<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996
1933 ACT REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ____ [ ]
POST-EFFECTIVE AMENDMENT NO. ____ [ ]
---------------------
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
(Exact Name of Registrant as Specified in Charter)
ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181
(Address of Principal Executive Offices)
TELEPHONE NUMBER: (630) 684-6000
---------------------
<TABLE>
<S> <C>
RONALD A. NYBERG, ESQ. COPIES TO:
EXECUTIVE VICE PRESIDENT, WAYNE W. WHALEN, ESQ.
GENERAL COUNSEL AND SECRETARY THOMAS A. HALE, ESQ.
VAN KAMPEN AMERICAN CAPITAL, INC. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
ONE PARKVIEW PLAZA (ILLINOIS)
OAKBROOK TERRACE, ILLINOIS 60181 333 WEST WACKER
(Name and Address of Agent for Service) CHICAGO, ILLINOIS 60606
</TABLE>
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
PURSUANT TO THE PROVISIONS OF RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940, REGISTRANT HAS ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES AND
INTENDS TO FILE A FORM 24F-2 WITH THE COMMISSION FOR ITS FISCAL YEAR ENDING
DECEMBER 31, 1996 ON OR BEFORE MARCH 1, 1997. THEREFORE, NO FILING FEE IS DUE AT
THIS TIME.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement is organized as follows:
-- Cross Reference Sheet with respect to Van Kampen American Capital Equity
Income Fund
-- Questions and Answers to Shareholders of Van Kampen American Capital
Balanced Fund
-- Letter to Shareholders of Van Kampen American Capital Balanced Fund
-- Notice of Special Meeting of Shareholders of Van Kampen American Capital
Balanced Fund
-- Prospectus/Proxy Statement regarding the proposed Reorganization of Van
Kampen American Capital Balanced Fund into Van Kampen American Capital
Equity Income Fund
-- Prospectus of the Van Kampen American Capital Equity Income Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen American Capital Balanced Fund into Van
Kampen American Capital Equity Income Fund
-- Part C Information
-- Exhibits
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) OF REGULATION C
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROSPECTUS/PROXY STATEMENT CAPTION*
- ---------- -------------------------------------
<S> <C> <C>
PART A INFORMATION REQUIRED IN THE PROSPECTUS/PROXY STATEMENT
Item 1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus/Proxy Statement........... Outside front cover page of
Prospectus/Proxy Statement
Item 2. Beginning and Outside Back Cover Page of
Prospectus/Proxy Statement......................... Outside back cover page of
Prospectus/Proxy Statement
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors
Item 4. Information about the Transaction.................... Summary; The Proposed Reorganization
Item 5. Information about the Registrant..................... Outside front cover page of
Prospectus/Proxy Statement;
Summary; The Proposed
Reorganization; Other Information;
Exhibit A; Prospectus and Statement
of Additional Information of the
Equity Income Fund (incorporated by
reference)
Item 6. Information about the Company Being Acquired......... Outside front cover page of
Prospectus/Proxy Statement;
Summary; Exhibit A; Prospectus and
Statement of Additional Information
of the Balanced Fund (incorporated
by reference)
Item 7. Voting Information................................... Other Information; Voting Information
and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; The Proposed Reorganization
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Additional Information about the
Equity Income Fund; Incorporation
of Documents by Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Additional Information about the
Balanced Fund; Incorporation of
Documents by Reference
Item 14. Financial Statements................................. Financial Statements; Incorporation
of Documents by Reference
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under the appropriate item, so
numbered, in Part C of this Registration Statement.
</TABLE>
- ---------------
* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 4
- DECEMBER 1996 -
IMPORTANT NOTICE
TO VAN KAMPEN AMERICAN CAPITAL
BALANCED FUND SHAREHOLDERS
QUESTIONS
& ANSWERS
Although we recommend that you read the complete Prospectus/Proxy Statement,
for your convenience, we have provided a brief overview of the issues to be
voted on.
