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VAN KAMPEN AMERICAN CAPITAL
GROWTH FUND
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Van Kampen American Capital Growth Fund (the "Fund") is a diversified
open-end management investment company, commonly known as a mutual fund. The
Fund's investment objective is to seek capital growth. The Fund seeks to achieve
its investment objective by investing primarily in a diversified portfolio of
common stocks and other equity securities of growth companies. Growth companies
generally include companies with established records of growth in sales or
earnings and companies with new products, services or processes that the Fund's
investment adviser believes offer investors above average potential for capital
growth. Any income received on such securities is incidental to the objective of
capital growth. There is no assurance that the Fund will achieve its investment
objective. The Fund is organized as a series of Van Kampen American Capital
Equity Trust.
The Fund's investment adviser is Van Kampen American Capital Investment
Advisory Corp. (the "Adviser"). This Prospectus sets forth certain information
about the Fund that a prospective investor should know before investing in the
Fund. Please read it carefully and retain it for future reference. The address
of the Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its
telephone number is (800) 421-5666.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated October 28, 1996, as
supplemented on January 15, 1997, containing additional information about the
Fund is hereby incorporated by reference in its entirety into this prospectus. A
copy of the Statement of Additional Information may be obtained without charge
by calling (800) 421-5666 or for Telecommunications Device for the Deaf at (800)
772-8889. The Statement of Additional Information has been filed with the
Securities and Exchange Commission ("SEC") and is available along with other
related materials at the SEC's internet web site (http://www.sec.gov).
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VAN KAMPEN AMERICAN CAPITAL (SM)
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THIS PROSPECTUS IS DATED OCTOBER 28, 1996, AS SUPPLEMENTED ON NOVEMBER 1, 1996,
JANUARY 2, 1997 AND JANUARY 15, 1997.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................................. 3
Shareholder Transaction Expenses................................ 5
Estimated Annual Fund Operating Expenses and Example............ 6
Financial Highlights............................................ 8
The Fund........................................................ 9
Investment Objective and Policies............................... 9
Portfolio Securities............................................ 10
Investment Practices............................................ 13
Investment Advisory Services.................................... 18
Alternative Sales Arrangements.................................. 20
Purchase of Shares.............................................. 22
Shareholder Services............................................ 32
Redemption of Shares............................................ 36
The Distribution and Service Plans.............................. 39
Distributions from the Fund..................................... 41
Tax Status...................................................... 42
Fund Performance................................................ 44
Description of Shares of the Fund............................... 45
Additional Information.......................................... 46
</TABLE>
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER, OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
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PROSPECTUS SUMMARY
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THE FUND. Van Kampen American Capital Growth Fund (the "Fund") is a diversified
series of Van Kampen American Capital Equity Trust (the "Trust"). The Trust is
an open-end management investment company organized as a Delaware business
trust.
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum subsequent investment for each class of shares (or less as described
under "Purchase of Shares").
INVESTMENT OBJECTIVE. The investment objective of the Fund is to seek capital
growth. There can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT POLICY. The Fund will attempt to achieve its investment objective by
investing primarily in a diversified portfolio of common stocks and other equity
securities of growth companies. Growth companies generally include companies
with established records of growth in sales or earnings and companies with new
products, services or processes that the Fund's investment adviser believes
offer investors above average potential for capital growth. The net asset value
per share of the Fund may increase or decrease depending on changes in the
securities markets, and other factors affecting the issuers of securities in
which the Fund may invest. See "Investment Objective and Policies."
INVESTMENT PRACTICES. The Fund may invest up to 25% of its assets in foreign
securities. Subject to certain limitations, the Fund may enter into strategic
transactions, lend its portfolio securities and enter into repurchase agreements
with selected commercial banks and broker-dealers. These investment practices
entail certain risks. See "Investment Practices."
INVESTMENT RESULTS. The investment results of the Fund for the period ended
June 30, 1996 are shown in the table of "Financial Highlights." The Fund
commenced investment operations in December 1995 with a limited amount of
capital being invested by affiliates of the Fund's Adviser. For the year ended
December 31, 1996, the Fund had not engaged in a broad continuous public
offering of its shares, had sold shares to only a limited number of public
investors and had not been subject to redemption requests. The Fund's Adviser
believes that the Fund's portfolio has been managed in a manner substantially
the same as if the Fund had been open for a broader distribution to public
investors. No assurances can be given, however, that the Fund's investment
performance would have been the same during such period if the Fund had been
broadly distributed. The Fund's investment results are based on historical
performance and are not intended to indicate future performance.
PURCHASE OF SHARES. Investors may elect to purchase Class A Shares, Class B
Shares or Class C Shares, each with different sales charges and expenses. The
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different classes of shares permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares and other circumstances. See "Purchase of Shares."
Investment opportunities for growth company securities may be more limited than
those in other sectors of the market. In order to facilitate the management of
the Fund's portfolio, the Fund may from time to time suspend the continuous
offering of its shares to investors. As market conditions permit, the Fund may
reopen sales of the Fund's shares to investors. Any such limited offerings of
the Fund may commence and terminate without any prior notice.
REDEMPTION. Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. Shares sold subject to a contingent
deferred sales charge ("CDSC Shares") may be redeemed at net asset value less a
deferred sales charge which will vary among each class of CDSC Shares and with
the length of time a redeeming shareholder has owned such shares. CDSC Shares
redeemed after the expiration of the CDSC period applicable to the respective
class of CDSC Shares will not be subject to a deferred sales charge. The Fund
may require the redemption of shares if the value of an account is $500 or less.
See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
distributes the Fund's shares.
DISTRIBUTIONS FROM THE FUND. Distributions from net investment income and
realized capital gains, if any, are distributed annually. Distributions with
respect to each class of shares will be calculated in the same manner on the
same day and will be in the same amount except that the different distribution
and service fees and administrative expenses relating to each class of shares
will be borne exclusively by the respective class of shares. See "Distributions
from the Fund."
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
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SHAREHOLDER TRANSACTION EXPENSES
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------ ------------
<S> <C> <C> <C>
Maximum sales charge imposed
on purchases (as a
percentage
of the offering price)...... 5.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)............. None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser of
the original purchase price
or redemption proceeds)..... None(2) Year 1--5.00% Year 1--1.00%
Year 2--4.00% After--None
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a
percentage of amount
redeemed)................... None None None
Exchange fees................. None None None
</TABLE>
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(1) Reduced on investments of $50,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a CDSC of 1.00% may be imposed on redemptions made
within one year of the purchase.
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
5
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ESTIMATED ANNUAL FUND OPERATING EXPENSES AND EXAMPLE(1)
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management fees(2) (as a percentage of
average daily net assets).................. 0.75% 0.75% 0.75%
12b-1 fees(3) (as a percentage of average
daily net assets).......................... 0.25% 1.00% 1.00%
Other expenses(2) (as a percentage of average
daily net assets; after expense
reimbursement)............................. 0.30% 0.30% 0.30%
Total expenses(2) (as a percentage of average
daily net assets).......................... 1.30% 2.05% 2.05%
</TABLE>
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(1) The Fund has not yet commenced a broad public distribution of its shares to
investors. The Fund did commence investment operations in December 1995 with
a limited amount of capital invested by affiliates of the Fund's Adviser.
For the fiscal period ended June 30, 1996, the Fund had limited net assets
because the Fund had not been actively distributing its shares during such
period. Thus, actual expenses for the period ended June 30, 1996 are not
considered representative for future periods after the Fund completes a
broad public distribution of its shares. The fees and expenses shown above
represent estimates for the Fund's first fiscal year after completing a
broad distribution of its shares. Actual expenses may be more or less than
those shown.
(2) The Adviser has agreed to waive management fees or reimburse other expenses
of the Fund through June 30, 1998 to the extent necessary so that total
estimated annual Fund operating expenses for such period would not exceed
1.30%, 2.05% and 2.05% for Class A Shares, Class B Shares and Class C
Shares, respectively. Absent such waiver, "Other expenses" are estimated to
be 0.85% for Class A Shares, 0.85% for Class B Shares and 0.85% for Class C
Shares and "Total expenses" are estimated to be 1.85% for Class A Shares,
2.60% for Class B Shares and 2.60% for Class C Shares. For the period ended
June 30, 1996, absent the Adviser's waiver of its fees and assumption of a
portion of other expenses, "Total expenses" would have been 15.69% for Class
A Shares, 15.70% for Class B Shares and 15.70% for Class C Shares.
(3) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge for distribution-related expenses. The
asset based sales charge with respect to Class C Shares includes 0.75% (as a
percentage of average daily net assets) paid to investors' broker-dealers as
sales compensation. No 12b-1 or service fees were accrued by the Fund for
the period ended June 30, 1996 because the Fund was not actively
distributing its shares during the period then ended. See "The Distribution
and Service Plans."
