VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST/, 497, 1996-11-01

VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST/
497, 1996-11-01

Previous: VAN KAMPEN AMERICAN CAPITAL EQUITY TRUST/, 497J, 1996-11-01

Next: NUVEEN TAX FREE BOND FUND INC, N-30D, 1996-11-01

<PAGE> 1

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL UTILITY FUND

Van Kampen American Capital 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.

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated the date hereof (the
"Prospectus"). This Statement of Additional Information does not include all the
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling (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.................................................................. B-2
Investment Policies and Restrictions.................................................... B-2
Additional Investment Considerations.................................................... B-4
Description of Securities Ratings....................................................... B-13
Trustees and Officers................................................................... B-20
Investment Advisory and Other Services.................................................. B-28
Custodian and Independent Accountants................................................... B-29
Portfolio Transactions and Brokerage Allocation......................................... B-29
Tax Status of the Fund.................................................................. B-30
The Distributor......................................................................... B-30
Legal Counsel........................................................................... B-31
Performance Information................................................................. B-31
Independent Accountants' Report......................................................... B-34
Financial Statements.................................................................... B-35
Notes to Financial Statements........................................................... B-41
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996.
<PAGE> 2

THE FUND AND THE TRUST

The Fund is a separate diversified series of Van Kampen American Capital
Equity Trust (the "Trust"), an open-end diversified management investment
company. 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"). At present, the Fund, Van Kampen American Capital
Balanced Fund, Van Kampen American Capital Growth Fund, Van Kampen American
Capital Value Fund, Van Kampen American Capital Prospector Fund, Van Kampen
American Capital Great American Companies Fund and Van Kampen American Capital
Aggressive Growth Fund are the only series of the Trust, although other series
may be organized and offered in the future. Each series of the Trust will be
treated as a separate corporation for federal income tax purposes.

The Declaration of Trust permits the Trustees to create one or more separate
investment portfolios and issue a series of shares for each portfolio. The
Trustee can further sub-divide each series of shares into one or more classes of
shares for each portfolio. The Trust can issue an unlimited number of shares
with $0.01 par value. Each share represents an equal proportionate interest in
the assets of the series with each other share in such series and no interest in
any other series. No series is subject to the liabilities of any other series.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, 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 two-thirds of the
shares then outstanding cast in person or by proxy at such meeting.

The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the Investment Company Act of 1940, as amended (the "1940 Act") or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares or
impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.

The Trust originally was organized as the Van Kampen Merritt Equity Trust, a
Massachusetts business trust, created by a Declaration of Trust dated March 26,
1987 (the "Massachusetts Trust"). The Massachusetts Trust was reorganized into
the Trust on July 31, 1995 pursuant to an Agreement and Plan of Reorganization
and Liquidation. The Trust was formed pursuant to an Agreement and Declaration
of Trust dated May 10, 1995 for the purpose of facilitating the Massachusetts
Trust's reorganization into a Delaware business trust. The Trust filed a
Certificate of Trust with the Delaware Secretary of State on July 28, 1995.

The Fund originally was organized as a sub-trust of the Massachusetts Trust.
In connection with the Massachusetts Trust's reorganization into a Delaware
business trust, the Fund was reorganized into a series of the Trust.

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.

B-2
<PAGE> 3

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (determined at the time of investment) would then be
invested in securities of a single issuer or, if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of an
issuer.

2. Issue senior securities, borrow money from banks or enter into reverse
repurchase agreements with banks in the aggregate in excess of 33 1/3% of
the Fund's total assets (after giving effect to any such borrowing); which
amount includes no more than 5% in borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.

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.

B-3
<PAGE> 4

Fund considers it advantageous to purchase or sell securities. Portfolio
turnover will be calculated by dividing the lesser of purchases or sales of
portfolio securities by the monthly average value of the securities in the
portfolio during the year. Securities, including options, whose maturity or
expiration date at the time of acquisition were one year or less will be
excluded from such calculation.

ADDITIONAL INVESTMENT CONSIDERATIONS

UTILITY SECURITIES

Entities that issue Utility Securities may be subject to a variety of risks
depending, in part, on such factors as the type of utility involved and its
geographic location. Such risks may include potential increases in operating
costs, increases in interest expenses for capital construction programs,
government regulation of rates charged to customers, costs associated with
compliance with environmental and other regulations, 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

B-4
<PAGE> 5

newer services will not be heavily regulated in the future. Regulation may limit
rates based on an authorized level of earnings, a price index, or another
formula. Telephone rate regulation may include government-mandated
cross-subsidies that limit the flexibility of existing service providers to
respond to competition. Regulation may also limit the use of new technologies
and hamper efficient depreciation of existing assets. If regulation limits the
use of new technologies by established carriers or forces cross-subsidies, large
private networks may emerge.

LOWER GRADE SECURITIES

The Fund may invest up to 20% of its assets in lower-grade income securities,
including lower-grade fixed-income Utility Securities. Such lower grade
securities are rated BB or B by S&P or Ba or B by Moody's. Investment in such
securities involves special risks, as described herein. Liquidity relates to the
ability of a Fund to sell a security in a timely manner at a price which
reflects the value of that security. As discussed below, the market for lower
grade securities is considered generally to be less liquid than the market for
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.

B-5
<PAGE> 6

additional expenses to the extent it is required to seek recovery upon a default
in the payment of interest or a repayment of principal on its portfolio
holdings, and the Fund may be unable to obtain full recovery thereof. In the
event that an issuer of securities held by the Fund experiences difficulties in
the timely payment of principal or interest and such issuer seeks to restructure
the terms of its borrowings, the Fund may incur additional expenses and may
determine to invest additional capital with respect to such issuer or the
project or projects to which the Fund's portfolio securities relate.

The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating fixed-income securities. Such ratings
evaluate only the safety of principal and interest payments, not market value
risk. Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings, the
Adviser 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

B-6
<PAGE> 7

institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, equity and income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.

Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.

Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.

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."

B-7
<PAGE> 8

market value by giving the Fund the right to sell such instrument at the option
exercise price. A call option, upon payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell, the
underlying instrument at the exercise price. The Fund's purchase of a call
option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as a paradigm, but is
also applicable to other financial intermediaries.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the 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.

B-8
<PAGE> 9

received (or the guarantors of the obligation of which have received) a
short-term credit rating of "A-1" from S&P or "P-1" from Moody's or an
equivalent rating from any other NRSRO. The staff of the SEC currently takes the
position that, in general, OTC options on securities other than U.S. Government
securities purchased by the Fund, and portfolio securities "covering" the amount
of the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing no more than 15% of its assets in illiquid
securities.

If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.

The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and or securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even 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

B-9
<PAGE> 10

subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price nor that
delivery will occur.

The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which the Fund may be subject may further restrict the Fund's ability to engage
in transactions in futures contracts and related options. The segregation
requirements with respect to futures contracts and options thereon are described
below.

OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.

CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holding denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of such
Counterparties have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
currency options) are determined to be of equivalent credit quality by the
Adviser.

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.

B-10
<PAGE> 11

The Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which the Fund has or in which the Fund expects to have
portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. For example, if the Adviser
considers the Austrian schilling is linked to the German deutschemark (the
"D-mark"), the Fund holds securities denominated in schillings and the Adviser
believes that that the value of schillings will decline against the U.S. dollar,
the Adviser may enter into a contract to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.

RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.

COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interest of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.

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

B-11
<PAGE> 12

the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.

The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.

EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and income
instruments are linked.

RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.

USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets 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.

B-12
<PAGE> 13

Except when the Fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid securities denominated in that currency equal to the Fund's obligations
or to segregate liquid high grade assets equal to the amount of the Fund's
obligation.

OTC options entered into by the Fund, including those on securities,
currencies, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.

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:

1. DEBT

A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors,
insurers, or lessees.

B-13
<PAGE> 14

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 payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation:

2. Nature of and provisions of the obligation:

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.

INVESTMENT GRADE

AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in the higher rated categories.

BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

SPECULATIVE GRADE

BB, B, CCC, CC, C: Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as
having significantly 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" is less vulnerable 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" is more vulnerable 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" is currently vulnerable 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: Debt rated "CC" is currently highly vulnerable to nonpayment. The rating
"CC" is also used for debt subordinated to senior debt that is assigned an
actual or implied "CCC" rating.

B-14
<PAGE> 15

C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed, but debt service payments are continued. The rating "C"
typically is applied to debt subordinated to senior debt which is assigned an
actual or implied "CCC-" debt rating.

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.

NR: Not rated.

R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe payment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.

BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A," "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.

2. COMMERCIAL PAPER

A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:

A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign
(+) designation.

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".

A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the
higher designations.

B Issues rated "B" are regarded as having significant speculative
characteristics.

C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.

D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the
date due, even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace
period.

A commercial paper rating is not a recommendation to purchase, 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 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.

B-15
<PAGE> 16

The ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of such information, or based on other circumstances.

3. VARIABLE RATE DEMAND BONDS

S&P 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+"). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, "SP-1+/A-1+").

4. NOTES

An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assignment:

-- Amortization schedule (the longer the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics will be given a plus (+)
designation.

SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.

SP-3 Speculative capacity to pay principal and interest.

5. PREFERRED STOCK

A S&P 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.

B-16
<PAGE> 17

<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. 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 nonpaying issue.
D A preferred stock rated "D" is a nonpaying 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, 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.
</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 (Moody's) rating symbols and their meanings (as published by
Moody's Investor Service) follows:

1. LONG-TERM DEBT

AAA: Bonds which are rated AAA are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

AA: Bonds which are rated AA are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than AAA securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA: Bonds which are rated BAA are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may by lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

B-17
<PAGE> 18

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 to B. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.

ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.

Should no rating be assigned, the reason may be one of the following:

1. An application for rating was not received or accepted.

2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.

3. There is a lack of essential data pertaining to the issue or issuer.

4. The issue was privately placed, in which case the rating is not
published in Moody's publications.

Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.

2. SHORT-TERM DEBT

Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year unless explicitly noted.

Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:

Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short- term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:

-- Leading market positions in well-established industries.

-- High rates of return on funds employed.

-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.

-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.

Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings,
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization

B-18
<PAGE> 19

characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.

Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternative liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

3. PREFERRED STOCK

Preferred stock rating symbols and their definitions are as follows:

AAA: An issue which is rated "AAA" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.

AA: An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.

A: An issue which is rated "A" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset 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.

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.

B-19
<PAGE> 20

TRUSTEES AND OFFICERS

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"), Van Kampen American Capital Asset
Management, Inc. (the "AC Adviser"), Van Kampen American Capital Distributors,
Inc. (the "Distributor"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital"), VK/AC Holding, Inc. or ACCESS Investor Services, Inc.
("ACCESS"). For purposes hereof, the terms "Van Kampen American Capital Funds"
or "Fund Complex" includes each of the open-end investment companies advised by
the VK Adviser (excluding The Explorer Institutional Trust) and each of the
open-end investment companies advised by the AC Adviser (excluding the Van
Kampen American Capital Exchange Fund and the Common Sense Trust).

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
1632 Morning Mountain Road President of MDT Corporation, a company which develops
Raleigh, NC 27614 manufactures, markets and services medical and scientific
Date of Birth: 07/14/32 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndtson, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Date of Birth: 06/03/49 of La Salle National Bank. Trustee of each of the Van
Kampen American Capital Funds.
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.
Date of Birth: 11/23/19
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee 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, Van Kampen American Capital
Oakbrook Terrace, IL 60181 Advisors, Inc. and Van Kampen American Capital
Date of Birth: 05/20/42 Management, Inc. Executive Vice President and a Director
of VK/AC Holding, Inc. and Van Kampen American Capital.
President and Director of Van Kampen Merritt Equity
Advisors Corp. Director of Van Kampen Merritt Equity
Holdings Corp. Director of McCarthy, Crisanti & Maffei,
Inc. Prior to September 1996, Chief Executive Officer
McCarthy, Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company, Limited. Prior to
July 1996, President, Chief Operating Officer and Trustee
of VSM Inc. and VCJ Inc. President, Chief Executive
Officer and Trustee of each of the Van Kampen American
Capital Funds. President, Chairman of the Board and
Trustee of other investment companies advised by the VK
Adviser. Executive Vice President of other investment
companies advised by the AC Adviser.
</TABLE>

B-20
<PAGE> 21

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
Date of Birth: 02/13/36 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.

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
Date of Birth: 10/10/22 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.

Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
155 Hickory Lane of Graduate School and Chairman, Department of Mechanical
Closter, NJ 07624-2322 Engineering, Stevens Institute of Technology. Director of
Date of Birth: 08/02/24 Dynalysis of Princeton, a firm engaged in engineering
research. Trustee and Co-Chairman of each of the Van
Kampen American Capital Funds.

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
Date of Birth: 01/31/22 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>

- ---------------

* Such trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. McDonnell is an interested person of the VK Adviser, the
AC Adviser and the Fund by reason of his positions with the VK Adviser and the
AC Adviser. Mr. Whalen is an interested person of the Fund by reason of his
firm acting as legal counsel to the Fund.

B-21
<PAGE> 22

OFFICERS

The address for William N. Brown, Curtis W. Morell, Robert C. Peck, Jr., Alan
T. Sachtleben, Paul R. Wolkenberg, Tanya M. Loden, Huey P. Falgout, Jr. and
Robert Sullivan is 2800 Post Oak Blvd., Houston, TX 77056. The address for Peter
W. Hegel, Ronald A. Nyberg, Edward C. Wood III, John L. Sullivan, Nicholas
Dalmaso, Scott E. Martin, Weston B. Wetherell and Steven M. Hill is One Parkview
Plaza, Oakbrook Terrace, IL 60181.

B-22
<PAGE> 23

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg........ Vice President and Executive Vice President, General Counsel
Date of Birth: Secretary and Secretary of Van Kampen American
07/29/53 Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen Merritt Equity Advisors Corp., and
Van Kampen Merritt Equity Holdings Corp.
Executive Vice President, General Counsel
and Assistant Secretary of Van Kampen
American Capital Advisors, Inc., American
Capital Contractual Services, Inc., Van
Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc. and ACCESS. Executive Vice
President, General Counsel, Assistant
Secretary and Director of Van Kampen
American Capital Trust Company. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to September 1996,
General Counsel of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Executive
Vice President and General Counsel of VSM
Inc. and VCJ Inc. Vice President and
Secretary of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Robert C. Peck, Jr...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
10/01/46 Inc. Executive Vice President and Director
of the AC Adviser and Van Kampen American
Capital Advisors, Inc. Vice President of
each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Alan T. Sachtleben...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
04/20/42 Inc. Executive Vice President and a
Director of the AC Adviser and Van Kampen
American Capital Advisors, Inc. Vice
President of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Paul R. Wolkenberg...... Vice President Executive Vice President of VK/AC Holding,
Date of Birth: Inc., Van Kampen American Capital, the
11/10/44 Distributor and the AC Adviser. President,
Chief Executive Officer and a Director of
Van Kampen American Capital Trust Company
and ACCESS. Director of American Capital
Contractual Services, Inc. Vice President
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Edward C. Wood III...... Vice President and Senior Vice President of the VK Adviser,
Date of Birth: Chief Financial Officer the AC Adviser and Van Kampen American
01/11/56 Capital Management, Inc. Vice President and
Chief Financial Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>

B-23
<PAGE> 24

<TABLE>
<CAPTION>
<S> <C> <C>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
John L. Sullivan........ Treasurer First Vice President of the VK Adviser and
Date of Birth: the AC Adviser. Treasurer of each of the
08/20/55 Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Tanya M. Loden.......... Controller Vice President of the VK Adviser and the AC
Date of Birth: Adviser. Controller of each of the Van
11/19/59 Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.
Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
03/01/65 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
11/15/63 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: Counsel and Assistant Secretary of Van
08/20/56 Kampen American Capital and VK/AC Holding,
Inc. Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser, the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc., ACCESS, Van Kampen Merritt
Equity Advisors Corp. and Van Kampen
Merritt Equity Holdings Corp. Prior to
September 1996, Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei,
Inc. Prior to July 1996, Senior Vice
President, Deputy General Counsel and
Secretary of VSM Inc. and VCJ Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>

B-24
<PAGE> 25

Each of the foregoing trustees and officers holds the same position with each
of the funds in the Fund Complex. As of December 31, 1995, there were 50 funds
in the Fund Complex. Each trustee who is not an affiliated person of the VK
Adviser, the AC Adviser, the Distributor or Van Kampen American Capital (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to the funds in the Fund Complex. Each fund in the Fund Complex
provides a deferred compensation plan to its Non-Affiliated Trustees that allows
trustees to defer receipt of his or her compensation and earn a return on such
deferred amounts based upon the return of the common shares of the funds in the
Fund Complex as more fully described below. Each fund in the Fund Complex also
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.

The compensation of each Non-Affiliated Trustee includes a retainer from the
Fund in an amount equal to $2,500 per calendar year, due in four quarterly
installments on the first business day of each calendar quarter. Each
Non-Affiliated Trustee receives a per meeting fee from the Fund in the amount of
$125 per regular quarterly meeting attended by the Non-Affiliated Trustee, due
on the date of such meeting, plus reasonable expenses incurred by the
Non-Affiliated Trustee in connection with his or her services as a trustee. Each
Non-Affiliated Trustee receives a per meeting fee from the Fund in the amount of
$125 per special meeting attended by the Non-Affiliated Trustee, due on the date
of such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee
in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.

