be processed at the net asset value next determined after receipt
of the request. Any applicable contingent deferred sales charge with respect to
CDSC Shares redeemed will be deducted from the redemption proceeds prior to
transmittal of such proceeds to the shareholder. The proceeds would then be made
payable to the registered shareowner(s) and mailed to the address registered on
the account or wired to a bank, as requested on the Authorizations. Shareholders
cannot redeem shares by telephone if stock certificates are held for those
shares. This service is not available with respect to shares held in an
Individual Retirement Account for which State Street Bank and Trust Company acts
as custodian. In addition, this service is not available with respect to shares
purchased by check until 15 days after purchase.
By establishing the telephone redemption service, a shareholder authorizes the
Fund or the Transfer Agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized to the address of record of such account or such other address as is
listed in the Authorization. The Fund, the Distributor, the Transfer Agent and
National Financial Data Services, Inc. ("NFDS") seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to redeem shares
by telephone to provide, on a recorded line, the name on the account, a social
security number or tax identification number and such additional information as
may be included in the Authorization. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine, including any fraudulent or
unauthorized request. This service may be amended or terminated at any time by
the Transfer Agent or the Fund. If a shareholder is unable to reach the Fund by
telephone, he or she may redeem shares pursuant to the procedures set forth
above under the caption "Written Redemption Request." During periods of extreme
economic or market changes, it may be difficult for investors to reach the Fund
by telephone and to effect telephone redemptions.
REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
telephone the request to the Distributor. Shareholders will receive the net
asset value next determined after such shareholder places the sell order. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholder. It is the responsibility of the investor's broker,
dealer or financial intermediary to transmit the redemption order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, sell orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or
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<PAGE> 132
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 redemption price due to the failure of the Distributor to receive
a sell order prior to such time must be settled between the investor and the
broker, dealer or financial intermediary submitting the order. The Fund does not
charge for this transaction (other than any contingent deferred sales charge
applicable to CDSC Shares). Shareholders must submit a written redemption
request in proper form to their securities dealer within five business days
after calling the dealer with the sell order. The request should indicate the
number of shares to be redeemed and the class designation of such shares,
identify the account number and the order or confirmation number assigned to the
trade and be signed by the shareholder exactly as the shares are registered. If
the amount of the redemption exceeds $50,000 or if the redemption proceeds will
be sent to an address other than the address of record, signature(s) must be
guaranteed by a member firm of a principal stock exchange, a commercial bank or
trust company which is a member of the Federal Deposit Insurance Corporation, a
credit union or a savings association. The guarantee must state the words
"Signature Guaranteed" along with the name of the granting institution.
Shareholders should verify with the institution that it is an eligible guarantor
prior to signing. A guarantee from a notary public is not acceptable. If
certificates are held for the shares being redeemed, such certificates must be
sent endorsed for transfer or accompanied by an endorsed stock power.
Certificates should be sent by registered mail to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, 1004
Baltimore Avenue, Dwight Building, Sixth Floor, Kansas City, MO 64105-1807.
Shareholders whose shares are held in an Individual Retirement Account ("IRA")
for which State Street Bank and Trust Company acts as custodian may not sell
their shares through their securities dealers.
REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on Class B Share
redemptions following the disability of a Class B shareholder. An individual
will be considered disabled for this purpose if he or she meets the definitions
thereof in Section 72(m)(7) of the Internal Revenue Code (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 Fund will
require satisfactory proof of disability before it determines to waive the CDSC
on Class B Shares.
In cases of disability, the CDSC on Class B 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 CDSC on Class B
Shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.
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<PAGE> 133
GENERAL. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to shareholders or their dealer, as the case may be,
within seven calendar days after a redemption request or repurchase order and
share certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,
which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.
The right of redemption or resale to the Fund may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the SEC, or during any period when the SEC
has by order permitted such suspension or postponement.
The Fund reserves the right to redeem any investment if the value of an
account falls below $500. Before the Fund makes such redemption it will provide
the shareholder with written notice and 30 days in which to make an additional
investment sufficient to increase the value of the account to at least $500.
- --------------------------------------------------------------------------------
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 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 sub-trust. 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
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<PAGE> 134
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.
- --------------------------------------------------------------------------------
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 nearly $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital, 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. and its subsidiaries (some of whom are
officers or trustees of the Fund) own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% 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 address of the Adviser is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
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 sub-trust. 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
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<PAGE> 135
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 % PER ANNUM
- ------------------------ -----------
<S> <C>
First $500 million.............................................. 0.65 of 1%
Over $500 million but less than $1 billion...................... 0.60 of 1%
Over $1 billion................................................. 0.55 of 1%
</TABLE>
Under its investment advisory agreement, 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 Investment Company Act, of the Adviser, Van Kampen American
Capital Distributors, Inc. or Van Kampen American Capital, Inc.), the charges
and expenses of 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, excluding
state securities registration expenses.
The Fund and the Adviser have adopted Codes of Ethics designed to recognize
the fiduciary relationship between the Fund and the Adviser and its employees.
The Codes permit trustees/directors, officers and employees to buy and sell
securities for their personal accounts subject to procedures designed to prevent
conflicts of interest including, in some instances, preclearance of trades.
The Adviser may utilize at its own expense credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Asset Management, Inc.
PORTFOLIO MANAGEMENT. Daniel Smith is an Assistant Vice President of the
Adviser and has been primarily responsible for the day to day management of the
Fund's portfolio since the Fund's commencement of investment operations. Mr.
Smith has been employed by the Adviser for the past five years.
- --------------------------------------------------------------------------------
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 fixed-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
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<PAGE> 136
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.
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,
the Distributor 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.
- --------------------------------------------------------------------------------
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 Investment
Company 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,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers, 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. Brokers, dealers and financial intermediaries that have
entered into Selling Agreements with the Distributor and sell shares of the Fund
are referred to herein as "financial intermediaries."
CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.30% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the 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
38
<PAGE> 137
holders of such shares by the Distributor and by financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.30% not paid to such
financial intermediaries as a service fee 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 connection with the distribution of Class B 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 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 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 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
financial intermediary's customers. The Fund pays the Distributor the lesser of
the balance of the 0.75% not paid to such financial 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 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 distribution-related expenses with respect to a class
of CDSC Shares for any given year may exceed the fees payable to the Distributor
with respect to such 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
distribution 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
39
<PAGE> 138
such class. As of December 31, 1994, there were $94,201 and $4,204 of
unreimbursed distribution expenses with respect to Class B Shares and Class C
Shares respectively, representing 0.07% and 0.00%, respectively of the Fund's
total net assets. If the Distribution Plan were 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 sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts 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
with respect to a particular class of CDSC Shares to defray distribution related
expenses attributable to any 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.
- --------------------------------------------------------------------------------
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.
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.
If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including tax-exempt interest and
taxable income including net short-term capital gain, but not net capital gains,
which are the excess of net long-term capital gains over net short-term capital
losses) in each year, it will not be required to pay federal income taxes on any
income distributed to Shareholders. 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. As a sub-trust of a
Massachusetts business trust, the Fund will not be subject to any excise or
income taxes in Massachusetts as long as it qualifies as a regulated investment
company for federal income tax purposes.
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
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<PAGE> 139
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 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 are subject to special provisions of
the Code that, among other things, may 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 accrue as income each year a portion of the 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.
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<PAGE> 140
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 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. Some 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. Shareholders receiving distributions
in the form of additional Shares purchased by the Plan Agent under the Fund's
Dividend Reinvestment Plan will be treated for federal income tax purposes as
receiving the amount of cash received by the Plan Agent on their behalf. In
general, the basis of such Shares will equal the price paid by the Plan Agent
for such Shares.
Although dividends generally will be treated as distributed 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.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
Shareholders.
The Fund is required, in 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.
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
42
<PAGE> 141
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.
- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
Upon written or telephone request to the Fund, however, a share certificate will
be issued for any or all of the full shares credited to a shareholder's account.
Share certificates which have been issued to a shareholder may be returned at
any time. If a shareholder requests share certificates to be issued, such
shareholder will be sent share certificates representing shares (with the
exception of fractional shares) of the Fund and will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost the shareholder must write to State Street Bank and Trust Company, c/o
National Financial Data Services, P.O. Box 419001, Kansas City, MO 64141-6001,
Attn: Van Kampen Merritt Funds, requesting an "affidavit of loss" and to obtain
a Surety Bond in a form acceptable to the Transfer Agent. On the date the letter
is received the Transfer Agent will calculate no more than 2.00% of the net
asset value of the issued shares, and bill the party to whom the certificate was
mailed.
SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Share account or
Class B Share account is valued at $10,000 or more, such shareholder's dividends
are being reinvested, a requested dollar amount may be paid from such account to
any person monthly, quarterly, semiannually or annually. The minimum amount that
may be withdrawn each period is $50; withdrawals will be made on the seventh
business day of the month in which they are scheduled to occur. Depending upon
the size of the payments requested and the fluctuations in the net asset value
of the shares redeemed, redemptions for the purpose of making such payments may
reduce or even exhaust the amounts in such account. If an investor acquires
additional shares of the Fund after joining the Systematic Withdrawal Program,
the investor must inform the Fund if he or she wants the new shares to be
subject to the Systematic Withdrawal Program by telephoning the Fund at
1-800-341-2911.
With respect to redemptions of Class B Shares made pursuant to the Systematic
Withdrawal Program, an investor may annually redeem up to 12% of the net asset
value of
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<PAGE> 142
the investor's initial investment in Class B Shares or, if the investor does not
join the program on the date of his or her initial investment, the net asset
value of the investor's Class B Shares on the date the investor elects to
participate in the Systematic Withdrawal Program. The Fund will waive the
contingent deferred sales charge applicable to Class B Shares redeemed pursuant
to the Fund's Systematic Withdrawal Program.
It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge, or will become
subject to a contingent deferred sales charge, in order to purchase shares at
the same time that shares are being redeemed upon which a sales charge may
already have been paid. Therefore, the Fund will not knowingly permit a
shareholder to make additional investments in shares of less than $5,000 if at
the same time such shareholder is making systematic withdrawals at a rate
greater than the distribution being paid on such shareholder's shares. The Fund
reserves the right to amend or terminate the systematic withdrawal program on
thirty days' notice, and a shareholder may withdraw from the program at any
time.
EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for ISC Shares or
money market fund shares of other Van Kampen Merritt mutual funds distributed by
the Distributor that offer an exchange privilege. Under the exchange privilege,
the Fund will offer to exchange its Class A Shares for ISC Shares or money
market fund shares, as the case may be, of such other funds on the basis of
relative net asset value per share. Any ISC Shares exchanged into the Fund that
have been charged a sales load lower than the sales load applicable to Class A
Shares of the Fund will be charged the applicable sales load differential upon
exchange. ISC Shares of the Van Kampen Merritt Money Market Fund and Van Kampen
Merritt Tax Free Money Fund which have not previously been charged a sales load
(except for shares purchased via the reinvestment option) will be charged the
applicable sales load upon exchange into the Fund.
Class B Shareholders of the Fund may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distributor ("New Class B Shares") on the basis of
relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of a fund acquired through use of
the exchange privilege will be subject to the contingent deferred sales charge
schedule relating to the Class B Shares of the fund from which the purchase of
Class B Shares was originally made.
Class C Shares of the Fund are exchangeable for Class C Shares of other Van
Kampen Merritt mutual funds distributed by the Distributor on the same terms set
forth in the preceding paragraph with respect to Class B Shares, except that
Class C Shares do not convert to Class A Shares. The exchange privilege with
respect to any Van Kampen Merritt money market fund sponsored by the Distributor
is not available for Class C Shareholders.
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<PAGE> 143
In order to qualify for the exchange privilege, it is required that the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the Fund). Shareholders will be able to effect an
exchange by telephone by calling the Fund at 1-800-341-2911 prior to 3:00 p.m.
Central Standard Time. For inquiries through Telecommunications Device for the
Deaf (TDD), dial 1-800-772-8889. The exchange will be processed at the net asset
value next determined after receipt of such request. By utilizing the telephone
exchange service, a shareholder authorizes the Fund or the Transfer Agent to act
upon the instructions of any person by telephone to exchange shares from any
account for which such service has been authorized to any identically registered
account(s) with any Van Kampen Merritt fund distributed by the Distributor that
offers an exchange privilege. The Fund, the Distributor, the Transfer Agent and
NFDS seek to employ procedures reasonably believed to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring a
person attempting to exchange shares by telephone to provide, on a recorded
line, the name on the account, a social security or tax identification number or
such additional information as may be deemed necessary or appropriate. An
investor agrees that no such person will be liable for any loss, liability, cost
or expense arising out of any request reasonably believed to be genuine,
including any fraudulent request. This service may be amended or terminated at
any time by the Transfer Agent or the Fund. If a shareholder has certificates
for any shares being exchanged, such certificates must be surrendered prior to
the exchange in the same manner as in redemption of such shares. See "Redemption
of Shares--Telephone Redemptions". Any shares exchanged between the Fund and any
of the other funds will begin earning dividends on the next business day after
the exchange is effected. 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.
An exchange between funds pursuant to the exchange privilege is treated as a
sale for federal income tax purposes and, depending upon the circumstances, a
short- or long-term capital gain or loss may be realized.
The exchange privilege may be modified or terminated at any time, subject to
the requirement that the Fund give prominent notice thereof at least 60 days
prior to the effective date of the modification or termination in certain
circumstances. The Fund reserves the right to limit the number of times a
shareholder may exercise the exchange privilege.
AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASSSM).
1. 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
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<PAGE> 144
into which redemptions are to be deposited together with the completed
application. Once the Transfer Agent has received the application and the voided
check or deposit slip, such shareholder's designated bank account, following any
redemption, will be credited with the proceeds of such redemption. Once enrolled
in the ACH plan, a shareholder may terminate participation at any time by
writing the Transfer Agent.
2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically invest distributions from a shareholder's account
directly into a shareholder's bank account.
3. Dividend Diversification. Quarterly distributions and any net long-term
capital gain distributions to a shareholder's account may be invested in the
same class of shares of any other Van Kampen Merritt mutual fund distributed by
the Distributor at the then current net asset value, WITHOUT A SALES CHARGE,
upon election by a shareholder. This election may be made on the account
application bound in this Prospectus, by written notice to the Transfer Agent or
by calling the Fund directly at 1-800-341-2911, during the hours of 7:00 a.m. to
7:00 p.m. Central Standard Time. For inquiries through Telecommunications Device
for the Deaf (TDD) dial 1-800-772-8889. In order to qualify for this privilege,
a shareholder must have established an account in the other mutual fund prior to
electing this privilege. This privilege may be modified or terminated by the
Fund at any time.
4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the Fund. In order to utilize this
option, a shareholder must fill out and sign the appropriate section of the
account application or the EASESM application which is available from the
Transfer Agent, the Fund, such shareholder's broker or dealer or the
Distributor. Once the Transfer Agent has received this application, such
shareholder's checking account at his or her designated local bank will be
debited each month in the amount authorized by such shareholder to purchase
shares of the Fund. Once enrolled in the EASESM program, a shareholder may
change the monthly amount or terminate participation at any time by writing or
calling the Transfer Agent. Shareholders in the EASESM program will receive a
confirmation of these transactions from the Fund monthly, and their regular bank
account statements will show the debit transaction each month.
By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the Application in performing such services by either
withdrawing funds for deposit in the Fund pursuant to the EASESM Plan or
depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election or by
depositing the shareholder's distributions in the Van Kampen Merritt fund
account indicated. A shareholder also agrees that neither the Fund, the
Distributor, the Transfer Agent nor NFDS will be liable for any loss, liability,
cost or expense arising out of any request, including any fraudulent request.
This service may be amended or terminated at any time by the Transfer Agent or
by the Fund.
46
<PAGE> 145
REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, within 120 days, repurchase Class A Shares of the Fund, or
Shares of other Van Kampen Merritt mutual funds distributed by the Distributor,
in an amount of at least $500 and not exceeding the redemption proceeds
received, at a purchase price equal to the net asset value next determined after
the reinstatement request is received by the Transfer Agent or the Distributor.
A Class C Shareholder who has redeemed shares of the Fund may repurchase Class C
Shares of the Fund, or Shares of other Van Kampen Merritt mutual funds
distributed by the Distributor with credit given for any contingent deferred
sales charge paid upon such redemption.
Exercising the reinstatement privilege will not affect the character of any
gain or loss realized on the redemption for federal income tax purposes, except
that if the redemption resulted in a loss, the reinstatement may result in the
loss being disallowed under the "wash sale" rules.
- --------------------------------------------------------------------------------
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS
- --------------------------------------------------------------------------------
Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including:
-- Individual Retirement Accounts (IRAs) for individuals.
-- Simplified Employee Pension Plans (SEPs) for employees.
-- Qualified plans for self-employed individuals.
-- Qualified corporate pension and profit sharing plans for employees.
The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. A reduced minimum initial investment,
available for purchase of Class A Shares, Class B Shares and Class C Shares only
in connection with a tax-sheltered retirement plan is $250.
IRAs are available for individuals under age 70 1/2 whether or not they are
active participants in any other tax-qualified employer plan. Generally,
individuals who are not active participants in a tax- qualified employer plan
may deduct from gross income their IRA contributions which do not exceed 100% of
compensation received during a year or $2,000 ($2,250 for a spousal account),
whichever is less. If an employee or the employee's spouse is an active
participant in a tax-qualified employer plan, the IRA deduction is phased out
above certain income levels. Individuals may, however, make non- deductible
contributions to their IRAs up to the lesser of 100% of annual compensation or
$2,000 ($2,250 for a spousal account) without being subject to an excise tax on
excessive contributions. Generally, earnings on investments held in an IRA are
not taxable until withdrawn. Subject to certain exceptions, substantial tax
penalties apply to withdrawals before age 59 1/2.
A SEP is a retirement program established by an employer (including
individuals) for the benefit of its eligible employees. Generally, any employee
who has attained age 21, worked for the employer during three of the past five
years and earned a specific amount
47
<PAGE> 146
from the employer in the current year will be eligible to participate. Under a
SEP, each participant establishes an IRA to which the sponsoring employer makes
annual calendar year contributions. Generally, those contributions cannot exceed
the lesser of $30,000 or 15% of the participant's compensation for the year. A
participating employee may also make his or her IRA contribution to the same
account. Generally, earnings on accounts held in an IRA established pursuant to
a SEP are not taxable until withdrawn. Subject to certain exceptions,
substantial tax penalties apply to withdrawals before attainment of age 59 1/2.
All contributions to an IRA made to the Fund through a broker must be settled
by April 15 (or, in the event that the 15th is not a business day, the next
following business day) in any year in order to be deemed a valid contribution
for the preceding year. Contributions made directly to the Fund via the mail
must be postmarked by April 15 in any year in order to be deemed a valid
contribution for the preceding year. A request for distributions from an IRA for
which State Street Bank and Trust Company acts as custodian must be made in
writing.
Shares of the Fund may also be purchased by all types of employer sponsored
tax qualified retirement plans which allow for investments in mutual funds. A
standardized Van Kampen Merritt plan is available through securities brokers,
dealers, financial intermediaries, the Fund, or the Distribution for employers
(including individuals) who desire to start or amend a retirement plan. The form
of this standardized plan has been determined to be "qualified" under the
Internal Revenue Code. An employer may use this prototype to establish a profit
sharing plan, a money purchase pension plan or both for its eligible employees.
The cost for the use of the prototype is an initial fee of $50 and there are no
annual fees. The adopting employer determines within the prescribed limits the
eligibility standards, rate of contributions and other significant provisions of
the prototype plan. The Distributor, as sponsor of this prototype plan, reserves
the right to amend such plan from time to time to assure its continued
qualification under the Internal Revenue Code or for other reasons. Employers
adopting this prototype plan will be bound by such amendments.
Shareholders considering establishing a retirement plan or purchasing shares
of the Fund in connection with a retirement plan should consult with their
attorney or tax advisor with respect to plan requirements and tax aspects
pertaining to them.
- --------------------------------------------------------------------------------
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
48
<PAGE> 147
information from independent organizations such as Lipper Analytical Services,
Inc., Business Week, Forbes or other industry publications. From time to time,
the Fund may compare its performance to certain securities and unmanaged indices
which may have different risk/reward characteristics than the Fund. Such
characteristics may include, but are not limited to, tax features, guarantees,
insurance and the fluctuation of principal and/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.
Please consult the Statement of Additional Information for more information
regarding the Fund's performance.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, c/o National Financial Data Services, Van
Kampen Merritt Funds, P.O. Box 419001, Kansas City, MO 64141-6001, transfer
agent for the Fund, performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. When an initial
investment is made in the Fund, an account will be opened for each shareholder
on the Fund's books and shareholders will receive a confirmation of the opening
of the account. Shareholders will receive quarterly statements giving details of
all activity in their account(s) and will also receive a statement whenever an
investment or withdrawal is made in or from their account. Information for
federal income tax purposes will be provided at the end of the year. Such
statements will present separately information with respect to each class of the
Fund's Shares. It is expected that the transfer agency costs attributable to the
Class B Shares and the Class C Shares will be higher than the transfer agency
costs attributable to the Class A Shares.
49
<PAGE> 148
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Fund is a sub-trust of the Van Kampen Merritt Equity Trust, a
Massachusetts business trust organized March 26, 1987 (the "Trust"). Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each sub-trust on matters affecting an individual sub-trust.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, without 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 represent an interest in the same assets of
the Fund and are identical in all respects except that each class bears certain
distribution expenses and has exclusive voting rights with respect to its
distribution fee. See "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 Class B Shareholders and Class C Shareholders 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 a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the Investment Company Act.
More detailed information concerning the Trust is set forth in the Statement of
Additional Information.
- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------
The fiscal year of the Fund ends on 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
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 Merritt Funds, One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Attn: Correspondence. Its
telephone number is 1-800-341-2911.
For inquiries through Telecommunications Device for the Deaf (TDD) dial
1-800-772-8889.
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<PAGE> 149
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.
- --------------------------------------------------------------------------------
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.
51
<PAGE> 150
VAN KAMPEN MERRITT
UTILITY FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
------------
Investment Adviser
VAN KAMPEN AMERICAN
CAPITAL INVESTMENT
ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
EXISTING SHAREHOLDERS-- Oakbrook Terrace, IL 60181
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE Transfer Agent
CALL THE FUND'S TOLL-FREE STATE STREET BANK AND
NUMBER--1-800-341-2911. TRUST COMPANY
c/o National Financial Data
Services
PROSPECTIVE INVESTORS--CALL Van Kampen Merritt Funds
YOUR BROKER OR 1-800-341-2911. P.O. Box 419001
Kansas City, MO 64141-6001
Custodian
DEALERS--FOR DEALER STATE STREET BANK AND
INFORMATION, SELLING TRUST COMPANY
AGREEMENTS, WIRE ORDERS, 225 Franklin Street, P.O. Box 1713
OR REDEMPTIONS CALL THE Boston, MA 02105-1713
DISTRIBUTOR'S TOLL-FREE Attn: Van Kampen Merritt Funds
NUMBER--1-800-225-2222.
Legal Counsel
SKADDEN, ARPS, SLATE,
FOR SHAREHOLDER AND MEAGHER & FLOM
DEALER INQUIRIES THROUGH 333 West Wacker Drive
TELECOMMUNICATIONS Chicago, IL 60606
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889 Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
FOR AUTOMATED TELEPHONE 303 East Wacker Drive
SERVICES DIAL 1-800-542-4344 Chicago, IL 60601
<PAGE> 151
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT
OF ADDITIONAL INFORMATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED APRIL 28, 1995
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN MERRITT UTILITY FUND
The Van Kampen Merritt Utility Fund (the "Fund") seeks to provide its
shareholders with capital appreciation and current income. The Fund will seek to
achieve its investment objective by investing in a diversified portfolio of
common stocks and income securities issued by companies engaged in the utilities
industry ("Utility Securities"). Companies engaged in the utilities industry
include those involved in the production, transmission, or distribution of
electric energy, gas, telecommunications services or the provision of other
utility or utility related goods and services. Under normal market conditions,
at least 80% of the Fund's total assets will be invested in Utility Securities.
In addition, the Fund may invest up to 20% of its assets in income securities
rated BB or B by Standard & Poor's Ratings Group ("S&P") or Ba or B by Moody's
Investors Service, Inc. ("Moody's") (or comparably rated by any other nationally
recognized statistical rating service ("NRSRO")) or in unrated income securities
considered by the Fund's investment adviser to be of comparable or higher
quality. The Fund may invest up to 35% of its assets in foreign currency
denominated securities issued by non-U.S. issuers. There can be no assurance
that the Fund will achieve its investment objective. The Fund is a separate
sub-trust of Van Kampen Merritt Equity Trust, a Massachusetts business trust
(the "Trust").
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated April 30, 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 1-800-341-2911, ext. 6504. 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>
<CAPTION>
PAGE
-----
<S> <C>
The Fund and the Trust.................................................................. B-2
Investment Policies and Restrictions.................................................... B-2
Additional Investment Considerations.................................................... B-3
Description of Securities Ratings....................................................... B-13
Officers and Trustees................................................................... B-19
Investment Advisory and Other Services.................................................. B-22
Portfolio Transactions and Brokerage Allocation......................................... B-24
Tax Status of the Fund.................................................................. B-25
The Distributor......................................................................... B-25
Legal Counsel........................................................................... B-26
Performance Information................................................................. B-26
Unaudited Financial Statements.......................................................... B-28
Notes to Unaudited Financial Statements................................................. B-35
Independent Auditors' Report............................................................ B-39
Audited Financial Statements............................................................ B-40
Notes to Audited Financial Statements................................................... B-47
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995.
<PAGE> 152
THE FUND AND THE TRUST
The Fund is a separate sub-trust of the Trust, an open-end diversified
management investment company. The Fund was established pursuant to a
Designation of Sub-Trust on March 10, 1993. At present, the Fund, Van Kampen
Merritt Growth and Income Fund, Van Kampen Merritt Balanced Fund, Van Kampen
Merritt Total Return Fund (which has not commenced investment operations) and
Van Kampen Merritt Growth Fund (which has not commenced investment operations)
are the only sub-trusts of the Trust, although other sub-trusts may be organized
and offered in the future.
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated March 26,
1987. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares in separate sub-trusts. Each share represents an
equal proportionate interest in the assets of the sub-trust with each other
share in such sub-trust and no interest in any other sub-trust. No sub-trust is
subject to the liabilities of any other sub-trust. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its sub-trusts, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its sub-trusts 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 sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust involved. Shares do not have
cumulative voting rights, preemptive rights or any conversion or exchange
rights. The Trust does not contemplate holding regular meetings of shareholders
to elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by the Investment Company Act of 1940, as amended (the "1940 Act") or
other applicable law) and except that the Trustees cannot amend the Declaration
of Trust to impose any liability on shareholders, make any assessment on shares
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (determined at the time of investment) would then be
invested in securities of a single issuer or, if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of an
issuer.
2. Issue senior securities, borrow money from banks or enter into reverse
repurchase agreements with banks in the aggregate in excess of 33 1/3% of
the Fund's total assets (after giving effect to any such borrowing); which
amount includes no more than 5% in borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.
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<PAGE> 153
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, 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 any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions nor short
term credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except in connection with
Strategic Transactions.
6. 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.
7. Make investments for the purpose of exercising control or participation in
management, 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.
8. 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.
9. 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.
10. 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 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 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.
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. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. 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.
ADDITIONAL INVESTMENT CONSIDERATIONS
UTILITY SECURITIES
Entities that issue Utility Securities may be subject to a variety of risks
depending, in part, on such factors as the type of utility involved and its
geographic location. Such risks may include potential increases in operating
costs, increases in interest expenses for capital construction programs,
government regulation of rates charged to customers, costs associated with
compliance with environmental and other regulations,
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<PAGE> 154
service interruption due to environmental, operational or other mishaps, the
effects of economic slowdowns, surplus capacity and increased competition from
other providers of utility services. Issuers of Utility Securities generally
have their rates determined by state utility commissions or other governmental
authorities or, depending on the jurisdiction and the nature of the issuer, such
issuers may set their own rates. Changes in service rates generally lag changes
in financing costs, and thus can favorably or unfavorably affect the ability of
issuers of Utility Securities to maintain or increase dividend rates on such
securities, depending upon whether such rates and costs are declining or rising.
To the extent that rates are established or reviewed by governmental
authorities, the utility is subject to the risk that such authority will not
authorize increased rates. Issuers of Utility Securities are subject to
regulation by various authorities and may be affected by the imposition of
special tariffs and charges. There can be no assurance that regulatory policies
or accounting standard changes will not negatively affect the ability of issuers
of Utility Securities to service principal, interest and dividend payments.
Because of the Trust's policy of investing at least 80% of its total assets in
Utility Securities, the Trust is more susceptible than an investment company
without such a policy to economic, political, environmental or regulatory
occurrences affecting issuers of Utility Securities. See "Investment Objective
and Policies" in the Prospectus.
Electric Utilities. Certain electric utilities ("Electric Utilities") with
uncompleted nuclear power facilities may have problems completing and licensing
such facilities, and there is public, regulatory and governmental concern with
the cost and safety of nuclear power facilities in general. Regulatory changes
with respect to nuclear and conventionally fueled generating facilities could
increase costs or impair the ability of such Electric Utilities to operate such
facilities, thus reducing their ability to service dividend payments with
respect to Utility Securities. Electric Utilities that utilize nuclear power
facilities must apply for recommissioning from the Nuclear Regulatory Commission
after 40 years. Failure to obtain recommissioning could result in an
interruption of service or the need to purchase more expensive power from other
entities and could subject the utility to significant capital construction costs
in connection with building new nuclear or alternative-fuel power facilities,
upgrading existing facilities or converting such facilities to alternative
fuels. Electric Utilities that utilize coal in connection with the production of
electric power are particularly susceptible to environmental regulation,
including the requirements of the federal Clean Air Act and of similar state
laws. Such regulation may necessitate large capital expenditures in order for
the utility to achieve compliance.