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EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE
YEAR YEARS
---- -----
<S> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (i) an operating expense ratio of
1.30% for Class A Shares, 2.05% for Class B Shares and
2.05% for Class C Shares, (ii) 5% annual return and
(iii) redemption at the end of each time period:
Class A Shares........................................ $70 $96
Class B Shares........................................ $71 $94
Class C Shares........................................ $31 $64
An investor would pay the following expenses on the same
$1,000 investment assuming no redemption at the end of
each period:
Class A Shares........................................ $70 $96
Class B Shares........................................ $21 $64
Class C Shares........................................ $21 $64
</TABLE>
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As the
Fund's assets increase, the fees waived or expenses reimbursed by the Adviser
are expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. THE INFORMATION CONTAINED IN THE ABOVE TABLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Redemption of
Shares," "Investment Advisory Services" and "The Distribution and Service
Plans."
7
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FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)
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The following schedule presents financial highlights for one Class A Share,
one Class B Share and one Class C Share of the Fund outstanding throughout the
period indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for the period indicated
and their report thereon appears in the Fund's Statement of Additional
Information. This information should be read in conjunction with the financial
statements and related notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------------- --------------------------- ---------------------------
DECEMBER 27, 1995 DECEMBER 27, 1995 DECEMBER 27, 1995
(COMMENCEMENT OF INVESTMENT (COMMENCEMENT OF INVESTMENT (COMMENCEMENT OF INVESTMENT
OPERATIONS) TO JUNE 30, OPERATIONS) TO JUNE 30, OPERATIONS) TO JUNE 30,
1996 1996 1996
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the
Period.............................. $10.000 $10.000 $10.000
------- ------- -------
Net Investment Loss................. (0.044) (0.045) (0.045)
Net Realized and Unrealized Gain on
Securities........................ 3.740 3.740 3.740
------- ------- -------
Total from Investment Operations...... 3.696 3.695 3.695
------- ------- -------
Net Asset Value, End of the Period.... $13.696 $13.695 $13.695
======= ======= =======
Total Return*(a)...................... 37.00%** 37.00%** 37.00%**
Net Assets at End of the Period (in
thousands).......................... $ 138.5 $ 89.0 $ 89.0
Ratio of Expenses to Average Net
Assets*(b).......................... 1.46% 1.46% 1.46%
Ratio of Net Investment Income to
Average Net Assets*................. (0.79%) (0.74%) (0.74%)
Portfolio Turnover.................... 94%** 94%** 94%**
Average Commission Paid Per Equity
Share Traded(c)..................... $ 0.028 $ 0.028 $ 0.028
- ----------------
* If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average Net
Assets(b)......................... 15.69% 15.70% 15.70%
Ratio of Net Investment Income to
Average Net Assets................ (15.02%) (14.97%) (14.97%)
</TABLE>
** Non-Annualized
(a) Total return is based upon net asset value, which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(b) The Ratios of Expenses are based upon Total Expenses, which does not
reflect credits earned on overnight cash balances. (See Note 1 to Financial
Statements)
(c) Represents the average brokerage commission paid on equity transactions
entered into during the period for trades where commissions were
applicable.
See Financial Statements and Notes Thereto
8
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THE FUND
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Van Kampen American Capital Growth Fund (the "Fund") is a separate diversified
series of Van Kampen American Capital Equity Trust (the "Trust"). The Trust is
an open-end management investment company organized as a Delaware business
trust.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also act as investment adviser to other mutual funds distributed by
Van Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of this Prospectus.
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INVESTMENT OBJECTIVE AND POLICIES
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The investment objective of the Fund is to seek capital growth. This objective
is fundamental and cannot be changed without approval of the shareholders of the
Fund. Any income received on such securities is incidental to the objective of
capital growth. There can be no assurance that the Fund will achieve its
investment objective.
The Fund seeks to achieve its investment objective by investing primarily in
common stocks and other equity securities of growth companies. Growth companies
generally include companies with established records of growth in sales or
earnings and companies with new products, services or processes that the Adviser
believes offer investors above average potential for capital growth. The Fund
may also invest in companies in cyclical industries during periods when the
Adviser believes that such investments offer an above average potential for
capital growth. The Fund may also invest in investment grade income securities
for purposes of capital growth and cash management or as a temporary defensive
measure. See "Portfolio Securities --Income Securities." The Fund may also
invest in shares of other investment companies that pursue investment objectives
consistent with that of the Fund to the extent and subject to the limitations
discussed below. The Fund may invest up to 25% of its total assets in securities
of foreign issuers.
The Fund's primary approach is to seek what the Adviser believes to be above
average growth opportunities on an individual company basis. Such growth company
securities may have above average price volatility. The Fund may also invest in
special situations involving new management, special products and techniques,
unusual developments, mergers or liquidations. Investments in special situations
and less seasoned companies often involve much greater risks than are inherent
in more conservative investments. The Fund attempts to reduce overall exposure
to risk from declines in individual security prices by spreading its investments
over many different companies in a variety of industries.
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<PAGE> 10
An investment in the Fund may not be appropriate for all investors. Because
prices of common stocks and other securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.
DEFENSIVE STRATEGIES. When, in the judgment of the Adviser, economic and
market conditions warrant, the Fund may invest temporarily for defensive
purposes up to 100% of its total assets in U.S. Government securities of various
maturities, investment grade corporate debt securities, preferred stocks,
convertible bonds, banker's acceptances and certificates of deposit.
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PORTFOLIO SECURITIES
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COMMON STOCK. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other class of securities, including such
entity's debt securities, preferred stock and other senior equity security.
Common stock usually carries with it the right to vote and frequently an
exclusive right to do so. In selecting common stocks for investment, the Fund
will focus primarily on the security's potential for capital growth.
OTHER EQUITY SECURITIES. The Fund may invest in other equity securities,
including convertible securities or preferred stock. A convertible security is a
bond, debenture, note, preferred stock or other security that may be converted
into or exchanged for a prescribed amount of common stock or other equity
security of the same or a different issuer within a particular period of time at
a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or the dividend paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities have characteristics similar to
nonconvertible income securities in that they ordinarily provide a stream of
income with generally higher yields than those of common stocks of the same or
similar issuers. Convertible securities rank senior to common stock in a
corporation's capital structure but are usually subordinated to comparable
nonconvertible securities. The Fund may invest in adjustable or fixed rate
preferred stock. Preferred stock generally has a preference as to dividends and
liquidation over an issuer's common stock but ranks junior to debt securities in
an issuer's capital structure. Unlike interest payments on debt securities,
preferred stock dividends are payable only if declared by the issuer's board of
directors. Preferred stock also may be subject to optional or mandatory
redemption provisions.
WARRANTS. The Fund may invest in warrants, which are securities permitting,
but not obligating, their holders to subscribe for other securities. Warrants do
not carry with them the right to dividends or voting rights with respect to the
securities that
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they entitle their holder to purchase, and they do not represent any rights in
the assets of the issuer. As a result, an investment in warrants may be
considered to be more speculative than most other types of equity investment. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date. The Fund may retain in its portfolio any
securities received upon the exercise of a warrant.
INVESTMENTS IN SPECIAL SITUATIONS AND LESS SEASONED COMPANIES. Investments in
special situations and securities of less seasoned companies may present greater
opportunities for growth but also involve greater risks than customarily are
associated with investments in securities of more established companies. Special
situations and securities of less seasoned companies may be subject to more
abrupt or erratic market movements than more established companies.
Additionally, these companies may have limited product lines, markets or
financial resources, may be dependent upon a limited management group, may be
subject to a greater degree of change in earnings and business prospects and may
be subject to greater uncertainties generally than more established companies.
In addition, securities of small capitalization companies are traded in lower
volume than those issued by larger companies.
FOREIGN SECURITIES. The Fund may invest up to 25% of the value of its total
assets in securities of foreign issuers. Investments in securities of foreign
entities and securities denominated in foreign currencies involve risks not
typically involved in domestic investment, including fluctuations in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since the Fund
may invest in securities denominated or quoted in currencies other than the
United States dollar, changes in foreign currency exchange rates may affect the
value of investments in the portfolio and the accrued income and unrealized
appreciation or depreciation of investments. Changes in foreign currency
exchange rates relative to the U.S. dollar will affect the U.S. dollar value of
the Fund's assets denominated in that currency and the Fund's yield on such
assets. With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of the United States entities. In addition, certain foreign
investments made by the Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Tax Status."