Q WHY IS A SHAREHOLDER MEETING BEING HELD?
A You are being asked to vote on a reorganization (the "Reorganization") of
Van Kampen American Capital Balanced Fund (the "Balanced Fund") into Van Kampen
American Capital Equity Income Fund (the "Equity Income Fund"), a fund that
pursues a similar investment objective.
Q HOW WILL THE REORGANIZATION AFFECT ME?
A Assuming shareholders of the Balanced Fund approve the Reorganization, the
assets and liabilities of the Balanced Fund will be combined with those of the
Equity Income Fund, and you will become a shareholder of the Equity Income
Fund. You will receive shares of the Equity Income Fund approximately equal in
value at the time of issuance to your shares of the Balanced Fund. Holders of
Class A shares of the Balanced Fund will receive Class A shares of the Equity
Income Fund; holders of Class B shares of the Balanced Fund will receive Class
B shares of the Equity Income Fund; and holders of Class C shares of the
Balanced Fund will receive Class C shares of the Equity Income Fund.
Q WHY IS THE REORGANIZATION BEING RECOMMENDED?
A The purpose of the proposed Reorganization is to permit the shareholders of
the Balanced Fund to (i) achieve certain economies of scale from the Equity
Income Fund's larger net asset size and the potentially lower operating
expenses associated therewith, (ii) eliminate the duplication of services and
expenses that currently exists as a result of the separate operations of the
funds and (iii) obtain potentially greater portfolio diversity and potentially
lower portfolio transaction costs.
Q WHO ADVISES THE EQUITY INCOME FUND AND PROVIDES OTHER SERVICES?
A Van Kampen American Capital Asset Management, Inc. (the "Equity Income
Adviser") provides advisory services to the Equity Income Fund under an
arrangement that is substantially similar to that currently in effect between
the Balanced Fund and Van Kampen American Capital Investment Advisory Corp.
(the
<PAGE> 5
"Balanced Adviser"). The contractual advisory fees payable by the Equity Income
Fund are less than the contractual advisory fees applicable to the Balanced
Fund.
Both the Equity Income Adviser and the Balanced Adviser are a wholly-owned
subsidiaries of Van Kampen American Capital, Inc. ("VKAC"). Van Kampen American
Capital Distributors, Inc. serves as distributor of shares of both the Equity
Income Fund and the Balanced Fund. In addition, State Street Bank & Trust
Company serves as the custodian of both the Equity Income Fund and the Balanced
Fund. ACCESS Investor Services, Inc. serves as the transfer agent for both the
Equity Income Fund and the Balanced Fund.
Q HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE EQUITY INCOME FUND
COMPARE TO THOSE PAYABLE BY THE BALANCED FUND?
A Management of the funds anticipates that, as a result of the Reorganization,
shareholders of the Balanced Fund would be subject to lower investment advisory
fees and lower total operating expenses as a percentage of net assets. The
advisory fees and other operating expenses of the Balanced Fund are currently
less than those of the Equity Income Fund but only because of voluntary expense
waivers or reimbursements from the Balanced Adviser. There can be no assurance
that the such waivers or reimbursements will continue for the Balanced Fund if
the Reorganization is not completed.
Q WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTION FEE IN
CONNECTION WITH THE REORGANIZATION?
A You will pay no sales loads or commissions in connection with the
Reorganization. The costs associated with the proposed Reorganization,
including the costs associated with the shareholder meeting, will be borne by
the Balanced Adviser. As more fully discussed in the combined Prospectus/Proxy
Statement, the holding period with respect to the contingent deferred sales
charge applicable to Class B shares or Class C shares of the Equity Income Fund
acquired in the Reorganization will be measured from the earlier of the time
(i) the holder purchased such Class B shares or Class C shares from the
Balanced Fund or (ii) the holder purchased Class B shares or Class C shares of
any other Van Kampen American Capital open-end fund and subsequently exchanged
them for shares of the Balanced Fund.