The trustees have approved an aggregate compensation cap with respect to funds
in the Fund Complex of $84,000 per Non-Affiliated Trustee per year (excluding
any retirement benefits) for the period July 22, 1995 through December 31, 1996,
subject to the net assets and the number of funds in the Fund Complex as of July
21, 1995 and certain other exceptions. In addition, each of the VK Adviser or
the AC Adviser, as the case may be, has agreed to reimburse each fund in the
Fund Complex through December 31, 1996 for any increase in the aggregate
trustee's compensation over the aggregate compensation paid by such fund in its
1994 fiscal year, provided that if a fund did not exist for the entire 1994
fiscal year appropriate adjustments will be made.

Each Non-Affiliated Trustee can elect to defer receipt of all or a portion of
the compensation earned by such Non-Affiliated Trustee until retirement. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to the return on the common shares of the Fund or other funds in the
Fund Complex as selected by the respective Non-Affiliated Trustee. To the extent
permitted by the 1940 Act, the Fund may invest in securities of those funds
selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.

B-25
<PAGE> 26

The Fund adopted a retirement plan on July 21, 1994. Under the Fund's
retirement plan, a Non-Affiliated Trustee who is receiving trustee's fees from
the Fund prior to such Non-Affiliated Trustee's retirement, has at least ten
years of service and retires at or after attaining the age of 60, is eligible to
receive a retirement benefit equal to $2,500 per year for each of the ten years
following such trustee's retirement. Trustees retiring prior to the age of 60 or
with fewer than 10 years but more than 5 years of service may receive reduced
retirement benefits from a series. The retirement plan contains a Fund Complex
retirement benefit cap of $60,000 per year.

Additional information regarding compensation and benefits for trustees is set
forth below. The "Registrant" is the Trust, which currently consists of seven
operating series. As indicated in the notes accompanying the table, the amounts
relate to either the Registrant's last fiscal year ended June 30, 1996 or the
Fund Complex' last calendar year ended December 31, 1995.

COMPENSATION TABLE

<TABLE>
<CAPTION>
ESTIMATED TOTAL
PENSION OR ANNUAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS BEFORE DEFERRAL
COMPENSATION BENEFITS ACCRUED FROM FROM REGISTRANT
BEFORE DEFERRAL AS PART OF REGISTRANT AND FUND
FROM REGISTRANT UPON COMPLEX PAID TO
NAME(1) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
- ------------------------------------- --------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan.................... $ 6,250 $1,815 $ 6,500 $84,250
Dr. Richard E. Caruso................ 2,875 -0- -0- 57,250
Philip P. Gaughan.................... 2,875 -0- -0- 76,500
Linda Hutton Heagy................... 6,250 216 7,500 38,417
Dr. Roger Hilsman.................... 6,250 -0- -0- 91,250
R. Craig Kennedy..................... 7,000 146 7,500 92,625
Donald C. Miller..................... 7,000 -0- -0- 94,625
Jack E. Nelson....................... 7,000 932 7,500 93,625
David Rees........................... 4,375 -0- -0- 83,250
Jerome L. Robinson................... 7,000 2,065 -0- 89,375
Lawrence J. Sheehan.................. 6,250 -0- -0- 91,250
Dr. Fernando Sisto................... 6,250 2,952 2,500 98,750
Wayne W. Whalen...................... 7,000 647 7,500 93,375
William S. Woodside.................. 6,250 -0- -0- 79,125
</TABLE>

- ---------------
(1) Mr. McDonnell, a trustee of the Trust, is an affiliated person of the VK
Adviser and AC Adviser and is not eligible for compensation or retirement
benefits from the Registrant. Messrs. Branagan, Caruso, Hilsman, Powell,
Rees, Sheehan, Sisto and Woodside were elected by shareholders to the Board
of Trustees on July 21, 1995. Ms. Heagy was appointed to the Board of
Trustees on September 7, 1995. Mr. Don G. Powell resigned from the Board of
Trustees on August 15, 1996, and did not receive any compensation or
benefits from the Fund while a trustee because he was an affiliated person
of the VK Adviser and AC Adviser. Messrs. Gaughan and Rees retired from the
Board of Trustees on January 26, 1996 and January 29, 1996, respectively.
Messrs. Caruso and Sheehan were removed from the Board of Trustees effective
September 7, 1995 and January 29, 1996, respectively.

(2) The amounts shown in this column are aggregated from the compensation paid
by each series in operation during the Registrant's fiscal year ended June
30, 1996 before deferral by the trustees under the deferred compensation
plan. The following trustees deferred all or a portion of their compensation
from the Registrant during the fiscal year ended June 30, 1996: Dr. Caruso,
$0; Mr. Gaughan, $2,875; Ms. Heagy, $1,250; Mr. Kennedy, $7,000; Mr. Miller,
$7,000; Mr. Nelson, $7,000; Mr. Rees, $2,750; Mr. Robinson, $7,000; Dr.
Sisto, $0; and Mr. Whalen, $7,000. The cumulative deferred compensation
(including interest) accrued with respect to each trustee from the
Registrant as of June 30, 1996 is as follows: Dr. Caruso, $0; Mr. Gaughan,
$7,342; Ms. Heagy, $1,279; Mr. Kennedy, $15,714; Mr. Miller, $14,933; Mr.
Nelson, $15,714; Mr. Rees, $4,292; Mr. Robinson, $15,133; Dr. Sisto, $0; and
Mr. Whalen, $12,244. The deferred compensation plan is described above the
Compensation Table. Amounts deferred are retained by the Fund and earn a
rate of return determined by reference to either the return on the common
shares of the Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee. To the extent permitted by the 1940 Act,
the Fund may invest in securities of those funds selected by the Non-
Affiliated Trustees in order to match the deferred compensation obligation.

B-26
<PAGE> 27

(3) The amounts shown in this column are aggregated from the Retirement Benefits
accrued by each series in operation during the Registrant's fiscal year
ended June 30, 1996. The Retirement Plan is described above the Compensation
Table.

(4) The amounts shown in this column are the estimated annual benefits payable
by the Registrant in each year of the 10-year period commencing in the year
of such trustee's retirement from the Registrant (based on $2,500 per series
for each series of the Registrant in operation) assuming: the trustee has 10
or more years of service on the Board of the respective series and retires
at or after attaining the age of 60. The actual annual benefit may be less
if the trustee is subject to the Fund Complex retirement benefit cap or if
the trustee is not fully vested at the time of retirement.

(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 1995, before
deferral by the trustees under the deferred compensation plan. The following
trustees deferred compensation paid by the Registrant and the Fund Complex
during the calendar year ended December 31, 1995; Dr. Caruso, $41,750; Mr.
Gaughan, $57,750; Ms. Heagy, $8,750; Mr. Kennedy, $65,875; Mr. Miller,
$65,875; Mr. Nelson, $65,875; Mr. Rees, $8,375; Mr. Robinson, $62,375; Dr.
Sisto, $30,260; and Mr. Whalen, $65,625. The deferred compensation earns a
rate of return determined by reference to the return on the common shares of
the Fund or other funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee. To the extent permitted by the 1940 Act, the Fund
may invest in securities of those funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
trustees' Fund Complex compensation cap commenced on July 22, 1995 and
covered the period between July 22, 1995 and December 31, 1995. Compensation
received prior to July 22, 1995 was not subject to the cap. For the calendar
year ended December 31, 1995, while certain trustees received compensation
over $84,000 in the aggregate, no trustee received compensation in excess of
the pro rata amount of the Fund Complex cap for the period July 22, 1995
through December 31, 1995. In addition to the amounts set forth above,
certain trustees received lump sum retirement benefit distributions not
subject to the cap in 1995 related to three mutual funds that ceased
investment operations during 1995 as follows: Mr. Gaughan, $22,136; Mr.
Miller, $33,205; Mr. Nelson, $30,851; Mr. Robinson, $11,068; and Mr. Whalen,
$27,332. The VK Adviser, AC Adviser and their affiliates also serve as
investment adviser for other investment companies; however, with the
exception of Messrs. McDonnell and Whalen, the trustees were not trustees of
such investment companies. Combining the Fund Complex with other investment
companies advised by the VK Adviser, AC Adviser and their affiliates, Mr.
Whalen received Total Compensation of $268,857 during the calendar year
ended December 31, 1995.

As of October 17, 1996, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund. As of October 17, 1996, no trustee or
officer of the Fund owns or would be able to acquire 5% or more of the common
stock of VK/AC Holding, Inc. Mr. McDonnell owns, or has the opportunity to
purchase, an equity interest in VK/AC Holding, Inc., the parent company of Van
Kampen American Capital, and has entered into an employment contract (for a term
until February 17, 1998) with Van Kampen American Capital.

As of October 17, 1996, no person was known by the Fund to own beneficially or
to hold of record as much as 5% of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
---------------------------------------------- ---------------- -------- ---------
<S> <C> <C> <C>
Van Kampen American Capital Trust Company..... 291,723 A 8.10%
2800 Post Oak Blvd. 436,537 B 7.60%
Houston, TX 77056 15,330 C 4.81%
Smith Barney Inc. ............................ 32,495 C 10.19%
00187318495
388 Greenwich Street
New York, NY 10013-2375
</TABLE>

Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.

B-27
<PAGE> 28

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the
Fund's investment adviser. The Adviser was incorporated as a Delaware
corporation in 1982 (and through December 31, 1987 transacted business under the
name of American Portfolio Advisory Service Inc.). The Adviser's principal
office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding,
Inc. is controlled, through the ownership of a substantial majority of its
common stock, by The Clayton & Dubilier Private Equity Fund IV Limited
Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed
by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The
General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited
Partnership ("C&D Associates L.P."). The general partners of C&D Associates
L.P., are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto
Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E.
Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In
addition, certain officers, directors and employees of Van Kampen American
Capital, Inc. own, in the aggregate, not more than 6% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 12% 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
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.

B-28
<PAGE> 29

For the period ended June 30, 1994 and for the years ended June 30, 1995 and
June 30, 1996, the Fund recognized advisory expenses of $749,584, $874,190 and
$1,009,003, respectively.

OTHER AGREEMENTS

ACCOUNTING SERVICES 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 and for the years ended June 30, 1995 and
1996, the Fund recognized expenses of approximately $5,300, $8,800 and $12,300,
respectively, representing the Adviser's cost of providing accounting services.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services 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 and for the years, ended June 30, 1995 and
1996, the Fund recognized expenses of approximately $9,200, $9,200 and $10,100,
respectively, representing Van Kampen American Capital, Inc.'s cost of providing
legal services.

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

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 accountants for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent accountants will be subject to
ratification by the shareholders of the Fund at any annual meeting of
shareholders.

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

B-29
<PAGE> 30

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 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 $57 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 more than 80 analysts devoted to various specializations.

B-30
<PAGE> 31

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 period ended June 30, 1994, the Fund recognized expenses under the
Plans of $129,926, $713,771 and $6,339 for the Class A Shares, Class B Shares
and Class C Shares, respectively, of which $107,353 and $176,184 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares and Class B Shares, respectively. For the year ended June 30, 1994, the
Fund has reimbursed the Distributor $5,109 and $8,437 for advertising expenses,
and $14,651 and $24,485 for compensation of the Distributor's sales personnel
for the Class A and Class B Shares, respectively.

For the year ended June 30, 1995, the Fund recognized expenses under the Plans
of $150,498, $821,749 and $12,075 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $125,426, $202,654 and $3,773 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares, Class B Shares and Class C Shares, respectively. For the year ended June
30, 1995, the Fund has reimbursed the Distributor $21,667, $34,789 and $0 for
advertising expenses, and $6,229, $9,082 and $0 for compensation of the
Distributor's sales personnel for the Class A Shares, Class B Shares and Class C
Shares, respectively.

For the year ended June 30, 1996, the Fund recognized expenses under the Plans
of $145,428, $930,703 and $40,805 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $120,117, $191,546 and $17,100 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares, Class B Shares and Class C Shares, respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).

PERFORMANCE INFORMATION

B-31
<PAGE> 32

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.

From time to time marketing materials may provide a portfolio manager update,
an adviser update and discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sector holdings and ten largest holdings. Materials may also mention
how Van Kampen American Capital believes the Fund compares relative to other Van
Kampen American Capital funds. Materials may also discuss the Dalbar Financial
Services study from 1984 to 1994 which examined investor cash flow into and out
of all types of mutual funds. The ten year study found that investors who bought
mutual fund shares and held such shares outperformed investors who bought and
sold. The Dalbar study conclusions were consistent regardless if shareholders
purchased their funds in direct or sales force distribution channels. The study
showed that investors working with a professional representative have tended
over time to earn higher returns than those who invested directly. The Fund will
also be marketed on the Internet.

CLASS A SHARES

The average total return, including the payment of the maximum front-end sales
charge, with respect to the Class A Shares for (i) the one year period ended
June 30, 1996 was 13.01% and (ii) the approximately two year, 11 month period
from July 28, 1993 (the commencement of investment operations of the Fund)
through June 30, 1996 was 4.52%.

B-32
<PAGE> 33

The Fund's cumulative non-standardized total return, including the payment of
the maximum front-end sales charge, with respect to the Class A Shares from
their inception through June 30, 1996 (as calculated in the Prospectus under the
heading "Fund Performance") was 13.82%.

The Fund's cumulative non-standardized total return, excluding the payment of
the maximum front-end sales charge, with respect to the Class A Shares from
their inception through June 30, 1996 (as calculated in the Prospectus under the
heading "Fund Performance") was 20.74%.

CLASS B SHARES

The average total return, including the payment of the CDSC, with respect to
the Class B Shares for (i) the one year period ended June 30, 1996 was 15.08%
and (ii) the approximately two year, 11 month period from July 28, 1993 (the
commencement of investment operations of the Fund) through June 30, 1996 was
4.75%.

The Fund's cumulative non-standardized total return, including the payment of
the CDSC, with respect to the Class B Shares from their inception through June
30, 1996 (as calculated in the Prospectus under the heading "Fund Performance")
was 14.56%.

The Fund's cumulative non-standardized total return, excluding the payment of
the CDSC, with respect to the Class B Shares from their inception through June
30, 1996 (as calculated in the Prospectus under the heading "Fund Performance")
was 18.06%.

CLASS C SHARES

The average total return, including the payment of the CDSC, with respect to
the Class C Shares for (i) the one year period ended June 30, 1996 was 18.00%
and (ii) the approximately two year, 11 month period from August 13, 1993 (the
commencement of distribution of the Class C Shares) through June 30, 1995 was
5.51%.

The Fund's cumulative non-standardized total return, including the payment of
the CDSC, with respect to the Class C Shares from their inception through June
30, 1996 (as calculated in the Prospectus under the heading "Fund Performance")
was 16.69%.

The Fund's cumulative non-standardized total return, excluding the payment of
the CDSC, with respect to the Class C Shares from their inception through June
30, 1996 (as calculated in the Prospectus under the heading "Fund Performance")
was 16.69%.

B-33
<PAGE> 34

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Trustees and Shareholders of
Van Kampen American Capital Utility Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Utility Fund (the "Fund"), including the portfolio of
investments, as of June 30, 1996, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1996, 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 American Capital Utility Fund as of June 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Chicago, Illinois
July 30, 1996

B-34
<PAGE> 35

PORTFOLIO OF INVESTMENTS

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS 88.5%
ELECTRIC UTILITIES 53.1%
Allegheny Power Systems Inc. ................................ 114,000 $ 3,519,750
Carolina Power & Light Co. .................................. 88,000 3,344,000
Cinergy Corp................................................. 109,000 3,488,000
CMS Energy Corp. ............................................ 117,000 3,612,375
DPL Inc. .................................................... 98,700 2,405,813
DTE Energy Co. .............................................. 99,000 3,056,625
Duke Power Co. .............................................. 55,740 2,856,675
Edison International......................................... 194,000 3,419,250
Empresa Nacional de Electricidad - ADR (Spain)............... 22,000 1,377,750
Entergy Corp. ............................................... 113,000 3,206,375
Florida Progress Corp. ...................................... 96,000 3,336,000
FPL Group Inc. .............................................. 74,000 3,404,000
General Public Utilities Corp. .............................. 104,175 3,672,169
Houston Industries Inc. ..................................... 135,000 3,324,375
Illinova Corp. .............................................. 124,000 3,565,000
National Power PLC - ADR (UK)................................ 99,500 2,425,312
Nipsco Inc. ................................................. 108,800 4,379,200
Ohio Edison Co. ............................................. 143,000 3,128,125
Peco Energy Co. ............................................. 75,000 1,950,000
Pinnacle West Capital Corp. ................................. 115,400 3,505,275
Portland General Corp. ...................................... 110,000 3,396,250
Powergen PLC - ADR (UK)...................................... 84,000 1,743,000
Public Service Co. of New Mexico............................. 236,000 4,838,000
Scana Corp. ................................................. 129,000 3,628,125
Sierra Pacific Resources..................................... 100,000 2,537,500
Texas Utilities Co. ......................................... 80,000 3,420,000
-------------
82,538,944
-------------
OIL, GAS, PIPELINE AND DISTRIBUTION 14.5%
Columbia Gas Systems Inc. ................................... 56,000 2,919,000
El Paso Natural Gas Co. ..................................... 43,000 1,655,500
MCN Corp. ................................................... 75,000 1,828,125
MCN Corp. - Convertible Preferred............................ 32,200 821,100
Nicor Inc. .................................................. 92,211 2,616,487
Noram Energy Corp. .......................................... 200,000 2,175,000
Panenergy Corp. ............................................. 80,000 2,630,000
Questar Corp. ............................................... 74,000 2,516,000
Sonat Inc. .................................................. 40,000 1,800,000
Southwest Gas Corp. ......................................... 100,000 1,600,000
</TABLE>

