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DEAR VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND SHAREHOLDER:
Enclosed is information asking you for your vote on a reorganization (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization (the
"Agreement") for the Van Kampen American Capital Utilities Income Fund (the "AC
Fund"). The Reorganization calls for the AC Fund shareholders to become
shareholders of the Van Kampen American Capital Utility Fund (the "VK Fund"), a
mutual fund which pursues a substantially similar investment objective.
The enclosed materials include a combined Proxy Statement/Prospectus
containing information you need to make an informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to some
of the important questions you might have about the proposed Reorganization. We
hope you find these explanations useful as you review your materials before
voting. For more detailed information about the Reorganization, please refer to
the combined Proxy Statement/Prospectus.
HOW WILL THE REORGANIZATION AFFECT ME?
Assuming shareholders of the AC Fund approve the Reorganization, the assets
and liabilities of the AC Fund will be combined with those of the VK Fund and
you will become a shareholder of the VK Fund. You will receive shares of the VK
Fund approximately equal in value at the time of issuance to the shares of the
AC Fund that you hold immediately prior to the Reorganization. See the section
of the combined Proxy Statement/Prospectus entitled "Distribution, Purchase,
Valuation, Redemption and Exchange of Shares." Class A shareholders of the AC
Fund will receive Class A shares of the VK Fund; Class B shareholders of the AC
Fund will receive Class B shares of the VK Fund; and Class C shareholders of the
AC Fund will receive Class C shares of the VK Fund.
WHY IS THE REORGANIZATION BEING RECOMMENDED?
As we reported to you earlier, the parent company of Van Kampen American
Capital Asset Management, Inc. ("AC Adviser"), the investment adviser to the AC
Fund, was acquired in December 1994 by Van Kampen American Capital, Inc.
("VKAC"), and was subsequently merged into VKAC. VKAC, through its wholly owned
subsidiaries, distributes and manages the Van Kampen American Capital funds. AC
Adviser is an affiliate of Van Kampen American Capital Investment Advisory Corp.
("VK Adviser"), the investment adviser to the VK Fund. The primary purposes of
the proposed Reorganization are to seek to achieve future economies of scale and
eliminate certain costs associated with operating the AC Fund and the VK Fund
separately. The Reorganization will result in combining the assets and
liabilities of the AC Fund with the assets and liabilities of the VK Fund and
consolidating their operations.
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The Reorganization is intended to provide various benefits to shareholders of
the AC Fund who become shareholders of the VK Fund (as well as to existing and
future investors in the VK Fund). For example, higher net asset levels should
enable the VK Fund to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
potentially reducing per share expense levels. Higher net asset levels also may
benefit portfolio management by permitting larger individual portfolio
investments that may result in reduced transaction costs or more favorable
pricing and by providing the opportunity for greater portfolio diversity. These
benefits, in turn, should have a favorable effect on the relative performance of
the VK Fund.
The consummation of the Reorganization is subject to the satisfaction of a
number of conditions (including approval by the AC Fund's shareholders), which
are summarized below in "The Proposed Reorganization -- Terms of the Agreement"
section of the combined Proxy Statement/Prospectus. These conditions are stated
in the Agreement which is attached as Exhibit A to the combined Proxy
Statement/Prospectus.
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN
CONNECTION WITH THE REORGANIZATION?
No. The full value of your shares of the AC Fund would be exchanged for shares
of the corresponding class of the VK Fund without any sales load, commission or
other transactional fee being imposed. As more fully discussed in the combined
Proxy Statement/Prospectus, the holding period for shareholders acquiring Class
B or C shares of the VK Fund in the Reorganization subject to a contingent
deferred sales charge will be measured from the time (i) the holder purchased
Class B or C shares from the AC Fund or (ii) purchased Class B or C shares of
any other Van Kampen American Capital open-end fund and subsequently exchanged
into Class B or C shares of the AC Fund. If the Reorganization is completed, the
VK Fund will bear costs associated with the Reorganization, such as printing and
mailing costs and other expenses associated with the Special Meeting. If the
Reorganization is not completed, VKAC will bear the costs associated with the
Reorganization.
HOW WILL THE FEES PAID BY THE VK FUND COMPARE TO THOSE PAYABLE BY THE AC FUND?
It is anticipated that, on a per share basis, the total of the various fees
and expenses incurred by the VK Fund will be less, upon completion of the
Reorganization, than the total of such fees and expenses applicable to the AC
Fund. The fees and expenses actually paid to date by the AC Fund have been less
than the total of such fees and expenses applicable to the AC Fund as a result
of voluntary fee waivers and expense reimbursements made by AC Adviser. However,
if the Reorganization is not consummated, the AC Adviser does not currently
intend to continue such voluntary fee waivers and expense reimbursements.
<PAGE> 3
WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE VK FUND? WHAT HAPPENS TO MY
ACCOUNT IF THE REORGANIZATION IS APPROVED?
If the Reorganization is approved, your interest in Class A, B or C shares,
respectively, of the AC Fund will automatically be converted into the same class
of shares of the VK Fund and we will send you written confirmation that this
change has taken place. You will receive the same class of shares of the VK Fund
approximately equal in value to your Class A, B or C shares of the AC Fund. No
certificates for VK Fund shares will be issued in connection with the
Reorganization, although such certificates will be available upon request. If
you currently hold certificates representing your shares of the AC Fund, it is
not necessary to surrender such certificates.
WHO WILL ADVISE THE VK FUND AND PROVIDE OTHER SERVICES?
VK Adviser provides advisory services to the VK Fund under an arrangement that
is substantially similar to that currently in effect between the AC Fund and AC
Adviser. The contractual advisory fees payable by the VK Fund are no higher than
the contractual advisory fees applicable to the AC Fund. Van Kampen American
Capital Distributors, Inc. serves as distributor of shares of both the VK Fund
and the AC Fund. In addition, State Street Bank & Trust Company, 225 Franklin
Street, P.O. Box 1713, Boston, Massachusetts 02105-1713 is the custodian of both
the VK Fund and the AC Fund. ACCESS Investor Services, Inc., P.O. Box 418256,
Kansas City, Missouri 64141-9256, serves as the transfer agent for both the VK
Fund and the AC Fund.
WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general, a shareholder of
the AC Fund will recognize no gain or loss upon its receipt of solely the shares
of the VK Fund in connection with the Reorganization. Additionally, the AC Fund
would not recognize any gain or loss as a result of the transfer of all of its
assets and liabilities solely in exchange for the shares of the VK Fund or as a
result of its liquidation. The VK Fund expects that it will not recognize any
gain or loss as a result of the Reorganization, that it will take a carryover
basis in the assets acquired from the AC Fund and that its holding period of
such assets will include the period during which the assets were held by the AC
Fund. See "The Proposed Reorganization -- Federal Income Tax Consequences" in
the combined Proxy Statement/Prospectus.
<PAGE> 4
WHAT IF I REDEEM MY AC FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE?
If you choose to redeem your shares of AC Fund before the Reorganization takes
place, the redemption will be treated as a normal sale of shares and will be a
taxable transaction, unless your account is not subject to taxation, such as an
individual retirement account or other tax-qualified retirement plan.
We hope these answers help to clarify the Reorganization proposal for you. If
you still have questions, do not hesitate to call us at 1-800-341-2911. Please
give this matter your prompt attention. We need to receive your proxy before the
shareholder meeting scheduled for September 15, 1995. If shareholders approve
the Reorganization, it is expected to take effect on September 22, 1995.
Thank you for your investment in Van Kampen American Capital Utilities Income
Fund.
Very truly yours,
Van Kampen American Capital Utilities
Income Fund
Don G. Powell
President and Trustee
<PAGE> 5
VAN KAMPEN AMERICAN
CAPITAL UTILITIES INCOME FUND
2800 POST OAK BOULEVARD
HOUSTON, TEXAS 77056
(800) 421-5666
NOTICE OF SPECIAL MEETING
SEPTEMBER 15, 1995
A Special Meeting of Shareholders of Van Kampen American Capital Utilities
Income Fund (the "AC Fund") will be held at the Hyatt Regency Oak Brook, 1909
Spring Road, Oak Brook, Illinois 60521, on September 15, 1995 at 2:00 p.m. (the
"Special Meeting"), for the following purposes:
(1) To approve a plan of reorganization pursuant to which the AC Fund would
transfer all of its assets and liabilities to the Van Kampen American Capital
Utility Fund (the "VK Fund") in exchange for corresponding Class A, B and C
shares of beneficial interest of the VK Fund, the AC Fund would distribute
such Class A, B and C shares of the VK Fund to the holders of Class A, B and C
shares of the AC Fund, respectively, and the AC Fund would be dissolved.
(2) To transact such other business as may properly come before the Special
Meeting.
The Special Meeting is scheduled to be held jointly with the special meetings
of the respective shareholders of five other Van Kampen American Capital Funds
because the shareholders of each of such funds are expected to consider and vote
on similar matters. In the event that any shareholder of any Van Kampen American
Capital Fund present at the special meetings objects to the holding of a joint
meeting and moves for an adjournment of the meeting of such fund to a time
immediately after the other special meetings so that such fund's special meeting
may be held separately, the persons named as proxies will vote in favor of such
adjournment. Shareholders of each Van Kampen American Capital Fund will vote
separately on each of the proposals relating to their fund, and an unfavorable
vote on a proposal by the shareholders of one fund will not affect the
implementation of such a proposal by another fund if the proposal is approved by
the shareholders of that fund.
Shareholders of record as of the close of business on August 1, 1995 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Nori L. Gabert
Secretary
August 4, 1995
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
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VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND
PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
This Proxy Statement/Prospectus is being furnished to shareholders of Van
Kampen American Capital Utilities Income Fund (the "AC Fund"), and relates to
the Special Meeting of Shareholders of the AC Fund (the "Special Meeting")
called for the purpose of approving the proposed reorganization of the AC Fund
(the "Reorganization") which would result in shareholders of the AC Fund in
effect exchanging their AC Fund shares for shares of the Van Kampen American
Capital Utility Fund (the "VK Fund"), a series of the Van Kampen American
Capital Equity Trust, a Delaware business trust (the "VKAC Equity Trust"). The
Reorganization would be accomplished as follows: (1) the VK Fund would acquire
all the then existing assets and liabilities of the AC Fund in exchange for
Class A, B and C shares of beneficial interest of the VK Fund (the "Shares");
(2) the AC Fund would distribute the Shares to the AC Fund's shareholders
holding the same respective class of shares; and (3) the AC Fund would dissolve
and all shares of the AC Fund would be cancelled.
The VK Fund, an open-end, diversified management investment company, is one of
three series of the VKAC Equity Trust, which is authorized to issue an unlimited
number of shares of beneficial interest, par value $.01 per share, for each
series authorized by its Board of Trustees. Each series represents interests in
a separate portfolio of securities and other assets, with its own investment
objectives and policies. The investment objective of the VK Fund is to seek
capital appreciation and current income, which is substantially similar to that
of the AC Fund. (See "Summary -- Comparisons of the VK Fund and AC Fund --
Investment Objective and Policies" below.) There can be no assurance that the VK
Fund will achieve its investment objective. The address, principal executive
office and telephone number of the VKAC Equity Trust is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, (708) 684-6000 or (800) 225-2222. The address,
principal executive office and telephone number of the AC Fund is 2800 Post Oak
Boulevard, Houston, Texas 77056, (800) 421-5666. The enclosed proxy and this
Proxy Statement/Prospectus are first being sent to AC Fund shareholders on or
about August 4, 1995.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<PAGE> 7
This Proxy Statement/Prospectus contains information shareholders of the AC
Fund should know before voting on the Reorganization and constitutes an offering
of Class A, B and C Shares of the VK Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated
August 2, 1995, relating to this Proxy Statement/Prospectus (the "Reorganization
SAI") has been filed with the Securities and Exchange Commission (the "SEC") and
is incorporated herein by reference. A Prospectus (the "VK Fund Prospectus") and
Statement of Additional Information containing additional information about the
VK Fund, each dated July 31, 1995, have been filed with the SEC and are
incorporated herein by reference. A copy of the VK Fund Prospectus accompanies
this Proxy Statement/Prospectus. A Prospectus and Statement of Additional
Information containing additional information about the AC Fund, each dated
August 1, 1995, have been filed with the SEC and are incorporated herein by
reference. Copies of any of the foregoing may be obtained without charge by
calling or writing to the AC Fund at the telephone number or address shown
above. If you wish to request the Reorganization SAI, please ask for the
"Reorganization SAI."
------------------------
No person has been authorized to give any information or make any
representation not contained in this Proxy Statement/Prospectus and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
------------------------
Each of the VK Fund and the VKAC Equity Trust is subject to the information
requirements of the Securities Exchange Act of 1934, as amended (the "Act"), and
the Investment Company Act of 1940, as amended, and in accordance therewith
files reports and other information with the SEC. Such reports, other
information and proxy statements filed by the VK Fund and the VKAC Equity Trust
can be inspected and copied at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Office
at 500 West Madison Street, Chicago, Illinois. Copies of such material can also
be obtained from the SEC's Public Reference Branch, Office of Consumer Affairs
and Information Services, Washington, D.C. 20549, at prescribed rates.
The date of this Proxy Statement/Prospectus is August 2, 1995.
2
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION...........
4
A. SUMMARY................................................... 4
The Reorganization........................................ 4
Comparisons of the VK Fund and AC Fund.................... 5
Investment Objective and Policies......................... 6
Advisory and Other Fees................................... 8
Distribution, Purchase, Valuation, Redemption and
Exchange of Shares........................................ 9
Federal Income Tax Consequences........................... 16
Reasons For The Proposed Reorganization................... 17
B. RISK FACTORS.............................................. 19
Nature of Investment...................................... 19
C. INFORMATION ABOUT THE FUNDS............................... 21
D. THE PROPOSED REORGANIZATION............................... 22
Terms of the Agreement.................................... 22
Description of Securities to Be Issued.................... 23
Shares of Beneficial Interest............................. 23
Voting Rights of Shareholders............................. 24
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 24
Federal Income Tax Consequences........................... 25
Capitalization............................................ 27
Comparative Performance Information....................... 27
Ratification of Investment Objective, Policies and
Restrictions of
the VK Fund............................................... 28
Legal Matters............................................. 28
Expenses.................................................. 29
F. RECOMMENDATIONS OF THE AC BOARD........................... 29
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING...........
29
OTHER INFORMATION................................................ 29
A. SHAREHOLDINGS OF THE AC FUND AND THE
VK FUND................................................... 29
B. SHAREHOLDER PROPOSALS..................................... 30
VOTING INFORMATION AND REQUIREMENTS.............................. 31
EXHIBIT A
EXHIBIT B
</TABLE>
3
<PAGE> 9
APPROVAL OR DISAPPROVAL
OF THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by references to, the more
complete information contained in this Proxy Statement/Prospectus, including the
Agreement and Plan of Reorganization by and between the AC Fund and the VKAC
Equity Trust attached hereto as Exhibit A (the "Agreement"), the prospectus of
the AC Fund dated August 1, 1995 (the "AC Fund Prospectus") incorporated herein
by reference, and the prospectus of the VK Fund dated July 31, 1995 (the "VK
Fund Prospectus") incorporated herein by reference and accompanying this Proxy
Statement/Prospectus. This Proxy Statement/Prospectus constitutes an offering of
Class A, B and C Shares of the VK Fund only.
THE REORGANIZATION
On May 11, 1995, the Board of Trustees of the AC Fund (the "AC Board")
approved the Agreement. The Agreement provides that the AC Fund will transfer
all of its assets and liabilities to the VK Fund in exchange for Class A, B and
C shares of the VK Fund. At the Closing (as defined herein), the VK Fund will
issue Shares of the VK Fund to the AC Fund, which VK Fund Shares will have an
aggregate net asset value approximately equal in amount to the net asset value
of the AC Fund net assets as of the Closing. See "Distribution, Purchase,
Valuation, Redemption and Exchange of Shares." The Agreement provides that the
AC Fund will dissolve pursuant to a plan of liquidation and dissolution to be
adopted by the AC Board following the Closing, and as part of such dissolution,
will distribute to each shareholder of the AC Fund Shares of the respective
class of the VK Fund approximately equal in value to their existing shares in
the AC Fund. All members of the AC Board were elected as trustees of the VKAC
Equity Trust on July 21, 1995.
The AC Board has unanimously determined that the Reorganization is in the best
interests of the shareholders of each class of shares of the AC Fund and that
such shareholders will not be diluted as a result of the Reorganization.
Similarly, the Board of Trustees of the VKAC Equity Trust (the "VK Board") has
unanimously determined that the Reorganization is in the best interests of the
VK Fund and that the interests of the shareholders of each class of shares of
the VK Fund will not be diluted as a result of the Reorganization. Management of
the respective funds believes that the proposed Reorganization of the AC Fund
into the VK Fund should allow the VK Fund to achieve future economies of scale
and to eliminate certain costs of operating the AC Fund and the VK Fund
separately.
4
<PAGE> 10
The VK Fund has agreed to pay all of the costs of soliciting approval of the
Reorganization by the AC Fund's shareholders and related costs of the
Reorganization in the event the Reorganization is completed, including expenses
incurred by the AC Fund. Accordingly, if the Reorganization is completed,
shareholders of the VK Fund after the Reorganization will bear a pro rata
portion of such expenses. If the Reorganization is not completed, VKAC will bear
the costs associated with the Reorganization.
The AC Board is asking shareholders of the AC Fund to approve the
Reorganization at a Special Meeting called to be held on September 15, 1995. If
shareholders of the AC Fund approve the Reorganization, it is expected that the
Closing will be on September 22, 1995, but it may be at a different time as
described herein.
THE AC BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF THE
REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND REQUIREMENTS."
COMPARISONS OF THE VK FUND AND THE AC FUND
The principal changes which would result from the Reorganization are listed
below:
(1) The holders of Class A, B and C shares of the AC Fund would become holders
of the same class of Shares, respectively, of the VK Fund. The AC Fund and
the VK Fund have substantially similar investment objectives and follow
similar investment strategies. Under normal market conditions, the VK Fund
will have at least 80% of its assets invested in common stocks and income
securities issued by companies engaged in the utilities industry ("Utility
Securities"), while the percentage of assets of the AC Fund required to be
invested in Utility Securities under normal market conditions is 65%. Each
Fund may invest up to 35% of respective assets in securities issued by
non-U.S. issuers.
(2) The VK Fund is managed by Van Kampen American Capital Investment Advisory
Corp. ("VK Adviser"), an affiliate of the AC Fund's adviser, Van Kampen
American Capital Asset Management, Inc. ("AC Adviser"). The annual
advisory fee for each of the VK Fund and the AC Fund is 0.65% of their
respective daily net assets. The VK Fund reduces its advisory fee to 0.60%
on assets over $500 million and to 0.55% on assets over $1 billion. As of
March 31, 1995, the VK Fund's net assets were approximately $131.9
million. As of March 31, 1995, the AC Fund's net assets were approximately
$25.2 million.
(3) Both the AC Fund and the VK Fund offer three classes of shares. Class A
shares of the VK Fund are subject to an initial sales charge of up to
5.75% while Class A shares of the AC Fund are subject to an initial sales
charge of
5
<PAGE> 11
up to 4.75%. Purchases of Class A shares of the VK Fund or the AC Fund in
amounts of $1,000,000 or more are not subject to an initial sales charge
but a contingent deferred sales charge of 1.00% may be imposed on certain
redemptions made within one year of the purchase. However, the initial
sales charge applicable to Class A Shares of the VK Fund will be waived
for Class A shares acquired in the Reorganization. Any subsequent
purchases of Class A Shares of the VK Fund will be subject to a sales
charge of up to 5.75%, excluding Class A shares purchased through the
dividend reinvestment plan. Class B shares of the VK Fund and the AC Fund
do not incur a sales charge when they are purchased, but generally are
subject to a contingent deferred sales charge of 4.00% if redeemed within
the first year after purchase, and reduced to zero over a six year period
in the case of the VK Fund and a five year period in the case of the AC
Fund. However, Class B Shares of the VK Fund acquired in the
Reorganization will remain subject to the contingent deferred sales
charge applicable to Class B shares of the AC Fund. Class C shares of the
VK Fund and the AC Fund do not incur a sales charge when they are
purchased, but are subject to a contingent deferred sales charge of 1.00%
if redeemed within the first year after purchase.
(4) Both the AC Fund and the VK Fund have adopted distribution plans (the
"Distribution Plans") pursuant to Rule 12b-1 under the Act and have
adopted service agreements or plans (the "Service Plans"). Both the VK
Fund and the AC Fund can pay up to 0.75% of their respective average daily
net assets attributable to Class B and C shares for reimbursement of
certain distribution-related expenses. In addition, both the VK Fund and
the AC Fund can pay up to 0.25% of the their respective average daily net
assets attributable to Class A, B and C shares for the provision of
ongoing services to shareholders. Class B shares of the VK Fund
automatically convert to Class A shares after seven years, while Class B
shares of the AC Fund automatically convert to Class A shares after six
years. Unlike Class C shares of the VK Fund, Class C shares of the AC Fund
automatically convert to Class A shares after ten years. However, Class B
and C Shares of the VK Fund acquired in the Reorganization will
automatically convert to Class A Shares in accordance with the same
conversion schedule applicable to Class B and C shares of the AC Fund,
respectively.
Certain other comparisons between the AC Fund and the VK Fund are discussed
below.
INVESTMENT OBJECTIVE AND POLICIES
The VK Fund and the AC Fund have substantially similar investment objectives
and also share similar investment practices, but there are also certain
differences in
6
<PAGE> 12
their investment policies, practices and restrictions. The investment objective
of the VK Fund is to seek to provide its shareholders capital appreciation and
current income. The primary investment objective of the AC Fund is to provide
its shareholders with current income. Capital appreciation is a secondary
objective which is sought only when consistent with the primary objective. Both
funds invest principally in a diversified portfolio of Utility Securities.
The portfolios of the VK Fund and the AC Fund have a similar emphasis on
credit quality. Both the VK Fund's and the AC Fund's investments in income
securities must be rated, at the time of investment, at least BBB by Standard
and Poor's ("S&P"), Baa by Moody's Investors Service, Inc. ("Moody's"), or
comparably rated by any other nationally recognized statistical rating
organization or if unrated, determined by the respective adviser to be of
comparable quality. However, the VK 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
organization or if unrated, determined by the VK Fund's adviser to be of
comparable quality.
In addition, the VK Fund may lend its portfolio securities to selected banks
or broker-dealers up to a maximum of 50% of its assets, while the AC Fund may
lend up to 33 1/3% of its assets. Further, the VK Fund may borrow money from
banks and enter into reverse repurchase agreements with banks in an amount up to
33 1/3% of its assets, while the AC Fund may not borrow in excess of 5% of its
assets. The VK Fund also has more flexibility to invest, without limitation, in
securities of unseasoned issuers, including their predecessors or sponsors,
which have been in operation for less than three years, while the AC Fund is
limited to 5% of its assets in such securities. With respect to 75% of its
assets, the VK Fund may not invest more than 5% of such assets in the securities
of any one issuer (except the U.S. Government, its agencies and
instrumentalities) or purchase more than ten percent of the outstanding voting
securities of any issuer; the AC Fund has the same restriction with respect to
100% of its assets.
The VK Fund is managed by VK Adviser while the AC Fund is managed by AC
Adviser. VK Adviser and AC Adviser are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which has been developing investment strategies
and products for individuals, businesses and institutions since 1974. VK Adviser
and AC Adviser are the primary investment advisers to the Van Kampen American
Capital funds. VKAC is a diversified asset management company with more than two
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and over $50 billion under management or supervision.
VKAC's more than 40 open-end and 38 closed-end funds and more than 2,700 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. The business address of VK Adviser is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. VK Adviser and its investment advisory agreement with
the
7
<PAGE> 13
VK Fund are more fully described in the VK Fund Prospectus and Statement of
Additional Information.
ADVISORY AND OTHER FEES
The AC Fund pays AC Adviser a monthly fee based on its average daily net asset
value at the annual rate of 0.65%. However, such fee has historically been
reduced to zero as a result of voluntary fee waivers and expense reimbursement
by AC Adviser. In addition, the AC Fund bears most expenses associated with its
operation and the issuance and repurchase or redemption of its securities,
except for the compensation of trustees affiliated with VKAC, and officers of
the AC Fund who are interested persons of VKAC or its subsidiaries. The total
operating expenses of the AC Fund for the period ended March 31, 1995 were
1.42%, 2.28% and 2.27% with respect to Class A, B and C shares, respectively,
after giving effect to voluntary expense reimbursement by AC Adviser. Absent
such voluntary expense reimbursement, such total operating expenses would have
been 2.31% for Class A, 3.17% for Class B and 3.16% for Class C. However, if the
Reorganization is not consummated, AC Adviser does not intend to continue the
aforementioned voluntary fee waivers and expense reimbursements.
The VK Fund pays VK Adviser a monthly fee based on its average daily net asset
value at the annual rates of 0.65% of the first $500 million; 0.60% of the next
$500 million; and 0.55% thereafter. The effective advisory fee for the period
ended December 31, 1994 was 0.65% of the VK Fund's average daily net asset
value. Similar to the AC Fund, the VK Fund also bears most expenses associated
with its operation and the issuance and repurchase or redemption of its
securities, except for the compensation of trustees affiliated with VKAC, and
officers of the VK Fund who are interested persons of VKAC or its subsidiaries.
The total operating expenses of the VK Fund for the period ended December 31,
1994 were 1.38%, 2.09% and 2.14% of the average daily net assets attributable to
Class A, B and C Shares, respectively, which are significantly lower than the
total operating expenses of the AC Fund before giving effect to voluntary
expense reimbursements. For a complete description of the VK Fund's advisory
services, see the respective sections in the VK Fund's Prospectus and Statement
of Additional Information entitled "Investment Advisory Services" and
"Investment Advisory and Other Services -- Investment Advisory Agreement." For a
complete description of the AC Fund's advisory services, see the respective
sections in the AC Fund's Prospectus and Statement of Additional Information
entitled "Investment Advisory Services" and "Investment Advisory Agreement."
In addition, the VK Fund has adopted the Distribution Plan with respect to
each class of its shares pursuant to Rule 12b-1 under the Act and has adopted
the Service Plan with respect to each class of its shares. The Distribution Plan
and the Service Plan provide that the VK Fund can pay up to 0.25%, 1.00% and
1.00% of the VK Fund's average daily net assets attributable to the Class A, B
and C Shares,
8
<PAGE> 14
respectively, for reimbursement of certain distribution-related expenses and for
the provision of ongoing services to shareholders. The Distribution Plan and the
Service Plan are being implemented through an agreement with Van Kampen American
Capital Distributors, Inc. ("VKAC Distributors"), the distributor of each class
of the VK Fund's shares, sub-agreements between VKAC Distributors and members of
the National Association of Securities Dealers, Inc. (the "NASD") who are acting
as securities dealers and NASD members or eligible non-members who are acting as
brokers or agents and similar agreements between the VK Fund and banks who are
acting as brokers for their customers that may provide their customers or
clients certain services or assistance. For a complete description of these
arrangements with respect to the VK Fund, see the section in the VK Fund's
Prospectus entitled "The Distribution and Service Plans." For a complete
description of these arrangements in respect of the AC Fund, see the respective
sections in the AC Fund's Prospectus and Statement of Additional Information
entitled "Distribution Plans."
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES
Generally, Class A Shares of the VK Fund are sold at net asset value
applicable at the time of such sale, plus a sales charge of up to 5.75% of the
offering price (which percentage is reduced on investments of $50,000 or more),
and are redeemable at their net asset value applicable at the time of
redemption. Class A shares of the AC Fund are sold at net asset value applicable
at the time of such sale, plus a sales charge of up to 4.75% of the offering
price (which percentage is reduced on investments of $100,000 or more), and are
redeemable at their net asset value applicable at the time of redemption.
Purchases of Class A shares of the VK Fund or the AC Fund in amounts of
$1,000,000 or more are not subject to an initial sales charge but a contingent
deferred sales charge of 1% may be imposed on certain redemptions made within
one year of purchase. Class A Shares of the VK Fund acquired in the
Reorganization will not be subject to a sales charge.
Generally, Class B shares do not incur a sales charge when they are purchased,
but generally are subject to a contingent deferred sales charge if redeemed
within a specified period of time from the date of purchase. Class B Shares of
the VK Fund are subject to a contingent deferred sales charge equal to 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 to zero over a six year period. Class B shares of the AC Fund 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 to
zero over a five year period. However, Class B Shares of the VK Fund acquired in
the Reorganization will remain subject to the contingent deferred sales charge
applicable to Class B shares of the AC Fund.
9
<PAGE> 15
Generally, Class C shares do not incur a sales charge if redeemed after the
first year of purchase. Both Class C Shares of the VK Fund and Class C shares of
the AC Fund are subject to a contingent deferred sales charge equal to 1.00% of
the lesser of the then current net asset value or the original purchase price on
such shares redeemed during the first year after purchase and do not incur a
sales charge if redeemed after the first year from the date of purchase. Class C
Shares of the AC Fund automatically convert to Class A Shares after ten years.
Class C Shares of the VK Fund have no such automatic conversion feature.
However, Class C Shares of the VK Fund acquired in the Reorganization will
remain subject to the conversion schedule applicable to Class C shares of the AC
Fund. See "Fee Comparisons" below.
With respect to fixed income securities, the VK Fund and the AC Fund use
different pricing methodologies in calculating net asset value per share, each
of which is widely used and generally accepted in the mutual fund industry. In
determining net asset value per share, the VK Fund generally values fixed income
portfolio securities once daily by using prices equal to the mean of the last
reported bid and ask price of such securities as of 5:00 p.m. Eastern time. When
calculating the net assets of the AC Fund in accordance with this pricing
methodology, the net asset value per share would have been $9.13, $9.12 and
$9.11 on July 21, 1995 for Classes A, B and C, respectively. The AC Fund,
however, generally computes net asset value per share by valuing fixed income
securities using the last reported bid price. When calculating the net assets of
the AC Fund in accordance with this pricing methodology, the net asset value per
share was $9.12, $9.11 and $9.10 on July 21, 1995 for Classes A, B and C,
respectively. In connection with the Reorganization, the net assets of the AC
Fund will be calculated using the current pricing methodology of the VK Fund.
For this reason the value of the VK Fund Shares received in connection with the
Reorganization may be approximately equal in value to the shares of the AC Fund
held immediately prior to the Reorganization rather than identical in value.
The minimum initial investment with respect to each class of shares in the VK
Fund and the AC Fund is $500, although Shares of the VK Fund acquired in
connection with the Reorganization will not be subject to the minimum investment
limitation. The minimum subsequent investment in the VK Fund and the AC Fund is
$25. For a complete description of these arrangements with respect to the VK
Fund, see the section in the VK Fund's Prospectus entitled "Purchase of Shares."
For a complete description of these arrangements with respect to the AC Fund,
see the respective sections in the AC Fund's Prospectus and Statement of
Additional Information entitled "Purchase of Shares" and "Purchase and
Redemption of Shares."
Shares of either the AC Fund or the VK Fund may be purchased by check, by
electronic transfer or by bank wire and offer exchange privileges among all
other
10
<PAGE> 16
Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors (except Van Kampen American Capital Government Target Fund).
Shares of the VK Fund and the AC Fund properly presented for redemption may be
redeemed or exchanged at the next determined net asset value per share (subject
to any applicable deferred sales charge). Shares of either the AC Fund or the VK
Fund may be redeemed or exchanged by mail or by special redemption privileges
(telephone exchange, telephone redemption, or electronic transfer). If a
shareholder of either fund attempts to redeem shares within a short time after
they have been purchased by check, the respective fund may delay payment of the
redemption proceeds until such fund can verify that payment for the purchase of
the shares has been (or will be) received. No further purchases of the shares of
the AC Fund may be made after the date on which the shareholders of the AC Fund
approve the Reorganization, and the stock transfer books of the AC Fund will be
permanently closed as of the date of Closing. Only redemption requests and
transfer instructions received in proper form by the close of business on the
day prior to the date of Closing will be fulfilled by the AC Fund. Redemption
requests or transfer instructions received by the AC Fund after that date will
be treated by the AC Fund as requests for the redemption or instructions for
transfer of the shares of the VK Fund credited to the accounts of the
shareholders of the AC Fund. Redemption requests or transfer instructions
received by the AC Fund after the close of business on the day prior to the date
of Closing will be forwarded to the VK Fund. For a complete description of these
redemption arrangements, see the section in the VK Fund's Prospectus entitled
"Redemption of Shares," and the respective sections in the AC Fund's Prospectus
and Statement of Additional Information entitled "Redemption of Shares" and
"Purchase and Redemption of Shares."
11
<PAGE> 17
The differences in the distribution, purchase and redemption procedures and
fee structure of the Shares of the VK Fund and the shares of the AC Fund are
highlighted in the table below.
FEE COMPARISONS
<TABLE>
<CAPTION>
VK AC
CLASS A SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. 5.75%(1) 4.75% 5.75%(1)
Maximum Deferred Sales Charge
(as a percentage of the lower of the original
purchase price or redemption proceeds)........... None None None
ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.65% 0.65% (2) 0.65%
Rule 12b-1 Fees.................................... 0.30%(5) 0.15% 0.25%
Other Expenses..................................... 0.43% 1.51% (2) 0.42%
Total Fund Operating Expenses
(before waivers and reimbursements).............. 1.38% 2.31% (2) 1.32%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(before waivers and reimbursements)(6)
One Year......................................... $ 71 $ 70 $ 70
Three Years...................................... $ 99 $ 116 $ 97
Five Years....................................... $ 129 $ 165 $ 126
Ten Years........................................ $ 214 $ 300 $ 207
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(before waivers and reimbursements)(6)
One Year......................................... $ 71 $ 70 $ 70
Three Years...................................... $ 99 $ 116 $ 97
Five Years....................................... $ 129 $ 165 $ 126
Ten Years........................................ $ 214 $ 300 $ 207
</TABLE>
12
<PAGE> 18
<TABLE>
<CAPTION>
VK AC
CLASS A SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
Total Fund Operating Expenses
(after waivers and reimbursements)............... 1.38% 1.42% 1.32%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(after waivers and reimbursements)(6)
One Year......................................... $ 71 $ 61 $ 70
Three Years...................................... $ 99 $ 90 $ 97
Five Years....................................... $ 129 $ 121 $ 126
Ten Years........................................ $ 214 $ 210 $ 207
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(after waivers and reimbursements)(6)
One Year......................................... $ 71 $ 61 $ 70
Three Years...................................... $ 99 $ 90 $ 97
Five Years....................................... $ 129 $ 121 $ 126
Ten Years........................................ $ 214 $ 210 $ 207
CLASS B SHARES
- ---------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge (as a percentage of
the lower of the original purchase price or
redemption proceeds)............................. 4.00%(4) 4.00% (3) 4.00%(4)
ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.65% 0.65% (2) 0.65%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.44% 1.52% (2) 0.43%
Total Fund Operating Expenses
(before waivers and reimbursements).............. 2.09% 3.17% (2) 2.08%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(before waivers and reimbursements)(6)
One Year......................................... $ 61 $ 72 $ 61
Three Years...................................... $ 100 $ 128 $ 100
Five Years....................................... $ 127 $ 181 $ 127
Ten Years........................................ $ 215 $ 310 $ 212
</TABLE>
13
<PAGE> 19
<TABLE>
<CAPTION>
VK AC
CLASS B SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(before waivers and reimbursements)(6)
One Year......................................... $ 21 $ 32 $ 21
Three Years...................................... $ 65 $ 98 $ 65
Five Years....................................... $ 112 $ 166 $ 112
Ten Years........................................ $ 215 $ 310 $ 212
Total Fund Operating Expenses
(after waiver and reimbursements)................ 2.09% 2.28% 2.08%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(after waivers and reimbursements)(6)
One Year......................................... $ 61 $ 63 $ 61
Three Years...................................... $ 100 $ 101 $ 100
Five Years....................................... $ 127 $ 137 $ 127
Ten Years........................................ $ 215 $ 220 $ 212
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(after waivers and reimbursements)(6)
One Year......................................... $ 21 $ 23 $ 21
Three Years...................................... $ 65 $ 71 $ 65
Five Years....................................... $ 112 $ 122 $ 112
Ten Years........................................ $ 215 $ 220 $ 212
CLASS C SHARES
- ---------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES
Maximum Sales Load Imposed on Purchase of a Share
(as a percentage of Offering Price).............. None None None
Maximum Deferred Sales Charge
(as a percentage of the lower of the original
purchase price or redemption proceeds)........... 1.00% 1.00% 1.00%
ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES
(as a percentage of average net assets)
Management Fees.................................... 0.65% 0.65% (2) 0.65%
Rule 12b-1 Fees.................................... 1.00% 1.00% 1.00%
Other Expenses..................................... 0.49% 1.51% (2) 0.48%
Total Fund Operating Expenses
(before waivers and reimbursements).............. 2.14% 3.16% (2) 2.13%
</TABLE>
14
<PAGE> 20
<TABLE>
<CAPTION>
VK AC
CLASS C SHARES FUND* FUND** PRO FORMA
- --------------------------------------------------- ----- ------ ---------
<S> <C> <C> <C>
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(before waivers and reimbursements)(6)
One Year......................................... $ 32 $ 42 $ 32
Three Years...................................... $ 67 $ 97 $ 67
Five Years....................................... $ 115 $ 165 $ 114
Ten Years........................................ $ 247 $ 347 $ 246
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(before waivers and reimbursements)(6)
One Year......................................... $ 22 $ 32 $ 22
Three Years...................................... $ 67 $ 97 $ 67
Five Years....................................... $ 115 $ 165 $ 114
Ten Years........................................ $ 247 $ 347 $ 246
Total Fund Operating Expenses
(after waivers and reimbursements)............... 2.14% 2.27% 2.13%
Expense Example of Total Operating Expenses
Assuming Redemption at the End of the Period
(after waivers and reimbursements)(6)
One Year......................................... $ 32 $ 33 $ 32
Three Years...................................... $ 67 $ 71 $ 67
Five Years....................................... $ 115 $ 122 $ 114
Ten Years........................................ $ 247 $ 261 $ 246
Expense Example of Total Operating Expenses
Assuming No Redemption at the End of the Period
(after waivers and reimbursements)(6)
One Year......................................... $ 22 $ 23 $ 22
Three Years...................................... $ 67 $ 71 $ 67
Five Years....................................... $ 115 $ 122 $ 114
Ten Years........................................ $ 247 $ 261 $ 246
</TABLE>
- ---------------
(1) Class A shares of the VK Fund received pursuant to the Reorganization will
not be subject to a sales charge upon purchase.