Foreign financial markets, while growing in volume, have, for the most part,
substantially less volume than United States markets, and securities of many
foreign companies are less liquid and their prices more volatile than securities
of comparable domestic companies. The foreign
11
<PAGE> 12
markets also have different clearance and settlement procedures and in certain
markets there have been times when settlements have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when assets
of the Fund are not invested and no return is earned thereon. The inability of
the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage commissions,
are generally higher than with transactions in United States securities. In
addition, the Fund will incur costs in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States.
INCOME SECURITIES. The Fund may invest in income securities, which include
primarily debt securities of various maturities. The Fund will only invest in
income securities that are investment grade at the time of investment.
Investment grade securities are securities that are rated at least BBB by
Standard & Poor's Ratings Group ("S&P"), Baa by Moody's Investors Services, Inc.
("Moody's") or comparably rated by any nationally recognized statistical rating
organization, or, if unrated, are considered by the Adviser to be of comparable
quality to securities so rated. Income securities rated A or higher by S&P or A
or higher by Moody's generally are regarded as high grade and have a strong to
outstanding capacity to pay interest or dividends and repay principal or
capital. Medium grade securities (i.e., securities rated BBB by S&P or Baa by
Moody's) are regarded as having an adequate capacity to pay interest or
dividends, and repay principal, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make such
payments. Securities rated Baa are regarded by Moody's as having some
speculative characteristics. For a description of such ratings see the Statement
of Additional Information.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. The values of income securities may change as interest
rate levels fluctuate. When interest rates decline, the value of a portfolio
invested in income securities generally can be expected to rise. Conversely,
when interest rates rise, the value of a portfolio invested in income securities
can be expected to decline. Volatility may be greater during periods of general
economic uncertainty.
The foregoing policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Fund will not be
required to dispose of a security in the event that S&P or Moody's (or any other
rating organization) or, in the case of unrated income securities, the Adviser,
downgrades its assessment of the credit characteristics of a particular issuer.
In determining whether the Fund will retain or sell such a security, the Adviser
may consider such
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<PAGE> 13
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.
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INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund may also
engage in the investment practices described below. These practices entail
risks. The investment practices described below are not fundamental and can be
changed without a vote of the shareholders of the Fund.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to selected commercial
banks or broker-dealers up to a maximum of 50% of the assets of the Fund. Such
loans must be callable at any time and be continuously secured by collateral
deposited by the borrower in a segregated account with the Fund's custodian
consisting of cash or liquid securities, which collateral is equal at all times
to at least 100% of the value of the securities loaned, including accrued
interest. The Fund will receive amounts equal to earned income for having made
the loan. Any cash collateral pursuant to these loans will be invested in
short-term instruments. The Fund is the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Fund and its shareholders. Thus, when the loan is terminated, the value
of the securities may be more or less than their value at the beginning of the
loan. In determining whether to lend its portfolio securities to a bank or
broker-dealer, the Fund will take into account the credit-worthiness of such
borrower and will monitor such credit-worthiness on an ongoing basis in as much
as default by the other party may cause delays or other collection difficulties.
The Fund may pay finders' fees in connection with loans of its portfolio
securities.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including securities the disposition of which is
subject to substantial legal or contractual restrictions on resale and
securities that are not readily marketable. The sale of restricted and illiquid
securities often require 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 restrictions 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.
REPURCHASE AGREEMENTS. The Fund may use up to 20% of its assets to enter into
repurchase agreements with selected commercial banks and broker-dealers, under
13
<PAGE> 14
which the Fund acquires securities and agrees to resell the securities at an
agreed upon time and at an agreed upon price. The Fund accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Fund enters into a repurchase agreement,
the value of the underlying security including accrued interest will be equal to
or exceed the value of the repurchase agreement and, for repurchase agreements
that mature in more than one day, the seller will agree that the value of the
underlying security including accrued interest will continue to be at least
equal to the value of the repurchase agreement. The Adviser will monitor the
value of the underlying security in this regard. The Fund will enter into
repurchase agreements only with commercial banks whose deposits are insured by
the Federal Deposit Insurance Corporation and whose assets exceed $500 million
or broker-dealers who are registered with the SEC. In determining whether to
enter into a repurchase agreement with a bank or broker-dealer, the Fund will
take into account the credit-worthiness of such party and will monitor its
credit-worthiness on an ongoing basis. In the event of default by such party,
the delays and expenses potentially involved in establishing the Fund's rights
to, and in liquidating, the security may result in loss to the Fund. The Fund's
ability to invest in repurchase agreements that mature in more than seven days
is subject to an investment restriction that limits the Fund's investment in
"illiquid" securities, including such repurchase agreements, to 15% of the
Fund's net assets.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that other funds advised or subadvised by the Adviser, or an
affiliate, would otherwise invest separately into a joint account. The cash in
the joint account is then invested in repurchase agreements and the funds that
contributed to the joint account share pro rata in the net revenue generated.
The Adviser believes that the joint account produces efficiencies and economies
of scale that may contribute to reduced transaction costs, higher returns,
higher quality investments and greater diversity of investments for the Fund
than would be available to the Fund investing separately. The manner in which
the joint account is managed is subject to conditions set forth in an SEC
exemption order authorizing this practice, which conditions are designed to
ensure the fair administration of the joint account.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may purchase and
sell portfolio securities on a "when issued" and "delayed delivery" basis. No
income accrues to or is earned by the Fund on portfolio securities in connection
with such purchase transactions prior to the date the Fund actually takes
delivery of such securities. These transactions are subject to market
fluctuations, the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher or lower than yields on such securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or liquid securities having
14
<PAGE> 15
an aggregate value equal to the account of such purchase commitments until
payment is made. The Fund will make commitments to purchase securities on such
basis early with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies and not for the purpose of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
BORROWINGS. The Fund is authorized to borrow money from banks (including
entering into reverse repurchase agreements) in an amount up to 33 1/3% of the
Fund's total assets (after giving effect to any such borrowing) not including
borrowings (and reverse repurchase agreements) for temporary purposes, such as
clearances of portfolio transactions, share repurchase and payment of dividends
and distributions. If the Fund is otherwise fully invested and the Adviser
believes market conditions exist with additional investment opportunities for
capital growth, the Fund may use borrowings to acquire additional portfolio
securities. Utilization of such investment leverage may result in higher returns
but may also increase the volatility of the Fund's net asset value and the
effects of leverage in a declining market would result in a greater decrease in
net asset value than if the Fund were not leveraged. The Fund has no current
intention to borrow money other than for such temporary purposes. See the Fund's
Statement of Additional Information for a more complete discussion of borrowings
and certain of the associated risks.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, equity and fixed-income indices and other financial
instruments and purchase and sell financial futures contracts and enter into
various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures.
Collectively, all of the above are referred to as "Strategic Transactions." The
Fund may also invest in income securities the terms of which include elements of
or are similar in effect to Strategic Transactions in which it may engage.
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets, to protect the Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to protect against changes in
currency exchange rates, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Any
or all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements,
15
<PAGE> 16
which cannot be assured. The Fund will comply with applicable regulatory
requirements when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. To the extent that a futures contract or
an option thereon is used to protect against possible changes in the market
value of securities that the Fund anticipates acquiring and the Fund
subsequently does not acquire such securities, the Fund will have incurred the
transactional expenses associated with entering into such transaction and will
be subject to the risks inherent in an unhedged purchase of such futures
contract or option. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. The Strategic Transactions that
the Fund may use and some of their risks are described more fully in the Fund's
Statement of Additional Information.
Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable income of the Fund. See "Tax Status."
INVESTMENT IN INVESTMENT COMPANIES. The Fund may invest in one or more
investment companies advised by the Adviser and its affiliates, including Van
Kampen American Capital Small Capitalization Fund ("Small Cap Fund") and Van
Kampen American Capital Foreign Securities Fund ("Foreign Securities Fund"). The
shares of the Small Cap Fund and Foreign Securities Fund are available only to
certain investment companies advised by the Adviser and its
16
<PAGE> 17
affiliates. The Adviser believes that the use of the Small Cap Fund and Foreign
Securities Fund may, from time to time, provide the Fund with the most effective
exposure to the performance of the small capitalization sector of the stock
market and to foreign securities while at the same time minimizing costs. The
Adviser charges no advisory fee for managing the Small Cap Fund or the Foreign
Securities Fund, nor are there any sales load or other charges associated with
distribution of their shares. Other expenses incurred by the Small Cap Fund and
Foreign Securities Fund are borne by them, and thus indirectly by the Van Kampen
American Capital funds that invest in them. With respect to such other expenses,
the Adviser anticipates that the efficiencies resulting from use of the Small
Cap Fund and Foreign Securities Fund will result in cost savings for the Fund
and other Van Kampen American Capital funds that will fully or partially offset
such expenses. In large part, these savings are attributable to the fact that
administrative actions that would have to be performed multiple times if each
Van Kampen American Capital fund held its own portfolio of small capitalization
or foreign stocks will need to be performed only once. The Adviser expects that
the Small Cap Fund and Foreign Securities Fund will experience trading costs
that will be substantially less than the trading costs that would be incurred if
small capitalization or foreign stocks were purchased separately for the Fund
and other Van Kampen American Capital funds. The Fund's investments in the Small
Cap Fund and the Foreign Securities Fund are subject to the terms and conditions
set forth in SEC exemptive orders authorizing such investments.