Gas Utilities. Many gas utilities ("Gas Utilities") generally have been
adversely affected by oversupply conditions, and by increased competition from
other providers of utility services. In addition, some Gas Utilities entered
into long-term contracts with respect to the purchase or sale of gas at fixed
prices, which prices have since changed significantly in the open market. In
many cases, such price changes have been to the disadvantage of the Gas Utility.
Gas Utilities are particularly susceptible to supply and demand imbalances due
to unpredictable climate conditions and other factors and are subject to
regulatory risks as well.
Telecommunications Utilities. Telecommunications regulation typically limits
rates charged, returns earned, providers of services, types of services,
ownership, areas served and terms for dealing with competitors and customers.
Telecommunications regulation generally has tended to be less stringent for
newer services, such as mobile services, than for traditional telephone service,
although there can be no assurances that such newer services will not be heavily
regulated in the future. Regulation may limit rates based on an authorized level
of earnings, a price index, or another formula. Telephone rate regulation may
include government-mandated cross-subsidies that limit the flexibility of
existing service providers to respond to competition. Regulation may also limit
the use of new technologies and hamper efficient depreciation of existing
assets. If regulation limits the use of new technologies by established carriers
or forces cross-subsidies, large private networks may emerge.
LOWER GRADE SECURITIES
The Fund may invest up to 20% of its assets in lower-grade income securities,
including lower-grade fixed-income Utility Securities. Such lower grade
securities are rated BB or B by S&P or Ba or B by Moody's. Investment in such
securities involves special risks, as described herein. Liquidity relates to the
ability of a Fund to sell a security in a timely manner at a price which
reflects the value of that security. As discussed below, the market for lower
grade securities is considered generally to be less liquid than the market for
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<PAGE> 155
investment grade securities. The relative illiquidity of some of the Fund's
portfolio securities may adversely affect the ability of the Fund to dispose of
such securities in a timely manner and at a price which reflects the value of
such security in the Adviser's judgment. The market for less liquid securities
tends to be more volatile than the market for more liquid securities and market
values of relatively illiquid securities may be more susceptible to change as a
result of adverse publicity and investor perceptions than are the market values
of higher grade, more liquid securities.
The Fund's net asset value will change with changes in the value of its
portfolio securities. Because the Fund will invest in fixed income securities,
the Fund's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities can be expected to decline. Net asset value and market value may be
volatile due to the Fund's investment in lower grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty.
The Adviser values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Fund may
invest, there may be relatively inactive trading in such securities and the
ability of the Adviser to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Fund's portfolio,
the responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the valuation of
the Fund's securities due to the reduced availability of reliable objective
data. To the extent that the Fund invests in illiquid securities and securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities are particularly difficult to dispose
of.
Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and adversely
affect the market value of such securities. In addition, in such circumstances,
the ability of issuers of lower grade securities to repay principal and to pay
interest, to meet projected financial goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
lower grade securities in the Fund's portfolio and thus the Fund's net asset
value. The secondary market prices of lower grade securities are less sensitive
to changes in interest rates than are those for higher rated securities, but are
more sensitive to adverse economic changes or individual issuer developments.
Adverse publicity and investor perceptions, whether or not based on rational
analysis, may also affect the value and liquidity of lower grade securities.
Yields on the Fund's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade securities in the Fund's portfolio and thus in the net asset value
of the Fund. Net asset value and market value may be volatile due to the Fund's
investment in lower grade and less liquid securities. Volatility may be greater
during periods of general economic uncertainty. The Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of interest or a repayment of principal on its portfolio holdings, and
the Fund may be unable to obtain full recovery thereof. In the event that an
issuer of securities held by the Fund experiences difficulties in the timely
payment of principal or interest and such issuer seeks to restructure the terms
of its borrowings, the Fund may incur additional expenses and may determine to
invest additional capital with respect to such issuer or the project or projects
to which the Fund's portfolio securities relate.
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating fixed-income securities. Such ratings
evaluate only the safety of principal and interest payments, not market value
risk. Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings, the
Adviser
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continuously monitors the issuers of such securities held in the Fund's
portfolio. The Fund may, if deemed appropriate by the Adviser, retain a security
whose rating has been downgraded below B by S&P or below B by Moody's, or whose
rating has been withdrawn.
Because the Fund may invest up to 20% of its assets in these unrated income
securities, achievement by the Fund of its investment objective may be more
dependent upon the Adviser's investment analysis than would be the case if the
Fund were investing exclusively in rated securities.
MONEY MARKET INSTRUMENTS
Money market instruments include (a) obligations of or guaranteed by the U.S.
government, its agencies or instrumentalities ("Government Money Market
Securities"), (b) obligations of banks subject to U.S. government regulation as
well as such other bank obligations as are insured by a U.S. government agency
("Bank Obligations"), (c) commercial paper (including variable amount master
demand notes) rated at least A-3 by S&P or Prime-3 by Moody's or, if not so
rated, issued by a corporation which has outstanding debt obligations rated at
least AA by S&P or Aa by Moody's and (d) debt obligations (other than commercial
paper) of corporate issuers which obligations are rated at least AA by S&P or Aa
by Moody's. Money market securities are subject, however, to the limitation that
they mature within one year of the date of their purchase or are subject to
repurchase agreements maturing within one year. Government Money Market
Securities include treasury bills, notes and bonds issued by the U.S. government
and backed by the full faith and credit of the United States, as well as
securities issued or guaranteed as to principal and interest by agencies and
instrumentalities of the U.S. government. Bank Obligations include certificates
of deposit and banker's acceptances of domestic banks (or Euro-dollar
obligations of foreign branches of such domestic banks) subject to U.S.
government regulation and time deposits of federal and state banks whose
accounts are insured by a government agency as well as such accounts themselves.
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
NRSRO) 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, in addition to the factors
described in the Prospectus under the heading "Investment Objective and
Policies," 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 any
other NRSRO.
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. 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 derivative instruments such as 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,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
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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" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money"
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(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 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 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 U.S. and foreign
securities exchanges and in the over-the-counter markets and or 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
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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 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 for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options 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
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instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of 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 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
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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 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.
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In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index- based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company. See "Tax Status" in the Prospectus.
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 Standard & Poor's Ratings Group) follows:
A Standard & Poor's 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.
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 Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
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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.
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.
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.
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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.
COMMERCIAL PAPER
A Standard & Poor's 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, or based on other circumstances.
VARIABLE RATE DEMAND BONDS
Standard & Poor's assigns "dual" ratings to all debt issues that have a put
option or demand feature as part of their structure.
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<PAGE> 166
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 for the put option (for
example, 'AAA/A-1+'). Or if the nominal maturity is short, a rating of
'SP-1+/AAA' is assigned. With short-term demand debt, S&P's note rating symbols
are used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
NOTES
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three 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 the issue is to be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics will be given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK
An S&P's preferred stock rating is an assessment of the capacity and
willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which issue is intrinsically
different from, and subordinated to, a debt issue. Therefore, to reflect this
difference, the preferred stock rating symbol will normally not be higher than
the debt rating symbol assigned to, or that would be assigned to, the senior
debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment -- capacity and willingness of the issuer to
meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the terms
of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's 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.
</TABLE>
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<TABLE>
<S> <C>
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 preferred
CCC 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.
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.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred stock
quality, the rating 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.
</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.
MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service rating symbols and their meanings (as published by Moody's
Investor Service) 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.
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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 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.
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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<PAGE> 169
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
payments.
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: Moody's applies 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.
OFFICERS AND TRUSTEES
The officers and Trustees of the Trust (of which the Fund is a sub-trust),
their principal occupations for the last five years and their affiliations, if
any, with the Adviser, Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM
Asia Pacific Company, Limited, Van Kampen American Capital Distributors, Inc.,
Van Kampen American Capital, Inc. or VK/AC Holding, Inc., are as follows:
DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.
President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc., and Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.
R. CRAIG KENNEDY, Trustee
Dennis Trading Group, Inc., 250 S. Wacker Drive, Suite 650, Chicago, IL
60606
Advisor to the Dennis Trading Group Inc.
Prior to 1993, President and Chief Executive Officer, Director and member
of the Investment Committee of the Joyce Foundation, a private foundation.
PHILIP G. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February, 1989, former Managing Director and Manager of Municipal
Bond Department, W.H. Newbold's Son & Co.
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<PAGE> 170
DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.
JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President of Nelson Investment Planning Services, Inc., a financial
planning company.
JEROME L. ROBINSON, Trustee
115 River Road, Edgewater, New Jersey 07020
President of Robinson Technical Products Corporation, a processor and
distributor of welding alloys, supplies and equipment.
Director of Pacesetter Software, a software programming company
specializing in white collar productivity.
Director and majority shareholder Hilarius Haarlem B.V., Haarlem, Holland,
a manufacturer and distributor of welding alloys.
WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.
PETER W. HEGEL,* Vice President
One Parkview Plaza, Oakbrook Terrace, IL 60181
Senior Vice President and Portfolio Manager of Van Kampen American Capital
Investment Advisory Corp.
Senior Vice President of Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.
RONALD A. NYBERG,* Vice President and Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc. and Van Kampen American Capital, Inc.
Executive Vice President, General Counsel and Director of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.
General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.
EDWARD C. WOOD III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.
SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.
First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.
Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.
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<PAGE> 171
WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Investment
Advisory Corp., Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc. and Van Kampen American Capital
Distributors, Inc.
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.
STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.
- ---------------
* Interested persons of the Fund as defined in the 1940 Act.
Each of the foregoing trustees acts as trustee for other investment companies
advised by the Adviser, and each of the foregoing officers of the Fund holds the
same positions with each of the investment companies advised by the Adviser.
The compensation of the officers and trustees who are affiliated persons (as
defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
trustees. During the next year, the Fund expects to pay trustees who are not
affiliated persons of the Adviser, Van Kampen American Capital Distributors,
Inc., or Van Kampen American Capital, Inc. $2,500 per year, and $250 per meeting
of the Board of Trustees, plus expenses. Under the Fund's retirement plan,
trustees who are not affiliated with the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc., have at least ten years
of service and retire at or after attaining the age of 60, are eligible to
receive a retirement benefit equal to the annual retainer for each of the ten
years following such trustee's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc. can
elect to defer receipt of all or a portion of the trustee's fees earned by such
trustee until such trustee's retirement. The deferred compensation earns a rate
of return determined by reference to the Fund or other Van Kampen Merritt mutual
funds advised by the Adviser as selected by the trustee. To the extent permitted
by the 1940 Act, the Fund may invest in securities of other Van Kampen Merritt
mutual funds advised by the Adviser in order to match the deferred compensation
obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Fund.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT
COMPENSATION FROM AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
NAME REGISTRANT(2) EXPENSES(3) RETIREMENT(4) PAID TO TRUSTEE(5)
- ------------------------------- ------------------ ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $7,620 $0 $2,500 $ 62,362
Philip G. Gaughan.............. 7,192 0 2,500 63,250
Donald C. Miller............... 9,841 0 2,500 62,178
Jack A. Nelson................. 9,875 0 2,500 62,362
Jerome L. Robinson............. 9,231 0 2,500 58,475
Wayne W. Whalen................ 2,031 0 2,500 49,875
</TABLE>
- ---------------
(1) Messrs. Merritt and McDonnell, Trustees of the Registrant during fiscal year
1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Registrant.
B-21
<PAGE> 172
(2) The Registrant is Van Kampen Merritt Equity Trust (the "Trust") which
currently is comprised of 3 sub-trusts, including the Fund. The amounts
shown in this column are accumulated from the Aggregate Compensation of each
of these 3 sub-trusts during such sub-trusts' 1994 fiscal year. Beginning in
October 1994, each Trustee, except Messrs. Gaughan and Whalen, began
deferring his entire aggregate compensation paid by the Fund. 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 Registrant. As of
December 31, 1994 fiscal year, no amounts had been accrued for retirement
benefits because such amounts were considered to be immaterial to the net
assets of the Registrant at such time. The Registrant will accrue amounts
for retirement benefits by the end of fiscal year 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 the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund, retires at or after attaining the age of 60 and the annual retainer in
the year prior to the Trustee's retirement is $2,500. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.
(5) The Fund Complex consists of 20 mutual funds advised by the Adviser that
have 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 Adviser also serves as investment adviser for other investment
companies; however, with the exception of Messrs. Merritt, McDonnell and
Whalen, the Trustees are not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the
Adviser, Mr. Whalen received Total Compensation of $161,850 during the
calendar year ended December 31, 1994.
As of April 13, 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.
To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.
As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Interstate/Johnson Lane, FBO 224-81081-16,
Interstate Tower, P.O. Box 1220, Charlotte, NC 28201-1220, 8%; John A. Blackwell
Trust, Blackwell-Stevenson Co P/S/PLAN U/A 8/22/86, 1840 Mayview Rd,
Bridgeville, PA 15017-1556, 7%; PaineWebber for the Benefit of San Jose State
University FNDN, Attn: John Troyan, P.O. Box 720130, San Jose, CA 95172-0130,
7%; L. J. Thompson, New Canton Highway, P.O. Box 273, Clyde, NC 28721-0273, 5%;
Donaldson, Lufkin, Jenrette Securities Corporation Inc., P.O. Box 2052, Jersey
City, NJ 07303-2052, 6%; and LP & Teresa Anderson Foundation, P.O. Box 190,
Miles City, MT 59301-0190, 7%.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton &
B-22
<PAGE> 173
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 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc.
The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. 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 officers of the Fund and trustees of the Trust if
duly elected to such positions.
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 sub-trust, to whom the
Adviser renders periodic reports of the Fund's investment activities.
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 sub-trust (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 period ended June 30, 1994, the Fund recognized advisory expenses of
$749,584.
OTHER AGREEMENTS
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee which would have been paid
to the Transfer Agent if the Transfer Agent had provided such services. Payment
by the Fund for such services is 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 Merritt mutual funds distributed by the Distributor,
share such costs proportionately among themselves based upon their respective
net asset values.
B-23
<PAGE> 174
For the period ended June 30, 1994, the Fund recognized expenses of
approximately $2,000, 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 equally, together with the other Van Kampen Merritt mutual funds
distributed by the Distributor, in 25% of the cost of providing such services,
with the remaining 75% of such cost being paid by the Fund and such other Van
Kampen Merritt funds based proportionally on their respective net assets.
For the period ended June 30, 1994, the Fund recognized expenses of
approximately $5,300, representing the Adviser's cost of providing accounting
services.
LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services
Agreement pursuant to which Van Kampen American Capital, Inc. provides legal
services, including without limitation: maintenance of the Fund's minute books
and records, preparation and oversight of the Fund's regulatory reports, and
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Fund. 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. The Fund,
and the other Van Kampen Merritt mutual funds distributed by the Distributor
share one half (50%) of such costs equally. The remaining one half (50%) of such
costs are allocated to specific funds based on specific time allocations, or in
the event services are attributable only to types of funds (i.e. closed-end or
open-end), the relative amount of time spent on each type of fund and then
further allocated between funds of that type based upon their respective net
asset values.
For the period ended June 30, 1994, the Fund recognized expenses of
approximately $9,200, representing Van Kampen American Capital, Inc.'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.
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.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security), than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Fund's Adviser, the amount
of additional commission or increased cost is reasonable in relation to the
value of such services.
B-24
<PAGE> 175
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate sub-trust.
The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to 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 Trust and each of its sub-trusts, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund will be subject to tax
if, among other things, it fails to distribute net capital gains, or if its
annual distributions, as a percentage of its income, are less than the
distributions required by tax laws.
THE DISTRIBUTOR
Shares of the Fund are offered 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 LP."), 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 6% of
the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% of the common stock of
VK/AC Holding, Inc. C & D LP. is managed by Clayton, Dubilier & Rice, Inc.
Clayton & Dubilier Associates IV Limited Partnership ("C & D Associates LP.") is
the general partner of C & D LP. 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 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
B-25
<PAGE> 176
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and 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 sub-trust, 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 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 year ended June 30, 1994, the Fund recognized expenses under the Plans
of $129,926, $713,771 and $6,339 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $107,353 and $176,184 represent payments
to financial intermediaries under the Selling Agreements for Class A Shares and
Class B Shares, respectively. For the year ended June 30, 1994, the Fund has
reimbursed the Distributor $5,109 and $8,437 for advertising expenses, and
$14,651 and $24,485 for compensation of the Distributor's sales personnel for
the Class A and Class B Shares, respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares, redeemed during the first
year after their issuance may be subject to a contingent deferred sales charge
in a maximum amount equal to 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.
B-26
<PAGE> 177
The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends and other
distributions made during the period) of a $1,000 investment in a given class of
shares of the Fund (less the maximum sales charge, if any) at the beginning of
the period, annualizing the increase or decrease over the specified period with
respect to such initial investment and expressing the result as a percentage.
Average compounded total return will be computed separately for each class of
shares.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC Shares imposed at the time of redemption were reflected, it would
reduce the performance quoted.
CLASS A SHARES
The average total return with respect to the Class A Shares for the
approximately 11 month period from July 28, 1993 (the commencement of investment
operations of the Fund) through June 30, 1994 was (12.70%).
The Fund's cumulative non-standardized total return with respect to the Class
A Shares from their inception through June 30, 1994 (as calculated in the
Prospectus under the heading "Fund Performance") was (7.38%).
CLASS B SHARES
The average total return with respect to the Class B Shares for the
approximately 11 month period from July 28, 1993 (the commencement of investment
operations of the Fund) through June 30, 1994 was (12.61%).
The Fund's cumulative non-standardized total return with respect to the Class
B Shares from their inception through June 30, 1994 (as calculated in the
Prospectus under the heading "Fund Performance") was (8.02%).
CLASS C SHARES
The average total return with respect to the Class C Shares for the
approximately 11 month period from August 13, 1993 (the commencement of
operations of the Class C Shares) through June 30, 1994 was (10.86%).
The Fund's cumulative non-standardized total return with respect to the Class
C Shares from their inception through June 30, 1994 (as calculated in the
Prospectus under the heading "Fund Performance") was (9.11%).
B-27
<PAGE> 178
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Common and Preferred Stocks 85.9%
Buildings & Real Estate 1.0%
Health & Retirement Property Trust ....... 92,750 $ 1,240,531
------------
Electric Utilities 28.1%
Boston Edison Co. ........................ 56,054 1,338,289
Carolina Power & Light Co. ............... 61,000 1,624,125
Central & South West Corp. ............... 60,000 1,357,500
Central LA Electric Co. .................. 59,130 1,396,946
CMS Energy Corp. ......................... 80,000 1,830,000
DPL Inc. ................................. 74,412 1,525,446
DQE Inc. ................................. 36,861 1,092,007
Duke Power Co. ........................... 36,000 1,372,500
Eastern Utilities Associates ............ 59,800 1,315,600
FPL Group Inc. ........................... 60,000 2,107,500
General Public Utilities Corp. ........... 69,175 1,815,844
Georgia Power Co. - Preferred ............ 90,000 1,845,000
Nynex Corp. ............................. 62,000 2,278,500
Oklahoma Gas & Electric Co. .............. 54,806 1,815,449
Pacific Gas & Electric Co. ............... 61,600 1,501,500
Peco Energy Co. .......................... 70,723 1,732,714
Pinnacle West Capital Corp. .............. 90,000 1,777,500
Southern Co. ............................. 83,125 1,662,500
Teco Energy Inc. ........................ 84,800 1,706,600
Texas Utilities Co. ...................... 38,500 1,232,000
Unicom Corp. ............................. 56,000 1,344,000
Washington Water Power Co. ............... 70,000 953,750
Wisconsin Energy Corp. ................... 68,478 1,771,868
------------
36,397,138
------------
Electronics 0.3%
Kenetech Corp. <F2> ....................... 30,000 431,250
------------
Natural Gas Pipeline and Distribution 18.5%
Coastal Corp. ........................... 81,300 2,093,475
El Paso Natural Gas Co. .................. 73,182 2,232,051
Enron Capital - Preferred ................ 40,000 870,000
Enron Corp. .............................. 67,895 2,070,797
Enserch Corp. ............................ 52,300 686,438
Equitable Resources Inc. ................. 47,150 1,278,944
</TABLE>
See Notes to Financial Statements
B-28
<PAGE> 179
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Natural Gas Pipeline and Distribution (Continued)
K N Energy Inc. ................................ 38,613 $ 917,059
MCN Corp. ...................................... 124,000 2,247,500
National Fuel Gas Co. .......................... 66,300 1,690,650
Nicor Inc. ..................................... 79,211 1,802,050
Questar Corp. .................................. 70,000 1,925,000
Sonat Inc. ..................................... 70,000 1,960,000
Tenneco Inc. ................................... 15,000 637,500
UGI Corp. ...................................... 88,018 1,793,367
Western Resources Inc. ......................... 61,900 1,771,887
------------
23,976,718
------------
Telecommunications 15.9%
Airtouch Communications Inc. <F2> ............... 50,000 1,456,250
Ameritech Corp. ................................ 54,870 2,215,376
AT & T Corp. ................................... 50,000 2,512,500
Bell Atlantic Corp. ............................ 38,000 1,890,500
Bellsouth Corp. ................................ 50,000 2,706,250
Citizens Utilities Co. ........................ 55,000 694,375
GTE Corp. <F4> .................................. 44,600 1,354,725
MCI Communications Corp. ....................... 102,000 1,874,250
Southwestern Bell Corp. ........................ 50,000 2,018,750
Telephone & Data Systems Inc. ................. 42,508 1,960,681
U.S. West Inc. ................................. 42,600 1,517,625
Viatel Inc. <F2> ................................ 117,325 457,568
------------
20,658,850
------------
Water & Sewer Utilities 1.5%
American Water Works Inc. ..................... 61,083 1,649,241
United Water Resources Inc. .................... 24,900 314,363
------------
1,963,604
------------
Foreign 20.6%
AES China Generating Co. Ltd. (China) <F2> ...... 50,000 531,250
British Telecommunications ADR (UK) ............ 35,000 2,104,375
Cable & Wireless PLC ADR (UK) .................. 96,000 1,680,000
China Light & Power Ltd ADR (Hong Kong) ........ 164,879 703,209
Empresa Nacional de Electricidad ADR (Spain) ... 40,000 1,620,000
Midlands Electricity PLC (UK) .................. 39,200 496,668
National Power PLC ADR (UK) .................... 30,000 2,295,117
</TABLE>
See Notes to Financial Statements
B-29
<PAGE> 180
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Foreign (Continued)
Norweb PLC (UK) ....................................... 107,800 $ 1,450,149
Powergen PLC ADR (UK) ................................. 30,000 2,511,018
Repsol SA ADR (Spain) ................................. 42,000 1,144,500
Rogers Cantel Mobile Communications Inc. (Canada) <F2> . 43,990 1,282,583
Royal PTT (Nederland) ................................. 30,000 1,011,003
Scottish Hydro Electric PLC (Germany) ................. 250,000 1,276,787
Southern Electric PLC (UK) ............................ 125,000 1,575,943
Tele Danmark A/S ADR (Denmark) <F2> .................... 50,000 1,275,000
Telefonica de Espana ADR (Spain) ...................... 30,000 1,053,750
TransCanada Pipelines Ltd (Canada) .................... 91,840 1,113,560
Vodafone Group PLC - ADR (United Kingdom) ............. 62,922 2,115,752
Westcoast Energy Inc. (Canada) ........................ 90,000 1,428,750
-------------
26,669,414
-------------
Total Common and Preferred Stocks .................... 111,337,505
-------------
</TABLE>
See Notes to Financial Statements
B-30
<PAGE> 181
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Income Securities 11.1%
Electric Utilities 2.1%
$ 3,000 Midland Funding Corp. II .................................... B- B2 11.750% 7/23/05 $ 2,790,000
------------
Natural Gas Pipeline and Distribution 1.8%
2,440 Coastal Corp. ................................................ BB+ Baa3 8.125 9/15/02 2,333,721
------------
Telecommunications 5.4%
2,000 Mobilemedia Communications <F3> .............................. CCC+ B3 0/10.500 12/01/03 1,110,000
1,500 Tele Communications Inc. ..................................... BBB- Baa3 8.250 1/15/03 1,419,706
1,000 Telephone & Data Systems Inc. ................................ BBB Baa3 8.400 2/24/23 873,522
2,112 Time Warner Inc. ............................................. BB+ Ba3 8.750 1/10/15 1,990,560
3,250 Viatel Inc. <F3> ............................................ NR NR 0/15.000 1/15/05 1,573,650
------------
6,967,438
------------
Foreign 1.8%
1,250 AES Corp. (China) ........................................... B+ Ba3 6.500 3/15/02 1,206,250
1,500 Argentina Rep (Argentina) .................................... BB- B1 8.375 12/20/03 1,102,500
------------
2,308,750
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Total Fixed Income Securities ........................................................................ 14,399,909
--------------
Total Long-Term Investments 97.0%
(Cost $139,241,360) <F1> ............................................................................. 125,737,414
--------------
Short-Term Investments 1.2%
Mexican Tesobonos ($500,000 par, yielding 7.647%, maturing 05/04/95) ................................ 480,000
Mexican Tesobonos ($500,000 par, yielding 8.194%, maturing 11/30/95) ................................ 449,800
Mexican Tesobonos ($700,000 par, yielding 7.740%, maturing 07/13/95) ................................ 657,300
--------------
Total Short-Term Investments
(Cost $1,620,025) <F1> ............................................................................... 1,587,100
Other Assets in Excess of Liabilities 1.8%.......................................................... 2,308,037
--------------
Net Assets 100%..................................................................................... $ 129,632,551
--------------
<FN>
<F1>At December 31, 1994, cost for federal income tax purposes including
short-term investments is $140,861,385; the aggregate gross unrealized
appreciation is $2,211,790 and the aggregate gross unrealized depreciation
is $15,836,109, resulting in net unrealized depreciation including
currency translation and open option transactions of $13,624,319.
<F2>Non-income producing security as this stock currently does not declare
dividends.
<F3>Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
<F4>Assets segregated as collateral for open option transactions.
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 182
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $139,241,360) <F1>....................................... $ 125,737,414
Short-Term Investments (Cost $1,620,025) <F1>............................................... 1,587,100
Cash........................................................................................ 1,945,750
Receivables:
Dividends................................................................................... 677,590
Interest.................................................................................... 382,840
Fund Shares Sold............................................................................ 285,171
Unamortized Organizational Expenses and Initial Registration Costs <F1>..................... 82,114
Options at Market Value (Net premiums paid of $139,650) <F5>................................ 52,500
Other....................................................................................... 514
---------------
Total Assets................................................................................ 130,750,993
---------------
Liabilities:
Payables:
Fund Shares Repurchased..................................................................... 457,086
Income Distributions........................................................................ 279,252
Investment Advisory Fee <F2>................................................................ 82,707
Accrued Expenses............................................................................ 299,397
---------------
Total Liabilities........................................................................... 1,118,442
---------------
Net Assets.................................................................................. $ 129,632,551
---------------
Net Assets Consist of:
Paid in Surplus <F3> ....................................................................... $ 150,409,499
Accumulated Undistributed Net Investment Income............................................. 168,339
Accumulated Net Realized Loss on Investments ............................................... (7,320,968)
Net Unrealized Depreciation on Investments.................................................. (13,624,319)
---------------
Net Assets.................................................................................. $ 129,632,551
---------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $49,735,735 and
3,986,676 shares of beneficial interest issued and outstanding) <F3>........................ $ 12.48
Maximum sales charge (4.65%* of offering price)............................................. .61
---------------
Maximum offering price to public ........................................................... $ 13.09
---------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $78,589,041 and
6,288,480 shares of beneficial interest issued and outstanding) <F3>........................ $ 12.50
---------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $1,306,340 and
104,572 shares of beneficial interest issued and outstanding) <F3>.......................... $ 12.49
---------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,435 and
115 shares of beneficial interest issued and outstanding) <F3> ............................. $ 12.48
---------------
*On sales of $100,000 or more, the sales charge will be reduced. Effective January 16, 1995,
the maximum sales charge was changed to 5.75%.
</TABLE>
See Notes to Financial Statements
B-32
<PAGE> 183
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the Six Months Ended December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Dividends (Net of foreign withholding taxes of $67,523)......................................... $ 3,107,551
Interest........................................................................................ 990,723
Net Realized Loss on Foreign Currency Translation .............................................. (1,268)
---------------
Total Income.................................................................................... 4,097,006
---------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $75,541, $421,207,
$6,086 and $2, respectively) <F6> .............................................................. 502,836
Investment Advisory Fee <F2> ................................................................... 447,533
Shareholder Services ........................................................................... 152,175
Trustees Fees and Expenses <F2>................................................................. 12,425
Amortization of Organizational Expenses and Initial Registration Costs <F1> .................... 11,592
Legal <F2>...................................................................................... 4,630
Other........................................................................................... 109,493
---------------
Total Expenses.................................................................................. 1,240,684
---------------
Net Investment Income........................................................................... $ 2,856,322
---------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................. $ 63,915,823
Cost of Securities Sold......................................................................... (68,782,408)
---------------
Net Realized Loss on Investments (Including realized loss on closed option
transactions of $173,277)....................................................................... (4,866,585)
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................................... (15,612,166)
End of the Period (Including unrealized depreciation on open option transactions and
foreign currency translation of $87,150 and $298, respectively)................................. (13,624,319)
---------------
Net Unrealized Appreciation on Investments During the Period.................................... 1,987,847
---------------
Net Realized and Unrealized Loss on Investments................................................. $ (2,878,738)
---------------
Net Decrease in Net Assets from Operations...................................................... $ (22,416)
---------------
</TABLE>
See Notes to Financial Statements
B-33
<PAGE> 184
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Six Months Ended December 31, 1994 and the Period July 28, 1993
(Commencement of Investment Operations) to June 30, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Period Ended
December 31, 1994 June 30, 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 2,856,322 $ 4,154,946
Net Realized Loss on Investments ........................................... (4,866,585) (2,099,212)
Net Unrealized Appreciation/Depreciation on Investments During the Period... 1,987,847 (15,612,166)
----------------- ---------------
Change in Net Assets from Operations ....................................... (22,416) (13,556,432)
----------------- ---------------
Distributions from Net Investment Income:
Class A Shares.............................................................. (1,795,999) (1,135,794)
Class B Shares.............................................................. (2,368,926) (1,491,532)
Class C Shares.............................................................. (35,460) (15,164)
Class D Shares.............................................................. (51) (3)
----------------- ---------------
(4,200,436) (2,642,493)
----------------- ---------------
Distributions in Excess of Net Realized Gain on Investments:
Class A Shares.............................................................. -0- (131,867)
Class B Shares.............................................................. -0- (222,070)
Class C Shares.............................................................. -0- (1,234)
----------------- ---------------
-0- (355,171)
----------------- ---------------
Total Distributions......................................................... (4,200,436) (2,997,664)
----------------- ---------------
Net Change in Net Assets from Investment Activities......................... (4,222,852) (16,554,096)
----------------- ---------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 11,817,310 164,220,373
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 3,369,177 2,433,525
Cost of Shares Repurchased.................................................. (17,667,667) (13,766,079)
----------------- ---------------
Net Change in Net Assets from Capital Transactions.......................... (2,481,180) 152,887,819
----------------- ---------------
Total Increase/Decrease in Net Assets....................................... (6,704,032) 136,333,723
Net Assets:
Beginning of the Period..................................................... 136,336,583 2,860
----------------- ---------------
End of the Period (Including undistributed net investment
income of $168,339 and $1,512,453, respectively) ........................... $ 129,632,551 $ 136,336,583
----------------- ---------------
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 185
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Utility Fund (the "Fund") was organized as a subtrust of the
Van Kampen Merritt Equity Trust, a Massachusetts business trust on March 10,
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 July 28, 1993, with two classes of common shares, Class
A and Class B shares. The distribution of the Fund's Class C and Class D shares
commenced on August 13, 1993 and March 14, 1994, respectively.