See Notes to Financial Statements

B-35
<PAGE> 36

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
OIL, GAS, PIPELINE AND DISTRIBUTION (CONTINUED)
Williams Cos Inc. - Convertible Preferred.................... 25,000 $ 1,965,625
-------------
22,526,837
-------------
REAL ESTATE INVESTMENT TRUSTS 3.0%
Bay Apartment Community Inc. ................................ 82,500 2,134,687
Meditrust.................................................... 75,000 2,503,125
-------------
4,637,812
-------------
TELECOMMUNICATIONS 17.9%
Ameritech Corp. ............................................. 25,670 1,524,156
AT & T Corp. ................................................ 31,600 1,959,200
Bellsouth Corp. ............................................. 48,000 2,034,000
Cable & Wireless PLC - ADR (UK).............................. 76,000 1,501,000
Century Telephone Enterprises Inc. .......................... 46,000 1,466,250
Frontier Corp. .............................................. 50,000 1,531,250
GTE Corp. ................................................... 40,000 1,790,000
Lucent Technologies Inc. .................................... 12,300 465,863
MCI Communications Corp. .................................... 55,000 1,409,375
MFS Communications Inc. - Convertible Preferred.............. 24,000 1,524,000
Nextel Communications Inc. (b)............................... 60,000 1,143,750
Pasifik Satelit Nusantara - ADR (Indonesia) (b).............. 115,000 2,300,000
Portugal Telecom SA - ADR (Portugal) (b)..................... 80,200 2,105,250
SBC Communications Inc. ..................................... 57,000 2,807,250
Sprint Corp. - Convertible Debt.............................. 60,000 2,415,000
Telefonica de Espana - ADR (Spain)........................... 26,000 1,433,250
Teleport Communications Group (b)............................ 24,300 464,859
-------------
27,874,453
-------------
TOTAL COMMON AND PREFERRED STOCKS..................................... 137,578,046
-------------
FIXED INCOME SECURITIES 9.4%
CABLE TELEVISION 0.6%
Cox Communications Inc. ($1,000,000 par, 6.875% coupon, 06/15/05
maturity, S&P rating A-)............................................ 966,435
-------------
ELECTRIC UTILITIES 2.4%
Idaho Power Co. ($500,000 par, 8.000% coupon, 03/15/04 maturity, S&P
rating A+).......................................................... 523,572
Iowa Electric Light & Pwr Co. ($700,000 par, 8.625% coupon, 05/15/01
maturity, S&P rating A)............................................. 748,213
Texas Utilities Electric Co. ($1,000,000 par, 8.250% coupon, 04/01/04
maturity, S&P rating BBB+).......................................... 1,054,061
Union Electric Co. ($500,000 par, 7.375% coupon, 12/15/04 maturity,
S&P rating AA-)..................................................... 506,595
Virginia Electric & Pwr Co. ($1,000,000 par, 6.625%
coupon, 04/01/03 maturity, S&P rating A)............................ 976,270
-------------
3,808,711
-------------
</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 37

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security Description Market Value
- ------------------------------------------------------------------------------------
<S> <C>
OIL, GAS, PIPELINE AND DISTRIBUTION 2.7%
Colorado Interstate Gas Co. ($500,000 par, 10.000% coupon, 06/15/05
maturity, S&P rating BBB-).......................................... $ 584,869
Enron Corp. ($1,000,000 par, 7.125% coupon, 05/15/07 maturity, S&P
rating BBB+)........................................................ 980,182
Laclede Gas Co. ($330,000 par, 8.500% coupon, 11/15/04 maturity, S&P
rating AA-)......................................................... 357,363
Panhandle Eastern Pipeline Co. ($500,000 par, 7.875% coupon, 08/15/04
maturity, S&P rating BBB)........................................... 513,770
Southwest Gas Corp. ($400,000 par, 9.750% coupon, 06/15/02 maturity,
S&P rating BBB-).................................................... 439,724
Texas Eastern Transmission Corp. ($100,000 par, 8.000% coupon,
07/15/02 maturity, S&P rating BBB).................................. 103,900
Texas Gas Transmission Corp. ($1,090,000 par, 8.625% coupon,
04/01/2004 maturity, S&P rating BBB)................................ 1,175,942
------------
4,155,750
------------
TELECOMMUNICATIONS 3.7%
360 Communications ($1,000,000 par, 7.125% coupon, 03/01/03 maturity,
S&P rating BBB-).................................................... 960,450
AT & T Corp. ($1,000,000 par, 7.500% coupon, 06/01/06 maturity, S&P
rating AA).......................................................... 1,023,813
GTE Corp. ($900,000 par, 9.375% coupon, 12/01/00 maturity, S&P rating
BBB+)............................................................... 983,117
MCI Communications Corp. ($1,000,000 par, 7.500% coupon, 08/20/04
maturity, S&P rating A)............................................. 1,021,841
Sprint Corp. ($1,000,000 par, 8.125% coupon, 07/15/02 maturity, S&P
rating BBB)......................................................... 1,054,145
United Telecommunications Kansas ($617,000 par, 9.750% coupon,
04/01/00 maturity, S&P rating BBB-)................................. 671,786
------------
5,715,152
------------
TOTAL FIXED INCOME SECURITIES......................................... 14,646,048
------------
TOTAL LONG-TERM INVESTMENTS 97.9%
(Cost $140,319,058) (a)............................................. 152,224,094
SHORT-TERM INVESTMENTS AT AMORTIZED COST 0.7%......................... 1,120,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.4%............................ 2,214,895
------------
NET ASSETS 100%....................................................... $155,558,989
============
</TABLE>

* Zero coupon bond

(a) At June 30, 1996, cost for federal income tax purposes is $140,319,058; the
aggregate gross unrealized appreciation is $13,246,084 and the aggregate
gross unrealized depreciation is $1,341,137, resulting in net unrealized
appreciation including foreign currency translation of $11,904,947.

(b) Non-income producing security as this stock currently does not declare
dividends.

See Notes to Financial Statements

B-37
<PAGE> 38
STATEMENT OF ASSETS AND LIABILITIES

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $140,319,058) (Note 1).............. $152,224,094
Short-Term Investments (Note 1)........................................ 1,120,000
Cash................................................................... 2,575
Receivables:
Securities Sold...................................................... 3,243,936
Dividends............................................................ 498,736
Interest............................................................. 236,913
Fund Shares Sold..................................................... 46,803
Unamortized Organizational Expenses (Note 1)........................... 47,653
Other.................................................................. 16,263
------------
Total Assets..................................................... 157,436,973
------------
LIABILITIES:
Payables:
Fund Shares Repurchased.............................................. 962,642
Securities Purchased................................................. 388,800
Income Distribution.................................................. 232,295
Investment Advisory Fee (Note 2)..................................... 81,239
Distributor and Affiliates (Notes 2 and 5)........................... 59,399
Accrued Expenses....................................................... 102,995
Deferred Compensation and Retirement Plans (Note 2).................... 50,614
------------
Total Liabilities................................................ 1,877,984
------------
NET ASSETS............................................................. $155,558,989
============
NET ASSETS CONSIST OF:
Capital (Note 3)....................................................... $145,127,111
Net Unrealized Appreciation on Securities.............................. 11,904,947
Accumulated Undistributed Net Investment Income........................ 17,591
Accumulated Net Realized Loss on Securities............................ (1,490,660)
------------
NET ASSETS............................................................. $155,558,989
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets
of $57,653,820
and 3,768,641 shares of capital stock issued and outstanding) (Note
3)................................................................. $ 15.30
Maximum sales charge (5.75%* of offering price).................... .93
------------
Maximum offering price to public................................... $ 16.23
============
Class B Shares:
Net asset value and offering price per share (Based on net assets
of $92,943,641 and
6,076,415 shares of capital stock issued and outstanding) (Note
3)................................................................. $ 15.30
============
Class C Shares:
Net asset value and offering price per share (Based on net assets
of $4,961,528 and
324,501 shares of capital stock issued and outstanding) (Note 3)... $ 15.29
============
</TABLE>

*On sales of $50,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

B-38
<PAGE> 39

STATEMENT OF OPERATIONS

For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $171,555)................ $ 6,679,775
Interest................................................................ 1,064,961
------------
Total Income........................................................ 7,744,736
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C
of $145,428, $930,703 and $40,805, respectively) (Note 5)............. 1,116,936
Investment Advisory Fee (Note 2)........................................ 1,009,003
Shareholder Services (Note 2)........................................... 278,466
Trustees Fees and Expenses (Note 2)..................................... 48,791
Amortization of Organizational Expenses (Note 1)........................ 23,058
Legal (Note 2).......................................................... 12,810
Other................................................................... 400,091
------------
Total Expenses...................................................... 2,889,155
Less Expenses Reimbursed............................................ 18,112
------------
Net Expenses........................................................ 2,871,043
------------
NET INVESTMENT INCOME................................................... $ 4,873,693
============
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Realized Gain/Loss on Securities:
Investments........................................................... $12,550,444
Foreign Currency Translation.......................................... (176,199)
------------
Net Realized Gain on Securities......................................... 12,374,245
------------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period............................................... 319,167
------------
End of the Period:
Investments......................................................... 11,905,036
Foreign Currency Translation........................................ (89)
------------
11,904,947
------------
Net Unrealized Appreciation on Securities During the Period............. 11,585,780
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.......................... $23,960,025
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.............................. $28,833,718
============
</TABLE>

See Notes to Financial Statements

B-39

<PAGE> 40

STATEMENT OF CHANGES IN NET ASSETS

For the Years Ended June 30, 1996 and 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, 1996 June 30, 1995
<S> <C> <C>
- ------------------------------------------------------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.................................... $ 4,873,693 $ 5,542,812
Net Realized Gain/Loss on Securities..................... 12,374,245 (11,154,213)
Net Unrealized Appreciation on
Securities During the Period........................... 11,585,780 15,931,333
---------- ----------
Change in Net Assets from Operations..................... 28,833,718 10,319,932
---------- ----------
Distributions from Net Investment Income:
Class A Shares......................................... (2,717,536) (2,381,991)
Class B Shares......................................... (3,509,438) (3,137,968)
Class C Shares......................................... (129,256) (46,441)
Class D Shares......................................... -0- (68)
--------- ---------
Total Distributions.................................. (6,356,230) (5,566,468)
--------- ---------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES...... 22,477,488 4,753,464
---------- ----------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold................................ 44,796,872 19,193,852
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................... 5,057,133 4,462,088
Cost of Shares Repurchased............................... (49,434,577) (32,083,914)
---------- ----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS....... 419,428 (8,427,974)
---------- ----------
TOTAL INCREASE/DECREASE IN NET ASSETS.................... 22,896,916 (3,674,510)
NET ASSETS:
Beginning of the Period.................................. 132,662,073 136,336,583
------------ ------------
End of the Period (Including undistributed net investment
income of $17,591 and $1,563,610, respectively)........ $155,558,989 $132,662,073
============ ============
</TABLE>

See Notes to Financial Statements

B-40
<PAGE> 41

NOTES TO FINANCIAL STATEMENTS

June 30, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Utility Fund (the "Fund") is organized as a series
of the Van Kampen American Capital Equity Trust, a Delaware business trust and
is registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide its shareholders with capital appreciation and current income,
through investment in common stocks and income securities of companies engaged
in the utilities industry. 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 commenced on August 13, 1993. On May
2, 1995, all Class D shareholders redeemed their shares and the class was
eliminated. The Fund will no longer offer Class D shares.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

A. SECURITY VALUATION--Portfolio securities are valued by using market
quotations or prices provided by market makers. Any securities for which current
market quotations are not readily available are valued at their fair value as
determined in good faith using procedures established by the Board of Trustees.
Securities with remaining maturities of 60 days or less are valued at amortized
cost.

B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At June 30, 1996, there were no when
issued or delayed delivery purchase commitments.

B-41

<PAGE> 42

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

security. The Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of the custodian
bank. The seller is required to maintain the value of the underlying security at
not less than the repurchase proceeds due the Fund.

C. INVESTMENT INCOME--Dividend income is recorded on the ex-dividend date;
interest income is recorded on an accrual basis. Bond discount is amortized over
the expected life of each applicable security.

D. ORGANIZATIONAL EXPENSES--The Fund has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with the Fund's organization 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
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.

E. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.

The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At June 30, 1996, the Fund had an accumulated capital loss carryforward
for tax purposes of $1,490,660, which will expire on June 30, 2003. Net realized
gains or losses may differ for financial and tax reporting purposes primarily as
a result of post October 31 losses which are not recognized for tax purposes
until the first day of the following fiscal year.

F. DISTRIBUTION OF INCOME AND GAINS--The Fund declares and pays dividends
quarterly from net investment income. Net investment income for federal income
tax purposes includes gains and losses realized on foreign currency
transactions. These realized gains and losses are included as net realized gains
or losses for financial reporting purposes. Permanent book and tax basis
differences relating to these items totaling $176,199 were reclassified from
accumulated net realized gain/loss on securities

B-42
<PAGE> 43

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

to accumulated undistributed net investment income. Additional permanent
differences relating to the recognition of fund merger expenses (see Note 3) and
certain other expenses which are not deductible for tax purposes totaling
$115,125 were reclassified from accumulated undistributed net investment income
to capital.

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 as ordinary income for tax purposes.

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 year ended June 30, 1996, the Fund recognized expenses of
approximately $30,100 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund.

In July, 1995, the Fund began using ACCESS Investor Services, Inc.
("ACCESS"), an affiliate of the Adviser, as the shareholder servicing agent of
the Fund. For the year ended June 30, 1996, the Fund recognized expenses of
approximately $217,100, representing ACCESS' cost of providing transfer agency
and shareholder services plus a profit.

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 June 30, 1996, VKAC owned 8,095, 181 and 140 shares of Classes A, B and
C, respectively.

B-43
<PAGE> 44

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of common shares, Classes A, B and C each
with a par value of $.01 per share. There are an unlimited number of shares of
each class authorized.

At June 30, 1996, capital aggregated $53,821,005, $86,795,620 and $4,510,486
for Classes A, B and C, respectively. For the year ended June 30, 1996,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
- -------------------------------------------------------------------------
Sales:
Class A.................................. 1,081,909 $ 14,643,191
Class B.................................. 1,829,596 24,638,568
Class C.................................. 391,241 5,515,113
---------- ------------
Total Sales................................ 3,302,746 $ 44,796,872
========== ============
Dividend Reinvestment:
Class A.................................. 150,482 $ 2,178,398
Class B.................................. 193,231 2,794,761
Class C.................................. 5,689 83,974
---------- ------------
Total Dividend Reinvestment................ 349,402 $ 5,057,133
========== ============
Repurchases:
Class A.................................. (1,228,535) $(17,887,971)
Class B.................................. (2,010,741) (29,087,995)
Class C.................................. (167,791) (2,458,611)
========== ============
Total Repurchases.......................... (3,407,067) $(49,434,577)
========== ============
</TABLE>

B-44

<PAGE> 45
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1995, capital aggregated $54,774,866, $88,342,760 and $1,345,079
for Classes A, B and C, respectively. For the year ended June 30, 1995,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................. 542,836 $ 7,012,472
Class B.................................. 907,385 11,745,156
Class C.................................. 34,020 436,224
Class D.................................. -0- -0-
--------- ------------
Total Sales................................ 1,484,241 $ 19,193,852
========= ============
Dividend Reinvestment:
Class A.................................. 150,900 $ 1,918,578
Class B.................................. 196,967 2,507,508
Class C.................................. 2,830 35,996
Class D.................................. 1 6
--------- ------------
Total Dividend Reinvestment................ 350,698 $ 4,462,088
========= ============
Repurchases:
Class A.................................. (918,564) $(11,858,442)
Class B.................................. (1,539,119) (19,841,320)
Class C.................................. (30,118) (382,553)
Class D.................................. (115) (1,599)
--------- ------------
Total Repurchases.......................... (2,487,916) $(32,083,914)
========= ============
</TABLE>

Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear

B-45
<PAGE> 46
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

the expense of their respective deferred sales arrangements, including higher
distribution and service fees and incremental transfer agency costs.

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- -------------------------------------------------------------------
<S> <C> <C>
First...................................... 4.00% 1.00%
Second..................................... 3.75% None
Third...................................... 3.50% None
Fourth..................................... 2.50% None
Fifth...................................... 1.50% None
Sixth...................................... 1.00% None
Seventh and Thereafter..................... None None
</TABLE>

For the year ended June 30, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$20,800 and CDSC on redeemed shares of approximately $595,700. Sales charges do
not represent expenses of the Fund.

On September 27, 1995, the Fund acquired all of the assets and liabilities
of the Van Kampen American Capital Utilities Income Fund (the "AC Fund"),
through a tax free reorganization approved by AC Fund shareholders on September
21, 1995. The Fund issued 606,825, 1,173,732 and 219,180 shares of Classes A, B
and C valued at $8,495,564, $16,432,324 and $3,068,523, respectively, in
exchange for AC Fund's net assets. Included in these net assets was a capital
loss carryforward of $357,695 which is included in accumulated net realized
gain/loss on securities and cumulative book and tax basis timing differences of
$2,408 which is a component of undistributed net investment income. The shares
issued in connection with this transaction are included in common share sales
for the current period. Combined net assets on the date of acquisition were
$160,940,399.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $183,915,696 and $183,466,376,
respectively.