The securities of small and medium sized companies that the Small Cap Fund may
invest in may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. In addition, small capitalization companies typically are subject to a
greater degree of change in earnings and business prospects than are larger,
more established companies. In light of these characteristics of small
capitalization companies and their securities, the Small Cap Fund may be subject
to greater investment risk than that assumed through investment in the equity
securities of larger capitalization companies. Risks associated with investing
in foreign securities are described under "Portfolio Securities -- Foreign
Securities."
The Fund will be deemed to own a pro rata portion of each investment of the
Small Cap Fund and the Foreign Securities Fund. For example, if the Fund's
investment in the Small Cap Fund were $10 million, and the Small Cap Fund had 5%
of its assets invested in the electronics industry, the Fund would be considered
to have an investment of $500,000 in the electronics industry.
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). See "Investment Policies and Restrictions" in the
Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers
17
<PAGE> 18
to effect the transactions and the negotiation of prices and any brokerage
commissions.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. If it is believed in the best interests of
the Fund, the Adviser may place portfolio transactions with brokers who provide
research or other services, even if the Fund will have to pay a higher
commission than would be the case if no weight were given to the broker's
furnishing of such services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services and this will be done only when, 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 to the Fund.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser,
the Distributor or dealers participating in the offering of the Fund's shares.
In addition, in selecting among firms to handle a particular transaction, the
Adviser and the Fund may take into account whether the firm has sold or is
selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
The Fund purchases securities which are believed by the Adviser to have
potential for capital growth. Common stocks are disposed of in situations where
it is believed that potential for such capital growth has lessened or that other
common stocks have a greater potential. Therefore, the Fund may purchase and
sell securities without regard to the length of time the security is to be, or
has been held. The rate may exceed 100%, which is higher than that of many other
investment companies. A 100% turnover rate occurs, for example, if all the
Fund's portfolio securities are replaced during one year. High portfolio
activity increases the Fund's transaction costs, including brokerage
commissions.
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management
18
<PAGE> 19
company with more than two million retail investor accounts, extensive
capabilities for managing institutional portfolios and more than $57 billion
under management or supervision. Van Kampen American Capital's more than 40
open-end and 38 closed-end funds and more than 2,500 unit investment trusts are
professionally distributed by leading financial advisers nationwide. Van Kampen
American Capital Distributors, Inc., the distributor of the Fund and sponsor of
the funds mentioned above, is a wholly-owned subsidiary of Van Kampen American
Capital.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM Holdings II, Inc.
which, in turn, is a wholly-owned subsidiary of Morgan Stanley Group Inc. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered broker-
dealer and investment manager adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
ADVISORY AGREEMENT. The business and affairs of the Fund are managed under the
direction of the Board of Trustees of the Trust, of which the Fund is a separate
series. Subject to the Trustees' authority, the Adviser and the officers of the
Fund supervise and implement the Fund's investment activities and are
responsible for overall management of the Fund's business affairs. The Fund pays
the Adviser a fee equal to a percentage of the average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS PERCENTAGE PER ANNUM
- ------------------------ --------------------
<S> <C>
First $500 million................................... 0.75 of 1.00%
Next $500 million.................................... 0.70 of 1.00%
Over $1 billion...................................... 0.65 of 1.00%
</TABLE>
Under its investment advisory agreement, the Fund has agreed to assume and pay
the charges and expenses of the Fund's operations, including the compensation of
the Trustees of the Trust (other than those who are affiliated persons, as
defined in the 1940 Act, of the Adviser, the Distributor or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent, and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, costs of
reports and notices to shareholders, costs of registering shares of the Fund
under federal and state securities laws, miscellaneous expenses
19
<PAGE> 20
and all taxes and fees to federal, state or other governmental agencies. The
Adviser reserves the right in its sole discretion from time-to-time to waive all
or a portion of its management fee or to reimburse the Fund for all or a portion
of its other expenses.
The Adviser may utilize at its own expense credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Asset Management, Inc.
PERSONAL INVESTING POLICIES The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees, directors, officers and
employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.
PORTFOLIO MANAGEMENT. Jeff New has been the portfolio manager responsible for
the day-to-day management of the Fund's investment portfolio since its
inception. Mr. New has been a Vice President of the Adviser since June 1995 and
a Vice President of Van Kampen American Capital Asset Management, Inc. since
1994. Prior to that time, Mr. New was an associate portfolio manager with Van
Kampen American Capital Asset Management, Inc.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and aggregate
distribution and service fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Fund.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Shares of each class are offered at a price
equal to their net asset value per share plus a sales charge which, at the
election of the purchaser, may be imposed (a) at the time of purchase (Class A
Share accounts under $1 million) or (b) on a contingent deferred basis (Class A
Share accounts over $1 million, Class B Shares and Class C Shares). Shares
purchased subject to a contingent deferred sales charge (a "CDSC") sometimes are
referred to herein collectively as "Contingent Deferred Sales Charge Shares" or
"CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares in an amount of $500,000 or more and not to accept any order for Class
C Shares in an
20
<PAGE> 21
amount of $1 million or more because it ordinarily will be more advantageous for
an investor making such an investment to purchase Class A Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
purchases under $1 million, a purchaser of such Class A Shares would not have
all of his or her funds invested initially and, therefore, would initially own
fewer shares than if Class B Shares or Class C Shares had been purchased. On the
other hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares or Class C
Shares. If such an investor anticipates that he or she will redeem such shares
prior to the expiration of the CDSC period applicable to Class B Shares, the
investor may wish to acquire Class C Shares which have a shorter CDSC period
(discussed below). Investors should weigh the benefits of deferring the sales
charge and having all of their funds invested against the higher aggregate
distribution and service fee applicable to Class B Shares and Class C Shares.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those sales charges, distribution fees, service fees and administrative
expenses applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class,
(iii) has a different exchange privilege and (iv) may have a conversion feature.
Generally, a class of shares subject to a higher ongoing distribution fee and
services fee or subject to the conversion feature will have a higher expense
ratio and pay lower dividends than a class of shares subject to a lower ongoing
distribution fee and service fee or not subject to the conversion feature. The
per share net asset values of the different classes of shares are expected to be
substantially the same; from time to time, however, the per share net asset
values of the classes may differ. The net asset value per share of each class of
shares of the Fund will be determined as described in this Prospectus under
"Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) SEC registration fees
21
<PAGE> 22
incurred by a class of shares; (iv) the expense of administrative personnel and
services as required to support the shareholders of a specific class; (v)
Trustees' fees or expense incurred as a result of issues relating to one class
of shares; (vi) accounting expenses relating solely to one class of shares; and
(vii) any other incremental expenses subsequently identified that should be
properly allocated to one or more classes of shares. All such expenses incurred
by a class will be borne on a pro rata basis by the outstanding shares of such
class. All allocations of administrative expenses to a particular class of
shares will be limited to the extent necessary to preserve the Fund's
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares to the public through Van Kampen
American Capital Distributors, Inc. (the "Distributor"), as principal
underwriter, which is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Shares also are offered through members of the National Association of
Securities Dealers, Inc. ("NASD") acting as securities dealers ("dealers") and
through NASD members acting as brokers for investors ("brokers") or eligible
non-NASD members acting as agents for investors ("financial intermediaries").
Investment opportunities for growth company securities may be more limited
than those in other sectors of the market. In order to facilitate the management
of the Fund's portfolio, the Fund may from time to time suspend the continuous
offering of its shares to investors. As market conditions permit, the Fund may
reopen sales of the Fund's shares to investors. Any such limited offerings of
the Fund may commence and terminate without any prior notice.
The Fund's shares are offered at net asset value per share next computed after
an investor places an order to purchase with the investor's broker, dealer, or
financial intermediary or directly with the Distributor, plus any applicable
sales charge. Sales personnel or brokers, dealers and financial intermediaries
distributing the Fund's shares may receive differing compensation for selling
different classes of shares. It is the responsibility of the investor's broker,
dealer or financial intermediary to transmit the order to the Distributor.