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 in securities listed on a securities exchange
shall be valued at their sale price as of the close of such securities exchange.
Investments in securities not listed on a securities exchange shall be valued
based on their last quoted bid price or, if not available, their fair value as
determined by the Board of Trustees or its delegate. Fixed income investments
are stated at value using market quotations or, if such valuations are not
available, estimates obtained from yield data relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Trustees. Short-term securities with
remaining maturities of less than 60 days are valued at amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.
C. Investment Income-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Bond discount is amortized over
the expected life of each applicable security.
D. Organizational Expenses and Initial Registration Costs The Fund has
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
("VKAC") for costs incurred in connection with the Fund's organization and
initial registration in the amount of $115,000. These costs are being
amortized on a straight line basis over the 60 month period ending
July 28, 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 by the Fund 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.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial and tax reporting purposes
primarily as a result of post October 31 losses which are not recognized for tax
purposes until the first day of the following fiscal year.
F. Distribution of Income and Gains-The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains
for book purposes may include short-term capital gains and gains on option and
futures transactions. All short-term capital gains and a portion of option and
futures gains are included in ordinary income for tax purposes.
B-35
<PAGE> 186
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
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... .65 of 1%
Next $500 million.... .60 of 1%
Over $1 billion...... .55 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
For the six months ended December 31, 1994, the Fund recognized expenses of
approximately $64,200 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 retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 104, 103, 100 and 100 shares of Classes A, B, C
and D, respectively.
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.
At December 31, 1994, paid in surplus aggregated $57,660,692, $91,289,057,
$1,458,152 and $1,598 for Classes A, B, C and D, respectively. For the six
months ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- --------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 369,195 $ 4,774,403
Class B....................... 517,543 6,716,671
Class C....................... 25,602 326,236
Class D....................... -0- -0-
------------ ----------------
Total Sales .................. 912,340 $ 11,817,310
------------ ----------------
Dividend Reinvestment:
Class A....................... 114,112 $ 1,449,174
Class B....................... 148,859 1,892,264
Class C....................... 2,184 27,734
Class D....................... 1 5
------------ ----------------
Total Dividend Reinvestment... 265,156 $ 3,369,177
------------ ----------------
Repurchases:
Class A....................... (486,244) $ (6,265,143)
Class B....................... (877,018) (11,251,294)
Class C....................... (11,844) (151,230)
Class D....................... -0- -0-
------------ ----------------
Total Repurchases............. (1,375,106) $ (17,667,667)
</TABLE>
B-36
<PAGE> 187
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
At June 30, 1994, paid in surplus aggregated $57,702,258, $93,931,416,
$1,255,412 and $1,593 for Classes A, B, C and D, respectively. For the period
ended June 30, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A ...................... 4,376,491 $ 63,097,058
Class B ...................... 6,920,468 99,775,499
Class C....................... 94,980 1,346,223
Class D....................... 114 1,593
---------- --------------
Total Sales................... 11,392,053 $ 164,220,373
---------- --------------
Dividend Reinvestment:
Class A ...................... 74,103 $ 1,036,464
Class B ...................... 98,967 1,383,421
Class C....................... 981 13,640
Class D....................... -0- -0-
---------- --------------
Total Dividend Reinvestment... 174,051 $ 2,433,525
---------- --------------
Repurchases:
Class A ...................... (461,081) $ (6,432,694)
Class B ...................... (520,439) (7,228,934)
Class C....................... (7,331) (104,451)
Class D....................... -0- -0-
---------- --------------
Total Repurchases............. (988,851) $(13,766,079)
---------- --------------
</TABLE>
Class B, C and D 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 Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- ---------------------------------------------------
<S> <C> <C> <C>
First ................. 4.00% 1.00% 0.75%
Second ................. 3.75% None None
Third .................. 3.50% None None
Fourth ................. 2.50% None None
Fifth ................. 1.50% None None
Sixth .................. 1.00% None None
Seventh and Thereafter . None None None
</TABLE>
For the six months ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$23,700 and CDSC on the redeemed shares of Classes B, C and D of approximately
$254,100. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the six months ended December 31, 1994, were $60,511,795
and $67,988,103, 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.
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.
B-37
<PAGE> 188
Van Kampen Merritt Utility Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
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 provide the return of an index without purchasing all of the securities
underlying the index.
Transactions in options for the six months ended December 31, 1994, were as
follows:
<TABLE>
<CAPTION>
Contracts Premium
- ---------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1994 ........ 112 $ (245,896)
Options Written and Purchased (Net) . 2,400 (269,543)
Options Terminated in Closing
Transactions (Net) .................. (2,212) 375,789
--------- -------------
Outstanding at December 31, 1994 .... 300 $ (139,650)
--------- -------------
</TABLE>
The description and market value of the outstanding option transactions as of
December 31, 1994, are as follows:
<TABLE>
<CAPTION>
Exp. Month/ Market Value
Contracts Exercise Price of Option
- ------------------------------------------------------------
<S> <C> <C> <C>
January 1995
Philadelphia Exchange
Utility Index
Purchase Calls . 300 Jan/230 $ 52,500
--------- ---------
</TABLE>
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each for Class A and Class D shares
and 1.00% each of Class B and Class C shares are accrued daily. Included in
these fees for the six months ended December 31, 1994, are payments to VKAC of
approximately $336,600.
B-38
<PAGE> 189
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Independent Auditors' Report
- -----------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen Merritt Utility Fund:
We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt Utility Fund (the "Fund"), including the portfolio of
investments, as of June 30, 1994, and the related statement of operations, and
the statement of changes in net assets for the period from July 28, 1993
(commencement of investment operations) through June 30, 1994, and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
June 30, 1994, by correspondence with the custodian 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 audit provides 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 Utility Fund as of June 30, 1994, the results of
its operations and the changes in its net assets for the period from July 28,
1993 (commencement of investment operations) through June 30, 1994, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick
Chicago, Illinois
August 4,1994
B-39
<PAGE> 190
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Portfolio of Investments
June 30, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Common and Preferred Stocks 81.2%
Electric Utilities 28.1%
Boston Edison Co.......................................... 56,054 $ 1,471,418
Carolina Power & Light Co................................. 55,885 1,292,341
Central & South West Corp................................. 66,000 1,402,500
Central LA Elec Co........................................ 59,130 1,389,555
CMS Energy Corp........................................... 86,000 1,795,250
Commonwealth Edison Co.................................... 50,000 1,137,500
Dominion Resources Inc.................................... 48,272 1,755,894
DPL Inc................................................... 74,412 1,469,637
DQE Inc................................................... 36,861 1,092,007
Duke Power Co............................................. 66,595 2,380,771
Entergy Corp.............................................. 75,000 1,856,250
FPL Group Inc............................................. 60,000 1,792,500
General Public Utilities Corp............................. 60,000 1,575,000
Georgia Power Co - Preferred.............................. 90,000 2,148,750
Idaho Pwr Co.............................................. 15,000 341,250
Kenetech Corp. <F2>....................................... 20,000 365,000
Nevada Power Co........................................... 20,000 382,500
New England Elec Sys...................................... 46,065 1,502,871
Nynex Corp................................................ 50,000 1,893,750
Oklahoma Gas & Elec Co.................................... 54,806 1,664,732
Pacific Gas & Electric Co................................. 61,600 1,463,000
Peco Energy Co............................................ 70,723 1,865,319
Pinnacle West Cap Corp.................................... 80,000 1,310,000
Southern Co............................................... 90,000 1,687,500
Teco Energy Inc........................................... 84,800 1,621,800
Wisconsin Energy Corp..................................... 68,478 1,634,912
------------
38,292,007
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Natural Gas Pipeline and Distribution 20.7%
Burlington Resources Inc.................................. 28,371 1,173,850
Coastal Corp.............................................. 71,237 1,923,399
Consolidated Natural Gas Co............................... 42,430 1,601,733
El Paso Natural Gas Co.................................... 73,182 2,360,119
Enron Cap - Preferred..................................... 40,000 905,000
Enron Corp................................................ 67,895 2,223,561
Enserch Corp.............................................. 15,000 215,625
Equitable Resources Inc................................... 50,647 1,740,991
K N Energy Inc............................................ 38,613 859,139
</TABLE>
See Notes to Financial Statement
B-40
<PAGE> 191
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Natural Gas Pipeline and Distribution (Continued)
MCN Corp.................................................. 62,000 $ 2,480,000
National Fuel Gas Co. NJ.................................. 66,300 1,947,562
Nicor Inc................................................. 79,211 2,089,190
Questar Corp.............................................. 52,549 1,701,274
Sonat Inc................................................. 70,000 2,152,500
Tenneco Inc............................................... 40,000 1,855,000
UGI Corp.................................................. 88,018 1,749,358
Western Resources Inc.................................... 47,425 1,274,547
------------
28,252,848
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Telecommunications 16.0%
Airtouch Communications Inc. <F2>........................ 74,671 1,764,102
Alltel Corp............................................... 95,059 2,388,358
AT & T Corp............................................... 40,000 2,175,000
Bell Atlantic Corp........................................ 36,000 2,016,000
Bellsouth Corp............................................ 15,000 926,250
Citizens Utilities Co..................................... 55,633 764,947
Comcast Corp.............................................. 63,343 1,140,174
GTE Corp. <F4>............................................ 39,982 1,259,433
MCI Communications Corp................................... 102,000 2,256,750
MFS Communications Inc. <F2>.............................. 50,000 1,237,500
Southwestern Bell Corp.................................... 50,000 2,175,000
Telephone & Data Sys Inc.................................. 42,508 1,572,796
U.S. West Inc............................................. 51,000 2,135,625
------------
21,811,935
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Water & Sewer Utilities 1.9%
American Wtr Wks Inc...................................... 61,083 1,656,876
Washington Wtr Pwr Co..................................... 70,000 1,006,250
------------
2,663,126
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Foreign 14.5%
AES China Generating Co. Ltd. (China) <F2>................ 50,000 562,500
Alcatel Alsthom Compagnie Generale d' Electricite
ADR (France)............................................ 21,000 456,750
British Gas PLC ADR (UK).................................. 40,000 1,660,000
British Telecommunications ADR (UK)....................... 23,920 1,348,490
China Light & Power Ltd ADR (Hong Kong)................... 164,879 842,598
Empresa Nacional de Electricidad ADR (Spain).............. 40,000 1,795,000
Grupo Iusacell SA de CV Ser D ADR (Mexico) <F2>........... 1,875 49,453
Grupo Iusacell SA de CV Ser L ADR (Mexico) <F2>........... 4,375 113,750
Morgan Stanley Group Inc, Japan Index Callable Warrants
Expiring 05/28/96 (Japan).............................. 51,120 293,940
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 192
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Foreign (Continued)
National Power PLC ADR (UK)............................... 30,000 $ 2,009,634
Powergen PLC ADR (UK)..................................... 30,000 2,342,832
Repsol SA ADR (Spain)..................................... 37,000 1,059,125
Rogers Cantel Mobile Communications
Inc. (Canada) <F2>...................................... 37,727 914,880
Tele Danmark A/S ADR (Denmark) <F2>....................... 50,000 1,231,250
Telefonica de Espana ADR (Spain).......................... 30,000 1,207,500
TransCanada Pipelines Ltd (Canada)........................ 91,840 1,090,600
Vodafone Group PLC ADR (United Kingdom)................... 20,974 1,588,780
Westcoast Energy Inc. (Canada)............................ 80,000 1,180,000
------------
19,747,082
------------
Total Common and Preferred Stocks......................... 110,766,998
------------
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 193
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Portfolio of Investments (Continued)
June 30, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Securities 15.0%
Electric Utilities 5.3%
$2,000 California Energy Inc. <F3>.......................... BB- Ba3 0/10.250% 01/15/04 $ 1,440,000
3,000 Calpine Corp........................................ B B1 9.250 02/01/04 2,770,000
3,000 Midland Funding Corp. II............................ B- B2 11.750 07/23/05 2,990,481
------------
7,200,481
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Natural Gas Pipeline and Distribution 1.8%
2,440 Coastal Corp........................................ BB+ Baa3 8.125 09/15/02 2,426,596
------------
Telecommunications 4.9%
2,000 Mobilemedia Communications <F3>..................... CCC+ B3 0/10.500 12/01/03 1,200,000
3,000 Panamsat L P/Panamsat Cap Corp. <F3>................ B- B3 0/11.375 08/01/03 1,935,000
1,500 Tele Communications Inc............................. BBB- Baa3 8.250 01/15/03 1,464,942
1,000 Telephone & Data Sys Inc............................ BBB Baa3 8.400 02/24/23 948,084
1,112 Time Warner Inc..................................... BBB- Ba3 8.750 01/10/15 1,116,170
------------
6,664,196
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Foreign 3.0%
1,250 AES Corp. (China)................................... B+ Ba3 6.500 03/15/02 1,157,813
1,500 Argentina Rep (Argentina)........................... BB- B1 8.375 12/20/03 1,231,875
2,000 Fideicomiso Petacalco Ser A (Mexico)................ BB+ Ba2 8.125 12/15/03 1,700,000
------------
4,089,688
------------
Total Fixed Income Securities......................................................................... 20,380,961
------------
Total Long-Term Investments 96.2%
(Cost $146,550,979) <F1>............................................................................ 131,147,959
------------
Short-Term Investments 4.0%
Repurchase Agreement, UBS Securities, U.S. T-Note, $4,825,000 par, 4.200% coupon, due 11/15/95,
dated 06/30/94, to be sold on 07/01/94 at $5,016,585................................................ 5,016,000
Other................................................................................................ 467,565
------------
Total Short-Term Investments.......................................................................... 5,483,565
Liabilities in Excess of Other Assets (0.2%).......................................................... (294,941)
------------
Net Assets 100%....................................................................................... $136,336,583
------------
<FN>
<F1>At June 30, 1994, cost for federal income tax purposes is
$146,550,979, the aggregate gross unrealized appreciation is
$1,074,096 and the aggregate gross unrealized depreciation
is $16,686,262, resulting in net unrealized depreciation
including open option transactions of $15,612,166.
<F2>Non-income producing security as this stock currently does
not declare dividends.
<F3>Currently is a zero coupon bond which will convert to a
coupon paying bond at a predetermined date.
<F4>Assets segregated as collateral for open option
transactions.
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 194
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $146,550,979) (Note 1)............................................. $131,147,959
Short-Term Investments (Note 1)....................................................................... 5,483,565
Cash.................................................................................................. 190
Receivables:
Investments Sold..................................................................................... 2,232,453
Dividends............................................................................................ 704,189
Interest............................................................................................. 472,064
Fund Shares Sold..................................................................................... 441,263
Unamortized Organizational Expenses and Initial Registration Costs (Note 1)........................... 93,706
Options at Market Value (Net premiums paid of $245,896) (Note 4)...................................... 36,750
Other................................................................................................. 2,067
-------------
Total Assets......................................................................................... 140,614,206
-------------
Liabilities:
Payables:
Investments Purchased................................................................................ 3,715,193
Fund Shares Repurchased.............................................................................. 181,536
Investment Advisory Fee (Note 2)..................................................................... 74,334
Accrued Expenses...................................................................................... 306,560
-------------
Total Liabilities.................................................................................... 4,277,623
-------------
Net Assets............................................................................................ $136,336,583
-------------
Net Assets Consist of:
Paid in Surplus....................................................................................... $152,890,679
Accumulated Undistributed Net Investment Income....................................................... 1,512,453
Accumulated Net Realized Loss on Investments.......................................................... (2,454,383)
Net Unrealized Depreciation on Investments............................................................ (15,612,166)
-------------
Net Assets............................................................................................ $136,336,583
-------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (based on net assets of $51,489,288 and
3,989,613 shares of beneficial interest issued and outstanding) (Note 3)............................. $ 12.91
Maximum sales charge (4.65%* of offering price)...................................................... .63
-------------
Maximum offering price to public..................................................................... $ 13.54
-------------
Class B Shares:
Net asset value and offering price per share (based on net assets of $83,705,297 and
6,499,096 shares of beneficial interest issued and outstanding) (Note 3).......................... $ 12.88
-------------
Class C Shares:
Net asset value and offering price per share (based on net assets of $1,140,525 and
88,630 shares of beneficial interest issues and outstanding) (Note 3).............................. $ 12.87
-------------
Class D Shares:
Net asset value and offering price per share (based on net assets of $1,473 and
114 shares of beneficial interest issued and outstanding) (Note 3)................................. $ 12.92
-------------
</TABLE>
*On sales of $100,000 or more, the offering price will be reduced.
See Notes to Financial Statements
B-44
<PAGE> 195
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Statement of Operations
For the Period July 28, 1993 (Commencement of Investment Operations)
through June 30, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Dividends (Net of foreign withholding taxes of $59,538).......................................... $ 4,662,190
Interest......................................................................................... 1,531,447
Accretion of Discount............................................................................ 6,056
Net Realized Loss on Foreign Currency Translation................................................ (418)
---------------
Total Income.................................................................................... 6,199,275
---------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $129,926, $713,771,
$6,339 and $2, respectively) (Note 5)........................................................... 850,038
Investment Advisory Fee (Note 2)................................................................. 749,584
Shareholder Services............................................................................. 178,236
Amortization of Organizational Expenses and Initial Registration Costs (Note 1).................. 21,294
Trustees Fees and Expenses (Note 2).............................................................. 20,900
Legal (Note 2)................................................................................... 18,590
Other............................................................................................ 205,687
---------------
Total Expenses.................................................................................. 2,044,329
---------------
Net Investment Income............................................................................ $ 4,154,946
---------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................. $ 117,960,843
Cost of Securities Sold......................................................................... (120,060,055)
---------------
Net Realized Loss on Investments (Including realized gain on closed and expired option
and futures transactions of $1,787 and $93,705, respectively)................................... (2,099,212)
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period......................................................................... -0-
End of the Period (Including unrealized depreciation on open option transactions of $209,146)... (15,612,166)
---------------
Net Unrealized Depreciation on Investments During the Period..................................... (15,612,166)
---------------
Net Realized and Unrealized Loss on Investments.................................................. $ (17,711,378)
---------------
Net Decrease in Net Assets from Operations....................................................... $ (13,556,432)
---------------
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 196
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Period July 28, 1993 (Commencement of Investment Operations)
through June 30, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
From Investment Activities:
Operations:
<S> <C>
Net Investment Income........................................................................... $ 4,154,946
Net Realized Loss on Investments................................................................ (2,099,212)
Net Unrealized Depreciation on Investments During the Period.................................... (15,612,166)
---------------
Change in Net Assets from Operations............................................................ (13,556,432)
---------------
Distributions from Net Investment Income:
Class A Shares................................................................................. (1,135,794)
Class B Shares................................................................................. (1,491,532)
Class C Shares................................................................................. (15,164)
Class D Shares................................................................................. (3)
---------------
(2,642,493)
---------------
Distributions in Excess of Net Realized Gain on Investments:
Class A Shares................................................................................. (131,867)
Class B Shares................................................................................. (222,070)
Class C Shares................................................................................. (1,234)
---------------
(355,171)
---------------
Total Distributions............................................................................ (2,997,664)
---------------
Net Change in Net Assets from Investment Activities............................................. (16,554,096)
---------------
From Capital Transactions (Note 3):
Proceeds from Shares Sold....................................................................... 164,220,373
Net Asset Value of Shares Issued Through Dividend Reinvestment.................................. 2,433,525
Cost of Shares Repurchased...................................................................... (13,766,079)
---------------
Net Change in Net Assets from Capital Transactions.............................................. 152,887,819
---------------
Total Increase in Net Assets.................................................................... 136,333,723
Net Assets:
Beginning of the Period......................................................................... 2,860
---------------
End of the Period (Including undistributed net investment income of $1,512,453)................. $ 136,336,583
---------------
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 197
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Notes of Financial Statements
June 30, 1994
- -----------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Utility Fund (the "Fund") was organized as a
subtrust of the Van Kampen Merritt Equity Trust, a Massachusetts business
trust, on March 10, 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 July 28, 1993 with two
classes of common shares, Class A and Class B shares. The distribution of the
Fund's Class C shares, which were initially introduced as Class D shares and
subsequently renamed Class C shares on March 7, 1994, commenced on August 13,
1993. The distribution of the Fund's fourth class of shares, Class D shares,
commenced on March 14, 1994.
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 in securities listed on a securities
exchange shall be valued at their sale price as of the close of such securities
exchange. Investments in securities not listed on a securities exchange shall be
valued based on their last quoted bid price or, if not available, their fair
value as determined by the Board of Trustees or its delegate. Fixed income
investments are stated at value using market quotations or, if such valuations
are not available, estimates obtained from yield data relating to instruments
or securities with similar characteristics in accordance with procedures
established in good faith by the Board of Trustees. Short-term securities with
remaining maturities of less than 60 days are valued at amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain in a segregated account with its custodian assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At June 30, 1994, there were no when
issued or delayed delivery purchase commitments.
C. Investment Income-Dividend income is recorded on the ex-dividend date
and interest income is recorded on an accrual basis. Original issue discount is
amortized over the expected life of each applicable security.
D. Organizational Expenses and Initial Registration Costs-The Fund has
reimbursed Van Kampen Merritt Inc. ("Van Kampen Merritt") for costs incurred in
connection with the Fund's organization and initial registration in the amount
of $115,000. These costs are being amortized on a straight line basis over the
60 month period ending July 28, 1998. Van Kampen Merritt Investment Advisory
Corp. (the "Adviser") has agreed that in the event any of the initial shares of
the Fund originally purchased by Van Kampen Merritt are redeemed during the
amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year.
F. Distribution of Income and Gains-The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and gains on option and futures
transactions. All short-term capital gains and a portion of option and futures
gains are included in ordinary income for tax purposes.
G. Option and Futures Transactions-Premiums received from call options
written are recorded as deferred credits. The position is marked to market daily
with any difference between the
B-47
<PAGE> 198
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Notes of Financial Statements (Continued)
June 30, 1994
- -----------------------------------------------------------------------------
options' current market value and premiums received recorded as
an unrealized gain or loss. If the options are not exercised, premiums
received are realized as a gain at expiration date. If the position is
closed prior to expiration, a gain or loss is realized based on
premiums received less the cost of the closing transaction. When
options are exercised, premiums received are added to the pro-
ceeds from the sale of the underlying securities and a gain or loss is
realized accordingly. These same principles apply to the sale of
put options.
Put and call options purchased are accounted for in the same manner as
portfolio securities. The cost of securities acquired through the exercise of
call options is increased by premiums paid. The proceeds from securities sold
through the exercise of put options are decreased by premiums paid.
Futures contracts are marked to market daily with fluctuations in value
settled daily in cash through a margin account. Gains or losses are realized at
the time the position is closed out or the contract expires.
2. Investment Advisory Agreement and Other Transactions
with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the
Adviser will provide investment advice and facilities to the Fund for an annual
fee payable monthly as follows:
Average Net Assets % Per Annum
- -----------------------------------------------------------------
First $500 million................................. .65 of 1%
Over $500 million but less than $1 billion......... .60 of 1%
Over $1 billion.................................... .55 of 1%
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 period ended June 30, 1994, the Fund recognized expenses of
approximately $16,600, representing Van Kampen Merritt's or the Adviser'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 the Adviser and Van Kampen Merritt. The Fund does not compensate
its officers or trustees who are officers of the Adviser or Van Kampen Merritt.
At June 30, 1994, Van Kampen Merritt owned 104, 103, 100 and 100 shares
of Classes A, B, C and D, respectively.
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C
and D. There are an unlimited number of shares of each class without par value
authorized.
At June 30, 1994, paid in surplus aggregated $57,702,258, $93,931,416,
$1,255,412 and $1,593 for Classes A, B, C and D, respectively. For the period
ended June 30, 1994, transactions were as follows:
Shares Value
- -------------------------------------------------------------------
Sales:
Class A................................. 4,376,491 $ 63,097,058
Class B................................. 6,920,468 99,775,499
Class C................................. 94,980 1,346,223
Class D................................. 114 1,593
---------- --------------
Total Sales............................. 11,392,053 $ 164,220,373
---------- --------------
Dividend Reinvestment:
Class A................................. 74,103 $ 1,036,464
Class B................................. 98,967 1,383,421
Class C................................. 981 13,640
Class D................................. 0 0
---------- --------------
Total Dividend Reinvestment............. 174,051 $ 2,433,525
---------- --------------
Repurchases:
Class A................................. (461,081) $ (6,432,694)
Class B................................. (520,439) (7,228,934)
Class C................................. (7,331) (104,451)
Class D................................. 0 0
---------- --------------
Total Repurchases....................... (988,851) $ (13,766,079)
---------- --------------
Class B, C and D 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 Classes C and D as detailed in the following
schedule. The Class B, C and D shares bear the expense of their respective
deferred
B-48
<PAGE> 199
Van Kampen Merritt Utility Fund
- -----------------------------------------------------------------------------
Notes of Financial Statements (Continued)
June 30, 1994
- -----------------------------------------------------------------------------
sales arrangements, including higher distribution and service fees and
incremental transfer agency costs.
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- ---------------------------------------------------------------------
First............................... 4.00% 1.00% 0.75%
Second.............................. 3.75% None None
Third............................... 3.50% None None
Fourth.............................. 2.50% None None
Fifth............................... 1.50% None None
Sixth............................... 1.00% None None
Seventh and Thereafter.............. None None None
For the period ended June 30, 1994, Van Kampen Merritt, as Distributor
for the Fund, received net commissions on sales of the Fund's Class A shares of
approximately $102,700 and CDSC on the redeemed shares of Classes B, C and D
of approximately $175,100. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities,
excluding short-term notes, for the period ended June 30, 1994, were
$263,362,228 and $117,156,294, respectively.
Transactions in options for the period ended June 30, 1994 were
as follows:
Contracts Premium
- ---------------------------------------------------------------------
Options Written and Purchased (Net)........ 2,500 $(658,358)
Options Terminated in
Closing Transactions (Net)................ (1,868) 427,671
Options Expired............................ (520) (15,209)
------- -----------
Outstanding at June 30, 1994............... 112 $(245,896)
------- -----------
The related futures contracts of the outstanding options transactions
at June 30, 1994, and the description and market value is as follows:
Expiration
Month/ Market
Exercise Value of
Contracts Price Options
- ---------------------------------------------------------------
September Treasury Bond Futures
Purchased Calls................... 112 Sept/106 $36,750
----- -------
5. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each for Class A and Class D
shares and 1.00% each for Class B and Class C shares are accrued daily. Included
in these fees for the period ended June 30, 1994, are payments to Van Kampen
Merritt of approximately $59,000.
B-49
<PAGE> 200
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH
AMENDMENT TO THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED APRIL 28, 1995
VAN KAMPEN MERRITT
BALANCED FUND
Van Kampen Merritt Balanced Fund (the "Fund") is a separate diversified
sub-trust of Van Kampen Merritt Equity Trust, an open-end management investment
company, commonly known as a mutual fund. The Fund's investment objective is to
seek to provide its shareholders with current income, while also seeking to
provide shareholders with capital growth. The Fund will seek to achieve its
investment objective by investing in a diversified portfolio of common stocks,
fixed income securities (including preferred stock, government securities,
corporate debt securities and convertible securities) and cash and cash
equivalents. There can be no assurance that the Fund will achieve its investment
objective.
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. (the "Adviser"). 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 1-800-225-2222.
(Continued on next page.)
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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.
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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 April 30, 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 1-800-225-2222, ext. 6504 or, for
Telecommunication Device For the Deaf, 1-800-772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL(SM)
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1995.
<PAGE> 201
(Continued from previous page.)
The Fund currently offers three classes of shares (the "Alternative Sales
Arrangements") 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. See "Purchasing
Shares of the Fund."
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<PAGE> 202
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................................... 4
Shareholder Transaction Expenses..................................... 7
Annual Fund Operating Expenses and Example........................... 8
Financial Highlights................................................. 10
The Fund............................................................. 11
Investment Objective and Policies.................................... 11
Investment Practices................................................. 15
Risks.............................................................. 19
Purchasing Shares of the Fund........................................ 20
Alternative Sales Arrangements..................................... 20
Initial Sales Charge Alternative................................... 22
Deferred Sales Charge Alternatives................................. 26
Distributions From the Fund.......................................... 29
Purchase of Additional Shares With Distributions................... 30
Redemption of Shares................................................. 30
Net Asset Value...................................................... 33
Investment Advisory Services......................................... 34
Portfolio Transactions and Brokerage Allocation...................... 36
The Distribution and Service Plans................................... 36
Tax Status........................................................... 38
Shareholder Programs................................................. 41
Investments by Tax-Sheltered Retirement Plans........................ 45
Fund Performance..................................................... 47
Shareholder Services................................................. 47
Description of Shares of the Fund.................................... 48
Shareholder Reports and Inquiries.................................... 49
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 EITHER OF THE FUNDS, THE ADVISER, OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUNDS 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
FUNDS TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.