B-46

<PAGE> 47

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

5. DISTRIBUTION AND SERVICE PLANS

The Fund and its shareholders have adopted a distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 and a 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 .25% for Class A shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for the
year ended June 30, 1996, are payments to VKAC of approximately $685,400.

B-47

<PAGE> 48

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL BALANCED FUND

Van Kampen American Capital Balanced Fund (the "Fund") seeks to provide its
shareholders with current income, while also seeking to provide shareholders
with capital growth. The Fund will seek to achieve its investment objective by
investing in a diversified portfolio of common stocks, fixed-income securities,
(including preferred stock, government securities, corporate debt securities and
convertible securities) and cash and cash equivalents. There can be no assurance
that the Fund will achieve its investment objective.

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the current Prospectus for the Fund (the "Prospectus")
dated as of the date hereof. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund, and investors should obtain and read the
Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained
without charge, by calling (800) 421-5666. This Statement of Additional
Information incorporates by reference the entire Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-3
Additional Investment Considerations.................................................. B-4
Description of Securities Ratings..................................................... B-14
Trustees and Officers................................................................. B-20
Investment Advisory and Other Services................................................ B-28
Custodian and Independent Accountants................................................. B-30
Portfolio Transactions and Brokerage Allocation....................................... B-30
Tax Status of the Fund................................................................ B-31
The Distributor....................................................................... B-31
Legal Counsel......................................................................... B-32
Performance Information............................................................... B-32
Independent Accountants' Report....................................................... B-35
Financial Statements.................................................................. B-36
Notes to Financial Statements......................................................... B-46
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996
<PAGE> 49

THE FUND AND THE TRUST

The Fund is a diversified series of Van Kampen American Capital Equity Trust
(the "Trust"), an open-end management investment company. The Fund was
established pursuant to a Designation of Series dated May 10, 1995. At present,
the Fund, Van Kampen American Capital Utility Fund, Van Kampen American Capital
Growth Fund, Van Kampen American Capital Value Fund, Van Kampen American Capital
Great American Companies Fund, Van Kampen American Capital Prospector Fund and
Van Kampen American Capital Aggressive Growth Fund are the only series of the
Trust, although other series may be organized and offered in the future. Each
series of the Trust will be treated as a separate corporation for federal income
tax purposes.

The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust dated as of 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 Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. The Trust can
issue an unlimited number of shares at par value $0.01 per share (prior to July
31, 1995, the shares had no par value). Each share represents an equal
proportionate interest in the assets of the series with each other share in such
series and no interest in any other series. No series is subject to the
liabilities of any other series. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Trust or any of its
series, requires inclusion of a clause to that effect in every agreement entered
into by the Trust or any of its series and indemnifies shareholders against any
such liability.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting. The Trust
will assist such holders in communicating with other shareholders of the Fund to
the extent required by the Investment Company Act of 1940, as amended (the "1940
Act").

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 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.

The Fund originally was organized under the name Van Kampen Merritt Balanced
Fund, as a sub-trust of the Massachusetts Trust. In connection with the
Massachusetts Trust's reorganization into a Delaware business trust, the Fund
was reorganized into a series of the Trust and renamed Van Kampen American
Capital Balanced Fund.

B-2
<PAGE> 50

INVESTMENT POLICIES AND RESTRICTIONS

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

2. Issue senior securities, enter into reverse repurchase agreements with
banks or engage in dollar rolls in the aggregate in excess of 33 1/3% of
the Fund's total assets (after giving effect to any such borrowing); which
amount includes no more than 5% in bank borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.

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.

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.

10. Purchase or sell real estate (including real estate limited partnership
interests), commodities or commodity contracts, except to the extent that
the securities that the Fund may invest in are considered to be interests
in real estate, commodities or commodity contracts or to the extent the
Fund exercises its rights under agreements relating to portfolio
securities (in which case the Fund may liquidate real estate acquired as a
result of a default on a mortgage), and except to the extent that
Strategic Transactions the Fund may engage in are considered to be
commodities or commodities contracts.

B-3
<PAGE> 51

The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that its
annual portfolio turnover rate will normally be less than 100%. Portfolio
turnover will be calculated by dividing the lesser of purchases or sales of
portfolio securities by the monthly average value of the securities in the
portfolio during the year. Securities, including options, whose maturity or
expiration date at the time of acquisition were one year or less will be
excluded from such calculation.

ADDITIONAL INVESTMENT CONSIDERATIONS

LOWER GRADE SECURITIES

The Fund may invest up to 20% of its assets in lower-grade fixed-income
securities (not including convertible securities). Such lower grade securities
are rated at least CC by Standard & Poor's Ratings Group ("S&P") or at least Ca
by Moody's Investor Services, Inc. ("Moody's"). Investment in such securities
involves special risks, as described herein. Liquidity relates to the ability of
a Fund to sell a security in a timely manner at a price which reflects the value
of that security. As discussed below, the market for lower grade securities is
considered generally to be less liquid than the market for investment grade
securities. The relative illiquidity of some of the Fund's portfolio securities
may adversely affect the ability of the Fund to dispose of such securities in a
timely manner and at a price which reflects the value of such security in the
Adviser's judgment. The market for less liquid securities tends to be more
volatile than the market for more liquid securities and market values of
relatively illiquid securities may be more susceptible to change as a result of
adverse publicity and investor perceptions than are the market values of higher
grade, more liquid securities.

B-4
<PAGE> 52

Yields on the Fund's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade securities in the Fund's portfolio and thus in the net asset value
of the Fund. Net asset value and market value may be volatile due to the Fund's
investment in lower grade and less liquid securities. Volatility may be greater
during periods of general economic uncertainty. The Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of interest or a repayment of principal on its portfolio holdings, and
the Fund may be unable to obtain full recovery thereof. In the event that an
issuer of securities held by the Fund experiences difficulties in the timely
payment of principal or interest and such issuer seeks to restructure the terms
of its borrowings, the Fund may incur additional expenses and may determine to
invest additional capital with respect to such issuer or the project or projects
to which the Fund's portfolio securities relate.

The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating fixed-income securities. Such ratings
evaluate only the safety of principal and interest payments, not market value
risk. Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings, the
Adviser continuously monitors the issuers of such securities held in the Fund's
portfolio. The Fund may, if deemed appropriate by the Adviser, retain a security
whose rating has been downgraded by S&P or Moody's, or whose rating has been
withdrawn.

Because the Fund may invest in unrated fixed-income securities, achievement by
the Fund of its investment objective may be more dependent upon the Adviser's
investment analysis than would be the case if the Fund were investing
exclusively in rated securities.

CONVERTIBLE SECURITIES

Convertible securities are fixed income securities (such as bonds, debentures,
notes and preferred stock) that may, at the holder's option, be converted into
or exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or in accordance
with a prescribed formula. A convertible security entitles the holder to receive
interest paid or accrued on convertible debt, or the dividend paid on
convertible preferred stock, until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities, until converted, have
the same general characteristics as other non-convertible, fixed income
securities, insofar as they generally provide a stable stream of income with
generally higher yields than those of common equity securities of the same or
similar issuers. By permitting the holder to exchange its investment for common
stock, convertible securities may also enable the investor to benefit from
appreciation in the market price of the underlying common stock. Therefore,
convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. Convertible securities rank
senior to common stock in a corporation's capital structure and, therefore,
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in a large measure upon the degree
to which the convertible security sells based on its value as a fixed income
security rather than that of the underlying common stock.

As with other fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The credit standing of the issuer and other
factors may also have an effect on the value of a convertible security. The
unique feature of the convertible security is that, as the market price of the
underlying common stock declines, a convertible security tends to trade
increasingly in a manner similar to a fixed income security, and may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock approaches or
exceeds the conversion price, the price of a convertible security increasingly
reflects the value of the underlying common stock and may rise accordingly,
although gains may be less for the convertible security than for the underlying
common stock to the extent of any "conversion premium." A convertible security
generally will sell at a premium over its conversion value (i.e., the security's
worth, at market value, if converted into the underlying common stock)
determined by the extent to which

B-5
<PAGE> 53

investors place value on the right to acquire the underlying common stock while
holding the fixed income security. Thus, appreciation of the underlying common
stock will result in substantial appreciation of the convertible security only
after the conversion premium has been eliminated.

Holders of fixed income securities (including convertible securities) have a
claim on the assets of the issuer prior to the holders of common stock in case
of liquidation. However, convertible securities are typically subordinated to
non-convertible, fixed income securities of the same issuer.

The Adviser believes that the characteristics of convertible securities make
them particularly appropriate vehicles to achieve the Fund's investment
objective. Convertible securities have unique investment characteristics because
(i) they have relatively high yields as compared to common stocks, (ii) they
have defensive characteristics since they provide a fixed return even if the
market price of the underlying common stock declines, and (iii) they provide the
potential for capital appreciation if the market price of the underlying common
stock increases.

A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by the
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or sell it
to a third party. Any of these actions could have an adverse effect on the
Fund's ability to achieve its investment objective. If the Fund surrenders the
security for redemption, it will receive the face amount of the security, and
possibly a redemption premium. However, the amount received may be less than the
value of the security before the redemption. Moreover, since a call for
redemption is most likely to occur in a declining interest rate environment, the
Fund may not be able to earn as high a rate of return when it reinvests the
proceeds. Selling or converting the security might be more advantageous than
surrendering for redemption, but the reinvestment risk would remain. Before the
Fund purchases a convertible security, it will review carefully the redemption
provisions of the security.

Convertible securities are generally not investment grade, that is, not rated
within the four highest categories by S&P and Moody's. To the extent that
convertible securities acquired by the Fund are rated lower than investment
grade or are not rated, there is a greater risk as to the timely repayment of
the principal of, and timely payment of interest or dividends on, such
securities. The Fund expects that many convertible securities which it purchases
will be rated below investment grade. Such securities generally are considered
to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and to involve major risk exposures to adverse
conditions that outweigh any quality and protective characteristics. See
"Additional Investment Considerations -- Lower Grade Securities". Under current
market conditions, not more than 35% of the Fund's total assets may be invested
in all fixed income securities that are rated below investment grade, or if
unrated, deemed by the Adviser to be of comparable quality.

In selecting convertible securities for the Fund, the Adviser will consider
the following factors, among others, (1) the Adviser's own evaluation of the
creditworthiness of the issuers of the securities; (2) the interest or dividend
income generated by the securities; (3) the potential for capital appreciation
of the securities and the underlying common stock; (4) the prices of the
securities relative to the underlying common stock; (5) the prices of the
securities relative to other comparable securities; (6) whether the securities
have unfavorable redemption provisions or are entitled to the benefits of
sinking funds or other protective conditions; (7) diversification of the Fund's
portfolio as to issuers and industries; (8) whether the securities are rated by
Moody's and/or S&P and, if so, the ratings assigned; and (9) whether the
underlying common stock can be sold short, although the Fund is not limited to
buying convertible securities the underlying common stock of which may be sold
short.

MONEY MARKET INSTRUMENTS

B-6
<PAGE> 54

paper) of corporate issuers which obligations are rated at least AA by S&P or Aa
by Moody's. Money market securities are subject, however, to the limitation that
they mature within one year of the date of their purchase or are subject to
repurchase agreements maturing within one year. Government Money Market
Securities include treasury bills, notes and bonds issued by the U.S. government
and backed by the full faith and credit of the United States, as well as
securities issued or guaranteed as to principal and interest by agencies and
instrumentalities of the U.S. government. Bank Obligations include certificates
of deposit and banker's acceptances of domestic banks (or Euro-dollar
obligations of foreign branches of such domestic banks) subject to U.S.
government regulation and time deposits of federal and state banks whose
accounts are insured by a government agency as well as such accounts themselves.

The Fund's policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Fund will not be
required to dispose of a security in the event that S&P or Moody's (or any other
nationally recognized statistical rating organization) or, in the case of
unrated income securities, the Adviser, downgrades its assessment of the credit
characteristics of a particular issuer. In determining whether the Fund will
retain or sell such a security, in addition to the factors described in the
Prospectus under the heading "Investment Objective and Policies," the Adviser
may consider such factors as the Adviser's assessment of the credit quality of
the issuer of such security, the price at which such security could be sold and
the rating, if any, assigned to such security by other nationally recognized
statistical rating organizations.

STRATEGIC TRANSACTIONS.

B-7
<PAGE> 55

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.

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.

B-8
<PAGE> 56

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.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers", or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of "A-1" from S&P
or "P-1" from Moody's or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.

B-9
<PAGE> 57

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.

B-10
<PAGE> 58

B-11
<PAGE> 59

B-12
<PAGE> 60

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 cash or liquid
securities 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 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 cash or liquid
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 cash or
liquid securities 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 cash or liquid securities 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 cash or liquid securities equal to the amount of the Fund's
obligation.

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 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.

B-13
<PAGE> 61

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 the Code for qualification as a regulated investment company.
See "Tax Status" in the Prospectus.

DESCRIPTION OF SECURITIES RATINGS

1. DEBT

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, in varying degrees, on the following
considerations:

1. Likelihood of payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation:

2. Nature of and provisions of the obligation:

INVESTMENT GRADE

AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

SPECULATIVE GRADE

B-14
<PAGE> 62

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.

CC: Debt rated "CC" is currently highly vulnerable to nonpayment. The rating
"CC" is also used for debt subordinated to senior debt that is assigned an
actual or implied "CCC" rating.

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: Not rated.

R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe payment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

2. COMMERCIAL PAPER

A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:

A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.

B-15
<PAGE> 63

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".

A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.

B Issues rated "B" are regarded as having significant speculative
characteristics.

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
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.

3. VARIABLE RATE DEMAND BONDS

S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.

4. NOTES

A S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assignment:

-- Amortization schedule (the longer the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).

-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).

Note rating symbols and definitions are as follows:

SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics will be given a plus (+)
designation.

SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.

SP-3 Speculative capacity to pay principal and interest.

5. PREFERRED STOCK

B-16
<PAGE> 64
The Preferred stock ratings are based on the following considerations:

1. Likelihood of payment-capacity and willingness to 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>
<CAPTION>
<S> <C>
AAA This is the highest rating that may be assigned by S&P to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality, fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a preferred stock in this
category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay preferred
CCC stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest. 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, 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.
</TABLE>

MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service (Moody's) rating symbols and their meanings (as published by
Moody's Investor Service) follows:

1. LONG-TERM DEBT

AAA: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

AA: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements

B-17
<PAGE> 65

may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than Aaa securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may by lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Note: Moody's applies the numerical modifiers 1, 2, and 3 in each generic
rating classification from AA to B. 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.

2. SHORT-TERM DEBT

Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers.

B-18
<PAGE> 66

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.

Issues rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earning,
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

3. PREFERRED STOCK

Preferred stock rating symbols and their definitions are as follows:

CAA: An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.

CA: An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.

C: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

B-19
<PAGE> 67

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.

TRUSTEES AND OFFICERS

TRUSTEES

B-20
<PAGE> 68

- ---------------

B-21
<PAGE> 69
OFFICERS

B-22
<PAGE> 70

B-23
<PAGE> 71

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
ACAdviser.Tanya M. Controller Vice President of the VK Adviser and the AC
Loden................. Adviser. Controller of each of the Van
Date of Birth: Kampen American Capital Funds and other
11/19/59 investment companies advised by the VK
Adviser and AC Adviser.
Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
03/01/65 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
11/15/63 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: Counsel and Assistant Secretary of Van
08/20/56 Kampen American Capital and VK/AC Holding,
Inc. Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser, the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc., ACCESS, Van Kampen Merritt
Equity Advisors Corp. and Van Kampen
Merritt Equity Holdings Corp. Prior to
September 1996, Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei,
Inc. Prior to July 1996, Senior Vice
President, Deputy General Counsel and
Secretary of VSM Inc. and VCJ Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>

B-24
<PAGE> 72

B-25
<PAGE> 73

COMPENSATION TABLE

B-26
<PAGE> 74

B-27
<PAGE> 75

As of October 17, 1996, no person was known by the Fund to own beneficially or
to hold of record as much as 5% of the Outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE OF
NAME AND ADDRESS OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
- ---------------------------------------------------------------- ---------------- -------- -------------
<S> <C> <C> <C>
Van Kampen American Capital Trust Company....................... 51,791 A 11.74%
2800 Post Oak Blvd. 56,293 B 10.20%
Houston, TX 77056 5,063 C 7.18%
Parker Hunter Incorporated FBO.................................. 20,941 C 29.89%
Frank Esparraguera IRA
Parker/Hunter Custodian
9 Glenview Avenue
Oil City, PA 16301-2137
Parker Hunter Incorporated FBO.................................. 18,534 C 26.27%
Dolores M.L. Esparraguera IRA
Parker/Hunter Custodian
9 Glenview Avenue
Oil City, PA 16301-2137
Donaldson Lufkin Jenrette....................................... 3,792 C 5.38%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
</TABLE>

Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.
("Van Kampen American Capital"), 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 own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 12% 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.

B-28
<PAGE> 76

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.

For the year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized advisory expenses of $0 and $0, respectively.

OTHER AGREEMENTS

SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 the Fund received support
services for shareholders, including the handling of all written and telephonic
communications, except initial order entry and other distribution related
communications. Payment by the Fund for such services was made on cost basis for
the employment of the personnel and the equipment necessary to render the
support services. At such time, the Fund, and the other Van Kampen American
Capital mutual funds distributed by the Distributor, shared such costs
proportionately among themselves based upon their respective net asset values.

For the year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized expenses of approximately $0 and $4,200, respectively, representing
the Distributor's cost of providing certain support services.

ACCOUNTING SERVICES 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 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 funds based proportionally on their
respective net assets.