(2) Before voluntary expense waiver. After application of the expense waiver,
Management Fees, Other Expenses, and Total Fund Operating Expenses would be
0.00%, 1.27% and 1.42% for Class A shares, 0.00%, 1.28% and 2.28% for Class
B shares and 0.00%, 1.27% and 2.27% for Class C shares, respectively.
(3) Class B shares of the AC Fund are subject to a contingent deferred sales
charge equal to 4.00% of the lesser of the then current net asset value or
the
15
<PAGE> 21
original purchase price on Class B shares redeemed during the first year
after purchase, which charge is reduced each year thereafter to 0.00% over a
five year period as follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 --
3.00%; Year 4 -- 2.50%; Year 5 -- 1.50%.
(4) Class B Shares of the VK Fund 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 thereafter to 0.00% over a six year
period as follows: Year 1 -- 4.00%; Year 2 -- 3.75%; Year 3 -- 3.50%; Year 4
-- 2.50%; Year 5 -- 1.50%; Year 6 -- 1.00%. However, Class B Shares acquired
in the Reorganization will be subject to the contingent deferred sales
charge schedule applicable to Class B shares of the AC Fund.
(5) As of June 30, 1995, the Rule 12b-1 fees for the VK Fund's Class A Shares
was reduced from 0.30% to 0.25%.
(6) Expenses examples reflect what an investor would pay on a $1,000 investment,
assuming a 5% annual return with either redemption or no redemption at the
end of each time period as noted in the above table. The Pro Forma column
reflects expenses estimated to be paid on new shares purchased from the
combined fund subsequent to the Reorganization. For those shares issued in
connection with the Reorganization, the following expenses would be incurred
based upon the purchase of the AC Fund immediately prior to the
Reorganization and the Pro Forma expense ratio:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
With Redemption at End of Period
Class A............................... $ 70 $97 $126 $ 207
Class B............................... $ 61 $95 $127 $ 204
Class C............................... $ 32 $67 $114 $ 246
Without Redemption at End of Period
Class A............................... $ 70 $97 $126 $ 207
Class B............................... $ 21 $65 $112 $ 204
Class C............................... $ 22 $67 $114 $ 246
</TABLE>
* For the semi-annual period ended December 31, 1994 on an annualized basis.
** For the semi-annual period ended March 31, 1995 on an annualized basis.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Code"). If the Reorganization so qualifies, in general a shareholder of
the AC Fund will recognize no gain or loss upon the receipt of solely the shares
of the VK Fund pursuant to the Reorganization. Additionally, the AC Fund would
not recognize any gain or loss as a result of the exchange of all of its assets
for the shares of the VK Fund or as a result of its liquidation. The VK Fund
expects that it will not recognize any gain or loss as a result of the
Reorganization, that it will take a carryover basis in the assets acquired from
the AC Fund and that its holding
16
<PAGE> 22
period of such assets will include the period during which the assets were held
by the AC Fund. See "The Proposed Reorganization -- Federal Income Tax
Consequences."
The above information is only a summary of more complete information contained
in this Proxy Statement/Prospectus and the related Statement of Additional
Information.
REASONS FOR THE PROPOSED REORGANIZATION
On December 20, 1994, The Van Kampen Merritt Companies, Inc. acquired from The
Travelers Inc. all of the outstanding capital stock of American Capital
Management & Research, Inc., the parent company of the AC Adviser. Immediately
after the acquisition, American Capital Management & Research, Inc. was merged
into The Van Kampen Merritt Companies, Inc. and the combined entity was renamed
Van Kampen American Capital, Inc. ("VKAC"). The VK Adviser and the AC Adviser
currently are each wholly-owned subsidiaries of VKAC.
On February 10, 1995, the VK Board and the AC Board held a joint meeting to
discuss with management ("Management") of the VK Adviser and the AC Adviser the
costs and potential benefits to shareholders of, among other things, (i)
combining certain funds advised by the VK Adviser and the AC Adviser, including
the VK Fund and the AC Fund in order to seek to achieve certain economies of
scale and efficiencies, (ii) permitting exchangeability of shares between funds
advised by the VK Adviser and the AC Adviser, (iii) selecting a common transfer
agent to facilitate exchangeability and enhance shareholder services, and (iv)
consolidating the VK Board and the AC Board into a combined board of trustees
(collectively, the "Consolidation").
The VK Board and the AC Board created a joint committee (the "Joint
Committee") to consider the possible costs and benefits to shareholders
associated with the proposed Consolidation, including the combination of the VK
Fund and the AC Fund. The Joint Committee held meetings on February 20, 1995,
March 27, 1995 and April 3, 1995 to consider issues relating to the
Consolidation, review information requested from and provided by Management and
review information requested from and provided by third-party analytical
services.
The VK Board and the AC Board held joint meetings on March 14, 1995 and April
6-7, 1995 to review the findings and recommendations of the Joint Committee. The
VK Board unanimously approved each element of the Consolidation, including the
combination of the VK Fund and AC Fund, on April 7, 1995, subject to approval of
the Consolidation by the AC Board. The AC Board met May 11, 1995, and
unanimously approved each element of the Consolidation, including the
combination of the VK Fund and the AC Fund. Each of the VK Board and the AC
17
<PAGE> 23
Board also approved submitting the necessary proposals to the respective
shareholders of the VK Fund and the AC Fund to effect the Consolidation.
At separate shareholder meetings held on July 21, 1995, shareholders of the VK
Fund and the AC Fund approved the reorganization of the VK Fund and the AC Fund
into Delaware business trusts (or series thereof) and the combination of the VK
Board and the AC Board. Shareholders of the AC Fund are now being asked to
approve its merger into the VK Fund in order to (i) eliminate the duplication of
services that currently exists as a result of the separate operations of the
funds, (ii) seek to achieve economies of scale by combining the assets of the
funds and (iii) potentially reduce transaction costs and obtain greater
portfolio diversity.
In connection with approving the combination of the AC Fund with the VK Fund,
the AC Board considered the costs resulting from the separate operations of the
AC Fund and the VK Fund in light of their substantially similar investment
objectives, policies and restrictions. The AC Board also considered the
potential expense savings, economies of scale, reduced per-share expenses and
benefits to the portfolio management process that could result from combining
the assets and operations of the AC Fund and the VK Fund. In this regard, the AC
Board reviewed information provided by the AC Adviser, VK Adviser and VKAC
Distributors, relating to the anticipated cost savings to the shareholders of
the AC Fund and the VK Fund as a result of the Reorganization.
In particular, the AC Board considered the probability that the elimination of
duplicative operations and the increase in asset levels of the VK Fund after the
Reorganization would result in the following potential benefits for investors,
although there can, of course, be no assurances in this regard:
(1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the AC Fund and the VK
Fund should eliminate the duplication of services that currently exists as
a result of their separate operations. For example, currently the AC Fund
and the VK Fund are managed separately by different affiliated investment
advisers. Consolidating the separate operations of the AC Fund with those
of the VK Fund should promote more efficient operations on a more cost-
effective basis.
(2) ACHIEVEMENT OF REDUCED PER SHARE EXPENSES AND ECONOMIES OF
SCALE. Combining the assets of the AC Fund with the assets of the VK Fund
also should lead to reduced expenses, on a per share basis, by allowing
fixed and relatively fixed costs, such as accounting, legal and printing
expenses, to be spread over a larger asset base. An increase in the net
asset levels of the VK Fund also could result in achieving future
economies of scale, which should also reduce per share expenses. Any
significant reductions in expenses on a per share basis should, in turn,
have a favorable effect on the relative total return of the VK Fund.
18
<PAGE> 24
(3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset levels also
should enable the VK Fund to purchase larger individual portfolio
investments that may result in reduced transaction costs or other more
favorable pricing and provide the opportunity for greater portfolio
diversity.
In determining whether to recommend approval of the Reorganization to
shareholders of the AC Fund, the AC Board considered a number of factors,
including, but not limited to: (1) capabilities and resources of VK Adviser and
other service providers to the VK Fund in the areas of marketing, investment and
shareholder services; (2) expenses and advisory fees applicable to the AC Fund
and the VK Fund before the Reorganization and the estimated expense ratios of
the VK Fund after the Reorganization; (3) the comparative investment performance
of the AC Fund and the VK Fund, as well as the performance of the VK Fund
compared to its peers; (4) the terms and conditions of the Agreement and whether
the Reorganization would result in dilution of AC Fund shareholder interests;
(5) the advantages of eliminating the competition and duplication of effort
inherent in marketing two funds having similar investment objectives, in
addition to the economies of scale realized through the combination of the two
funds; (6) the compatibility of the Funds' service features available to
shareholders, including the retention of applicable holding periods and exchange
privileges; (7) the costs estimated to be incurred by the respective funds as a
result of the Reorganization; and (8) the anticipated tax consequences of the
Reorganization. Based upon these as well as other factors, the AC Board
unanimously determined that the Reorganization is in the best interests of the
shareholders of the AC Fund.
B. RISK FACTORS
NATURE OF INVESTMENT
Each of the VK Fund and the AC Fund invest primarily in Utility Securities.
Because of the policy of concentrating their respective investments in Utility
Securities, the Funds may be more susceptible than an investment company without
such a policy to any single economic, political or regulatory occurrence
affecting issuers of Utility Securities. Investment in either of the VK Fund or
the AC Fund may not be appropriate for all investors.
Certain investment policies and practices of the VK Fund involve special
risks. Investment in Utility Securities involves risks of economic, political or
regulatory occurrences affecting issuers of Utility Securities. Such risks
include increases in fuel and other operating costs, high interest expenses,
costs associated with environmental and nuclear safety regulation, service
interruptions, the effects of economic slowdowns, surplus capacity, competition
and changes in the overall regulatory environment. Investment in equity
securities involves risk of fluctuation in value as a result of changes in
market conditions and in actual or perceived changes in the business prospects
of the issuer. Investments in income securities are
19
<PAGE> 25
subject to fluctuations in value in response to changes in market rates of
interest and in actual or perceived changes in the credit quality of the issuer.
Investment in lower grade income securities are subject to greater credit and
market risk. Such securities may be less liquid, more volatile and have less
publicly available information as compared to higher grade income securities.
Other investment policies and practices involve special risks, including
investment in foreign securities, use of options, futures, interest rate and
currency transactions, entering into when issued and delayed delivery
transactions, use of repurchase and reverse repurchase agreements and lending of
portfolio securities. For a more complete discussion of the risks of an
investment in the VK Fund, see the sections of the VK Fund Prospectus entitled
"Investment Objective and Policies" and "Investment Practices."
Unlike the AC Fund, the VK 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 organization or if
unrated, determined by VK 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.
Unlike the AC Fund, the VK 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 such 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. The VK Fund has no current
intention to borrow money other than for temporary purposes. Accordingly, the VK
Fund will not acquire additional utility securities during any period in which
its borrowings exceed 5% of the VK Fund's total assets. The VK Fund will borrow
only when the VK Adviser believes that such borrowings will benefit the VK Fund.
Borrowing by the VK 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 VK Fund's portfolio. Although
the principal of such borrowings will be fixed, the VK Fund's assets may change
in value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the VK 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 VK Fund will have to pay, the VK Fund's
net income will be greater than if borrowing were not used. Conversely, if the
income from the
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<PAGE> 26
assets retained with borrowed funds is not sufficient to cover the cost of
borrowing, the net income of the VK Fund will be less than if borrowing were not
used, and therefore the amount available for distribution to stockholders as
dividends will be reduced.
Both the VK Fund and the AC Fund may engage in certain options and financial
futures transactions. For a complete description of the VK Fund's investment
practices, see the section in the VK Fund's Prospectus entitled "Investment
Practices" and "Investment Objective and Policies" and the sections of the AC
Fund's Prospectus entitled "Investment Practices" and "Investment Objectives and
Policies" and in the section of the Statement of Additional Information entitled
"Investment Policies and Techniques."
C. INFORMATION ABOUT THE FUNDS
VK Fund. Information about the VK Fund is included in its current Prospectus
dated July 31, 1995, which accompanies this Proxy Statement/Prospectus.
Additional information about the VK Fund is included in its current Statement of
Additional Information dated the same date as the VK Fund Prospectus. Copies of
the VK Fund Statement of Additional Information may be obtained without charge
by calling (800) 341-2911. The VK Fund files proxy material, reports and other
information with the SEC. These reports can be inspected and copied at the
Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can also be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates.
AC Fund. Information about the AC Fund is included in its current Prospectus
dated August 1, 1995. Additional information about the AC Fund is included in
its current Statement of Additional Information dated the same date as the AC
Fund Prospectus. Copies of the AC Fund's Statement of Additional Information may
be obtained without charge by calling (800) 421-5666. The AC Fund files proxy
material, reports and other information with the SEC. These reports can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C. 20549
at prescribed rates.
Management's Discussion of VK Fund Performance as of the Annual Report dated
June 30, 1994 and Management's Discussion of AC Fund Performance as of the
Annual Report dated September 30, 1994 are attached hereto as Exhibit B.
The VK Fund, as a series of VKAC Equity Trust, a Delaware business trust, and
the AC Fund, as a Delaware business trust, are governed by their respective
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<PAGE> 27
Agreements and Declarations of Trust ("Declaration"), their respective Bylaws
and applicable Delaware law.
D. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement, a copy of which
is attached hereto as Exhibit A. The affirmative vote of a majority of the
outstanding shares entitled to vote is required to approve the Agreement at a
meeting of shareholders at which a quorum is present.
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the VK Fund series of the VKAC Equity Trust will
acquire all of the assets and liabilities of the AC Fund on the date of the
Closing in exchange for Class A, B and C Shares, of the VK Fund.
Subject to AC Fund shareholder approval of the Reorganization, the closing
(the "Closing") will occur within 15 business days after the later of the
receipt of all necessary regulatory approvals and the final adjournment of the
Special Meeting or such later date as soon as practicable thereafter as the VK
Fund and the AC Fund may mutually agree.
On the date of Closing, the AC Fund will transfer to the VK Fund all of the
assets and liabilities of the AC Fund. The VKAC Equity Trust will in turn
transfer to the AC Fund a number of Class A, B and C Shares, of the VK Fund
approximately equal in value to the value of the net assets of the AC Fund
transferred to the VK Fund as of the date of Closing, as determined in
accordance with the valuation method described in the VK Fund's then current
prospectus. In order to minimize any potential for undesirable federal income
and excise tax consequences in connection with the Reorganization, the VK Fund
and the AC Fund may distribute on or before the Closing all or substantially all
of their respective undistributed net investment income (including net capital
gains) as of such date.
The AC Fund expects to distribute the Class A, B and C Shares of the VK Fund
to the shareholders of the AC Fund promptly after the Closing and then to
dissolve pursuant to a plan of liquidation and dissolution adopted by the AC
Board.
The AC Fund and the VKAC Equity Trust have made certain standard
representations and warranties to each other regarding their respective
capitalization, status and conduct of business.
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<PAGE> 28
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. approval of the Reorganization by the AC Fund's shareholders;
2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws including without limitation exemptive
relief under Section 17(a) of the Act for which the VK Fund filed an
application with the SEC on July 12, 1995 (no assurance can be given that
such relief will be obtained);
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
5. the effectiveness under applicable law of the registration statement of
the VK Fund of which this Proxy Statement/Prospectus forms a part and the
absence of any stop orders under the Securities Act pertaining thereto;
and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the AC
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse affect on the interests of AC Fund's shareholders.
The Agreement may also be terminated by the non-breaching party if there has
been a material misrepresentation, material breach of any representation or
warranty, material breach of contract or failure of any condition to Closing.
The AC Board recommends that you vote to approve the Reorganization, as it
believes the Reorganization is in the best interests of the AC Fund's
shareholders and that the interests of the AC Fund's existing shareholders will
not be diluted as a result of consummation of the proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF BENEFICIAL INTEREST
Beneficial interests in the VK Fund being offered hereby are represented by
transferable Class A, B and C Shares, par value $.01 per share. The VKAC Equity
Trust's Declaration permits the trustees of the VKAC Equity Trust, as they deem
necessary or desirable, to create one or more separate investment portfolios and
to
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<PAGE> 29
issue a separate series of shares for each portfolio and subject to compliance
with the Act to further sub-divide the shares of a series into one or more
classes of shares for such portfolio.
VOTING RIGHTS OF SHAREHOLDERS
Holders of shares of the VK Fund are entitled to one vote per share on matters
as to which they are entitled to vote; however, separate votes generally are
taken by each series on matters affecting an individual series. The Declaration
of VKAC Equity Trust and the Declaration of AC Fund are substantially identical,
except that the Declaration of the VKAC Equity Trust permits the VK Board or
shareholders to remove a trustee with or without cause by the act of two-thirds
of such trustees or shareholders, respectively. The Declaration of the AC Fund
permits (i) the AC Board to remove a trustee with cause by the act of two-thirds
of the trustees and (ii) shareholders holding a majority of the shares of each
series outstanding to remove a trustee with or without cause. The Declaration of
the AC Fund also requires the approval of 80% of the trustees in office or
majority vote of the shares of each series then outstanding to amend these
provisions.
Each of the VK Fund and the AC Fund operate as a diversified, open-end
management investment company registered with the SEC under the Act. Therefore,
in addition to the specific voting rights described above, shareholders of the
VK Fund, as well as shareholders of the AC Fund, are entitled, under current
law, to vote with respect to certain other matters, including changes in
fundamental investment policies and restrictions and the ratification of the
selection of independent auditors. Moreover, under the Act, shareholders owning
not less than 10% of the outstanding shares of the AC Fund or VK Fund may
request that the respective board of trustees call a shareholders' meeting for
the purpose of voting upon the removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the VK Fund will establish an account for
each AC Fund shareholder containing the appropriate number of Shares of the VK
Fund. The shareholder services and shareholder programs of the VK Fund and the
AC Fund have already been substantially conformed as part of the Consolidation.
Shareholders of the AC Fund who are accumulating AC Fund shares under the
dividend reinvestment plan, or who are receiving payment under the systematic
withdrawal plan with respect to AC Fund shares, will retain the same rights and
privileges after the Reorganization in connection with the VK Fund Class A, B
and C Shares, respectively, received in the Reorganization through substantially
similar plans maintained by the VK Fund. Van Kampen American Capital Trust
Company will continue to serve as custodian for the assets of AC Fund
shareholders held in IRA accounts after the Reorganization. Such IRA investors
will be sent appropriate
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<PAGE> 30
documents to confirm Van Kampen American Capital Trust Company's custodianship.
It will not be necessary for shareholders of the AC Fund to whom certificates
have been issued to surrender their certificates. Upon liquidation of the AC
Fund, such certificates will become null and void.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the AC Fund and
shareholders of the VK Fund. It is based upon the Code, legislative history,
Treasury regulations, judicial authorities, published positions of the Internal
Revenue Service (the "Service") and other relevant authorities, all as in effect
on the date hereof and all of which are subject to change or different
interpretations (possibly on a retroactive basis). This summary is limited to
shareholders who hold their AC Fund shares as capital assets. No advance rulings
have been or will be sought from the Service regarding any matter discussed in
this Proxy Statement/Prospectus. Accordingly, no assurances can be given that
the Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisors to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
VKAC Equity Trust and the AC Fund receive an opinion from O'Melveny & Myers
substantially to the effect that for federal income tax purposes:
1. The acquisition by the VKAC Equity Trust of the assets of the AC Fund in
exchange solely for Class A, B or C Shares of the VK Fund and the assumption by
the VK Fund of the liabilities of the AC Fund will qualify as a tax-free
reorganization within the meaning of Section 368(a)(1) of the Code.
2. No gain or loss will be recognized by the AC Fund or the VK Fund upon the
transfer to the VKAC Equity Trust of the assets of the AC Fund in exchange
solely for the Class A, B or C Shares of the VK Fund and the assumption by the
VK Fund of the liabilities of the AC Fund.
3. The VK Fund's basis in the AC Fund assets received in the Reorganization
will, in each instance, equal the basis in such assets in the hands of the AC
Fund immediately prior to the transfer, and the VK Fund's holding period of such
assets will, in each instance, include the period during which the assets were
held by the AC Fund.
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<PAGE> 31
4. No gain or loss will be recognized by the shareholders of the AC Fund upon
the exchange of their shares of the AC Fund solely for the Class A, B or C
Shares, respectively, of the VK Fund.
5. The aggregate tax basis of the Class A, B and C Shares of the VK Fund
received by the shareholders of the AC Fund will be the same as the aggregate
tax basis of the shares of the AC Fund surrendered in exchange therefor.
6. The holding period of the Class A, B and C Shares of the VK Fund received
by the shareholders of the AC Fund will include the holding period of the shares
of the AC Fund surrendered in exchange therefor if such surrendered shares of
the AC Fund are held as capital assets by such shareholder.
In rendering its opinion, O'Melveny & Myers may rely upon certain
representations of the management of the AC Fund and the VKAC Equity Trust and
assume that the Reorganization will be consummated as described in the Agreement
and that redemptions of shares of the AC Fund occurring prior to the Closing
will consist solely of redemptions in the ordinary course of business.
The VK Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the AC Fund and its shareholders.
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<PAGE> 32
CAPITALIZATION
The following table sets forth the capitalization of the AC Fund and the VK
Fund as of March 31, 1995 and the pro forma combined capitalization of both as
if the Reorganization had occurred on that date. These numbers may differ at the
time of Closing.
CAPITALIZATION TABLE AS OF MARCH 31, 1995
<TABLE>
<CAPTION>
VK FUND AC FUND PRO FORMA
----------- ---------- -----------
<S> <C> <C> <C>
NET ASSETS
Class A Shares............ $ 50,205,767(1) $ 8,679,874 $ 58,885,641(1)
Class B Shares............ 80,561,804 14,272,635 94,834,439
Class C Shares............ 1,149,726 2,345,602 3,495,328
------------ ----------- ------------
Total.............. $131,917,297 $25,298,111 $157,215,408
============ =========== ============
NET ASSET VALUE PER SHARE
Class A Shares............ $12.76 $8.72 $12.76
Class B Shares............ 12.79 8.71 12.79
Class C Shares............ 12.78 8.70 12.78
SHARES OUTSTANDING
Class A Shares............ 3,933,453(1) 995,792 4,613,694(1)
Class B Shares............ 6,298,006 1,638,873 7,413,927
Class C Shares............ 89,941 269,483 273,478
----------- ---------- -----------
Total.............. 10,321,400 2,904,148 12,301,099
=========== ========== ===========
SHARES AUTHORIZED
Class A Shares............ Unlimited Unlimited Unlimited
Class B Shares............ Unlimited Unlimited Unlimited
Class C Shares............ Unlimited Unlimited Unlimited
</TABLE>
- ---------------
(1) Includes $1,468 and 115 shares representing Class D shares outstanding as of
March 31, 1995.
COMPARATIVE PERFORMANCE INFORMATION
The average annual total return for the AC Fund for the one-year period ended
March 31, 1995 and for the period beginning December 1, 1993 (the date shares of
the AC Fund were first offered for sale to the public) through March 31, 1995
were (1.51)% and (5.13)%, in respect of its Class A shares; (.14)% and (4.24)%
in respect of its Class B shares; and 2.72% and (1.52)% in respect of its Class
C shares. The average annual total return for VK Fund for the one-year period
ended March 31, 1995 and for the period beginning July 23, 1993 (the date Class
A and B Shares of the VK Fund were first offered for sale to the public) through
March 31,
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<PAGE> 33
1995 were (5.23)% and (5.85)% in respect of its Class A Shares; (3.91)% and
(5.15)% in respect of its for Class B Shares and for the one-year period ended
March 31, 1995 and the period beginning August 13, 1993 (the date Class C Shares
of the VK Fund were first offered for sale to the public) through March 31, 1995
were (.95)% and (3.77)% in respect of its Class C Shares. The return figures
include the effect of the maximum sales charge applicable to purchases and sales
of Shares of both the VK Fund and the AC Fund.
The total return figures above assume reinvestment of all dividends and
distributions. They are not necessarily indicative of future results. The
performance of a Fund is a result of conditions in the securities markets,
portfolio management and operating expenses. Although information such as that
shown above is useful in reviewing a Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE VK FUND
Approval of the Reorganization will constitute the ratification by AC Fund
shareholders of the investment objective, policies and restrictions,
Distribution Plan and Advisory Agreement of the VK Fund. For a discussion of the
investment objective, policies and restrictions of the VK Fund, see "Summary --
Comparisons of the VK Fund and AC Fund" and the VK Fund Prospectus accompanying
this Proxy Statement/Prospectus. Approval of the Reorganization will constitute
approval of amendments to any of the fundamental investment restrictions of the
AC Fund that might otherwise be interpreted as impeding the Reorganization, but
solely for the purpose of and to the extent necessary for, consummation of the
Reorganization.
LEGAL MATTERS
Certain legal matters concerning the issuance of Class A, B and C Shares of
the VK Fund will be passed upon by Skadden, Arps, Slate, Meagher & Flom, 333
West Wacker Drive, Chicago, Illinois 60606, which serves as counsel to the VK
Fund. Wayne W. Whalen, a partner of Skadden, Arps, Slate, Meagher & Flom, is a
Trustee of the VKAC Equity Trust. On July 21, 1995, Mr. Whalen was elected as a
Trustee of the AC Fund.
Certain legal matters concerning the federal income tax consequences of the
Reorganization will be passed upon by O'Melveny & Myers, 400 South Hope Street,
Los Angeles, California 90071, which serves as counsel to AC Fund. Lawrence J.
Sheehan, a former partner of and currently of counsel to said firm, is a Trustee
of the AC Fund. On July 21, 1995, Mr. Sheehan was elected as a Trustee of the
VKAC Equity Trust.
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<PAGE> 34
EXPENSES
The expenses of the Reorganization, including expenses incurred by the AC Fund
will be borne by the VK Fund after the Reorganization. Accordingly, the VK Fund
and its shareholders after the Reorganization will bear such expenses of the
Reorganization. The AC Board has determined that the arrangements regarding the
payment of expenses and other charges relating to the Reorganization are fair
and equitable.
F. RECOMMENDATIONS OF AC BOARD
The AC Board has unanimously approved the Agreement and has determined that
participation in the Reorganization is in the best interests of the shareholders
of the AC Fund. THE AC BOARD RECOMMENDS VOTING FOR THE PROPOSED REORGANIZATION.
OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING
It is not anticipated that any action will be asked of the shareholders of the
AC Fund other than as indicated above, but if other matters are properly brought
before the Special Meeting, it is intended that the persons named in the proxy
will vote in accordance with their judgment.
OTHER INFORMATION
A. SHAREHOLDINGS OF THE AC FUND AND THE VK FUND
At the close of business on July 21, 1995, there were 1,301,664 Class A
shares, 1,706,700 Class B shares and 291,249 Class C shares, respectively, of
the AC Fund.
Certain officers, directors and employees of VKAC own, in the aggregate, not
more than 7% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately on additional 11% of the
common stock of VK/AC Holding, Inc. Advantage Capital Corporation, a retail
broker-dealer affiliate of VKAC Distributors, is a wholly owned subsidiary of
VK/AC Holding, Inc. No officer or trustee of the VK Fund or the AC Fund owns or
would be able to acquire 5% or more of the Common Stock of VK/AC Holding, Inc.
The trustees and officers of the AC Fund as a group own less than 1% of the
outstanding shares of the AC Fund.
As of July 6, 1995, no person was known by management to own beneficially or
of record as much as 5% of the outstanding Class A shares of the AC Fund except
as follows: 21.05% was owned by Van Kampen American Capital Asset Management
Inc., 2800 Post Oak Boulevard, Houston, Texas 77056, 25.69% was owned by Van
29
<PAGE> 35
Kampen American Capital Trust Company, 2800 Post Oak Boulevard, Houston,
Texas 77056 and 6.10% was owned by Smith Barney Inc., 388 Greenwich Street, 22nd
Floor, New York, New York 10013-2375.
As of July 6, 1995, no person was known by management to own beneficially or
of record as much as 5% of the outstanding Class B shares of the AC Fund except
as follows: 21.72% was owned by Van Kampen American Capital Trust Company, 2800
Post Oak Boulevard, Houston, Texas 77056, 15.29% was owned by Donaldson Lufkin
Jenrette, 1 Pershing Plaza, 5th Floor, Jersey City, New Jersey 07399-0002, 5.92%
was owned by National Financial Services Corp., Church Street Station, P.O. Box
3730, New York, New York 10008-3730, 8.96% was owned by PaineWebber, Inc.,
Genises Jungco-Lincoln Harbor, 1000 Harbor Blvd., 6th Floor, Weehawken, New
Jersey 67087-6727 and 6.71% was owned by Smith Barney Inc., 388 Greenwich
Street, 22nd Floor, New York, New York 10013-2375.
As of July 6, 1995, no person was known by management to own beneficially or
of record as much as 5% of the outstanding Class C shares of the AC Fund except
as follows: 4.20% was owned by Van Kampen American Capital Trust Company, 2800
Post Oak Boulevard, Houston, Texas 77056, 15.36% was owned by Donaldson Lufkin
Jenrette, 1 Pershing Plaza, 5th Floor and 49.60% was owned by Smith Barney Inc.,
388 Greenwich Street, 22nd Floor, New York, New York 10013-2375.
At the close of business on July 21, 1995, there were 3,763,987 Class A
shares, 6,031,270 Class B shares and 89,739 Class C shares, respectively, of the
AC Fund.
As of July 17, 1995, the trustees and officers as a group own less than 1% of
the shares of the VK Fund.
To the knowledge of the VK Fund, as of July 17, 1995, no person owned of
record or beneficially 5% or more of the VK Fund's Class A shares or Class B
shares.
As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the VK Fund's Class C shares: Interstate/Johnson Lane, FBO
224-81081-16, Interstate Tower, P.O. Box 1220, Charlotte, NC 28201-1220, 8%;
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%; and LP & Teresa Anderson
Foundation, P.O. Box 190, Miles City, MT 59301-0190, 7%.
B. SHAREHOLDER PROPOSALS
As a general matter, the AC Fund does not intend to hold future regular annual
or special meetings of shareholders unless required by the Act. Any shareholder
who wishes to submit proposals for consideration at a meeting of shareholders of
the VK Fund should send such proposal to the VK Fund at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. To be considered for presentation at a
shareholders' meeting,
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<PAGE> 36
rules promulgated by the SEC Commission require that, among other things, a
shareholder's proposal must be received at the offices of the VK Fund a
reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.
VOTING INFORMATION AND REQUIREMENTS
Each valid proxy given by a shareholder of the AC Fund will be voted by the
persons named in the proxy in accordance with the designation on such proxy on
the Reorganization proposal and as the persons named in the proxy may determine
on such other business as may come before the Special Meeting on which
shareholders are entitled to vote. If no designation is made, the proxy will be
voted by the persons named in the proxy as recommended by the AC Board "FOR"
approval of the Reorganization.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Fund a written notice of revocation, by delivering a
duly executed proxy bearing a later date, or by attending the Meeting and voting
in person.
The giving of a proxy will not affect your right to vote in person if you
attend the Special Meeting and wish to do so.
The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote is required to constitute a quorum at the
Special Meeting. APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE
OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF THE AC FUND ENTITLED
TO VOTE AT THE SPECIAL MEETING AT WHICH A QUORUM IS CONSTITUTED. Shares not
voted with respect to a proposal due to an abstention or broker non-vote will be
deemed votes not cast with respect to such proposal, but such shares will be
deemed present for quorum purposes.
In the event that sufficient votes in favor of the Reorganization are not
received by the scheduled time of the Special Meeting, the persons named in the
proxy may propose and vote in favor of one or more adjournments of the Special
Meeting to permit further solicitation of proxies. If sufficient shares were
present to constitute a quorum, but insufficient votes had been cast in favor of
the Reorganization to approve it, proxies would be voted in favor of adjournment
only if the AC Board determined that adjournment and additional solicitation was
reasonable and in the best interest of the shareholders of the AC Fund, taking
into account the nature of the proposal, the percentage of the votes actually
cast, the percentage of negative votes, the nature of any further solicitation
that might be made and the information provided to shareholders about the
reasons for additional solicitation. Any such adjournment will require the
affirmative vote of the holders of a majority of the outstanding shares voted at
the session of the Special Meeting to be adjourned.
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<PAGE> 37
Proxies of shareholders of the AC Fund are solicited by the AC Board. The cost
of solicitation will be paid by the VK Fund after the Reorganization if the
Reorganization is completed. If the Reorganization is not completed VKAC will
bear the costs associated with the Reorganization. In order to obtain the
necessary quorum at the Special Meeting, additional solicitation may be made by
mail, telephone, telegraph or personal interview by representatives of the VK
Fund, the VK Adviser or VKAC, or by dealers or their representatives. In
addition, such solicitation servicing may also be provided by Applied Mailing
Systems, a solicitation firm located in Boston, Massachusetts, at a cost
estimated to be approximately $5,600, plus reasonable expenses.
August 2, 1995
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
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<PAGE> 38
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as
of July 31, 1995, by and between the Van Kampen American Capital Equity Trust, a
Delaware business trust formed under the laws of the State of Delaware ("VKM
Trust") on behalf of its series, the Van Kampen American Capital Utility Fund
(the "VKM Fund") and the Van Kampen American Capital Utilities Income Fund, a
business trust formed under the laws of the State of Delaware (the "AC Fund").
W I T N E S S E T H:
WHEREAS, on December 20, 1994, (the "Acquisition Date") The Van Kampen
Merritt Companies, Inc. ("TVKMC") acquired all of the issued and outstanding
shares of American Capital Management & Research, Inc. ("American Capital") and
subsequently changed the combined entity's name to Van Kampen American
Capital, Inc.;
WHEREAS, American Capital and TVKMC, through their affiliated
companies, sponsor and manage a number of registered investment companies; and
WHEREAS, Van Kampen American Capital Distributors, Inc., successor by
merger between Van Kampen Merritt Inc. and American Capital Marketing, Inc.,
acts as the sponsor and principal underwriter for both the AC Fund and the VKM
Fund;
WHEREAS, the AC Fund was organized as a Maryland corporation, pursuant
to a Certificate of Incorporation dated August 31, 1993 and subsequently
reorganized as a Delaware business trust, pursuant to an Agreement and
Declaration of Trust subsequently amended and restated as of June 20, 1995,
pursuant to which it is authorized to issue an unlimited number of shares of
beneficial interest with par value of $0.01 per share;
WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly,
American Capital Asset Management, Inc.) ("VKAC Asset Management") provides
investment advisory and administrative services to the AC Fund;
WHEREAS, the VKM Trust was organized as a Massachusetts business trust,
and subsequently reorganized as a Delaware business trust pursuant to an
Agreement and Declaration of Trust (the "Declaration of Trust") dated May 10,
1995, pursuant to which it is authorized to issue an unlimited number of
shares of beneficial interest with par value of $0.01 per share, which at
present have been divided into different series, each series constituting a
separate and distinct series of the VKM Trust, including the VKM Fund;
WHEREAS, Van Kampen American Capital Investment Advisory Corp.
(formerly, Van Kampen Merritt Investment Advisory Corp.) ("Advisory Corp.")
provides investment advisory and administrative services to the VKM Fund;
WHEREAS, the Board of Trustees of each of the VKM Trust and the AC
Fund have determined that entering into this Agreement for the VKM Fund to
acquire the assets and liabilities of the AC Fund is in the best interests of
the shareholders of each respective fund; and
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WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained
herein, and intending to be legally bound hereby, the parties hereto agree as
follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent
set forth in Sections 7 and 8 hereof, the AC Fund will convey, transfer and
deliver to the VKM Fund at the closing, provided for in Section 2 hereof, all
of the existing assets of the AC Fund (including accrued interest to the
Closing Date) consisting primarily of nondefaulted, liquid, utility securities
(defined below) (at least eighty (80%) percent of any income securities
included therein being investment grade rated) due bills, cash and other
marketable securities acceptable to the VKM Fund as more fully set forth on
Schedule 1 hereto, and as amended from time to time prior to the Closing Date
(as defined below), free and clear of all liens, encumbrances and claims
whatsoever (the assets so transferred collectively being referred to as the
"Assets"). For purposes of this Agreement, "utility securities" shall mean
the common stocks and income securities of those companies involved in the
production, transmission, or distribution of electric energy, gas,
telecommunications services or the provisions of other utility or utility
related goods or services.