3
<PAGE> 203
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PROSPECTUS SUMMARY
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THE FUND Van Kampen Merritt Balanced Fund (the "Fund") is a separate
diversified sub-trust of Van Kampen Merritt Equity Trust, which is an open-end
management investment company organized as a Massachusetts business trust. See
"The Fund."
INVESTMENT OBJECTIVE, POLICIES AND RISKS The Fund's investment objective is to
provide its shareholders with current income, while also seeking to provide
shareholders with capital growth. There can be no assurance that the Fund will
achieve its investment objective.
The Fund will seek to achieve its investment objective by investing in a
diversified portfolio of equity securities consisting of common and preferred
stocks, fixed-income securities (including government securities, corporate debt
securities and convertible securities) and cash and cash equivalents. The mix of
these securities is determined by the Fund's investment adviser on the basis of
existing and anticipated market conditions. The relative percentages of each
type of security in the portfolio can be expected to fluctuate and at times the
Fund may be invested primarily in debt securities or primarily in equity
securities.
In normal market conditions, the Fund will have at least 25% of its total
assets invested in equity securities and 25% of its total assets invested in
investment grade fixed-income debt securities. The Fund's investments in
fixed-income securities will be, at the time of investment, of investment grade
quality. Investment grade securities are those rated at least BBB by Standard &
Poor's Ratings Group ("S&P"), or at least Baa by Moody's Investor Services, Inc.
("Moody's") or comparably rated by any other nationally recognized statistical
rating organization or, if unrated, considered by the Fund's investment adviser
to be of comparable quality. The Fund may, however, invest up to 20% of its
assets in fixed-income securities that are rated below investment grade but not
rated lower than CC by S&P or Ca by Moody's or comparably rated by any other
nationally recognized statistical rating organization or, if unrated, considered
by the Fund's investment adviser to be of comparable or higher quality. The
foregoing 20% limit shall not apply to convertible securities. The Fund may not,
however, invest more than 35% of its total assets in all fixed-income
securities, including convertible securities, rated below investment grade or,
if unrated, deemed by the Adviser to be of comparable quality. Such lower rated
or unrated 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.
While offering opportunities for higher yields, lower-grade securities are
considered below investment grade and involve a greater degree of credit risk
than investment grade income securities; although the lower-grade income
securities of an issuer generally involve a lower degree of credit risk than its
common stock.
The Fund may invest up to 25% of its assets in securities issued by non-U.S.
issuers. Under current market conditions, the Fund anticipates that at least one
half of the Fund's investments in such foreign securities will be U.S.
dollar-denominated. Investments in foreign securities involve certain risks not
ordinarily associated with investments in
4
<PAGE> 204
securities of domestic issuers, including fluctuations in foreign exchange
rates, future political and economic developments, confiscatory taxation and the
possible imposition of exchange controls or other foreign governmental laws or
restrictions.
The Fund's net asset value per share will fluctuate depending on market
conditions and other factors. See "Investment Objective and Policies."
The Fund also may use various investment techniques including options,
futures, swaps and other derivatives, entering into when-issued or delayed
delivery transactions, lending portfolio securities, repurchase agreements and
reverse repurchase agreements. Such transactions entail certain risks. See
"Investment Practices."
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 and other circumstances. Investors
should consider such factors together with the amount of sales charges and the
aggregate distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.
The Fund is currently authorized to offer three classes of its 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 either (i) at the
time of the purchase ("Class A Shares") or (ii) on a contingent deferred basis
(Class A Share accounts over $1 million, "Class B Shares" and "Class C Shares").
Class A Share accounts over $1,000,000 or otherwise subject to a contingent
deferred sales charge ("CDSC"), Class B Shares and Class C Shares sometimes are
referred to herein collectively as "CDSC Shares".
The minimum initial investment with respect to Class A Shares, Class B Shares
and Class C Shares is $1,000. The minimum subsequent investment with respect to
each class of shares is $100.
Class A Shares. Class A Shares are subject to an initial sales charge equal to
5.75% of the public offering price (6.10% of the net amount invested), reduced
on investments of $50,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.30% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a contingent deferred sales charge.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but generally are subject to a sales charge if redeemed within six
years of purchase. Class B Shares are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or the
original purchase price on Class B Shares redeemed during the first year after
purchase, which charge is reduced each year thereafter. Class B Shares are
subject to ongoing distribution and service fees at an
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<PAGE> 205
aggregate annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B Shares. Class B Shares automatically will convert to
Class A Shares seven years after the end of the calendar month in which the
investor's order to purchase was accepted.
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a contingent deferred sales charge
equal to 1.00% of the lesser of the then current net asset value or the original
purchase price on Class C Shares redeemed during the first year after purchase.
Class C Shares are subject to ongoing distribution and service fees at an
aggregate annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class C Shares.
INVESTMENT ADVISER AND ADVISORY FEE Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the investment adviser for the Fund. The
annual advisory fee for the Fund is 0.70% of its average daily net assets,
reduced on net assets over certain amounts. See "Investment Advisory Services."
DISTRIBUTIONS FROM THE FUND Distributions from net investment income are
declared daily and paid quarterly; net realized capital gains, if any, are
distributed annually. 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 administrative
expenses relating to each class of shares will be borne exclusively by the
respective class of shares. See "Distributions from the Fund."
REDEMPTION Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. The Fund may require the redemption of shares if the value of an account
is $500 or less. See "Redemption of Shares."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
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<PAGE> 206
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SHAREHOLDER TRANSACTION EXPENSES
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<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)........... 5.75%(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 original
purchase price on redemption
proceeds)..................... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fees................... None None None
</TABLE>
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(1) Reduced on investments of $50,000 or more.
(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."
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<PAGE> 207
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ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management fees(1) (as a percentage of average
daily net assets).............................. 0.00% 0.00% 0.00%
12b-1 fees(2) (as a percentage of average daily
net assets).................................... 0.30% 1.00% 1.00%
Other expenses(1) (as a percentage of average
daily net assets).............................. 0.49% 0.54% 0.54%
Total(1) (as a percentage of average daily net
assets)........................................ 0.79% 1.54% 1.54%
</TABLE>
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(1) The Adviser has agreed to temporarily waive a portion of its "Management
fees" so that such fee will not exceed 0.50% during the Fund's first fiscal
year ending June 30, 1995. After June 30, 1995, the Adviser may, in its sole
discretion, determine to continue to waive a portion of its fee or it may
discontinue this practice without notice to shareholders. Absent the
Adviser's waiver of a portion its fee and assumption of a portion of the
expenses of the Fund, "Management fees" would have been 0.70% for each of
the Class A Shares, Class B Shares and Class C Shares and "Total" would have
been 3.14% for Class A Shares, 3.88% for Class B Shares and 3.88% for Class
C Shares.
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid 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,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation.
8
<PAGE> 208
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 0.79% for Class A Shares, 1.54% for
Class B Shares and 1.54% for Class C Shares,
(ii) 5% annual return and (iii) redemption at
the end of each time period:
Class A Shares.................................. $65 $81 $99 $150
Class B Shares.................................. $56 $84 $99 $145
Class C Shares.................................. $26 $49 $84 $183
An investor would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares.................................. $65 $81 $99 $150
Class B Shares.................................. $16 $49 $84 $145
Class C Shares.................................. $16 $49 $84 $183
</TABLE>
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. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. The ten year amount with respect to Class B Shares of
the Fund reflects the lower 12b-1 and service fees applicable to such shares
after conversion to 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."
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<PAGE> 209
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FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the period)
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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
period indicated. This information should be read in conjunction with the
unaudited financial statements and related notes thereto included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------------- ------------- -------------
JUNE 24, 1994 JUNE 24, 1994 JUNE 24, 1994
------------- ------------- -------------
(COMMENCEMENT (COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT OF INVESTMENT
OPERATIONS) OPERATIONS) OPERATIONS)
TO TO TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1994
------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, Beginning of
Period........................... $14.300 $14.300 $14.300
---------- ---------- ----------
Net Investment Income............ .298 .242 .200
Net Realized and Unrealized Loss
on Investments................. (.280) (.267) (.226)
---------- ---------- ----------
Total from Investment Operations... .018 (.025) (.026)
---------- ---------- ----------
Less:
Distributions from Net Investment
Income......................... .225 .185 .185
---------- ---------- ----------
Total Distributions................ .225 .185 .185
---------- ---------- ----------
Net Asset Value, End of Period..... $14.093 $14.090 $14.089
========== ========== ==========
Total Return(1) (Non-annualized)... .10% (.19%) (.19%)
Net Assets at End of Period
(in millions).................... $ 4.5 $ 6.1 $ 0.6
Ratio of Expenses to Average Net
Assets(1) (annualized)........... .79% 1.54% 1.54%
Ratio of Net Investment Income to
Average Net Assets(1)
(annualized)..................... 4.32% 3.56% 3.56%
Portfolio Turnover................. 22.06% 22.06% 22.06%
- ----------------
(1) If certain expenses had not been assumed or waived by the investment adviser,
the Total Return would be reduced and the ratios would have been as follows:
<CAPTION>
<S> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)............ 3.14% 3.88% 3.88%
Ratio of Net Investment Income
to Average Net Assets
(annualized)................... 1.97% 1.22% 1.23%
</TABLE>
See Unaudited Financial Statements and Notes Thereto
10
<PAGE> 210
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THE FUND
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Van Kampen Merritt Balanced Fund (the "Fund") is a mutual fund, which pools
shareholders' money to seek to achieve a specified investment objective. In
technical terms, the Fund is a recently organized separate diversified sub-trust
of Van Kampen Merritt Equity Trust (the "Trust"), which is an open-end
management investment company, organized as a Massachusetts business trust.
Mutual funds sell their shares to investors and invest the proceeds in a
portfolio of securities. A mutual fund allows investors to pool their money with
that of other investors in order to obtain professional investment management.
Mutual funds generally make it possible for investors to obtain greater
diversification of their investments and to simplify their recordkeeping.
Investment in the Fund involves special considerations as the Fund is a newly
organized investment company with no history of investment operations.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also act as investment adviser to 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.
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INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to provide its shareholders with current
income, while also seeking to provide shareholders with capital growth. The Fund
will seek to achieve its investment objective by investing in a diversified
portfolio of equity securities consisting of common and preferred stocks,
fixed-income securities (including government securities, corporate debt
securities and convertible securities) and cash and cash equivalents. The mix of
these securities is determined by the Adviser on the basis of existing and
anticipated market conditions. The relative percentages of each type of security
in the portfolio can be expected to fluctuate and at times the Fund may be
invested primarily in debt securities or primarily in equity securities. In
normal market conditions, the Fund will have at least 25% of its total assets
invested in equity securities and 25% of its total assets invested in investment
grade fixed-income debt securities. The Fund's investments in fixed-income
securities will be, at the time of investment, of investment grade quality.
Investment grade rated securities are those rated at least BBB by Standard &
Poor's Ratings Group ("S&P"), or at least Baa by Moody's Investors Services,
Inc. ("Moody's") or comparably rated by any other nationally recognized
statistical rating organization ("NRSRO") or, if unrated, considered by the
Adviser to be of comparable quality. The Fund may, however, invest up to 20% of
its assets in fixed-income securities that are rated below investment grade but
not rated lower than CC by S&P or Ca by Moody's or comparably rated by any other
NRSRO or, if unrated, considered by the Adviser to be of comparable quality. The
foregoing 20% limit shall not apply to convertible securities. The Fund may not,
however, invest more than 35% of its total assets in all fixed-income
securities, including convertible securities, which are rated
11
<PAGE> 211
below investment grade or, if unrated, deemed by the Adviser to be of comparable
quality. The Fund may invest up to 25% of its assets in securities issued by
non-U.S. issuers. Under current market conditions, the Fund anticipates that at
least one half of the Fund's investments in foreign securities will be U.S.
dollar-denominated. The Fund's investment objective is 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 "Investment Company Act"). There can be no assurance that the
Fund will achieve its investment objective.
ALLOCATION OF INVESTMENTS
The relative proportion of securities held by the Fund at any particular time
in the fixed-income and equity sectors of the market will be based on the
Adviser's views on market and economic conditions at such time and on the
Adviser's assessment of the relative investment opportunities and investment
risks presented in such sectors. In making such assessment, the Adviser will
consider such factors as actual or perceived changes in interest rate cycles,
business or economic conditions, rates of inflation, political factors, currency
relationships, investor demand, new issue or secondary market supply and other
factors. The Adviser applies a fundamental investment analysis in selecting
particular fixed-income and equity securities, including the macroeconomic
factors referenced above and, with respect to the particular issuers of such
securities, factors such as the creditworthiness and overall financial condition
of the issuer, the strength of management, product lines and competitive
positions of such issuer.
Peter W. Hegel, the Adviser's Chief Investment Officer, makes investment
allocation decisions for the Fund between the fixed-income and equity sectors
based on the recommendations of investment professionals of the Adviser. Once
the investment allocation decisions have been made, the Fund's portfolio
manager, Dan Smith, makes selections of particular securities consistent with
the foregoing and in consultation with the other investment professionals of the
Adviser. Allocations within the Fund's portfolio between fixed-income and equity
investment may be adjusted at any time and are formally reviewed at least
monthly. See also "Investment Advisory Services -- Portfolio Management."
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 100% with respect to either the equity portfolio or the
fixed-income portfolio. 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. See "Investment Policies and Restrictions" in the Statement of
Additional Information.
PORTFOLIO SECURITIES
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
12
<PAGE> 212
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 potential for appreciation and on its dividend
paying capacity.
FIXED-INCOME SECURITIES. The Fund may invest its assets in fixed-income
securities, which include preferred stocks, government securities, corporate
debt securities of various maturities and 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. The Fund's investments in fixed-income securities will be, at the
time of investment, rated investment grade. Investment grade rated securities
are those rated at least BBB by S&P, or at least Baa by Moody's or comparably
rated by any other NRSRO or, if unrated, considered by the Adviser to be of
comparable quality. The Fund may, however, invest up to 20% of its assets in
income securities that are rated at least CC by S&P or at least Ca by Moody's or
comparably rated by any other NRSRO or, if unrated, considered by the Fund's
investment adviser to be of comparable quality. The foregoing 20% limit shall
not apply to convertible securities. The Fund may not, however, invest more than
35% of its total assets in all fixed-income securities, including convertible
securities, which are rated below investment grade or, if unrated, deemed by the
Adviser to be of comparable quality.
Investment in lower grade securities involve a greater degree of credit risk
as compared with investment in higher grade securities. Such lower rated or
unrated 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 and/or repay principal in accordance with their terms.
While offering opportunities for higher yields, lower-grade securities are
considered below investment grade and involve a greater degree of credit risk
that investment grade income securities; although the lower-grade income
securities of an issuer generally involve a lower degree of credit risk than its
common stock. Such securities are regarded by the rating agencies, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation; assurance of interest
and principal payments or maintenance of other terms of the securities over any
long period of time may be small. The market for lower grade securities is
considered to be less liquid than the market for investment grade securities
which may adversely affect the ability of the Fund to dispose of such securities
in a timely manner at a price which reflects the value of such security in the
Adviser's judgment. Because issuers of lower grade securities frequently choose
not to seek a rating of their securities, the Fund will rely more heavily on the
Adviser's ability to determine the relative investment quality of such
securities than if the Fund invested exclusively in higher grade securities. For
a description of the ratings assigned to income securities, including lower
grade income securities, please see "Description of Securities Ratings" in the
Statement of Additional Information.
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The net asset value of the Fund will change with changes in the value of its
portfolio securities. The values of income securities may change as interest
rate levels fluctuate. To the extent that the Fund invests in income securities,
the net asset value of the Fund can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in income securities generally can be expected to rise. Conversely,
when interest rates rise, the value of a portfolio invested in income securities
generally can be expected to decline. Volatility may be greater during periods
of general economic uncertainty.
The foregoing 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
NRSRO 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, in addition to the factors
described above, 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 any other NRSRO.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in securities
issued by non-U.S. issuers of similar quality as the securities described above
as determined by the Adviser. Under current market conditions, the Fund
anticipates that at least one half of the Fund's investments in foreign
securities will be U.S. dollar-denominated. Investments in securities of foreign
entities and securities denominated in foreign currencies involve risks not
typically involved in domestic investment, including fluctuations in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since the Fund
may invest in securities denominated or quoted in currencies other than the
United States dollar, changes in foreign currency exchange rates may affect the
value of investments in the portfolio and the accrued income and unrealized
appreciation or depreciation of investments. Changes in foreign currency
exchange rates relative to the U.S. dollar will affect the U.S. dollar value of
the Fund's assets denominated in that currency and the Fund's yield on such
assets. With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by the Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Tax Status."
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign markets also have different
clearance and settlement procedures and in certain markets there have been
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<PAGE> 214
times when settlements have been unable to keep pace with the volume of
securities transactions making it difficult to conduct such transactions. Delays
in settlement could result in temporary periods when assets of the Fund are not
invested 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 portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities, including custodial costs and foreign brokerage commissions, are
generally higher than with transactions in United States securities. In
addition, the Fund will incur costs in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States.
DEFENSIVE STRATEGIES. In certain circumstances market conditions 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 taxable 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 NRSRO); commercial paper rated in the highest grade by either rating
service (or comparably rated by any other NRSRO); certificates of deposit and
bankers' acceptances; repurchase agreements with respect to any of the foregoing
investments; or any other fixed-income securities that the Adviser considers
consistent with such strategy.
- --------------------------------------------------------------------------------
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions, enter into currency transactions, purchase and
sell securities on a "when issued" and "delayed delivery" basis, enter into
repurchase and reverse repurchase agreements and lend its portfolio securities
in each case, subject to the limitations set forth below. These investments
entail risks.
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, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into 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 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
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<PAGE> 215
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. 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 of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Certain Strategic Transactions may provide the
opportunity for increased income, but may have characteristics similar to
leverage. As a result, increases and decreases in the net asset value of the
Fund may be larger than comparable changes in the net asset value of the Fund if
the Fund did not engage in such Strategic Transactions. 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.
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."
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<PAGE> 216
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 restriction 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 purchase 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 or lower 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.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including securities the disposition of which is
subject to substantial
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<PAGE> 217
legal or contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules.
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.
DOLLAR ROLLS. In order to seek a high level of current income, the Fund may
enter into dollar rolls in which the Fund sells securities for delivery in the
current month and simultaneously contracts to repurchase, typically in 30 or 60
days, substantially similar (same type and coupon) securities on a specified
future date from the same party at an agreed upon price which is less than the
sales price. During the roll period, the Fund forgoes principal and interest
paid on the securities. The Fund is compensated by the difference between the
current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The cash proceeds from the sale will be maintained
by the Fund in a segregated account with its custodian in which cash, U.S.
Government Securities or other liquid high-grade debt obligations will be equal
in value to its obligations. Because such assets are maintained in a segregated
account, the Fund will not treat such obligations as senior securities for
purposes of the Investment Company Act. A "covered roll" is a specific type of
dollar roll for which there is an offsetting cash position or cash equivalent
security position which matures on or before the forward settlement date of the
dollar roll transaction. "Covered rolls" are not subject to these segregation
requirements.
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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 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. Reverse repurchase
agreements create leverage and will be treated as borrowings for the purposes of
the Fund's investment restriction on borrowings.
The Fund is authorized to enter into dollar rolls and/or reverse repurchase
agreements with banks in an amount up to 33 1/3% of the Fund's total assets
(after giving effect to any such dollar rolls and reverse repurchase agreements)
which amount includes no more than 5% in borrowings and reverse repurchase
agreements from any entity for temporary purposes, such as clearances of
portfolio transactions, share repurchases and payment of dividends and
distributions. The Fund has no current intention to borrow money other than for
such temporary purposes. Accordingly, the Fund will not acquire additional
securities during any period in which its borrowings exceed 5% of the Fund's
total assets. The Fund will borrow only when the Adviser believes that such
borrowings will benefit the Fund.
Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations such as changes in the net
asset value of the Shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Fund which can exceed the income from the assets
retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Fund will be less than if borrowing
were not used, and therefore the amount available for distribution to
stockholders as dividends will be reduced.
RISKS. The Fund's investment in certain portfolio securities and other
investment practices entail certain risks. Please see the discussion of such
risks contained under "Investment Objective and Policies -- Portfolio
Securities" and "Investment Practices."
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
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. See
"Investment Policies and Restrictions" in the Statement of Additional
Information.
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- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Fund has designated three classes of shares for sale to the public 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") who are acting as securities dealers
("dealers") and through NASD members or eligible non-NASD members who are acting
as brokers or agents for investors ("brokers"). The Fund reserves the right to
suspend or terminate the continuous public offering of its shares at any time
and without prior notice.
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 currently 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 (the
"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 $1,000,000 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 $1,000.
The minimum subsequent investment with respect to each class of shares is $100.
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 $1,000,000 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
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Share accounts under $1 million, a purchaser of such Class A Shares would not
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 period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares or Class C
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 (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 CDSC 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 "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 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.
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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 securities
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
Distributor 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 Distributor 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. See "Net Asset Value."
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. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation 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 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.
INITIAL SALES CHARGE ALTERNATIVE
Investors choosing the initial sales charge alternative purchase 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
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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. See "Alternative Sales Arrangements" above. The staff
of the SEC has taken the position that brokers, dealers or financial
intermediaries who receive more than 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.
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
-------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- --------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Less than $50,000............................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000............... 4.75 4.99 4.00
$100,000 but less than $250,000.............. 3.75 3.90 3.00
$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
$1,000,000 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% 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 "Purchasing Shares Of The Fund --
Deferred Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a Letter of Intent (even if investors are not currently making
an investment of a size that would normally qualify for a quantity discount).
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, financial intermediary or the Distributor.
For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:
(i) an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned,
either alone or in combination, by any of the foregoing; or
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(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Internal
Revenue Code, as amended); or
(iii) a "company" as defined in Section 2(a)(8) of the Investment Company Act.
1. Combination of Investments. Purchases of Class A Shares of the Fund, or of
other Van Kampen Merritt funds distributed by the Distributor subject to an
initial sales charge ("ISC Shares"), which are made at any one time by "any
person" may be combined to receive a quantity discount.
2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares "any
person" (as defined above) may combine their current purchase with the current
public offering price of Class A Shares of the Fund or ISC Shares, which are
owned by such person. If the account an investor is combining for rights of
accumulation differs from the account into which the investor's current purchase
is placed, the investor must indicate to the Transfer Agent the account number
(and, if applicable, fund name) of such other account.
3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase an amount of Class
A Shares, during a 13 month period, that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent, applied
towards completion of an investor's Letter of Intent. In addition, if an
investor's broker, dealer or financial intermediary and the Distributor, agree
to refund the appropriate portion of their respective concessions to the Fund,
the sales charge on an investor's previous purchases made within 90 days may be
adjusted to the reduced sales charge under the Letter of Intent, and the
refunded concession will be used to purchase shares of the Fund at the public
offering price next determined after receipt of such monies. Each investment
made after signing the Letter of Intent will be entitled to the sales charge
applicable to the total investment indicated in the Letter of Intent. If an
investor does not complete the necessary purchases under the Letter of Intent
within 13 months from the date of the first purchase included thereunder, the
sales charge will be adjusted upward, corresponding to the amount actually
purchased.
When an investor signs a Letter of Intent, Class A Shares purchased with a
value of 5% of the amount specified in the Letter of Intent will be restricted;
that is, these Class A Shares cannot be sold or redeemed until the Letter of
Intent is satisfied or the additional sales charges have been paid. If the total
purchases made under the Letter of Intent, less redemptions, equal or exceed the
amount specified in the Letter of Intent, these Class A Shares will no longer be
restricted. If the total purchases, less redemptions, exceed the amount so
specified, and qualify an investor for a further quantity discount, the
Distributor and the investor's securities broker, dealer or financial
intermediary will, upon request, remit their respective portions of the sales
concession and with that amount, purchase
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additional Class A Shares of the Fund for the investor's account at the next
computed offering price. If an investor does not complete the necessary
purchases under the Letter of Intent, the sales charges will be adjusted upward
and if, after written notice, the investor does not pay the increased sales
charge, sufficient restricted Class A Shares will be redeemed to pay such
charge.
OTHER PURCHASE PROGRAMS. Purchasers of Class A Shares may be entitled to
reduced 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.
1. Unit Trust Reinvestment Programs. The Fund will permit unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund and ISC Shares 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 established 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 securities broker, dealer, 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
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
2. NAV Purchase Options
The classes of investors entitled to purchase shares of the Fund at net asset
value are as follows:
(a) Current or retired Trustees/Directors of funds advised by Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc. or John Govett & Co. Limited and such persons'
families and their
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<PAGE> 225
beneficial accounts. The term "families" includes a person's spouse,
children and grandchildren, parents, and a person's spouse's parents.
(b) 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 such fund or an affiliate of
such subadviser; and such persons' families and their beneficial accounts.
(c) Directors, officers, employees and registered representatives of financial
institutions that have a selling 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.
(d) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
Class A Shares of the Fund and ISC Shares of other funds distributed by
the Distributor as described herein under "Purchasing Shares Of The Fund
-- Initial Sales Charge Alternative -- Quantity Discounts," during the 13
month period commencing with the first investment pursuant hereto equals
at least $1 million. The Distributor may pay such entities through which
purchases are made an amount up to 0.50% of the amount invested, over a
twelve month period following such transaction.
(e) 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% for such purchases.
(f) Accounts as to which a selling firm charges an account management fee
("wrap accounts"), provided the selling firm has executed a supplemental
agreement to their existing selling agreement with the Distributor.
(g) 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.
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
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<PAGE> 226
percentage rate will be equal to (i) 1.00% with respect to Class A Shares in an
amount of $1 million or more; (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. Sales compensation with respect to Class A Shares
subject to a CDSC is set forth under "Purchasing Shares of the Fund -- Initial
Sales Charge Alternative".
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 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 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 and services fees 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
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<PAGE> 227
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).
The contingent deferred sales charge is waived (i) on a redemption of shares
following the death of a shareholder, or (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or other retirement plan
to a shareholder who has attained the age of 70 1/2.
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1,000,000 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% 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 Program. See
"Shareholder Programs -- Systematic Withdrawal Program."
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.
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
for 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
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<PAGE> 228
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 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 Internal Revenue
Code of 1986, as amended, 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.
- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay quarterly to holders of each class of
shares distributions of all or substantially all net investment income of the
Fund attributable to the respective class. 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
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
quarterly 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
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<PAGE> 229
the different classes of shares to differ. Generally, distributions with respect
to a class of shares subject to a higher distribution fee will be lower than
distributions with respect to a class of shares subject to a lower distribution
fee.
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 information under the "Distributions" section of the
Account Application accompanying this Prospectus or available from State Street
Bank and Trust Company, c/o National Financial Data Services, Van Kampen Merritt
Funds, P.O. Box 419001, Kansas City, MO 64141-6001 (the "Transfer Agent"). After
the Transfer Agent 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 quarterly 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 elects
otherwise to the Transfer Agent. This election may be made by telephone by
calling 1-800-341-2911 or in writing to the Transfer Agent. For inquiries
through Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. If a
shareholder elects to change the method of distribution, such change will be
effective only with regard to distributions for which the record date is seven
or more business days after the Transfer Agent has received the request.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge (other
than, with respect to the CDSC Shares, any applicable contingent deferred sales
charge) at any time by mailing a written redemption request in proper form to
the Transfer Agent. This request should be sent to State Street Bank and Trust
Company, c/o National Financial Data Services, Van Kampen Merritt Funds, P.O.
Box 419001, Kansas City, MO 64141-6001. The request should indicate the number
of shares to be redeemed of a particular fund and the class designations of such
shares, identify the account number and be signed exactly as the shares are
registered. If the amount being redeemed is in excess of $50,000 or if the
redemption proceeds will be sent to an address other than the address of record,
the signature(s) must be guaranteed by a member firm of a principal stock
exchange, a commercial bank or trust company which is a member of the Federal
Deposit Insurance Corporation ("FDIC"), a credit union or a savings association.
The guarantee must state the words "Signature Guaranteed" along with the name of
the granting institution. Shareholders should verify with the institution that
it is an eligible guarantor prior to signing. A guarantee from a notary public
is not acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent and endorsed for transfer or accompanied by an
endorsed stock power. Share certificates should be sent by registered mail to
National Financial Data Services, 1004 Baltimore Avenue, Dwight Building, Sixth
Floor, Kansas City, MO 64105-1807. Shareholders will receive the net asset value
per share next computed after the Transfer Agent receives the redemption request
and certificates (if any) in proper form. Any applicable contingent deferred
sales charge with
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<PAGE> 230
respect to CDSC Shares redeemed will be deducted from the redemption proceeds
prior to transmittal of such proceeds to the shareholder.
TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Fund at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption by
the Fund. For inquiries through Telecommunications Device for the Deaf (TDD),
dial 1-800-772-8889. There is a $500 minimum and a $1,000,000 maximum per
request if the redemption proceeds are to be mailed to the shareholder. If the
redemption proceeds are to be wired to a bank there is a minimum of $5,000 and a
$1,000,000 maximum per request. Prior to redeeming shares by telephone the
"Expedited Telephone Redemption" section of either the Account Application or
Expedited Telephone Redemption and Exchange Request Form (the "Authorization")
must be completed and on file with the Transfer Agent. The signature(s) on the
Authorization must be guaranteed by a member firm of a principal stock exchange,
a commercial bank or trust company which is a member of the FDIC, a credit union
or a savings association unless the Authorization is completed at the time an
account is originally established. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. A redemption requested by
telephone will be processed at the net asset value next determined after receipt
of the request. Any applicable contingent deferred sales charge with respect to
CDSC Shares redeemed will be deducted from the redemption proceeds prior to
transmittal of such proceeds to the shareholder. The proceeds would then be made
payable to the registered shareowner(s) and mailed to the address registered on
the account or wired to a bank, as requested on the Authorizations. Shareholders
cannot redeem shares by telephone if stock certificates are held for those
shares. This service is not available with respect to shares held in an
Individual Retirement Account for which State Street Bank and Trust Company acts
as custodian. In addition, this service is not available with respect to shares
purchased by check until 15 days after purchase.