Because the Fund generally determines net asset value once each business day as
of the close of business, purchase orders placed through an investor's broker,
dealer, or financial intermediary must be transmitted to the Distributor by such
broker, dealer or financial intermediary prior to such time in order for the
investor's order to be fulfilled on the basis of the net asset value to be
determined that day. Any change in the purchase price due to the failure of the
Distributor to receive a purchase order prior to such time must be settled
between the investor and the broker, dealer or financial intermediary submitting
the order.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any
22
<PAGE> 23
broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor is sponsoring a sales incentive program for A.G. Edwards
& Sons, Inc. ("A.G. Edwards"). The Distributor will reallow its portion of the
Fund's sales concession to A.G. Edwards on sales of Class A Shares of the Fund
relating to the "rollover" of any savings into an Individual Retirement Account
("IRA"), the transfer of assets into an IRA and contributions to an IRA,
commencing on January 1, 1997 and terminating on April 15, 1997. The Distributor
may provide additional compensation to Edward D. Jones & Co. or an affiliate
thereof based on a combination of its sales of shares and increases in assets
under management. Such payments to brokers, dealers and financial intermediaries
for sales contests, other sales programs and seminars are made by the
Distributor out of its own assets and not out of assets of the Fund. These
programs will not change the price an investor pays for shares or the amount
that the Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers or agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between an investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor, the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers and financial intermediaries who receive
23
<PAGE> 24
more than 90% or more of the sales charge may be deemed to be "underwriters" as
that term is defined in the Securities Act of 1933, as amended.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
-------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000.................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000....... 4.75 4.99 4.00
$100,000 but less than $250,000...... 3.75 3.90 3.00
$250,000 but less than $500,000...... 2.75 2.83 2.25
$500,000 but less than $1,000,000.... 2.00 2.04 1.75
$1,000,000 or more*.................. * * *
</TABLE>
- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a CDSC of
1.00% on redemptions made within one year of the purchase. A commission will
be paid by the Distributor to brokers, dealers and financial intermediaries
who initiate and are responsible for purchases of $1 million or more as
follows: 1.00% on sales to $2 million, plus 0.80% on the next million and
0.50% on the excess over $3 million. See "Purchase of Shares -- Deferred Sales
Charge Alternatives" for additional information.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor and advised by the Adviser or Van
Kampen American Capital Asset Management, Inc.
24
<PAGE> 25
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of the Participating Funds
although other Participating Funds may have different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
Participating Funds which have been previously purchased and are still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of the Fund at net asset value with no minimum initial or subsequent
investment requirement if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all other investments made
from unit trust
25
<PAGE> 26
distributions will be 1.00% of the offering price (1.01% of net asset value). Of
this amount, the Distributor will pay to the broker, dealer or financial
intermediary, if any, through which such participation in the qualifying program
was initiated 0.50% of the offering price as a dealer concession or agency
commission. Persons desiring more information with respect to this program,
including the applicable terms and conditions thereof, should contact their
broker, dealer, financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired trustees or directors of funds advised by the Adviser,
Van Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and children under 21 years of age when purchasing for any
accounts they beneficially own, or, in the case of any such financial
institution, when purchasing for retirement plans for such institution's
employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or any
combination of shares of the Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay
26
<PAGE> 27
brokers, dealers or financial intermediaries through which purchases are
made an amount up to 0.50% of the amount invested, over a 12-month period
following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $3 million or more and which
invest in multiple fund families through national wirehouse alliance
programs.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company serves as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. Prior to February 1, 1997, a commission will be paid to
authorized dealers who initiate and are responsible for such purchases
within a rolling twelve-month period as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a
commission will be paid as follows: 1.00% on sales to $2 million, plus
0.80% on the next $1 million, plus 0.50% on the next $47 million, plus
0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
27
<PAGE> 28
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and other Van Kampen American Capital funds, (iv) has a membership
that the authorized dealer can certify as to the group's members and (v)
satisfies other uniform criteria established by the Distributor for the
purpose of realizing economies of scale in distributing such shares. A
qualified group does not include one whose sole organization nexus, for
example, is that its participants are credit card holders of the same
institution, policy holders of an insurance company, customers of a bank
or broker-dealer, clients of an investment adviser or other similar
groups. Shares purchased in each group's participants account in
connection with this privilege will be subject to a CDSC of 1.00% in the
event of redemption within one year of purchase, and a commission will be
paid to authorized dealers who initiate and are responsible for such sales
to each individual as follows: 1.00% on sales to $2 million, plus 0.80% on
the next million and 0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the Fund, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries,
which percentage rate is equal to (i) with respect to Class A Shares, 1.00% on
sales to $2 million, plus 0.80% on the next million and 0.50% on the excess over
$3 million; (ii) 4.00% with respect to Class B Shares; and (iii) 1.00% with
respect to Class C Shares. Such compensation
28
<PAGE> 29
will not change the price an investor will pay for CDSC Shares or the amount
that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a CDSC at the rates set forth below charged as a percentage of the
dollar amount subject thereto. The amount of the contingent deferred sales
charge will vary depending on (i) the class of CDSC Shares to which such shares
belong and (ii) the number of years from the time of payment for the purchase of
the CDSC Shares until the time of their redemption. The charge will be assessed
on an amount equal to the lesser of the then current market value or the
original purchase price of the CDSC Shares being redeemed. Accordingly, no sales
charge will be imposed on increases in net asset value above the initial
purchase price. In addition, no CDSC will be assessed on CDSC Shares derived
from reinvestment of dividends or capital gains distributions. Solely for
purposes of determining the number of years from the time of any payment for the
purchase of CDSC Shares, all payments during a month will be aggregated and
deemed to have been made on the last day of the month.
Proceeds from the CDSC and the distribution fee applicable to a class of CDSC
Shares are paid to the Distributor and are used by the Distributor to defray its
expenses related to providing distribution-related services to the Fund in
connection with the sale of shares of such class of CDSC Shares, such as the
payment of compensation to selected dealers and agents for selling such shares.
The combination of the CDSC and the distribution fee facilitates the ability of
the Fund to sell such CDSC Shares without a sales charge being deducted at the
time of purchase.
In determining whether a CDSC is applicable to a redemption of CDSC Shares, it
will be assumed that the redemption is made first of any CDSC Shares acquired
pursuant to reinvestment of dividends or distributions, second of CDSC Shares
that have been held for a sufficient period of time such that the CDSC no longer
is applicable to such shares, third of Class A Shares in the shareholder's Fund
account that have converted from Class B Shares or Class C Shares, if any, and
fourth of CDSC Shares held longest during the period of time that a CDSC is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value per share since the time of
purchase.
To provide an example, assume an investor purchased 100 Class B Shares at $10
per share (at a cost of $1,000) and in the second year after purchase, the net
asset value per share is $12 and, during such time, the investor has acquired 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 shares
will not be subject to charge because of dividend reinvestment. With respect to
the remaining 40 shares, the charge is applied only to the original cost of $10
per share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds will be charged at a rate of 4.00% (the
applicable rate in the second year after purchase).
29
<PAGE> 30
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments of $1 million or more, although for such
investments the Fund imposes a CDSC of 1.00% on redemptions made within one year
of the purchase. A commission will be paid by the Distributor to dealers who
initiate and are responsible for purchases of $1 million or more as follows:
1.00% on sales to $2 million, plus 0.80% on the next million and 0.50% on the
excess over $3 million.
CLASS B SHARES. Class B Shares redeemed within five years of purchase
generally will be subject to a CDSC at the rates set forth below, charged as a
percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- --------------------------------------------- --------------------------------
<S> <C>
First........................................ 5.00%
Second....................................... 4.00%
Third........................................ 3.00%
Fourth....................................... 2.50%
Fifth........................................ 1.50%
Sixth and after.............................. 0.00%
</TABLE>
The CDSC generally is waived on redemptions of Class B Shares made pursuant to
the Systematic Withdrawal Plan. See "Shareholder Services -- Systematic
Withdrawal Plan."
CLASS C SHARES. Class C Shares redeemed within the first twelve months of
purchase generally will be subject to a CDSC of 1.00% of the dollar amount
subject thereto. Class C Shares redeemed thereafter will not be subject to a
CDSC.
CONVERSION FEATURE. Class B Shares automatically will convert to Class A
Shares eight years after the end of the month in which a shareholder's order to
purchase the shares was accepted and thereafter will not be subject to the
higher distribution and service fees applicable to Class B Shares. The purpose
of the conversion feature is to relieve the holders of Class B Shares that have
been outstanding for a period of time sufficient for the Distributor to have
been compensated for distribution expenses related to such shares from most of
the burden of such distribution-related expenses. The Fund does not expect to
issue any share certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of such shares
in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the shares in the respective sub-account also will convert to Class A
Shares.