Q WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE EQUITY INCOME FUND? WHAT
HAPPENS TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
A If the Reorganization is approved, your interest in shares of the Balanced
Fund automatically will be converted into shares of the Equity Income Fund, and
we will send you written confirmation that this change has taken place. You
will receive the same class of shares of the Equity Income Fund approximately
equal in value to your class of shares of the Balanced Fund. No certificates
for Equity Income Fund shares will be issued in
<PAGE> 6
connection with the Reorganization, although such certificates will be
available upon request. If you currently hold certificates representing your
shares of the Balanced Fund, it is not necessary to return such certificates.
Q WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986. If the
Reorganization so qualifies, in general, a shareholder of the Balanced Fund
will recognize no gain or loss upon the receipt solely of the shares of the
Equity Income Fund in connection with the Reorganization. Additionally, the
Balanced Fund would not recognize any gain or loss as a result of the transfer
of all of its assets and liabilities solely in exchange for the shares of the
Equity Income Fund or as a result of its liquidation.
Q WHAT IF I REDEEM OR EXCHANGE MY SHARES OF THE BALANCED FUND BEFORE THE
REORGANIZATION TAKES PLACE?
A If you choose to redeem or exchange your shares of the Balanced Fund before
the Reorganization takes place, the redemption or exchange will be treated as a
normal redemption or exchange of shares and generally will be a taxable
transaction, unless your account is not subject to taxation, such as an
individual retirement account or other tax-qualified retirement plan.
Q WHERE DO I CALL FOR FURTHER INFORMATION?
A Please call Investor Services at 1-800-421-5666 (TDD users call
1-800-772-8889) weekdays from 7:00 a.m. to 7:00 p.m. Central time.
<PAGE> 7
ABOUT THE PROXY CARD
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
APPROVAL OF REORGANIZATION --
mark "For," "Against" or "Abstain"
OTHER BUSINESS - mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
SAMPLE
PROXY
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
1. FOR / / AGAINST / / ABSTAIN / / THE PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF
REORGANIZATION XXXXXXXX.
2. FOR / / AGAINST / / ABSTAIN / / TO ACT UPON ANY AND ALL OTHER
BUSINESS XXXXXXXX.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE> 8
DEAR VAN KAMPEN AMERICAN CAPITAL BALANCED FUND SHAREHOLDER:
Enclosed is a proxy asking you to vote on the reorganization of your Balanced
Fund into the Van Kampen American Capital Equity Income Fund, a mutual fund that
pursues a similar investment objective. Upon shareholder approval, you would
become a shareholder of the Equity Income Fund.
The enclosed Prospectus/Proxy Statement contains information you will need to
make an informed decision. For your convenience, we also have provided a brief
question and answer section, which we hope you will find useful as you review
your materials before voting. For more detailed information about the
reorganization, please refer to the Prospectus/Proxy Statement.
The reorganization proposal has been approved by the Trustees of the Balanced
Fund, who recommend you vote "FOR" such proposal. Please give this matter your
prompt attention. We will need to receive your proxy card before the shareholder
meeting scheduled for March 13, 1997. YOUR IMMEDIATE RESPONSE WILL HELP SAVE ON
THE COSTS OF ADDITIONAL SOLICITATIONS. We look forward to your participation,
and we thank you for your continued confidence in Van Kampen American Capital.