B. CONSIDERATION. In consideration thereof, the VKM Trust agrees that
on the Closing Date the VKM Trust will (i) deliver to the AC Fund full and
fractional Class A, Class B and Class C shares of beneficial interest of the VKM
Fund having net asset values per share calculated as provided in Section 3A
hereof, in an amount equal to the aggregate dollar value of the Assets
determined pursuant to Section 3A of this Agreement net of any liabilities of
the AC Fund described in Section 3E hereof (the "Liabilities")
(collectively, the "VKM Fund Shares") and (ii) assume all of the AC Fund's
Liabilities. All VKM Fund Shares delivered to the AC Fund in exchange for
such Assets shall be delivered at net asset value without sales load,
commission or other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business
days after the later of receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the AC Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the VKM Trust shall deliver to the AC Fund the VKM Fund
Shares in the amount determined pursuant to Section 1B hereof and the AC Fund
thereafter shall, in order to effect the distribution of such shares to the AC
Fund stockholders, instruct the VKM Trust to register the pro rata interest in
the VKM Fund Shares (in full and fractional shares) of each of the holders of
record of shares of the AC Fund in accordance with their holdings of either
Class A, Class B or Class C shares and shall provide as part of such
instruction a complete and updated list of such holders (including addresses
and taxpayer identification numbers), and the VKM Trust agrees promptly to
comply with said instruction. The VKM Trust shall have no obligation to
inquire as to the validity, propriety or correctness of such instruction, but
shall assume that such instruction is valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the AC Fund
to be transferred and assumed, respectively, by the VKM Fund shall be computed
as of the Closing Date, in the manner set forth in the most recent Prospectus
and Statement of Additional Information of the VKM Fund (collectively, the "VKM
Trust Prospectus"), copies of which have been delivered to the AC Fund.
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<PAGE> 40
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State
Street Bank and Trust Company, 225 Franklin Street, Post Office Box 1713,
Boston, Massachusetts 02105-1713, as custodian for the VKM Fund (the
"Custodian") for the benefit of the VKM Fund, duly endorsed in proper form for
transfer in such condition as to constitute a good delivery thereof, free and
clear of all liens, encumbrances and claims whatsoever, in accordance with the
custom of brokers, and shall be accompanied by all necessary state stock
transfer stamps, the cost of which shall be borne by the AC Fund.
C. FAILURE TO DELIVER SECURITIES. If the AC Fund is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the AC Fund's
securities for the reason that any of such securities purchased by the VKM
Trust have not yet been delivered to it by the AC Fund's broker or brokers,
then, in lieu of such delivery, the AC Fund shall deliver to the Custodian,
with respect to said securities, executed copies of an agreement of assignment
and due bills executed on behalf of said broker or brokers, together with such
other documents as may be required by the VKM Trust or Custodian, including
brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The VKM Trust, in order to assist the AC
Fund in the distribution of the VKM Fund Shares to the AC Fund shareholders
after delivery of the VKM Fund Shares to the AC Fund, will establish pursuant
to the request of the AC Fund an open account with the VKM Fund for each
shareholder of the AC Fund and, upon request by the AC Fund, shall transfer to
such account the exact number of full and fractional Class A, Class B and
Class C shares of the VKM Fund then held by the AC Fund specified in the
instruction provided pursuant to Section 2 hereof. The VKM Fund is not
required to issue certificates representing VKM Fund Shares unless requested to
do so by a shareholder. Upon liquidation or dissolution of the AC Fund,
certificates representing shares of beneficial interest of the AC Fund shall
become null and void.
E. LIABILITIES. The Liabilities shall include all of the AC Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein
are consummated, the VKM Trust agrees to pay (i) for the reasonable outside
expenses for the transactions contemplated herein; including, but not by way of
limitation, the preparation of the VKM Trust's Registration Statement on Form
N-14 (the "Registration Statement") and the solicitation of the AC Fund
shareholder proxies; (ii) AC Fund's reasonable attorney's fees which
fees shall be payable pursuant to receipt of an itemized statement, and (iii)
the cost of rendering the tax opinion, more fully referenced in Section 7F
below. In the event the transactions contemplated herein are not consummated
for any reason, then all reasonable expenses set forth above incurred to the
date of termination of this Agreement shall be borne by Advisory Corp.
G. DISSOLUTION. As soon as practicable after the Closing Date but in
no event later than one year after the Closing Date, the AC Fund shall
voluntarily dissolve and completely liquidate the AC Fund, by taking, in
accordance with the Delaware Business Trust Law and Federal securities laws,
all steps as shall be necessary and proper to effect a complete liquidation and
dissolution of the AC Fund. Immediately after the Closing Date, the stock
transfer books relating to the AC Fund shall be closed and no transfer of
shares shall thereafter be made on such books.
4. AC FUND'S REPRESENTATIONS AND WARRANTIES.
The AC Fund, hereby represents and warrants to the VKM Trust, which
representations and warranties are true and correct on the date hereof, and
agrees with the VKM Trust that:
A. ORGANIZATION. The AC Fund is a Delaware Business Trust duly formed
and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of
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<PAGE> 41
Delaware. The AC Fund is qualified to do business in all jurisdictions in
which it is required to be so qualified, except jurisdictions in which the
failure to so qualify would not have a material adverse effect on the AC Fund.
The AC Fund has all material federal, state and local authorizations necessary
to own all of the properties and assets of the AC Fund and to carry on its
business as now being conducted, except authorizations which the failure to so
obtain would not have a material adverse effect on the AC Fund.
B. REGISTRATION. The AC Fund is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as an open-end, diversified
management company and such registration has not been revoked or rescinded.
The AC Fund is in compliance in all material respects with the 1940 Act and
the rules and regulations thereunder with respect to its activities. All of
the outstanding shares of beneficial interest of the AC Fund have been duly
authorized and are validly issued, fully paid and non-assessable and not
subject to pre-emptive or
dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the AC Fund audited as of and for the
year ended September 30, 1994, true and complete copies of which have been
heretofore furnished to the VKM Trust, fairly represent the financial condition
and the results of operations of the AC Fund as of and for their respective
dates and periods in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The AC Fund shall furnish to the VKM Trust
(i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the AC Fund for the period ended June 30, 1995; and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments and the results of the AC Fund's
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and the results of its operations
and changes in financial position for the periods then ended; and such
financial statements shall be certified by the Treasurer of the AC Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date
will be, no contingent Liabilities of the AC Fund not disclosed in the
financial statements delivered pursuant to Sections 4C and 4D which would
materially affect the AC Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the AC Fund which would, if adversely determined, materially affect
the AC Fund's financial condition. All Liabilities were incurred by the AC
Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The AC Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
AC Fund's Prospectus and Statement of Additional Information, there are no
material agreements outstanding relating to the AC Fund to which the AC Fund is
a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case
no later than 30 calendar days after the Closing Date, Price Waterhouse,
auditors for the AC Fund, shall furnish the VKM Fund with a statement of the
earnings and profits of the AC Fund within the meaning of the Code as of the
Closing Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets
of the AC Fund at the date hereof are, or on the Closing Date or any subsequent
delivery date will be, "restricted securities" under the Securities Act of
1933, (the "Securities Act") or the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, or will be securities for which
market quotations are not readily available for purposes of Section 2(a)(41)
under the 1940 Act.
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<PAGE> 42
I. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other material tax returns and reports of the AC Fund required by
law to have been filed by such dates shall have been filed, and all Federal
and other taxes shown thereon shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of the
AC Fund's knowledge no such return is currently under audit and no assessment
has been asserted with respect to any such return.
J. CORPORATE AUTHORITY. The AC Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein.
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein have been duly authorized by the AC
Fund's Board of Trustees, and except for obtaining approval of the holders of
the shares of beneficial interest of the AC Fund, no other corporate acts or
proceedings by the AC Fund are necessary to authorize this Agreement and the
transactions contemplated herein. This Agreement has been duly executed and
delivered by the AC Fund and constitutes a legal, valid and binding obligation
of AC Fund enforceable in accordance with its terms subject to bankruptcy laws
and other equitable remedies.
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the AC Fund does not and will not (i) violate
any provision of the Declaration of Trust or amendment thereof of the AC Fund,
(ii) violate any statute, law, judgment, writ, decree, order, regulation or
rule of any court or governmental authority applicable to the AC Fund, (iii)
result in a violation or breach of, or constitute a default under any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the AC Fund is subject, or (iv) result in the creation
or imposition or any lien, charge or encumbrance upon any property or assets of
the AC Fund. Except as set forth in Schedule 2 to this Agreement, (i) no
consent, approval, authorization, order or filing with or notice to any court
or governmental authority or agency is required for the consummation by the AC
Fund of the transactions contemplated by this Agreement and (ii) no consent of
or notice to any third party or entity is required for the consummation by the
AC Fund of the transactions contemplated by this Agreement.
L. ABSENCE OF CHANGES. From the date of this Agreement through the
Closing Date, there shall not have been:
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the AC Fund,
other than changes in the ordinary course of its business, or any pending or
threatened litigation, which has had or may have a material adverse effect on
such business, results of operations, assets or financial condition;
(2) issued any option to purchase or other right to acquire shares
of the AC Fund granted by the AC Fund to any person other than subscriptions to
purchase shares at net asset value in accordance with terms in the Prospectus
for the AC Fund;
(3) any entering into, amendment or termination of any contract or
agreement by AC Fund, except as otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the AC Fund for borrowed money or any commitment to borrow money
entered into by the AC Fund;
(5) any amendment of the Declaration of Trust of the AC Fund; or
(6) any grant or imposition of any lien, claim, charge or
encumbrance (other than encumbrances arising in the ordinary course of business
with respect to covered options) upon any asset of the AC Fund other than a
lien for taxes not yet due and payable.
M. TITLE. On the Closing Date, the AC Fund will have good and
marketable title to the Assets, free and clear of all liens, mortgages,
pledges, encumbrances, charges, claims and equities whatsoever, other than a
lien for taxes not yet due and payable and full right, power and authority to
sell, assign,
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<PAGE> 43
transfer and deliver such Assets; upon delivery of such Assets, the VKM Fund
will receive good and marketable title to such Assets, free and clear of all
liens, mortgages, pledges, encumbrances, charges, claims and equities other
than a lien for taxes not yet due and payable.
N. PROXY STATEMENT. The AC Fund's Proxy Statement, at the time of
delivery by the AC Fund to its shareholders in connection with a special
meeting of shareholders to approve this transaction, and the AC Fund's
Prospectus and Statement of Additional Information with respect to the AC Fund
on the forms incorporated by reference into such Proxy Statement and as of
their respective dates (collectively, the "AC's Proxy Statement/Prospectus"),
and at the time the Registration Statement becomes effective, the Registration
Statement insofar as it relates to the AC Fund and at all times subsequent
thereto and including the Closing Date, as amended or as supplemented if it
shall have been amended or supplemented, conform and will conform, in all
material respects, to the applicable requirements of the applicable Federal and
state securities laws and the rules and regulations of the SEC thereunder, and
do not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 4N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the VKM Trust, VKM Fund or their affiliates
furnished to the AC Fund by the VKM Trust.
O. BROKERS. There are no brokers or finders fees payable by the AC
Fund in connection with the transactions provided for herein.
P. TAX QUALIFICATION. The AC Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
Q. FAIR MARKET VALUE. The fair market value on a going concern basis
of the Assets will equal or exceed the Liabilities to be assumed by the VKM
Fund and those to which the Assets are subject.
R. AC FUND LIABILITIES. Except as otherwise provided for herein, the
AC Fund shall use reasonable efforts, consistent with its ordinary operating
procedures, to repay in full any indebtedness for borrowed money and have
discharged or reserved against all of the AC Fund's known debts, liabilities
and obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.
5. THE VKM TRUST'S REPRESENTATIONS AND WARRANTIES.
The VKM Trust, on behalf of the VKM Fund, hereby represents and
warrants to the AC Fund, which representations and warranties are true and
correct on the date hereof, and agrees with the AC Fund, that:
A. ORGANIZATION. The VKM Trust is a Delaware Business Trust duly
formed and in good standing under the laws of the State of Delaware and is duly
authorized to transact business in the State of Delaware. The VKM Fund is a
separate series of the VKM Trust duly designated in accordance with the
applicable provisions of the Declaration of Trust. The VKM Trust and VKM Fund
are qualified to do business in all jurisdictions in which they are required to
be so qualified, except jurisdictions in which the failure to so qualify would
not have a material adverse effect on either the VKM Trust or VKM Fund. The
VKM Trust has all material federal, state and local authorizations necessary to
own on behalf of the VKM Trust all of the properties and assets allocated to
the VKM Fund and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have
a material adverse effect on the VKM Trust or VKM Fund.
B. REGISTRATION. The VKM Fund is registered under the 1940 Act as an
open-end, diversified management company and such registration has not been
revoked or rescinded. The VKM Trust is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder. All of the
outstanding shares of beneficial interest of the VKM Fund have been duly
authorized and are validly issued, fully paid and non-assessable and not
subject to pre-emptive dissenters rights.
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<PAGE> 44
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the VKM Fund audited as of and for the
year ended June 30, 1994, true and complete copies of which have been
heretofore furnished to the AC Fund fairly represent the financial condition
and the results of operations of the VKM Fund as of and for their respective
dates and periods in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Fund
(i) an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
of the VKM Fund for the period ended June 30, 1995, and (ii) within five (5)
business days after the Closing Date, an unaudited statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets as of and for the interim period ending on
the Closing Date; such financial statements will represent fairly the financial
position and portfolio of investments of the VKM Fund and the results of its
operations as of, and for the period ending on, the dates of such statements in
conformity with generally accepted accounting principles applied on a
consistent basis during the period involved and fairly present the financial
position of the VKM Fund as at the dates thereof and the results of its
operations and changes in financial position for the periods then ended; and
such financial statements shall be certified by the Treasurer of the VKM Trust
as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
VKM Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the VKM Fund's financial
condition, and there are no legal, administrative, or other proceedings
pending or, to its knowledge, threatened against the VKM Fund which would, if
adversely determined, materially affect the VKM Fund's financial condition.
F. MATERIAL AGREEMENTS. The VKM Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
VKM Trust Prospectus there are no material agreements outstanding to which the
VKM Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other material tax returns and reports of the VKM Fund required by
laws to have been filed by such dates shall have been filed, and all Federal
and other taxes shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the VKM Fund's knowledge
no such return is currently under audit and no assessment has been asserted
with respect to any such return.
H. CORPORATE AUTHORITY. The VKM Trust has the necessary power under
its Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein
have been duly authorized by the VKM Trust's Board of Trustees, no other
corporate acts or proceedings by the VKM Trust or VKM Fund are necessary to
authorize this Agreement and the transactions contemplated herein. This
Agreement has been duly executed and delivered by the VKM Trust and constitutes
a valid and binding obligation of the VKM Trust enforceable in accordance with
its terms subject to bankruptcy laws and other equitable remedies.
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VKM Trust does not and will not (i) result
in a material violation of any provision of the Declaration of Trust of the VKM
Trust or the Designation of Series of the VKM Fund, (ii) result in a material
violation of any statute, law, judgment, writ, decree, order, regulation or
rule of any court or governmental authority applicable to the VKM Trust or
(iii) result in a material violation or breach of, or constitute a default
under, or result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the VKM Trust pursuant to any
material contract, indenture, mortgage, loan agreement, note, lease or other
instrument or obligation to which the VKM Trust is subject. Except as set
forth in Schedule 3 to this Agreement, (i) no consent, approval, authorization,
order or filing with notice to any court or governmental authority or agency is
required for the consummation by the VKM
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<PAGE> 45
Trust of the transactions contemplated by this Agreement and (ii) no consent of
or notice to any third party or entity is required for the consummation by the
VKM Trust of the transactions contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or
other proceedings pending or, to its knowledge, threatened against the VKM Fund
which would materially affect its financial condition.
K. SHARES OF THE VKM FUND: REGISTRATION. The VKM Fund Shares to be
issued pursuant to Section 1 hereof will be duly registered under the
Securities Act and all applicable state securities laws.
L. SHARES OF THE VKM FUND: AUTHORIZATION. Subject to the matters set
forth in the Statement of Additional Information of the VKM Fund, under the
heading "The Fund and the Trust", a copy of which has been furnished to the AC
Fund, the shares of beneficial interest of the VKM Fund to be issued pursuant
to Section 1 hereof have been duly authorized and, when issued in accordance
with this Agreement, will be validly issued and fully paid and non-assessable
by the VKM Trust and conform in all material respects to the description
thereof contained in the VKM Trust's Prospectus furnished to the AC Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
VKM Fund, other than changes in the ordinary course of its business, which has
had a material adverse effect on such business, results of operations, assets
or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus contained therein filed on Form N-14, the ("Registration
Statement"), as of the effective date of the Registration Statement, and at all
times subsequent thereto up to and including the Closing Date, as amended or as
supplemented if they shall have been amended or supplemented, will conform, in
all material respects, to the applicable requirements of the applicable Federal
securities laws and the rules and regulations of the SEC thereunder, and will
not include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, except that no representations or warranties in this Section 5N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the AC Fund furnished to the VKM Trust by the AC
Fund.
O. TAX QUALIFICATION. The VKM Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years. For purposes of this
Section, any reference to the VKM Fund shall include its predecessors, a
sub-trust of a Massachusetts business trust organized and designated on March
26, 1987 and subsequently reorganized by merger with and into the VKM Fund.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the AC Fund and VKM Trust each agrees that (except as expressly
contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The AC Fund shall operate only in the ordinary
course of business consistent with prior practice. No party shall take any
action that would, or reasonably would be expected to, result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The AC Fund and VKM Trust shall file
all reports required to be filed by the AC Fund and VKM Trust with the SEC
between the date of this Agreement and the Closing
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<PAGE> 46
Date and shall deliver to the other party copies of all such reports promptly
after the same are filed. Except where prohibited by applicable statutes and
regulations, each party shall promptly provide the other (or its counsel) with
copies of all other filings made by such party with any state, local or federal
government agency or entity in connection with this Agreement or the
transactions contemplated hereby. Each of the AC Fund and the VKM Trust shall
use all reasonable efforts to obtain all consents, approvals, and
authorizations required in connection with the consummation of the transactions
contemplated by this Agreement and to make all necessary filings with the
Secretary of State of the State of Delaware.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY
STATEMENT/PROSPECTUS. In connection with the Registration Statement and the AC
Fund's Proxy Statement/Prospectus, each party hereto will cooperate with the
other and furnish to the other the information relating to the AC Fund, VKM
Trust or VKM Fund, as the case may be, required by the Securities Act or the
Exchange Act and the rules and regulations thereunder, as the case may be, to
be set forth in the Registration Statement or the Proxy Statement/Prospectus,
as the case may be. The AC Fund shall promptly prepare and file with the SEC
the Proxy Statement/Prospectus and the VKM Trust shall promptly prepare and
file with the SEC the Registration Statement, in which the Proxy
Statement/Prospectus will be included as a prospectus. In connection with the
Registration Statement, insofar as it relates to the AC Fund and its affiliated
persons, VKM Trust shall only include such information as is approved by the AC
Fund for use in the Registration Statement. The VKM Trust shall not amend or
supplement any such information regarding the VKM Trust and such affiliates
without the prior written consent of the AC Fund which consent shall not be
unreasonably withheld. The VKM Trust shall promptly notify and provide the AC
Fund with copies of all amendments or supplements filed with respect to the
Registration Statement. The VKM Trust shall use all reasonable efforts to have
the Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. The VKM Trust shall also take any
action (other than qualifying to do business in any jurisdiction in which it is
now not so qualified) required to be taken under any applicable state
securities laws in connection with the issuance of the VKM Trust's shares of
beneficial interest in the transactions contemplated by this Agreement, and the
AC Fund shall furnish all information concerning the AC Fund and the holders of
the AC Fund's shares or beneficial interest as may be reasonably requested in
connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing
Date, the AC Fund shall make available to the VKM Trust a copy of each report,
schedule, registration statement and other document (the "Documents") filed or
received by it during such period pursuant to the requirements of Federal or
state securities laws or Federal or state banking laws (other than Documents
which such party is not permitted to disclose under applicable law or which are
not relevant to the AC Fund). During the period prior to the Closing Date, the
VKM Trust shall make available to the AC Fund each Document pertaining to the
transactions contemplated hereby filed or received by it during such period
pursuant to Federal or state securities laws or Federal or state banking laws
(other than Documents which such party is not permitted to disclose under
applicable law).
E. SHAREHOLDERS MEETING. The AC Fund shall call a meeting of its
shareholders to be held as promptly as practicable for the purpose of voting
upon the approval of this Agreement and the transactions contemplated herein,
and shall furnish a copy of the Proxy Statement/Prospectus and form of proxy to
each shareholder of the AC Fund as of the record date for such meeting of
shareholders. The AC Fund's Board of Trustees shall recommend to the AC Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The AC Fund and VKM Trust covenant and
agree to coordinate the respective portfolios of the AC Fund and VKM Fund from
the date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the VKM Fund's portfolio, the resulting
portfolio will meet the VKM Fund's investment objectives, policies and
restrictions, as set forth in the VKM Trust Prospectus, a copy of which has
been delivered to the AC Fund.
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G. DISTRIBUTION OF THE SHARES. At Closing the AC Fund covenants that
it shall cause to be distributed the VKM Fund Shares in the proper pro rata
amount for the benefit of AC Fund's shareholders and such that the AC Fund
shall not continue to hold amounts of said shares so as to cause a violation of
Section 12(d)(1) of the 1940 Act. The AC Fund covenants further
that, pursuant to Section 3G, it shall liquidate and dissolve the AC Fund as
promptly as practicable after the Closing Date. The VKM Trust covenants to use
all reasonable efforts to cooperate with the AC Fund and the AC Fund's transfer
agent in the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other
party prior to the date hereof, each of the AC Fund and the VKM Trust
represents that no agent, broker, investment banker, financial advisor or other
firm or person is or will be entitled to any broker's or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and each party shall hold the other harmless
from and against any all claims, liabilities or obligations with respect to any
such fees, commissions or expenses asserted by any person to be due or payable
in connection with any of the transactions contemplated by this Agreement on
the basis of any act or statement alleged to have been made by such first party
or its affiliate.
I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date
any further action is necessary or desirable in order to carry out the purposes
of this Agreement the proper officers and trustees of each party to this
Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the AC Fund and the VKM Trust will consult with
each other before issuing any press releases or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
herein and shall not issue any press release or make any public statement prior
to such consultation, except as may be required by law or the rules of any
national securities exchange on which such party's securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that
the transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the VKM Trust, the VKM Fund nor the AC Fund shall
take any action, or cause any action to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to
the Closing Date, the VKM Trust, the VKM Fund and the AC Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
O'Melveny & Myers, counsel to the AC Fund, to render the tax opinion required
herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing
Date, the AC Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE AC FUND.
The obligations of the AC Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the AC Fund, of the following conditions:
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<PAGE> 48
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the shares of the AC Fund present in person or by
proxy at a meeting of said shareholders in which a quorum is constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the VKM Trust contained herein shall be true
in all material respects as of the Closing Date, and as of the Closing Date
there shall have been no material adverse change in the financial condition,
results of operations, business properties or assets of the VKM Fund, and the
AC Fund shall have received a certificate of the President or Vice President of
the VKM Trust satisfactory in form and substance to the AC Fund so stating.
The VKM Trust shall have performed and complied in all material respects with
all agreements, obligations and covenants required by this Agreement to be so
performed or complied with by it on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court
of competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the transactions contemplated by
this Agreement shall be in effect, nor shall any proceeding by any state, local
or federal government agency or entity asking any of the foregoing be pending.
There shall not have been any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the
transactions contemplated by this Agreement illegal or which has a material
adverse affect on the business operations of the VKM Fund.
F. TAX OPINION. The AC Fund shall have obtained an opinion from
O'Melveny & Myers, counsel for the AC Fund, dated as of the Closing Date,
addressed to the AC Fund, that the consummation of the transactions set forth
in this Agreement comply with the requirements of a reorganization as described
in Section 368(a) of the Code substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The AC Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of
the Closing Date, addressed to the AC Fund substantially in the form and to the
effect that: (i) the VKM Trust is duly formed and in good standing as a
business trust under the laws of the State of Delaware; (ii) the Board of
Trustees of the VKM Trust has duly designated the VKM Fund as a series of the
VKM Trust pursuant to the terms of the Declaration of Trust of the VKM Trust;
(iii) the VKM Fund is registered as an open-end, diversified management company
under the 1940 Act; (iv) this Agreement and the reorganization provided for
herein and the execution of this Agreement have been duly authorized and
approved by all requisite action of VKM Trust and this Agreement has been duly
executed and delivered by the VKM Trust and (assuming the Agreement is a valid
and binding obligation of the other parties thereto) is a valid and binding
obligation of the VKM Trust; (v) neither the execution or delivery by the VKM
Trust of this Agreement nor the consummation by the VKM Trust or VKM Fund of
the transactions contemplated thereby contravene the VKM Trust's Declaration of
Trust, or, to the best of their knowledge, violate any provision of any statute
or any published regulation or any judgment or order disclosed to us by the VKM
Trust as being applicable to the VKM Trust or the VKM Fund; (vi) to the best of
their knowledge based solely on the certificate of an appropriate officer of
the VKM Trust attached hereto, there is no pending or threatened litigation
which would have the effect of prohibiting any material business practice or
the acquisition of any material property or the conduct of any material
business of the VKM Fund or might have a material adverse effect on the value
of any assets of the VKM Fund; (vii) the VKM Fund's Shares have been duly
authorized and upon issuance thereof in accordance with this
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<PAGE> 49
Agreement will, subject to certain matters regarding the liability of a
shareholder of a Delaware trust, be validly issued, fully paid and non-
assessable; (viii) except as to financial statements and schedules and other
financial and statistical data included or incorporated by reference therein
and subject to usual and customary qualifications with respect to Rule 10b-5
type opinions, as of the effective date of the Registration Statement filed
pursuant to the Agreement, the portions thereof pertaining to VKM Trust and the
VKM Fund comply as to form in all material respects with the requirements of
the Securities Act, the Securities Exchange Act and the 1940 Act and the rules
and regulations of the Commission thereunder and no facts have come to
counsel's attention which would cause them to believe that as of the
effectiveness of the portions of the Registration Statement applicable to VKM
Trust and VKM Fund, the Registration Statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and (ix) to
the best of their knowledge and information and subject to the qualifications
set forth below, the execution and delivery by the VKM Trust of the Agreement
and the consummation of the transactions therein contemplated do not require,
under the laws of the States of Delaware or Illinois or the federal laws of the
United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency or
body (except such as have been obtained). Counsel need express no opinion,
however, as to any such consent, approval, authorization, registration,
qualification, order or filing (a) which may be required as a result of the
involvement of other parties to the Agreement in the transactions contemplated
by the Agreement because of their legal or regulatory status or because of any
other facts specifically pertaining to them; (b) the absence of which does not
deprive the AC Fund of any material benefit under the Agreement; or (c) which
can be readily obtained without significant delay or expense to the AC Fund,
without loss to the AC Fund of any material benefit under the Agreement and
without any material adverse effect on the AC Fund during the period such
consent, approval, authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in this opinion, (b) laws of the States of
Delaware and Illinois and the United States of America which, in counsel's
experience, are normally applicable to transactions of the type provided for
in the Agreement and (c) court orders and judgments disclosed to us by the VKM
Trust in connection with this opinion. In addition, although counsel need not
specifically consider the possible applicability to the VKM Trust of any
other laws, orders or judgments, nothing has come to their attention in
connection with their representation of the VKM Trust and the VKM Fund in this
transaction that has caused them to conclude that any other consent, approval,
authorization, registration, qualification, order or filing is required.
H. OFFICER CERTIFICATES. The AC Fund shall have received a
certificate of an authorized officer of the VKM Trust, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 5
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees shall be furnished to the AC Fund.
8. CONDITIONS TO OBLIGATIONS OF VKM TRUST
The obligations of the VKM Trust hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the VKM Trust of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the shares of the AC Fund present in person or by
proxy at a meeting of said shareholders in which a quorum is constituted.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the AC Fund contained herein shall be true in
all material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition, results
of operations, business, properties or assets of the AC Fund since March 31,
1995 and the VKM Trust shall have received a certificate of the Chairman or
President of the AC Fund satisfactory in form and substance to the VKM Trust so
stating. The AC Fund shall have performed and complied in all
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<PAGE> 50
material respects with all agreements, obligations and covenants required by
this Agreement to be so performed or complied with by them on or prior to the
Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity seeking any of the foregoing be pending. There
shall not be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement, which makes the consummation of the
transactions contemplated by this Agreement illegal.
F. TAX OPINION. The VKM Trust shall have obtained an opinion from
O'Melveny & Myers, counsel for the AC Fund, dated as of the Closing Date,
addressed to the VKM Trust and VKM Fund, that the consummation of the
transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Code substantially in the
form attached as Annex A.
G. OPINION OF COUNSEL. The VKM Trust and VKM Fund shall have
received the opinion of O'Melveny & Myers, counsel for AC Fund, dated as of the
Closing Date, addressed to the VKM Trust and VKM Fund, substantially in the
form and to the effect that: (i) the AC Fund is duly formed and existing
as a trust under the laws of the State of Delaware; (ii) the AC Fund is
registered as an open-end, diversified management company under the 1940 Act;
(iii) this Agreement and the reorganization provided for herein and the
execution of this Agreement have been duly authorized by all necessary trust
action of the AC Fund and this Agreement has been duly executed and delivered
by the AC Fund and (assuming the Agreement is a valid and binding obligation of
the other parties thereto) is a valid and binding obligation of the AC Fund;
(iv) neither the execution or delivery by the AC Fund of this Agreement nor the
consummation by the AC Fund of the transactions contemplated thereby contravene
the AC Fund's Declaration of Trust or, to their knowledge, violate any
provision of any statute, or any published regulation or any judgment or order
disclosed to them by the AC Fund as being applicable to the AC Fund; (v) to
their knowledge based solely on the certificate of an appropriate officer of
the AC Fund attached thereto, there is no pending, or threatened litigation
involving the AC Fund except as disclosed therein, (vi) except as to financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions as of the effective
date of the Registration Statement filed pursuant to the Agreement, the
portions thereof pertaining to the AC Fund comply as to form in all material
respects with their requirements of the Securities Act, the Securities Exchange
Act and the 1940 Act and the rules and regulations of the Commission thereunder
and no facts have come to counsel's attention which cause them to believe that
as of the effectiveness of the portions of the Registration Statement
applicable to the AC Fund, the Registration Statement contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading;
and (vii) to their knowledge and subject to the qualifications set forth below,
the execution and delivery by the AC Fund of the Agreement and the consummation
of the transactions therein contemplated do not require, under the laws of the
State of Delaware, or the federal laws of the United States, the consent,
approval, authorization, registration, qualification or order of, or filing
with, any court or governmental agency or body (except such as have been
obtained under the Securities Act, the 1940 Act or the rules and regulations
thereunder.) Counsel need express no opinion, however, as to any such
consent, approval, authorization, registration, qualification, order or filing
(a)
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<PAGE> 51
which may be required as a result of the involvement of other parties to the
Agreement in the transactions contemplated by the Agreement because of their
legal or regulatory status or because of any other facts specifically
pertaining to them; (b) the absence of which does not deprive the VKM Trust or
VKM Fund of any material benefit under such agreements; or (c) which can be
readily obtained without significant delay or expense to the VKM Trust or VKM
Fund, without loss to the VKM Trust or VKM Fund of any material benefit under
the Agreement and without any material adverse effect on them during the period
such consent, approval authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or fillings under (a)
laws which are specifically referred to in the opinion, (b) law of the State
of Delaware and the United States of America which, in counsel's experience,
are normally applicable to transactions of the type provided for in the
Agreement and (c) court orders and judgments disclosed to them by the AC Fund
in connection with the opinion. Counsel's opinion as to the validity and
binding nature of this Agreement may be limited to the present law of the State
of Delaware. Counsel's other opinions may be limited to the present Federal law
of the United States and the present general corporation and trust laws of the
State of Delaware.
H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended,
shall consist solely of nondefaulted, liquid and investment grade "utility
securities" (as defined in Section 1A), cash and other marketable securities
which are in conformity with the VKM Fund's investment objectives, policies and
restrictions as set forth in the VKM Trust Prospectus, a copy of which has been
delivered to the AC Fund.
I. SHAREHOLDER LIST. The AC Fund shall have delivered to the VKM
Trust an updated list of all shareholders of the AC Fund, as reported by the AC
Fund's transfer agent, as of one (1) business day prior to the Closing Date
with each shareholder's respective holdings in the SL Portfolio, taxpayer
identification numbers, Form W-9 and last known address.
J. OFFICER CERTIFICATES. The VKM Trust shall have received a
certificate of an authorized officer of the AC Fund, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 4
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Board of Trustees and shareholders shall be
furnished to the VKM Trust.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized
by their respective Boards of Trustees amend this Agreement at any time before
or after approval thereof by the shareholders of the AC Fund; provided, however,
that after receipt of AC Fund shareholder approval, no amendment shall be made
by the parties hereto which substantially changes the terms of Sections 1, 2
and 3 hereof without obtaining AC Fund's shareholder approval thereof or that
affect any applications for exemptive relief from the SEC or any orders with
respect thereto without obtaining the approval of the staff of the SEC.
(B) At any time prior to the Closing Date, either of the
parties may by written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor
shall any waiver on the part of any party of any such right, power or
privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
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<PAGE> 52
(C) This Agreement may be terminated, and the transactions
contemplated herein may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the Board of Trustees of
the VKM Trust and the AC Fund;
(ii) by the AC Fund, if the VKM Trust breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iii) by the VKM Trust, if the AC Fund breaches in
any material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iv) by either the AC Fund or VKM Trust, if the
Closing has not occurred on or prior to September 30, 1995 (provided that the
rights to terminate this Agreement pursuant to this subsection (C) (iv) shall
not be available to any party whose failure to fulfill any of its obligations
under this Agreement has been the cause of or resulted in the failure of the
Closing to occur on or before such date);
(v) by the VKM Trust in the event that: (a) all
the conditions precedent to the AC Fund's obligation to close, as set forth in
Section 7 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the VKM Trust gives the AC Fund written
assurance of its intent to close irrespective of the satisfaction or
non-satisfaction of all conditions precedent to the VKM Trust's obligation to
close, as set forth in Section 8 of this Agreement; and (c) the AC Fund then
fails or refuses to close within the earlier of five (5) business days or
September 30, 1995; or
(vi) by the AC Fund in the event that: (a) all the
conditions precedent to the VKM Trust's obligation to close, as set forth in
Section 8 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the AC Fund gives the VKM Trust written
assurance of its intent to close irrespective of the satisfaction or
non-satisfaction of all the conditions precedent to the AC Fund's obligation to
close, as set forth in Section 7 of this Agreement; and (c) the VKM Trust then
fails or refuses to close within the earlier of five (5) business days or
September 30, 1995.
10. REMEDIES
In the event of termination of this Agreement by either or both of the AC Fund
and VKM Trust pursuant to Section 9(C), written notice thereof shall forthwith
be given by the terminating party to the other party hereto, and this Agreement
shall therefore terminate and become void and have no effect, and the
transactions contemplated herein and thereby shall be abandoned, without
further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
(A) SURVIVAL. The representations and warranties included or provided
for herein, or in the Schedules or other instruments delivered or to be
delivered pursuant hereto, shall survive the Closing Date for a three year
period except that any representation or warranty with respect to taxes shall
survive for the expiration of the statutory period of limitations for
assessments of tax deficiencies as the same may be extended from time to time
by the taxpayer. The covenants and agreements included or provided for herein
shall survive and be continuing obligations in accordance with their terms.
The period for which a representation, warranty, covenant or agreement survives
shall be referred to hereinafter as the "Survival Period." Notwithstanding
anything set forth in the immediately preceding sentence, the VKM Trust's and
the AC Fund's right to seek indemnity pursuant to this Agreement shall survive
for a period of ninety (90) days beyond the expiration of the Survival Period
of the representation, warranty, covenant or agreement upon which indemnity is
sought. In no event shall the
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<PAGE> 53
VKM Trust or the AC Fund be obligated to indemnify the other if indemnity is
not sought within ninety (90) days of the expiration of the applicable Survival
Period.
(B) INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and
hold the other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a
party or otherwise or with which such Indemnified Party may be or may have been
threatened, (collectively, the "Losses") arising out of or related to any
claim of a breach of any representation, warranty or covenant made herein by
the Indemnitor; provided, however, that no Indemnified Party shall be
indemnified hereunder against any Losses arising directly from such Indemnified
Party's (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv)
reckless disregard of the duties involved in the conduct of such Indemnified
Party's position.