The CDSC schedule and conversion schedule applicable to a CDSC Share acquired
through the exchange privilege is determined by reference to the Van Kampen
American Capital fund from which such share originally was purchased. The
holding period of a CDSC Share acquired through the exchange privilege is
30
<PAGE> 31
determined by reference to the date such share originally was purchased from a
Van Kampen American Capital fund.
The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution fee and higher transfer agency costs with
respect to such Shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Code and (ii) that the
conversion of such shares does not constitute a taxable event under federal
income tax law. The conversion of Class B Shares to Class A Shares may be
suspended if such an opinion is no longer available. In that event, no further
conversions of such shares would occur, and such shares might continue to be
subject to the higher aggregate distribution and service fees for an indefinite
period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The CDSC is waived on redemptions
of Class B Shares and Class C Shares (i) following the death or disability (as
defined in the Code) of a shareholder, (ii) in connection with required minimum
distributions from an IRA or other retirement plan, (iii) pursuant to the Fund's
systematic withdrawal plan but limited to 12% annually of the initial value of
the account, and (iv) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The CDSC
also is waived on redemptions of Class C Shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See "Shareholder Services" and "Redemption of
Shares" for further discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares and dividing the result by the number of
shares of such class of the Fund outstanding. The net asset value for the Fund
is computed once daily as of the close of the daily trading session of the New
York Stock Exchange, Monday through Friday, except on customary business
holidays, or except on any day on which no purchase or redemption orders are
received, or there is not a sufficient degree of trading in the Fund's portfolio
securities such that the Fund's net asset value per share might be materially
affected. The Fund reserves the right to calculate the net asset value and to
adjust the public offering price based thereon more frequently than once a day
if deemed desirable. The net asset value per share of the different classes of
shares are expected to be substantially the same; from time to time, however,
the per share net asset value of the different classes of shares may differ.
The securities of the Fund that are listed on a securities exchange are valued
at their closing sales price on the day of the valuation. Price valuations for
listed securities are based on market quotations where the security is primarily
traded or, if actual trade information is not available on any valuation date,
are valued at the
31
<PAGE> 32
mean of the bid and asked prices. Unlisted securities in the portfolio are
valued by using market quotations, prices provided by market makers or estimates
of market values obtained from yield data relating to instruments or securities
with similar characteristics in accordance with procedures established in good
faith by the Board of Trustees of the Trust of which the Fund is a series.
Securities with remaining maturities of 60 days or less are valued at amortized
cost when amortized cost is determined in good faith by or under the direction
of the Board of Trustees of the Trust to be representative of the fair value at
which it is expected such securities may be resold. Any securities or other
assets for which current market quotations are not readily available are valued
at their fair value as determined in good faith under procedures established by
and under the general supervision of the Board of Trustees.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which shares are held by ACCESS. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and to obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received,
ACCESS will calculate a fee for replacing the lost certificate equal to no more
than 2.00% of the net asset value of the issued shares and bill the party to
whom the replacement certificate was mailed.
32
<PAGE> 33
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of certain other
Participating Funds so long as a pre-existing account for such class of shares
exists for such shareholder. Both accounts must be of the same type, either
non-retirement or retirement. Any two non-retirement accounts can be used. If
the accounts are retirement accounts, they must both be for the same type of
retirement plan (e.g. IRA, 403(b)(7), 401(k) or Keogh) and for the benefit of
the same individual. If the qualified pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value as of
the payable date of the distribution.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged with shares of certain
other Participating Funds subject to certain limitations. Before effecting an
exchange, shareholders in the Fund should obtain and read a current prospectus
of the fund into which the exchange is to be made. SHAREHOLDERS MAY ONLY
EXCHANGE INTO SUCH OTHER FUNDS AS ARE OFFERED AND LEGALLY AVAILABLE FOR SALE IN
THEIR STATE.
33
<PAGE> 34
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days prior to an exchange. Shares of the
Fund registered in a shareholder's name for less than 30 days may only be
exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such request.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales shares are not subject to any sales charge upon exchange into the
Fund. Class A Shares of Van Kampen American Capital funds that generally do not
impose an initial sales charge are subject to the appropriate sales charge
applicable to Class A Shares of the Fund.
No sales charges is imposed upon the exchange of Class B Shares and Class C
Shares. The CDSC schedule and conversion schedule applicable to a Class B Share
or Class C Share acquired through the exchange privilege is determined by
reference to the Van Kampen American Capital fund from which such share
originally was purchased. The holding period of a Class B Share or Class C Share
acquired through the exchange privilege is determined by reference to the date
such share originally was purchased from a Van Kampen American Capital fund.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, a shareholder agrees that
neither VKAC nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VKAC and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification options) and broker, dealer or financial
intermediary of record as the account from which shares are exchanged, unless
otherwise specified by the shareholder. In order to establish a
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<PAGE> 35
systematic withdrawal plan for the new account or dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. The Fund reserves the right to reject any order to acquire its
shares through exchange. In addition, the Fund may restrict or terminate the
exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more may establish a quarterly, semi-annual or annual withdrawal plan. This plan
provides for the orderly use of the entire account, not only the income but also
the capital, if necessary. Each withdrawal constitutes a redemption of shares on
which taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual, or annual checks in any amount not less than
$25. Such a systematic withdrawal plan may also be maintained by an investor
purchasing shares for a retirement plan established on a form made available by
the Fund. See "Shareholder Services -- Retirement Plans."
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment in the Fund at the time the election to participate in
the plan is made. See "Purchase of Shares -- Deferred Sales Charge
Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A Shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated
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<PAGE> 36
bank account, following any redemption, will be credited with the proceeds of
such redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing ACCESS.
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REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would exceed $50,000, or
if the proceeds are not to be paid to the record owner at the record address, or
if the record address has changed within the previous 30 days, signature(s) must
be guaranteed by one of the following: a bank or trust company; a broker-dealer;
a credit union; a national securities exchange, registered securities
association or clearing agency; a savings and loan association; or a federal
savings bank. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by check mailed within
three business days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payments may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any gain or loss realized on the redemption of shares
is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to
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<PAGE> 37
transmit redemption requests received by them to the Distributor so they will be
received prior to such time. Any change in the redemption price due to failure
of the Distributor to receive a sell order prior to such time must be settled
between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Requests") to the dealer within three business days after calling the dealer
with the sell order. Payment for shares redeemed (less any sales charge, if
applicable) will ordinarily be made by check mailed within three business days
to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. If an account has
multiple owners, ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the
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<PAGE> 38
shareholder's bank account of record. This privilege is not available if the
address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
CDSC on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares and Class C Shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the CDSC on Class B Shares and Class C Shares applies
to a total or partial redemption, but only to redemptions of shares held at the
time of the initial determination of disability.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable CDSC will be deducted from the proceeds of this redemption. Any
involuntary redemption may only occur if the shareholder account is less than
the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any CDSC paid upon such redemption. Such reinstatement is made at the net asset
value next determined after the order is received, which must be within 180 days
after the date of the redemption. Reinstatement at net asset value is also
offered to participants in those eligible retirement plans held or administered
by Van Kampen American Capital Trust Company for repayment of principal (and
interest) on their borrowings on such plans.
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- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with the distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.25% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the Service Plan. From such amount, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries as a service fee or the amount of the
Distributor's actual distribution-related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan in connection with the distribution of Class B Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class B Shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of the 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution-related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing
39
<PAGE> 40
provision of services to holders of such shares by the Distributor and by
brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual distribution-related expenses with respect to Class B
Shares and Class C Shares for any given year may exceed the amounts payable to
the Distributor with respect to such shares under the Distribution Plan, the
Service Plan and payments received pursuant to the CDSC. In such event, with
respect to any such class of CDSC Shares, any unreimbursed distribution-related
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. As of June 30, 1996 there were no unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively. If the Distribution Plan was terminated or not continued, the Fund
would not be contractually obligated to pay the Distributor for any expenses not
previously reimbursed by the Fund or recovered through the CDSC.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the CDSC applicable to a particular class of
shares to defray distribution-related expenses attributable to any other class
of CDSC shares. Various federal and state laws prohibit national banks and some
state-chartered commercial banks from underwriting or dealing in the Fund's
shares. In addition, state securities laws on this issue may differ from the
interpretations of federal law, and banks and financial institutions may be
required to register as dealers pursuant to state law. In the unlikely event
that a court were to find that these laws prevent such banks from providing such
services described above, the Fund would seek alternate providers and expects
that shareholders would not experience any disadvantage.