By establishing the telephone redemption service, a shareholder authorizes the
Fund or the Transfer Agent to act upon the instructions of any person by
telephone to redeem shares for any account for which such service has been
authorized to the address of record of such account or such other address as is
listed in the Authorization. The Fund, the Distributor, the Transfer Agent and
National Financial Data Services, Inc. ("NFDS") seek to employ procedures
reasonably believed to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring a person attempting to redeem shares
by telephone to provide, on a recorded line, the name on the account, a social
security number or tax identification number and such additional information as
may be included in the Authorization. An investor agrees that no such person
will be liable for any loss, liability, cost or expense arising out of any
request reasonably believed to be genuine, including any fraudulent or
unauthorized request. This service may be amended or terminated at any time by
the Transfer Agent or the Fund. If a shareholder is unable to reach the Fund by
telephone, he or she may redeem shares pursuant to the procedures set forth
above under the caption "Written Redemption Request." During
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<PAGE> 231
periods of extreme economic or market changes, it may be difficult for investors
to reach the Fund by telephone and to effect telephone redemptions.
REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
telephone the request to the Distributor. Shareholders will receive the net
asset value next determined after such shareholder places the sell order. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholder. It is the responsibility of the investor's broker,
dealer or financial intermediary to transmit the redemption order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, sell orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor 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 redemption price due to the
failure of the Distributor to receive a sell order prior to such time must be
settled between the investor and the broker, dealer or financial intermediary
submitting the order. The Fund does not charge for this transaction (other than
any contingent deferred sales charge applicable to CDSC Shares). Shareholders
must submit a written redemption request in proper form to their securities
dealer within five business days after calling the dealer with the sell order.
The request should indicate the number of shares to be redeemed and the class
designation of such shares, identify the account number and the order or
confirmation number assigned to the trade and be signed by the shareholder
exactly as the shares are registered. If the amount of the redemption exceeds
$50,000 or if the redemption proceeds will be sent to an address other than the
address of record, signature(s) must be guaranteed by a member firm of a
principal stock exchange, a commercial bank or trust company which is a member
of the FDIC, a credit union or a savings association. The guarantee must state
the words "Signature Guaranteed" along with the name of the granting
institution. Shareholders should verify with the institution that it is an
eligible guarantor prior to signing. A guarantee from a notary public is not
acceptable. If certificates are held for the shares being redeemed, such
certificates must be sent endorsed for transfer or accompanied by an endorsed
stock power. Certificates should be sent by registered mail to State Street Bank
and Trust Company, c/o National Financial Data Services, Van Kampen Merritt
Funds, 1004 Baltimore Avenue, Dwight Building, Sixth Floor, Kansas City, MO
64105-1807. Shareholders whose shares are held in an Individual Retirement
Account ("IRA") for which State Street Bank and Trust Company acts as custodian
may not sell their shares through their securities dealers.
REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on Class B Share
redemptions following the disability of a Class B shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Internal Revenue Code (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
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<PAGE> 232
furnishing the Secretary of Treasury with proof as he or she may require, the
Fund will require satisfactory proof of disability before it determines to waive
the CDSC on Class B Shares.
In cases of disability, the CDSC on Class B 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 CDSC on Class B
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. Whether shares are redeemed by the Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to shareholders or their dealer, as the case may be,
within seven calendar days after a redemption request or repurchase order and
share certificates (if any) are received in proper form as set forth above. Wire
transfers from the Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the Fund will not
mail the proceeds until checks received for the purchase of shares have cleared,
which may take 10 days or more. The proceeds, of course, may be more or less
than the cost of the shares.
The right of redemption or resale to the Fund may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the SEC, or during any period when the SEC
has by order permitted such suspension or postponement.
The Fund reserves the right to redeem any investment if the value of an
account falls below $500. Before the Fund makes such redemption it will provide
the shareholder with written notice and 30 days in which to make an additional
investment sufficient to increase the value of the account to at least $500.
- --------------------------------------------------------------------------------
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 value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering
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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 sub-trust. 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.
- --------------------------------------------------------------------------------
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 nearly $50 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly-owned subsidiary
of Van Kampen American Capital, 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. and its subsidiaries (some of whom are
officers or trustees of the Fund) own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% 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
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owns or would own 5% or more of the common stock of VK/AC Holding, Inc. The
address of the Adviser is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
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 sub-trust. 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 % PER ANNUM
- ------------------------ -----------
<S> <C>
First $500 million.............................................. 0.70 of 1%
Over $500 million............................................... 0.65 of 1%
</TABLE>
Under its investment advisory agreement, 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 Investment Company Act, of the Adviser, Van Kampen American
Capital Distributors, Inc. or Van Kampen American Capital, Inc.), the charges
and expenses of 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, excluding
state securities registration expenses.
The Fund and the Adviser have adopted Codes of Ethics designed to recognize
the fiduciary relationship between the Fund and the Adviser and its employees.
The Codes permit trustees/directors, officers and employees to buy and sell
securities for their personal accounts subject to procedures designed to prevent
conflicts of interest including, in some instances, preclearance of trades.
The Adviser may utilize at its own expense credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Asset Management, Inc. (formerly American Capital Asset Management, Inc.).
PORTFOLIO MANAGEMENT. Peter W. Hegel, Senior Vice President and Chief
Investment Officer of the Adviser, is responsible for investment allocation
decisions between the fixed-income and equity sectors of the Fund. Daniel Smith
is an Assistant Vice President of the Adviser and is primarily responsible for
the day to day management of the Fund's portfolio. Messrs. Hegel and Smith each
have been employed by the Adviser for the past five years.
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<PAGE> 235
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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 fixed-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.
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,
the Distributor 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.
- --------------------------------------------------------------------------------
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 Investment
Company 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,
distributor of
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<PAGE> 236
each class of the Fund's shares, sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers, 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. Brokers, dealers and financial intermediaries that have entered into
Selling Agreements with the Distributor and sell shares of the Fund are referred
to herein as "financial intermediaries."
CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.30% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the 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 financial intermediaries and in connection with the
maintenance of such shareholders' accounts. The Fund pays the Distributor the
lesser of the balance of the 0.30% not paid to such financial intermediaries as
a service fee 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 connection with the distribution of Class B 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 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 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 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
financial intermediary's customers. The Fund pays the Distributor the lesser of
the balance of the 0.75% not paid to such financial 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 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.
37
<PAGE> 237
The Distributor's actual distribution-related expenses with respect to a class
of CDSC Shares for any given year may exceed the fees payable to the Distributor
with respect to such 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
distribution 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. As of December 31, 1994, there
were $8,110 and $6,289 of unreimbursed distribution expenses with respect to
Class B Shares and Class C Shares, respectively, representing 0.07% and 0.06% of
the Fund's total net assets. If the Distribution Plan were 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 sub-trust of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one sub-trust of the Trust may indirectly
benefit the other funds which are sub-trusts 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
with respect to a particular class of CDSC Shares to defray distribution related
expenses attributable to any 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.
- --------------------------------------------------------------------------------
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.
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.
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<PAGE> 238
If the Fund so qualifies and distributes each year to its Shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses) in
each year, it will not be required to pay federal income taxes on any income
distributed to Shareholders. 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. As a sub-trust of a Massachusetts
business trust, the Fund will not be subject to any excise or income taxes in
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes.
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 net capital gains (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
net capital gains 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 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 are subject to special provisions of
the Code that, among other things, may 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
39
<PAGE> 239
amount, timing and character of distributions to Shareholders. For example, with
respect to securities issued at a discount, the Fund will be required to accrue
as income each year a portion of the 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.
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 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. Some 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 distributed when paid,
dividends declared in October, November or December, payable to Shareholders of
record on a specified date in such quarter 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.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
Shareholders.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
Shareholders who do not
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<PAGE> 240
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.
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.
- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
Upon written or telephone request to the Fund, however, a share certificate will
be issued for any or all of the full shares credited to a shareholder's account.
Share certificates which have been issued to a shareholder may be returned at
any time. If a shareholder requests share certificates to be issued, such
shareholder will be sent share certificates representing shares (with the
exception of fractional shares) of the Fund and will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost the shareholder must write to State Street Bank and Trust Company, c/o
National Financial Data Services, P.O. Box 419001, Kansas City, MO 64141-6001,
Attn: Van Kampen Merritt Funds, requesting an "affidavit of loss" and to obtain
a Surety Bond in a form acceptable to the Transfer Agent. On the date the letter
is received the Transfer Agent will calculate no more than 2.00% of the net
asset value of the issued shares, and bill the party to whom the certificate was
mailed.
SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's Class A Share account or
Class B Share account is valued at $10,000 or more, and such shareholder's
dividends are being reinvested, a requested dollar amount may be paid from such
account to any person monthly, quarterly, semiannually or annually. The minimum
amount that may be withdrawn each period is $50; withdrawals will be made on the
seventh business day of the month in which they are scheduled to occur.
Depending upon the size of the payments requested and the fluctuations in the
net asset value of the shares redeemed, redemptions
41
<PAGE> 241
for the purpose of making such payments may reduce or even exhaust the amounts
in such account. If an investor acquires additional shares of the Fund after
joining the Systematic Withdrawal Program, the investor must inform the Fund if
he or she wants the new shares to be subject to the Systematic Withdrawal
Program by telephoning the Fund at 1-800-341-2911.
With respect to redemptions of Class B Shares made pursuant to the Systematic
Withdrawal Program, an investor may annually redeem up to 12% of the net asset
value of the investor's initial investment in Class B Shares or, if the investor
does not join the program on the date of his or her initial investment, the net
asset value of the investor's Class B Shares on the date the investor elects to
participate in the Systematic Withdrawal Program. The Fund will waive the
contingent deferred sales charge applicable to Class B Shares redeemed pursuant
to the Fund's Systematic Withdrawal Program.
It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge, or will become
subject to a contingent deferred sales charge, in order to purchase shares at
the same time that shares are being redeemed upon which a sales charge may
already have been paid. Therefore, the Fund will not knowingly permit a
shareholder to make additional investments in shares of less than $5,000 if at
the same time such shareholder is making systematic withdrawals at a rate
greater than the distribution being paid on such shareholder's shares. The Fund
reserves the right to amend or terminate the systematic withdrawal program on
thirty days' notice, and a shareholder may withdraw from the program at any
time.
EXCHANGE PRIVILEGE. Any Class A Shares of the Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for ISC Shares or
money market fund shares of other Van Kampen Merritt mutual funds distributed by
the Distributor that offer an exchange privilege. Under the exchange privilege,
the Fund will offer to exchange its Class A Shares for ISC Shares or money
market fund shares, as the case may be, of such other funds on the basis of
relative net asset value per share. Any ISC Shares exchanged into the Fund that
have been charged a sales load lower than the sales load applicable to Class A
Shares of the Fund will be charged the applicable sales load differential upon
exchange. ISC Shares of the Van Kampen Merritt Money Market Fund and Van Kampen
Merritt Tax Free Money Fund which have not previously been charged a sales load
(except for shares purchased via the reinvestment option) will be charged the
applicable sales load upon exchange into the Fund.
Class B Shareholders of the Fund may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen Merritt
mutual funds sponsored by the Distributor ("New Class B Shares") on the basis of
relative net asset value per Class B Share, without the payment of any
contingent deferred sales charge that might otherwise be due on redemption of
the Outstanding Class B Shares. Class B Shares of a fund acquired through use of
the exchange privilege will be subject to the contingent deferred sales charge
schedule relating to the Class B Shares of the fund from which the purchase of
Class B Shares was originally made.
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<PAGE> 242
Class C Shares of the Fund are exchangeable for Class C Shares of other Van
Kampen Merritt mutual funds distributed by the Distributor on the same terms set
forth in the preceding paragraph with respect to Class B Shares, except that
Class C Shares do not convert to Class A Shares. The exchange privilege with
respect to any Van Kampen Merritt money market fund sponsored by the Distributor
is not available for Class C Shareholders.
In order to qualify for the exchange privilege, it is required that the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the Fund). Shareholders will be able to effect an
exchange by telephone by calling the Fund at 1-800-341-2911 prior to 3:00 p.m.
Central Standard Time. For inquiries through Telecommunications Device for the
Deaf (TDD), dial 1-800-772-8889. The exchange will be processed at the net asset
value next determined after receipt of such request. By utilizing the telephone
exchange service, a shareholder authorizes the Fund or the Transfer Agent to act
upon the instructions of any person by telephone to exchange shares from any
account for which such service has been authorized to any identically registered
account(s) with any Van Kampen Merritt fund distributed by the Distributor that
offers an exchange privilege. The Fund, the Distributor, the Transfer Agent and
NFDS seek to employ procedures reasonably believed to confirm that instructions
communicated by telephone are genuine. Such procedures include requiring a
person attempting to exchange shares by telephone to provide, on a recorded
line, the name on the account, a social security or tax identification number or
such additional information as may be deemed necessary or appropriate. An
investor agrees that no such person will be liable for any loss, liability, cost
or expense arising out of any request reasonably believed to be genuine,
including any fraudulent request. This service may be amended or terminated at
any time by the Transfer Agent or the Fund. If a shareholder has certificates
for any shares being exchanged, such certificates must be surrendered prior to
the exchange in the same manner as in redemption of such shares. See "Redemption
of Shares--Telephone Redemptions". Any shares exchanged between the Fund and any
of the other funds will begin earning dividends on the next business day after
the exchange is effected. 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.
An exchange between funds pursuant to the exchange privilege is treated as a
sale for federal income tax purposes and, depending upon the circumstances, a
short- or long-term capital gain or loss may be realized.
The exchange privilege may be modified or terminated at any time, subject to
the requirement that the Fund give prominent notice thereof at least 60 days
prior to the effective date of the modification or termination in certain
circumstances. The Fund reserves the right to limit the number of times a
shareholder may exercise the exchange privilege.
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<PAGE> 243
AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASS(SM)).
1. 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
the Transfer Agent has received the application and the voided check or deposit
slip, such shareholder's designated bank account, following any redemption, will
be credited with the proceeds of such redemption. Once enrolled in the ACH plan,
a shareholder may terminate participation at any time by writing the Transfer
Agent.
2. Automated Dividend Programs. The Fund will, upon the election of a
shareholder, automatically invest distributions from a shareholder's account
directly into a shareholder's bank account.
3. Dividend Diversification. Quarterly distributions and any net long-term
capital gain distributions to a shareholder's account may be invested in the
same class of shares of any other Van Kampen Merritt mutual fund distributed by
the Distributor at the then current net asset value, WITHOUT A SALES CHARGE,
upon election by a shareholder. This election may be made on the account
application, by written notice to the Transfer Agent or by calling the Fund
directly at 1-800-341-2911 during the hours of 7:00 a.m. to 7:00 p.m. Central
Standard Time. For inquiries through Telecommunications Device for the Deaf
(TDD) dial 1-800-772-8889. In order to qualify for this privilege, a shareholder
must have established an account in the other mutual fund prior to electing this
privilege. This privilege may be modified or terminated by the Fund at any time.
4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the Fund. In order to utilize this
option, a shareholder must fill out and sign the appropriate section of the
account application or the EASESM application which is available from the
Transfer Agent, the Fund, such shareholder's broker or dealer or the
Distributor. Once the Transfer Agent has received this application, such
shareholder's checking account at his or her designated local bank will be
debited each month in the amount authorized by such shareholder to purchase
shares of the Fund. Once enrolled in the EASESM program, a shareholder may
change the monthly amount or terminate participation at any time by writing or
calling the Transfer Agent. Shareholders in the EASESM program will receive a
confirmation of these transactions from the Fund monthly, and their regular bank
account statements will show the debit transaction each month.
By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the
44
<PAGE> 244
Application in performing such services by either withdrawing funds for deposit
in the Fund pursuant to the EASESM Plan or depositing distributions and
redemptions in the bank account indicated by the voided check or deposit slip
accompanying the shareholder's election or by depositing the shareholder's
distributions in the Van Kampen Merritt fund account indicated. A shareholder
also agrees that neither the Fund, the Distributor, the Transfer Agent nor NFDS
will be liable for any loss, liability, cost or expense arising out of any
request, including any fraudulent request. This service may be amended or
terminated at any time by the Transfer Agent or by the Fund.
REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares may, within 120 days, repurchase Class A Shares of the Fund, or
Shares of other Van Kampen Merritt mutual funds distributed by the Distributor,
in an amount of at least $500 and not exceeding the redemption proceeds
received, at a purchase price equal to the net asset value next determined after
the reinstatement request is received by the Transfer Agent or the Distributor.
A Class C Shareholder who has redeemed shares of the Fund may repurchase Class C
Shares of the Fund, or Shares of other Van Kampen Merritt mutual funds
distributed by the Distributor with credit given for any contingent deferred
sales charge paid upon such redemption.
Exercising the reinstatement privilege will not affect the character of any
gain or loss realized on the redemption for federal income tax purposes, except
that if the redemption resulted in a loss, the reinstatement may result in the
loss being disallowed under the "wash sale" rules.
- --------------------------------------------------------------------------------
INVESTMENTS BY TAX-SHELTERED RETIREMENT PLANS
- --------------------------------------------------------------------------------
Shares of the Fund are available for purchase in connection with certain types
of tax-sheltered retirement plans, including:
- Individual Retirement Accounts (IRA's) for individuals.
- Simplified Employee Pension Plans (SEP's) for employees.
- Qualified plans for self-employed individuals.
- Qualified corporate pension and profit-sharing plans for employees.
The purchase of shares of the Fund may be limited by the plans' provisions and
does not itself establish such plans. A reduced minimum initial investment,
available for purchase of Class A Shares, Class B Shares and Class C Shares only
in connection with a tax-sheltered retirement plan is $250.
IRA's are available for individuals under age 70 1/2 whether or not they are
active participants in any other tax-qualified employer plan. Generally,
individuals who are not active participants in a tax-qualified employer plan may
deduct from gross income their IRA contributions which do not exceed 100% of
compensation received during a year or $2,000 ($2,250 for a spousal account),
whichever is less. If an employee or the employee's
45
<PAGE> 245
spouse is an active participant in a tax-qualified employer plan the IRA
deduction is phased out above certain income levels. Individuals may, however,
make non-deductible contributions to their IRA up to the lesser of 100% of
annual compensation or $2,000 ($2,250 for a spousal account) without being
subject to an excise tax on excessive contributions.
All contributions to an IRA made to the Fund through a broker must be settled
by April 15 in any year in order to be deemed a valid contribution for the
preceding year. Contributions made directly to the Fund via the mail must be
postmarked by April 15 in any year in order to be deemed a valid contribution
for the preceding year. Generally, earnings on investments held in an IRA are
not taxable until withdrawn. Subject to certain exceptions, substantial tax
penalties apply to withdrawals before age 59 1/2. A request for distributions
from an IRA for which State Street Bank and Trust Company acts as custodian must
be made in writing.
A SEP is a retirement program established by an employer (including
individuals) for the benefit of its eligible employees. Generally, any employee
who has attained age 21, worked for the employer during three of the past five
years and earned a specified amount from the employer in the current year will
be eligible to participate. Under a SEP, each participant establishes an IRA to
which the sponsoring employer makes annual calendar year contributions.
Generally, these contributions cannot exceed the lesser of $30,000 or 15% of the
participant's compensation for the year. A participating employee may also make
his or her IRA contribution to the same account. Generally, earnings on accounts
held in an IRA established pursuant to a SEP are not taxable until withdrawn.
Subject to certain exceptions, substantial tax penalties apply to withdrawals
before age 59 1/2.
Shares of the Fund may also be purchased by all types of employer sponsored
tax-qualified retirement plans which allow for investments in mutual funds. A
standardized Van Kampen Merritt plan is available through securities brokers,
dealers, financial intermediaries, the Fund or the Distributor for employers
(including individuals) who desire to start or amend a retirement plan. The form
of this standardized plan has been determined to be "qualified" under the
Internal Revenue Code. An employer may use this prototype to establish a profit
sharing plan, a money purchase pension plan or both for its eligible employees.
The cost for the use of the prototype plan is $50, and there are no annual fees.
The adopting employer determines within the prescribed limits the eligibility
standards, rate of contributions and other significant provisions of the
prototype plan. The Distributor, as sponsor of this prototype plan, reserves the
right to amend such plan from time to time to assure its continued qualification
under the Internal Revenue Code or for other reasons. Employers adopting this
prototype plan will be bound by such amendments.
Investors considering establishing a retirement plan or purchasing shares of
the Fund in connection with a retirement plan should consult with their attorney
or tax advisor with respect to plan requirements and tax aspects pertaining to
them.
46
<PAGE> 246
- --------------------------------------------------------------------------------
FUND PERFORMANCE
- --------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. In
addition the Fund may include in advertisements or other sales literature
information regarding the past performance of certain types of investments or
market indices. Any historical performance information regarding the Fund 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, Forbes or other industry publications. From time to time, the Fund may
compare its performance to certain securities and unmanaged indices which may
have different risk/reward characteristics than the Fund. Such characteristics
may include, but are not limited to, tax features, guarantees, insurance and the
fluctuation of principal and/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.
Please consult the Statement of Additional Information for more information
regarding the Fund's performance.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
State Street Bank and Trust Company, c/o National Financial Data Services, Van
Kampen Merritt Funds, P.O. Box 419001, Kansas City, MO 64141-6001, transfer
agent for the Fund, performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. When an initial
investment is made in the Fund,
47
<PAGE> 247
an account will be opened for each shareholder on the Fund's books and
shareholders will receive a confirmation of the opening of the account.
Shareholders will receive quarterly statements giving details of all activity in
their account(s) and will also receive a statement whenever an investment or
withdrawal is made in or from their account. Information for federal income tax
purposes will be provided at the end of the year. Such statements will present
separately information with respect to each class of the Fund's Shares. It is
expected that the transfer agency costs attributable to the Class B Shares and
the Class C Shares will be higher than the transfer agency costs attributable to
the Class A Shares.
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Fund is a sub-trust of the Van Kampen Merritt Equity Trust, a
Massachusetts business trust organized March 26, 1987 (the "Trust"). Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each sub-trust on matters affecting an individual sub-trust.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, without 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 represent an interest in the same assets of
the Fund and are identical in all respects except that each class bears certain
distribution expenses and has exclusive voting rights with respect to its
distribution fee. See "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 Class B Shareholders and Class C Shareholders 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 a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the Investment Company Act.
More detailed information concerning the Trust is set forth in the Statement of
Additional Information.
48
<PAGE> 248
- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------
The fiscal year of the Fund ends on June 30 of each year. 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
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 The Van Kampen Merritt Family of
Funds, One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Attn:
Correspondence. Its telephone number is 1-800-341-2911.
For inquiries through Telecommunications Device for the Deaf (TDD) dial
1-800-772-8889.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial 1-800-542-4344.
- --------------------------------------------------------------------------------
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.
49
<PAGE> 249
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344
VAN KAMPEN MERRITT
BALANCED FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
STATE STREET BANK AND
TRUST COMPANY
c/o National Financial Data Services
Van Kampen Merritt Funds
P.O. Box 419001
Kansas City, MO 64141-6001
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Merritt 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> 250
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. AN
AMENDMENT TO THE REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME SUCH AMENDMENT TO THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL
INFORMATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN
WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION -- DATED APRIL 28, 1995
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN MERRITT BALANCED FUND
The Van Kampen Merritt Balanced Fund (the "Fund") seeks to provide its
shareholders with current income, while also seeking to provide shareholders
with capital growth. The Fund will seek to achieve its investment objective by
investing in a diversified portfolio of common stocks, fixed-income securities,
(including preferred stock, government securities, corporate debt securities and
convertible securities) and cash and cash equivalents. There can be no assurance
that the Fund will achieve its investment objective. The Fund is a separate
sub-trust of Van Kampen Merritt Equity Trust, a Massachusetts business trust
(the "Trust").
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated April 30, 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 1-800-341-2911, ext. 6504. 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>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-3
Description of Securities Ratings..................................................... B-14
Officers and Trustees................................................................. B-19
Investment Advisory and Other Services................................................ B-23
Portfolio Transactions and Brokerage Allocation....................................... B-24
Tax Status of the Fund................................................................ B-25
The Distributor....................................................................... B-25
Legal Counsel......................................................................... B-26
Performance Information............................................................... B-26
Unaudited Financial Statements........................................................ B-28
Notes to Unaudited Financial Statements............................................... B-35
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1995
B-1
<PAGE> 251
THE FUND AND THE TRUST
The Fund is a separate sub-trust of the Trust, an open-end diversified
management investment company. The Fund was established pursuant to a
Designation of Sub-Trust on March 17, 1994. At present, the Fund, Van Kampen
Merritt Utility Fund, Van Kampen Merritt Growth and Income Fund, Van Kampen
Merritt Total Return Fund (which has not commenced investment operations) and
Van Kampen Merritt Growth Fund (which has not yet commenced investment
operations) are the only sub-trusts of the Trust, although other sub-trusts may
be organized and offered in the future.
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated March 26,
1987. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares in separate sub-trusts. Each share represents an
equal proportionate interest in the assets of the sub-trust with each other
share in such sub-trust and no interest in any other sub-trust. No sub-trust is
subject to the liabilities of any other sub-trust. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its sub-trusts, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its sub-trusts 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 sub-trust on matters affecting an individual
sub-trust. For example, a change in investment policy for a sub-trust would be
voted upon by shareholders of only the sub-trust involved. Shares do not have
cumulative voting rights, preemptive rights or any conversion or exchange
rights. The Trust does not contemplate holding regular meetings of shareholders
to elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
sub-trust) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any sub-trust without approval by a majority of the shares of each affected
sub-trust present at a meeting of shareholders (or such higher vote as may be
required by the Investment Company Act of 1940, as amended (the "1940 Act") or
other applicable law) and except that the Trustees cannot amend the Declaration
of Trust to impose any liability on shareholders, make any assessment on shares
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (determined at the time of investment) would then be
invested in securities of a single issuer or, if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of an
issuer.
2. Issue senior securities, enter into reverse repurchase agreements with
banks or engage in dollar rolls in the aggregate in excess of 33 1/3% of
the Fund's total assets (after giving effect to any such borrowing); which
amount includes no more than 5% in bank borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.
B-2
<PAGE> 252
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, 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 any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions nor short
term credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except in connection with
Strategic Transactions.
6. 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.
7. Make investments for the purpose of exercising control or participation in
management, 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.
8. 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.
9. 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.
10. Purchase or sell real estate (including real estate limited partnership
interests), 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 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 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.
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. 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 100%. 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.
ADDITIONAL INVESTMENT CONSIDERATIONS
LOWER GRADE SECURITIES
The Fund may invest up to 20% of its assets in lower-grade fixed-income
securities (not including convertible securities). Such lower grade securities
are rated at least CC by Standard & Poor's Ratings Group ("S&P") or at least Ca
by Moody's Investor Services, Inc. ("Moody's"). Investment in such securities
B-3
<PAGE> 253
involves special risks, as described herein. Liquidity relates to the ability of
a Fund to sell a security in a timely manner at a price which reflects the value
of that security. As discussed below, the market for lower grade securities is
considered generally to be less liquid than the market for investment grade
securities. The relative illiquidity of some of the Fund's portfolio securities
may adversely affect the ability of the Fund to dispose of such securities in a
timely manner and at a price which reflects the value of such security in the
Adviser's judgment. The market for less liquid securities tends to be more
volatile than the market for more liquid securities and market values of
relatively illiquid securities may be more susceptible to change as a result of
adverse publicity and investor perceptions than are the market values of higher
grade, more liquid securities.
The Fund's net asset value will change with changes in the value of its
portfolio securities. Because the Fund will invest in fixed income securities,
the Fund's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities can be expected to decline. Net asset value and market value may be
volatile due to the Fund's investment in lower grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty.
The Adviser values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Fund may
invest, there may be relatively inactive trading in such securities and the
ability of the Adviser to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Fund's portfolio,
the responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the valuation of
the Fund's securities due to the reduced availability of reliable objective
data. To the extent that the Fund invests in illiquid securities and securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities are particularly difficult to dispose
of.
Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and adversely
affect the market value of such securities. In addition, in such circumstances,
the ability of issuers of lower grade securities to repay principal and to pay
interest, to meet projected financial goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
lower grade securities in the Fund's portfolio and thus the Fund's net asset
value. The secondary market prices of lower grade securities are less sensitive
to changes in interest rates than are those for higher rated securities, but are
more sensitive to adverse economic changes or individual issuer developments.
Adverse publicity and investor perceptions, whether or not based on rational
analysis, may also affect the value and liquidity of lower grade securities.
Yields on the Fund's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade securities in the Fund's portfolio and thus in the net asset value
of the Fund. Net asset value and market value may be volatile due to the Fund's
investment in lower grade and less liquid securities. Volatility may be greater
during periods of general economic uncertainty. The Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of interest or a repayment of principal on its portfolio holdings, and
the Fund may be unable to obtain full recovery thereof. In the event that an
issuer of securities held by the Fund experiences difficulties in the timely
payment of principal or interest and such issuer seeks to restructure the terms
of its borrowings, the Fund may incur additional expenses and may determine to
invest additional capital with respect to such issuer or the project or projects
to which the Fund's portfolio securities relate.
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating fixed-income securities. Such ratings
evaluate only the
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safety of principal and interest payments, not market value risk. Additionally,
because the creditworthiness of an issuer may change more rapidly than is able
to be timely reflected in changes in credit ratings, the Adviser continuously
monitors the issuers of such securities held in the Fund's portfolio. The Fund
may, if deemed appropriate by the Adviser, retain a security whose rating has
been downgraded by S&P or Moody's, or whose rating has been withdrawn.