B-29
<PAGE> 77

For the year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized expenses of approximately $0 and $3,900, respectively, representing
the Adviser's cost of providing accounting services.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital Funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: maintenance of
the fund's minute books and records, preparation and oversight of the fund's
regulatory reports, and other information provided to shareholders, as well as
responding to day-to-day legal issues on behalf of the funds. Payment by the
Fund for such services is made on a cost basis for the salary and salary related
benefits, including but not limited to bonuses, group insurances and other
regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to Funds distributed by the Distributor, one half of such costs 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 year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized expenses of approximately $7,100 and $5,900, respectively,
representing Van Kampen American Capital's cost of providing legal services.

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

B-30
<PAGE> 78

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.

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 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 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 $57 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
more than 80 analysts devoted to various specializations.

The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, 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."

B-31
<PAGE> 79

The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that 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 period ended June 30, 1995, the Fund recognized expenses under the
Plans of $12,732, $58,308 and $4,287 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $10,718, $14,491 and $0 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares, Class B Shares and Class C Shares, respectively. For the period ended
June 30, 1995, the Fund reimbursed the Distributor $947, $1,820 and $0 for
advertising expenses, and $1,288, $1,331 and $0 for compensation of the
Distributor's sales personnel for the Class A Shares, Class B Shares and Class C
Shares, respectively.

For the year ended June 30, 1996, the Fund recognized expenses under the Plans
of $13,183, $70,267 and $8,345 for the Class A Shares, Class B Shares and Class
C Shares, respectively, of which $10,558, $14,037 and $3,332 represent payments
to financial intermediaries under the Selling Agreements for Class A Shares,
Class B Shares and Class C Shares, respectively.

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).

PERFORMANCE INFORMATION

FUND PERFORMANCE INFORMATION

The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula 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 of the
lesser of the then current net asset value of the shares redeemed or their
initial purchase price from the Fund. Yield quotations do not reflect the
imposition of a contingent deferred sales charge, and if any such contingent
deferred sales charge imposed at the time of redemption were reflected, it would
reduce the performance quoted.

B-32
<PAGE> 80

BALANCED INVESTING

The Adviser believes that various asset classes have performed differently
overtime after adjusting for inflation. This performance difference among
various asset classes is further reflected in the relative performance of
certain market indices such as certificates of deposit, stock indices and bond
indices.

The Adviser believes a balanced approach to investing provides the opportunity
to benefit from the differing performance described above and that an investment
in a mutual fund which has a balanced investment objective forms a prudent part
of an investor's portfolio.

CLASS A SHARES

The average total return, including payment of the maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended June 30, 1996
was 8.45% and (ii) the period from June 24, 1994 (the commencement of investment
operations of the Fund) through June 30, 1996 was 9.89%.

The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from their inception
through June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 20.98%.

CLASS B SHARES

The average total return, including payment of the maximum CDSC, with respect
to the Class B Shares for (i) the one year period ended June 30, 1996 was 10.25%
and (ii) the period from June 24, 1994 (the commencement of investment
operations of the Fund) through June 30, 1996 was 10.84%.

The Fund's cumulative non-standardized total return, including payment of the
maximum CDSC, with respect to the Class B Shares from their inception through
June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 23.10%.

B-33
<PAGE> 81

CLASS C SHARES

The average total return, including payment of the maximum CDSC, with respect
to the Class C Shares for (i) the one year period ended June 30, 1996 was 13.25%
and (ii) the period from June 24, 1994 (the commencement of operations of the
Class C Shares) through June 30, 1996 was 12.38%.

The Fund's cumulative non-standardized total return, including payment of the
maximum CDSC, with respect to the Class C Shares from their inception through
June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 26.60%.

B-34
<PAGE> 82

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Trustees and Shareholders of
Van Kampen American Capital Balanced Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Balanced Fund (the "Fund"), including the portfolio of
investments, as of June 30, 1996, and the related statement of operations for
the year then ended, and the statement of changes in net assets and the
financial highlights for the year then ended and for the period from June 24,
1994 (commencement of investment operations) through June 30, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Balanced Fund as of June 30, 1996, the results of its
operations for the year then ended, the changes in its net assets and financial
highlights for the year then ended and for the period from June 24, 1994
(commencement of investment operations) through June 30, 1995, in conformity
with generally accepted accounting principles.

KPMG Peat Marwick LLP
Chicago, Illinois
August 2, 1996

B-35

<PAGE> 83

PORTFOLIO OF INVESTMENTS

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 52.5%
AEROSPACE & DEFENSE 0.6%
General Dynamics Corp.......................................... 900 $ 55,800
Rockwell International Corp.................................... 700 40,075
------------
95,875
------------
AUTOMOBILE 1.1%
Chrysler Corp.................................................. 900 55,800
Daimler Benz SA (Germany)...................................... 700 37,712
Fiat SA (Italy)................................................ 1,600 27,200
General Motors Corp............................................ 600 31,425
TRW Inc........................................................ 300 26,963
------------
179,100
------------
BANKING 2.7%
Bankamerica Corp............................................... 600 45,450
Bankers Trust NY Corp.......................................... 400 29,550
Chase Manhattan Corp........................................... 1,800 127,125
Corporacion Bancaria De Espana - ADR (Spain)................... 3,500 77,000
Fleet Financial Group Inc...................................... 800 34,800
Morgan, J.P. & Co. Inc......................................... 1,100 93,087
PNC Bank Corp.................................................. 900 26,775
------------
433,787
------------
BEVERAGE 0.3%
Anheuser Busch Cos., Inc....................................... 600 45,000
------------
BROADCAST, RADIO & TELEVISION 1.1%
Cox Communications Inc. (b).................................... 3,900 84,338
Tele Communications Inc. (b)................................... 4,900 88,812
------------
173,150
------------
CAPITAL GOODS 0.5%
Cooper Industries Inc.......................................... 700 29,050
Dover Corp..................................................... 400 18,450
Honeywell Inc.................................................. 500 27,250
------------
74,750
------------
CHEMICAL 1.8%
Betz Laboratories Inc.......................................... 1,000 43,875
Dow Chemical Co................................................ 900 68,400
Du Pont (E.I.) De Nemours Co................................... 300 23,738
Lyondell Petrochemical Co. .................................... 2,600 62,725
Praxair Inc. .................................................. 2,000 84,500
------------
283,238
------------
CONSUMER DURABLES 1.8%
Alco Standard Corp. ........................................... 800 36,200
</TABLE>

See Notes to Financial Statements

B-36

<PAGE> 84

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DURABLES (CONTINUED)
Caterpillar Inc. .............................................. 400 $ 27,100
Cooper Tire & Rubber........................................... 1,500 33,375
Ingersoll Rand Co. ............................................ 1,000 43,750
Johnson Controls Inc. ......................................... 200 13,900
Masco Corp. ................................................... 800 24,200
Maytag Corp. .................................................. 1,600 33,400
Newell Co. .................................................... 1,500 45,937
Sunbeam Oster Inc. ............................................ 2,100 30,975
------------
288,837
------------
CONTAINERS, PACKAGING & GLASS 0.4%
Crown Cork & Seal Inc.......................................... 800 36,000
Temple Inland Inc. ............................................ 500 23,375
------------
59,375
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING 0.5%
General Electric Co. .......................................... 915 79,148
------------
ELECTRIC UTILITIES 6.0%
Carolina Power & Light Co. .................................... 200 7,600
Central & South West Corp. .................................... 1,600 46,400
Cilcorp Inc. .................................................. 400 17,100
DTE Energy Co. ................................................ 5,000 154,375
Florida Progress Corp. ........................................ 800 27,800
FPL Group Inc. ................................................ 1,400 64,400
Houston Industries Inc. ....................................... 3,000 73,875
Idaho Power Co. ............................................... 1,800 56,025
Illinova Corp. ................................................ 5,600 161,000
Minnesota Power & Light Co. ................................... 900 26,100
Northern STS Power Co. ........................................ 400 19,750
Ohio Edison Co. ............................................... 300 6,563
Oklahoma Gas & Electric Co. ................................... 400 15,850
Pacificorp..................................................... 1,300 28,925
Peco Energy Co. ............................................... 980 25,480
Portland General Corp. ........................................ 2,400 74,100
Southwestern Public Service Co. ............................... 1,300 42,412
Texas Utilities Co. ........................................... 1,300 55,575
Unicorn Corp. ................................................. 1,400 39,025
------------
942,355
------------
</TABLE>

See Notes to Financial Statements

B-37
<PAGE> 85

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 1.1%
Norsk Hydro AS - ADR (Norway).................................. 900 $ 43,987
Repsol SA - ADR (Spain)........................................ 2,000 69,500
Total SA (France).............................................. 1,100 40,838
YPF Sociedad Anonima - ADR (Argentina)......................... 1,100 24,750
------------
179,075
------------
ENGINEERING & CONSTRUCTION 0.7%
Fluor Corp..................................................... 400 26,150
Foster Wheeler Corp............................................ 800 35,900
J. Ray McDermott SA (b)........................................ 1,900 47,500
------------
109,550
------------
ENVIRONMENTAL 2.2%
Browning Ferris Industries Inc................................. 4,600 133,400
WMX Technologies Inc........................................... 6,500 212,875
------------
346,275
------------
FINANCIAL SERVICES 0.9%
Bear Stearns Cos., Inc......................................... 2,625 62,016
Franklin Resources Inc......................................... 800 48,800
Great Western Financial Corp................................... 1,000 23,875
------------
134,691
------------
FOOD 1.8%
CPC International Inc.......................................... 300 21,600
Heinz, H.J. & Co............................................... 1,600 48,600
Quaker Oats Co................................................. 500 17,062
Sara Lee Corp.................................................. 800 25,900
Unilever....................................................... 1,200 174,150
------------
287,312
------------
HEALTHCARE 1.1%
Johnson & Johnson.............................................. 1,000 49,500
Mallinckrodt Group Inc......................................... 3,300 128,288
------------
177,788
------------
INSURANCE 3.2%
Aetna Life & Casualty Co....................................... 1,200 85,800
AFLAC Inc. .................................................... 1,200 35,850
Allmerica Financial Corp. ..................................... 500 14,875
Allstate Corp. ................................................ 900 41,062
AMBAC Inc. .................................................... 600 31,275
American Bankers Insurance Group............................... 1,500 65,437
American General Corp. ........................................ 700 25,463
Cigna Corp. ................................................... 200 23,575
</TABLE>

See Notes to Financial Statements

B-38
<PAGE> 86

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE (CONTINUED)
MBIA Inc. ..................................................... 800 $ 62,300
Providian Corp. ............................................... 600 25,725
St. Paul Cos., Inc. ........................................... 700 37,450
Sunamerica Inc................................................. 950 53,675
------------
502,487
------------
LEISURE/ENTERTAINMENT 0.8%
International Game Technology.................................. 1,600 27,000
Time Warner Inc. .............................................. 1,800 70,650
Trump Hotels & Casino Resorts (b).............................. 1,000 28,500
------------
126,150
------------
MINING, STEEL, IRON & NON-PRECIOUS METAL 0.3%
Bethleham Steel Corp. (b)...................................... 4,000 47,500
------------
NATURAL GAS PIPELINE AND DISTRIBUTION 3.4%
Coastal Corp. ................................................. 2,100 87,675
El Paso Natural Gas Co. ....................................... 700 26,950
Pacific Enterprises............................................ 4,900 145,162
Panenergy Corp. ............................................... 4,100 134,788
Sonat Inc. .................................................... 3,000 135,000
------------
529,575
------------
OIL & GAS 4.1%
Amoco Corp. ................................................... 550 39,806
Atlantic Richfield Co. ........................................ 300 35,550
British Petroleum PLC - ADR (UK)............................... 200 21,375
Burlington Resources Inc. ..................................... 700 30,100
Chevron Corp. ................................................. 600 35,400
Enron Oil & Gas Co. ........................................... 700 19,513
Exxon Corp. ................................................... 300 26,063
Louisiana Land & Exploration Co. .............................. 400 23,050
Mobil Corp. ................................................... 400 44,850
Noble Affiliates Inc. ......................................... 800 30,200
Occidental Petroleum Corp. .................................... 1,900 47,025
Phillips Petroleum Co. ........................................ 600 25,125
Pogo Producing Co. ............................................ 1,100 41,937
Royal Dutch Petroleum Co. (Netherlands)........................ 300 46,125
Schlumberger Ltd............................................... 300 25,275
Seagull Energy Corp. (b)....................................... 1,500 37,500
Shell Transport & Trading PLC - ADR (UK)....................... 400 35,200
Texaco Inc..................................................... 700 58,712
</TABLE>

See Notes to Financial Statements

B-39

<PAGE> 87

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS (CONTINUED)
USX Marathon Group............................................. 1,600 $ 32,200
------------
655,006
------------
PAPER 2.1%
Boise Cascade Corp............................................. 3,500 128,187
Champion International Corp.................................... 600 25,050
Consolidated Papers Inc........................................ 300 15,600
Georgia Pacific Corp........................................... 500 35,500
International Paper Co......................................... 1,400 51,625
Mead Corp...................................................... 500 25,938
Willamette Industries Inc...................................... 900 53,550
------------
335,450
------------
PERSONAL & NON-DURABLE 1.4%
Bausch & Lomb Inc.............................................. 400 17,000
Colgate Palmolive Co........................................... 700 59,325
Dial Corp...................................................... 1,400 40,075
Kimberly Clark Corp............................................ 400 30,900
Tambrands Inc.................................................. 1,900 77,663
------------
224,963
------------
PHARMACEUTICALS 3.7%
Abbott Labs.................................................... 1,100 47,850
American Home Products Corp.................................... 1,200 72,150
Astra AB - ADR (Sweden)........................................ 600 26,250
Bristol Myers Squibb Co........................................ 2,640 237,600
Merck & Co. Inc................................................ 700 45,237
Schering Plough Corp........................................... 600 37,650
Smithkline Beecham PLC - ADR (UK).............................. 500 27,188
Warner Lambert Co.............................................. 1,600 88,000
------------
581,925
------------
PRINTING & PUBLISHING 0.3%
Gannett Inc.................................................... 300 21,225
New York Times Co. ............................................ 800 26,100
------------
47,325
------------
RETAIL 2.4%
Dayton Hudson Corp............................................. 300 30,938
Dillard Department Stores Inc. ................................ 2,100 76,650
Federated Department Stores Inc. (b)........................... 1,100 37,537
Harcourt General Inc. ......................................... 1,200 60,000
Kroger Co. (b)................................................. 1,500 59,250
Sears Roebuck & Co. ........................................... 1,300 63,212
</TABLE>

See Notes to Financial Statements

B-40

<PAGE> 88

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL (CONTINUED)
Toys R Us Inc. (b)............................................. 900 $ 25,650
Wal-Mart Stores Inc. .......................................... 700 17,763
------------
371,000
------------
TECHNOLOGY 2.5%
3Com Corp. .................................................... 400 18,300
Avnet Inc. .................................................... 1,000 42,125
BMC Software Inc. (b).......................................... 400 23,900
Cadence Design Systems Inc. ................................... 600 20,250
Cisco Systems Inc. (b)......................................... 500 28,312
Computer Associates International Inc. ........................ 500 35,625
Gateway 2000 Inc. (b).......................................... 800 27,200
Intel Corp. ................................................... 200 14,688
International Rectifier Corp. (b).............................. 1,100 17,738
Lucent Technologies Inc. (b)................................... 500 18,937
Microsoft Corp. (b)............................................ 200 24,025
Motorola Inc. ................................................. 600 37,725
Newbridge Networks Corp. (b)................................... 200 13,100
SCI Systems Inc. (b)........................................... 600 24,375
Sun Guard Data Systems (b)..................................... 1,300 52,162
------------
398,462
------------
TELECOMMUNICATIONS 2.5%
Ameritech Corp. ............................................... 875 51,953
Bellsouth Corp. ............................................... 900 38,138
Ericsson L M Telephone Co. - ADR (Sweden)...................... 900 19,350
Nynex Corp. ................................................... 2,400 114,000
Sprint Corp. .................................................. 1,000 42,000
Tele Danmark AS - ADR (Denmark)................................ 3,900 98,962
Telefonica de Espana - ADR (Spain)............................. 500 27,563
------------
391,966
------------
TOBACCO 1.0%
Philip Morris Cos., Inc. ...................................... 1,300 135,200
RJR Nabisco Holdings Corp. .................................... 800 24,800
------------
160,000
------------
TRANSPORTATION 0.2%
Illinois Central Corp. ........................................ 1,200 34,050
------------
TOTAL COMMON STOCKS............................................ 8,295,165
------------
</TABLE>

See Notes to Financial Statements

B-41
<PAGE> 89

PORTFOLIO OF INVESTMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Security
Description Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
GOVERNMENT AND AGENCY FIXED-INCOME SECURITIES (U.S.) 35.1%
Federal Home Loan Bank Corp. Series P2 ($1,000,000 par, 8.50% coupon,
02/08/02 maturity, S&P rating AAA)..................................... $ 1,027,850
U.S. Treasury Bond ($3,900,000 par, 7.25% coupon, 05/15/16 maturity)... 3,995,238
U.S. Treasury Note ($500,000 par, 7.50% coupon, 02/15/05 maturity)..... 526,205
-----------
TOTAL GOVERNMENT AND AGENCY FIXED-INCOME SECURITIES (U.S.)............. 5,549,293
-----------
TOTAL LONG-TERM INVESTMENTS 87.6%
(Cost $13,472,057) (a)............................................... 13,844,458
SHORT-TERM INVESTMENTS AT AMORTIZED COST 11.5%
Student Loan Marketing Disc Note ($1,820,000 par, yielding 5.45%,
maturing 07/01/96)................................................... 1,820,000
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9%............................ 143,713
-----------
NET ASSETS 100%....................................................... $15,808,171
===========
</TABLE>

(a) At June 30, 1996, cost for federal income tax purposes is $13,472,057; the
aggregate gross unrealized appreciation is $699,999 and the aggregate gross
unrealized depreciation is $327,598, resulting in net unrealized
appreciation of $372,401.