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<PAGE> 41
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to annually declare dividends to holders of each class of shares
from net investment income and net short-term capital gains attributable to each
respective class. The Fund also presently intends to make distributions of net
long-term capital gains, if any, annually. Dividends are composed of all or a
portion of investment income earned by each class of shares of the Fund plus all
or a portion of net short-term capital gains by the Fund on transactions in
securities and futures and options hedging transactions, less the expenses
attributable to the respective class. Long-term capital gains distributions
consist of the Fund's gain on transactions in securities and futures and options
hedging transactions, net of any realized capital losses, less any carryover
capital losses from previous years.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee or the conversion
feature will be lower than distributions with respect to a class of shares
subject to a lower distribution fee, service fee or not subject to the
conversion feature.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment or redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Shareholders wishing to utilize this service
should complete the appropriate section of the account application accompanying
this Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS,
P.O. Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this
completed form, distribution checks will be sent to the bank or other person so
designated by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund automatically will
credit distributions to a shareholder's account in additional shares of the Fund
valued at net asset value, without sales charge. Unless the Shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ( (800) 772-8889 for the hearing
impaired) or in writing to ACCESS.
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<PAGE> 42
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and the
diversification of its assets. If the Fund so qualifies and if it distributes to
its shareholders at least 90% of its net investment income (including tax-exempt
interest, taxable income and net short-term capital gains, but not net capital
gains, which are the excess of net long-term capital gains over net short-term
capital losses), it will not be required to pay federal income taxes on any
income distributed to shareholders. The Fund intends to distribute at least the
minimum amount of net investment income required to satisfy the 90% distribution
requirement. The Fund will not be subject to federal income tax on any net
capital gains distributed to its shareholders.
Distributions of the Fund's net investment income are taxable to shareholders
as ordinary income to the extent of the Fund's earnings and profits, whether
received in shares or cash. Shareholders who receive distributions in the form
of additional shares will have a basis for federal income tax purposes in each
share equal to the value thereof on the distribution date. Distributions of the
Fund's net capital gains ("capital gain dividends"), if any, are taxable to
shareholders as long-term capital gains regardless of the length of time the
Fund shares have been held by such shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of the
shares held by the shareholders and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such shareholder (assuming such shares
are held as a capital asset). The Fund will inform shareholders of the source
and tax status of such distributions promptly after the close of each calendar
year. Some portion of the distributions made by the Fund generally will be
eligible for the dividends received deduction for corporations if the Fund
receives qualifying dividends during the year and if certain other requirements
of the Code are satisfied.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be
42
<PAGE> 43
required to recognize any net built-in gains (the excess of aggregate gains,
including items of income, over aggregate losses that would have been realized
if it had been liquidated) in order to qualify as a regulated investment company
in a subsequent year.
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) will be a taxable transaction for federal income tax
purposes. Selling shareholders will recognize gain or loss in an amount equal to
the difference between their basis in such sold shares of the Fund and the
amount received. If such shares are held as a capital asset, the gain or loss
will be a capital gain or loss and will generally be long-term if such
shareholders have held their shares for more than one year. Any loss realized
upon a taxable disposition of shares held for six months or less will be treated
as long-term capital loss to the extent of any capital gain dividends received
with respect to such shares. For purposes of determining whether shares have
been held for six months or less, the holding period is suspended for any
periods during which the shareholder's risk of loss is diminished as a result of
holding one or more other positions in substantially similar or related property
or through certain options or short sales.
Some of the Fund's investment practices are subject to special provisions of
the Code that may, among other things, defer the use of losses of the Fund and
affect the holding period of securities held by the Fund and the character of
the gains or losses realized by the Fund. These provisions may also require the
Fund to mark-to-market some of the positions in its portfolio (i.e., treat them
as if they were closed out), which may cause the Fund to recognize income
without receiving the cash with which to make distributions in amounts necessary
to satisfy the distribution requirements for avoiding federal income and, as
described below, excise taxes. The Fund will monitor its transactions and may
make certain tax elections in order to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months.
Income from investments in foreign securities may be subject to foreign
taxation imposed by withholding. Shareholders of the Fund will not be able to
claim any deduction or foreign tax credit with respect to such foreign taxes.
In order to avoid a 4% excise tax, the Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (computed on the basis of the
one-year period ending on October 31 of such year), plus any amounts that were
not distributed in previous taxable years. For purposes of the excise tax, any
ordinary income or capital gain net income retained by and subject to federal
income tax in the hands of the Fund will be treated as having been distributed.
43
<PAGE> 44
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31 of the year in which the dividend was declared.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as having been paid by the Fund
(except for purposes of the 4% excise tax) during such taxable year. In such
case, shareholders will be treated as having received such dividends in the
taxable year in which the distribution is actually made.
The Fund is required, in certain circumstances, to withhold 31% of dividends
and certain other payments, including redemptions, paid to shareholders who do
not furnish to the Fund their correct taxpayer identification number (in the
case of individuals, their social security number) or who are otherwise subject
to backup withholding. Foreign shareholders, including shareholders who are
non-resident aliens, may be subject to U.S. withholding tax on certain
distributions (whether received in cash or in shares) at a rate of 30% or such
lower rate as prescribed by any applicable treaty.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own advisors regarding the
specific federal tax consequences of holding and disposing of shares, as well as
the effects of state, local and foreign tax laws and any proposed tax law
changes.
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FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such total return will be
calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. Such calculations are based on
historical information and are not intended to indicate future performance. In
lieu of or in addition to total return calculations, such information may
include performance rankings and similar information from independent
organizations such as Lipper Analytical Services, Inc. or nationally recognized
financial publications. In addition, from time to time the Fund may compare its
performance to certain securities and unmanaged indices which may have different
risk/reward characteristics than the Fund. Such characteristics may include, but
are not limited to, tax features, guarantees, insurance and the fluctuation of
principal or return. In addition, from time to time sales materials and
advertisements for the Fund may include hypothetical information.
The Fund commenced investment operations in December 1995 with a limited
amount of capital being invested by affiliates of the Fund's Adviser. For the
year ended December 31, 1996, the Fund had not engaged in a broad continuous
public
44
<PAGE> 45
offering of its shares, had sold shares to only a limited number of public
investors and had not been subject to redemption requests. The Fund's Adviser
believes that the Fund's portfolio has been managed in a manner substantially
the same as if the Fund had been open for a broader distribution to public
investors. No assurances can be given, however, that the Fund's investment
performance would have been the same during such period if the Fund had been
broadly distributed. The Fund's investment results are based on historical
performance and are not intended to indicate future performance.
Further information about the Fund's performance is contained in its Annual
Report and its Statement of Additional Information each of which can be obtained
without charge by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired).
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DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Equity Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each series on matters affecting an individual series.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, divided into classes.
The Fund currently offers three classes, designated Class A Shares, Class B
Shares and Class C Shares. Each class of shares represents an interest in the
same assets of the Fund and are identical in all respects except that each class
bears certain distribution expenses and has exclusive voting rights with respect
to its distribution fee. See "The Distribution and Service Plans."
The Fund is permitted to issue an unlimited number of classes of shares. Each
class of shares is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. There are no conversion, preemptive or other subscription rights,
except with respect to the conversion of Class B Shares into Class A Shares as
described above. In the event of liquidation, each share of the Fund is entitled
to its pro rata portion of all of the Fund's net assets after all debt and
expenses of the Fund have been paid. Since Class B Shares and Class C Shares pay
higher distribution expenses, the liquidation proceeds to holders of Class B
Shares and Class C Shares are likely to be lower than to holders of Class A
Shares.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Trust will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed
45
<PAGE> 46
information concerning the Trust is set forth in the Statement of Additional
Information.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Fund is June 30. The Fund sends to its shareholders
at least semi-annually reports showing the Fund's portfolio and other
information. An annual report, containing financial statements audited by the
Fund's independent accountants, is sent to shareholders each year. After the end
of each year, shareholders will receive federal income tax information regarding
dividends and capital gains distributions.
Shareholder inquiries should be directed to the Van Kampen American Capital
Growth Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn:
Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
46
<PAGE> 47
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE
CALL THE FUND'S TOLL-FREE
NUMBER (800) 421-5666.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER (800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684
VAN KAMPEN AMERICAN CAPITAL
GROWTH FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Growth Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Growth Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 48
------------------------------------------------------------------------------
GROWTH FUND
------------------------------------------------------------------------------
P R O S P E C T U S
OCTOBER 28, 1996, AS SUPPLEMENTED
ON NOVEMBER 1, 1996, JANUARY 2, 1997
AND JANUARY 15, 1997.