Because the Fund may invest in unrated fixed-income securities, achievement by
the Fund of its investment objective may be more dependent upon the Adviser's
investment analysis than would be the case if the Fund were investing
exclusively in rated securities.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities (such as bonds, debentures,
notes and preferred stock) that may, at the holder's option, be converted into
or exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or in accordance
with a prescribed formula. A convertible security entitles the holder to receive
interest paid or accrued on convertible debt, or the dividend paid on
convertible preferred stock, until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities, until converted, have
the same general characteristics as other non-convertible, fixed income
securities, insofar as they generally provide a stable stream of income with
generally higher yields than those of common equity securities of the same or
similar issuers. By permitting the holder to exchange its investment for common
stock, convertible securities may also enable the investor to benefit from
appreciation in the market price of the underlying common stock. Therefore,
convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. Convertible securities rank
senior to common stock in a corporation's capital structure and, therefore,
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in a large measure upon the degree
to which the convertible security sells based on its value as a fixed income
security rather than that of the underlying common stock.
As with other fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The credit standing of the issuer and other
factors may also have an effect on the value of a convertible security. The
unique feature of the convertible security is that, as the market price of the
underlying common stock declines, a convertible security tends to trade
increasingly in a manner similar to a fixed income security, and may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock approaches or
exceeds the conversion price, the price of a convertible security increasingly
reflects the value of the underlying common stock and may rise accordingly,
although gains may be less for the convertible security than for the underlying
common stock to the extent of any "conversion premium." A convertible security
generally will sell at a premium over its conversion value (i.e., the security's
worth, at market value, if converted into the underlying common stock)
determined by the extent to which investors place value on the right to acquire
the underlying common stock while holding the fixed income security. Thus,
appreciation of the underlying common stock will result in substantial
appreciation of the convertible security only after the conversion premium has
been eliminated.
Holders of fixed income securities (including convertible securities) have a
claim on the assets of the issuer prior to the holders of common stock in case
of liquidation. However, convertible securities are typically subordinated to
non-convertible, fixed income securities of the same issuer.
The Adviser believes that the characteristics of convertible securities make
them particularly appropriate vehicles to achieve the Fund's investment
objective. Convertible securities have unique investment characteristics because
(i) they have relatively high yields as compared to common stocks, (ii) they
have defensive characteristics since they provide a fixed return even if the
market price of the underlying common stock declines, and (iii) they provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by the
Fund is called for redemption, the Fund will be required to surrender the
security for redemption,
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convert it into the underlying common stock or sell it to a third party. Any of
these actions could have an adverse effect on the Fund's ability to achieve its
investment objective. If the Fund surrenders the security for redemption, it
will receive the face amount of the security, and possibly a redemption premium.
However, the amount received may be less than the value of the security before
the redemption. Moreover, since a call for redemption is most likely to occur in
a declining interest rate environment, the Fund may not be able to earn as high
a rate of return when it reinvests the proceeds. Selling or converting the
security might be more advantageous than surrendering for redemption, but the
reinvestment risk would remain. Before the Fund purchases a convertible
security, it will review carefully the redemption provisions of the security.
Convertible securities are generally not investment grade, that is, not rated
within the four highest categories by S&P and Moody's. To the extent that
convertible securities acquired by the Fund are rated lower than investment
grade or are not rated, there is a greater risk as to the timely repayment of
the principal of, and timely payment of interest or dividends on, such
securities. The Fund expects that many convertible securities which it purchases
will be rated below investment grade. Such securities generally are considered
to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and to involve major risk exposures to adverse
conditions that outweigh any quality and protective characteristics. See
"Additional Investment Considerations -- Lower Grade Securities". Under current
market conditions, not more than 35% of the Fund's total assets may be invested
in all fixed income securities that are rated below investment grade, or if
unrated, deemed by the Adviser to be of comparable quality.
In selecting convertible securities for the Fund, the Adviser will consider
the following factors, among others, (1) the Adviser's own evaluation of the
creditworthiness of the issuers of the securities; (2) the interest or dividend
income generated by the securities; (3) the potential for capital appreciation
of the securities and the underlying common stock; (4) the prices of the
securities relative to the underlying common stock; (5) the prices of the
securities relative to other comparable securities; (6) whether the securities
have unfavorable redemption provisions or are entitled to the benefits of
sinking funds or other protective conditions; (7) diversification of the Fund's
portfolio as to issuers and industries; (8) whether the securities are rated by
Moody's and/or S&P and, if so, the ratings assigned; and (9) whether the
underlying common stock can be sold short, although the Fund is not limited to
buying convertible securities the underlying common stock of which may be sold
short.
MONEY MARKET INSTRUMENTS
Money market instruments include (a) obligations of or guaranteed by the U.S.
government, its agencies or instrumentalities ("Government Money Market
Securities"), (b) obligations of banks subject to U.S. government regulation as
well as such other bank obligations as are insured by a U.S. government agency
("Bank Obligations"), (c) commercial paper (including variable amount master
demand notes) rated at least A-3 by S&P or Prime-3 by Moody's or, if not so
rated, issued by a corporation which has outstanding debt obligations rated at
least AA by S&P or Aa by Moody's and (d) debt obligations (other than commercial
paper) of corporate issuers which obligations are rated at least AA by S&P or Aa
by Moody's. Money market securities are subject, however, to the limitation that
they mature within one year of the date of their purchase or are subject to
repurchase agreements maturing within one year. Government Money Market
Securities include treasury bills, notes and bonds issued by the U.S. government
and backed by the full faith and credit of the United States, as well as
securities issued or guaranteed as to principal and interest by agencies and
instrumentalities of the U.S. government. Bank Obligations include certificates
of deposit and banker's acceptances of domestic banks (or Euro-dollar
obligations of foreign branches of such domestic banks) subject to U.S.
government regulation and time deposits of federal and state banks whose
accounts are insured by a government agency as well as such accounts themselves.
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, in addition to the factors described in the
Prospectus under the heading "Investment Objective and Policies," 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
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could be sold and the rating, if any, assigned to such security by other
nationally recognized statistical rating organizations.
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. 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 derivative instruments such as 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,
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" in the Prospectus.
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GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, 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
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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 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 U.S. and foreign
securities exchanges and in the over-the-counter markets and or 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 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
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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 for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options 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.
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.
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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.
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.
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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 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
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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 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" in the Prospectus.
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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 Standard & Poor's Ratings Group) follows:
A Standard & Poor's 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.
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 Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the 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.
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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.
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.
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.
COMMERCIAL PAPER
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
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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
Standard & Poor's 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 Standard & Poor's 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).
-- 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>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to a preferred
stock issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
</TABLE>
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<PAGE> 266
<TABLE>
<S> <C>
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 preferred
CCC 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.
MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service rating symbols and their meanings (as published by Moody's
Investor Service) 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
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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.
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.
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<PAGE> 268
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.
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.
OFFICERS AND TRUSTEES
The officers and Trustees of the Trust (of which the Fund is a sub-trust),
their principal occupations for the last five years and their affiliations, if
any, with the Adviser, Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM
Asia Pacific Company, Limited, Van Kampen American Capital Distributors, Inc.,
Van Kampen American Capital, Inc. or VK/AC Holding, Inc., are as follows:
DENNIS J. MCDONNELL,* President, Chief Executive Officer and Trustee
One Parkview Plaza, Oakbrook Terrace, IL 60181
Director of VK/AC Holding, Inc. and Van Kampen American Capital, Inc.
President, Chief Operating Officer and Director of Van Kampen American
Capital Investment Advisory Corp., Van Kampen American Capital Asset
Management, Inc., and Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.
Chairman and Director of MCM Asia Pacific Company, Limited
Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc.
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<PAGE> 269
R. CRAIG KENNEDY, Trustee
Dennis Trading Group, Inc., 250 S. Wacker Drive, Suite 650, Chicago, IL
60606
Advisor to the Dennis Trading Group Inc.
Prior to 1993, President and Chief Executive Officer, Director and member
of the Investment Committee of the Joyce Foundation, a private foundation.
PHILIP G. GAUGHAN, Trustee
9615 Torresdale Avenue, Philadelphia, PA 19114
Prior to February, 1989, former Managing Director and Manager of Municipal
Bond Department, W.H. Newbold's Son & Co.
DONALD C. MILLER, Trustee
415 North Adams, Hinsdale, IL 60521
Prior to 1992, Director of Royal Group, Inc. of Charlotte, North Carolina,
a company in insurance-related businesses.
JACK E. NELSON, Trustee
423 Country Club Drive, Winter Park, FL 32789
President of Nelson Investment Planning Services, Inc., a financial
planning company.
JEROME L. ROBINSON, Trustee
115 River Road, Edgewater, New Jersey 07020
President of Robinson Technical Products Corporation, a processor and
distributor of welding alloys, supplies and equipment.
Director of Pacesetter Software, a software programming company
specializing in white collar productivity.
Director and majority shareholder Hilarius Haarlem B.V., Haarlem, Holland,
a manufacturer and distributor of welding alloys.
WAYNE W. WHALEN,* Trustee
333 West Wacker Drive, Chicago, IL 60606
Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom.
PETER W. HEGEL,* Vice President
One Parkview Plaza, Oakbrook Terrace, IL 60181
Senior Vice President and Portfolio Manager of Van Kampen American Capital
Investment Advisory Corp.
Senior Vice President of Van Kampen American Capital Management, Inc.
Director of McCarthy, Crisanti & Maffei, Inc.
RONALD A. NYBERG,* Vice President and Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Executive Vice President, General Counsel and Secretary of VK/AC Holding,
Inc. and Van Kampen American Capital, Inc.
Executive Vice President, General Counsel and Director of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.
General Counsel and Assistant Secretary of McCarthy, Crisanti & Maffei,
Inc.
Director of ICI Mutual Insurance Co., a provider of insurance to members of
the Investment Company Institute.
Prior to March 1991, Secretary of Van Kampen Merritt Inc., Van Kampen
Merritt Investment Advisory Corp. and McCarthy, Crisanti & Maffei, Inc.
B-20
<PAGE> 270
EDWARD C. WOOD III,* Vice President, Treasurer and Chief Financial Officer
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President of Van Kampen American Capital Investment Advisory
Corp.
SCOTT E. MARTIN,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
First Vice President, Deputy General Counsel and Assistant Secretary of
VK/AC Holding, Inc. and Van Kampen American Capital, Inc.
First Vice President, Deputy General Counsel and Secretary of Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital Management, Inc. and
Van Kampen American Capital Distributors, Inc.
Deputy General Counsel and Secretary of McCarthy, Crisanti & Maffei, Inc.
WESTON B. WETHERELL,* Assistant Secretary
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President, Associate General Counsel and Assistant Secretary of Van
Kampen American Capital, Inc., Van Kampen American Capital Investment
Advisory Corp., Van Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Management, Inc. and Van Kampen American Capital
Distributors, Inc.
Assistant Secretary of McCarthy, Crisanti & Maffei, Inc.
JOHN L. SULLIVAN,* Controller
One Parkview Plaza, Oakbrook Terrace, IL 60181
Vice President of Van Kampen American Capital Investment Advisory Corp.
STEVEN M. HILL,* Assistant Treasurer
One Parkview Plaza, Oakbrook Terrace, IL 60181
Assistant Vice President of Van Kampen American Capital Investment Advisory
Corp.
- ---------------
* Interested persons of the Fund as defined in the 1940 Act.
Each of the foregoing trustees acts as trustee for other investment companies
advised by the Adviser, and each of the foregoing officers of the Fund holds the
same positions with each of the investment companies advised by the Adviser.
The compensation of the officers and trustees who are affiliated persons (as
defined in the 1940 Act) of the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc. is paid by the
respective entity. The Fund pays the compensation of all other officers and
trustees. During the next year, the Fund expects to pay trustees who are not
affiliated persons of the Adviser, Van Kampen American Capital Distributors,
Inc. or Van Kampen American Capital, Inc. $2,500 per year, and $250 per meeting
of the Board of Trustees, plus expenses. Under the Fund's retirement plan,
trustees who are not affiliated with the Adviser, Van Kampen American Capital
Distributors, Inc. or Van Kampen American Capital, Inc., have at least ten years
of service and retire at or after attaining the age of 60, are eligible to
receive a retirement benefit equal to the annual retainer for each of the ten
years following such trustees's retirement. Under certain conditions, reduced
benefits are available for early retirement. Under the Fund's deferred
compensation plan, a trustee who is not affiliated with the Adviser, Van Kampen
American Capital Distributors, Inc. or Van Kampen American Capital, Inc. can
elect to defer receipt of all or a portion of the trustee's fees earned by such
trustee until such trustee's retirement. The deferred compensation earns a rate
of return determined by reference to the Fund or other Van Kampen Merritt mutual
funds advised by the Adviser as selected by the trustee. To the extent permitted
by the 1940 Act, the Fund may invest in securities of other Van Kampen Merritt
mutual funds advised by the Adviser in order to match the deferred compensation
obligation. The deferred compensation plan is not funded and obligations
thereunder represent general unsecured claims against the general assets of the
Fund.
B-21
<PAGE> 271
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT
COMPENSATION FROM AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
NAME REGISTRANT(2) EXPENSES(3) RETIREMENT(4) PAID TO TRUSTEE(5)
- ------------------------------- ------------------ ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $7,620 $0 $2,500 $ 62,362
Philip G. Gaughan.............. 7,192 0 2,500 63,250
Donald C. Miller............... 9,841 0 2,500 62,178
Jack A. Nelson................. 9,875 0 2,500 62,362
Jerome L. Robinson............. 9,231 0 2,500 58,475
Wayne W. Whalen................ 2,031 0 2,500 49,875
</TABLE>
- ---------------
(1) Messrs. Merritt and McDonnell, Trustees of the Registrant during fiscal
year 1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Registrant.
(2) The Registrant is Van Kampen Merritt Equity Trust (the "Trust") which
currently is comprised of 3 sub-trusts, including the Fund. The amounts
shown in this column are accumulated from the Aggregate Compensation of
each of these 3 sub-trusts during such sub-trusts' 1994 fiscal year.
Beginning in October 1994, each Trustee, except Messrs. Gaughan and
Whalen, began deferring his entire aggregate compensation paid by the
Fund. 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 Registrant.
As of December 31, 1994 fiscal year, no amounts had been accrued for
retirement benefits because such amounts were considered to be immaterial
to the net assets of the Registrant at such time. The Registrant will
accrue amounts for retirement benefits by the end of fiscal year 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 the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund, retires at or after attaining the age of 60 and the annual retainer
in the year prior to the Trustee's retirement is $2,500. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.
(5) The Fund Complex consists of 20 mutual funds advised by the Adviser that
have 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 Adviser also serves as investment adviser for other
investment companies; however, with the exception of Messrs. Merritt,
McDonnell and Whalen, the Trustees are not trustees of such investment
companies. Combining the Fund Complex with other mutual funds and
investment companies advised by the Adviser, Mr. Whalen received Total
Compensation of $161,850 during the calendar year ended December 31, 1994.
As of April 13, 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.
As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class A Shares: Edward D. Jones & Co. F/A/O Clyde M.
Harper & EDJ#788-00123-1-0, P.O. Box 2500, Maryland Heights, MO 63043-8500, 5%.
To the knowledge of the Fund, as of April 13, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class B Shares.
B-22
<PAGE> 272
As of April 13, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Donaldson, Lufkin, Jenrette Securities
Corporation Inc., P.O. Box 2052, Jersey City, NJ 07303-2052, 7%; Parker Hunter
Incorporated FBO, Dolores M. L. Esparraguera IRA, Parker/Hunter Custodian, 9
Glenview Avenue, Oil City, PA 16301-2137, 39%; and Parker Hunter Incorporated
FBO, Frank Esparraguera IRA, Parker/Hunter Custodian, 9 Glenview Avenue, Oil
City, PA 16301-2137, 45%.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates
L.P., are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto
Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E.
Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of Van Kampen American
Capital, Inc. own, in the aggregate, not more than 6% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 10% of the common stock of VK/AC Holding, Inc.
The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. 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 officers of the Fund and trustees of the Trust if
duly elected to such positions.
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 sub-trust, to whom the
Adviser renders periodic reports of the Fund's investment activities.
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 sub-trust (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.
B-23
<PAGE> 273
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.
OTHER AGREEMENTS
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee which would have been paid
to the Transfer Agent if the Transfer Agent had provided such services. Payment
by the Fund for such services is 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 Merritt mutual funds distributed by the Distributor,
share such costs proportionately among themselves based upon their respective
net asset values.
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 equally, together with the other Van Kampen Merritt mutual funds
distributed by the Distributor, in 25% of the cost of providing such services,
with the remaining 75% of such cost being paid by the Fund and such other funds
based proportionally on their respective net assets.
LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. provides legal services,
including without limitation: maintenance of the Fund's minute books and
records, preparation and oversight of the Fund's regulatory reports, and other
information provided to shareholders, as well as responding to day-to-day legal
issues on behalf of the Fund. 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. The Fund, and the other
Van Kampen Merritt mutual funds distributed by the Distributor share one half
(50%) of such costs equally. The remaining one half (50%) of such costs are
allocated to specific funds based on specific time allocations, or in the event
services are attributable only to types of funds (i.e. closed-end or open-end),
the relative amount of time spent on each type of fund and then further
allocated between funds of that type based upon their respective net asset
values.
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.
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
B-24
<PAGE> 274
execution, clearance procedures, wire service quotations and statistical and
other research information provided to the Fund, or the Adviser, including
quotations necessary to determine the value of the Fund's net assets. Any
research benefits derived are available for all clients of the Adviser. Since
statistical and other research information is only supplementary to the research
efforts of the Adviser to the Fund and still must be analyzed and reviewed by
its staff, the receipt of research information is not expected to materially
reduce its expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security), than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Fund's Adviser, the amount
of additional commission or increased cost is reasonable in relation to the
value of the such services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate sub-trust.
The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to 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 Trust and each of its sub-trusts, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund will be subject to tax
if, among other things, it fails to distribute net capital gains, or if its
annual distributions, as a percentage of its income, are less than the
distributions required by tax laws.
THE DISTRIBUTOR
Shares of the Fund are offered 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 LP."), a Connecticut limited partnership. In
addition, certain officers, directors and employees of
B-25
<PAGE> 275
Van Kampen American Capital, Inc., and its subsidiaries own, in the aggregate
not more than 6% of the common stock of VK/AC Holding, Inc. and have the right
to acquire, upon the exercise of options, approximately an additional 10% of the
common stock of VK/AC Holding, Inc. C&D LP. is managed by Clayton, Dubilier &
Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C & D
Associates LP.") is the general partner of C & D LP. 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 Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and 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 sub-trust, 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 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.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
FUND 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
B-26
<PAGE> 276
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.
The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends and other
distributions made during the period) of a $1,000 investment in a given class of
shares of the Fund (less the maximum sales charge, if any) at the beginning of
the period, annualizing the increase or decrease over the specified period with
respect to such initial investment and expressing the result as a percentage.
Average compounded total return will be computed separately for each class of
shares.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC Shares imposed at the time of redemption were reflected, it would
reduce the performance quoted.
BALANCED INVESTING
The Adviser believes that various asset classes have performed differently
overtime after adjusting for inflation. This performance difference among
various asset classes is further reflected in the relative performance of
certain market indices such as certificates of deposit, stock indices and bond
indices.
The Adviser believes a balanced approach to investing provides the opportunity
to benefit from the differing performance described above and that an investment
in a mutual fund which has a balanced investment objective forms a prudent part
of an investor's portfolio.
B-27
<PAGE> 277
Van Kampen Merritt Balanced Fund
- ------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994 (Unaudited)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
- ------------------------------------------------------------------------
<S> <C> <C>
Common and Preferred Stocks 43.4%
Automobile 0.9%
Chrysler Corp. ................................. 2,120 $103,880
--------
Beverage, Food & Tobacco 0.9%
B A T Inds PLC ADR (UK) ....................... 3,880 52,380
Pepsico Inc. ................................... 1,500 54,375
-------
106,755
-------
Buildings & Real Estate 0.9%
Health & Retirement Property Trust ............. 4,040 54,035
Healthcare Realty Trust Inc. ................... 2,270 47,670
-------
101,705
-------
Chemical 2.4%
Hercules Inc. .................................. 500 57,687
IMC Global Inc. ................................ 950 41,088
Imperial Chemical Industries PLC ADR(UK) ....... 1,460 67,890
Lyondell Petrochemical Co. ..................... 4,040 104,535
-------
271,200
-------
Consumer Durables 1.0%
Electrolux - ADR (Sweden) ...................... 2,250 114,469
-------
Consumer Non-Durables 0.5%
Procter & Gamble Co. ........................... 860 53,320
-------
Diversified/Conglomerate Manufacturing 2.6%
Eastman Kodak Co. .............................. 1,190 56,822
General Electric Co. ........................... 1,990 101,490
Hanson PLC - ADR (United Kingdom) .............. 4,415 79,470
Vitro Sociedad Anonima ADR (Mexico) ........... 4,026 56,364
-------
294,146
-------
Diversified/Conglomerate Service 1.0%
ITT Corp. ...................................... 1,210 107,236
-------
Electric Utilities 2.2%
CMS Energy Corp. ............................... 1,310 29,966
Duke Power Co. ................................. 740 28,212
Empresa Nacional de Electricidad ADR (Spain) .. 650 26,325
Georgia Power Co. - Preferred .................. 2,500 51,250
Peco Energy Co. ................................ 1,080 26,460
Southern Co. ................................... 1,500 30,000
Teco Energy Inc. ............................... 1,430 28,779
Unicom Corp. ................................... 1,330 31,920
-------
252,912
-------
Electronics 1.4%
General Motors Corp. - Preferred ............... 1,400 80,325
National Semiconductor Corp. - Preferred ....... 1,000 72,500
-------
152,825
-------
</TABLE>
See Notes to Financial Statements
B-28
<PAGE> 278
Van Kampen Merritt Balanced Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Engineering & Construction 0.7%
McDermott International Inc. ........... 3,370 $ 83,408
---------
Environmental 0.7%
Chemical Waste Management Inc. ......... 8,000 75,000
---------
Financial Services 2.4%
Banco De Santander ADR(Spain) .......... 1,010 38,632
Capital One Financial Corp. <F2> ........ 3,700 59,200
Chemical Banking Corp. ................. 1,210 43,409
Federal National Mortgage Assn. ........ 530 38,624
Morgan Stanley Group Inc. - Preferred .. 5,340 86,775
---------
266,640
---------
Insurance 1.5%
American General Corp. ................. 1,660 46,895
Aon Corp. .............................. 1,410 45,120
Chubb Corp. ............................ 620 47,972
Reliance Group Holdings Inc. ........... 6,325 32,416
---------
172,403
---------
Medical Supplies 0.5%
Baxter International Inc. .............. 2,080 58,760
---------
Mining & Steel 2.6%
Bethleham Steel Corp.- Preferred ....... 1,130 56,783
Cyprus Amax Minerals Co. ............... 2,660 69,493
Phelps Dodge Corp. ..................... 1,150 71,156
Trinity Inds Inc. ...................... 3,137 98,815
---------
296,247
---------
Natural Gas Pipeline and Distribution 1.0%
El Paso Natural Gas Co. ................ 880 26,840
TransCanada Pipelines Ltd(Canada) ...... 2,370 28,736
UGI Corp. .............................. 1,420 28,933
Westcoast Energy Inc.(Canada) .......... 1,750 27,781
---------
112,290
---------
Oil & Gas 6.7%
Amoco Corp. ............................ 1,580 93,418
Atlantic Richfield Co. - Preferred ..... 2,000 52,250
British Petroleum PLC ADR(UK) .......... 1,220 97,447
Chevron Corp. .......................... 2,200 98,175
Coastal Corp. .......................... 1,670 43,003
Phillips Petroleum Co. ................. 2,867 93,894
Royal Dutch Petroleum Co. .............. 900 96,750
Sonat Inc. ............................. 1,050 29,400
</TABLE>
See Notes to Financial Statements
B-29
<PAGE> 279
Van Kampen Merritt Balanced Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security Description Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Oil & Gas (Continued)
Tenneco Inc. ................................ 1,190 $ 50,575
Texaco Inc. ................................. 1,550 92,806
---------
747,718
---------
Pharmaceuticals 2.3%
Bristol Myers Squibb Co. .................... 940 54,403
Foxmeyer Health Corp. - Preferred Series A .. 2,566 83,383
Glaxo Holdings PLC ADR (UK) ................. 3,250 66,219
Merck & Co. Inc. ............................ 1,500 57,187
---------
261,192
---------
Printing & Publishing 1.6%
Commerce Clearing House Inc. Class A ........ 2,930 49,810
Dun & Bradstreet Corp. ...................... 1,140 62,700
McGraw Hill Inc. ............................ 960 64,200
---------
176,710
---------
Retail 1.3%
Penney, J.C. Inc. ........................... 1,270 56,674
Sears Roebuck & Co. ......................... 1,430 65,780
Tractor Supply Co. <F2> ...................... 1,000 21,000
---------
143,454
---------
Technology 0.9%
DSC Communications Corp. <F2> ................ 2,690 96,504
---------
Telecommunications 5.4%
Ameritech Corp. ............................. 2,030 81,961
AT & T Corp. ................................ 1,597 80,249
Bell Atlantic Corp. ......................... 1,000 49,750
Bellsouth Corp. ............................. 1,540 83,352
British Telecommunications ADR(UK) .......... 1,385 83,273
Nynex Corp. ................................. 2,110 77,543
Southwestern Bell Corp. ..................... 1,280 51,680
Tele Danmark A/S ADR(Denmark) <F2> ........... 2,690 68,595
Telefonica de Espana ADR (Spain) ........... 750 26,344
------
602,747
-------
Transportation 1.5%
Burlington Northern Inc. - Preferred ........ 2,150 114,487
Hunt J B Transport Services Inc. ............ 3,400 51,850
-------
166,337
-------
Water & Sewer Utilities 0.5%
American Water Works Inc. ................... 2,030 54,810
-------
Total Common and Preferred Stocks ................... 4,872,668
---------
</TABLE>
See Notes to Financial Statements
B-30
<PAGE> 280
Van Kampen Merritt Balanced Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Income Securities 45.1%
Beverage, Food & Tobacco 2.2%
$ 250 San Miguel Corp. (Philippines) .................. NR NR 9.000% 4/27/00 $ 240,925
------------
Buildings & Real Estate 0.5%
60 USG Corp. ....................................... BB- B1 10.250 12/15/02 60,900
------------
Electronics 0.7%
80 Avnet Inc. Subordinated Debenture Convertible ... A- A3 6.000 4/15/12 80,600
------------
Energy 0.6%
65 Thermo Electron Senior Debenture Convertible .... BBB+ NR 5.000 4/15/01 68,981
------------
Entertainment 0.7%
82 Time Warner Inc. ................................ BB+ Ba3 8.750 1/10/15 77,080
------------
Financial Services 39.2%
800 US Treasury Notes ............................... AAA Aaa 5.000 1/31/99 721,500
1,000 US Treasury Notes ............................... AAA Aaa 6.875 7/31/99 963,436
750 US Treasury Notes ............................... AAA Aaa 7.250 10/31/99 739,688
2,000 US Treasury Notes ............................... AAA Aaa 7.500 11/15/01 1,963,750
------------
4,388,374
------------
Mining & Steel 0.5%
60 Bethlehem Steel Corp. ........................... B+ B1 10.375 9/01/03 58,800
------------
Transportation 0.7%
100 AMR Corp. Subordinated Debenture Convertible .... BB- Ba2 6.125 11/01/24 80,000
------------
Total Fixed Income Securities................................................................. 5,055,660
------------
Total Long-Term Investments 88.5%
(Cost $10,151,785) <F1>....................................................................... 9,928,328
------------
Short-Term Investments 11.2%
Repurchase Agreement, J.P. Morgan Securities, U.S. T-Note, $1,015,000 par, 3.875% coupon,
due 09/30/95, dated 12/30/94, to be sold on 01/03/95 at $978,571 ............................. 978,000
Mexican Tesobonos ($100,000 par, yielding 8.389%, maturing 07/13/95) ......................... 93,900
Mexican Tesobonos ($200,000 par, yielding 9.160%, maturing 11/30/95) ......................... 179,920
------------
Total Short-Term Investments
(Cost $1,258,599) <F1>........................................................................ 1,251,820
Other Assets in Excess of Liabilities 0.3%................................................... 30,456
------------
Net Assets 100%............................................................................... $ 11,210,604
------------
<FN>
<F1>At December 31, 1994, cost for federal income tax purposes including
short-term investments is $11,410,384; the aggregate gross unrealized
appreciation is $113,234 and the aggregate gross unrealized depreciation is
$343,470, resulting in net unrealized depreciation of $230,236.
<F2>Non-income producing security as this stock currently does not declare
dividends.
</FN>
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 281
Van Kampen Merritt Balanced Fund
- -------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $10,151,785) <F1>........................................ $ 9,928,328
Short-Term Investments (Cost $1,258,599) <F1>............................................... 1,251,820
Cash........................................................................................ 535
Receivables:
Interest.................................................................................... 85,036
Dividends................................................................................... 19,092
Fund Shares Sold............................................................................ 8,375
Unamortized Organizational Expenses and Initial Registration Costs <F1>..................... 107,645
-------------
Total Assets................................................................................ 11,400,831
-------------
Liabilities:
Payables:
Investments Purchased....................................................................... 99,959
Organizational Expenses and Initial Registration Costs...................................... 41,907
Income Distributions ....................................................................... 19,386
Fund Shares Repurchased .................................................................... 12,607
Accrued Expenses............................................................................ 16,368
-------------
Total Liabilities........................................................................... 190,227
-------------
Net Assets.................................................................................. $ 11,210,604
-------------
Net Assets Consist of:
Paid in Surplus <F3>........................................................................ $ 11,418,328
Accumulated Undistributed Net Investment Income............................................. 48,579
Accumulated Net Realized Loss on Investments................................................ (26,067)
Net Unrealized Depreciation on Investments.................................................. (230,236)
-------------
Net Assets.................................................................................. $ 11,210,604
-------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $4,453,675 and
316,010 shares of beneficial interest issued and outstanding) <F3>.......................... $ 14.09
Maximum sales charge (4.65%* of offering price)............................................. .69
-------------
Maximum offering price to public............................................................ $ 14.78
-------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $6,112,171 and
433,801 shares of beneficial interest issued and outstanding) <F3>.......................... $ 14.09
-------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $643,152 and
45,649 shares of beneficial interest issued and outstanding) <F3>........................... $ 14.09
-------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,606 and
114 shares of beneficial interest issued and outstanding) <F3>.............................. $ 14.09
-------------
*On sales of $100,000 or more, the sales charge will be reduced. Effective January 16, 1995,
the maximum sales charge was changed to 5.75%.