(b) Non-income producing security as this stock currently does not declare
dividends.

See Notes to Financial Statements

B-42
<PAGE> 90

STATEMENT OF ASSETS AND LIABILITIES

June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $13,472,057) (Note 1)................. $13,844,458
Short-Term Investments (Note 1).......................................... 1,820,000
Cash..................................................................... 7,589
Receivables:
Securities Sold........................................................ 155,366
Interest............................................................... 83,990
Fund Shares Sold....................................................... 48,750
Dividends.............................................................. 19,904
Unamortized Organizational Expenses (Note 1)............................. 47,648
-----------
Total Assets......................................................... 16,027,705
-----------
LIABILITIES:
Payables:
Securities Purchased................................................... 149,688
Distributor and Affiliates (Notes 2 and 5)............................. 33,464
Income Distributions................................................... 25,084
Fund Shares Repurchased................................................ 1,121
Deferred Compensation and Retirement Plans (Note 2)...................... 9,722
Accrued Expenses......................................................... 455
-----------
Total Liabilities.................................................... 219,534
-----------
NET ASSETS............................................................... $15,808,171
===========
NET ASSETS CONSIST OF:
Capital (Note 3)......................................................... $14,428,476
Accumulated Net Realized Gain on Securities.............................. 999,594
Net Unrealized Appreciation on Securities................................ 372,401
Accumulated Undistributed Net Investment Income.......................... 7,700
-----------
NET ASSETS............................................................... $15,808,171
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets
of $6,514,423 and 405,826 shares of capital stock issued and
outstanding) (Note 3)................................................ $ 16.05
Maximum sales charge (5.75%* of offering price)...................... .98
-----------
Maximum offering price to public..................................... $ 17.03
===========
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$8,227,046 and 512,997 shares of capital stock issued and
outstanding) (Note 3)................................................ $ 16.04
===========
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$1,066,702 and 66,511 shares of capital stock issued and outstanding)
(Note 3)............................................................. $ 16.04
===========
</TABLE>

* On sales of $50,000 or more, the sales charge will be reduced.

See Notes to Financial Statements

B-43
<PAGE> 91

STATEMENT OF OPERATIONS

For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................................. $ 371,050
Dividends (Net of foreign withholding taxes of $2,156).................... 183,927
----------
Total Income.......................................................... 554,977
----------
EXPENSES:
Investment Advisory Fee (Note 2).......................................... 91,893
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$13,183, $70,267 and $8,345, respectively) (Note 5)..................... 91,795
Custody................................................................... 82,553
Registration.............................................................. 68,699
Printing.................................................................. 41,455
Shareholder Services (Note 2)............................................. 23,504
Audit..................................................................... 18,620
Amortization of Organizational Expenses (Note 1).......................... 16,045
Trustees Fees and Expenses (Note 2)....................................... 12,699
Legal (Note 2)............................................................ 11,966
Other..................................................................... 5,984
----------
Total Expenses........................................................ 465,213
Less Fees Waived and Expenses Reimbursed ($91,893 and $236,400,
respectively)....................................................... 328,293
----------
Net Expenses........................................................ 136,920
----------
NET INVESTMENT INCOME..................................................... $ 418,057
==========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments.......................................... $1,765,158
----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................................. 808,706
End of the Period:
Investments........................................................... 372,401
----------
Net Unrealized Depreciation on Securities During the Period............... (436,305)
----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............................ $1,328,853
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS................................ $1,746,910
==========
</TABLE>

See Notes to Financial Statements

B-44
<PAGE> 92

STATEMENT OF CHANGES IN NET ASSETS

For the Year Ended June 30, 1996 and the Period June 24, 1994
(Commencement of Investment Operations) to June 30, 1995
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
From June 24, 1994
(Commencement of
Year Ended Investment Operations)
June 30, 1996 to June 30, 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 418,057 $ 375,863
Net Realized Gain/Loss on Securities.................. 1,765,158 (9,560)
Net Unrealized Appreciation/Depreciation on
Securities.......................................... (436,305) 808,706
--------- ---------
Change in Net Assets from Operations.................. 1,746,910 1,175,009
--------- ---------
Distributions from Net Investment Income:
Class A Shares...................................... (197,797) (156,268)
Class B Shares...................................... (216,743) (177,438)
Class C Shares...................................... (25,849) (13,922)
Class D Shares...................................... -0- (49)
--------- ---------
(440,389) (347,677)
--------- ---------
Distributions from Net Realized Gain on Securities
(Note 1):
Class A Shares...................................... (297,718) -0-
Class B Shares...................................... (408,895) -0-
Class C Shares...................................... (49,391) -0-
--------- ---------
(756,004) -0-
--------- ---------
Total Distributions................................... (1,196,393) -0-
--------- ---------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... 550,517 827,332
--------- ---------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............................. 5,236,767 13,761,643
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................ 972,782 264,667
Cost of Shares Repurchased............................ (3,021,589) (2,789,668)
--------- ---------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.... 3,187,960 11,236,642
--------- ---------
TOTAL INCREASE IN NET ASSETS.......................... 3,738,477 12,063,974
NET ASSETS:
Beginning of the Period............................... 12,069,694 5,720
--------- ---------
End of the Period (Including undistributed net
investment income of $7,700 and $28,186,
respectively)....................................... $15,808,171 $12,069,694
----------- -----------
</TABLE>

See Notes to Financial Statements

B-45

<PAGE> 93

NOTES TO FINANCIAL STATEMENTS

June 30, 1996
- --------------------------------------------------------------------------------

1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Balanced Fund (the "Fund") is organized as a series
of the Van Kampen American Capital Equity Trust, a Delaware business trust and
is registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide its shareholders with current income, while also seeking to provide
shareholders with capital growth. The Fund commenced investment operations on
June 24, 1994, and has outstanding three classes of common shares, Classes A, B
and C. On May 2, 1995, all Class D shareholders redeemed their shares and the
class was eliminated. The Fund will no longer offer Class D shares.

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-46

<PAGE> 94

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

A repurchase agreement is a short-term investment in which the Fund acquires
ownership of a debt security and the seller agrees to repurchase the security at
a future time and specified price. Repurchase agreements are collateralized by
the underlying debt security. The Fund will make payment for such securities
only upon physical delivery or evidence of book entry transfer to the account of
the custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the Fund.

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--The Fund has agreed to reimburse Van Kampen American
Capital Distributors, Inc. or its affiliates (collectively "VKAC") for costs
incurred in connection with the Fund's organization in the amount of $80,000.
These costs are being amortized on a straight line basis over the 60 month
period ending June 23, 1999. Van Kampen American Capital Investment Advisory
Corp. (the "Adviser") has agreed that in the event any of the initial shares of
the Fund originally purchased by VKAC are redeemed during the amortization
period, the Fund will be reimbursed for any unamortized organizational expenses
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.

Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year.

F. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays quarterly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains which are included in ordinary income for
tax purposes. Permanent book and tax basis differences relating to expenses that
are not deductible for tax purposes totaling $1,846 were reclassified from
accumulated undistributed net investment income to capital.

B-47
<PAGE> 95

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

For the year ended June 30, 1996, 14.3% of the distributions from net
realized gains on securities was considered long-term capital gains for Federal
income tax purposes. Since this distribution was made in December of 1995, it
was reported to shareholders along with other 1995 calendar year distributions.

2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES

Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:

<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ----------------------------------------------------------------------
<S> <C>
First $500 million...................................... .70 of 1%
Over $500 million....................................... .65 of 1%
</TABLE>

Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.

For the year ended June 30, 1996, the Fund incurred expenses of
approximately $11,200 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund all of which was waived by VKAC.

In July, 1995, the Fund began using ACCESS Investor Services, Inc.
("ACCESS"), an affiliate of the Adviser, as the shareholder servicing agent of
the Fund. For the year ended June 30, 1996, the Fund incurred expenses of
approximately $15,400, representing ACCESS' cost of providing transfer agency
and shareholder services plus a profit, all of which was assumed by VKAC.

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 June 30, 1996, VKAC owned 106 shares each of Classes A, B and C.

B-48
<PAGE> 96

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

3. CAPITAL TRANSACTIONS

The Fund has outstanding three classes of common shares, Classes A, B and C each
with a par value of $.01 per share. There are an unlimited number of shares of
each class authorized.

At June 30, 1996, capital aggregated $5,958,597, $7,493,118 and $976,761 for
Classes A, B and C, respectively. For the year ended June 30, 1996, transactions
were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 160,539 $ 2,556,624
Class B....................................... 149,768 2,395,715
Class C....................................... 17,813 284,428
-------- -----------
Total Sales..................................... 328,120 $ 5,236,767
======== ===========
Dividend Reinvestment:
Class A....................................... 27,877 $ 437,407
Class B....................................... 33,104 518,661
Class C....................................... 1,066 16,714
-------- -----------
Total Dividend Reinvestment..................... 62,047 $ 972,782
======== ===========
Repurchases:
Class A....................................... (91,336) $(1,459,621)
Class B....................................... (96,683) (1,543,634)
Class C....................................... (1,160) (18,334)
-------- -----------
Total Repurchases............................... (189,179) $(3,021,589)
======== ===========
</TABLE>

B-49

<PAGE> 97

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

At June 30, 1995, capital aggregated $4,424,914, $6,123,381 and $694,067 for
Classes A, B and C, respectively. For the period ended June 30, 1995,
transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................... 375,263 $ 5,399,046
Class B...................................... 532,317 7,659,184
Class C...................................... 49,426 703,213
Class D...................................... 14 200
-------- -----------
Total Sales.................................... 957,020 $13,761,643
======== ===========
Dividend Reinvestment:
Class A...................................... 8,285 $ 121,482
Class B...................................... 9,487 139,212
Class C...................................... 273 3,968
Class D...................................... -0- 5
-------- -----------
Total Dividend Reinvestment.................... 18,045 $ 264,667
======== ===========
Repurchases:
Class A...................................... (74,902) $(1,097,044)
Class B...................................... (115,096) (1,676,445)
Class C...................................... (1,007) (14,544)
Class D...................................... (114) (1,635)
-------- -----------
Total Repurchases.............................. (191,119) $(2,789,668)
======== ===========
</TABLE>

B-50

<PAGE> 98

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

June 30, 1996
- --------------------------------------------------------------------------------

the expense of their respective deferred sales arrangements, including higher
distribution and service fees and incremental transfer agency costs.

<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ------------------------------------------------------------------------
<S> <C> <C>
First........................................... 4.00% 1.00%
Second.......................................... 3.75% None
Third........................................... 3.50% None
Fourth.......................................... 2.50% None
Fifth........................................... 1.50% None
Sixth........................................... 1.00% None
Seventh and Thereafter.......................... None None
</TABLE>

For the period ended June 30, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$10,100 and received CDSC on redeemed shares of approximately $31,200. Sales
charges do not represent expenses of the Fund.

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales, excluding U.S.
Government Securities and short-term investments were $16,905,770 and
$17,212,426, respectively.

5. DISTRIBUTION AND SERVICE PLANS

The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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.

B-51
<PAGE> 99

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL GROWTH FUND

Van Kampen American Capital Growth Fund (the "Fund") seeks capital growth. The
Fund will attempt to achieve this investment objective by investing primarily in
a diversified portfolio of common stocks and other equity securities of growth
companies. Growth companies generally include those companies with established
records of growth in sales or earnings and companies with new products, new
services or new processes that the Fund's investment adviser believes offer
investors in the equity securities of such companies above average potential for
capital growth. There is no assurance that the Fund will achieve its investment
objective.

This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the current Prospectus for the Fund dated the date
hereof (the "Prospectus"). This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund, and investors should obtain and read the
Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained
without charge, by calling (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 (the "SEC"), Washington, D.C. These items may
be obtained from the SEC upon payment of the fee prescribed, or inspected at the
SEC's office at no charge.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-3
Additional Investment Considerations................................................. B-4
Description of Securities Ratings.................................................... B-11
Trustees and Officers................................................................ B-18
Legal Counsel........................................................................ B-26
Investment Advisory and Other Services............................................... B-26
Custodian and Independent Accountants................................................ B-28
Portfolio Transactions and Brokerage Allocation...................................... B-28
Tax Status of the Fund............................................................... B-29
The Distributor...................................................................... B-29
Performance Information.............................................................. B-30
Independent Accountants' Report...................................................... B-32
Financial Statements................................................................. B-33
Notes to Financial Statements........................................................ B-39
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996.
<PAGE> 100

THE FUND AND THE TRUST

The Fund is a separate diversified series of Van Kampen American Capital
Equity Trust (the "Trust"), an open-end management investment company. The Fund
was established pursuant to a Designation of series dated September 7, 1995. At
present, the Fund, Van Kampen American Capital Utility Fund, Van Kampen American
Capital Balanced Fund, Van Kampen American Capital Value Fund, Van Kampen
American Capital Great American Companies Fund, Van Kampen American Capital
Prospector Fund and Van Kampen American Capital Aggressive Growth Fund are the
only series of the Trust, although other series may be organized and offered in
the future. Each series of the trust will be treated as a separate corporation
for federal income tax purposes.

The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and 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, par value $0.01 per share, for each portfolio. The Trustees can further
sub-divide each series of shares into one or more classes of shares for each
portfolio. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.

Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting. The Trust
will assist such holders in communicating with other shareholders of the Fund to
the extent required by the Investment Company Act of 1940 (the "1940 Act").

The Trustees may amend the Declaration of Trust (including with respect to any
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 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.

The Trust originally was organized as the Van Kampen Merrit Equity Trust, a
Massachusetts business trust created by a Declaration of Trust dated March 26,
1987 (the "Massachusetts Trust"). The Massachusetts Trust was reorganized into
the Trust on July 31, 1995 pursuant to an Agreement and Plan of Reorganization
and Liquidation. The Trust was formed pursuant to an Agreement and Declaration
of Trust dated May 10, 1995 for the purpose of facilitating the Massachusetts
Trust's reorganization into a Delaware business trust. The Trust filed a
Certificate of Trust with the Delaware Secretary of State on July 28, 1995.

B-2
<PAGE> 101

INVESTMENT POLICIES AND RESTRICTIONS

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its instrumentalities), if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or, if, as a
result, such Fund would hold more than 10% of the outstanding voting
securities of an issuer; except that up to 25% of the Fund's total assets
may be invested without regard to such limitations. Neither limitation
shall apply to the acquisition of shares of other open-end investment
companies to the extent permitted by rule or order of the SEC exempting
the Fund from the limitations imposed by Section 12(d)(1) of the 1940 Act.

2. Invest more than 25% of its assets in a single industry, provided,
however, that this limitation excludes shares of other open-end investment
companies owned by the Fund but includes the Fund's pro rata portion of
the securities and other assets owned by any such company. (Neither the
U.S. Government nor any of its agencies or instrumentalities will be
considered an industry for purposes of this restriction.)

3. 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 excludes no more than 5% in borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances of senior securities, borrowings, delayed delivery and when
issued transactions and strategic transactions.

4. 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.

5. Sell any securities "short," unless at all times when a short position is
open the Fund owns an equal amount of the securities or of securities
convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.

6. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.

8. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition, except as permitted under the
1940 Act and except to the extent permitted by rule or order of the SEC
exempting the Fund from the limitations imposed by Section 12(d)(1) of the
1940 Act.

9. Invest in 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.

B-3
<PAGE> 102

single foreign government, or by all supranational organizations in the
aggregate, are considered to be securities of issuers in the same industry.

The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.

The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. This limitation excludes shares of other
open-end investment companies owned by the Fund but includes the Fund's pro rata
portion of the securities and other assets owned by any such company. The Fund
may, from time to time, adopt a more restrictive limitation with respect to
investment in illiquid and restricted securities in order to comply with the
most restrictive state securities law, currently 10%. This policy does not
include restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, as amended, which the Board of Trustees or the
Fund's investment adviser has determined under Board-approved guidelines to be
liquid. The Fund's policy with respect to investment in illiquid and restricted
securities is not a fundamental policy and may be changed by the Board of
Trustees, in consultation with the Adviser, without obtaining shareholder
approval.

From time to time the Fund may commit to more stringent restrictions in order
to be able to offer its shares to residents in particular states.

ADDITIONAL INVESTMENT CONSIDERATIONS

BORROWING

The Fund may borrow up to 33 1/3% of the value of its total assets from banks
(including entering into reverse repurchase agreements) which amount excludes no
more than 5% in borrowings and reverse repurchase agreements with any entity for
temporary purposes. The Fund has no current intention to borrow money other than
for temporary purposes.

Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations such as potential changes in
the net asset value of the Shares and in the yield on the Fund's portfolio.
Although the principal of such borrowings will be fixed, the Fund's assets may
change in value during the time the borrowing is outstanding. Borrowing will
create interest expenses for the Fund which can exceed the income from the
assets retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Fund will be less than if borrowing
were not used, and therefore the amount available for distribution to
shareholders as dividends will be reduced.