(C) INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its
best efforts to minimize any liabilities, damages, deficiencies, claims,
judgments, assessments, costs and expenses in respect of which indemnity may be
sought hereunder. The Indemnified Party shall given written notice to
Indemnitor within the earlier of ten (10) days of receipt of written notice to
Indemnitor or thirty (30) days from discovery by Indemnified Party of any
matters which may give rise to a claim for indemnification or reimbursement
under this Agreement. The failure to give such notice shall not affect the
right of Indemnified Party to indemnity hereunder unless such failure has
materially and adversely affected the rights of the Indemnitor; provided that
in any event such notice shall have been given prior to the expiration of the
Survival Period. At any time after ten (10) days from the giving of such
notice, Indemnified Party may, at its option, resist, settle or otherwise
compromise, or pay such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost and expense, to
assume the defense of any such matter, in which case Indemnified Party shall
have the right, at no cost or expense to Indemnitor, to participate in such
defense. If Indemnitor does not assume the defense of such matter, and in any
event until Indemnitor states in writing that it will assume the defense,
Indemnitor shall pay all costs of Indemnified Party arising out of the defense
until the defense is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain Indemnitor's consent to any payment or
settlement of any such claim. Indemnitor shall keep Indemnified Party fully
apprised at all times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided
for hereunder, Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations relating to the
matter for which indemnification has been made.
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12. SURVIVAL
The provisions set forth in Sections 10, 11 and 16 hereof shall survive
the termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the AC Fund shall be addressed to
the AC Fund c/o Van Kampen American Capital Asset Management, Inc., 2800 Post
Oak Boulevard, Houston, TX 77056; Attention: General Counsel, with a copy to
George M. Bartlett, O'Melveny & Myers, 400 South Hope Street, Los Angeles,
California 90071, or at such other address as the AC Fund may designate by
written notice to the VKM Trust. Notice to the VKM Trust shall be addressed to
the VKM Trust c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel
or at such other address and to the attention of such other person as the VKM
Trust may designate by written notice to the AC Fund. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other parties.
15. BOOKS AND RECORDS.
The AC Fund and the VKM Trust agree that copies of the books and
records of the AC Fund relating to the Assets including, but not limited to all
files, records, written materials; e.g., closing transcripts, surveillance
files and credit reports shall be delivered by the AC Fund to the VKM Trust at
the Closing Date. In addition to, and without limiting the foregoing, the AC
Fund and the VKM Trust agree to take such action as my be necessary in order
that the VKM Trust shall have reasonable access to such other books and records
as may be reasonably requested, all for three years after the Closing Date for
the three tax years ending December 31, 1992, December 31, 1993 and December
31, 1994 namely, general ledger, journal entries, voucher registers;
distribution journal; payroll register; monthly balance owing report; income
tax returns; tax depreciation schedules; and investment tax credit basis
schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties
(written or oral), is intended as a complete and exclusive statement of the
terms of the Agreement between the parties and may not be amended, modified or
changed or terminated orally. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been executed by the
AC Fund and VKM Trust and delivered to each of the parties hereto. The headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. This
Agreement is for the sole benefit of the parties thereto, and nothing in this
Agreement, expressed or implied, is intended to confer upon any other person
any rights or remedies under or by reason of this Agreement. This Agreement
shall be governed by and construed in accordance with the laws of the State of
Delaware without regard to principles of conflicts or choice of law.
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17. LIMITATION OF LIABILITY.
A copy of the Declarations of Trust of the VKM Trust and AC Fund are on
file with the Secretary of State of the State of Delaware and notice, is hereby
given and the parties hereto acknowledge and agree that this instrument is
executed on behalf of the Trustees of the VKM Trust and the AC Fund,
respectively, as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders of the VKM
Trust or of the AC Fund individually but binding only upon the assets and
property of the VKM Trust or the AC Fund as the case may be.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first written above.
VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND, a Delaware
business trust.
By: ______________________________
Title: _____________________________
Attest: _________________________________
Title: ________________________________
VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST, a Delaware business trust.
By: _______________________________
Title: _____________________________
Attest: __________________________________
Title: ________________________________
18
<PAGE> 56
EXHIBIT B
MANAGEMENT'S DISCUSSION OF
VK FUND AND AC FUND PERFORMANCE
Management's Discussion of VK Fund Performance as of the Annual Report dated
June 30, 1994.
The past twelve months have been difficult ones for the VK Fund. A steady rise
in interest rates, which drove the value of the benchmark 30-year Treasury bond
down by nearly 20 percent at one point, led to poor performance for virtually
all fixed-income investments. The Federal Reserve's efforts to control the pace
of the economy, combined with the market's apprehension over inflation, proved
detrimental on other fronts, as stocks mirrored the sub-par performance of the
bond market.
Most experts would agree that inflation, or more accurately the fear of
inflation, is largely responsible for the abrupt upturn in interest rates. Up
until the end of 1993, inflation was of little concern as the nation struggled
to recover from the recession that welcomed us into the '90s. But as the economy
rebounded with conspicuous flare during the final quarter of 1993, advancing at
a 6.3% pace as measured by the gross domestic product ("GDP"), inflationary
concerns reemerged.
For nearly five years, the Federal Reserve (the "Fed") worked to nurture the
economy to a sustainable level of moderate economic growth by reducing short-
term interest rates to the lowest levels in decades. Suddenly confronted with
the prospect that the economy might overheat, the Fed reversed its monetary
policy and began to increase short-term rates in February of 1994. The central
bank feared that a booming economy would lead to higher inflation which could
prematurely stifle the sustained expansion it hoped to promote. Between February
4, 1994 and May 16, 1994, the Fed Funds rate was increased four separate times,
rising in total from 3% to 4.25%.
Many believe that the Fed reacted in haste, increasing rates too aggressively
in response to a threat that was illusory. To date, inflation has yet to surface
as a formidable risk to an economic expansion that continues to send mixed
signals. For example, GDP growth retreated sharply to 3.3% in the first quarter
of 1994, from 6.3% the quarter prior, before rising slightly to 3.7% in second
quarter 1994. Others would contend that the economy was showing legitimate signs
of strength and by enduring higher rates now, we have established a foundation
for sustainable economic growth and a lower, more stable rate environment in the
longer term. Regardless of the validity of the cause or the reasonableness of
the market's reaction, one thing is certain -- we find ourselves in a much
higher rate environment than just a few months ago.
B-1
<PAGE> 57
- ------------------------------------------------------------------------------
PERFORMANCE RESULTS FOR THE PERIOD
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Wall Street Journal Abbreviations
Fund Group.......................... VanKampen Mer
Fund Name........................... UtilA UtilB N/A
Quotron Symbol........................ VKUAX VKUBX VKUCX
Life of Fund cumulative total return
based on NAV(1)..................... (7.38%) (8.02%) (9.11%)
Life of Fund average annual
total return(2)..................... (12.70%) (12.61%) (10.86%)
Commencement Date..................... 07/28/93 07/28/93 08/13/93
</TABLE>
- ----------------
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period ended June 30,
1994, and does not include payment of the maximum sales charge (4.65% for A
shares) or contingent deferred sales charge (4% for B shares; 1% for C
shares).
(2) Standardized total return for the period ended June 30, 1994.
Past performance does not guarantee future results. Investment return and net
asset value will fluctuate with market conditions. Investor's shares, when
redeemed, may be worth more or less than their original cost.
STANDARDIZED TOTAL RETURN COMPARISON VK FUND VS.
S&P UTILITY INDEX (AUGUST 1993 THROUGH JUNE 1994)
The following graph compares the value of an investment in the VK Fund's Class
A shares with the value of an investment in the securities comprising the S&P
Utility Index from August 1993 through June 30, 1994, the last trading day of
fiscal year 1994, based on a $10,000 investment in Class A shares of the VK Fund
and in the securities comprising such index as of August 1993. The approximate
values of such an investment at the end of fiscal year 1994 were: Class A shares
of the VK Fund -- $8,800, S&P Utility Index -- $9,000.
The Index is unmanaged and expense-free and its performance does not reflect
the transaction and other costs applicable to the VK Fund's actively managed
portfolio.
Performance of Class B and C shares may vary from Class A shares illustrated
above due to distribution and administrative expense differentials applicable to
these classes. Past performance is not indicative of future performance.
B-2
<PAGE> 58
AC Fund shareholders may request a copy of the VK Fund Annual Report dated
June 30, 1995, which includes Management's Discussion of the VK Fund's
Performance through June 30, 1995, when such Annual Report becomes available by
calling (800) 341-2911.
Management's Discussion of AC Fund Performance as of the Annual Report dated
September 30, 1994.
The AC Fund's 1994 performance was impacted by three key factors. Prior to the
AC Fund's inception, interest rates had been falling, which prompted many fixed-
income investors to move their money into higher-yielding utilities securities.
As interest rates started rising, a trend which has continued through the first
nine months of 1994, these non-traditional utilities investors switched back to
other types of fixed-income investments. The declining demand for utilities
securities caused prices to fall.
Second, utility companies make extensive use of debt financing. When interest
rates go up, the companies' costs increase because they have to pay higher
interest rates to borrow money. This reduces the amount of money available for
dividends.
Third, several major states led by California have taken steps - or indicated
an intention to do so - to increase competition for electric utilities.
California, for example, has considered allowing companies other than utilities
to compete to provide electricity to large industrial firms. Concerned about the
impact of increasing competition, several major electric utilities have cut
their dividend.
The AC Fund is not limited to investing in a single sector of the utilities
industry. In fact, initially only 35% of the AC Fund's net assets were invested
in electric utilities. The AC Fund has the ability to invest in all types of
utilities, as well as both stocks and bonds.
There were two noteworthy changes in the allocation of the AC Fund's assets
between inception and September 30, 1994. The percentage of bonds in the
portfolio declined to 48% while the percentage invested in stocks increased
slightly. AC Adviser believed utility stocks had greater appreciation potential
relative to bonds due to their considerable price decline. Also, AC Adviser
believed gradually increased electric utilities holdings to 45% to take
advantage of the values created by the severe correction in electric utility
stocks. Despite the challenges to the industry, there are some electric
utilities that are positioned to compete and that probably will do well in the
future. The price of electric utilities securities had been pushed down so far
that the issues of some of these companies were selling for favorable prices.
The AC Fund's focus has been on purchasing the issues of those utilities that
are well positioned for this new environment. Some of the companies whose stocks
the AC Fund purchased during the reporting period included Duke Power and
Southern Company. The AC Fund also bought bonds issued by gas transmission
B-3
<PAGE> 59
companies like Panhandle Eastern, Enron and Colorado Interstate Gas. In the
telephone industry, the AC Fund bought bonds issued by Pacific Telephone &
Telegraph.
In the ten months ended September 30, 1994, Class A shares of the AC Fund
achieved a total return at net asset value (without a sales charge) of -7.24%,
including reinvestment of dividends totalling $.39 per share. Class B shares of
the AC fund achieved a total return at net asset value of -7.72%, including
reinvestment of dividends totalling $.334 per share. Class C shares of the AC
Fund achieved a total return at net asset value of -7.82%, including
reinvestment of dividends totalling $.334 per share. During the period covered
by this report, AC Adviser subsidized a portion of the AC Fund's expenses.
Without this subsidy, the total returns would have been lower.
The Standard & Poor's 40 Utilities Index, which reflects the performance of
utilities stocks, achieved a total return of -12.13% during the reporting
period. The Lehman Brothers Utility Index, which reflects the performance of
utility bonds, achieved a total return of -5.23% for the same period.
Additionally, the average total return for all utility funds tracked by Lipper
Analytical Services was -6.48% for the reporting period. The Lipper average is
the benchmark against which many utility funds are compared. Neither the indices
nor the average reflect commissions or fees that would be paid by an investor
purchasing the securities they represent.
<TABLE>
<S> <C>
AGGREGATE TOTAL RETURN -- CLASS A (AS OF 9/30/94) SINCE 12/1/93**
At Net Asset Value................................... - 7.24%
With Maximum 4.75% Sales Charge...................... -11.64%
AGGREGATE TOTAL RETURN -- CLASS B (AS OF 9/30/94) SINCE 12/1/93**
At Net Asset Value................................... - 7.72%
With Applicable Contingent Deferred Sales Charge Upon
Redemption (Maximum 4%)............................ -11.28%
AGGREGATE TOTAL RETURN -- CLASS C (AS OF 9/30/94) SINCE 12/1/93**
At Net Asset Value................................... - 7.82%
With Applicable Contingent Deferred Sales Charge Upon
Redemption (Maximum 1%)............................ - 8.71%
</TABLE>
- -------------------------
** Fund invested to meet its objective.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
AC FUND (CLASS A) VS. STANDARD & POOR'S 40 UTILITIES INDEX,
LEHMAN BROTHERS UTILITY BOND INDEX AND
LIPPER UTILITIES FUND AVERAGE
The following graph compares the value of an investment in the AC Fund's Class
A shares with the value of an investment in the Lipper Utility Fund Average,
B-4
<PAGE> 60
the Lehman Brothers Utility Bond Index and the S&P 40 Utilities Index from
December 1993 through September 30, 1994, the last trading day of fiscal year
1994, based upon a $10,000 investment in Class A shares of the AC Fund and in
the securities comprising such respective indices as of September 1994. The
approximate values of such an investment for the ten month period ending
September 30, 1994, the last trading day of the AC Fund's fiscal year, were:
Class A shares of the AC Fund -- $9,200, Lipper Utility Fund Average -- $9,275,
Lehman Brothers Utility Bond Index -- $9,475, S&P 40 Utilities Index -- $8,800.
Past performance is not indicative of future performance. Performance of other
classes of shares of the Fund will be greater or less than the lines shown based
on the differences in loads or fees paid by shareholders investing in the
different classes.
The Standard & Poor's 40 Utilities Index reflects the performance of utilities
stocks, while the Lehman Brothers Utility Bond Index reflects the performance of
utility bonds and the Lipper Utility Fund Average is an average of utility
mutual funds tracked by Lipper Analytical Services. While the SEC requires that
we provide a broad-based securities market index comparison, it may not assist
you in evaluating the performance of your Fund against its objectives. Neither
the S&P or Lehman indexes nor the Lipper average reflect any commissions or fees
that would be paid by an investor purchasing the securities they represent. All
front-end sales charges and all other fees and expenses are included in the
performance shown for the AC Fund Class A with ending value of $8,836. In
addition, since investors purchase shares of the AC Fund with varying sales
charges depending primarily on volume purchased, the AC Fund's Class A
performance at net asset value also is shown.
B-5
<PAGE> 61
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
UTILITY FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital Utility Fund, formerly known as Van Kampen
Merritt Utility Fund (the "Fund"), is a separate diversified series of Van
Kampen American Capital 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 (800) 421-5666.
(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 July 31, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666 or for Telecommunication
Device For the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL(SM)
------------------
THIS PROSPECTUS IS DATED JULY 31, 1995.
<PAGE> 62
(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 0.25% 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 "Alternative
Sales Arrangements" and "Purchase of Shares."
2
<PAGE> 63
- ------------------------------------------------------------------------------
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............................................ 18
Investment Advisory Services.................................... 23
Alternative Sales Arrangements.................................. 24
Purchase of Shares.............................................. 26
Shareholder Services............................................ 36
Redemption of Shares............................................ 40
The Distribution and Service Plans.............................. 43
Distributions from the Fund..................................... 45
Tax Status...................................................... 46
Fund Performance................................................ 49
Description of Shares of the Fund............................... 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> 64
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Utility Fund (the "Fund") is a separate
diversified series of Van Kampen American Capital Equity Trust, which is an
open-end management investment company organized as a Delaware business trust.
See "The Fund."
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment (or less as described under "Purchase
of Shares").
INVESTMENT OBJECTIVE. 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.
INVESTMENT POLICY AND RISKS. The Fund will attempt to achieve its investment
objective by investing primarily in the securities summarized below.
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, Inc. ("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
4
<PAGE> 65
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 -- Portfolio Securities -- 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 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."
INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights."
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 million or otherwise subject to a contingent deferred
sales charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred
to herein collectively as "CDSC Shares."
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 0.25% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A
5
<PAGE> 66
Shares qualify for reduced or no initial sales charges and may be subject to a
CDSC.
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 CDSC 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 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 CDSC 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.
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. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. 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."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.
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."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 67
- ------------------------------------------------------------------------------
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 the lesser of
the original purchase price or
redemption proceeds).......... None(2) Year Year
1--4.00% 1--1.00%
Year After--None
2--3.75%
Year
3--3.50%
Year
4--2.50%
Year
5--1.50%
Year
6--1.00%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fees................... None None None
</TABLE>
- ----------------
(1) Reduced on investments of $50,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase.
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1
distribution fee, a portion of which may indirectly pay for the initial
sales commission incurred on behalf of the investor. See "The Distribution
and Service Plans."
7
<PAGE> 68
- ------------------------------------------------------------------------------
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)............................ .65% .65% .65%
12b-1 Fees(1) (as a percentage of average
daily net assets)............................ .29% 1.00% 1.00%
Other Expenses (as a percentage of average
daily net assets)............................ .40% .40% .44%
Total Expenses (as a percentage of average
daily
net assets).................................. 1.34% 2.05% 2.09%
</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. As of June 30, 1995,
the Board of Trustees of the Trust reduced 12b-1 and service fees for the
Fund's Class A Shares to 0.25%. See "The Distribution and Service Plans".
8
<PAGE> 69
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 1.34% for
Class A Shares, 2.05% for Class B Shares
and 2.09% for Class C Shares, (ii) 5%
annual return and (iii) redemption at the
end of each time period:
Class A Shares.......................... $ 70 $98 $ 127 $ 210
Class B Shares.......................... $ 61 $99 $ 125 $ 213*
Class C Shares.......................... $ 31 $65 $ 112 $ 242
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.......................... $ 70 $98 $ 127 $ 210
Class B Shares.......................... $ 21 $64 $ 110 $ 213*
Class C Shares.......................... $ 21 $65 $ 112 $ 242
</TABLE>
- ---------------
* Based on conversion to Class A Shares after seven years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion 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> 70
- --------------------------------------------------------------------------------
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
--------------------------- --------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
------------ ------------- ------------ ------------- ------------ ----------------
<CAPTION>
(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> 71
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital 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 series of Van Kampen
American Capital Equity Trust (the "Trust"), which is an open-end management
investment company, organized as a Delaware 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 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 Service, 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
11
<PAGE> 72
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 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. An investment in the Fund may not be
appropriate for all investors. The Fund is not intended to be a complete
investment program, and investors should consider their long-term investment
goals and financial needs when making an investment decision with respect to the
Fund. An investment in the Fund is intended to be a long-term investment and
should not be used as a trading vehicle.
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
12
<PAGE> 73
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, 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
13
<PAGE> 74
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 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.
14
<PAGE> 75
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% 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
15
<PAGE> 76
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 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
16
<PAGE> 77
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 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);
17
<PAGE> 78
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 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
18
<PAGE> 79
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 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.
19
<PAGE> 80
"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 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,
20
<PAGE> 81
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 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
21
<PAGE> 82
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 "1940 Act"). See "Investment Policies and Restrictions" in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The 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
22
<PAGE> 83
"Portfolio Transactions and Brokerage Allocation" in the Statement of Additional
Information for more information.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios and over $50 billion under management or supervision.
Van Kampen American Capital's more than 40 open-end and 38 closed-end funds and
more than 2,700 unit investment trusts are professionally distributed by leading
financial advisers nationwide.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. 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. 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 and its subsidiaries (some of whom are officers or
trustees of the Fund) own, in the aggregate, not more than 7% of the common
stock of VK/AC Holding Inc. and have the right to acquire, upon the exercise of
options, approximately an additional 11% of the common stock of VK/AC Holding,
Inc. Presently, and after giving effect to the exercise of such options, no
officer or trustee of the Fund owns or would own 5% or more of the common stock
of VK/AC Holding, Inc.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will
23
<PAGE> 84
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 1940 Act, of the Adviser, Distributor or Van Kampen American
Capital), 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 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.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit 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.
PORTFOLIO MANAGEMENT. Mary Jayne Maly is primarily responsible for the day-
to-day management of the Fund's investment portfolio. Ms. Maly has been
primarily responsible for managing the Fund's investment portfolio since May,
1995. Ms. Maly has been a portfolio manager with Van Kampen American Capital
Asset Management, Inc. since 1994. Ms. Maly was an associate portfolio manager
with Van Kampen American Capital Asset Management, Inc. from 1992 to 1994. Prior
to that time, Ms. Maly was a senior equity analyst at Texas Commerce Investment
Management Company.
- ------------------------------------------------------------------------------
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
24
<PAGE> 85
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 ("Class A
Shares") or (b) on a contingent deferred basis (Class A Share accounts of $1
million or more, "Class B Shares" and "Class C Shares"). Class A Share accounts
over $1 million or otherwise subject to a contingent deferred sales charge
("CDSC"), Class B Shares and Class C Shares sometimes are referred to herein
collectively as "Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares or Class C Shares in an amount of $1 million or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A 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
25
<PAGE> 86
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 "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares that shall be approved by the SEC pursuant to
an amended exemptive order. All such expenses incurred by a class will be borne
on a pro rata basis by the outstanding shares of such class. All allocations of
administrative expenses to a particular class of shares will be limited to the
extent necessary to preserve the Fund's qualification as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers shares for sale to the public on a continuous basis through
Van Kampen American Capital Distributors, Inc. (the "Distributor"), as principal
underwriter, which is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Shares are also offered through members of the National Association of
Securities Dealers, Inc. ("NASD") acting as securities dealers ("dealers") and
through NASD members acting as brokers for investors ("brokers") or eligible
26
<PAGE> 87
non-NASD members acting as agents for investors ("financial intermediaries").
The Fund reserves the right to suspend or terminate the continuous public
offering of its shares at any time and without prior notice.
The Fund's shares are offered at net asset value per share next computed after
an investor places an order to purchase directly with the investor's broker,
dealer or financial intermediary or with the Distributor, plus any applicable
sales charge. Sales personnel of brokers, dealers and financial intermediaries
distributing the Fund's shares may receive differing compensation for selling
different classes of shares. It is the responsibility of the investor's broker,
dealer or financial intermediary to transmit the order to the Distributor.
Because the Fund generally will determine net asset value once each business day
as of the close of business, purchase orders placed through an investor's
broker, dealer or financial intermediary must be transmitted to the 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.
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 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. Such payments to brokers, dealers and
financial intermediaries for sales contests, other sales programs and seminars
are made by the Distributor out of its own assets and not out of the assets of
the Fund. These programs will not change the price an investor pays for shares
or the amount that the Fund will receive from such sale.
27
<PAGE> 88
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.
SALES CHARGE TABLE
<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
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% on sales to
$2 million, plus 0.80% on the next million, plus 0.20% on the next $2 million
and 0.08% on the excess over $5 million. See "Purchase of Shares -- Deferred
Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity
28
<PAGE> 89
discounts, investors should contact their broker, dealer or financial
intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("Money Market Fund"), Van Kampen American Capital Tax Free
Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve Fund
("Reserve Fund") and The Govett Funds, Inc.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund alone, or in combination with other shares of the Fund and
shares of other Participating Funds although other Participating Funds may have
different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
29
<PAGE> 90
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund with no minimum initial or subsequent investment requirement, and
with a lower sales charge if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all investments made from
unit trust distributions will be 1.00% of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their broker, dealer or financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment
30
<PAGE> 91
purposes and that the shares will not be resold except through redemption by the
Fund, by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the Fund imposes a contingent deferred sales
charge of 1.00% in the event of redemptions within one year of the
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purchase other than redemptions required to make payments to participants
under the terms of the plan. The contingent deferred sales charge incurred
upon certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the Fund, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
on sales to $2 million, plus 0.80% on the next million, plus 0.20% on the next
$2 million and 0.08% on the excess over $5 million; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The
amount of the contingent deferred sales charge will vary depending on (i) the
class 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
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<PAGE> 93
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 asset
value of $2 per share. Therefore, $400 of the $600 redemption proceeds will be
charged at a rate of 3.75% (the applicable rate in the second year after
purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1 million or more, although for such
investments the Fund imposes a contingent deferred sales charge of 1.00% on
redemptions made within one year of the purchase. A commission will be paid to
dealers who initiate and are responsible for purchases of $1 million or more as
follows: 1.00% on sales to $2 million, plus 0.80% on the next million, plus
0.20% on the next $2 million and 0.08% on the excess over $5 million.
33
<PAGE> 94
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> <C>
First............................................... 4.00%
Second.............................................. 3.75%
Third............................................... 3.50%
Fourth.............................................. 2.50%
Fifth............................................... 1.50%
Sixth............................................... 1.00%
Seventh and after................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
Conversion Feature. Seven years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher distribution fee applicable to Class B Shares. The
purpose of the conversion feature is to relieve the holders of Class B Shares
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 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.
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<PAGE> 95
The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution and service fees and transfer agency costs
with respect to Class B Shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Code and (ii) that
the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period, which period may extend beyond the period ending seven
years after the end of the month in which the shares were issued.
CLASS C SHARES. Class C Shares redeemed within the first twelve months of
purchase generally will be subject to a contingent deferred sales charge of
1.00% of the dollar amount subject thereto. Class C Shares redeemed thereafter
will not be subject to a contingent deferred sales charge. Class C Shares of the
Fund do not convert to Class A Shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset 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
35
<PAGE> 96
time to time, however, the per share net asset value of the different classes of
shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO
36
<PAGE> 97
64141-9256, requesting an "affidavit of loss" and to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. American
Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh
plans. Details regarding fees, as well as full plan administration for profit
sharing, pension and 401(k) plans, are available from the Distributor.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Money Market Fund, Tax Free Money Fund or Reserve Fund so
long as a pre-existing account for such class of shares exists for such
shareholder.
If the qualified pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of another
Participating Fund, the Money Market Fund, the Tax Free Money Fund or
37
<PAGE> 98
the Reserve Fund, subject to certain limitations herein or in such other fund's
prospectus. Before effecting an exchange, shareholders in the Fund should obtain
and read a current prospectus of the fund into which the exchange is to be made.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE
FOR SALE IN THEIR STATE.
In general, shares of the Fund must have been registered in the shareholder's
name for at least 15 days prior to an exchange. Shares of the Fund registered in
a shareholder's name for less than 15 days may only be exchanged upon receipt of
prior approval of the Adviser; however, under normal circumstances, it is the
policy of the Adviser not to approve such requests. Upon 60 days after the date
of this prospectus, the Fund will increase the number of days shares must be
registered in a shareholder's name prior to an exchange to 30 days.
Exchanges of Class A Shares of the Fund that have been charged a sales charge
lower than the sales charge applicable to the other fund will have the sales
charge differential imposed upon the exchange into such fund. Similarly,
exchanges of any Class A Shares of other funds that have been charged a sales
charge lower than the sales charge applicable to the Fund will have the sales
charge differential imposed upon exchange into the Fund. Shares of other funds
which have not previously been charged a sales charge (except for shares
purchased via the reinvestment option) will be charged the sales charge
differential applicable to Class A Shares of the Fund upon exchange into the
Fund.
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. Upon redemption of Class B Shares and Class C Shares from the Van Kampen
American Capital family of funds, Class B Shares and Class C Shares which have
been exchanged are subject to the contingent deferred sales charge imposed by
the initial Van Kampen American Capital fund purchased by the investor prior to
any exchanges. The holding period requirements for the contingent deferred sales
charge, and the conversion privilege for Class B Shares of the Fund, are
determined by the date of purchase into the initial Van Kampen American Capital
fund purchased by the investor prior to any exchanges.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van
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<PAGE> 99
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, a shareholder agrees that neither VKAC nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. If the exchanging shareholder does not have an account in the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gains options (except dividend
diversification options) and broker, dealer or financial intermediary of record
as the account from which shares are exchanged, unless otherwise specified by
the shareholder. In order to establish a systematic withdrawal plan for the new
account or dividend diversification options for the new account, an exchanging
shareholder must file a specific written request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
may restrict or terminate the exchange privilege at any time on 60 days' notice
to its shareholders of any termination or material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25. Such a systematic withdrawal plan
may also be maintained by an investor purchasing shares for a retirement plan
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with
39
<PAGE> 100
purchases of additional shares ordinarily will be disadvantageous to the
shareholder because of the duplication of sales charges. The Fund reserves the
right to amend or terminate the systematic withdrawal program on thirty days'
notice to its shareholders.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the
40
<PAGE> 101
authorized signer and certified within the prior 60 days must accompany the
redemption request. The redemption price is the net asset value per share next
determined after the request is received by ACCESS in proper form. Payment for
shares redeemed (less any sales charge, if applicable) will ordinarily be made
by check mailed within three business days after acceptance by ACCESS of the
request and any other necessary documents in proper order. Such payments may be
postponed or the right of redemption suspended as provided by the rules of the
SEC. If the shares to be redeemed have been recently purchased by check, ACCESS
may delay mailing a redemption check until it confirms that the purchase check
has cleared, usually a period of up to 15 days. Any gain or loss realized on the
redemption of shares is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use
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<PAGE> 102
the Fund's other redemption procedures previously described. Requests received
by ACCESS prior to 4:00 p.m., New York time, on a regular business day will be
processed at the net asset value per share determined that day. These privileges
are available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
the shares to be redeemed have been recently purchased by check, ACCESS may
delay mailing a redemption check or wiring redemption proceeds until it confirms
that the purchase check has cleared, usually a period of up to 15 days. If an
account has multiple owners, ACCESS may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
Shares and Class C Shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
42
<PAGE> 103
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value next determined after the order is
received, which must be within 120 days after the date of the redemption. See
"Purchase of Shares -- Waiver of Contingent Deferred Sales Charge."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor, and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.25% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and 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 brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries as a service fee or the amount of the
Distributor's actual distribution related expense.
43
<PAGE> 104
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 brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of the 0.75% not paid to such
brokers, dealers or 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 brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual 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
44
<PAGE> 105
shareholders of 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 less than 0.01%,
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 series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge 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.
- ------------------------------------------------------------------------------
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.
45
<PAGE> 106
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit dividend 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 the Shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The following discussion reflects applicable federal income 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.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
46
<PAGE> 107
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.
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
47
<PAGE> 108
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 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
48
<PAGE> 109
more than one year. Any loss realized upon a taxable disposition of Shares held
for six months or less will be treated as a long-term capital loss to the extent
of any capital gains dividends received with respect to such Shares. For
purposes of determining whether Shares have been held for six months or less,
the holding period is suspended for any periods during which the Shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of holding and disposing of Shares, as
well as the effects of state, local and foreign tax law and any proposed tax law
changes.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, 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
49
<PAGE> 110
premiums from futures transactions engaged in by the Fund. Distribution rates
will be computed separately for each class of the Fund's shares.
Further information about the Fund's performance is contained in its Annual
Report and its Statement of Additional Information each of which can be obtained
without charge by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired).
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Equity Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized in 1993 as a sub-trust of Van Kampen Merritt Equity Trust,
a Massachusetts business trust, and was reorganized as a series of the Trust as
of July 31, 1995. Shares of the Trust entitle their holders to one vote per
share; however, separate votes are taken by each series on matters affecting an
individual series.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, $0.01 par value, divided into classes. The fund
currently offers three classes, designated Class A Shares, Class B Shares and
Class C Shares. Each class of shares 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 holders of Class B Shares and Class C Shares are likely
to be lower than to other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of 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 1940 Act. More detailed
information concerning the Trust is set forth in the Statement of Additional
Information.
50
<PAGE> 111
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The 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 the Fund's
independent auditors, is sent to shareholders each year. After the end of each
year, shareholders will receive federal income tax information regarding
dividends and capital gains distributions.
Shareholder inquiries should be directed to the Van Kampen American Capital
Utility Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn:
Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and Shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
51
<PAGE> 112
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER (800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER (800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5666
VAN KAMPEN AMERICAN CAPITAL
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
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital Funds
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 113
UTILITY FUND
------------------------------------------------------------------------------
P R O S P E C T U S
JULY 31, 1995
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 114
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(708) 684-6000
---------------------
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
DATED AUGUST 2, 1995
------------------------
This Statement of Additional Information provides information about the Van
Kampen American
Capital Utility Fund, an open-end management investment company (the "VK Fund"),
a series of the Van Kampen American Capital Equity Trust ("VKAC Equity Trust"),
in addition to information contained in the Proxy Statement/Prospectus of the VK
Fund, dated August 2, 1995, which also serves as the Proxy Statement of the Van
Kampen American Capital Utilities Income Fund (the "AC Fund"), in connection
with the issuance of Class A, B and C Shares of the VK Fund to shareholders of
the AC Fund. This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Proxy Statement/Prospectus, into which it
has been incorporated by reference and which may be obtained by contacting the
VK Fund located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181 (800)
225-2222 or the AC Fund located at 2800 Post Oak Boulevard, Houston, Texas 77056
(800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the AC Fund................................................ 2
Additional Information About the VK Fund and the VKAC Equity Trust.................... 2
Additional Information About the AC Fund.............................................. 2
Financial Statements.................................................................. 2
Pro Forma Financial Statements........................................................ 2
</TABLE>
The VKAC Equity Trust will provide, without charge, upon the written or
oral request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.
1
<PAGE> 115
PROPOSED REORGANIZATION OF THE AC FUND
The shareholders of the AC Fund are being asked to approve an acquisition
of all the assets and liabilities of the AC Fund in exchange for Class A, B and
C Shares of the VK Fund (the "Reorganization").
For detailed information about the Reorganization, shareholders should
refer to the Proxy Statement/Prospectus.
ADDITIONAL INFORMATION ABOUT THE VK FUND AND THE VKAC EQUITY TRUST
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VK Fund, dated July 31, 1995, attached as Appendix
A to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE AC FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the AC Fund, dated August 1, 1995, attached as
Appendix B to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the VK Fund for fiscal year ended June 30, 1994,
attached as Appendix C to this Statement of Additional Information, (ii) the
unaudited semi-annual financial statements of the VK Fund for the six months
ended December 31, 1994, attached as Appendix D to this Statement of Additional
Information, (iii) the audited financial statements of the AC Fund for fiscal
year ended September 30, 1994, attached as Appendix E to this Statement of
Additional Information and (iv) the unaudited semi-annual financial statements
of the AC Fund for the six months ended March 31, 1995, attached as Appendix F
to this Statement of Additional Information.
The unaudited semi-annual financial statements of the VK Fund and the AC
Fund, respectively, reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the interim periods
presented. All such adjustments are of a normal recurring nature.
PRO FORMA FINANCIAL STATEMENTS
Set forth below are unaudited pro forma financial statements of the VK Fund
giving effect to the Reorganization which include (i) Pro Forma Condensed
Statement of Assets and Liabilities at December 31, 1994, (ii) Pro Forma
Condensed Statement of Operations for the year ended December 31, 1994; and
(iii) Pro Forma Portfolio of Investments at December 31, 1994.
2
<PAGE> 116
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
UNAUDITED
<TABLE>
<CAPTION>
VK FUND AC FUND ADJUSTMENTS PRO FORMA
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investments, at Market Value (cost of $139,241,360,
$21,330,573 and $160,571,933, respectively)(3)..... $125,737,414 $20,272,287 $ 0 $146,009,701
Short Term Investments (cost of $1,620,025,
$1,286,404 and $2,906,429, respectively)........... 1,587,100 1,286,404 0 2,873,504
Cash(4)(5)........................................... 1,945,750 4,963 9,194 1,959,907
Unamortized Organization Expenses and Initial
Registration Costs(4).............................. 82,114 11,786 (11,786) 82,114
Other Assets less Liabilities........................ 280,173 253,226 0 533,399
------------ ----------- ---------- ------------
Net Assets........................................... $129,632,551 $21,828,666 $ (2,592) $151,458,625
============ =========== ========== ============
Net Assets Consist of:
Capital............................................ $150,409,499 $23,278,433 $ 0 $173,687,932
Accumulated Undistributed Net Investment
Income(5)........................................ 168,339 2,592 (2,592) 168,339
Accumulated Net Realized Loss on Investments....... (7,320,968) (394,073) 0 (7,715,041)
Net Unrealized Depreciation on Investments......... (13,624,319) (1,058,286) 0 (14,682,605)
------------ ----------- ---------- ------------
Net Assets........................................... $129,632,551 $21,828,666 $ (2,592) $151,458,625
============ =========== ========== ============
Class A Shares:
Net Assets (including the conversion of Class D
shares to Class A shares)(5)..................... $ 49,737,170 $ 8,015,034 $ (952) $ 57,751,252
Shares Outstanding(1).............................. 3,986,791 962,824 (320,594) 4,629,021
------------ ----------- ------------
NAV................................................ $ 12.48 $ 8.32 $ 12.48
============ =========== ============
Class B Shares:
Net Assets(5)...................................... $ 78,589,041 $11,807,834 $ (1,402) $ 90,395,473
Shares Outstanding(1).............................. 6,288,480 1,418,902 (474,275) 7,233,107
------------ ----------- ------------
NAV................................................ $ 12.50 $ 8.32 $ 12.50
============ =========== ============
Class C Shares:
Net Assets(5)...................................... $ 1,306,340 $ 2,005,798 $ (238) $ 3,311,900
Shares Outstanding(1).............................. 104,572 241,166 (80,574) 265,164
------------ ----------- ------------
NAV................................................ $ 12.49 $ 8.32 $ 12.49
============ =========== ============
</TABLE>
- ---------------
(1) -- The pro forma statements are presented as if the Reorganization was
effective December 31, 1994. The pro forma statements give effect to the
proposed exchange of stock for assets with the VK Fund being the surviving
entity. The proposed transaction will be accounted for in accordance with
generally accepted accounting principles as a tax-free Reorganization. The
historical cost basis of the investments is carried over to the surviving
entity.