</TABLE>
See Notes to Financial Statements
B-32
<PAGE> 282
Van Kampen Merritt Balanced Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the Period June 24, 1994 (Commencement of Investment Operations)
to December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest..................................................................................................... $ 165,059
Dividends (Net of foreign withholding taxes of $2,128)....................................................... 71,421
Accretion of Discount........................................................................................ 4,784
-------------
Total Income................................................................................................. 241,264
-------------
Expenses:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $5,897, $26,386, $874
and $3, respectively) <F6> .................................................................................. 33,160
Investment Advisory Fee <F2>................................................................................. 32,847
Custody...................................................................................................... 22,807
Audit........................................................................................................ 20,800
Shareholder Services ........................................................................................ 19,891
Amortization of Organizational Expenses and Initial Registration Costs <F1> ................................. 12,355
Printing..................................................................................................... 12,084
Trustees Fees and Expenses <F2>.............................................................................. 7,240
Legal <F2> .................................................................................................. 6,540
Other........................................................................................................ 974
-------------
Total Expenses............................................................................................... 168,698
Less Fees Deferred and Expenses Reimbursed ($32,847 and $77,772, respectively)............................... 110,619
-------------
Net Expenses................................................................................................. 58,079
-------------
Net Investment Income........................................................................................ $ 183,185
-------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.......................................................................................... $ 1,512,104
Cost of Securities Sold...................................................................................... (1,538,171)
-------------
Net Realized Loss on Investments (Including realized loss on closed and expired option transactions of 34,366
and realized gain on futures transactions of $57,054)........................................................ (26,067)
-------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period...................................................................................... -0-
End of the Period............................................................................................ (230,236)
-------------
Net Unrealized Depreciation on Investments During the Period................................................. (230,236)
-------------
Net Realized and Unrealized Loss on Investments.............................................................. $ (256,303)
-------------
Net Decrease in Net Assets from Operations................................................................... $ (73,118)
-------------
</TABLE>
See Notes to Financial Statements
B-33
<PAGE> 283
Van Kampen Merritt Balanced Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Period June 24, 1994 (Commencement of Investment Operations)
to December 31, 1994 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From Investment Activities:
<S> <C>
Operations:
Net Investment Income......................................................................................... $ 183,185
Net Realized Loss on Investments.............................................................................. (26,067)
Net Unrealized Depreciation on Investments During the Period.................................................. (230,236)
-------------
Change in Net Assets from Operations ......................................................................... (73,118)
-------------
Distributions from Net Investment Income:
Class A Shares................................................................................................ (62,325)
Class B Shares................................................................................................ (69,797)
Class C Shares................................................................................................ (2,459)
Class D Shares................................................................................................ (25)
-------------
Total Distributions........................................................................................... (134,606)
-------------
Net Change in Net Assets from Investment Activities........................................................... (207,724)
-------------
From Capital Transactions <F3>:
Proceeds from Shares Sold..................................................................................... 12,451,624
Net Asset Value of Shares Issued Through Dividend Reinvestment................................................ 105,762
Cost of Shares Repurchased.................................................................................... (1,144,778)
-------------
Net Change in Net Assets from Capital Transactions............................................................ 11,412,608
-------------
Total Increase in Net Assets.................................................................................. 11,204,884
Net Assets:
Beginning of the Period....................................................................................... 5,720
-------------
End of the Period (Including undistributed net investment income of $48,579) ................................. $ 11,210,604
-------------
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 284
Van Kampen Merritt Balanced Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994 (Unaudited)
- -------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Balanced Fund (the "Fund") was organized as a sub
trust of the Van Kampen Merritt Equity Trust, a Massachusetts business
trust, on March 17, 1994, 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
June 24, 1994 with four classes of common shares, Classes A, B, C and
D shares.
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 in securities listed on a securities
exchange shall be valued at their sale price as of the close of such
securities exchange. Investments in securities not listed on a securities
exchange shall be valued based on their last quoted bid price or, if not
available, their fair value as determined by the Board of Trustees or its
delegate. Fixed income investments are stated at value using market
quotations or, if such valuations are not available, estimates obtained from
yield data relating to instruments or securities with similar characteristics
in accordance with procedures established in good faith by the Board of
Trustees. Short-term securities with remaining maturities of less than 60
days are valued at amortized cost.
B. Security Transactions-Security transactions are recorded on a
trade date basis. Realized gains and losses are determined on an identified
cost basis. The Fund may purchase and sell securities on a "when issued" and
"delayed delivery" basis, with settlement to occur at a later date. The value
of the security so purchased is subject to market fluctuations during this
period. The Fund will maintain in a segregated account with its custodian
assets having an aggregate value at least equal to the amount of the when
issued or delayed delivery purchase commitments until payment is made. At
December 31, 1994, there were no when issued or delayed delivery purchase
commitments.
C. Investment Income-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Bond discount is amortized
over the expected life of each applicable security.
D. Organizational Expenses and Initial Registration Costs-The Fund has agreed to
reimburse Van Kampen American Capital Distributors, Inc. or its affiliates
("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 June 24, 1999. 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.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
F. Distribution of Income and Gains-The Fund declares daily and pays quarterly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and gains on option and futures
transactions. All short-term capital gains and a portion of option and futures
gains are included in ordinary income for tax purposes.
B-35
<PAGE> 285
Van Kampen Merritt Balanced Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- -------------------------------------------------------------------------------
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... .70 of 1%
Over $500 million.... .65 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
For the period ended December 31, 1994, the Fund recognized expenses of
approximately $9,000, 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 retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 100 shares each of Classes A, B, C and D.
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.
At December 31, 1994, paid in surplus aggregated $4,532,185, $6,237,636,
$646,874 and $1,633 for Classes A, B, C and D, respectively. For the period
ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
- ----------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 329,073 $ 4,720,743
Class B....................... 492,723 7,077,475
Class C....................... 46,092 653,206
Class D....................... 14 200
-------- --------------
Total Sales................... 867,902 $ 12,451,624
-------- --------------
Dividend Reinvestment:
Class A....................... 3,495 $ 49,567
Class B....................... 3,809 53,953
Class C....................... 159 2,239
Class D....................... -0- 3
-------- --------------
Total Dividend Reinvestment... 7,463 $ 105,762
-------- --------------
Repurchases:
Class A....................... (16,658) $ (239,555)
Class B....................... (62,831) (895,222)
Class C....................... (702) (10,001)
Class D....................... -0- -0-
-------- --------------
Total Repurchases............. (80,191) $ (1,144,778)
-------- --------------
</TABLE>
Class B, C and D 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 Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
- ----------------------------------------------------
<S> <C> <C> <C>
First ................... 4.00% 1.00% 0.75%
Second .................. 3.75% None None
Third ................... 3.50% None None
Fourth .................. 2.50% None None
Fifth ................... 1.50% None None
Sixth ................... 1.00% None None
Seventh and Thereafter .. None None None
</TABLE>
B-36
<PAGE> 286
Van Kampen Merritt Balanced Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994 (Unaudited)
- -------------------------------------------------------------------------------
For the period ended December 31, 1994, VKAC, as Distributor for
the Fund, paid net commissions on sales of the Fund's Class A shares of
approximately $3,600 and received CDSC on the redeemed shares of
Classes B, C and D of approximately $19,900. Sales charges do not rep
resent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the period ended December 31, 1994, were
$11,585,880 and $1,438,883, 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 and to manage the portfolio's effective yield,
maturity and duration. 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 invest
ments. 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. The Fund generally invests
in options on U.S. Treasury bond and the S&P 500 Index. These contracts
are generally used by the Fund to manage the portfolio's effective maturity
and duration and as a substitute for purchasing specified securities.
Transactions in options for the period ended December 31, 1994 were as follows:
<TABLE>
<CAPTION>
Contracts Premium
- -------------------------------------------------------
<S> <C> <C>
Options Written and
Purchased (Net).............. 385 $ (319,040)
Options Terminated in Closing
Transactions (Net)........... (235) 294,215
Options Expired (Net)........ (150) 24,825
----- ------------
Outstanding at
December 31, 1994............ -0- $ -0-
----- ------------
</TABLE>
B. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on the S&P 500 Index and typically closes the
contract prior to the delivery date. These contracts are generally used as a
substitute for purchasing specific securities.
The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.
Transactions in futures contracts, each with a par value of $500, for the period
ended December 31, 1994, were as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Contracts
<S> <C>
Futures Opened..................... 6
Futures Closed..................... (6)
--
Outstanding at December 31, 1994... -0-
--
</TABLE>
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each for Class A
and Class D shares and 1.00% each for Class B and Class C shares
are accrued daily. Included in these fees for the period ended
December 31,1994, are payments to VKAC of approximately $21,000.
B-37
<PAGE> 287
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:
Included in Part A of the Registration Statement:
GROWTH AND INCOME FUND, UTILITY FUND AND BALANCED FUND:
Financial Highlights
GROWTH FUND AND TOTAL RETURN FUND:
Not applicable
Included in Part B of the Registration Statement:
GROWTH AND INCOME FUND AND UTILITY FUND:
Unaudited Financial Statements
Notes to Unaudited Financial Statements
Independent Auditor's Report
Audited Financial Statements
Notes to Audited Financial Statements
BALANCED FUND:
Unaudited Financial Statements
Notes to Unaudited Financial Statements
GROWTH FUND AND TOTAL RETURN FUND:
Not applicable
(B) EXHIBITS:
(1)(a) Agreement and Declaration of Trust(4)
(b) Form of Establishment and Designation of Sub-trust
(i) Van Kampen Merritt Growth and Income Fund, as amended
and restated(14)
(ii) Van Kampen Merritt Growth Fund(4)
(iii) Van Kampen Merritt Total Return Fund(4)
(iv) Van Kampen Merritt Utility Fund, as amended
and restated(14)
(v) Van Kampen Merritt Balanced Fund(15)
(2) By-Laws(4)
(4) Specimen Certificate of share of beneficial interest in
(a) Van Kampen Merritt Growth and Income Fund
(i) Class A Shares(9)
(ii) Class B Shares(9)
(iii) Class C Shares(13)
(b) Van Kampen Merritt Growth Fund(4)
(c) Van Kampen Merritt Total Return Fund(4)
(d) Van Kampen Merritt Utility Fund
(i) Class A Shares(9)
(ii) Class B Shares(9)
(iii) Class C Shares(13)
(e) Van Kampen Merritt Balanced Fund
(i) Class A Shares(15)
(ii) Class B Shares(15)
(iii) Class C Shares(15)
C-1
<PAGE> 288
(5)(a) Form of Investment Advisory Agreement for
(i) Van Kampen Merritt Growth and Income Fund, as amended(7)
(ii) Van Kampen Merritt Growth Fund(4)
(iii) Van Kampen Merritt Total Return Fund(4)
(iv) Van Kampen Merritt Utility Fund(10)
(v) Van Kampen Merritt Balanced Fund(15)
(b) Form of Investment Sub-Advisory Agreement for
(i) Van Kampen Merritt Growth Fund(4)
(ii) Van Kampen Merritt Total Return Fund(4)
(6)(a) Form of Distribution and Service Agreement(15)
(b) Form of Dealer Agreement, as amended(14)
(c) Form of Broker Agreement, as amended(14)
(d) Form of Bank Agreement, as amended(14)
(8)(a) Form of Custodian Agreement(10)
(b) Form of Transfer Agency Agreement(10)
(9)(a) Support Service Agreement(4)
(b) Fund Accounting Agreement(4)
(c) Form of Amended Legal Services Agreement(6)
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(i) Van Kampen Merritt Growth and Income Fund(13)
(ii) Van Kampen Merritt Utility Fund(13)
(iii) Van Kampen Merritt Balanced Fund(15)
(11) Consent of KPMG Peat Marwick LLP
(i) Van Kampen Merritt Growth and Income Fund+
(ii) Van Kampen Merritt Utility Fund+
(iii) Van Kampen Merritt Balanced Fund+
(13) Letter of Understanding relating to initial capital(2)
(15) (a) Form of Distribution Plan pursuant to Rule 12b-1(15)
(b) Form of Shareholder Assistance Agreement(10)
(c) Form of Administrative Services Agreement(10)
(d) Form of Service Plan(14)
(16) Computation of Performance Quotations
(i) Van Kampen Merritt Growth and Income Fund(16)
(ii) Van Kampen Merritt Utility Fund(16)
(17) List of certain investment companies in response to Item 29(a)+
(18) List of Officers and Directors of Van Kampen American Capital
Distributors, Inc. in response to Item 29(b)+
(19) Power of attorney(13)
(27) Financial Data Schedules+
- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-8122, filed August 19, 1986.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed October 29, 1986.
(3) Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed August 20, 1987.
(4) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A, File Number 33-8122, filed April 19,
1988.
(5) Incorporated by reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-1A, File Number 33-8122, filed November 2,
1989.
(6) Incorporated by reference to Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A, File Number 33-8122, filed August 28,
1992.
(7) Incorporated by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
Filed March 16, 1993.
C-2
<PAGE> 289
(8) Incorporated by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed May 13, 1993.
(9) Incorporated by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed May 14, 1993.
(10) Incorporated by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed June 8, 1993.
(11) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement, File No. 33-8122, filed on July 22,
1993.
(12) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement, File No. 33-8122, filed on October 4,
1993.
(13) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement, File No. 33-8122, filed on December
30, 1993.
(14) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement, File No. 33-8122, filed on February
25, 1994.
(15) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement, File No. 33-8122, filed on March 18,
1994.
(16) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement, File No. 33-8122, filed on August 19,
1994.
+ Filed herewith.
C-3
<PAGE> 290
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.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of April 13, 1995:
<TABLE>
<CAPTION>
(2)
NUMBER
(1) OF
RECORD
TITLE OF CLASS HOLDERS
----------------------------------------------------------------- -----
<S> <C>
Shares of Beneficial Interest of Van Kampen Merritt Growth and
Income Fund, without par value*
Class A Shares.............................................. 4,783
Class B Shares.............................................. 2,649
Class C Shares.............................................. 46
Shares of Beneficial Interest of Van Kampen Merritt Utility Fund,
without par value*
Class A Shares.............................................. 5,015
Class B Shares.............................................. 7,117
Class C Shares.............................................. 63
Shares of Beneficial Interest of Van Kampen Merritt Balanced
Fund, without par value*
Class A Shares.............................................. 348
Class B Shares.............................................. 461
Class C Shares.............................................. 21
Shares of Beneficial Interest of Van Kampen Merritt Growth Fund,
without par value.............................................. 0
Shares of Beneficial Interest of Van Kampen Merritt Total Return
Fund, without par value........................................ 0
</TABLE>
- ---------------
* Prior to May 1, 1995, the Fund offered Class D Shares.
ITEM 27. INDEMNIFICATION.
Please see Article 5.3 of the Registrant's Agreement and Declaration of
Trust (Exhibit 1) for indemnification of officers and trustees. Registrant's
trustees and officers are also covered by an Errors and Omissions Policy. The
Distribution Agreement of each Fund provides that such Fund shall indemnify the
Distributor and certain persons related thereto for any loss or liability
arising from any alleged misstatement of a material fact (or alleged omission to
state a material fact) contained in, among other things, the Registration
Statement or Prospectus except to the extent the misstated fact or omission was
made in reliance upon information provided by or on behalf of such Distributor.
(See Section 7 of the Distribution Agreement.)
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
Registrant and distributor and any investment advisor pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of the Registrant and the principal underwriter in connection
with the successful defense of any action, suit or proceeding) is asserted
against the Registrant by such trustee, officer or controlling person or the
Distributor 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.
C-4
<PAGE> 291
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER:
See "Investment Advisory Services" in the Prospectus 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 or employment of a substantial nature of each of the officers and
Directors of Van Kampen American Capital Investment Advisory Corp., reference is
made to the Adviser's current Form ADV filed under the Investment Advisers Act
of 1940, 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 incorporated by
reference herein.
(b) Van Kampen American Capital, Inc., the only principal underwriter for
Registrant, is an affiliated person of an affiliated person of the Fund. The
name, principal business address and positions and offices with Van Kampen
American Capital, Inc. of each of the officers thereof are set forth in Exhibit
18. 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 by Section 31(a) of the
Investment Company Act of 1940 and the Rules thereunder to be maintained (i) by
the Registrant will be maintained at its offices located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, or at State Street Bank and Trust Company, 225
Franklin Street, P.O. Box 1912, Boston, MA 02105; (ii) by the Adviser will be
maintained at its offices, located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, and (iii) by Van Kampen American Capital Distributors, Inc., the
principal underwriter, will be maintained at its offices located at One Parkview
Plaza, Oakbrook Terrace, Illinois 60181.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Registrant hereby undertakes to file an amendment to Registration
Statement, using financial statements for Van Kampen Merritt Growth Fund and Van
Kampen Merritt Total Return Fund, which financial statements need not be
certified, within six months from the commencement of investment operations of
each such Fund.
(b) Not applicable.
C-5
<PAGE> 292
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, VAN KAMPEN MERRITT EQUITY TRUST,
CERTIFIES THAT IT MEETS ALL THE REQUIREMENTS FOR EFFECTIVENESS OF THIS
REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF 1993,
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 APRIL, 1995.
VAN KAMPEN MERRITT EQUITY 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 APRIL 27, 1995, BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<S> <C>
Chairman of the Board and Trustee
- ---------------------------------------------
/s/ DENNIS J. McDONNELL* President (Chief Executive Officer) and
- --------------------------------------------- Trustee
Dennis J. McDonnell
/s/ R. CRAIG KENNEDY* Trustee
- ---------------------------------------------
R. Craig Kennedy
/s/ PHILIP P. GAUGHAN* Trustee
- ---------------------------------------------
Philip P. Gaughan
/s/ DONALD C. MILLER* Trustee
- ---------------------------------------------
Donald C. Miller
/s/ JACK E. NELSON* Trustee
- ---------------------------------------------
Jack E. Nelson
/s/ JEROME L. ROBINSON* Trustee
- ---------------------------------------------
Jerome L. Robinson
/s/ WAYNE W. WHALEN* Trustee
- ---------------------------------------------
Wayne W. Whalen
/s/ EDWARD C. WOOD, III* Vice President and Treasurer
- --------------------------------------------- (Chief Financial and Accounting Officer)
Edward C. Wood, III
</TABLE>
- ---------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney, a copy of which
previously was filed.
/s/ RONALD A. NYBERG
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
April 27, 1995
C-6
<PAGE> 293
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 22 TO FORM N-1A
SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON APRIL 28, 1995
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NUMBER
------ ------- -----------
<S> <C>
(1) (a) Agreement and Declaration of Trust(4)
(b) Form of Establishment and Designation of Sub-trust
(i) Van Kampen Merritt Growth and Income Fund, as amended and restated(14)
(ii) Van Kampen Merritt Growth Fund(4)
(iii) Van Kampen Merritt Total Return Fund(4)
(iv) Van Kampen Merritt Utility Fund, as amended and restated(14)
(v) Van Kampen Merritt Balanced Fund(15)
(2) By-Laws(4)
(4) Specimen Certificate of share of beneficial interest in
(a) Van Kampen Merritt Growth and Income Fund
(i) Class A Shares(9)
(ii) Class B Shares(9)
(iii) Class C Shares(13)
(b) Van Kampen Merritt Growth Fund(4)
(c) Van Kampen Merritt Total Return Fund(4)
(d) Van Kampen Merritt Utility Fund
(i) Class A Shares(9)
(ii) Class B Shares(9)
(iii) Class C Shares(13)
(e) Van Kampen Merritt Balanced Fund
(i) Class A Shares(15)
(ii) Class B Shares(15)
(iii) Class C Shares(15)
(5) (a) Form of Investment Advisory Agreement for
(i) Van Kampen Merritt Growth and Income Fund, as amended(7)
(ii) Van Kampen Merritt Growth Fund(4)
(iii) Van Kampen Merritt Total Return Fund(4)
(iv) Van Kampen Merritt Utility Fund(10)
(v) Van Kampen Merritt Balanced Fund(15)
(b) Form of Investment Sub-Advisory Agreement for
(i) Van Kampen Merritt Growth Fund(4)
(ii) Van Kampen Merritt Total Return Fund(4)
(6) (a) Form of Distribution and Service Agreement(15)
(b) Form of Dealer Agreement as amended(14)
(c) Form of Broker Agreement as amended(14)
(d) Form of Bank Agreement as amended(14)
(8) (a) Form of Custodian Agreement(10)
(b) Form of Transfer Agency Agreement(10)
(9) (a) Support Service Agreement(4)
(b) Fund Accounting Agreement(4)
(c) Form of Amended Legal Services Agreement(6)
(10) Opinion and consent of Skadden, Arps, Slate, Meagher & Flom
(i) Van Kampen Merritt Growth and Income Fund(13)
(ii) Van Kampen Merritt Utility Fund(13)
(iii) Van Kampen Merritt Balanced Fund(15)
</TABLE>
<PAGE> 294
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NUMBER
<S> <C> <C>
(11) Consent of KPMG Peat Marwick LLP
(i) Van Kampen Merritt Growth and Income Fund+
(ii) Van Kampen Merritt Utility Fund+
(iii) Van Kampen Merritt Balanced Fund+
(13) Letter of Understanding relating to initial capital(2)
(15) (a) Form of Distribution Plan pursuant to Rule 12b-1(15)
(b) Form of Shareholder Assistance Agreement(10)
(c) Form of Administrative Services Agreement(10)
(d) Form of Service Plan(14)
(16) Computation of Performance Quotations
(i) Van Kampen Merritt Growth and Income Fund(16)
(ii) Van Kampen Merritt Utility Fund(16)
(17) List of certain investment companies in response to Item 29(a)+
(18) List of Officers and Directors of Van Kampen American Capital Distributors, Inc.
in response to Item 29(b)+
(19) Power of attorney(13)
(27) Financial Data Schedules+
</TABLE>
- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 33-8122, filed August 19, 1986.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed October 29, 1986.
(3) Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed August 20, 1987.
(4) Incorporated by reference to Post-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-1A, File Number 33-8122, filed April 19,
1988.
(5) Incorporated by reference to Post-Effective Amendment No. 6 to Registrant's
Registration Statement on Form N-1A, File Number 33-8122, filed November 2,
1989.
(6) Incorporated by reference to Post-Effective Amendment No. 9 to Registration
Statement on Form N-1A, File Number 33-8122, filed August 28, 1992.
(7) Incorporated by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed March 16, 1993.
(8) Incorporated by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed May 13, 1993.
(9) Incorporated by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed May 14, 1993.
(10) Incorporated by reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A, File Number 33-8122,
filed June 8, 1993.
(11) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement, File No. 33-8122, filed July 22, 1993.
(12) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement, File No. 33-8122, filed October 4,
1993.
(13) Incorporated herein by reference to Post-Effective Amendment No. 16 to
Registrant's Registration Statement, File No. 33-8122, filed December 30,
1993.
(14) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement, File No. 33-8122, filed on February
25, 1994.
(15) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement, File No. 33-8122, filed on March 18,
1994.
(16) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement, File No. 33-0122, filed on August 19,
1994.
+ Filed herewith.
<PAGE> 1
Exhibit (11)(i)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen Merritt Growth and 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.
/s/ KPMG Peat Marwick, LLP
Chicago, Illinois
April 21, 1995
<PAGE> 1
Exhibit (11)(ii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen Merritt Utility 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.
/s/ KPMG Peat Marwick, LLP
Chicago, Illinois
April 21, 1995
<PAGE> 1
Exhibit (11)(iii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen Merritt Balanced Fund:
We consent to the reference to our Firm under the heading "Custodian and
Independent Auditors" in the Statement of Additional Information.
/s/ KPMG Peat Marwick, LLP
Chicago, Illinois
April 21, 1995
<PAGE> 1
EXHIBIT 17
INVESTMENT COMPANIES FOR WHICH
VAN KAMPEN/AMERICAN CAPITAL DISTRIBUTORS INC.
ACTS AS PRINCIPAL UNDERWRITER OR DEPOSITOR
APRIL 12, 1995
Van Kampen Merritt U.S. Government Trust
Van Kampen Merritt Tax Free Fund
Van Kampen Merritt Insured Tax Free Income Fund
Van Kampen Merritt Tax Free High Income Fund
Van Kampen Merritt California Insured Tax Free Fund
Van Kampen Merritt Municipal Income Fund
Van Kampen Merritt Limited Term Municipal Income Fund
Van Kampen Merritt Florida Insured Tax Free Income Fund
Van Kampen Merritt New Jersey Tax Free Income Fund
Van Kampen Merritt New York Tax Free Income Fund
Van Kampen Merritt Trust
Van Kampen Merritt High Yield Fund
Van Kampen Merritt Short-Term Global Income Fund
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Van Kampen Merritt Strategic Income Fund
Van Kampen Merritt Emerging Markets Income Fund
Van Kampen Merritt Growth Fund
Van Kampen Merritt Equity Trust
Van Kampen Merritt Growth and Income Fund
Van Kampen Merritt Utility Fund
Van Kampen Merritt Balanced Fund
Van Kampen Merritt Total Return Fund
Van Kampen Merritt Pennsylvania Tax Free Income Fund
Van Kampen Merritt Money Market Trust
Van Kampen Merritt Money Market Fund
Van Kampen Merritt Tax Free Money Fund
Van Kampen Merritt Prime Rate Income Trust
Van Kampen Merritt Series Trust
American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc.
American Capital Emerging Growth Fund, Inc.
American Capital Enterprise Fund, Inc.
American Capital Equity Income Fund, Inc.
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc.
American Capital Real Estate Securities Fund, Inc.
American Capital Reserve Fund, Inc.