B-4
<PAGE> 103

STRATEGIC TRANSACTIONS

The Fund may, but is not required to, utilize various other investment
strategies as described below. 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 fixed-income indices and other
financial instruments and purchase and sell financial futures contracts and
options thereon and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps and 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
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 protest 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.

B-5
<PAGE> 104

A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options 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.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.

B-6
<PAGE> 105

that the terms of the OTC option will be satisfied. The Fund will engage in OTC
option transactions only with United States government securities dealers
recognized by the Federal Reserve Bank of New York as "primary dealers", or
broker dealers, domestic or foreign banks or other financial institutions which
have received (or the guarantors of the obligation of which have received) a
short-term credit rating of "A-1" from Standard & Poor's Ratings Group ("S&P")
or "P-1" from Moody's Investor Services, Inc. ("Moody's") or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO"). The staff of the SEC currently takes the position that, in general,
OTC options on securities other than U.S. Government securities purchased by the
Fund, and portfolio securities "covering" the amount of the Fund's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Fund's
limitation on investing no more than 15% of its assets in illiquid securities.

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) that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets. All calls sold by the Fund must be "covered" (i.e.,
the Fund must own the securities or futures contract subject to the call) or
must meet the asset segregation requirements described below as long as the call
is outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold. 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) (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 fixed-
income market changes 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, 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, 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.

B-7
<PAGE> 106

on a daily basis as the mark to market value of the contract fluctuates. The
purchase of options on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price nor that delivery will occur.

The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. 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 herein.

The Fund also may invest in foreign stock index futures traded outside the
United States. Foreign stock index futures traded outside the United States
include the Nikkei Index of 225 Japanese stocks traded on the Singapore
International Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese
stocks traded on the Osaka Exchange, Financial Times Stock Exchange Index of the
100 largest stocks on the London Stock Exchange, the All Ordinaries Share Price
Index of 307 stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33
stocks on the Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks
on the New Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto
Stock Exchange. Futures and futures options on the Nikkei Index are traded on
the Chicago Mercantile Exchange and United States commodity exchanges may
develop futures and futures options on other indices of foreign securities.
Futures and options on United States devised index of foreign stocks are also
being developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.

B-8
<PAGE> 107

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 of 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.

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 the value of schillings will decline against the U.S. dollar, the
Adviser may enter into a contract to see D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.

RISK 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 and 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 interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.

B-9
<PAGE> 108

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 cash or liquid securities 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, 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. To the extent such assets are
other than cash or cash equivalents, such assets will be marked to market on a
daily basis. To the extent that the Fund segregates assets other than cash or
cash equivalents in connection with the purchase or sale of a futures contract
or the sale of an option thereon, the Fund will be subject to market risks with
respect to the open futures or option position as well as with respect to the
portfolio securities segregated against such position. To the extent that the
market value of such position and of such portfolio securities have a high
degree of positive correlation, market fluctuations may adversely affect both
the value of such position

B-10
<PAGE> 109

and the value of such portfolio securities, which has the effect of leveraging
the Fund's portfolio assets and increasing the Fund's investment risk.

The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.

DESCRIPTION OF SECURITIES RATINGS

1. DEBT

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 payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation and repayment of principal in
accordance with the terms of the obligation;

2. Nature of and provisions of the obligation;

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.

INVESTMENT GRADE

AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

B-11
<PAGE> 110

circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.

SPECULATIVE GRADE

BB, B, CCC, CC, C: Debt rated "BB", "B", "CCC", "CC", and "C" is regarded as
having significantly 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.

CC: Debt rated "CC" is currently highly vulnerable to nonpayment. The rating
"CC" is also used for debt subordinated to senior debt that is assigned an
actual or implied "CCC" rating.

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: Not rated.

R: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe payment risk--such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.

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.

B-12
<PAGE> 111

2. COMMERCIAL PAPER

A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.

Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:

A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+)
designation.

A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".

A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.

B Issues rated "B" are regarded as having significant speculative
characteristics.

C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.

D Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date
due, even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.

A commercial paper rating is not a recommendation to purchase, 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.

3. VARIABLE RATE DEMAND BONDS

S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.

4. NOTES

-- 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.

B-13
<PAGE> 112

SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.

SP-3 Speculative capacity to pay principal and interest.

5. PREFERRED STOCK

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 law of bankruptcy and other laws affecting
creditors' rights.

<TABLE>
<S> <C>
AAA This is the highest rating that may be assigned by S&P to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality, fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a preferred stock in this
category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay preferred
CCC stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest. 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 nonpaying issue.
D A preferred stock rated "D" is a nonpaying 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, 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.
</TABLE>

B-14
<PAGE> 113

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 (Moody's) rating symbols and their meanings (as published by
Moody's Investor Service) follows:

1. LONG-TERM DEBT

AA: Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than AAA securities.

A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA: Bonds which are rated BAA are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may by lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA: Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

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.

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.

B-15
<PAGE> 114

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.

2. SHORT-TERM DEBT

Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:

Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:

--Leading market positions in well-established industries.

--High rates of return on funds employed.

-- Conservative capitalization structure with moderate reliance on debt
and ample asset protection.

-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.

-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.

Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

Issuers rated Not Prime do not fall within any of the Prime rating categories.

3. PREFERRED STOCK

Preferred stock rating symbols and their definitions are as follows:

AAA: An issue which is rated 'AAA' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.

AA: An issue which is rated 'AA' is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.

A: An issue which is rated 'A' is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the
'AAA' and 'AA' classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.

BAA: An issue which is rated 'BAA' is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.

BA: An issue which is rated 'BA' is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this class.

B: An issue which is rated 'B' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.

B-16
<PAGE> 115

CAA: An issue which is rated 'CAA' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.

CA: An issue which is rated 'CA' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.

C: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.

Moody's applies numerical modifiers 1, 2 and 3 in each rating classification
from "AA" through "BB" in its preferred stock rating system: the modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.

B-17
<PAGE> 116

TRUSTEES AND OFFICERS

TRUSTEES

B-18
<PAGE> 117

<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
Date of Birth: 03/31/20 Trust Company of Chicago and Continental Illinois
Corporation. Trustee and Co-Chairman 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
Date of Birth: 02/13/36 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.
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
Date of Birth: 10/10/22 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
155 Hickory Lane of Graduate School and Chairman, Department of Mechanical
Closter, NJ 07624-2322 Engineering, Stevens Institute of Technology. Director of
Date of Birth: 08/02/24 Dynalysis of Princeton, a firm engaged in engineering
research. Trustee and Co-Chairman of each 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 (Illinois), legal counsel to the Van Kampen
Chicago, IL 60606 American Capital Funds, The Explorer Institutional Trust
Date of Birth: 08/22/39 and the closed-end investment companies advised by the VK
Adviser. Trustee of each of the Van Kampen American
Capital Funds, The Explorer Institutional Trust and the
closed-end investment companies advised by the VK
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Date of Birth: 01/31/22 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>

- ---------------

B-19
<PAGE> 118

OFFICERS

B-20
<PAGE> 119

B-21
<PAGE> 120

<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
John L. Sullivan........ Treasurer First Vice President of the VK Adviser and
Date of Birth: the AC Adviser. Treasurer of each of the
08/20/55 Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Tanya M. Loden.......... Controller Vice President of the VK Adviser and the AC
Date of Birth: Adviser. Controller of each of the Van
11/19/59 Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.
Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
03/01/65 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
11/15/63 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: Counsel and Assistant Secretary of Van
08/20/56 Kampen American Capital and VK/AC Holding,
Inc. Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser, the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc., ACCESS, Van Kampen Merritt
Equity Advisors Corp. and Van Kampen
Merritt Equity Holdings Corp. Prior to
September 1996, Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei,
Inc. Prior to July 1996, Senior Vice
President, Deputy General Counsel and
Secretary of VSM Inc. and VCJ Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>

B-22
<PAGE> 121

B-23
<PAGE> 122

COMPENSATION TABLE

B-24
<PAGE> 123

B-25
<PAGE> 124

<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
- ---------------------------------------------------------------------- ---------------- -------- ---------
<S> <C> <C> <C>
BENEFICIAL AND RECORD HOLDER:
Van Kampen American Capital........................................... 7,000 A 69.41%
Attn: Dominick Cogliandro 6,500 B 100%
One Chase Manhattan Plaza 6,500 C 100%
37th Floor
New York, NY 10005-1401
Jeff D. New & Valerie New Jt Ten...................................... 1,990 A 19.74%
5719 Rocky Brook
Kingwood, TX 77345-1417
Van Kampen American Capital TR Cust................................... 1,017 A 10.09%
IRA A/C Glen O. Willis
140 April Waters Dr. N
Montgomery, TX 77356-8823
RECORD HOLDER ONLY:
Van Kampen American Capital Trust Company............................. 1,041 A 10.33%
2800 Post Oak Blvd.
Houston, TX 77056
</TABLE>

LEGAL COUNSEL

Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).

INVESTMENT ADVISORY AND OTHER SERVICES

INVESTMENT ADVISORY AGREEMENT

The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.
("Van Kampen American Capital"), which in turn is a wholly-owned subsidiary of
VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of
a substantial majority of its common stock by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital, Inc. own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 12% of the common stock of VK/AC
Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own 5% or more of the
common stock of VK/AC Holding, Inc.

The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will administer the business affairs of the Fund, supervise the
Fund's overall investment activities in the context of

B-26
<PAGE> 125

implementing the Fund's investment objectives, furnish offices, necessary
facilities and equipment, provide administrative services, and permit its
officers and employees to serve without compensation as Trustees of the Trust
and officers of the Fund if duly elected to such positions.

The Adviser's activities are subject to the review and supervision of the
Trustees to whom the Adviser renders periodic reports of the Fund's investment
activities.

The investment advisory agreement remains in effect from year to year if
specifically approved by the Trustees (including the independent Trustees) on
behalf of the Fund or the Fund's shareholders in compliance with the
requirements of the 1940 Act. The agreement may be terminated without penalty
upon 60 days written notice by either party thereto and will automatically
terminate in the event of assignment.

The Adviser has undertaken to reimburse the Fund for annual expenses of the
Fund which exceed the most stringent limit prescribed by any state in which the
Fund's shares are offered for sale. Currently, the most stringent limit in any
state would require such reimbursement to the extent that aggregate operating
expenses of the Fund (excluding interest, taxes and other expenses which may be
excludable under applicable state law) exceed in any fiscal year 2 1/2% of the
average annual net assets of the Fund up to $30 million, 2% of the average
annual net assets of the Fund of the next $70 million, and 1 1/2% of the
remaining average annual net assets of the Fund. In addition to making any
required reimbursements, the Adviser may in its discretion, but is not obligated
to, waive all or any portion of its fee or assume all or any portion of the
expenses of the Fund.

For the period ended June 30, 1996, the Fund recognized advisory expense of
$0.

OTHER AGREEMENTS

ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the VK 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 Adviser and distributed by the Distributor in 25% of
the cost of providing such services, with 25% of the remaining 75% of such cost
being paid by the Fund and such other funds based proportionally on their
respective net assets.

For the period ended June 30, 1996, the Fund paid expenses of approximately
$0, representing the Adviser's cost of providing accounting services.

LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the funds' minute books and records, preparation and oversight of
the funds' regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary-
related benefits, including but not limited to bonuses, group insurance and
other regular wages for the employment of personnel as well as the overhead and
expenses related to office space and the equipment necessary to render such
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, 1996, the Fund paid expenses of approximately
$0, representing Van Kampen American Capitals cost of providing legal services.

B-27
<PAGE> 126

CUSTODIAN AND INDEPENDENT ACCOUNTANTS

PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION

The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses. In selecting among the firms believed to meet the criteria for
handling a particular transaction, the Fund's Adviser may take into
consideration that certain firms have sold or are selling shares of the Fund and
that certain firms provide market, statistical or other research information to
the Fund and the Adviser, and may select firms that are affiliated with the
Fund, its Adviser or its Distributor.

If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Fund's Adviser, the amount of
additional commission or increased cost is reasonable in relation to the value
of such services.

In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Fund's Adviser are considered at or about
the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective size of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the 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.

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.

B-28
<PAGE> 127

Portfolio turnover is calculated by dividing the lesser of purchases or sales
of portfolio securities by the monthly average value of the securities in the
portfolio during the year. Securities, including options, whose maturity or
expiration date at the time of acquisition were one year or less are excluded
from such calculation. The Fund anticipates that the annual portfolio turnover
rate of the Fund's portfolio will generally be less than 100%. If the turnover
rate for the Fund does reach or exceed this percentage, the Fund's brokerage
costs may increase and the Adviser will monitor the Fund's trading practices to
avoid potential adverse tax consequences.

TAX STATUS OF THE FUND

The Trust and any of its series, including the Fund, will be treated as
separate corporations for federal 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 must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. 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.

B-29
<PAGE> 128

For the period ended June 30, 1996, the Fund has paid expenses under the Plans
of $0, $0 and $0 for the Class A Shares, Class B Shares and Class C Shares,
respectively, of which $0 and $0 represent payments to financial intermediaries
under the Selling Agreements for Class A Shares and Class B Shares respectively.

PERFORMANCE INFORMATION

The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period; yield is computed by first dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum 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 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 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.

From time to time marketing materials may provide a portfolio manager update,
an adviser update and discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sector holdings and ten largest holdings. Materials may also mention
how Van Kampen American Capital believes the Fund compares relative to other Van
Kampen American Capital funds. Materials may also discuss the Dalbar Financial
Services study from 1984 to 1994 which examined investor cash flow into and out
of all type of mutual funds. The ten year study found that investors who bought
mutual fund shares and held such shares outperformed investors who bought and
sold. The Dalbar study conclusions were consistent regardless if shareholders
purchased their funds in direct or sales force distribution channels. The study
showed that investors working with a professional representative have tended
over time to earn higher returns than those who invested directly. The Fund will
also be marketed on the Internet.

B-30
<PAGE> 129

CLASS A SHARES

The average total return with respect to the Class A Shares for the period
from December 27, 1995 (the commencement of investment operations of the Fund)
through June 30, 1996 was 65.07%.

The Fund's cumulative non-standardized total return, excluding payment of the
maximum front-end sales charge, with respect to the Class A Shares from their
inception through June 30, 1996 (as calculated in the Prospectus under the
heading "Fund Performance") was 37.00%.

CLASS B SHARES

The average total return with respect to the Class B Shares for the period
from December 27, 1995 (the commencement of investment operations of the Fund)
through June 30, 1996 was 74.92%.

The Fund's cumulative non-standardized total return, including the payment of
the maximum CDSC, with respect to the Class B Shares from their inception
through June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 33.00%.

The Fund's cumulative non-standardized total return, excluding payment of the
maximum CDSC, with respect to Class A Shares from their inception through June
30, 1996 (as calculated in the Prospectus under the heading "Fund Performance")
was 37.00%.

CLASS C SHARES

The average total return with respect to the Class C Shares for the period
from December 27, 1995 (the commencement of investment operations of the Fund)
through June 30, 1996 was 82.74%.

The Fund's cumulative non-standardized total return, including the payment of
the maximum CDSC, with respect to the Class C Shares from their inception
through June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 36.00%.

The Fund's cumulative non-standardized total return, excluding payment of the
maximum CDSC, with respect to the Class A Shares from their inception through
June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 37.00%.