(2) -- The pro forma statement presumes the issuance by the VK Fund of 642,230
Class A shares, 944,627 Class B shares, and 160,592 Class C shares in
exchange for the assets and liabilities of the AC Fund.
(3) -- Due to the differences in the pricing methodologies of the two funds,
immediately prior to the Reorganization the investments of the AC Fund will
be valued on the same basis as the investments of the VK Fund and as a
result, the market value of the AC Fund will be increased by approximately
$52,500, or $0.02 per share.
(4) -- In connection with this transaction, the Distributor, prior to the
Reorganization, will reimburse the AC Fund for any remaining unamortized
organizational expenses and initial registration costs.
(5) -- In connection with this transaction, the AC Fund, prior to the
Reorganization, will distribute all of its undistributed net investment
income.
(6) -- In connection with this transaction, the combined Fund immediately after
the Reorganization will incur a non-recurring cost associated with the
combination of approximately $113,000, or $.009 per share.
3
<PAGE> 117
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
UNAUDITED
<TABLE>
<CAPTION>
VK FUND AC FUND ADJUSTMENTS PRO FORMA
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income....................... $ 8,402,771 $ 1,016,234 $ 0 $ 9,419,005
------------ ----------- ----------- ------------
Expenses:
Distribution (12b-1) and Service
Fees............................... 1,012,996 101,760 (27,600)(1) 1,087,156
Investment Advisory Fee............... 898,025 97,708 0 995,733
All Other Expenses.................... 562,488 233,546 (107,200)(2) 688,834
------------ ----------- ----------- ------------
Total Expenses.......................... 2,473,509 433,014 (134,800) 2,771,723
Less Expenses Waived.................... 0 157,313 (157,313)(3) 0
------------ ----------- ----------- ------------
Net Expenses.......................... 2,473,509 275,701 22,513 2,771,723
------------ ----------- ----------- ------------
Net Investment Income................... 5,929,262 740,533 (22,513) 6,647,282
------------ ----------- ----------- ------------
Realized and Unrealized Loss on
Investments:
Net Realized Loss on Investments...... (7,771,099) (391,399) 0 (8,162,498)
Net Change in Unrealized Depreciation
on Investments During the Period... (13,208,401) (1,052,857) 0 (14,261,258)
------------ ----------- ----------- ------------
Net Realized and Unrealized Gain/Loss on
Investments........................... (20,979,500) (1,444,256) 0 (22,423,756)
------------ ----------- ----------- ------------
Net Decrease in Net Assets from
Operations............................ $(15,050,238) $ (703,723) $ (22,513) $(15,776,474)
============ =========== ========== ============
</TABLE>
- ---------------
(1) -- In connection with this transaction, the Class A Share Distribution and
Service Plan of the VK Fund will be reduced from a maximum of .30% of
average net assets to .25%.
(2) -- Reflects the reduction of other operating expenses as a result of the
elimination of certain duplicative expenses and the results of operating a
larger, more efficient Fund rather than two smaller Funds.
(3) -- It is anticipated that, subsequent to this transaction, there will be no
waiver of management fees or assumption of other expenses by the investment
adviser.
4
<PAGE> 118
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
PRO FORMA -- PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES ($)MARKET VALUE
- -------------------- ------- ----------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS 80.3%
BUILDINGS & REAL ESTATE 0.8%
Health & Retirement Property Trust................................. 92,750 1,240,531
-------------
ELECTRIC UTILITIES 28.8%
Baltimore Gas & Electric Co........................................ 20,500 453,563
Boston Edison Co................................................... 56,054 1,338,289
</TABLE>
<TABLE>
<S> <C> <C>
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.................................................... 99,100 2,266,912
DPL Inc............................................................ 100,212 2,054,346
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...................................................... 76,600 2,690,575
General Public Utilities Corp...................................... 86,175 2,262,094
Georgia Power Co. -- Preferred..................................... 90,000 1,845,000
NIPSCO Industries, Inc............................................. 15,000 446,250
Nynex Corp......................................................... 78,100 2,870,175
Oklahoma Gas & Electric Co......................................... 54,806 1,815,449
Pacific Gas & Electric Co.......................................... 61,600 1,501,500
Pacificorp......................................................... 28,500 516,563
Peco Energy Co..................................................... 87,823 2,151,664
Pinnacle West Capital Corp......................................... 116,000 2,291,000
Public Service Company of Colorado................................. 15,500 455,312
Public Service Enterprise Group.................................... 16,800 445,200
Scana Corp......................................................... 10,600 446,525
Southern Co........................................................ 107,225 2,144,500
Teco Energy Inc.................................................... 84,800 1,706,600
Texas Utilities Co................................................. 50,500 1,616,000
Unicom Corp........................................................ 56,000 1,344,000
Washington Water Power Co.......................................... 70,000 953,750
Wisconsin Energy Corp.............................................. 68,478 1,771,868
-------------
43,545,813
-------------
</TABLE>
5
<PAGE> 119
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
PRO FORMA -- PORTFOLIO OF INVESTMENTS -- CONTINUED
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES ($)MARKET VALUE
- -------------------- ------- ----------------
<S> <C> <C>
ELECTRONICS 0.3%
Kenetech Corp...................................................... 30,000 431,250
-------------
NATURAL GAS PIPELINE AND DISTRIBUTION 16.8%
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
K N Energy Inc..................................................... 38,613 917,059
MCN Corp........................................................... 124,000 2,247,500
National Fuel Gas Co. NJ........................................... 66,300 1,690,650
Nicor Inc.......................................................... 79,211 1,802,050
Pacific Enterprises................................................ 24,100 512,125
Questar Corp....................................................... 70,000 1,925,000
Sonat Inc.......................................................... 70,000 1,960,000
Tenneco Inc........................................................ 15,000 637,500
Transco Energy..................................................... 10,000 455,000
UGI Corp........................................................... 88,018 1,793,367
Western Resources Inc.............................................. 78,800 2,255,650
-------------
25,427,606
-------------
TELECOMMUNICATIONS 14.7%
Airtouch Communications Inc........................................ 50,000 1,456,250
Ameritech Corp..................................................... 69,470 2,804,851
AT & T Corp........................................................ 50,000 2,512,500
Bell Atlantic Corp................................................. 38,000 1,890,500
Bellsouth Corp..................................................... 60,600 3,279,975
Citizens Utilities Co.............................................. 55,000 694,375
GTE Corp........................................................... 44,600 1,354,725
MCI Communications Corp............................................ 102,000 1,874,250
Pacific Telesis Group.............................................. 17,200 490,200
Southwestern Bell Corp............................................. 50,000 2,018,750
</TABLE>
6
<PAGE> 120
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
PRO FORMA -- PORTFOLIO OF INVESTMENTS -- CONTINUED
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES ($)MARKET VALUE
- -------------------- ------- ----------------
<S> <C> <C>
TELECOMMUNICATIONS -- CONTINUED
Telephone & Data Systems Inc....................................... 42,508 1,960,681
U.S. West Inc...................................................... 42,600 1,517,625
Viatel Inc......................................................... 117,325 457,568
-------------
22,312,250
-------------
WATER & SEWER UTILITIES 1.3%
American Water Works Inc........................................... 61,083 1,649,241
United Water Resources Inc......................................... 24,900 314,363
-------------
1,963,604
-------------
FOREIGN 17.6%
AES China Generating Co. Ltd. (China).............................. 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
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).................. 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)..................................... 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 121,590,468
-------------
</TABLE>
7
<PAGE> 121
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
PRO FORMA -- PORTFOLIO OF INVESTMENTS -- CONTINUED
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
PAR
AMOUNT
($000) DESCRIPTION COUPON(%) MATURITY ($)MARKET VALUE
- ------ ------------------------------------------------ -------- -------- ---------------
<S> <C> <C> <C> <C>
FIXED INCOME SECURITIES 16.1%
ELECTRIC UTILITIES 4.1%
380 Alabama Power Co................................ 6.375 08/01/99 351,842
100 Baltimore Gas & Electric Co..................... 7.500 01/15/07 92,770
200 Cincinnati Gas & Electric Co.................... 6.450 02/15/04 174,700
500 Idaho Power Co.................................. 8.000 03/15/04 488,200
700 Iowa Electric Light & Power..................... 8.625 05/15/01 707,490
3,000 Midland Funding Corp. II........................ 11.750 07/23/05 2,790,000
200 San Diego Gas & Electric Co..................... 7.625 06/15/02 191,180
400 Southern Union Co............................... 7.600 02/01/24 335,492
250 Texas Utilities Electric Co..................... 6.250 10/01/04 212,038
500 Union Electric Co............................... 7.375 12/15/04 467,800
200 Virginia Electric & Power Co.................... 8.875 06/01/99 203,620
200 Virginia Electric & Power Co.................... 6.000 08/01/01 175,840
---------------
6,190,972
---------------
NATURAL GAS PIPELINE AND DISTRIBUTION 3.2%
2,440 Coastal Corp.................................... 8.125 09/15/02 2,333,721
500 Colorado Interstate Gas Co...................... 10.000 06/15/05 541,400
595 Enron Corp...................................... 6.750 07/01/05 517,352
400 Enserch Corp.................................... 6.375 02/01/04 342,720
330 Laclede Gas Co.................................. 8.500 11/15/04 331,683
75 Occidental Petroleum............................ 10.125 09/15/09 80,385
500 Panhandle Eastern Corp.......................... 7.875 08/15/04 476,300
100 Texas Eastern Transmission Corp................. 8.000 07/15/02 96,730
85 Union Oil of California 8.750 08/15/01 85,833
100 Union Oil of California......................... 6.375 02/01/04 85,650
---------------
4,891,774
---------------
TELECOMMUNICATIONS 6.8%
600 AT & T Corp..................................... 7.500 06/01/06 562,080
355 GTE Corp........................................ 9.375 12/01/00 369,945
390 MCI Communications Corp......................... 7.500 08/20/04 367,341
2,000 Mobilemedia Communications...................... 0/10.500 12/01/03 1,110,000
485 Motorola, Inc................................... 7.600 01/01/07 457,064
</TABLE>
8
<PAGE> 122
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
PRO FORMA -- PORTFOLIO OF INVESTMENTS -- CONTINUED
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
PAR
AMOUNT
($000) DESCRIPTION COUPON(%) MATURITY ($)MARKET VALUE
- ------ ------------------------------------------------ -------- -------- ---------------
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS -- CONTINUED
80 Northwestern Bell Telephone Co.................. 9.500 05/01/00 84,216
450 Pacific Telephone & Telegraph Co................ 6.000 11/01/02 388,935
600 Tele-Communications, Inc........................ 7.250 08/01/05 517,620
1,500 Tele-Communications, Inc........................ 8.250 01/15/03 1,419,706
1,000 Telephone & Data Systems Inc.................... 8.400 02/24/23 873,522
2,112 Time Warner Inc................................. 8.750 01/10/15 1,990,560
617 United Telecommunications, Inc.................. 9.750 04/01/00 644,888
3,250 Viatel Inc...................................... 0/15.000 01/15/05 1,573,650
---------------
10,359,527
---------------
FOREIGN 2.0%
1,250 AES Corp. (China)............................... 6.500 03/15/02 1,206,250
1,500 Argentina Rep (Argentina)....................... 8.375 12/20/03 1,102,500
200 Hydro Quebec (Canada)........................... 7.375 02/01/03 187,380
500 Hydro Quebec (Canada)........................... 8.050 07/07/24 480,830
---------------
2,976,960
---------------
TOTAL FIXED INCOME SECURITIES................................................... 24,419,233
---------------
TOTAL LONG-TERM INVESTMENTS (COST $160,571,933) 96.4%........................... 146,009,701
---------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,906,429) 1.9%............................. 2,873,504
---------------
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%...................................... 2,575,420
---------------
NET ASSETS 100%................................................................. $ 151,458,625
============
</TABLE>
9
<PAGE> 123
APPENDIX A
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL UTILITY FUND
Van Kampen American Capital Utility Fund, formerly known as 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 series of Van Kampen American
Capital Equity Trust, a Delaware 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 July 31, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling (800) 421-5666. This Statement of Additional Information incorporates by
reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (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.................................................................. 2
Investment Policies and Restrictions.................................................... 2
Additional Investment Considerations.................................................... 3
Description of Securities Ratings....................................................... 13
Officers and Trustees................................................................... 19
Investment Advisory and Other Services.................................................. 25
Portfolio Transactions and Brokerage Allocation......................................... 27
Tax Status of the Fund.................................................................. 27
The Distributor......................................................................... 27
Legal Counsel........................................................................... 29
Performance Information................................................................. 29
Unaudited Financial Statements.......................................................... 31
Notes to Unaudited Financial Statements................................................. 38
Independent Auditors' Report............................................................ 42
Audited Financial Statements............................................................ 43
Notes to Audited Financial Statements................................................... 50
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 31, 1995.
1
<PAGE> 124
THE FUND AND THE TRUST
The Fund is a separate series of the Trust, an open-end diversified
management investment company. At present, the Fund, Van Kampen Merritt Growth
and Income Fund, Van Kampen American Capital Balanced Fund, Van Kampen American
Capital Total Return Fund (which has not commenced investment operations) and
Van Kampen American Capital Growth Fund (which has not commenced investment
operations) are the only series of the Trust, although other series may be
organized and offered in the future.
The Trust is a Delaware business trust established under the laws of the
State of Delaware by a Declaration of Trust dated May 10, 1995 (the "Declaration
of Trust"). The Declaration of Trust permits the Trustees to create one or more
separate investment portfolios and issue a series of shares for each portfolio.
The Trustee can further sub-divide each series of shares into one or more
classes of shares for each portfolio. Each share represents an equal
proportionate interest in the assets of the series with each other share in such
series and no interest in any other series. No series is subject to the
liabilities of any other series. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Trust or any of its
series, requires inclusion of a clause to that effect in every agreement entered
into by the Trust or any of its series and indemnifies shareholders against any
such liability. The Fund was originally organized in 1993 as a sub-trust of Van
Kampen Merritt Equity Trust, a Massachusetts business trust by a Declaration of
Trust dated March 26, 1987, under the name of Van Kampen Merritt Utility Fund,
and was reorganized as a series of the Trust as of July 31, 1995.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange rights. The Trust
does not contemplate holding regular meetings of shareholders to elect Trustees
or otherwise. However, the holders of 10% or more of the outstanding shares may
by written request require a meeting to consider the removal of Trustees by a
vote of a majority of the shares present and voting at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the Investment Company Act of 1940, as amended (the "1940 Act") or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares or
impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under
the caption "Investment 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
2
<PAGE> 125
other than in connection with issuances, borrowings, hedging transactions
and risk management techniques.
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
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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, 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
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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
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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 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,
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or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" 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.
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With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument 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
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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 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.
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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.
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.
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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.
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
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Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and income
instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets 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
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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.
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.
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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.
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.
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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.
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
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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.
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'.
</TABLE>
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<TABLE>
<S> <C>
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.
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.
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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 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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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
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 tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each
19
<PAGE> 142
of the open-end investment companies advised by the VK Adviser (excluding the
Van Kampen Merritt Series Trust) and each of the open-end investment companies
advised by the AC Adviser.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing.
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
</TABLE>
20
<PAGE> 143
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. (NASD) and Securities Investors
Protection Corp. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A director of Source
Glendale, CA 91208 Capital, Inc., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. Trustee of each of the Van Kampen
American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
</TABLE>
21
<PAGE> 144
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
- --------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.
Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Vice
Age: 39 and Chief Financial President, Treasurer and Chief Financial
Officer Officer of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
</TABLE>
22
<PAGE> 145
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
- --------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Sheehan is an interested person of the VK Adviser and the Fund by reason of
his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an
interested person of the Fund by reason of his firm acting as legal counsel
for the Fund.
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of Van Kampen
American Capital, and have entered into employment contracts (for a term of five
years) with Van Kampen American Capital.
The Fund will pay trustees who are not affiliated persons of the VK
Adviser, the Distributor or Van Kampen American Capital an annual retainer of
$2,500 per year and $125 per regular quarterly meeting of the Fund, plus
expenses. No additional fees are proposed at the present time to be paid for
special meetings, committee meetings or to the chairman of the board. The
trustees have approved an aggregate annual compensation cap from the combined
fund complex of $84,000 per trustee (excluding any retirement benefits) until
December 31, 1996, based upon the current net assets and the current number of
Van Kampen American Capital funds (except that Mr. Whalen, who is also a trustee
of the closed-end funds advised by the VK Adviser would receive additional
compensation for serving as a trustee of such funds). In addition, the VK
Adviser has agreed to reimburse the Fund through December 31, 1996, for any
increase in the aggregate trustees' compensation over the aggregate compensation
paid by the Fund in its 1994 fiscal year.
23
<PAGE> 146
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. Powell and McDonnell, Trustees of the Registrant (as defined below),
were affiliated persons of the Adviser and were not eligible for
compensation or retirement benefits from the Registrant. Messrs. Branagan,
Caruso, Hilsman, Rees, Sheehan, Sisto and Woodside were elected as trustees
of the Trust at a shareholders meeting held July 21, 1995 and thus received
no compensation or retirement benefits from the Registrant during its 1994
fiscal year.
(2) The Registrant is Van Kampen American Capital Equity Trust (the "Trust")
which currently is comprised of 3 operating series, including the Fund. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 3 series during such series' 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 Registrant's last completed fiscal year end for which audited financial
statements are available ended June 30, 1994. The Retirement Plan commenced
as of August 1, 1994 for the Registrant.
(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.
(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser that had the same members on each Funds' Board of
Trustees. The amounts shown in this column are accumulated from the
Aggregate Compensation of each of these 20 mutual funds in the Fund Complex
during the calendar year ended December 31, 1994. The VK Adviser also serves
as investment adviser for other investment companies; however, with the
exception of Messrs. Powell, McDonnell and Whalen, the Trustees are not
trustees of such investment companies. Combining the Fund Complex with other
investment companies advised by the Adviser, Mr. Whalen received Total
Compensation of $161,850 during the calendar year ended December 31, 1994.
As of July 17, 1995, the trustees and officers as a group 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 July 17, 1995, no person owned of
record or beneficially 5% or more of the Fund's Class A Shares or Class B
Shares.
As of July 17, 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%;
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%; and LP & Teresa Anderson
Foundation, P.O. Box 190, Miles City, MT 59301-0190, 7%.
24
<PAGE> 147
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is
the Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc., which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC
Holding, Inc. is controlled, through the ownership of a substantial majority of
its common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates
L.P., are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto
Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E.
Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of Van Kampen American
Capital, Inc. own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
The investment advisory agreement 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 series, 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 series (or by the Fund's shareholders), and by the
disinterested trustees in compliance with the requirements of the 1940 Act. The
agreement may be terminated without penalty upon 60 days' written notice by
either party thereto and will automatically terminate in the event of
assignment.
The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
25
<PAGE> 148
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 which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, 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. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital mutual funds advised
by the VK Adviser and distributed by the Distributor, shared such costs
proportionately among themselves based upon their respective net asset values.
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 American Capital
mutual funds advised by the VK Adviser and 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 American Capital 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 VK Adviser's cost of providing accounting
services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen
American Capital funds advised by the VK Adviser and distributed by the
Distributor have entered into Legal Services Agreement pursuant to which Van
Kampen American Capital provides legal services, including without limitation:
maintenance of the funds' minute books and records, preparation and oversight of
the funds' regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the fund's.
Payment by the Fund for such services is made on a cost basis for the salary and
salary related benefits, including but not limited to bonuses, group insurances
and other regular wages for the employment of personnel, as well as overhead and
the expenses related to the office space and the equipment necessary to render
the legal services. Other funds distributed by the Distributor also receive
legal services from Van Kampen American Capital. Of the total costs for legal
services provided to funds distributed by the Distributor, one half of such
costs are allocated equally to each fund and the remaining one half of such
costs are allocated to specific funds based on monthly time records.
For the 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.
26
<PAGE> 149
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.
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 series.
The trustees have adopted certain policies incorporating the standards of
Rule 17e-1 issued by the SEC under the 1940 Act which requires that the
commissions paid to the Distributor and other affiliates of the Fund must be
reasonable and fair compared to the commissions, fees or other remuneration
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 series, 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
The Distributor offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual
27
<PAGE> 150
fund group according to Strategic Insight. Van Kampen American Capital's roots
in money management extend back to 1926. Today, Van Kampen American Capital
manages or supervises more than $50 billion in mutual funds, closed-end funds
and unit investment trusts -- assets which have been entrusted to Van Kampen
American Capital in more than 2 million investor accounts. Van Kampen American
Capital has one of the largest research teams (outside of the rating agencies)
in the country, with 86 analysts devoted to various specializations.
Shares of the Fund are offered through the Distributor, One Parkview Plaza,
Oakbrook Terrace, 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 7% of
the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. C & D 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 financial intermediaries 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 financial intermediaries that have entered into
sub-agreements with the Distributor and sell shares of the Fund are referred to
herein as "financial intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Distribution Plan provides
that it will continue in full 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
28
<PAGE> 151
$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.
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%).
29
<PAGE> 152
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%).
30
<PAGE> 153
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
31
<PAGE> 154
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
32
<PAGE> 155
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
33
<PAGE> 156
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
34
<PAGE> 157
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
35
<PAGE> 158
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
36
<PAGE> 159
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
37
<PAGE> 160
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.
38
<PAGE> 161
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>
39
<PAGE> 162
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.
40
<PAGE> 163
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.
41
<PAGE> 164
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
42
<PAGE> 165
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
43
<PAGE> 166
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
44
<PAGE> 167
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
45
<PAGE> 168
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
46
<PAGE> 169
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
47
<PAGE> 170
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
48
<PAGE> 171
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
49
<PAGE> 172
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
50
<PAGE> 173
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
51
<PAGE> 174
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.
52
<PAGE> 175
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND
AUGUST 1, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 1,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION................................................................... 2
INVESTMENT POLICIES AND TECHNIQUES.................................................... 4
DEPOSITARY RECEIPTS................................................................... 4
REPURCHASE AGREEMENTS................................................................. 4
FORWARD COMMITMENTS................................................................... 5
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................... 5
LOANS OF PORTFOLIO SECURITIES......................................................... 12
INVESTMENT RESTRICTIONS............................................................... 13
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 15
INVESTMENT ADVISORY AGREEMENT......................................................... 20
DISTRIBUTOR........................................................................... 21
DISTRIBUTION PLANS.................................................................... 21
TRANSFER AGENT........................................................................ 23
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 23
DETERMINATION OF NET ASSET VALUE...................................................... 25
PURCHASE AND REDEMPTION OF SHARES..................................................... 26
EXCHANGE PRIVILEGE.................................................................... 30
CHECK WRITING PRIVILEGE............................................................... 30
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 31
FUND PERFORMANCE...................................................................... 33
OTHER INFORMATION..................................................................... 34
FINANCIAL STATEMENTS.................................................................. 34
APPENDIX -- DESCRIPTION OF BOND RATINGS............................................... 35
</TABLE>
<PAGE> 176
GENERAL INFORMATION
Van Kampen American Capital Utilities Income Fund (the "Fund") was
originally incorporated in Maryland on August 31, 1993 and reorganized as a
trust under the laws of Delaware July 31, 1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor") and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC's roots in money
management extend back to 1926. Today, VKAC manages or supervises more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with more than 86 analysts devoted to various specializations.
VKAC equity fund philosophy is to normally remain fully invested and
diversified across many industries to achieve consistent long-term returns.
VKAC uses a four-step investment process designed to attempt to produce
consistently good short-term results, which should help lead to superior
long-term performance.
Fully Invested: Money invested in a VKAC stock fund will normally be fully
invested in the market to attempt to maximize the potential for long-term
returns. The importance of being fully invested can be illustrated by the
following comparison. By missing fewer than four percent of the months during
the past 68 years, the value of one dollar invested in 1926 was $11.57 at the
end of 1994, compared to $810.54 for one dollar that was invested for the entire
period (Source: Micropal, Inc.). During the most recent five-year period
(1990-1994), the average annual total return for stocks, as measured by the
Standard and Poor's 500 Stock Index, a broad-based, unmanaged index, was 8.87
percent. However, the average annual return for the S&P 500 for the same period
excluding the 20 best days for stock market performance, was just 0.67 percent.
Of course, past performance is no guarantee of future results.
Widely Varied: A widely varied portfolio usually reduces risk and increases
relative stability. Since VKAC's goal is consistency, a widely varied portfolio
across industries is emphasized. VKAC stock funds are varied both in terms of
the number of industries and the number of stocks within each industry in which
they
2
<PAGE> 177
invest. Generally, the stock funds invest in 12 broad economic sectors, and in
many individual stocks within each sector.
Clearly Defined: The basic characteristics of VKAC funds are determined by
a pre-defined profile which remains constant over time.
Blended Investment Style: Market conditions are constantly changing, which
means the stocks that perform well should be expected to change. A rigid
investment style might cause an investor to suffer when certain types of stocks
lose favor with the market. The two most common investment styles are growth,
which emphasizes companies that are projected to experience rapid growth in
earnings, and value, which focuses on companies whose stock is selling for less
than the company's net worth. At VKAC, our style is blended between growth and
value of a fund-specific basis. The results of our approval are constantly
evaluated and compared to other similar funds. Although past performance is no
guarantee of future results, VKAC remains committed to our belief that this
approach should help maximize potential for long-term returns.
As of July 6, 1995, no person was known by management to own beneficially
or of record as much as five percent of the outstanding shares of any class
except the following:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OWNERSHIP AT CLASS PERCENTAGE
OF HOLDER JULY 6 OF SHARES OWNERSHIP
- ---------------------------------------- -------------------- --------- ----------
<S> <C> <C> <C>
Van Kampen American Capital 217,192 shares of Class A 21.05%
Asset Management Inc. beneficial ownership
2800 Post Oak Boulevard
Houston, Texas 77056
Van Kampen American Capital 283,755 shares held Class A 25.69%
Trust Company of record
2800 Post Oak Boulevard 375,528 shares held Class B 21.72%
Houston, Texas 77056 of record
12,508 shares held Class C 4.20%
of record
Donaldson Lufkin Jenrette 264,329 shares held Class B 15.29%
1 Pershing Plaza 5th floor of record
Jersey City, New Jersey 07399-0002 45,733 shares held Class C 15.36%
of record
National Financial Services Corp. 102,286 shares held Class B 5.92%
Church Street Station of record
P.O. Box 3730
New York, New York 10008-3730
Paine Webber, Inc. 154,892 shares held Class B 8.96%
Genises Jungco-Lincoln Harbor of record
1000 Harbor Blvd., 6th Floor
Weehawken, New Jersey 07087-6727
</TABLE>
3
<PAGE> 178
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OWNERSHIP AT CLASS PERCENTAGE
OF HOLDER JULY 6 OF SHARES OWNERSHIP
- ---------------------------------------- -------------------- --------- ----------
<S> <C> <C> <C>
Smith Barney Inc. 62,944 shares held Class A 6.10%
388 Greenwich Street -- 22nd Floor of record
New York, New York 10013-2375 115,990 shares held Class B 6.71%
of record
147,700 shares held Class C 49.60%
of record
</TABLE>
The outstanding shares of the Fund were held of record by Van Kampen
American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056,
acting as custodian for certain employee benefit plans and retirement accounts.
INVESTMENT POLICIES AND TECHNIQUES
The Fund's primary investment objective is to seek current income. Capital
appreciation is a secondary objective which is sought only when consistent with
the primary objective. The Fund will seek to achieve its investment objectives
by investing in a diversified portfolio of common stocks and income securities
issued by companies engaged in the utilities industry. The following disclosures
supplement disclosures set forth in the Prospectus. Readers must refer also to
the Prospectus for a complete presentation.
DEPOSITARY RECEIPTS
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with broker-dealers or
domestic banks (or a foreign branch or subsidiary thereof). A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a debt security and the seller agrees to repurchase the
obligation at a future time and set price, usually not more than seven days from
the date of purchase, thereby determining the yield during the purchaser's
holding period. Repurchase agreements are collateralized by the underlying debt
securities and may be considered to be loans under the Investment Company Act of
1940, as amended ("1940 Act"). The Fund will make payment for such securities
only upon physical delivery or evidence of book entry transfer to the account of
a custodian or bank acting as agent. The seller under a repurchase agreement is
required to maintain the value of the underlying securities marked to market
daily at not less than the repurchase price. The underlying securities (normally
securities of the U.S. Government, or its agencies and instrumentalities), may
have maturity dates exceeding one year. The Fund does not bear the risk of a
decline in value of the underlying security unless the seller defaults under its
repurchase obligation. See the Prospectus for further information.
4
<PAGE> 179
FORWARD COMMITMENTS
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash, cash equivalents, liquid high
grade debt securities or U.S. Government securities (which may have maturities
which are longer than the term of the Forward Commitment) with the Fund's
custodian in an aggregate amount equal to the amount of its commitment as long
as the obligation to purchase continues. Since the market value of both the
securities subject to the Forward Commitment and the securities held in the
segregated account may fluctuate, the use of Forward Commitments may magnify the
impact of interest rate changes on the Fund's net asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered by the
securities subject to the Forward Commitment, but is designed to provide a hedge
against a decline in value of a security which the Fund owns or has the right to
acquire. In either circumstance, the Fund maintains in a segregated account
(which is marked to market daily) either the security covered by the Forward
Commitment or cash, cash equivalents, liquid high grade debt securities or U.S.
Government securities (which may have maturities which are longer than the term
of the Forward Commitment) with the Fund's custodian in an aggregate amount
equal to the amount of its commitment as long as the obligation to sell
continues. By entering into a Forward Commitment sale transaction, the Fund
forgoes or reduces the potential for both gain and loss in the security which is
being hedged by the Forward Commitment sale. See Prospectus for further
information.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may engage in transactions in options, futures contracts and
options on futures contracts. Set forth below is certain additional information
regarding options, futures contracts and options on futures contracts. See
Prospectus for further information.
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund's current return can be expected to
fluctuate because premiums earned from an option writing program and dividend or
interest income yields on portfolio securities vary as economic and market
conditions change. Writing options on portfolio securities also is likely to
result in a higher portfolio turnover.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund writes call
options either on a covered basis or for cross-hedging purposes. A call option
is covered if at all times during the option period the Fund owns or has the
right to acquire securities of the type that it would be obligated to deliver if
any outstanding option were exercised. An option is for cross-hedging purposes
if it is not covered by the security subject to the option, but is designed to
provide a hedge against a security which the Fund owns or has the right to
acquire. In such circumstances, the Fund maintains in a segregated account with
the Fund's Custodian, cash or U.S. Government securities in an amount not less
than the market value of the underlying security, marked to market daily, while
the option is outstanding.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a
5
<PAGE> 180
segregated account with its Custodian cash, cash equivalents or U.S. Government
securities in an amount of not less than the exercise price of the option, or
would hold a put on the same underlying security at an equal or greater exercise
price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as writer of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a writer, but would provide an asset of
equal value to its obligation under the option written. If the Fund is not able
to enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has written, it will be required to maintain the
securities subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. In
addition, the Fund may purchase call options for capital appreciation. Since the
premium paid for a call option is typically a small fraction of the price of the
underlying security, a given amount of funds will purchase call options covering
a much larger quantity of such security than could be purchased directly. By
purchasing call options, the Fund could benefit from any significant increase in
the price of the underlying security to a greater extent than had it invested
the same amount in the security directly. However, because of the very high
volatility of option premiums, the Fund would bear a significant risk of losing
the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. In addition, the Fund may purchase put
options for capital appreciation in anticipation of a price decline in the
underlying security and a corresponding increase in the value of the put option.
The purchase of put options for capital appreciation involves the same
significant risk of loss as described above for call options.
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In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
The Fund will not purchase call or put options on securities if as a
result, more than ten percent of its net assets would be invested in premiums on
such options.
The Fund may purchase either listed or over-the-counter options, which are
considered illiquid.
RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Fund will purchase additional mortgage-related securities from the same pool (if
obtainable) or replacement mortgage-related securities in the cash market in
order to maintain its cover. A mortgage-related security held by the Fund to
cover an option position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the coupon rate at
which new pools are originated under the FHA/VA loan ceiling in effect at any
given time. If this should occur, the Fund will no longer be covered, and the
Fund will either enter into a closing purchase transaction or replace such
mortgage-related security with a mortgage-related security which represents
cover. When the Fund closes its position or replaces such mortgage-related
security, it may realize an unanticipated loss and incur transaction costs.
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option,
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multiplied by a specified dollar multiple. The writer of the option is
obligated, in return for the premium received, to make delivery of this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
FOREIGN CURRENCY OPTIONS
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Fund from time to
time and over-the-counter options may also be purchased, but only when the
Adviser believes that a liquid secondary market exists for such options,
although there can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investment generally. See "Investment Practices -- Using Options, Futures
Contracts and Related Options" in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
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FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC") under which the Fund is exempt from registration as
a "commodity pool."
Types of Contracts. An interest rate futures contract is an agreement
pursuant to which a party agrees to take or make delivery of a specified debt
security (such as U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills
and GNMA Certificates) at a specified future time and at a specified price.
Interest rate futures contracts also include cash settlement contracts based
upon a specified interest rate such as the London interbank offering rate for
dollar deposits, LIBOR.
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the
Chicago Mercantile Exchange and United States commodity exchanges may develop
futures and futures options on other indices of foreign securities. Futures and
options on United States devised index of foreign stocks are also being
developed.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten percent) of the contract amount. This amount is known as initial
margin. The nature of initial margin in futures transactions is different from
that of margin in securities transactions in that futures contract margin does
not involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
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<PAGE> 184
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs. Ordinarily commissions on futures transactions
are lower than transaction costs incurred in the purchase and sale of
securities.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for this imperfect correlation, the Fund could buy or sell futures contracts in
a greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of the securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not be
correlated with movements in the securities or index underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depositary requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities or index
underlying the futures contract. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities markets. Therefore, increased
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<PAGE> 185
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction judged over a very short time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability
correctly to predict the direction of movements in the market. For example, if
the Fund hedges against a decline in the market, and market prices instead
advance, the Fund will lose part or all of the benefit of the increase in value
of its securities holdings because it will have offsetting losses in futures
contracts. In such cases, if the Fund has insufficient cash, it may have to sell
portfolio securities at a time when it is disadvantageous to do so in order to
meet the daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain other
conditions specified in CFTC regulations) and (ii) that the Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed five percent of the fair market value of the Fund's assets. In order to
prevent leverage in connection with the purchase of futures contracts by the
Fund, an amount of cash, cash equivalents or liquid high grade debt securities
equal to the market value of the obligation under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with the
Custodian.
Additional Risks to Options and Futures Transactions. Each of the United
States exchanges has established limitations governing the maximum number of
call or put options on the same underlying security or futures contract (whether
or not covered) which may be written by a single investor, whether acting alone
or in concert with others (regardless of whether such options are written on the
same or different Exchanges or are held or written on one or more accounts or
through one or more brokers). Option positions of all investment companies
advised by the Adviser are combined for purposes of these limits. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. These position limits may
restrict the number of listed options which the Fund may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
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adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund is subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purposes as, the sale of a futures contract; at the same time, it
could write put options at a lower strike price (a "put bear spread") to offset
part of the cost of the strategy to the Fund. The purchase of call options on
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless, in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However there may be circumstances, such as when there
is no movement in the level of the index, when the use of an option on a future
would result in a loss to the Fund when the use of a future would not.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities to unaffiliated brokers, dealers and
financial institutions provided that cash equal to 100% of the market value of
the securities loaned is deposited by the borrower with the Fund and is
maintained each business day. While such securities are on loan, the borrower is
required to pay the Fund any income accruing thereon. Furthermore, the Fund may
invest the cash collateral in portfolio securities thereby increasing the return
to the Fund as well as increasing the market risk to the Fund.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. The Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may not be changed
without the approval of the holders of a majority of its outstanding shares.
Such majority is defined as the lesser of (i) 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any
permitted loans of its portfolio securities, or (iii) entering into
repurchase agreements, utilizing options, futures contracts and
foreign currency futures and options thereon, forward contracts,
forward commitments and other investment strategies and instruments
that would be considered "senior securities" but for the maintenance
by the Fund of a segregated account with its custodian or some other
form of "cover".
2. Borrow in excess of five percent of the market or other fair value of
its total assets; or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Margin
deposits or payments in connection with the writing of options, or in
connection with the purchase or sale of forward contracts, futures
contracts and foreign currency futures and options thereon, are not
deemed to be a pledge or other encumbrance.
3. Make any investment in real estate except that the Fund may purchase or
sell securities which are secured by real estate and securities issued
by real estate investment trusts and corporation engaged primarily in
real estate.
4. Invest more than five percent of its assets in the securities of any
one issuer (except the U.S. Government, its agencies and
instrumentalities) or purchase more than ten percent of the outstanding
voting securities of any one issuer.