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 49
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND
Van Kampen American Capital Growth Fund (the "Fund") seeks capital growth. The
Fund seeks 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 companies with established records
of growth in sales or earnings and companies with new products, services or
processes that the Fund's investment adviser believes offer investors 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 October 28,
1996, as supplemented on November 1, 1996, January 2, 1997 and January 15, 1997,
(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-25
Investment Advisory and Other Services............................................... B-25
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-31
Financial Statements................................................................. B-32
Notes to Financial Statements........................................................ B-38
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996,
AS SUPPLEMENTED ON JANUARY 15, 1997.
<PAGE> 50
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, 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 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.
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.
B-2
<PAGE> 51
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Purchase any securities (other than obligations issued or guaranteed by
the United States Government or by its instrumentalities), if, as a
result, more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or, if, as a
result, such Fund would hold more than 10% of the outstanding voting
securities of an issuer; except that up to 25% of the Fund's total assets
may be invested without regard to such limitations and except that the
Fund may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from the
provisions 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.
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 and except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
8. The Fund may not invest in securities issued by other investment companies
except as part of a merger, reorganization or other acquisition and except
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from
the provisions 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.
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
B-3
<PAGE> 52
mortgage), and except to the extent that Strategic Transactions the Fund
may engage in are considered to be commodities or commodities contracts.
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.
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 voting shares or (ii) 67% or more
of the Fund's voting shares present at a meeting at which the holders of more
than 50% of the outstanding voting 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. 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. To
the extent that the Fund is otherwise fully invested and the Adviser believes
that additional investment opportunities exist with the potential for capital
growth, the Fund may employ leverage for the purpose of acquiring portfolio
securities. Such utilization of leverage is considered speculative, and involves
risks. The assets of the Fund, including any additional assets which may be
purchased with the proceeds of any borrowings, will consist primarily of common
stocks and other equity securities of growth companies, the prices of which are
volatile. In the event that the values of the Fund's portfolio securities do not
appreciate or, in fact, depreciate, the Fund would be forced to liquidate a
portion of its portfolio, which could be significant depending upon the
magnitude of the decline in value of the Fund's assets, to pay interest
B-4
<PAGE> 53
on, and repay the principal of, any such borrowings. Even in the event that any
assets purchased with the proceeds of such borrowings appreciate as anticipated
by the Adviser, a portion of the Fund's assets may be required to be liquidated
to meet scheduled principal and interest payments with respect to such
borrowings. Any such liquidations may be at inopportune times and prices.
Utilization of investment leverage would result in a higher volatility of the
net asset value of the Fund. The effect of leverage in a declining market would
result in a greater decrease in net asset value to holders of the Fund's shares
than if the Fund were not leveraged.
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 protect against changes in currency exchange rates, or to establish
a position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale 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.
B-5
<PAGE> 54
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such 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.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
B-6
<PAGE> 55
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from Standard &
Poor's Ratings Group ("S&P") or "P-1" from Moody's Investor Services, Inc.
("Moody's") or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 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) 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.
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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 the futures commission merchant or with a financial intermediary as
security for its obligations an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 10% of the face amount of
the contract (but may be higher in some circumstances). Additional cash or
assets (variation margin) may be required to be deposited thereafter on a daily
basis as the mark to market value of the contract fluctuates. The purchase of
options on financial futures involves payment of a premium for the option
without any further obligation on the part of the Fund. If the Fund exercises an
option on a futures contract it will be obligated to post initial margin (and
potential subsequent variation margin) for the resulting futures position just
as it would for any position. Futures contracts and options thereon are
generally settled by entering into an offsetting transaction but there can be no
assurance that the position can be offset prior to settlement at an advantageous
price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. 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.
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.
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.
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
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<PAGE> 57
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 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.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency
other than with respect to cross hedging and proxy hedging as described below.
The Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which the Fund has or in which the Fund expects to have
portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. For example, if the Adviser
considers the Austrian schilling is linked to the German deutschemark (the
"D-mark"), the Fund holds securities denominated in schillings and the Adviser
believes that 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"
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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.
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 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.
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
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extent such assets are other than cash or cash equivalents, such assets will be
marked to market on a daily basis. To the extent that the Fund segregates assets
other than cash or cash equivalents in connection with the purchase or sale of a
futures contract or the sale of an option thereon, the Fund will be subject to
market risks with respect to the open futures or option position as well as with
respect to the portfolio securities segregated against such position. To the
extent that the market value of such position and of such portfolio securities
have a high degree of positive correlation, market fluctuations may adversely
affect both the value of such position and the value of such portfolio
securities, which has the effect of leveraging the Fund's portfolio assets and
increasing the Fund's investment risk.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the 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.
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.
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A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in the higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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.
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.
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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, 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.
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).
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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 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>
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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.
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.
B-15
<PAGE> 64
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 characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternative liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated 'aaa' is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated 'aa' is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated 'a' is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated 'baa' is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
B-16
<PAGE> 65
ba: An issue which is rated 'ba' is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated 'b' generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated 'caa' is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
ca: An issue which is rated 'ca' is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification
from "AA" through "BB" in its preferred stock rating system: the modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
B-17
<PAGE> 66
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.................. Cofounder, 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.
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.
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.
</TABLE>
B-18
<PAGE> 67
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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 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.
</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-19
<PAGE> 68
OFFICERS
The address for Curtis W. Morell, 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.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Peter W. Hegel.......... Vice President Executive Vice President of the VK Adviser,
Date of Birth: AC Adviser, Van Kampen American Capital
06/25/56 Management, Inc. and Van Kampen American
Capital Advisors, Inc. Prior to September
1996, Director of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Director
of VSM Inc. Vice President of each of the
Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Curtis W. Morell........ Vice President and Senior Vice President of the VK Adviser and
Date of Birth: Chief Accounting the AC Adviser. Vice President and Chief
08/04/46 Officer Accounting Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.
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.
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.
</TABLE>
B-20
<PAGE> 69
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
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.
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.
</TABLE>
B-21
<PAGE> 70
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
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.
Weston B. Wetherell..... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: and Assistant Secretary of Van Kampen
06/15/56 American Capital, the VK Adviser, the AC
Adviser, the Distributor, Van Kampen
American Capital Management, Inc. and 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.
Steven M. Hill.......... Assistant Treasurer Assistant Vice President of the VK Adviser
Date of Birth: and AC Adviser. Assistant Treasurer of each
10/16/64 of the Van Kampen American Capital Funds
and other investment companies advised by
the VK Adviser and the AC Adviser.
Robert Sullivan......... Assistant Controller Assistant Vice President of the VK Adviser
Date of Birth: and the AC Adviser. Assistant Controller of
03/30/33 each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser.
</TABLE>
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
B-22
<PAGE> 71
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.
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
B-23
<PAGE> 72
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. Messrs. Hilsman, Miller and Woodside
retired from the Board of Trustees effective December 31, 1996.
(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.
(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.
B-24
<PAGE> 73
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>
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
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.
("Van Kampen American Capital"), which in turn is a wholly-owned subsidiary of
VK/AC Holding, Inc. Van Kampen American Capital is a wholly-owned subsidiary of
VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM
Holdings II, Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley
Group Inc. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment manager adviser, and Morgan Stanley International,
are engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; asset management; trading of futures,
options, foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; and global custody, securities clearance services and securities
lending.
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-25
<PAGE> 74
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 agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Trustees to whom the Adviser renders periodic reports of the Fund's investment
activities.
The investment advisory agreement 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-26
<PAGE> 75
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
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.
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.
B-27
<PAGE> 76
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 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."
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-28
<PAGE> 77
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.
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 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-29
<PAGE> 78
The Fund commenced investment operations in December 1995 with a limited
amount of capital being invested by affiliates of the Fund's Adviser. For the
year ended December 31, 1996, the Fund had not engaged in a broad continuous
public offering of its shares, had sold shares to only a limited number of
public investors and had not been subject to redemption requests. The Fund's
Adviser believes that the Fund's portfolio has been managed in a manner
substantially the same as if the Fund had been open for a broader distribution
to public investors. No assurances can be given, however, that the Fund's
investment performance would have been the same during such period if the Fund
had been broadly distributed. The Fund's investment results are based on
historical performance and are not intended to indicate future performance.
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, 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 29.12%.
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-30
<PAGE> 79
[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-31
<PAGE> 80
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
June 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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-32
<PAGE> 81
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-33
<PAGE> 82
VAN KAMPEN AMERICAN CAPITAL GROWTH FUND
PORTFOLIO OF INVESTMENTS
June 30, 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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-34
<PAGE> 83
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-35
<PAGE> 84
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-36
<PAGE> 85
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-37
<PAGE> 86
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-38
<PAGE> 87
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.
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 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-39