B-31
<PAGE> 130
[KPMG PEAT MARWICK LLP LETTERHEAD]

INDEPENDENT ACCOUNTANTS' REPORT

The Board of Trustees and Shareholders of
Van Kampen American Capital Growth Fund:

We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Growth Fund (the "Fund"), including the portfolio of
investments, and the related statement of operations, the statement of changes
in net assets and the financial highlights for the period from December 27, 1995
(commencement of investment operations) to June 30, 1996. 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, 1996, 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 American Capital Growth Fund as of June 30, 1996, the results of its
operations, the changes in its net assets and financial highlights for the
period from December 27, 1995 (commencement of investment operations) to June
30, 1996, in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois
August 15, 1996

B-32
<PAGE> 131
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND

PORTFOLIO OF INVESTMENTS

June 30, 1996
- ------------------------------------------------------------------------------

Security Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 94.0%
CONSUMER NON-DURABLES - 11.0%
Designer Holdings Ltd. (b) 200 $ 5,325
Fila Holdings-ADR (Italy) 50 4,312
Liz Claiborne Inc. 130 4,501
Nautica Enterprises Inc. (b) 140 4,025
Oakley Inc. (b) 100 4,550
Philip Morns Cos. Inc. 80 8,320
Tommy Hilfiger Corp. (b) 70 3,754
-------
34,787
-------

CONSUMER SERVICES - 13.2%
Career Horizons Inc. (b) 100 3,500
Evergreen Media Corp. Class A (b) 150 6,412
First USA Paymentech Inc. (b) 200 8,000
Intelliquest Information Group (b) 200 6,550
Outback Steakhouse Inc. (b) 120 4,138
RAC Financial Group Inc. (b) 200 5,650
Sonic Corp. (b) 150 3,638
United Waste Systems Inc. (b) 120 3,870
-------
41,758
-------

FINANCE - 6.9%
Green Tree Financial Corp. 150 4,687
Money Store Inc. 200 4,425
Olympic Financial (b) 150 3,450
PennCorp Financial Group 150 4,762
SunAmerica Inc. 80 4,520
-------
21,844
-------

HEALTH CARE - 9.6%
Arterial Vascular Engineering (b) 200 7,250
Dura Pharmaceuticals Inc. (b) 60 3,360
Elan-ADR (Ireland) (b) 40 2,285
ESC Medical Systems Ltd. (b) 150 4,238
Guidant Corp. 100 4,925
Orthodontic Centers of America (b) 100 2,650
Renal Treatment Centers Inc. (b) 200 5,750
-------
30,458
-------

PRODUCER MANUFACTURING - 2.7%
Case Corp. 90 4,320
Greenfield Industries Inc. 130 4,290
-------
8,610
-------
</TABLE>

See Notes to Financial Statements

B-33
<PAGE> 132
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND

PORTFOLIO OF INVESTMENTS (CONTINUED)

JUNE 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>

Security Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>

RAW MATERIALS/PROCESSING INDUSTRIES - 2.0%
Praxair Inc. 150 $ 6,337
--------
RETAIL - 7.0%
Eckerd Jack Corp. (b) 200 4,525
Saks Holdings Inc. (b) 200 6,825
TJX Cos. Inc. 130 4,388
U.S. Office Products Co. (b) 150 6,300
--------
22,038
--------

TECHNOLOGY - 39.0%
Adaptec Inc. (b) 90 4,264
ADC Telecommunications Inc. (b) 100 4,500
Analog Devices Inc. (b) 100 2,550
Ascend Communications Inc. (b) 60 3,375
Aspect Telecommunications Corp. (b) 100 4,950
BMC Software Inc. (b) 70 4,182
Boston Communications Group (b) 300 4,950
Check Point Software Tech (b) 200 4,800
Cisco Systems Inc. (b) 100 5,662
Computer Association International Inc. 70 4,987
Farallon Communications (b) 200 2,950
Inference Corp. Class A (b) 150 3,600
McAfee Associations Inc. (b) 90 4,410
Medic Computer System Inc. (b) 70 5,679
Netscape Communications Corp. (b) 50 3,112
Octel Communications (b) 200 3,950
Oracle System Corp. (b) 135 5,324
PC Docs Group International Inc. (b) 150 2,981
Proxim Inc. (b) 110 4,428
Sapient Corp. (b) 150 6,338
SCI Systems Inc. (b) 100 4,063
Siebel Systems Inc. (b) 200 6,150
Sun Microsystems Inc. (b) 100 5,888
Tellabs Inc. (b) 60 4,013
TSX Corp. (b) 150 4,163
U.S. Robotics Corp. (b) 100 8,550
Wind River Systems Inc. (b) 100 3,450
--------
123,269
--------

</TABLE>

See Notes to Financial Statements

B-34
<PAGE> 133
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND

PORTFOLIO OF INVESTMENTS

June 30, 1996
- ------------------------------------------------------------------------------

Security Description Shares Market Value
- ------------------------------------------------------------------------------
<S> <C> <C>

UTILITIES - 2.6%
WorldCom Inc. (b) 150 $ 8,306
--------

TOTAL LONG-TERM INVESTMENTS 94.0%
(Cost $239,188) (a) 297,407
OTHER ASSETS IN EXCESS OF LIABILITIES 6.0% 19,139
--------
NET ASSETS 100% $316,546
========
</TABLE>

(a) At June 30, 1996, cost for federal income tax purposes is $239,188; the
aggregate gross unrealized appreciation is $62,035 and the aggregate gross
unrealized depreciation is $3,816, resulting in net unrealized appreciation
of $58,219.

(b) Non-income producing security as this stock does not currently declare
dividends.

See Notes to Financial Statements

B-35

<PAGE> 134
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND

STATEMENT OF ASSETS AND LIABILITIES

June 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:

Investments at Market Value (Cost $239,188) (Note 1) $297,407
Cash 14,766
Receivables:
Securities Sold 13,234
Distributor 4,961
Dividends 99
Other 1,404
Unamortized Organizational Expenses (Note 1) 36,100
--------
Total Assets 367,971
--------

LIABILITIES:

Payables:
Organizational Expenses 40,000
Securities Purchased 8,600
Deferred Compensation and Retirement Plans (Note 2) 2,825
--------
Total Liabilities 51,425
--------
NET ASSETS $316,546
========

NET ASSETS CONSIST OF:
Capital (Note 3) $235,843
Net Unrealized Appreciation on Securities 58,219
Accumulated Net Realized Gain on Securities 22,484
--------
NET ASSETS $316,546
========

MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share
(Based on net assets of $138,510 and 10,113 shares
of capital stock and outstanding) (Note 3) $ 13.70
Maximum sales charge (5.75% of offering price) 0.84
--------
Maximum offering price to public $ 14.54
========

CLASS B SHARES:
Net asset value and offering price per share
(Based on net assets of $89,018 and 6,500 shares
of capital stock issued and outstanding) (Note 3) $ 13.70
========

CLASS C SHARES:
Net asset value and offering price per share
(Based on net assets of $89,018 and 6,500 shares
of capital stock issued and outstanding) (Note 3) $ 13.70
========

* On sales of $50,000 or more, the sales charge
will be reduced.

</TABLE>

See Notes to Financial Statements

B-36
<PAGE> 135

VAN KAMPEN AMERICAN CAPITAL GROWTH FUND

STATEMENT OF OPERATIONS
FOR THE PERIOD DECEMBER 27, 1995 (COMMENCEMENT
OF INVESTMENT OPERATIONS) TO JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 517
Interest 217
--------
Total Income 734
--------

EXPENSES:

Audit 7,500
Trustees Fees and Expenses (Note 2) 5,250
Amortization of Organizational Expenses (Note 1) 3,900
Investment Advisory Fee (Note 2) 1,018
Legal (Note 2) 1,000
Custody (Note 1) 618
Other 2,013
--------

Total Expenses 21,299
Less: Fees Waived and Expenses Reimbursed
($1,018 and $18,298, respectively) 19,316
Earnings Credits on Cash Balances (Note 1) 219
--------
Net Expenses 1,764
--------
NET INVESTMENT LOSS $ (1,030)
========

REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:

Net Realized Gain on Investments $ 23,514
--------

Net Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period 0
End of the Period:
Investments 58,219
--------
Change in Net Unrealized Appreciation on
Investments During the Period 58,219
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS $ 81,733
========
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 80,703
========
</TABLE>

See Notes to Financial Statements

B-37

<PAGE> 136
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND

STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD DECEMBER 27, 1995
(COMMENCEMENT OF INVESTMENT OPERATIONS)
TO JUNE 30, 1996

- -------------------------------------------------------------------------------

FROM INVESTMENT ACTIVITIES:
<TABLE>
<S> <C>
Operations:
Net Investment Loss $ (1,030)
Net Realized Gain on Securities 23,514
Net Unrealized Appreciation on Securities During the Period 58,219
--------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES 80,703
--------

FROM CAPITAL TRANSACTIONS (NOTE 3):

Proceeds of Shares Sold 35,843
--------
TOTAL INCREASE IN NET ASSETS 116,546

NET ASSETS:
Beginning of the Period 200,000
--------
End of the Period $316,546
========

</TABLE>

See Notes to Financial Statements

B-38
<PAGE> 137
VAN KAMPEN AMERICAN CAPITAL
GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES

Van Kampen American Capital Growth Fund (the "Fund") is organized as a series of
Van Kampen American Capital Equity Trust (the "Trust"), a Delaware business
trust and is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective is to seek capital growth by investing primarily in a diversified
portfolio of common stocks and other equity securities of growth companies. The
Fund commenced investment operations on December 27, 1995, with three classes of
common shares, Class A, Class B and Class C.

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statement and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

A. SECURITY VALUATION - Investments in securities listed on a securities
exchange shall be valued at their sale price as of the close of such securities
exchange or, if not available, their fair value as determined 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.
A repurchase agreement is a short-term investment in which the Fund
acquires ownership of a debt security and the seller agrees to repurchase the
security at a future time and specified price. The Fund may invest independently
in repurchase agreements, or transfer uninvested cash balances into a pooled
cash account along with other investment companies advised by Van Kampen
American Capital Investment Advisory Corp. (the "Adviser"), the daily aggregate
of which is invested in repurchase agreements. Repurchase agreements are
collateralized by the underlying debt security. The Fund will make payment for
such securities only upon physical delivery or evidence of book entry transfer
to the account of the custodian bank. The seller is required to maintain the
value of the underlying security at not less than the repurchase proceeds due
the Fund.

C. INVESTMENT INCOME - Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis.

D. ORGANIZATIONAL EXPENSES - The Fund has agreed to reimburse Van Kampen
American Capital Distributors, Inc. or its affiliates ("collectively VKAC") for
costs incurred in connection with the Fund's organization in the amount of
$40,000. These costs are being amortized on a straight line basis over the 60
month period ending December 27, 2000. The Adviser has agreed that in the event
any of the initial shares of the Fund originally purchased by VKAC are redeemed
during the amortization period, the Fund will be reimbursed for any unamortized
organizational expenses in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.

E. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income and gains
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 - Distributions from net investment income
and net realized gains, if any, are made annually. Distributions from net
realized gains for book purposes may include short-term capital gains. All
short-term capital gains are included as ordinary income for tax purposes. This
tax basis ordinary income is offset by the net investment loss for tax purposes
of $1,126. As a result, this permanent book and tax basis difference has been
reclassified from accumulated net realized gain on securities to accumulated
undistributed net investment income.

G. EXPENSE REDUCTIONS - During the period ended June 30, 1996, the Fund's
custody fee was reduced by $219 as a result of credits earned on overnight cash
balances.

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 .75%

Next $500 million .70%

Over $1 billion .65%
</TABLE>

B-39
<PAGE> 138
VAN KAMPEN AMERICAN CAPITAL
GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)

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, 1996, the Fund incurred expenses of
approximately $1,000 representing VKAC's cost of providing accounting services
to the Fund. These services are provided by VKAC at cost. All of this cost has
been waived by VKAC.

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.

At June 30, 1996, VKAC owned 7,000 shares of Class A and 6,500 shares each
of Classes B and C, respectively.

3. CAPITAL TRANSACTIONS

The Fund has outstanding three classes of common shares, Classes A, B and C,
each with a par value of $.01 per share. There are an unlimited number of shares
of each class authorized.

At June 30, 1996, capital aggregated $105,843, $65,000 and $65,000 for
Classes A, B and C, respectively.

For the period ended June 30, 1996, transactions were as follows:

<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Sales:

Class A 3,113 $35,843
===== =======
</TABLE>

Class B and Class C shares are offered without a front end sales charge,
but are subject to a contingent deferred sales charge (CDSC). The CDSC will be
imposed on most redemptions made within six years of the purchase for Class B
and one year of the purchase for Class C as detailed in the following schedule.
The Class B and Class C shares bear the expense of their respective deferred
sales arrangements, including higher distribution and service fees and
incremental transfer agency costs.

3. CAPITAL TRANSACTIONS (CONTINUED)

<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Class B Class C
Year of Redemption Shares Shares
- -----------------------------------------------------------------------------
<S> <C> <C>
First 4.00% 1.00%
Second 3.75% None
Third 3.50% None
Fourth 2.50% None
Fifth 1.50% None
Sixth 1.00% None
Seventh and Thereafter None None
</TABLE>

4. INVESTMENT TRANSACTIONS

During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $453,171 and $237,497, respectively.

5. DISTRIBUTION AND SERVICE PLANS

The Fund and its Shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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.

The Fund's net assets are subject to annual fees under the Plans of up to
.25% for Class A shares and 1.00% each for Class B and Class C shares. No fees
related to the Plans have been accrued by the Fund as the Fund is currently
owned solely by affiliated persons.

B-40
<PAGE> 139

STATEMENT OF ADDITIONAL INFORMATION

VAN KAMPEN AMERICAN CAPITAL VALUE FUND

Van Kampen American Capital Value Fund (the "Fund") seeks long-term growth of
capital. The Fund will attempt to achieve this investment objective by investing
primarily in a diversified portfolio of common stocks and other equity
securities of medium and larger capitalization companies that are believed by
the Fund's investment adviser to be selling below their intrinsic value and to
offer the opportunity for significant growth of capital. There is no assurance
that the Fund will achieve its investment objective.

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the current Prospectus for the Fund dated the date
hereof (the "Prospectus"). This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund, and investors should obtain and read the
Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained
without charge by calling (800) 421-5666. This Statement of Additional
Information incorporates by reference the entire Prospectus.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust............................................................... B-2
Investment Policies and Restrictions................................................. B-3
Additional Investment Considerations................................................. B-4
Description of Securities Ratings.................................................... B-11
Trustees and Officers................................................................ B-18
Legal Counsel........................................................................ B-26
Investment Advisory and Other Services............................................... B-26
Custodian and Independent Accountants................................................ B-27
Portfolio Transactions and Brokerage Allocation...................................... B-27
Tax Status of the Fund............................................................... B-28
The Distributor...................................................................... B-28
Performance Information.............................................................. B-29
Independent Accountants' Report...................................................... B-32
Financial Statements................................................................. B-33
Notes to Financial Statements........................................................ B-38
</TABLE>

THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996.
<PAGE> 140

THE FUND AND THE TRUST

The Fund is a separate diversified series of the Van Kampen American Capital
Equity Trust (the "Trust"), an open-end management investment company. The Fund
was established pursuant to a Designation of Series dated May 10, 1995. At
present, the Fund, Van Kampen American Capital Utility Fund, Van Kampen American
Capital Balanced Fund, Van Kampen American Capital Growth Fund, Van Kampen
American Capital Great American Companies Fund, Van Kampen American Capital
Prospector Fund and Van Kampen American Capital Aggressive Growth Fund are the
only series of the Trust, although other series may be organized and offered in
the future. Each series of the Trust will be treated as a separate corporation
for federal income tax purposes.

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. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting. The Trust
will assist such holders in communicating with other shareholders of the Fund to
the extent required by the Investment Company Act of 1940 (the "1940 Act").

The Trustees may amend the Declaration of Trust (including with respect to any
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 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.

The Trust originally was organized as the Van Kampen Merritt Equity Trust, a
Massachusetts business trust, created by a Declaration of Trust dated March 26,
1987 (the "Massachusetts Trust"). The Massachusetts Trust was reorganized into
the Trust on July 31, 1995 pursuant to an Agreement and Plan of Reorganization
and Liquidation. The Trust was formed pursuant to an Agreement and Declaration
of Trust dated May 10, 1995 for the purpose of facilitating The Massachusetts
Trust's reorganization into a Delaware business Trust. The Trust filed a
Certificate of Trust with the Delaware Secretary of State on July 28, 1995.

B-2
<PAGE> 141

INVESTMENT POLICIES AND RESTRICTIONS

Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:

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.

8. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition, except as permitted under the
1940 Act and except to the extent permitted by order of the SEC exempting
the Fund from the limitations imposed by Section 12(d)(1) of the 1940 Act.

9. Invest in 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.

B-3
<PAGE> 142

For purposes of the concentration policy of the Fund contained in limitation
(2) above, the Fund intends to comply with the SEC staff position that
securities issued or guaranteed as to principal and interest by any one single
foreign government, or by all supranational organizations in the aggregate, are
considered to be securities of issuers in the same industry.

From time to time the Fund may commit to more stringent restrictions in order
to be able to offer its shares to residents in particular states.

ADDITIONAL INVESTMENT CONSIDERATIONS

BORROWING

B-4
<PAGE> 143

STRATEGIC TRANSACTIONS

In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, equity and fixed-income indices and other
financial instruments and purchase and sell financial futures contracts and
options thereon and enter into various currency transactions such as currency
forward contracts, currency futures contracts, currency swaps and 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
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 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.

B-5
<PAGE> 144

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 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.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.

B-6
<PAGE> 145

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 fixed-income market
changes 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,
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, 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.

B-7
<PAGE> 146

The Fund also may invest in foreign stock index futures traded outside the
United States. Foreign stock index futures traded outside the United States
include the Nikkei Index of 225 Japanese stocks traded on the Singapore
International Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese
stocks traded on the Osaka Exchange, Financial Times Stock Exchange Index of the
100 largest stocks on the London Stock Exchange, the All Ordinaries Share Price
Index of 307 stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33
stocks on the Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks
on the New Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto
Stock Exchange. Futures and futures options on the Nikkei Index are traded on
the Chicago Mercantile Exchange and United States commodity exchanges may
develop futures and futures options on other indices of foreign securities.
Futures and options on United States devised index of foreign stocks are also
being developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.

B-8
<PAGE> 147

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 of 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.

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 the value of schillings will decline against the U.S. dollar, the
Adviser may enter into a contract to see D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.

COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions and 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 interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.

B-9
<PAGE> 148

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 cash or liquid securities 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, 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. To the extent such assets are
other than cash or cash equivalents, such assets will be marked to market on a
daily basis. To the extent that the Fund segregates assets other than cash or
cash equivalents in connection with the purchase or sale of a futures contract
or the sale of an option thereon, the Fund will be subject to market risks with
respect to the open futures or option position as well as with respect to the
portfolio securities segregated against such position. To the extent that the
market value of such position and of such portfolio securities have a high
degree of positive correlation, market fluctuations may adversely affect both
the value of such position

B-10
<PAGE> 149

and the value of such portfolio securities, which has the effect of leveraging
the Fund's portfolio assets and increasing the Fund's investment risk.

DESCRIPTION OF SECURITIES RATINGS

1. DEBT

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 payment--capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation;

2. Nature of and provisions of the obligation;

3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.

INVESTMENT GRADE

AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

B-11
<PAGE> 150

circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.

SPECULATIVE GRADE

CC: Debt rated "CC" is currently highly vulnerable to nonpayment. The rating
"CC" is also used for debt subordinated to senior debt that is assigned an
actual or implied "CCC" rating.

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: Not rated.

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.

B-12
<PAGE> 151