5. Purchase or sell commodities or commodity contracts except that the
Fund may enter into transactions in options, futures contracts and
foreign currency futures or options thereon and forward contracts.
6. Underwrite securities of other companies, except insofar as the Fund
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 in the resale of any securities owned by the Fund.
7. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or
offsetting purchase transactions with respect to such options, (b)
purchase options to the extent that the premiums paid for all such
options owned at any time do not exceed ten percent of its total
assets, and enter into closing or offsetting transactions with respect
to such options, and (c) engage in transactions in interest rate
futures contracts and related options provided that such transactions
are entered into for bona fide hedging purposes (or that the
underlying commodity value of the Fund's long positions do not exceed
the sum of certain identified liquid investments as specified in CFTC
regulations), provided further that the aggregate initial margin and
premiums do not exceed five percent of the fair market value of the
Fund's total assets, and provided further that the Fund
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<PAGE> 188
may not purchase futures contracts or related options if more than 30%
of the Fund's total assets would be so invested.
8. Make loans of money or securities, except (a) by investment in
repurchase agreements in accordance with applicable requirements set
forth in the Fund's Prospectus or (b) by lending its portfolio
securities in amounts not to exceed 33 1/3% of the Fund's total assets,
provided that such loans are secured by cash collateral that is at least
equal to the market value. See "Repurchase Agreements" and "Lending of
Securities" herein and "Investment Practices" in the Prospectus.
The Fund has adopted additional investment restrictions, which may be
changed by the Trustees without a vote of shareholders. These restrictions
provide that the Fund shall not:
1. Make short sales of securities, unless at the time of the sale the Fund
owns an equal amount of such securities. Notwithstanding the foregoing,
the Fund may engage in transactions in options, forward contacts,
futures contracts, foreign currency futures and options thereon.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. Transactions in forward contracts, options,
futures contracts, foreign currency futures and options on such
contracts, including deposits or payments by the Fund of initial or
maintenance margin in connection with any such transaction, are not
considered to be purchases of securities on margin.
3. Invest in securities of any company if any officer or director of the
Fund or of the Adviser owns more than one-half of one percent of the
outstanding securities of such company, and such officers and directors
own in the aggregate more than five percent of the outstanding
securities of such issuer.
4. Invest in interests in oil, gas, or other mineral exploration or
development programs.
5. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition.
6. Purchase an illiquid security if, as a result of such purchase, more
than 15% of the Fund's net assets would be invested in such securities.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have
a maturity of longer than seven days.
7. Invest in warrants or rights except where acquired in units or attached
to other securities. This restriction does not apply to options,
futures contracts or options on futures contracts.
8. Purchase securities of unseasoned issuers, including their predecessors
or sponsors, which have been in operation for less than three years,
and equity securities of issuers which are not readily marketable if by
reason thereof the value of its aggregate investment in such classes of
securities will exceed five percent of its total assets.
The Fund may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
The Fund has made an undertaking with one state to provide written
notification to shareholders of any change in its investment objective at least
30 days prior to implementing such change and will waive any fee or charge which
may result if the shareholder decides to redeem his or her account as a result
of such change in
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<PAGE> 189
the investment objectives. The Fund has also undertaken to invest no more than
10% of its total assets in securities of real estate investment trusts.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and executive officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art. Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Co-Chairman of the Board and a trustee of
each of the Van Kampen American Capital Funds.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital Funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital. A Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
Funds.
</TABLE>
16
<PAGE> 191
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. Co-Chairman of the Board and a Trustee of each
Age: 70 of the Van Kampen American Capital Funds.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
17
<PAGE> 192
OFFICERS
The Fund's officers, other than Messrs. McDonnell and Nyberg, are located
at 2800 Post Oak Blvd., Houston, Texas 77056. Messrs. McDonnell and Nyberg are
located at One Parkview Plaza, Oakbrook Terrace, IL 61181.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Thomas Copper............ Vice President Associate Portfolio Manager of the Adviser;
Age: 36 formerly, Credit Analyst of the Adviser.
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 41 Secretary and Corporate Secretary of the Adviser.
Tanya M. Loden........... Vice President and Vice President and Controller of most of
Age: 35 Controller the investment companies advised by the
Adviser, formerly Tax Manager/Assistant
Controller.
Mary Jayne Maly.......... Vice President Portfolio Manager of the Adviser; formerly,
Age: 39 Senior Equity Analyst, Texas Commerce
Investment Management Company.
Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser. Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.
Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 48 Treasurer investment companies advised by the
Adviser.
Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 41 and Secretary of Van Kampen American
Capital. Executive Vice President and a
Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.
Robert C. Peck, Jr....... Vice President Senior Vice President and Director of the
Age: 48 Adviser.
Alan T. Sachtleben....... Vice President Executive Vice President and Director of
Age: 53 the Adviser, Executive Vice President of
VK/AC Holding, Inc. and Van Kampen American
Capital.
J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.
</TABLE>
18
<PAGE> 193
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Paul R. Wolkenberg....... Vice President Senior Vice President of the Adviser;
Age: 50 President, Chief Operating Officer and
Director of Van Kampen American Capital
Services, Inc. Executive Vice President,
Chief Operating Officer and Director of Van
Kampen American Capital Trust Company.
Executive Vice President and Director of
ACCESS.
</TABLE>
The Trustees and officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Fund during
its last fiscal year. During the fiscal year ended September 30, 1994, the
Trustees who were not affiliated with the Adviser or its parent received as a
group $1,575 in trustees' fees from the Fund in addition to certain
out-of-pocket expenses. Such Trustees also received compensation for serving as
trustees of other investment companies advised by the Adviser. For legal
services rendered during the fiscal year, the Fund paid legal fees of $2,975 to
the law firm of O'Melveny & Myers of which Mr. Sheehan is Of Counsel. The firm
also serves as legal counsel to other Van Kampen American Capital Funds.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as trustees is set forth
below. The compensation shown for the Fund is for the most recent fiscal year,
and the total compensation shown for the Fund and other related mutual funds is
for the calendar year ended December 31, 1994. Mr. Powell is not compensated for
his service as Trustee because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
AGGREGATE BENEFITS COMPENSATION
COMPENSATION ACCRUAL FROM THE FUND
FROM THE AS PART OF FUND COMPLEX PAID TO
NAME OF PERSON FUND EXPENSES TRUSTEES(1)(5)
- ------------------------------------------------- ------------ --------------- ---------------
<S> <C> <C> <C>
J. Miles Branagan................................ $295 0 $64,000
Dr. Richard E. Caruso(3)......................... 310(2) 0 64,000
Dr. Roger Hilsman................................ 280 0 66,000
David Rees....................................... 295 0 64,000
Lawrence J. Sheehan.............................. 295 0 67,000
Dr. Fernando Sisto(3)............................ 370(2) 0 82,000
William S. Woodside(4)........................... 0 0 18,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $280 for Dr. Caruso and $265 for
Dr. Sisto.
(3) Messrs. Caruso and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Fund is as follows: $280 for
Dr. Caruso and $265 for Dr. Sisto.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, with respect to the second and fourth columns, $235
and $36,000, respectively, was paid by the Adviser directly.
(5) Includes the following amounts for which the various funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in footnote 4 above).
19
<PAGE> 194
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $640 and a
meeting fee of $18 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate an
additional expense that might be caused by the new compensation arrangement, the
trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for serving as a
trustee of such funds). In addition, the Adviser has agreed to reimburse the
Fund through December 31, 1996 for any increase in the aggregate trustees'
compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objectives. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation materials. In addition,
the Adviser furnishes at no cost to the Fund the services of a President of the
Fund, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts were paid to the Adviser or its parent in reimbursement
of personnel, office space, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost. The Fund also pays shareholder service agency fees,
distribution fees, service fees, custodian fees, legal and auditing fees, the
costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the company for any actions or omissions if
it acted without willful misfeasance, bad faith, negligence or reckless
disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at annual rate
of 0.65% of the average daily net assets of the Fund.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The
Adviser agrees to use its best efforts to recapture tender solicitation fees and
exchange offer fees for the Fund's benefit, and to advise the Trustees of the
Fund of any other commissions, fees, brokerage or similar payments which may be
possible under applicable laws for the Adviser or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc. to receive in connection with
the Fund's portfolio transactions or other arrangements which may benefit the
Fund.
20
<PAGE> 195
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitations applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the Distribution Plans.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on not more than 60 days' nor less than 30 days' written notice.
During the fiscal year ended September 30, 1994, the Adviser received $-0-
in advisory fees from the Fund. For such period, the Fund paid $17,596 for
accounting services.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement, (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Underwriting Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
During the fiscal year ended September 30, 1994, total underwriting commissions
on the sale of shares of the Fund were $118,639. Of such total, the amount
retained by the Distributor was $18,378. The remainder was reallowed to dealers.
Of such dealer reallowances, $30,810 was received by Advantage Capital
Corporation, an affiliated dealer of the Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan", "Class B Plan" and "Class C
Plan", respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
21
<PAGE> 196
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and C Plans,
authorized payments by the Fund include payments at an annual rate of up to
0.25% of the net assets of the shares of the respective class to reimburse the
Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund include payments at an annual rate of up to 0.75% of the net assets of
the Class B shares to reimburse the Distributor for (1) commissions and
transaction fees of up to 4% of the purchase price of Class B shares purchased
by the clients of broker-dealers and other Service Organizations, (2) out-of-
pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses,
and (6) interest expense thereon computed at the three-month LIBOR rate plus one
and one-half percent compounded quarterly on the unreimbursed distribution
expenses. With respect to the Class C Plan, authorized payments by the Fund
include payments at an annual rate of up to 0.75% of the net assets of the Class
C shares to reimburse the Distributor for (1) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees paid to broker-dealers and other
Service Organizations in an amount up to 0.75% of the average daily net assets
of the Fund's Class C shares, (2) out-of-pocket expenses of printing and
distributing prospectuses and annual and semiannual shareholder reports to other
than existing shareholders, (3) out-of-pocket and overhead expenses for
preparing, printing and distributing advertising material and sales literature,
(4) expenses for promotional incentives to broker-dealers and financial and
industry professionals, (5) advertising and promotion expenses, including
conducting and organizing sales seminars, marketing support salaries and
bonuses, and travel-related expenses, and (6) interest expense thereon computed
at the three-month LIBOR rate plus one and one-half percent compounded quarterly
on the unreimbursed distribution expenses. Such reimbursements are subject to
the maximum sales charge limits specified by the NASD for asset-based charges.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the form of
servicing agreement was approved by the Trustees, including a majority of the
Trustees who are not affiliated persons (as defined in the 1940 Act) of the Fund
and who have no direct or indirect financial interest in the operation of either
Plan or in any agreements related to the Plan ("Independent Trustees"). In
approving each Plan in accordance with the
22
<PAGE> 197
requirements of Rule 12b-1, the Trustees determined that there is a reasonable
likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of the Fund.
Any change in any of the Plans that would materially increase the distribution
or service expenses borne by the Fund requires shareholder approval voting
separately by class; otherwise, it may be amended by a majority of the Trustees,
including a majority of the Independent Trustees, by vote cast in person at a
meeting called for the purpose of voting upon such amendment. So long as the
Plans are in effect, the selection or nomination of the Independent Trustees is
committed to the discretion of the Independent Trustees.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $7,768 or .15%, (not annualized) respectively, of
the Class A shares' average net assets. Such expenses were paid to reimburse the
Distributor for payments made to Service Organizations for servicing Fund
shareholders and for administering the Class A Plan. For the fiscal year ended
September 30, 1994, the Fund's aggregate expenses under the Class B Plan were
$50,180 or .83% (not annualized) of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$45,162 for commissions and transaction fees paid to broker-dealers and other
Service Organizations in respect of sales of Class B shares of the Fund and
$5,018 for fees paid to Service Organizations for servicing Class B shareholders
and administering the Class B Plan. For the fiscal year ended September 30,
1994, the Fund's aggregate expenses under the Class C Plan were $7,517 or .83%
(not annualized) of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $6,765 for
commissions and transaction fees paid to broker-dealers and other Service
Organizations in respect of sales of Class C shares of the Fund and $752 for
fees paid to Service Organizations for servicing Class C shareholders and
administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended September 30, 1994, ACCESS, shareholder
service agent and dividend disbursing agent for the Fund, received fees
aggregating $6,315 for these services. These services are provided at cost plus
a profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions paid on such transactions. It is the policy of the Adviser to seek
the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the
23
<PAGE> 198
quality of its execution services on a continuing basis and its financial
condition. When more than one firm is believed to meet these criteria,
preference may be given to firms which also provide research services to the
Fund or the Adviser. Consistent with the Rules of Fair Practice of the NASD and
subject to seeking best execution and such other policies as the Trustees may
determine, the Adviser may consider sales of shares of the Fund and of the other
Van Kampen American Capital mutual funds as a factor in the selection of firms
to execute portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the investment advisory agreement, the Fund's
Trustees has authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
research services provided to the Adviser. The Adviser is of the opinion that
the continued receipt of supplemental investment research services from dealers
is essential to its provision of high quality portfolio management services to
the Fund. The Adviser undertakes that such higher commissions will not be paid
by the Fund unless (a) the Adviser determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction or
in terms of the Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other applicable state and
federal laws, and (c) in the opinion of the Adviser, the total commissions paid
by the Fund are reasonable in relation to the expected benefits to the Fund over
the long term. The investment advisory fee paid by the Fund under the investment
advisory agreement is not reduced as a result of the Adviser's receipt of
research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
24
<PAGE> 199
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons (as defined in the 1940 Act) of the Adviser.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal year ended September 30, 1994 totalled $39,197. During the year ended
September 30, 1994, the Fund paid $28,916 in brokerage commissions on
transactions totalling $12,656,588 to brokers selected primarily on the basis of
research services provided to the Adviser.
Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
Travelers. Such affiliated persons included Smith Barney and Robinson Humphrey.
Effective December 20, 1994, Smith Barney and Robinson Humphrey ceased to be
affiliates of the Adviser. The negotiated commission paid to an affiliated
broker on any transaction would be comparable to that payable to a
non-affiliated broker in a similar transaction. The Fund paid the following
commission to these brokers during the periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
ROBINSON
SMITH BARNEY HUMPHREY
------------ --------
<S> <C> <C>
Fiscal 1994 $3,150 $2,058
Fiscal 1994 Percentages:
Commissions with affiliate to total commissions 8.04% 5.25%
Value of brokerage transactions with affiliate to total
transactions 7.74% 3.24%
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets including Japanese markets on days which are not
business days in New York. The Fund's net asset value is not calculated and the
Fund does not effect sales, redemptions and repurchases of its shares on days
which are not business days in New York. There may be significant variations in
the net asset value of Fund shares on account of changes in prices of stocks
traded in foreign stock markets on days when net asset value is not calculated
and on which shareholders cannot redeem.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class pursuant to an order issued by the
Securities and Exchange Commission.
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<PAGE> 200
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
ALTERNATIVE SALES ARRANGEMENTS
The Fund offers three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
distribution fees, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in this prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by the
shareholder service agent. The minimum initial investment of $500 or more, in
the form of a check payable to the Fund, must accompany the application. This
minimum may be waived by the Distributor for plans involving continuing
investments. Subsequent investments of $25 or more may be mailed directly to
ACCESS. All such investments are made at the public offering price of Fund
shares next computed following receipt of payment by ACCESS. Confirmations of
the opening of an account and of all subsequent transactions in the account are
forwarded by ACCESS to the investor's dealer of record, unless another dealer is
designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single purchaser, as is a trustee or other fiduciary purchasing for a
single fiduciary account. An aggregate investment includes all shares of the
Fund and all shares of certain other participating Van Kampen American Capital
mutual funds described in the Prospectus (the "Participating Funds") which have
been previously purchased and are still
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<PAGE> 201
owned, plus the shares being purchased. The current offering price is used to
determine the value of all such shares. If, for example, an investor has
previously purchased and still holds Class A shares of the Fund and shares of
other Participating Funds having a current offering price of $40,000, and that
person purchases $65,000 of additional Class A shares of the Fund, the charge
applicable to the $65,000 purchase would be 3.75% of the offering price. The
same reduction is applicable to purchases under a Letter of Intent as described
in the next paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN
ORDER IS PLACED FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE
BASIS OF PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN
SUCH AN ORDER IS PLACED BY MAIL. The reduced sales charge will not be applied if
such notification is not furnished at the time of the order. The reduced sales
charge will also not be applied should a review of the records of the
Distributor or ACCESS fail to confirm the representations concerning the
investor's holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
the value of all shares of such Participating Funds previously purchased and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding the investor in shares of the Fund the amount of excess sales
charges, if any, paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
is closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may be
postponed for more than seven days during any period when (a) the New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York Stock Exchange is restricted; (c) an emergency exists as a result
of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund to fairly determine
the value of its net assets; or (d) the Securities and Exchange Commission, by
order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC -- Class A") of one percent is imposed in the event of
certain redemptions within one year of the
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<PAGE> 202
purchase. If a CDSC -- Class A is imposed upon redemption, the amount of the
CDSC -- Class A will be equal to the lesser of a specified percentage of the net
asset value of the shares at the time of purchase, or one percent of the net
asset value of the shares at the time of redemption.
The CDSC -- Class A will only be imposed if a Qualified Purchaser redeems
an amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one-year period prior to the redemption. The CDSC --
Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., retirement plans qualified under Section 401(a) of the Code
and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such payments include, but are not limited to, death, disability,
retirement, or separation from service. No CDSC -- Class A will be imposed on
exchanges between funds. For purposes of the CDSC -- Class A, when shares of one
fund are exchanged for shares of another fund, the purchase date for the shares
of the fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent will apply to the net
asset value privilege. Also, in order to establish an amount of $1,000,000 or
more, a Qualified Purchaser may aggregate shares of Van Kampen American Capital
Reserve Fund, Van Kampen American Capital Tax Free Money Fund and Van Kampen
American Capital Money Market Fund with shares of other participating funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemptions of Shares," redemption of
Class B and Class C shares is subject to a contingent deferred sales charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE
The CDSC -- Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or
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<PAGE> 203
partial redemption, but only to redemptions of shares held at the time of the
death or initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of Van Kampen American
Capital funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held onto the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC -- Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
(d)Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC -- Class B and C
upon such involuntary redemption.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(e)Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC -- Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C shares of the Fund, provided that the reinvestment is
effected within 120 days after such redemption
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<PAGE> 204
and the shareholder has not previously exercised this reinvestment privilege
with respect to Class C shares of the Fund. Shares acquired in this manner will
be deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC -- Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus: By use of the exchange
privilege, the investor authorizes ACCESS to act on telephonic, telegraphic or
written exchange instructions from any person representing himself to be the
investor or the agent of the investor and believed by ACCESS to be genuine. VKAC
and its subsidiaries, including ACCESS (collectively, " Van Kampen American
Capital"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither Van Kampen American Capital nor the
Fund will be liable for following telephone instructions which it reasonably
believes to be genuine, Van Kampen American Capital and the Fund may be liable
for any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signatures are persons not referenced in the account registration or if more
than 30 days have elapsed since
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<PAGE> 205
ACCESS established the account on its records. Moreover, if the shareholder is a
corporation, partnership, trust, fiduciary, executor or administrator, the
appropriate documents appointing authorized signers (corporate resolutions,
partnerships or trust agreements) must accompany the authorization card. The
documents must be certified in original form, and the certificates must be dated
within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund declares dividends each business day on Class A shares, Class B
shares and Class C shares and distributes monthly substantially all of its net
investment income to shareholders of Class A, Class B and Class C shares. The
daily dividends are a fixed amount determined for each class at least monthly.
The per share dividends on Class B and Class C shares will be lower than the per
share dividends on Class A shares as a result of the distribution fees and
higher transfer agency fees applicable to the Class B and Class C shares. The
Fund intends similarly to distribute to shareholders any taxable net realized
capital gains. Taxable net realized capital gains are the excess, if any, of the
Fund's total profits on the sale of securities during the year over its total
losses on the sale of securities, including capital losses carried forward from
prior years in accordance with the tax laws. Such capital gains, if any, are
distributed at least once a year. All income dividends and capital gains
distributions are reinvested in shares of the Fund at net asset value without
sales charge on the record date, except that any shareholder may otherwise
instruct the shareholder service agent in writing and receive cash. Shareholders
are informed as to the sources of distributions at the time of payment.
The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a regulated investment company, the Fund is not subject to federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least 98% of its
ordinary net investment income for the twelve months ended December 31, plus 98%
of its capital gains net income for the twelve months ended October 31 of such
calendar year. The Fund intends to distribute sufficient amounts to avoid
liability for the excise tax.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income qualify for the 70% dividends received
deduction for corporations. To qualify for the dividends received deduction, a
corporate shareholder must hold the shares on which the dividend is paid for
more than 45 days.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on the record date even though
paid in the next year.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends and distributions from short-term capital gains are not
eligible for the dividends received deduction referred to above. Any loss on the
sale of
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Fund shares held for less than six months is treated as a long-term capital loss
to the extent of any long-term capital gain distribution paid on such shares,
subject to any exception that may be provided by IRS regulations for losses
incurred under certain systematic withdrawal plans. All dividends and
distributions are taxable to the shareholder whether or not reinvested in
shares. Shareholders are notified annually by the Fund as to the federal tax
status of dividends and distributions paid by the Fund.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to listed options (excluding
equity options as defined in the Code), futures contracts, and options on
futures contracts which the Fund may write, purchase or sell. Such options and
contracts are classified as Section 1256 contracts under the Code. The character
of gain or loss resulting from the sale, disposition, closing out, expiration or
other terminations of Section 1256 contracts is generally treated as long-term
capital gain or loss to the extent of 60% thereof and short-term capital gain or
loss to the extent of 40% thereof ("60/40 gain or loss"). Such contracts, when
held by the Fund at the end of a fiscal year, generally are required to be
treated as sold at market value on the last day of such fiscal year for federal
income tax purposes ("marked-to-market"). Over-the-counter options are not
classified as Section 1256 contracts and are not subject to the mark-to-market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Fund from transactions in over-the-counter options generally constitute
short-term capital gains or losses. If over-the-counter call options written, or
over-the-counter put options
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<PAGE> 207
purchased, by the Fund are exercised, the gain or loss realized on the sale of
the underlying securities may be either short-term or long-term, depending on
the holding period of the securities. In determining the amount of gain or loss,
the sales proceeds are reduced by the premium paid for over-the-counter puts or
increased by the premium received for over-the-counter calls.
Certain of the Fund's transactions in options, futures contracts, and
options on futures contracts, particularly its hedging transactions, may
constitute "straddles" which are defined in the Code as offsetting positions
with respect to personal property. A straddle in which at least one (but not
all) of the positions are Section 1256 contracts is a "mixed straddle" under the
code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
FUND PERFORMANCE
The Fund's overall total return (computed in the manner described in the
Prospectus) for Class A shares of the Fund for the one year and 16 month
periods, ended March 31, 1995 was -0.44% and -4.34%, respectively. The Fund's
overall total return (computed in the manner described in the Prospectus) for
Class B shares for the time periods was -0.14% and -4.24%, respectively. The
Fund's overall total return (computed in the manner described in the Prospectus)
for Class C shares for the one year and 16 month periods ended March 31, 1995
was 2.72% and -1.52%, respectively. These results are based on historical
earnings and net asset value fluctuations and are not intended to indicate
future performance. Such information should be considered in light of the Fund's
investment objective and policies as well as the risks incurred in the Fund's
investment practices.
Total return is computed separately for Class A, Class B and Class C
shares.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
From time to time, VKAC will announce the results of its monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
IntentionsSM and the Van Kampen American Capital Mutual Fund IndexSM -- which
polls measure how Americans plan to use their money.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of
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<PAGE> 208
mutual funds for investors at different stages of their lives; and (4) in
reports or other communications to shareholders or in advertising material,
illustrate the benefits of compounding at various assumed rates of return. Such
illustrations may be in the form of charts or graphs and will not be based on
historical returns experienced by the Fund.
From time to time, the Fund may also illustrate allocations among different
types of mutual funds for investors at different stages of their lives.
OTHER INFORMATION
CUSTODY OF ASSETS -- State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as Custodian for the Company. The custodian
has entered into agreements with foreign sub-custodians which are approved by
the Trustees pursuant to Rule 17f-5 under the 1940 Act. The Custodian and
sub-custodians generally domestically, and frequently abroad, do not actually
hold certificates for the securities in their custody, but instead have book
records with domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the securities.
SHAREHOLDER REPORTS -- Semiannual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs annual audits of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual and Semi-Annual Report to Shareholders including the related report of
Independent Accountants on such financial statements are included in the
Statement of Additional Information.
The following information is not included in the Annual Report. This
example assumes a purchase of Class A shares of the Fund aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund.
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1994 1995
------------- ---------
<S> <C> <C>
Net Asset Value per Class A Share................. $8.39 $8.72
Class A Per Share Sales Charge -- 4.75% of
offering price (4.99% of net asset value per
share).......................................... $ .42 $ .43
Class A Per Share Offering Price to the Public.... $8.81 $9.15
</TABLE>
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APPENDIX -- DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
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 in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. such bonds lack outstanding investment characteristics and in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Nonrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
35
<PAGE> 210
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.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is
being paid. D: Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS
Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.
36
<PAGE> 211
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Obligations 47.3%
CONSUMER SERVICES 2.7%
$600,000 Tele-Communications, Inc., 7.25%, 8/1/05 . . . . . . . . . . . . . . $ 530,520
-------------
ENERGY 12.5%
500,000 Colorado Interstate Gas Co., 10.00%, 6/15/05 . . . . . . . . . . . . 550,400
95,000 Enron Corp., 6.75%, 7/1/05 . . . . . . . . . . . . . . . . . . . . . 84,407
400,000 ENSERCH Corp., 6.375%, 2/1/04 . . . . . . . . . . . . . . . . . . . 347,608
330,000 Laclede Gas Co., 8.50%, 11/15/04 . . . . . . . . . . . . . . . . . . 336,897
75,000 Occidental Petroleum, 10.125%, 9/15/09 . . . . . . . . . . . . . . . 80,906
500,000 Panhandle Eastern Corp., 7.875%, 8/15/04 . . . . . . . . . . . . . . 485,175
400,000 Southern Union Co., 7.60%, 2/1/24 . . . . . . . . . . . . . . . . . 339,552
100,000 Texas Eastern Transmission Corp., 8.00%, 7/15/02 . . . . . . . . . . 99,750
Union Oil of California
100,000 6.375%, 2/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . . 87,130
85,000 8.75%, 8/15/01 . . . . . . . . . . . . . . . . . . . . . . . . . . 88,120
-------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,499,945
-------------
TECHNOLOGY 2.3%
485,000 Motorola, Inc., 7.60%, 1/1/07 . . . . . . . . . . . . . . . . . . . 464,872
-------------
UTILITIES 29.8%
380,000 Alabama Power Co., 6.375%, 8/1/99 . . . . . . . . . . . . . . . . . 361,167
600,000 American Telephone & Telegraph Corp., 7.50%, 6/1/06 . . . . . . . . 573,540
100,000 Baltimore Gas & Electric Co., 7.50%, 1/15/07 . . . . . . . . . . . . 94,560
200,000 Cincinnati Gas & Electric Co., 6.45%, 2/15/04 . . . . . . . . . . . 176,940
100,000 Duke Power Co., 7.00%, 6/1/00 . . . . . . . . . . . . . . . . . . . 96,650
355,000 GTE Corp., 9.375%, 12/1/00 . . . . . . . . . . . . . . . . . . . . . 379,388
Hydro Quebec
200,000 7.375%, 2/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . 187,980
500,000 8.05%, 7/7/24 . . . . . . . . . . . . . . . . . . . . . . . . . . 488,580
500,000 Idaho Power Co., 8.00%, 3/15/04 . . . . . . . . . . . . . . . . . . 495,100
300,000 Iowa Electric Light & Power, 8.625%, 5/15/01 . . . . . . . . . . . . 310,350
390,000 MCI Communications Corp., 7.50%, 8/20/04 . . . . . . . . . . . . . . 373,230
80,000 Northwestern Bell Telephone Co., 9.50%, 5/1/00 . . . . . . . . . . . 86,264
450,000 Pacific Telephone & Telegraph Co., 6.00%, 11/1/02 . . . . . . . . . 391,635
200,000 San Diego Gas & Electric Co., 7.625%, 6/15/02 . . . . . . . . . . . 195,060
250,000 Texas Utilities Electric Co., 6.25%, 10/1/04 . . . . . . . . . . . . 214,357
500,000 Union Electric Co., 7.375%, 12/15/04 . . . . . . . . . . . . . . . . 476,400
617,000 United Telecommunications, Inc., 9.75%, 4/1/00 . . . . . . . . . . . 660,251
Virginia Electric & Power Co.
200,000 6.00%, 8/1/01 . . . . . . . . . . . . . . . . . . . . . . . . . . 180,800
200,000 8.875%, 6/1/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 208,780
-------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 5,951,032
-------------
TOTAL CORPORATE OBLIGATIONS (COST $10,050,317) . . . . . . . . . . 9,446,369
-------------
</TABLE>
F-1
<PAGE> 212
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 44.1%
ENERGY 4.0%
13,500 Nicor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327,375
22,100 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . . 469,625
-------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . 797,000
-------------
FINANCE 2.3%
7,500 Equity Residential Properties Trust . . . . . . . . . . . . . . . . 238,125
6,100 Weingarten Realty Investors . . . . . . . . . . . . . . . . . . . . 218,075
-------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 456,200
-------------
UTILITIES 37.8%
14,600 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 587,650
20,500 Baltimore Gas & Electric Co. . . . . . . . . . . . . . . . . . . . . 471,500
9,600 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 535,200
13,100 CMS Energy Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 284,925
25,800 DPL, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,100
12,600 Duke Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 491,400
16,600 FPL Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 539,500
14,100 NYNEX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542,850
14,200 Pacific Telesis Group . . . . . . . . . . . . . . . . . . . . . . . 436,650
28,500 Pacificorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,938
17,100 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 433,913
15,500 Public Service Company of Colorado . . . . . . . . . . . . . . . . . 418,500
16,800 Public Service Enterprise Group . . . . . . . . . . . . . . . . . . 441,000
10,600 SCANA Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470,375
24,100 Southern Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448,863
16,900 Western Resources, Inc. . . . . . . . . . . . . . . . . . . . . . . 479,538
-------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 7,565,902
-------------
TOTAL COMMON STOCK (COST $9,199,579) . . . . . . . . . . . . . . . 8,819,102
-------------
Convertible Preferred Stock 2.3%
10,000 Transco Energy Co., $3.50 (Cost $461,250) . . . . . . . . . . . . . 450,000
-------------
Principal
Amount Short-Term Investments 3.8%
---------
$560,000 Prudential Funding Corp., 4.70%, 10/3/94 . . . . . . . . . . . . . . 559,781
200,000 United States Treasury Note, 7.75%, 2/15/95 . . . . . . . . . . . . 201,594
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $762,031) . . . . . . . . . . . 761,375
-------------
TOTAL INVESTMENTS (COST $20,473,177) 97.5% . . . . . . . . . . . . . 19,476,846
Other assets and liabilities, net 2.5% . . . . . . . . . . . . . . . 505,787
-------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,982,633
=============
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 213
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
September 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $20,473,177) . . . . . . . . . . . . . $ 19,476,846
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,078
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . 339,923
Interest and dividends receivable . . . . . . . . . . . . . . . . . . . . 269,006
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,053
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,117,906
------------
LIABILITIES
Payable for Fund shares purchased . . . . . . . . . . . . . . . . . . . . 55,342
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,442
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,372
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,117
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 135,273
------------
Net Assets, equivalent to $8.39 per share for Class A and
Class B shares and $8.38 per share for Class C shares . . . . . . . . . $ 19,982,633
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 892,244 Class A, 1,279,763
Class B and 209,939 Class C shares outstanding . . . . . . . . . . . . $ 23,819
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,250,210
Accumulated net realized loss on securities . . . . . . . . . . . . . . . (326,263)
Unrealized depreciation of securities . . . . . . . . . . . . . . . . . . (996,331)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 31,198
------------
NET ASSETS at September 30, 1994 . . . . . . . . . . . . . . . . . . . . $ 19,982,633
============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 214
STATEMENT OF OPERATIONS
November 23, 1993* through September 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 400,095
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,632
-------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670,727
-------------
EXPENSES
Management fees (net of expense reimbursement of $65,379) . . . . . . . . . . . . . . -
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,855
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,768
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . . . . . 50,180
Distribution and service fees - Class C . . . . . . . . . . . . . . . . . . . . . . . 7,517
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,596
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,292
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . . 14,846
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,975
Director's fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,633
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,663
Expense reimbursement in excess of management fees . . . . . . . . . . . . . . . . . (76,410)
-------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,915
-------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516,812
-------------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . (326,081)
Net unrealized depreciation of securities . . . . . . . . . . . . . . . . . . . . . . (996,331)
-------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . (1,322,412)
-------------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . $ (805,600)
=============
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-4
<PAGE> 215
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
November 23, 1993* through September 30, 1994
<TABLE>
<S> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . . $ 101,000
-----------
Operations
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 516,812
Net realized loss on securities . . . . . . . . . . . . . . . . . . . (326,081)
Net unrealized depreciation of securities . . . . . . . . . . . . . . . (996,331)
-----------
Decrease in net assets resulting from operations . . . . . . . . . . (805,600)
-----------
Dividends to shareholders from net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225,591)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (226,800)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,691)
-----------
(486,082)
-----------
Funds share transactions
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,870,409
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,813,610
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,166,085
-----------
24,850,104
-----------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,220
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,883
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,750
-----------
422,853
-----------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,139,284)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,610,501)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (349,857)
-----------
(4,099,642)
-----------
Increase in net assets resulting from Fund share transactions . . . 21,173,315
-----------
Increase in Net Assets . . . . . . . . . . . . . . . . . . . . . . . . 19,881,633
-----------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . . . $19,982,633
===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-5
<PAGE> 216
Notes to Financial Statements
Note 1-Organization
American Capital Utilities Income Fund, Inc. (the "Fund") was organized as an
open-end, diversified management investment company in Maryland on August 31,
1993. The Fund's investment manager, American Capital Asset Management, Inc.
(the "Adviser") contributed the initial capital of $101,000 on November 8, 1993
and an additional $1,899,000 on November 30, 1993. The Fund began offering
shares on November 23, 1993.
Note 2-Significant Accounting Policies
The Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
A. Investment Valuations
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which
the last sale price is not available are valued at the last reported bid
price. Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market value.
Short-term investments with a maturity of more than 60 days when purchased
are valued based on market quotations, until the remaining days to maturity
becomes less than 61 days. From such time, until maturity, the investments
are valued at amortized cost.
B. Federal Income Taxes
No provision for federal income taxes is required because the Fund intends
to elect to be taxed as a "regulated investment company" under the Internal
Revenue Code and intends to maintain this qualification by annually
distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no
distributions of capital gains will be made until tax- basis capital loss
carryforwards, if any, expire or are offset by net realized capital gains.
C. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized gains
and losses on investments are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.
D. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which may
differ from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
E. Debt Discount or Premium
The Fund accounts for discounts and premiums on the same basis as is
followed for federal income tax reporting. Accordingly, originally issue
discounts on debt securities purchased are amortized over the life of the
security. Premiums on debt securities are not amortized. Market discounts
are accounted for at the time of sale as realized gains for book purposes
and ordinary income for tax purposes.
F. Organization Costs
Organization expenses of approximately $15,000 were deferred and are being
amortized over a five year period ending November, 1998.
F-6
<PAGE> 217
Note 3-Management Fees and Other Transactions with Affiliates
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.65%. From time to time, the Adviser may voluntarily elect to reimburse the
Fund a portion of the Fund's expenses. Such reimbursement may be discontinued
at any time without prior notice. For the period ended September 30, 1994, such
reimbursement amounted to $141,789.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his discretion. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the period ended September 30, 1994, these charges included $1,621 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities, and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the period ended September 30, 1994, such
fees aggregated $6,315.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $18,378 and $30,810, respectively, as their
portion of the commission charged on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its average
daily net assets to the Distributor for expenses and service fees incurred.
Class B shares and Class C shares pay an additional fee of up to .75% per annum
of their average net assets to reimburse the Distributor for its distribution
expenses. Actual distribution expenses incurred by the Distributor for Class B
shares and Class C shares may exceed the amounts reimbursed to the Distributor
by the Fund. At September 30, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B plan and Class C plan aggregated approximately
$462,250 and $29,000, respectively, and may be carried forward and reimbursed
through either the collection of the contingent deferred sales charges from
share redemptions or, subject to the annual renewal of the plans, future Fund
reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
Note 4-Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $770 plus a fee of $15 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at an annual rate of $290. During the period, such fees aggregated $1,575.
The directors may participate in a voluntary deferred compensation plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At September 30, 1994, the liability for the Plan aggregated
$500. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
Note 5-Investment Activity
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $28,382,015 and $8,140,116,
respectively.
For federal income tax purposes, the identified cost of investments owned at
September 30, 1994 was $20,475,892. Gross unrealized appreciation of
investments aggregated $80,850 and gross unrealized depreciation of investments
aggregated $1,079,896. Approximately $323,500 in financial statement losses are
deferred for tax purposes until the following fiscal year.