American Capital Tax-Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
<PAGE> 2
<TABLE>
<S> <C>
Emerging Markets Municipal Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1
Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 347
Insured Municipals Income Trust (Discount) . . . . . . . . . . . . . . . . . . . . Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) . . . . . . . . . . . . . Series 1 through 98
Insured Municipals Income Trust (Intermediate Term) . . . . . . . . . . . . . . . . Series 5 through 83
Insured Municipals Income Trust (Limited Term) . . . . . . . . . . . . . . . . . . Series 9 through 79
Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . . . . . . Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered Maturity) . . . . . . . . . Series 1 and 2
Insured Tax Free Bond Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 6
Insured Tax Free Bond Trust (Limited Term) . . . . . . . . . . . . . . . . . . . . Series 1
Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 89
Investors' Quality Tax-Exempt Trust-Intermediate . . . . . . . . . . . . . . . . . Series 1
Investors' Corporate Income Trust . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 12
Investors' Governmental Securities Income Trust . . . . . . . . . . . . . . . . . . Series 1 through 7
Van Kampen Merritt International Bond Income Trust . . . . . . . . . . . . . . . . Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1
Alabama Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 8
Arizona Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 16
Arizona Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 12
Arkansas Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1
California Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 138
California Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . Series 1
California Insured Municipals Income Trust (1st Intermediate Series) . . . . . . . Series 1 through 3
California Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1 through 20
California Insured Municipals Income Trust (Intermediate Laddered) . . . . . . . . Series 1 through 18
Colorado Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 73
Colorado Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 18
Connecticut Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 26
Connecticut Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1
Delaware Investor's Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipal Income Trust - Intermediate . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 91
Florida Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 and 2
Florida Insured Municipals Income Trust (Intermediate Laddered) . . . . . . . . . . Series 1 through 12
Georgia Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 75
Georgia Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 16
Hawaii Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1
Investors' Quality Municipals Trust (AMT) . . . . . . . . . . . . . . . . . . . . . Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 54
Louisiana Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 13
Maine Investor's Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . Series 1
Maryland Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 70
Massachusetts Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 30
Massachusetts Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . Series 1
Michigan Financial Institutions Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1
Michigan Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 127
Michigan Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . Series 1
Michigan Insured Municipals Income Trust (1st Intermediate Series) . . . . . . . . Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 30
Minnesota Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 55
Minnesota Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 21
Missouri Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 89
Missouri Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . Series 1
Missouri Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 15
Missouri Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . Series 1
Nebraska Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
New Mexico Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 17
New Jersey Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 101
New Jersey Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . Series 1 through 22
New Jersey Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 and 4
New York Insured Municipals Income Trust-Intermediate . . . . . . . . . . . . . . . Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) . . . . . . . . . . . . . . Series 1
New York Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 125
New York Insured Tax-Free Bond Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1
New York Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 15
New York Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1
North Carolina Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 81
Ohio Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 96
Ohio Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . . . . . Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) . . . . . . . . . . . . . Series 1
Ohio Insured Municipals Income Trust
(Intermediate Laddered Maturity) . . . . . . . . . . . . . . . . . . . . . . . . . Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . . Series 1 through 16
Oklahoma Insured Municipal Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 15
Oregon Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . . Series 1 through 53
Pennsylvania Insured Municipals Income Trust - Intermediate . . . . . . . . . . . . Series 1 through 6
Pennsylvania Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 200
Pennsylvania Insured Municipals Income Trust (Premium Bond Series) . . . . . . . . Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . Series 1 through 79
Tennessee Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . Series 1-3 and 5-31
Texas Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . . . . Series 1 through 39
Texas Insured Municipal Income Trust (Intermediate Ladder) . . . . . . . . . . . . Series 1
Virginia Investors' Quality Tax-Exempt Trust . . . . . . . . . . . . . . . . . . . Series 1 through 64
Van Kampen Merritt Utility Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 6
Van Kampen Merritt Insured Income Trust . . . . . . . . . . . . . . . . . . . . . . Series 1 through 45
Van Kampen Merritt Insured Income Trust (Intermediate Term) . . . . . . . . . . . . Series 1 through 44
Van Kampen Merritt Select Equity Trust . . . . . . . . . . . . . . . . . . . . . . Series 1
Van Kampen Merritt Select Equity and Treasury Trust . . . . . . . . . . . . . . . . Series 1
Washington Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . . Series 1
West Virginia Insured Municipals Income Trust . . . . . . . . . . . . . . . . . . . Series 1 through 5
</TABLE>
<PAGE> 1
EXHIBIT 18
OFFICERS
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & Chief Executive Officer Houston, TX
William R. Molinari President & Chief Operating Oakbrook Terrace, IL
Officer
Ronald A. Nyberg Executive Vice President & General Oakbrook Terrace, IL
Counsel
William R. Rybak Executive Vice President & Chief Oakbrook Terrace, IL
Financial Officer
Robert A. Broman Sr. Vice President Oakbrook Terrace, IL
Gary R. DeMoss Sr. Vice President Oakbrook Terrace, IL
Robert J. Froehlich Sr. Vice President Oakbrook Terrace, IL
Keith K. Furlong Sr. Vice President Oakbrook Terrace, IL
Richard D. Humphrey Sr. Vice President Houston, TX
Robert S. West Sr. Vice President Oakbrook Terrace, IL
John H. Zimmermann, III Sr. Vice President Oakbrook Terrace, IL
Timothy K. Brown 1st Vice President Laguna Niguel, CA
James S. Fosdick 1st Vice President Oakbrook Terrace, IL
Edward F. Lynch 1st Vice President Oakbrook Terrace, IL
Scott E. Martin 1st Vice President, Deputy General Oakbrook Terrace, IL
Counsel & Secretary
Mark R. McClure 1st Vice President Oakbrook Terrace, IL
Mark T. McGannon 1st Vice President Oakbrook Terrace, IL
Charles G. Millington 1st Vice President, Controller Oakbrook Terrace, IL
& Treasurer
Michael L. Stallard 1st Vice President Oakbrook Terrace, IL
David M. Swanson 1st Vice President Oakbrook Terrace, IL
Patricia A. Bettlach Vice President St. Louis, MO
Carol S. Biegel Vice President Oakbrook Terrace, IL
Linda Mae Brown Vice President Oakbrook Terrace, IL
William F. Burke, Jr. Vice President Mendham, NJ
Thomas M. Byron Vice President Oakbrook Terrace, IL
Glenn M. Cackovic Vice President Laguna Niguel, CA
Joseph N. Caggiano Vice President New York, NY
Richard J. Charlino Vice President Oakbrook Terrace, IL
Eleanor M. Cloud Vice President Oakbrook Terrace, IL
Dominick Cogliandro Vice President & Asst. Treasurer New York, NY
Suzanne Cummings Vice President Houston, TX
David B. Dibo Vice President Oakbrook Terrace, IL
Howard A. Doss Vice President Tampa, FL
Charles Edward Fisher Vice President Oakbrook Terrace, IL
William J. Fow Vice President Redding, CT
Erich P. Gerth Vice President Dallas, TX
John A. Hanhauser Vice President Philadelphia, PA
Eric J. Hargens Vice President Orlando, FL
J. Christopher Jackson Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
Dana R. Klein Vice President Oakbrook Terrace, IL
Ann Marie Klingenhagen Vice President Oakbrook Terrace, IL
David R. Kowalski Vice President & Director Oakbrook Terrace, IL
of Compliance
S. William Lehew III Vice President Charlotte, NC
Walter Lynn Vice President Flower Mound, TX
Michele L. Manley Vice President Oakbrook Terrace, IL
Kevin S. Marsh Vice President Bellevue, WA
Ruth L. McKeel Vice President Oakbrook Terrace, IL
Ronald E. Pratt Vice President Marietta, GA
Craig S. Prichard Vice President Oakbrook Terrace, IL
Walter E. Rein Vice President Oakbrook Terrace, IL
Michael W. Rohr Vice President Oakbrook Terrace, IL
James B. Ross Vice President Oakbrook Terrace, IL
James J. Ryan Vice President Oakbrook Terrace, IL
Heather R. Sabo Vice President Richmond, VA
Lisa A. Schomer Vice President Oakbrook Terrace, IL
Ronald J. Schuster Vice President Tampa, FL
Darren D. Stabler Vice President Phoenix, AZ
Christopher J. Staniforth Vice President Leawood, KS
William C. Strafford Vice President Granger, IN
James C. Taylor Vice President Oakbrook Terrace, IL
John F. Tierney Vice President Oakbrook Terrace, IL
Curtis L. Ulvestad Vice President Red Wing, MN
Jeffrey A. Urbina Vice President Oakbrook Terrace, IL
Sandra A. Waterworth Vice President and Assistant Oakbrook Terrace, IL
Secretary
Steven T. West Vice President Wayne, PA
Weston B. Wetherell Vice President, Assoc. General Oakbrook Terrace, IL
Counsel & Asst. Secretary
James R. Yount Vice President Seattle, WA
Richard P. Zgonina Vice President Oakbrook Terrace, IL
Eric J. Bridges Asst. Vice President Oakbrook Terrace, IL
Richard B. Callaghan Asst. Vice President Oakbrook Terrace, IL
Stephen M. Cutka Asst. Vice President Oakbrook Terrace, IL
Gerald A. Davis Asst. Vice President Oakbrook Terrace, IL
Jeanette M. Dierkes Asst. Vice President Oakbrook Terrace, IL
Jerome M. Dybzinski Asst. Vice President Oakbrook Terrace, IL
Robert D. Gorski Asst. Vice President Oakbrook Terrace, IL
Susan J. Hill Asst. Vice President Oakbrook Terrace, IL
Natalie N. Hurdle Asst. Vice President New York, NY
Peggy E. Moro Asst. Vice President Oakbrook Terrace, IL
David R. Niemi Asst. Vice President Oakbrook Terrace, IL
Daniel J. O'Keefe Asst. Vice President Oakbrook Terrace, IL
Allison Okun Asst. Vice President Oakbrook Terrace, IL
David B. Partain Asst. Vice President Oakbrook Terrace, IL
Scott M. Pulkrabek Asst. Vice President Oakbrook Terrace, IL
Christine K. Putong Asst. Vice President & Asst. Secretary Oakbrook Terrace, IL
Michael Quinn Asst. Vice President Oakbrook Terrace, IL
David P. Robbins Asst. Vice President Oakbrook Terrace, IL
Thomas J. Sauerborn Asst. Vice President New York, NY
Jeffrey C. Shirk Asst. Vice President Philadelphia, PA
David H. Villarreal Asst. Vice President Oakbrook Terrace, IL
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Kathleen M. Wennerstrum Asst. Vice President Oakbrook Terrace, IL
Barbara A. Withers Asst. Vice President Oakbrook Terrace, IL
Huey P. Falgout, Jr. Asst. Secretary Houston, TX
Nori L. Gabert Asst. Secretary Houston, TX
David C. Goodwin Asst. Secretary Oakbrook Terrace, IL
Gina M. Scumaci Asst. Secretary Oakbrook Terrace, IL
</TABLE>
<PAGE> 4
DIRECTORS
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
<TABLE>
<CAPTION>
NAME OFFICE LOCATION
- ---- ------ --------
<S> <C> <C>
Don G. Powell Chairman & CEO 2800 Post Oak Blvd.
Houston, TX 77056
William R. Molinari President & COO One Parkview Plaza
Oakbrook Terrace, IL 60181
Ronald A. Nyberg Executive Vice President One Parkview Plaza
& General Counsel Oakbrook Terrace, IL 60181
William R. Rybak Executive Vice President One Parkview Plaza
& CFO Oakbrook Terrace, IL 60181
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> GROWTH & INCOME FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 84,501,302<F1>
<INVESTMENTS-AT-VALUE> 84,340,096<F1>
<RECEIVABLES> 1,071,474<F1>
<ASSETS-OTHER> 3,894<F1>
<OTHER-ITEMS-ASSETS> 88<F1>
<TOTAL-ASSETS> 85,415,552<F1>
<PAYABLE-FOR-SECURITIES> 3,458,900<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 422,842<F1>
<TOTAL-LIABILITIES> 3,881,742<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 48,959,102
<SHARES-COMMON-STOCK> 2,792,551
<SHARES-COMMON-PRIOR> 2,626,362
<ACCUMULATED-NII-CURRENT> 28,366<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1,243,928)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (161,206)<F1>
<NET-ASSETS> 49,878,068<F1>
<DIVIDEND-INCOME> 693,015<F1>
<INTEREST-INCOME> 276,661<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 664,824<F1>
<NET-INVESTMENT-INCOME> 304,852<F1>
<REALIZED-GAINS-CURRENT> (1,243,928)<F1>
<APPREC-INCREASE-CURRENT> 2,892,616<F1>
<NET-CHANGE-FROM-OPS> 1,953,540<F1>
<EQUALIZATION> 11,051<F1>
<DISTRIBUTIONS-OF-INCOME> (733,571)
<DISTRIBUTIONS-OF-GAINS> (244,299)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 358,393
<NUMBER-OF-SHARES-REDEEMED> (242,721)
<SHARES-REINVESTED> 50,517
<NET-CHANGE-IN-ASSETS> 3,396,032
<ACCUMULATED-NII-PRIOR> 658,391<F1>
<ACCUMULATED-GAINS-PRIOR> 399,510<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 238,987<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 664,824<F1>
<AVERAGE-NET-ASSETS> 49,441,113
<PER-SHARE-NAV-BEGIN> 17.698
<PER-SHARE-NII> .094
<PER-SHARE-GAIN-APPREC> .432
<PER-SHARE-DIVIDEND> (.274)
<PER-SHARE-DISTRIBUTIONS> (.089)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.861
<EXPENSE-RATIO> 1
<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> GROWTH & INCOME FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 84,501,302<F1>
<INVESTMENTS-AT-VALUE> 84,340,096<F1>
<RECEIVABLES> 1,071,474<F1>
<ASSETS-OTHER> 3,894<F1>
<OTHER-ITEMS-ASSETS> 88<F1>
<TOTAL-ASSETS> 85,415,552<F1>
<PAYABLE-FOR-SECURITIES> 3,458,900<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 422,842<F1>
<TOTAL-LIABILITIES> 3,881,742<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 32,422,278
<SHARES-COMMON-STOCK> 1,687,686
<SHARES-COMMON-PRIOR> 1,402,963
<ACCUMULATED-NII-CURRENT> 28,366<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1,243,928)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (161,206)<F1>
<NET-ASSETS> 30,236,782<F1>
<DIVIDEND-INCOME> 693,015<F1>
<INTEREST-INCOME> 276,661<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 664,824<F1>
<NET-INVESTMENT-INCOME> 304,852<F1>
<REALIZED-GAINS-CURRENT> (1,243,928)<F1>
<APPREC-INCREASE-CURRENT> 2,892,616<F1>
<NET-CHANGE-FROM-OPS> 1,953,540<F1>
<EQUALIZATION> 11,051<F1>
<DISTRIBUTIONS-OF-INCOME> (196,275)
<DISTRIBUTIONS-OF-GAINS> (148,335)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 489,182
<NUMBER-OF-SHARES-REDEEMED> (221,683)
<SHARES-REINVESTED> 17,224
<NET-CHANGE-IN-ASSETS> 5,426,105
<ACCUMULATED-NII-PRIOR> 658,391<F1>
<ACCUMULATED-GAINS-PRIOR> 399,510<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 238,987<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 664,824<F1>
<AVERAGE-NET-ASSETS> 28,731,970
<PER-SHARE-NAV-BEGIN> 17.684
<PER-SHARE-NII> .029
<PER-SHARE-GAIN-APPREC> .428
<PER-SHARE-DIVIDEND> (.136)
<PER-SHARE-DISTRIBUTIONS> (.089)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.916
<EXPENSE-RATIO> 2
<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> GROWTH & INCOME FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 84,501,302<F1>
<INVESTMENTS-AT-VALUE> 84,340,096<F1>
<RECEIVABLES> 1,071,474<F1>
<ASSETS-OTHER> 3,894<F1>
<OTHER-ITEMS-ASSETS> 88<F1>
<TOTAL-ASSETS> 85,415,552<F1>
<PAYABLE-FOR-SECURITIES> 3,458,900<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 422,842<F1>
<TOTAL-LIABILITIES> 3,881,742<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,453,818
<SHARES-COMMON-STOCK> 79,077
<SHARES-COMMON-PRIOR> 29,332
<ACCUMULATED-NII-CURRENT> 28,366<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1,243,928)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (161,206)<F1>
<NET-ASSETS> 1,416,984<F1>
<DIVIDEND-INCOME> 693,015<F1>
<INTEREST-INCOME> 276,661<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 664,824<F1>
<NET-INVESTMENT-INCOME> 304,852<F1>
<REALIZED-GAINS-CURRENT> (1,243,928)<F1>
<APPREC-INCREASE-CURRENT> 2,892,616<F1>
<NET-CHANGE-FROM-OPS> 1,953,540<F1>
<EQUALIZATION> 11,051<F1>
<DISTRIBUTIONS-OF-INCOME> (5,002)
<DISTRIBUTIONS-OF-GAINS> (6,866)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 49,779
<NUMBER-OF-SHARES-REDEEMED> (549)
<SHARES-REINVESTED> 515
<NET-CHANGE-IN-ASSETS> 898,086
<ACCUMULATED-NII-PRIOR> 658,391<F1>
<ACCUMULATED-GAINS-PRIOR> 399,510<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 238,987<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 664,824<F1>
<AVERAGE-NET-ASSETS> 746,460
<PER-SHARE-NAV-BEGIN> 17.691
<PER-SHARE-NII> .031
<PER-SHARE-GAIN-APPREC> .422
<PER-SHARE-DIVIDEND> (.136)
<PER-SHARE-DISTRIBUTIONS> (.089)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.919
<EXPENSE-RATIO> 2
<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> 014
<NAME> GROWTH & INCOME FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 84,501,302<F1>
<INVESTMENTS-AT-VALUE> 84,340,096<F1>
<RECEIVABLES> 1,071,474<F1>
<ASSETS-OTHER> 3,894<F1>
<OTHER-ITEMS-ASSETS> 88<F1>
<TOTAL-ASSETS> 85,415,552<F1>
<PAYABLE-FOR-SECURITIES> 3,458,900<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 422,842<F1>
<TOTAL-LIABILITIES> 3,881,742<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 2,132
<SHARES-COMMON-STOCK> 111
<SHARES-COMMON-PRIOR> 110
<ACCUMULATED-NII-CURRENT> 28,366<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (1,243,928)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (161,206)<F1>
<NET-ASSETS> 1,976<F1>
<DIVIDEND-INCOME> 693,015<F1>
<INTEREST-INCOME> 276,661<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> 664,824<F1>
<NET-INVESTMENT-INCOME> 304,852<F1>
<REALIZED-GAINS-CURRENT> (1,243,928)<F1>
<APPREC-INCREASE-CURRENT> 2,892,616<F1>
<NET-CHANGE-FROM-OPS> 1,953,540<F1>
<EQUALIZATION> 11,051<F1>
<DISTRIBUTIONS-OF-INCOME> (29)
<DISTRIBUTIONS-OF-GAINS> (10)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> 38
<ACCUMULATED-NII-PRIOR> 658,391<F1>
<ACCUMULATED-GAINS-PRIOR> 399,510<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 238,987<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 664,824<F1>
<AVERAGE-NET-ASSETS> 2,001
<PER-SHARE-NAV-BEGIN> 17.618
<PER-SHARE-NII> .093
<PER-SHARE-GAIN-APPREC> .445
<PER-SHARE-DIVIDEND> (.265)
<PER-SHARE-DISTRIBUTIONS> (.089)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.802
<EXPENSE-RATIO> 1
<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> 021
<NAME> VKM UTILITY FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 140,861,385<F1>
<INVESTMENTS-AT-VALUE> 127,324,514<F1>
<RECEIVABLES> 1,345,601<F1>
<ASSETS-OTHER> 82,114<F1>
<OTHER-ITEMS-ASSETS> 1,998,764<F1>
<TOTAL-ASSETS> 130,750,993<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,118,442<F1>
<TOTAL-LIABILITIES> 1,118,442<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 57,660,692
<SHARES-COMMON-STOCK> 3,986,676
<SHARES-COMMON-PRIOR> 3,989,613
<ACCUMULATED-NII-CURRENT> 168,339<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7,320,968)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,624,319)<F1>
<NET-ASSETS> 49,735,735
<DIVIDEND-INCOME> 3,107,551<F1>
<INTEREST-INCOME> 990,723<F1>
<OTHER-INCOME> (1,268)<F1>
<EXPENSES-NET> 1,240,684<F1>
<NET-INVESTMENT-INCOME> 2,856,322<F1>
<REALIZED-GAINS-CURRENT> (4,866,585)<F1>
<APPREC-INCREASE-CURRENT> 1,987,847<F1>
<NET-CHANGE-FROM-OPS> (22,416)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,795,999)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 369,195
<NUMBER-OF-SHARES-REDEEMED> (486,244)
<SHARES-REINVESTED> 114,112
<NET-CHANGE-IN-ASSETS> (1,753,553)
<ACCUMULATED-NII-PRIOR> 1,512,453<F1>
<ACCUMULATED-GAINS-PRIOR> (2,454,383)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> (355,171)<F1>
<GROSS-ADVISORY-FEES> 447,533<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,240,684<F1>
<AVERAGE-NET-ASSETS> 51,735,969
<PER-SHARE-NAV-BEGIN> 12.906
<PER-SHARE-NII> .3
<PER-SHARE-GAIN-APPREC> (.281)
<PER-SHARE-DIVIDEND> (.45)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.475
<EXPENSE-RATIO> 1
<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 a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 022
<NAME> VKM UTILITY FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 140,861,385<F1>
<INVESTMENTS-AT-VALUE> 127,324,514<F1>
<RECEIVABLES> 1,345,601<F1>
<ASSETS-OTHER> 82,114<F1>
<OTHER-ITEMS-ASSETS> 1,998,764<F1>
<TOTAL-ASSETS> 130,750,993<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,118,442<F1>
<TOTAL-LIABILITIES> 1,118,442<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 91,289,057
<SHARES-COMMON-STOCK> 6,288,480
<SHARES-COMMON-PRIOR> 6,499,096
<ACCUMULATED-NII-CURRENT> 168,339<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7,320,968)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,624,319)<F1>
<NET-ASSETS> 78,589,041
<DIVIDEND-INCOME> 3,107,551<F1>
<INTEREST-INCOME> 990,723<F1>
<OTHER-INCOME> (1,268)<F1>
<EXPENSES-NET> 1,240,684<F1>
<NET-INVESTMENT-INCOME> 2,856,322<F1>
<REALIZED-GAINS-CURRENT> (4,866,585)<F1>
<APPREC-INCREASE-CURRENT> 1,987,847<F1>
<NET-CHANGE-FROM-OPS> (22,416)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2,368,926)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 517,543
<NUMBER-OF-SHARES-REDEEMED> (877,018)
<SHARES-REINVESTED> 148,859
<NET-CHANGE-IN-ASSETS> (5,116,256)
<ACCUMULATED-NII-PRIOR> 1,512,453<F1>
<ACCUMULATED-GAINS-PRIOR> (2,454,383)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> (355,171)<F1>
<GROSS-ADVISORY-FEES> 447,533<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,240,684<F1>
<AVERAGE-NET-ASSETS> 83,444,882
<PER-SHARE-NAV-BEGIN> 12.880
<PER-SHARE-NII> .257
<PER-SHARE-GAIN-APPREC> (.271)
<PER-SHARE-DIVIDEND> (.369)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.497
<EXPENSE-RATIO> 2
<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 a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 023
<NAME> VKM UTILITY FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 140,861,385<F1>
<INVESTMENTS-AT-VALUE> 127,324,514<F1>
<RECEIVABLES> 1,345,601<F1>
<ASSETS-OTHER> 82,114<F1>
<OTHER-ITEMS-ASSETS> 1,998,764<F1>
<TOTAL-ASSETS> 130,750,993<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,118,442<F1>
<TOTAL-LIABILITIES> 1,118,442<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,458,152
<SHARES-COMMON-STOCK> 104,572
<SHARES-COMMON-PRIOR> 88,630
<ACCUMULATED-NII-CURRENT> 168,339<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7,320,968)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,624,319)<F1>
<NET-ASSETS> 1,306,340
<DIVIDEND-INCOME> 3,107,551<F1>
<INTEREST-INCOME> 990,723<F1>
<OTHER-INCOME> (1,268)<F1>
<EXPENSES-NET> 1,240,684<F1>
<NET-INVESTMENT-INCOME> 2,856,322<F1>
<REALIZED-GAINS-CURRENT> (4,866,585)<F1>
<APPREC-INCREASE-CURRENT> 1,987,847<F1>
<NET-CHANGE-FROM-OPS> (22,416)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (35,460)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 25,602
<NUMBER-OF-SHARES-REDEEMED> (11,844)
<SHARES-REINVESTED> 2,184
<NET-CHANGE-IN-ASSETS> 165,815
<ACCUMULATED-NII-PRIOR> 1,512,453<F1>
<ACCUMULATED-GAINS-PRIOR> (2,454,383)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> (355,171)<F1>
<GROSS-ADVISORY-FEES> 447,533<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,240,684<F1>
<AVERAGE-NET-ASSETS> 1,200,026
<PER-SHARE-NAV-BEGIN> 12.868
<PER-SHARE-NII> .237
<PER-SHARE-GAIN-APPREC> (.244)
<PER-SHARE-DIVIDEND> (.369)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.492
<EXPENSE-RATIO> 2
<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 a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 024
<NAME> VKM UTILITY FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995<F1>
<PERIOD-START> JUL-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 140,861,385<F1>
<INVESTMENTS-AT-VALUE> 127,324,514<F1>
<RECEIVABLES> 1,345,601<F1>
<ASSETS-OTHER> 82,114<F1>
<OTHER-ITEMS-ASSETS> 1,998,764<F1>
<TOTAL-ASSETS> 130,750,993<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,118,442<F1>
<TOTAL-LIABILITIES> 1,118,442<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,598
<SHARES-COMMON-STOCK> 115
<SHARES-COMMON-PRIOR> 114
<ACCUMULATED-NII-CURRENT> 168,339<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7,320,968)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,624,319)<F1>
<NET-ASSETS> 1,435
<DIVIDEND-INCOME> 3,107,551<F1>
<INTEREST-INCOME> 990,723<F1>
<OTHER-INCOME> (1,268)<F1>
<EXPENSES-NET> 1,240,684<F1>
<NET-INVESTMENT-INCOME> 2,856,322<F1>
<REALIZED-GAINS-CURRENT> (4,866,585)<F1>
<APPREC-INCREASE-CURRENT> 1,987,847<F1>
<NET-CHANGE-FROM-OPS> (22,416)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (51)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1
<NET-CHANGE-IN-ASSETS> (38)
<ACCUMULATED-NII-PRIOR> 1,512,453<F1>
<ACCUMULATED-GAINS-PRIOR> (2,454,383)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> (355,171)<F1>
<GROSS-ADVISORY-FEES> 447,533<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,240,684<F1>
<AVERAGE-NET-ASSETS> 1,481
<PER-SHARE-NAV-BEGIN> 12.921
<PER-SHARE-NII> .294
<PER-SHARE-GAIN-APPREC> (.293)
<PER-SHARE-DIVIDEND> (.444)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 12.478
<EXPENSE-RATIO> 1
<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 a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> BALANCE FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUN-24-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 11,410,384<F1>
<INVESTMENTS-AT-VALUE> 11,180,148<F1>
<RECEIVABLES> 112,503<F1>
<ASSETS-OTHER> 107,645<F1>
<OTHER-ITEMS-ASSETS> 535<F1>
<TOTAL-ASSETS> 11,400,831<F1>
<PAYABLE-FOR-SECURITIES> 99,959<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 90,268<F1>
<TOTAL-LIABILITIES> 190,227<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 4,532,185
<SHARES-COMMON-STOCK> 316,010
<SHARES-COMMON-PRIOR> 100
<ACCUMULATED-NII-CURRENT> 48,579<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (26,067)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (230,236)<F1>
<NET-ASSETS> 4,453,675
<DIVIDEND-INCOME> 71,421<F1>
<INTEREST-INCOME> 165,059<F1>
<OTHER-INCOME> 4,784<F1>
<EXPENSES-NET> 58,079<F1>
<NET-INVESTMENT-INCOME> 183,185<F1>
<REALIZED-GAINS-CURRENT> (26,067)<F1>
<APPREC-INCREASE-CURRENT> (230,236)<F1>
<NET-CHANGE-FROM-OPS> (73,118)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (62,325)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 329,073
<NUMBER-OF-SHARES-REDEEMED> (16,658)
<SHARES-REINVESTED> 3,495
<NET-CHANGE-IN-ASSETS> 4,452,245
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> 0<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 32,847<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 168,698<F1>
<AVERAGE-NET-ASSETS> 3,786,956
<PER-SHARE-NAV-BEGIN> 14.300
<PER-SHARE-NII> .298
<PER-SHARE-GAIN-APPREC> (.280)
<PER-SHARE-DIVIDEND> (.225)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 14.093
<EXPENSE-RATIO> 1
<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> 032
<NAME> BALANCE FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUN-24-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 11,410,384<F1>
<INVESTMENTS-AT-VALUE> 11,180,148<F1>
<RECEIVABLES> 112,503<F1>
<ASSETS-OTHER> 107,645<F1>
<OTHER-ITEMS-ASSETS> 535<F1>
<TOTAL-ASSETS> 11,400,831<F1>
<PAYABLE-FOR-SECURITIES> 99,959<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 90,268<F1>
<TOTAL-LIABILITIES> 190,227<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 6,237,636
<SHARES-COMMON-STOCK> 433,801
<SHARES-COMMON-PRIOR> 100
<ACCUMULATED-NII-CURRENT> 48,579<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (26,067)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (230,236)<F1>
<NET-ASSETS> 6,112,171
<DIVIDEND-INCOME> 71,421<F1>
<INTEREST-INCOME> 165,059<F1>
<OTHER-INCOME> 4,784<F1>
<EXPENSES-NET> 58,079<F1>
<NET-INVESTMENT-INCOME> 183,185<F1>
<REALIZED-GAINS-CURRENT> (26,067)<F1>
<APPREC-INCREASE-CURRENT> (230,236)<F1>
<NET-CHANGE-FROM-OPS> (73,118)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (69,797)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 492,723
<NUMBER-OF-SHARES-REDEEMED> (62,831)
<SHARES-REINVESTED> 3,809
<NET-CHANGE-IN-ASSETS> 6,110,741
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> 0<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 32,847<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 168,698<F1>
<AVERAGE-NET-ASSETS> 5,075,297
<PER-SHARE-NAV-BEGIN> 14.300
<PER-SHARE-NII> .242
<PER-SHARE-GAIN-APPREC> (.267)
<PER-SHARE-DIVIDEND> (.185)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 14.090
<EXPENSE-RATIO> 2
<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> 033
<NAME> BALANCE FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUN-24-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 11,410,384<F1>
<INVESTMENTS-AT-VALUE> 11,180,148<F1>
<RECEIVABLES> 112,503<F1>
<ASSETS-OTHER> 107,645<F1>
<OTHER-ITEMS-ASSETS> 535<F1>
<TOTAL-ASSETS> 11,400,831<F1>
<PAYABLE-FOR-SECURITIES> 99,959<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 90,268<F1>
<TOTAL-LIABILITIES> 190,227<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 646,874
<SHARES-COMMON-STOCK> 45,649
<SHARES-COMMON-PRIOR> 100
<ACCUMULATED-NII-CURRENT> 48,579<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (26,067)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (230,236)<F1>
<NET-ASSETS> 643,152
<DIVIDEND-INCOME> 71,421<F1>
<INTEREST-INCOME> 165,059<F1>
<OTHER-INCOME> 4,784<F1>
<EXPENSES-NET> 58,079<F1>
<NET-INVESTMENT-INCOME> 183,185<F1>
<REALIZED-GAINS-CURRENT> (26,067)<F1>
<APPREC-INCREASE-CURRENT> (230,236)<F1>
<NET-CHANGE-FROM-OPS> (73,118)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2,459)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 46,092
<NUMBER-OF-SHARES-REDEEMED> (702)
<SHARES-REINVESTED> 159
<NET-CHANGE-IN-ASSETS> 641,722
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> 0<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 32,847<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 168,698<F1>
<AVERAGE-NET-ASSETS> 167,348
<PER-SHARE-NAV-BEGIN> 14.300
<PER-SHARE-NII> .200
<PER-SHARE-GAIN-APPREC> (.226)
<PER-SHARE-DIVIDEND> (.185)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 14.089
<EXPENSE-RATIO> 2
<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> 034
<NAME> BALANCE FUND
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUN-24-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 11,410,384<F1>
<INVESTMENTS-AT-VALUE> 11,180,148<F1>
<RECEIVABLES> 112,503<F1>
<ASSETS-OTHER> 107,645<F1>
<OTHER-ITEMS-ASSETS> 535<F1>
<TOTAL-ASSETS> 11,400,831<F1>
<PAYABLE-FOR-SECURITIES> 99,959<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 90,268<F1>
<TOTAL-LIABILITIES> 190,227<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,633
<SHARES-COMMON-STOCK> 114
<SHARES-COMMON-PRIOR> 100
<ACCUMULATED-NII-CURRENT> 48,579<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (26,067)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (230,236)<F1>
<NET-ASSETS> 1,606
<DIVIDEND-INCOME> 71,421<F1>
<INTEREST-INCOME> 165,059<F1>
<OTHER-INCOME> 4,784<F1>
<EXPENSES-NET> 58,079<F1>
<NET-INVESTMENT-INCOME> 183,185<F1>
<REALIZED-GAINS-CURRENT> (26,067)<F1>
<APPREC-INCREASE-CURRENT> (230,236)<F1>
<NET-CHANGE-FROM-OPS> (73,118)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (25)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 14
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 176
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> 0<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 32,847<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 168,698<F1>
<AVERAGE-NET-ASSETS> 1,612
<PER-SHARE-NAV-BEGIN> 14.300
<PER-SHARE-NII> .319
<PER-SHARE-GAIN-APPREC> (.309)
<PER-SHARE-DIVIDEND> (.222)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 14.088
<EXPENSE-RATIO> 1
<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>