F-7
<PAGE> 218
Note 6-Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
The Fund has 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock during the period
were as follows:
<TABLE>
<S> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . 1,116,081
Class B . . . . . . . . . . . . . . . . . . . . . . 1,446,604
Class C . . . . . . . . . . . . . . . . . . . . . . 248,296
-----------
2,810,981
-----------
Shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . 24,273
Class B . . . . . . . . . . . . . . . . . . . . . . 21,860
Class C . . . . . . . . . . . . . . . . . . . . . . 2,888
-----------
49,021
-----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . (248,110)
Class B . . . . . . . . . . . . . . . . . . . . . . (188,701)
Class C . . . . . . . . . . . . . . . . . . . . . . (41,245)
-----------
(478,056)
-----------
Increase in shares outstanding . . . . . . . . . 2,381,946
===========
</TABLE>
F-8
<PAGE> 219
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the period
indicated.
<TABLE>
<CAPTION>
November 23, 1993(1) through
September 30, 1994
-----------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period . . . . . . . . . . $ 9.44 $ 9.44 $ 9.44
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . .53 .52 .53
Expenses . . . . . . . . . . . . . . . . . . . . . . . . (.09) (.14) (.15)
------ ------ ------
Net investment income . . . . . . . . . . . . . . . . . . .44 .38 .38
Net realized and unrealized losses on securities . . . . (1.10) (1.09) (1.106)
------ ------ ------
Total from investment operations . . . . . . . . . . . . (.66) (.71) (.726)
DIVIDENDS FROM NET INVESTMENT INCOME . . . . . . . . . . (.39) (.34) (.334)
------ ------ ------
Net asset value, end of period . . . . . . . . . . . . . $ 8.39 $ 8.39 $ 8.38
====== ====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . . . . . . . (7.24%) (7.72%) (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . $ 7.5 $ 10.7 $ 1.8
Average net assets (millions) . . . . . . . . . . . . . $ 5.2 $ 6.0 $ 0.9
Ratios to average net assets(2)
Expenses . . . . . . . . . . . . . . . . . . . . . . . 1.06% 1.82% 1.79%
Expenses, without expense reimbursement . . . . . . . . 2.43% 3.19% 3.16%
Net investment income . . . . . . . . . . . . . . . . . 5.48% 4.66% 4.65%
Net investment income, without expense reimbursement . 4.11% 3.29% 3.28%
Portfolio turnover rate . . . . . . . . . . . . . . . . . 72% 72% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Per share information based on average month-end shares outstanding.
See Notes to Financial Statements.
F-9
<PAGE> 220
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
American Capital Utilities Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Utilities Income
Fund, Inc. at September 30, 1994, and the results of its operations, the
changes in its net assets and the selected per share data and ratios for the
period from November 23, 1993 (commencement of operations) through September
30, 1994, in conformity with generally accepted accounting principles. These
financial statements and selected per share data and ratios (hereafter referred
to as "financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included confirmation
of securities at September 30, 1994 by correspondence with the custodian and
brokers, provides a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
November 14, 1994
F-10
<PAGE> 221
PORTFOLIO OF INVESTMENTS
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount/
Number of Shares
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS 40.0%
CONSUMER SERVICES 2.1%
$600 Tele-Communications, Inc....................... 7.750% 08/01/05 $ 541,800
----------------
ENERGY 13.7%
500 Colorado Interstate Gas Co..................... 10.000% 06/15/05 559,250
595 Enron Corp..................................... 6.750% 07/01/05 543,949
400 ENSEARCH Corp.................................. 6.375% 02/01/04 356,360
330 Laclede Gas Co................................. 8.500% 11/15/04 346,731
75 Occidental Petroleum Corp...................... 10.125% 09/15/09 85,087
500 Panhandle Eastern Corp......................... 7.875% 08/15/04 497,180
400 Southern Union Co.............................. 7.600% 02/01/24 354,800
400 Southwest Gas Co............................... 9.750% 06/15/02 433,320
100 Texas Eastern Transmission Corp................ 8.000% 07/15/02 101,080
100 Union Oil of California........................ 6.375% 02/01/04 89,820
85 Union Oil of California........................ 8.750% 08/15/01 89,190
----------------
TOTAL ENERGY............................... 3,456,767
----------------
TECHNOLOGY 1.9%
485 Motorola, Inc.................................. 7.600% 01/01/07 479,714
----------------
UTILITIES 22.3%
600 A T & T Corp................................... 7.500% 06/01/06 591,480
100 Baltimore Gas & Electric Co.................... 7.500% 01/15/07 97,400
200 Cincinnati Gas & Electric Co................... 6.450% 02/15/04 183,060
500 Florida Power & Light Co....................... 6.875% 04/01/04 471,050
355 GTE Corp....................................... 9.375% 12/01/00 381,803
500 Idaho Power Co................................. 8.000% 03/15/04 508,250
700 Iowa Electric Light & Power Co................. 8.625% 05/15/01 734,440
635 MCI Communications Corp........................ 7.500% 08/20/04 625,285
80 Northwestern Bell Telephone Co................. 9.500% 05/01/00 86,640
200 San Diego Gas & Electric Co.................... 7.625% 06/15/02 199,460
250 Texas Utilities Electric Co.................... 6.250% 10/01/04 223,590
500 Union Electric Co.............................. 7.375% 12/15/04 490,300
617 United Telecommunications, Inc................. 9.750% 04/01/00 665,928
200 Virginia Electric & Power Co................... 6.000% 08/01/01 184,120
200 Virginia Electric & Power Co................... 8.875% 06/01/99 209,800
----------------
TOTAL UTILITIES............................ 5,652,606
----------------
TOTAL CORPORATE OBLIGATIONS (Cost $10,455,626). 10,130,887
----------------
COMMON STOCK 56.8%
ENERGY 4.7%
25 Pacific Enterprises.............................................. 618,750
25 Panhandle Eastern Corp........................................... 575,000
----------------
TOTAL ENERGY................................................. 1,193,750
----------------
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 222
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount/
Number of Shares
(000) Description Market Value
- -------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 52.1%
14 Ameritech Corp............................ $ 577,500
26 Baltimore Gas & Electric Co............... 614,250
10 Bellsouth Corp............................ 595,000
25 CMS Energy Corp........................... 584,375
29 DPL, Inc.................................. 605,375
25 Eastern Utilities Association............. 596,875
20 FPL Group, Inc............................ 727,500
22 General Public Utilities Corp............. 640,750
12 GTE Corp.................................. 399,000
7 National Power ADR........................ 75,250
19 NIPSCO Industries, Inc.................... 591,375
16 NYNEX Corp................................ 634,000
19 Pacific Telesis Group..................... 574,750
30 Pacificorp................................ 581,250
24 Peco Energy Co............................ 603,000
27 Pinnacle West Capital Corp................ 563,625
5.2 Powergen Power & Light ADR................ 63,050
19 Public Service Co. of Colorado............ 584,250
22 Public Service Enterprise Group........... 602,250
29 Southern Co............................... 590,875
18 Texas Utilities Electric Co............... 571,500
24 Unicom Corp............................... 570,000
15 U. S. West, Inc........................... 600,000
20 Western Resources, Inc.................... 625,000
----------------
TOTAL UTILITIES........................... 13,170,800
----------------
TOTAL COMMON STOCK (Cost $13,991,594)..... 14,364,550
----------------
REPURCHASE AGREEMENT 2.1%
$ 535 Salomon Brothers, Inc, dated 3/31/95,
6.27% due 4/3/95 (collateralized by
U. S. Government obligations in a pooled
cash account) repurchase
proceeds $535,279 (Cost $535,000)......... 535,000
----------------
TOTAL INVESTMENTS (Cost $24,982,220) 98.9% ................. 25,030,437
OTHER ASSETS AND LIABILITIES, NET 1.1%...................... 267,674
----------------
NET ASSETS 100%............................................. $ 25,298,111
----------------
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 223
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Investment, at market value (Cost $24,982,220)............... $ 25,030,437
Cash......................................................... 2,984
Interest and dividends receivable............................ 318,764
Receivable for Fund shares sold.............................. 70,581
Other assets................................................. 35,396
----------------
Total Assets................................................ 25,458,162
----------------
LIABILITIES
Due to Distributor........................................... 21,862
Due to shareholder service agent............................. 29,242
Deferred Directors' compensation............................. 1,374
Dividends payable............................................ 18,270
Payable for Fund shares redeemed............................. 17,281
Accrued expenses and other payables.......................... 72,022
----------------
Total Liabilities........................................... 160,051
----------------
NET ASSETS, equivalent to $8.72 per share for Class A, $8.71
per share Class B and $8.70 per share for Class C shares.... $ 25,298,111
----------------
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 995,792 Class A, 1,638,873 Class B and
269,483 Class C shares outstanding.......................... $ 29,041
Capital surplus.............................................. 25,669,373
Accumulated net realized loss on securities.................. (456,783)
Net unrealized appreciation of securities.................... 48,217
Undistributed net investment income.......................... 8,263
----------------
NET ASSETS at March 31, 1995................................. $ 25,298,111
----------------
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 224
STATEMENT OF OPERATIONS
Six Months Ended March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................................... $ 445,920
Dividends.................................................... 314,116
----------------
Investment income........................................... 760,036
----------------
EXPENSES:
Management fees.............................................. 72,767
Registration and filing fees................................. 62,865
Service fees--Class A........................................ 5,980
Distribution and service fees--Class B....................... 61,001
Distribution and service fees--Class C....................... 10,143
Accounting services.......................................... 26,816
Shareholder service agent's fees and expenses................ 44,609
Audit fees................................................... 14,400
Reports to shareholders...................................... 9,919
Director's fees and expenses................................. 5,510
Legal fees................................................... 3,199
Miscellaneous................................................ 1,772
Expense reimbursement........................................ (99,662)
----------------
Total expenses.............................................. 219,319
----------------
NET INVESTMENT INCOME...................................... 540,717
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities.............................. (130,520)
Net unrealized appreciation of securities during the period.. 1,044,548
----------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............. 914,028
----------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 1,454,745
----------------
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 225
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 23, 1993*
Six Months Ended through
March 31, 1995 September 30, 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period.......... $19,982,633 $ 101,000
----------- -----------
Operations
Net investment income................... 540,717 516,812
Net realized loss on securities......... (130,520) (326,081)
Net unrealized appreciation (deprecia-
tion) of securities during the period.. 1,044,548 (996,331)
----------- -----------
Increase (decrease) in net assets
resulting from operations............ 1,454,745 (805,600)
----------- -----------
Distributions to shareholders from net
investment income
Class A................................ (225,289) (225,591)
Class B................................ (290,220) (226,800)
Class C................................ (48,143) (33,691)
----------- -----------
(563,652) (486,082)
----------- -----------
Capital transactions
Proceeds from shares sold
Class A................................ 2,321,151 9,870,409
Class B................................ 4,053,715 12,813,610
Class C................................ 576,648 2,166,085
----------- -----------
6,951,514 24,850,104
----------- -----------
Proceeds from shares issued for distri-
butions reinvested
Class A................................ 204,839 210,220
Class B................................ 238,579 187,883
Class C................................ 32,346 24,750
----------- -----------
475,764 422,853
----------- -----------
Cost of shares redeemed
Class A................................ (1,660,741) (2,139,284)
Class B................................ (1,237,109) (1,610,501)
Class C................................ (105,043) (349,857)
----------- -----------
(3,002,893) (4,099,642)
----------- -----------
Increase in net assets resulting from
capital transactions..................... 4,424,385 21,173,315
----------- -----------
INCREASE IN NET ASSETS................... 5,315,478 19,881,633
----------- -----------
NET ASSETS, end of period................ $25,298,111 $19,982,633
----------- -----------
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-15
<PAGE> 226
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------
November 23,
Six Months 1993(1)
Ended through
March 31, September 30,
1995 1994(4)
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C>
Net asset value, beginning of period............... $ 8.39 $ 9.44
------ ------
Income from investment operations
Investment income................................. .29 .53
Expenses.......................................... (.06) (.09)
------ ------
Net investment income.............................. .23 .44
Net realized and unrealized gains or losses on
securities........................................ .334 (1.10)
------ ------
Total from investment operations................... .564 (.66)
------ ------
Distributions from net investment income........... (.234) (.39)
------ ------
Net asset value, end of period..................... $ 8.72 $ 8.39
------ ------
TOTAL RETURN (3)................................... 6.70% (7.24%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............... $8.7 $7.5
Average net assets (millions)...................... $8.2 $5.2
Ratios to average net assets (2)
Expenses.......................................... 1.42% 1.06%
Expenses, without expense reimbursement........... 2.31% 2.43%
Net investment income............................. 5.41% 5.48%
Net investment income, without expense
reimbursement.................................... 4.52% 4.11%
Portfolio turnover rate............................ 29% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-16
<PAGE> 227
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------
November 23,
Six Months 1993(1)
Ended through
March 31, September 30,
1995 1994(4)
- -------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C>
Net asset value, beginning of period............... $ 8.39 $ 9.44
------ -------
Income from investment operations
Investment income................................. .29 .52
Expenses.......................................... (.10) (.14)
------ -------
Net investment income.............................. .19 .38
Net realized and unrealized gains or losses on
securities........................................ .332 (1.096)
------ -------
Total from investment operations................... .522 (.716)
------ -------
Distributions from net investment income........... (.202) (.334)
------ -------
Net asset value, end of period..................... $ 8.71 $ 8.39
------ -------
TOTAL RETURN (3)................................... 6.30% (7.72%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............... $14.3 $10.7
Average net assets (millions)...................... $12.2 $6.0
Ratios to average net assets (2)
Expenses.......................................... 2.28% 1.82%
Expenses, without expense reimbursement........... 3.17% 3.19%
Net investment income............................. 4.52% 4.66%
Net investment income, without expense
reimbursement.................................... 3.63% 3.29%
Portfolio turnover rate............................ 29% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-17
<PAGE> 228
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------
November 23,
Six Months 1993(1)
Ended through
March 31, September 30,
1995 1994(4)
- -------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............... $ 8.38 $ 9.44
------ -------
Income from investment operations
Investment income................................. .29 .53
Expenses.......................................... (.10) (.15)
------ -------
Net investment income.............................. .19 .38
Net realized and unrealized gains or losses on
securities........................................ .332 (1.106)
------ -------
Total from investment operations................... .522 (.726)
------ -------
Distributions from net investment income........... (.202) (.334)
------ -------
Net asset value, end of period..................... $ 8.70 $ 8.38
------ -------
TOTAL RETURN (3)................................... 6.30% (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............... $2.3 $1.8
Average net assets (millions)...................... $2.0 $0.9
Ratios to average net assets (2)
Expenses.......................................... 2.27% 1.79%
Expenses, without expense reimbursement........... 3.16% 3.16%
Net investment income............................. 4.51% 4.65%
Net investment income, without expense
reimbursement.................................... 3.62% 3.28%
Portfolio turnover rate............................ 29% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-18
<PAGE> 229
NOTES TO FINANCIAL STATEMENTS
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
NOTE 1--ORGANIZATION
American Capital Utilities Income Fund, Inc. (the "Fund") was organized as an
open-end, diversified management investment company in Maryland on August 31,
1993. The Fund's investment manager, Van Kampen American Capital Asset Manage-
ment, Inc. (the "Adviser") contributed the initial capital of $101,000 on No-
vember 8, 1993 and an additional $1,899,000 on November 30, 1993. The Fund
began offering shares on November 23, 1993.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The following is a sum-
mary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
A. INVESTMENT VALUATIONS-Securities listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities for which the last sale price is not available are valued at the last
reported bid price.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations, until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
B. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund intends to elect to be taxed as a "regulated investment company"
under the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no distribu-
tions of capital gains will be made until tax-basis capital loss carryforwards,
if any, expire or are offset by net realized capital gains.
Approximately $323,500 in financial statement losses are deferred for tax
purposes until the 1995 fiscal year.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on invest-
ments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily.
F-19
<PAGE> 230
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
D. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
E. DEBT DISCOUNT OR PREMIUM-The Fund accounts for original issue discounts and
premiums on the same basis as is followed for federal income tax reporting. Ac-
cordingly, originally issue discounts on long-term debt securities purchased
are amortized over the life of the security. Premiums on debt securities are
not amortized. Market discounts are accounted for at the time of sale as real-
ized gains for book purposes and ordinary income for tax purposes.
F. ORGANIZATION COSTS-Organization expenses of approximately $15,000 were de-
ferred and are being amortized over a five year period ending November, 1998.
NOTE 3--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate of
.65%. From time to time, the Adviser may voluntarily elect to reimburse the
Fund a portion of the Fund's expenses. Such reimbursement may be discontinued
at any time without prior notice. For the period ended March 31, 1995, such re-
imbursement amounted to $99,662.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his discretion. Charges are allo-
cated among investment companies advised or sub-advised by the Adviser. For the
period ended March 31, 1995, these charges included $3,130 as the Fund's share
of the employee costs attributable to the Fund's accounting officers. A portion
of the accounting services expense was paid to the Adviser in reimbursement of
personnel, facilities, and equipment costs attributable to the provision of ac-
counting services to the Fund. The services provided by the Adviser are at
cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period ended March 31, 1995, such fees aggregated $30,900.
The Fund has been advised that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both af-
filiates of the Adviser, received $3,383 and $10,323, respectively, as their
portion of the commission charged on sales of Fund shares during the period.
F-20
<PAGE> 231
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
Under the Distribution Plans, the Fund pays up to .25% per annum of its aver-
age daily net assets to the Distributor for expenses and service fees incurred.
Class B shares and Class C shares pay an additional fee of up to .75% per annum
of their average net assets to reimburse the Distributor for its distribution
expenses. Actual distribution expenses incurred by the Distributor for Class B
shares and Class C shares may exceed the amounts reimbursed to the Distributor
by the Fund. At March 31, 1995, the unreimbursed expenses incurred by the Dis-
tributor under the Class B plan and Class C plan aggregated approximately
$529,000 and $31,000, respectively, and may be carried forward and reimbursed
through either the collection of the contingent deferred sales charges from
share redemptions or, subject to the annual renewal of the plans, future Fund
reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 4--DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $730 plus a fee of $20 per day for Board and Commit-
tee meetings attended. The Chairman receives additional fees from the Fund at
an annual rate of $270. During the period, such fees aggregated $2,849.
The directors may participate in a voluntary deferred compensation plan (the
"Plan"). The Plan is not funded and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered under the Plan elects to be credited
with an earnings component on amounts deferred equal to the income earned by
the Fund on its short-term investments or equal to the total return of the
Fund.
NOTE 5--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $11,020,452 and $6,356,147, re-
spectively.
The cost of investments owned at March 31, 1995 was the same for federal in-
come tax and financial reporting purposes. Gross unrealized appreciation of in-
vestments aggregated $649,418 and gross unrealized depreciation of investments
aggregated $601,201.
NOTE 6--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the
F-21
<PAGE> 232
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
time of redemption on a contingent deferred basis (the Class B shares and Class
C shares). All classes of shares have the same rights, except that Class B
shares and Class C shares bear the cost of distribution fees and certain other
class specific expenses. Realized and unrealized gains or losses, investment
income and expenses (other than class specific expenses) are allocated daily to
each class of shares based upon the relative proportion of net assets of each
class. Class B shares and Class C shares automatically convert to Class A
shares six years and ten years after purchase, respectively, subject to certain
conditions.
The Fund has 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock during the period
were as follows:
<TABLE>
<CAPTION>
NOVEMBER 23, 1993*
SIX MONTHS ENDED THROUGH
MARCH 31, 1995 SEPTEMBER 30, 1994
- -------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A................................... 273,477 1,116,081
Class B................................... 476,363 1,446,604
Class C................................... 68,131 248,296
-------- ---------
817,971 2,810,981
-------- ---------
Shares issued for distributions reinvested
Class A................................... 24,018 24,273
Class B................................... 27,959 21,860
Class C................................... 3,791 2,888
-------- ---------
55,768 49,021
-------- ---------
Shares redeemed
Class A................................... (193,947) (248,110)
Class B................................... (145,212) (188,701)
Class C................................... (12,378) (41,245)
-------- ---------
(351,537) (478,056)
-------- ---------
Increase in shares outstanding............. 522,202 2,381,946
-------- ---------
</TABLE>
*Commencement of operations
F-22
<PAGE> 233
APPENDIX C
VAN KAMPEN MERRITT UTILITY FUND
PORTFOLIO OF INVESTMENTS
JUNE 30, 1994
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES ($)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.(2)................................................... 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
----------
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
</TABLE>
See Notes to Financial Statements
C-1
<PAGE> 234
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 20.7% -- CONTINUED
K N Energy Inc. .................................................... 38,613 859,139
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
----------
TELECOMMUNICATIONS 16.0%
Airtouch Communications Inc.(2)..................................... 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.(4)........................................................ 39,982 1,259,433
MCI Communications Corp. ........................................... 102,000 2,256,750
MFS Communications Inc.(2).......................................... 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
----------
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
---------
FOREIGN 14.5%
AES China Generating Co. Ltd. (China)(2)............................ 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
</TABLE>
See Notes to Financial Statements
C-2
<PAGE> 235
VAN KAMPEN MERRITT UTILITY FUND
PORTFOLIO OF INVESTMENTS -- CONTINUED
JUNE 30, 1994
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES ($)MARKET VALUE
-------------------- ------ ---------------
<S> <C> <C>
FOREIGN 14.5% -- CONTINUED
Grupo Iusacell SA de CV Ser D ADR (Mexico)(2)....................... 1,875 49,453
Grupo Iusacell SA de CV Ser L ADR (Mexico)(2)....................... 4,375 113,750
Morgan Stanley Group Inc, Japan Index Callable Warrants
Expiring 05/28/96 (Japan)......................................... 51,120 293,940
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)(2)................ 37,727 914,880
Tele Danmark A/S ADR (Denmark)(2)................................... 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
C-3
<PAGE> 236
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.(3)....... 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
--------------
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(3)... CCC+ B3 0/10.500 12/01/03 1,200,000
3,000 Panamsat L P/Panamsat B- B3 0/11.375 08/01/03 1,935,000
Cap Corp.(3)....................
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
--------------
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 BB+ Ba2 8.125 12/15/03 1,700,000
(Mexico)........................
--------------
4,089,688
--------------
TOTAL FIXED INCOME SECURITIES.......................................................... 20,380,961
--------------
TOTAL LONG-TERM INVESTMENTS 96.2%
(COST $146,550,979)(1)................................................................. 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
==============
</TABLE>
- ---------------
(1) 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.
(2) Non-income producing security as this stock currently does not declare
dividends.
(3) Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
(4) Assets segregated as collateral for open option transactions.
See Notes to Financial Statements
C-4
<PAGE> 237
VAN KAMPEN MERRITT UTILITY FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1994
<TABLE>
<S> <C>
ASSETS
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
C-5
<PAGE> 238
VAN KAMPEN MERRITT UTILITY FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD JULY 28, 1993
(COMMENCEMENT OF INVESTMENT OPERATIONS)
THROUGH JUNE 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME:
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
C-6
<PAGE> 239
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>
<S> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
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
C-7
<PAGE> 240
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS
The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the period indicated.
<TABLE>
<CAPTION>
CLASS A SHARES
------------------
FROM JULY 28, 1993
(COMMENCEMENT OF
INVESTMENT
OPERATIONS) TO
JUNE 30, 1994
------------------
<S> <C>
Net asset value, beginning of period........................................ $ 14.300
----------
New investment income....................................................... .479
Net realized and unrealized loss on investments............................. (1.513)
----------
Total from investment operations............................................ (1.034)
----------
Less:
Distributions from net investment income.................................. .323
Distributions in excess of net realized gain on investments............... .037
----------
Total distributions......................................................... .360
----------
Net assets value, end of period............................................. $ 12.906
==============
TOTAL RETURN (annualized)................................................... (8.03%)
Net assets at end of period (in millions)................................... $ 51.5
Ratio of expenses to average net assets (annualized)........................ 1.34%
Ratio of net investment income to average net assets (annualized)........... 4.10%
Portfolio turnover.......................................................... 101.54%
</TABLE>
See Notes to Financial Statements
C-8
<PAGE> 241
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the period indicated.
<TABLE>
<CAPTION>
CLASS B SHARES
----------------
FROM JULY 28,
1993
(COMMENCEMENT OF
INVESTMENT
OPERATIONS) TO
JUNE 30, 1994
----------------
<S> <C>
Net asset value, beginning of period........................................ $ 14.300
----------------
Net investment income....................................................... .394
Net realized and unrealized loss on investments............................. (1.519)
----------------
Total from investment operations............................................ (1.125)
----------------
Less:
Distributions from net investment income.................................. .258
Distributions in excess of net realized gain on investments............... .037
----------------
Total distributions......................................................... .295
----------------
Net asset value, end of period.............................................. $ 12.880
==============
TOTAL RETURN (annualized)................................................... (8.72%)
Net assets at end of period (in millions)................................... $ 83.7
Ratio of expenses to average net assets (annualized)........................ 2.06%
Ratio of net investment income to average net assets (annualized)........... 3.36%
Portfolio turnover.......................................................... 101.54%
</TABLE>
See Notes to Financial Statements
C-9
<PAGE> 242
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the period indicated.
<TABLE>
<CAPTION>
CLASS C SHARES
--------------------
FROM AUGUST 13, 1993
(COMMENCEMENT OF
DISTRIBUTION) TO
JUNE 30, 1994
--------------------
<S> <C>
Net asset value, beginning of period...................................... $ 14.460
----------
Net investment income..................................................... .330
Net realized and unrealized loss on investments........................... (1.627)
----------
Total from investment operations.......................................... (1.297)
----------
Less:
Distributions from net investment income................................ .258
Distributions in excess of net realized gain on investments............. .037
----------
Total distributions....................................................... .295
----------
Net asset value, end of period............................................ $ 12.868
================
TOTAL RETURN (annualized)................................................. (9.89%)
Net assets at end of period (in millions)................................. $ 1.1
Ratio of expenses to average net assets (annualized)...................... 2.05%
Ratio of net investment income to average net assets (annualized)......... 3.38%
Portfolio turnover........................................................ 101.54%
</TABLE>
See Notes to Financial Statements
C-10
<PAGE> 243
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents selected per share data and related ratios
for one share of the Fund outstanding throughout the period indicated.
<TABLE>
<CAPTION>
CLASS D SHARES
-------------------
FROM MARCH 14, 1994
(COMMENCEMENT OF
DISTRIBUTION) TO
JUNE 30, 1994
-------------------
<S> <C>
Net asset value, beginning of period...................................... $13.930
----------
Net investment income..................................................... .258
Net realized and unrealized loss on investments........................... (1.237)
----------
Total from investment operations.......................................... (.979)
----------
Less distributions from net investment income............................. .030
----------
Net asset value, end of period............................................ $12.921
===============
TOTAL RETURN (annualized)................................................. (19.67%)
Net assets at end of period (in thousands)................................ $ 1.5
Ratio of expenses to average net assets (annualized)...................... 1.39%
Ratio of net investment income to average net assets (annualized)......... 4.15%
Portfolio turnover........................................................ 101.54%
</TABLE>
See Notes to Financial Statements
C-11
<PAGE> 244
VAN KAMPEN MERRITT UTILITY FUND
NOTES OF FINANCIAL STATEMENTS
JUNE 30, 1994
NOTE 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.
C-12
<PAGE> 245
VAN KAMPEN MERRITT UTILITY FUND
NOTES OF FINANCIAL STATEMENTS
JUNE 30, 1994 -- CONTINUED
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 options' current market value and premiums
received recorded as an unrealized gain or loss. If the options are not
exercised, premiums received are realized as a gain at expiration date. If the
position is closed prior to expiration, a gain or loss is realized based on
premiums received less the cost of the closing transaction. When options are
exercised, premiums received are added to the proceeds from the sale of the
underlying securities and a gain or loss is realized accordingly. These same
principles apply to the sale of put options.
Put and call options purchased are accounted for in the same manner as
portfolio securities. The cost of securities acquired through the exercise of
call options is increased by premiums paid. The proceeds from securities sold
through the exercise of put options are decreased by premiums paid.
Futures contracts are marked to market daily with fluctuations in value
settled daily in cash through a margin account. Gains or losses are realized at
the time the position is closed out or the contract expires.
NOTE 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%
Over $500 million but less than $1 billion..................................... .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 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.
C-13
<PAGE> 246
VAN KAMPEN MERRITT UTILITY FUND
NOTES OF FINANCIAL STATEMENTS
JUNE 30, 1994 -- CONTINUED
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.
NOTE 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:
<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.
C-14
<PAGE> 247
VAN KAMPEN MERRITT UTILITY FUND
NOTES OF FINANCIAL STATEMENTS
JUNE 30, 1994 -- CONTINUED
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 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.
NOTE 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:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
--------- ---------
<S> <C> <C>
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)
--------- ---------
</TABLE>
The related futures contracts of the outstanding options transactions at
June 30, 1994, and the description and market value is as follows:
<TABLE>
<CAPTION>
EXPIRATION
MONTH/ MARKET
EXERCISE VALUE OF
CONTRACTS PRICE OPTIONS
--------- ---------- --------
<S> <C> <C> <C>
September Treasury Bond Futures Purchased Calls................. 112 Sept/106 $ 36,750
--- --------
</TABLE>
C-15
<PAGE> 248
VAN KAMPEN MERRITT UTILITY FUND
NOTES OF FINANCIAL STATEMENTS
JUNE 30, 1994 -- CONTINUED
NOTE 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.
C-16
<PAGE> 249
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 LLP
Chicago, Illinois
August 4, 1994
C-17
<PAGE> 250
APPENDIX D
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.(2)................................................... 30,000 431,250
---------------
</TABLE>
See Notes to Financial Statements
D-1
<PAGE> 251
VAN KAMPEN MERRITT UTILITY FUND
PORTFOLIO OF INVESTMENTS -- CONTINUED
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES ($)MARKET VALUE
- -------------------------------------------------------------------- ------- ---------------
<S> <C> <C>
ELECTRIC UTILITIES -- CONTINUED
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
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.(2)..................................... 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.(4)........................................................ 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.(2)...................................................... 117,325 457,568
-------------
20,658,850
-------------
</TABLE>
See Notes to Financial Statements
D-2
<PAGE> 252
VAN KAMPEN MERRITT UTILITY FUND
PORTFOLIO OF INVESTMENTS -- CONTINUED
DECEMBER 31, 1994 (UNAUDITED)
<TABLE>
<CAPTION>
SECURITY DESCRIPTION SHARES ($)MARKET VALUE
- -------------------------------------------------------------------- ------- ---------------
<S> <C> <C>
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)(2)............................ 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
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)(2)................ 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)(2)................................... 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
D-3
<PAGE> 253
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
- ------ ------------------------------------ ------ ------- -------- -------- -------------
<C> <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(3)....... 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.(3)...................... 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
-------------
TOTAL FIXED INCOME SECURITIES......................................................... 14,399,909
-------------
TOTAL LONG-TERM INVESTMENTS 97.0% (COST $139,241,360)(1).............................. 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)(1)..................................... 1,587,100
Other Assets in Excess of Liabilities 1.8%............................................ 2,308,037
-------------
NET ASSETS 100%....................................................................... $129,632,551
===========
</TABLE>
- ---------------
(1) 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.
(2) Non-income producing security as this stock currently does not declare
dividends.
(3) Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
(4) Assets segregated as collateral for open option transactions.
See Notes to Financial Statements
D-4
<PAGE> 254
VAN KAMPEN MERRITT UTILITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (Cost $139,241,360) (Note 1)............................... $125,737,414
Short-term investments (Cost $1,620,025) (Note 1)....................................... 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 (Note 1)............. 82,114
Options at market value (Net premiums paid of $139,650) (Note 5)........................ 52,500
Other................................................................................... 514
------------
Total Assets...................................................................... 130,750,993
------------
LIABILITIES:
Payables:
Fund shares repurchased................................................................. 457,086
Income distributions.................................................................... 279,252
Investment advisory fee (Note 2)........................................................ 82,707
Accrued expenses........................................................................ 299,397
------------
Total Liabilities................................................................. 1,118,442
------------
NET ASSETS.............................................................................. $129,632,551
=============
NET ASSETS CONSIST OF:
Paid in surplus (Note 3)................................................................ $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) (Note 3).............. $ 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) (Note 3).............. $ 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) (Note 3)................ $ 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) (Note 3)........................ $ 12.48
------------
</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
D-5
<PAGE> 255
VAN KAMPEN MERRITT UTILITY FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
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) (Note 6).................... 502,836
Investment advisory fee (Note 2).............................................. 447,533
Shareholder services.......................................................... 152,175
Trustees fees and expenses (Note 2)........................................... 12,425
Amortization of organizational expenses and initial registration costs........ 11,592
Legal (Note 2)................................................................ 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
D-6
<PAGE> 256
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, JUNE 30,
1994 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 (Note 3):
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
D-7
<PAGE> 257
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
CLASS A SHARES
-------------------------------------
FROM
JULY 28, 1993
(COMMENCEMENT OF
SIX MONTHS INVESTMENT
ENDED OPERATIONS) TO
DECEMBER 31, 1994 JUNE 30, 1994
----------------- ----------------
<S> <C> <C>
Net asset value, beginning of period........................ $12.906 $ 14.300
----------------- ----------------
Net investment income....................................... .300 .479
Net realized and unrealized loss on investments............. (.281) (1.513)
----------------- ----------------
Total from investment operations............................ .019 (1.034)
----------------- ----------------
Less:
Distributions from net investment income.................. .450 .323
Distributions in excess of net realized gain on
investments............................................ 0 .037
----------------- ----------------
Total distributions......................................... .450 .360
----------------- ----------------
Net asset value, end of period.............................. $12.475 $ 12.906
============= ==============
TOTAL RETURN (non-annualized)............................... .13% (7.38%)
Net assets at end of period (in millions)................... $ 49.7 $ 51.5
Ratio of expenses to average net assets (annualized)........ 1.38% 1.34%
Ratio of net investment income to average net assets
(annualized).............................................. 4.63% 4.10%
Portfolio turnover.......................................... 45.87% 101.54%
</TABLE>
See Notes to Financial Statements
D-8
<PAGE> 258
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
CLASS B SHARES
---------------------------------------
FROM
JULY 28, 1993
(COMMENCEMENT OF
SIX MONTHS INVESTMENT
ENDED OPERATIONS) TO
DECEMBER 31, 1994 JUNE 30, 1994
----------------- ------------------
<S> <C> <C>
Net asset value, beginning of period......................... $12.880 $ 14.300
----------------- ----------
Net investment income........................................ .257 .394
Net realized and unrealized loss on investments.............. (.271) (1.519)
----------------- ----------
Total from investment operations............................. (.014) (1.125)
----------------- ----------
Less:
Distributions from net investment income................... .369 .258
Distributions in excess of net realized gain on
investments............................................. -- .037
----------------- ----------
Total Distributions.......................................... .369 .295
----------------- ----------
Net asset value, end of period............................... $12.497 $ 12.880
============= =============
TOTAL RETURN (non-annualized)................................ (.10%) (8.02%)
Net assets at end of period (in millions).................... $ 78.6 $ 83.7
Ratio of expenses to average net assets (annualized)......... 2.09% 2.06%
Ratio of net investment income to average net assets
(annualized)............................................... 3.92% 3.36%
Portfolio turnover........................................... 45.87% 101.54%
</TABLE>
See Notes to Financial Statements
D-9
<PAGE> 259
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
CLASS C SHARES
-----------------------------------------
FROM
AUGUST 13, 1993
SIX MONTHS (COMMENCEMENT OF
ENDED DISTRIBUTION) TO
DECEMBER 31, 1994 JUNE 30, 1994
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period....................... $12.868 $ 14.460
----------------- ----------
Net investment income...................................... .237 .330
Net realized and unrealized loss on investments............ (.244) (1.627)
----------------- ----------
Total from investment operations........................... (.007) (1.297)
----------------- ----------
Less:
Distributions from net investment income................. .369 .258
Distributions in excess of net realized gain on
investments........................................... 0 .037
----------------- ----------
Total distributions........................................ .369 .295
----------------- ----------
Net asset value, end of period............................. $12.492 $ 12.868
============= ===============
TOTAL RETURN (non-annualized).............................. (.10%) (9.11%)
Net assets at end of period (in millions).................. $ 1.3 $ 1.1
Ratio of expenses to average net assets (annualized)....... 2.14% 2.05%
Ratio of net investment income to
Average net assets (annualized)............................ 3.87% 3.38%
Portfolio turnover......................................... 45.87% 101.54%
</TABLE>
See Notes to Financial Statements
D-10
<PAGE> 260
VAN KAMPEN MERRITT UTILITY FUND
FINANCIAL HIGHLIGHTS -- CONTINUED
The following schedule presents financial highlights for one share of the
Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
CLASS D SHARES
----------------------------------------
FROM MARCH 14, 1994
SIX MONTHS (COMMENCEMENT OF
ENDED DISTRIBUTION) TO
DECEMBER 31, 1994 JUNE 30, 1994
----------------- -------------------
<S> <C> <C>
Net asset value, beginning of period....................... $12.921 $13.930
----------------- ----------
Net investment income...................................... .294 .258
Net realized and unrealized loss on investments............ (.293) (1.237)
----------------- ----------
Total from investment operations........................... .001 (.979)
Less distributions from net investment income.............. .444 .030
----------------- ----------
Net asset value, end of period............................. $12.478 $12.921
============= ===============
TOTAL RETURN (non-annualized).............................. .01% (7.04%)
Net assets at end of period (in thousands)................. $ 1.4 $ 1.5
Ratio of expenses to average net assets (annualized)....... 1.43% 1.39%
Ratio of net investment income to average net assets
(annualized)............................................. 4.55% 4.15%
Portfolio turnover......................................... 45.87% 101.54%
</TABLE>
See Notes to Financial Statements
D-11
<PAGE> 261
VAN KAMPEN MERRITT UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 (UNAUDITED)
NOTE 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.
D-12
<PAGE> 262
VAN KAMPEN MERRITT UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 (UNAUDITED) -- CONTINUED
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.
NOTE 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.
NOTE 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.
D-13
<PAGE> 263
VAN KAMPEN MERRITT UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 (UNAUDITED) -- CONTINUED
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>
D-14
<PAGE> 264
VAN KAMPEN MERRITT UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 (UNAUDITED) -- CONTINUED
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>
D-15
<PAGE> 265
VAN KAMPEN MERRITT UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 (UNAUDITED) -- CONTINUED
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.
NOTE 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.
NOTE 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.
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>
D-16
<PAGE> 266
VAN KAMPEN MERRITT UTILITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 (UNAUDITED) -- CONTINUED
NOTE 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 $336,600.
D-17
<PAGE> 267
APPENDIX E
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION COUPON MATURITY ($)MARKET VALUE
- --------- ------------------------------------------------- ------ -------- ---------------
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS 47.3%
CONSUMER SERVICES 2.7%
$ 600,000 Tele-Communications, Inc. ....................... 7.25 8/1/05 $ 530,520
---------------
ENERGY 12.5%
500,000 Colorado Interstate Gas Co. ..................... 10.00 6/15/05 550,400
95,000 Enron Corp. ..................................... 6.75 7/1/05 84,407
400,000 ENSERCH Corp. ................................... 6.375 2/1/04 347,608
330,000 Laclede Gas Co. ................................. 8.50 11/15/04 336,897
75,000 Occidental Petroleum............................. 10.125 9/15/09 80,906
500,000 Panhandle Eastern Corp. ......................... 7.875 8/15/04 485,175
400,000 Southern Union Co. .............................. 7.60 2/1/24 339,552
100,000 Texas Eastern Transmission Corp. ................ 8.00 7/15/02 99,750
100,000 Union Oil of California.......................... 6.375 2/1/04 87,130
85,000 Union Oil of California.......................... 8.75 8/15/01 88,120
---------------
TOTAL ENERGY................................... 2,499,945
---------------
TECHNOLOGY 2.3%
485,000 Motorola, Inc. .................................. 7.60 1/1/07 464,872
---------------
UTILITIES 29.8%
380,000 Alabama Power Co. ............................... 6.375 8/1/99 361,167
600,000 American Telephone & Telegraph Corp. ............ 7.50 6/1/06 573,540
100,000 Baltimore Gas & Electric Co. .................... 7.50 1/15/07 94,560
200,000 Cincinnati Gas & Electric Co. ................... 6.45 2/15/04 176,940
100,000 Duke Power Co. .................................. 7.00 6/1/00 96,650
355,000 GTE Corp. ....................................... 9.375 12/1/00 379,388
200,000 Hydro Quebec..................................... 7.375 2/1/03 187,980
500,000 Hydro Quebec..................................... 8.05 7/7/24 488,580
500,000 Idaho Power Co. ................................. 8.00 3/15/04 495,100
300,000 Iowa Electric Light & Power...................... 8.625 5/15/01 310,350
390,000 MCI Communications Corp. ........................ 7.50 8/20/04 373,230
80,000 Northwestern Bell Telephone Co. ................. 9.50 5/1/00 86,264
450,000 Pacific Telephone & Telegraph Co. ............... 6.00 11/1/02 391,635
200,000 San Diego Gas & Electric Co. .................... 7.625 6/15/02 195,060
250,000 Texas Utilities Electric Co. .................... 6.25 10/1/04 214,357
500,000 Union Electric Co. .............................. 7.375 12/15/04 476,400
617,000 United Telecommunications, Inc. ................. 9.75 4/1/00 660,251
200,000 Virginia Electric & Power Co..................... 6.00 8/1/01 180,800
200,000 Virginia Electric & Power Co..................... 8.875 6/1/99 208,780
---------------
TOTAL UTILITIES................................ 5,951,032
---------------
TOTAL CORPORATE OBLIGATIONS 9,446,369
(Cost $10,050,317).........................
---------------
</TABLE>
Not a Part of the Prospectus
E-1
<PAGE> 268
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
INVESTMENT PORTFOLIO -- CONTINUED
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT DESCRIPTION ($)MARKET VALUE
- --------- ------------------------------------------------------------------- ---------------
<S> <C>
COMMON STOCK 44.1%
ENERGY 4.0%
$ 13,500 Nicor, Inc. ....................................................... $ 327,375
22,100 Pacific Enterprises................................................ 469,625
---------------
TOTAL ENERGY..................................................... 797,000
---------------
FINANCE 2.3%
7,500 Equity Residential Properties Trust................................ 238,125
6,100 Weingarten Realty Investors........................................ 218,075
---------------
TOTAL FINANCE.................................................... 456,200
---------------
UTILITIES 37.8%
14,600 Ameritech Corp..................................................... 587,650
20,500 Baltimore Gas & Electric Co........................................ 471,500
9,600 Bellsouth Corp..................................................... 535,200
13,100 CMS Energy Corp.................................................... 284,925
25,800 DPL, Inc........................................................... 503,100
12,600 Duke Power Co...................................................... 491,400
16,600 FPL Group, Inc. ................................................... 539,500
14,100 NYNEX Corp......................................................... 542,850
14,200 Pacific Telesis Group.............................................. 436,650
28,500 Pacificorp......................................................... 480,938
17,100 Peco Energy Co..................................................... 433,913
15,500 Public Service Company of Colorado................................. 418,500
16,800 Public Service Enterprise Group.................................... 441,000
10,600 SCANA Corp......................................................... 470,375
24,100 Southern Co........................................................ 448,863
16,900 Western Resources, Inc............................................. 479,538
---------------
TOTAL UTILITIES.................................................. 7,565,902
---------------
TOTAL COMMON STOCK (Cost $9,199,579)............................. 8,819,102
---------------
CONVERTIBLE PREFERRED STOCK 2.3%
10,000 Transco Energy Co. $3.50 (Cost $461,250)........................... 450,000
---------------
SHORT-TERM INVESTMENTS 3.8%
560,000 Prudential Funding Corp., 4.70%, 10/3/94........................... 559,781
200,000 United States Treasury Note, 7.75%, 2/15/95........................ 201,594
---------------
TOTAL SHORT-TERM INVESTMENTS (Cost $762,031)..................... 761,375
---------------
TOTAL INVESTMENTS 97.5% (Cost $20,473,177)...................................... 19,476,846
OTHER ASSETS AND LIABILITIES, NET 2.5%.......................................... 505,787
---------------
NET ASSETS 100%................................................................. $19,982,633
============
</TABLE>
See Notes to Financial Statements
Not a Part of the Prospectus
E-2
<PAGE> 269
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $20,473,177)................................ $19,476,846
Cash........................................................................... 2,078
Receivable for Fund shares sold................................................ 339,923
Interest and dividends receivable.............................................. 269,006
Other assets................................................................... 30,053
-----------
Total Assets............................................................ 20,117,906
-----------
LIABILITIES
Payable for Fund shares purchased.............................................. 55,342
Accrued expenses............................................................... 47,442
Due to Distributor............................................................. 18,372
Dividends payable.............................................................. 14,117
-----------
Total Liabilities....................................................... 135,273
-----------
NET ASSETS, equivalent to $8.39 per share for Class A and
Class B shares and $8.38 per share for Class C shares........................ $19,982,633
==========
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 892,244 Class A, 1,279,763 Class B and
209,939 Class C shares outstanding........................................... $ 23,819
Capital surplus................................................................ 21,250,210
Accumulated net realized loss on securities.................................... (326,263)
Unrealized depreciation of securities.......................................... (996,331)
Undistributed net investment income............................................ 31,198
-----------
NET ASSETS at September 30, 1994............................................... $19,982,633
==========
</TABLE>
See Notes to Financial Statements
Not a Part of the Prospectus
E-3
<PAGE> 270
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
STATEMENT OF OPERATIONS
NOVEMBER 23, 1993* THROUGH SEPTEMBER 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest....................................................................... $ 400,095
Dividends...................................................................... 270,632
-----------
Investment income............................................................ 670,727
-----------
EXPENSES
Management fees (net of expense reimbursement of $65,379)...................... --
Registration and filing fees................................................... 86,855
Service fees -- Class A........................................................ 7,768
Distribution and service fees -- Class B....................................... 50,180
Distribution and service fees -- Class C....................................... 7,517
Audit fees..................................................................... 22,000
Accounting services............................................................ 17,596
Reports to shareholders........................................................ 15,292
Shareholder service agent's fees and expenses.................................. 14,846
Legal fees..................................................................... 2,975
Director's fees and expenses................................................... 1,633
Miscellaneous.................................................................. 3,663
Expense reimbursement in excess of management fees............................. (76,410)
-----------
Total expenses............................................................... 153,915
-----------
NET INVESTMENT INCOME........................................................ 516,812
-----------
Net Realized and Unrealized Loss on Securities
Net realized loss on securities................................................ (326,081)
Net unrealized depreciation of securities...................................... (996,331)
-----------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES............................... (1,322,412)
-----------
DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $ (805,600)
==========
</TABLE>
- -------------------------
* Commencement of Operations
See Notes to Financial Statements
Not a Part of the Prospectus
E-4
<PAGE> 271
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
NOVEMBER 23, 1993* THROUGH SEPTEMBER 30, 1994
<TABLE>
<S> <C>
NET ASSETS, beginning of period................................................ $ 101,000
-----------
Operations
Net investment income........................................................ 516,812
Net realized loss on securities.............................................. (326,081)
Net unrealized depreciation of securities.................................... (996,331)
-----------
Decrease in net assets resulting from operations.......................... (805,600)
-----------
Dividends to Shareholders from Net Investment Income
Class A...................................................................... (225,591)
Class B...................................................................... (226,800)
Class C...................................................................... (33,691)
-----------
(486,082)
-----------
Funds Share Transactions
Proceeds from shares sold
Class A................................................................... 9,870,409
Class B................................................................... 12,813,610
Class C................................................................... 2,166,085
-----------
24,850,104
-----------
Proceeds from shares issued for dividends reinvested
Class A................................................................... 210,220
Class B................................................................... 187,883
Class C................................................................... 24,750
-----------
422,853
-----------
Cost of shares redeemed
Class A................................................................... (2,139,284)
Class B................................................................... (1,610,501)
Class C................................................................... (349,857)
-----------
(4,099,642)
-----------
INCREASE IN NET ASSETS RESULTING FROM FUND SHARE TRANSACTIONS............. 21,173,315
-----------
INCREASE IN NET ASSETS......................................................... 19,881,633
-----------
NET ASSETS, end of period...................................................... $19,982,633
==========
</TABLE>
- ---------------
* Commencement of operations
See Notes to Financial Statements
Not a Part of the Prospectus
E-5
<PAGE> 272
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION
American Capital Utilities Income Fund, Inc. (the "Fund") was organized as
an open-end, diversified management investment company in Maryland on August 31,
1993. The Fund's investment manager, American Capital Asset Management, Inc.
(the "Adviser") contributed the initial capital of $101,000 on November 8, 1993
and an additional $1,899,000 on November 30, 1993. The Fund began offering
shares on November 23, 1993.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
A. INVESTMENT VALUATIONS -- Securities listed or traded on a national
securities exchange are valued at the last sale price. Unlisted securities and
listed securities for which the last sale price is not available are valued at
the last reported bid price.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are valued based
on market quotations, until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
B. FEDERAL INCOME TAXES -- No provision for federal income taxes is
required because the Fund intends to elect to be taxed as a "regulated
investment company" under the Internal Revenue Code and intends to maintain this
qualification by annually distributing all of its taxable net investment income
and taxable net realized capital gains to its shareholders. It is anticipated
that no distributions of capital gains will be made until tax-basis capital loss
carryforwards, if any, expire or are offset by net realized capital gains.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME -- Investment
transactions are accounted for on the trade date. Realized gains and losses on
investments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily.
D. DIVIDENDS AND DISTRIBUTIONS -- Dividends and distributions to
shareholders are recorded on the record date. The Fund distributes tax basis
earnings in accordance with the minimum distribution requirements of the
Internal Revenue Code, which may differ from generally accepted accounting
principles. Such dividends or distributions may exceed financial statement
earnings.
E. DEBT DISCOUNT OR PREMIUM -- The Fund accounts for discounts and premiums
on the same basis as is followed for federal income tax reporting. Accordingly,
originally issue discounts on debt securities purchased are amortized over the
life of the security. Premiums on debt securities are not amortized. Market
discounts are accounted for at the time of sale as realized gains for book
purposes and ordinary income for tax purposes.
F. ORGANIZATION COSTS -- Organization expenses of approximately $15,000
were deferred and are being amortized over a five year period ending November,
1998.
Not a Part of the Prospectus
E-6
<PAGE> 273
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 3 -- MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are
paid monthly, based on the average daily net assets of the Fund at an annual
rate of .65%. From time to time, the Adviser may voluntarily elect to reimburse
the Fund a portion of the Fund's expenses. Such reimbursement may be
discontinued at any time without prior notice. For the period ended September
30, 1994, such reimbursement amounted to $141,789.
Accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his discretion. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the period ended September 30, 1994, these charges included $1,621 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities, and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the period ended September 30, 1994, such
fees aggregated $6,315.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $18,378 and $30,810, respectively, as their
portion of the commission charged on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its
average daily net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to .75%
per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At September 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B plan and Class C plan aggregated
approximately $462,250 and $29,000, respectively, and may be carried forward and
reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of
the Adviser, the Distributor, the Retail Dealer and the shareholder service
agent.
NOTE 4 -- DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by
the Fund at the annual rate of $770 plus a fee of $15 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the Fund
at an annual rate of $290. During the period, such fees aggregated $1,575.
Not a Part of the Prospectus
E-7
<PAGE> 274
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The directors may participate in a voluntary deferred compensation plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will be
paid solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At September 30, 1994, the liability for the Plan aggregated
$500. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund on
its short-term investments or equal to the total return of the Fund.
NOTE 5 -- INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $28,382,015 and $8,140,116,
respectively.
For federal income tax purposes, the identified cost of investments owned
at September 30, 1994 was $20,475,892. Gross unrealized appreciation of
investments aggregated $80,850 and gross unrealized depreciation of investments
aggregated $1,079,896. Approximately $323,500 in financial statement losses are
deferred for tax purposes until the following fiscal year.
NOTE 6 -- CAPITAL
The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of distribution fees and certain other class specific expenses. Realized
and unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
Not a Part of the Prospectus
E-8
<PAGE> 275
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
The Fund has 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock during the period were
as follows:
<TABLE>
<S> <C>
Shares sold
Class A..................................................................... 1,116,081
Class B..................................................................... 1,446,604
Class C..................................................................... 248,296
---------
2,810,981
---------
Shares issued for dividends reinvested
Class A..................................................................... 24,273
Class B..................................................................... 21,860
Class C..................................................................... 2,888
---------
49,021
---------
Shares redeemed
Class A..................................................................... (248,110)
Class B..................................................................... (188,701)
Class C..................................................................... (41,245)
---------
(478,056)
---------
Increase in shares outstanding................................................... 2,381,946
========
</TABLE>
Not a Part of the Prospectus
E-9
<PAGE> 276
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the
period indicated.
<TABLE>
<CAPTION>
NOVEMBER 23, 1993(1)
THROUGH
SEPTEMBER 30, 1994
---------------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period........................... $ 9.44 $ 9.44 $ 9.44
------- ------- -------
Income from investment operations
Investment income......................................... .53 .52 .53
Expenses.................................................. (.09) (.14) (.15)
------- ------- -------
Net investment income........................................ .44 .38 .38
Net realized and unrealized losses on securities............. (1.10) (1.10) (1.106)
------- ------- -------
Total from investment operations............................... (.66) (.72) (.726)
Dividends from net investment income......................... (.39) (.33) (.334)
------- ------- -------
Net asset value, end of period............................... $ 8.39 $ 8.39 $ 8.38
====== ====== ======
TOTAL RETURN(3)........................................... (7.24%) (7.72%) (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)......................... $ 7.5 $ 10.7 $ 1.8
Average net assets (millions).................................. $ 5.2 $ 6.0 $ 0.9
Ratios to average net assets(2)
Expenses.................................................. 1.06% 1.82% 1.79%
Expenses, without expense reimbursement................... 2.43% 3.19% 3.16%
Net investment income..................................... 5.48% 4.66% 4.65%
Net investment income, without expense reimbursement...... 4.11% 3.29% 3.28%
Portfolio turnover rate........................................ 72% 72% 72%
</TABLE>
- ---------------
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September 30,
1994. Total return does not consider the effect of sales charges.
(4) Per share information based on average month-end shares outstanding.
See Notes to Financial Statements
Not a Part of the Prospectus
E-10
<PAGE> 277
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
American Capital Utilities Income Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations and
of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Utilities Income
Fund, Inc. at September 30, 1994, and the results of its operations, the changes
in its net assets and the selected per share data and ratios for the period from
November 23, 1993 (commencement of operations) through September 30, 1994, in
conformity with generally accepted accounting principles. These financial
statements and selected per share data and ratios (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at
September 30, 1994 by correspondence with the custodian and brokers, provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
November 14, 1994
Not a Part of the Prospectus
E-11
<PAGE> 278
APPENDIX F
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS
MARCH 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/
NUMBER OF SHARES DESCRIPTION COUPON MATURITY ($)MARKET VALUE
- ----------------- ----------------------------------------- --------- -------- ---------------
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS 40.0%
CONSUMER SERVICES 2.1%
$ 600,000 Tele-Communications, Inc................. 7.750 08/01/05 $ 541,800
-----------
ENERGY 13.7%
500,000 Colorado Interstate Gas Co. ............. 10.000 06/15/05 559,250
595,000 Enron Corp. ............................. 6.750 07/01/05 543,949
400,000 ENSEARCH Corp. .......................... 6.375 02/01/04 356,360
330,000 Laclede Gas Co. ......................... 8.500 11/15/04 346,731
75,000 Occidental Petroleum Corp. .............. 10.125 09/15/09 85,087
500,000 Panhandle Eastern Corp. ................. 7.875 08/15/04 497,180
400,000 Southern Union Co. ...................... 7.600 02/01/24 354,800
400,000 Southwest Gas Co. ....................... 9.750 06/15/02 433,320
100,000 Texas Eastern Transmission Corp. ........ 8.000 07/15/02 101,080
100,000 Union Oil of California.................. 6.375 02/01/04 89,820
85,000 Union Oil of California.................. 8.750 08/15/01 89,190
-----------
TOTAL ENERGY.......................... 3,456,767
-----------
TECHNOLOGY 1.9%
485,000 Motorola, Inc. .......................... 7.600 01/01/07 479,714
-----------
UTILITIES 22.3%
600,000 A T & T Corp. ........................... 7.500 06/01/06 591,480
100,000 Baltimore Gas & Electric Co. ............ 7.500 01/15/07 97,400
200,000 Cincinnati Gas & Electric Co. ........... 6.450 02/15/04 183,060
500,000 Florida Power & Light Co. ............... 6.875 04/01/04 471,050
355,000 GTE Corp. ............................... 9.375 12/01/00 381,803
500,000 Idaho Power Co. ......................... 8.000 03/15/04 508,250
700,000 Iowa Electric Light & Power Co. ......... 8.625 05/15/01 734,440
635,000 MCI Communications Corp. ................ 7.500 08/20/04 625,285
80,000 Northwestern Bell Telephone Co. ......... 9.500 05/01/00 86,640
200,000 San Diego Gas & Electric Co. ............ 7.625 06/15/02 199,460
250,000 Texas Utilities Electric Co. ............ 6.250 10/01/04 223,590
500,000 Union Electric Co. ...................... 7.375 12/15/04 490,300
617,000 United Telecommunications, Inc. ......... 9.750 04/01/00 665,928
200,000 Virginia Electric & Power Co. ........... 6.000 08/01/01 184,120
200,000 Virginia Electric & Power Co. ........... 8.875 06/01/99 209,800
-----------
TOTAL UTILITIES....................... 5,652,606
-----------
TOTAL CORPORATE OBLIGATIONS 10,130,887
(Cost $10,455,626)....................
-----------
</TABLE>
See Notes to Financial Statements
F-1
<PAGE> 279
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
PORTFOLIO OF INVESTMENTS -- CONTINUED
MARCH 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT/
NUMBER OF SHARES DESCRIPTION ($)MARKET VALUE
- ----------------- -------------------------------------------------------------- ---------------
<S> <C> <C>
COMMON STOCK 56.8%
ENERGY 4.7%
25,000 Pacific Enterprises........................................... $ 618,750
25,000 Panhandle Eastern Corp. ...................................... 575,000
-------------
TOTAL ENERGY............................................... 1,193,750
-------------
UTILITIES 52.1%
14,000 Ameritech Corp. .............................................. 577,500
26,000 Baltimore Gas & Electric Co. ................................. 614,250
10,000 Bellsouth Corp. .............................................. 595,000
25,000 CMS Energy Corp. ............................................. 584,375
29,000 DPL, Inc. .................................................... 605,375
25,000 Eastern Utilities Association................................. 596,875
20,000 FPL Group, Inc. .............................................. 727,500
22,000 General Public Utilities Corp. ............................... 640,750
12,000 GTE Corp. .................................................... 399,000
7,000 National Power ADR............................................ 75,250
19,000 NIPSCO Industries, Inc. ...................................... 591,375
16,000 NYNEX Corp. .................................................. 634,000
19,000 Pacific Telesis Group......................................... 574,750
30,000 Pacificorp. .................................................. 581,250
24,000 Peco Energy Co. .............................................. 603,000
27,000 Pinnacle West Capital Corp. .................................. 563,625
5,200 Powergen Power & Light ADR.................................... 63,050
19,000 Public Service Co. of Colorado................................ 584,250
22,000 Public Service Enterprise Group............................... 602,250
29,000 Southern Co. ................................................. 590,875
18,000 Texas Utilities Electric Co. ................................. 571,500
24,000 Unicom Corp. ................................................. 570,000
15,000 U. S. West, Inc. ............................................. 600,000
20,000 Western Resources, Inc. ...................................... 625,000
-------------
TOTAL UTILITIES............................................ 13,170,800
-------------
TOTAL COMMON STOCK (Cost $13,991,594)...................... 14,364,550
-------------
REPURCHASE AGREEMENT 2.1%
$ 535,000 Salomon Brothers, Inc, dated 3/31/95, 6.27% due 4/3/95
(collateralized by U. S. Government obligations in a pooled
cash account) repurchase proceeds $535,093 (Cost $535,000).... 535,000
-------------
TOTAL INVESTMENTS 98.9% (Cost $24,982,220)......................................... 25,030,437
OTHER ASSETS AND LIABILITIES, NET 1.1%............................................. 267,674
-------------
NET ASSETS 100%.................................................................... $25,298,111
=============
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 280
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $24,982,220)................................ $25,030,437
Cash........................................................................... 2,984
Interest and dividends receivable.............................................. 318,764
Receivable for Fund shares sold................................................ 70,581
Other assets................................................................... 35,396
-----------
Total Assets............................................................ 25,458,162
-----------
LIABILITIES
Due to Distributor............................................................. 21,862
Due to shareholder service agent............................................... 29,242
Deferred Directors' compensation............................................... 1,374
Dividends payable.............................................................. 18,270
Payable for Fund shares redeemed............................................... 17,281
Accrued expenses and other payables............................................ 72,022
-----------
Total Liabilities....................................................... 160,051
-----------
NET ASSETS, equivalent to $8.72 per share for Class A, $8.71 per share Class B
and $8.70 per share for Class C shares....................................... $25,298,111
===========
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 995,792 Class A, 1,638,873 Class B and
269,483 Class C shares outstanding........................................... $ 29,041
Capital surplus................................................................ 25,669,373
Accumulated net realized loss on securities.................................... (456,783)
Net unrealized appreciation of securities...................................... 48,217
Undistributed net investment income............................................ 8,263
-----------
NET ASSETS at March 31, 1995................................................... $25,298,111
==========
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 281
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest........................................................................ $ 445,920
Dividends....................................................................... 314,116
----------
Investment income.......................................................... 760,036
----------
EXPENSES:
Management fees................................................................. 72,767
Registration and filing fees.................................................... 62,865
Service fees -- Class A......................................................... 5,980
Distribution and service fees -- Class B........................................ 61,001
Distribution and service fees -- Class C........................................ 10,143
Accounting services............................................................. 26,816
Shareholder service agent's fees and expenses................................... 44,609
Audit fees...................................................................... 14,400
Reports to shareholders......................................................... 9,919
Director's fees and expenses.................................................... 5,510
Legal fees...................................................................... 3,199
Miscellaneous................................................................... 1,772
Expense reimbursement........................................................... (99,662)
----------
Total Expenses............................................................. 219,319
----------
NET INVESTMENT INCOME...................................................... 540,717
----------
Net Realized and Unrealized Gain (Loss) on Securities:
Net realized loss on securities................................................. (130,520)
Net unrealized appreciation of securities during the period..................... 1,044,548
----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............................. 914,028
----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................... $1,454,745
=========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 282
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
NOVEMBER 23, 1993*
SIX MONTHS ENDED THROUGH
MARCH 31, 1995 SEPTEMBER 30, 1994
---------------- ------------------
<S> <C> <C>
NET ASSETS, beginning of period............................. $ 19,982,633 $ 101,000
---------------- ------------------
Operations
Net investment income..................................... 540,717 516,812
Net realized loss on securities........................... (130,520) (326,081)
Net unrealized appreciation (depreciation) of securities
during the period...................................... 1,044,548 (996,331)
---------------- ------------------
Increase (decrease) in net assets resulting from
operations........................................... 1,454,745 (805,600)
---------------- ------------------
Dividends to shareholders from net investment income
Class A................................................... (225,289) (225,591)
Class B................................................... (290,220) (226,800)
Class C................................................... (48,143) (33,691)
---------------- ------------------
(563,652) (486,082)
---------------- ------------------
Fund share transactions
Proceeds from shares sold
Class A................................................ 2,321,151 9,870,409
Class B................................................ 4,053,715 12,813,610
Class C................................................ 576,648 2,166,085
---------------- ------------------
6,951,514 24,850,104
---------------- ------------------
Proceeds from shares issued for dividends reinvested
Class A................................................ 204,839 210,220
Class B................................................ 238,579 187,883
Class C................................................ 32,346 24,750
---------------- ------------------
475,764 422,853
---------------- ------------------
Cost of shares redeemed
Class A................................................ (1,660,741) (2,139,284)
Class B................................................ (1,237,109) (1,610,501)
Class C................................................ (105,043) (349,857)
---------------- ------------------
(3,002,893) (4,099,642)
---------------- ------------------
INCREASE IN NET ASSETS RESULTING FROM SHARE
TRANSACTIONS......................................... 4,424,385 21,173,315
---------------- ------------------
INCREASE IN NET ASSETS...................................... 5,315,478 19,881,633
---------------- ------------------
NET ASSETS, end of period................................... $ 25,298,111 $ 19,982,633
================ ==================
</TABLE>
- ---------------
* Commencement of operations
See Notes to Financial Statements
F-5
<PAGE> 283
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
CLASS A CLASS A
-------------- ---------------------
SIX MONTHS NOVEMBER 23, 1993(1)
ENDED THROUGH
MARCH 31, 1995 SEPTEMBER 30, 1994(4)
-------------- ---------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................... $ 8.39 $ 9.44
------- -------
Income from investment operations
Investment income................................. .29 .53
Expenses.......................................... (.06) (.09)
------- -------
Net investment income................................ .23 .44
Net realized and unrealized gains or losses on
securities........................................ .334 (1.10)
------- -------
Total from investment operations..................... .564 (.66)
------- -------
Dividends from net investment income................. (.234) (.39)
------- -------
Net asset value, end of period....................... $ 8.72 $ 8.39
======= =======
TOTAL RETURN(3)................................... 6.70% (7.24%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................. $ 8.7 $ 7.5
Average net assets (millions)........................ $ 8.2 $ 5.2
Ratios to average net assets(2)
Expenses.......................................... 1.42% 1.06%
Expenses, without expense reimbursement........... 2.31% 2.43%
Net investment income............................. 5.41% 5.48%
Net investment income, without expense
reimbursement................................... 4.52% 4.11%
Portfolio turnover rate.............................. 29% 72%
</TABLE>
- ---------------
(1) -- Commencement of operations.
(2) -- Annualized; see Note 3.
(3) -- Total return not annualized. Total return calculated from December 1,
1993 (date the Fund began meeting its investment objective) through
September 30, 1994. Total return does not consider the effect of sales
charges.
(4) -- Based on average month-end shares outstanding.
See Notes to Financial Statements
F-6
<PAGE> 284
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
CLASS B CLASS B
---------- -------------
NOVEMBER 23,
SIX MONTHS 1993(1)
ENDED THROUGH
MARCH 31, SEPTEMBER 30,
1995 1994(4)
---------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................................. $ 8.39 $ 9.44
-------- ---------
Income from investment operations
Investment income.................................................. .29 .52
Expenses........................................................... (.10) (.14)
-------- ----------
Net investment income................................................ .19 .38
Net realized and unrealized gains or losses on securities............ .332 (1.096)
-------- ----------
Total from investment operations..................................... .522 (.716)
-------- ----------
Dividends from net investment income................................. (.202) (.334)
-------- ----------
Net asset value, end of period....................................... $ 8.71 $ 8.39
======== ==========
TOTAL RETURN(3)...................................................... 6.30% (7.72%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................. $ 14.3 $ 10.7
Average net assets (millions)........................................ $ 12.2 $ 6.0
Ratios to average net assets(2)
Expenses........................................................... 2.28% 1.82%
Expenses, without expense reimbursement............................ 3.17% 3.19%
Net investment income.............................................. 4.52% 4.66%
Net investment income, without expense reimbursement............... 3.63% 3.29%
Portfolio turnover rate.............................................. 29% 72%
</TABLE>
- ---------------
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September 30,
1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-7
<PAGE> 285
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
CLASS C CLASS C
----------- -------------
NOVEMBER 23,
SIX MONTHS 1993(1)
ENDED THROUGH
MARCH 31, SEPTEMBER 30,
1995 1994(4)
----------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................................. $ 8.38 $ 9.44
--------- ----------
Income from investment operations
Investment income.................................................. .29 .53
Expenses........................................................... (.10) (.15)
--------- ----------
Net investment income................................................ .19 .38
Net realized and unrealized gains or losses on securities............ .332 (1.106)
--------- ----------
Total from investment operations..................................... .522 (.726)
--------- ----------
Dividends from net investment income................................. (.202) (.334)
--------- ----------
Net asset value, end of period....................................... $ 8.70 $ 8.38
========= ==========
TOTAL RETURN(3)................................................. 6.30% (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................................. $ 2.3 $ 1.8
Average net assets (millions)........................................ $ 2.0 $ 0.9
Ratios to average net assets(2)
Expenses........................................................... 2.27% 1.79%
Expenses, without expense reimbursement............................ 3.16% 3.16%
Net investment income.............................................. 4.51% 4.65%
Net investment income, without expense reimbursement............... 3.62% 3.28%
Portfolio turnover rate.............................................. 29% 72%
</TABLE>
- ---------------
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September 30,
1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-8
<PAGE> 286
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 (UNAUDITED)
NOTE 1 -- ORGANIZATION
Van Kampen American Capital Utilities Income Fund, Inc. (the "Fund") was
organized as an open-end, diversified management investment company in Maryland
on August 31, 1993. The Fund's investment manager, Van Kampen American Capital
Asset Management, Inc. (the "Adviser") contributed the initial capital of
$101,000 on November 8, 1993 and an additional $1,899,000 on November 30, 1993.
The Fund began offering shares on November 23, 1993.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. The
following is a summary of significant accounting policies consistently followed
by the Fund in the preparation of its financial statements.
A. INVESTMENT VALUATIONS -- Securities listed or traded on a national
securities exchange are valued at the last sale price. Unlisted securities and
listed securities for which the last sale price is not available are valued at
the last reported bid price.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are valued based
on market quotations, until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
B. FEDERAL INCOME TAXES -- No provision for federal income taxes is
required because the Fund intends to elect to be taxed as a "regulated
investment company" under the Internal Revenue Code and intends to maintain this
qualification by annually distributing all of its taxable net investment income
and taxable net realized capital gains to its shareholders. It is anticipated
that no distributions of capital gains will be made until tax-basis capital loss
carryforwards, if any, expire or are offset by net realized capital gains.
Approximately $323,500 in financial statement losses are deferred for tax
purposes until the following fiscal year.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME -- Investment
transactions are accounted for on the trade date. Realized gains and losses on
investments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily.
D. DIVIDENDS AND DISTRIBUTIONS -- Dividends and distributions to
shareholders are recorded on the record date. The Fund distributes tax basis
earnings in accordance with the minimum distribution requirements of the
Internal Revenue Code, which may differ from generally accepted accounting
principles. Such dividends or distributions may exceed financial statement
earnings.
E. DEBT DISCOUNT OR PREMIUM -- The Fund accounts for original issue
discounts and premiums on the same basis as is followed for federal income tax
reporting. Accordingly, originally issue discounts on long-term debt securities
purchased are amortized over the life of the security. Premiums on debt
securities are not
F-9
<PAGE> 287
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 (UNAUDITED) -- CONTINUED
amortized. Market discounts are accounted for at the time of sale as realized
gains for book purposes and ordinary income for tax purposes.
F. ORGANIZATION COSTS -- Organization expenses of approximately $15,000
were deferred and are being amortized over a five year period ending November,
1998.
NOTE 3 -- MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are
paid monthly, based on the average daily net assets of the Fund at an annual
rate of .65%. From time to time, the Adviser may voluntarily elect to reimburse
the Fund a portion of the Fund's expenses. Such reimbursement may be
discontinued at any time without prior notice. For the period ended March 31,
1995, such reimbursement amounted to $99,662.
Accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his discretion. Charges are
allocated among investment companies advised or sub-advised by the Adviser. For
the period ended March 31, 1995, these charges included $3,130 as the Fund's
share of the employee costs attributable to the Fund's accounting officers. A
portion of the accounting services expense was paid to the Adviser in
reimbursement of personnel, facilities, and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period ended March 31, 1995, such fees aggregated $30,900.
The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $3,383 and $10,323, respectively, as their
portion of the commission charged on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its
average daily net assets to the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to .75%
per annum of their average net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At March 31, 1995, the unreimbursed expenses incurred
by the Distributor under the Class B plan and Class C plan aggregated
approximately $529,000 and $31,000, respectively, and may be carried forward and
reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of
the Adviser, the Distributor, the Retail Dealer and the shareholder service
agent.
F-10
<PAGE> 288
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 (UNAUDITED) -- CONTINUED
NOTE 4 -- DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by
the Fund at the annual rate of $730 plus a fee of $20 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the Fund
at an annual rate of $270. During the period, such fees aggregated $2,849.
The directors may participate in a voluntary deferred compensation plan
(the "Plan"). The Plan is not funded and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered under the Plan elects to be credited with
an earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
NOTE 5 -- INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $11,020,452 and $6,356,147,
respectively.
The cost of investments owned at March 31, 1995 was the same for federal
income tax and financial reporting purposes. Gross unrealized appreciation of
investments aggregated $649,418 and gross unrealized depreciation of investments
aggregated $601,201.
NOTE 6 -- CAPITAL
The Fund offers three classes of shares at their respective net asset
values per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of shares
have the same rights, except that Class B shares and Class C shares bear the
cost of distribution fees and certain other class specific expenses. Realized
and unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
F-11
<PAGE> 289
AMERICAN CAPITAL UTILITIES INCOME FUND, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1995 (UNAUDITED) -- CONTINUED
The Fund has 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock during the period were
as follows:
<TABLE>
<CAPTION>
NOVEMBER 23, 1993*
SIX MONTHS ENDED THROUGH
MARCH 31, 1995 SEPTEMBER 30, 1994
---------------- ------------------
<S> <C> <C>
Shares sold
Class A................................................... 273,477 1,116,081
Class B................................................... 476,363 1,446,604
Class C................................................... 68,131 248,296
------------ ------------
817,971 2,810,981
------------ ------------
Shares issued for dividends reinvested
Class A................................................... 24,018 24,273
Class B................................................... 27,959 21,860
Class C................................................... 3,791 2,888
------------ ------------
55,768 49,021
------------ ------------
Shares redeemed
Class A................................................... (193,947) (248,110)
Class B................................................... (145,212) (188,701)
Class C................................................... (12,378) (41,245)
------------ ------------
(351,537) (478,056)
------------ ------------
Increase in shares outstanding.............................. 522,202 2,381,946
============ ============
</TABLE>
- ---------------
* Commencement of operations
F-12