PLEASE SIGN AND RETURN YOUR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Sincerely,
Dennis J. McDonnell
President
<PAGE> 9
VAN KAMPEN AMERICAN CAPITAL
BALANCED FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
NOTICE OF SPECIAL MEETING
MARCH 13, 1997
A Special Meeting of shareholders of Van Kampen American Capital Balanced Fund
(the "Balanced Fund"), a series of Van Kampen American Capital Equity Trust (the
"Equity Trust"), will be held at the offices of Van Kampen American Capital,
Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on March 13, 1997 at
(the "Special Meeting"), for the following purposes:
(1) To approve an Agreement and Plan of Reorganization pursuant to which the
Balanced Fund would (i) transfer all of its assets to the Van Kampen American
Capital Equity Income Fund (the "Equity Income Fund") in exchange solely for
Class A, B and C shares of beneficial interest of the Equity Income Fund and
the Equity Income Fund's assumption of the liabilities of the Balanced Fund,
(ii) distribute such shares of the Equity Income Fund to the holders of shares
of the Balanced Fund and (iii) be dissolved.
(2) To transact such other business as may properly come before the Special
Meeting.
Shareholders of record as of the close of business on January 23, 1997 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
Ronald A. Nyberg
Secretary
January , 1997
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 10
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus/Proxy Statement shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any
sale of these securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such jurisdiction.
SUBJECT TO COMPLETION -- DATED DECEMBER 24, 1996
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
This Prospectus/Proxy Statement is being furnished to shareholders of Van
Kampen American Capital Balanced Fund (the "Balanced Fund"), a series of Van
Kampen American Capital Equity Trust (the "Equity Trust"), and relates to the
special meeting of shareholders of the Balanced Fund to be held at the offices
of Van Kampen American Capital, Inc., One Parkview Plaza, Oakbrook Terrace,
Illinois 60181 on March 13, 1997 at and at any and all adjournments
thereof (the "Special Meeting"). Shareholders of record as of the close of
business on January 23, 1997 are entitled to vote at the Special Meeting. The
purpose of the Special Meeting is to approve or disapprove the proposed
reorganization of the Balanced Fund (the "Reorganization") into the Van Kampen
American Capital Equity Income Fund (the "Equity Income Fund"). The
Reorganization would result in shareholders of the Balanced Fund in effect
exchanging their Class A, B and C shares of the Balanced Fund for corresponding
Class A, B and C shares of the Equity Income Fund. The purpose of the
Reorganization is to permit the shareholders of the Balanced Fund to (i) achieve
certain economies of scale from the Equity Income Fund's larger net asset size
and the potentially lower operating expenses associated therewith, (ii)
eliminate the duplication of services and expenses that currently exists as a
result of the separate operations of the funds and (iii) obtain potentially
greater portfolio diversity and potentially lower portfolio transaction costs.
The Equity Income Fund is an open-end, diversified management investment
company organized as a Delaware business trust. The primary investment objective
of the Equity Income Fund is to provide investors with the highest possible
income consistent with safety of principal. An important secondary investment
objective of the Equity Income Fund is to provide investors with long-term
growth of capital. The investment objective of the Balanced Fund is to seek to
provide investors with current income, while also seeking to provide investors
with capital growth. There can be no assurance that the Equity Income Fund or
the Balanced Fund will achieve its respective investment objective(s). The
address, principal executive office and telephone number of both the Equity
Income Fund and the Balanced Fund is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, (630) 684-6000 or (800) 421-5666. The enclosed proxy and this
Prospectus/Proxy Statement are first being sent to Balanced Fund shareholders on
or about January , 1997.
---------------------
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/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<PAGE> 11
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the Balanced Fund should know before voting on the
Reorganization (in effect, investing in Class A, B or C shares of the Equity
Income Fund) and constitutes an offering of Class A, B and C shares of
beneficial interest, par value $.01 per share, of the Equity Income Fund only.
Please read it carefully and retain it for future reference. A Statement of
Additional Information dated January , 1997, relating to this Prospectus/Proxy
Statement (the "Reorganization SAI") has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated herein by reference. A
Prospectus (the "Equity Income Fund Prospectus") and Statement of Additional
Information containing additional information about the Equity Income Fund, each
dated April 29, 1996, have been filed with the SEC and are incorporated herein
by reference. A Prospectus (the "Balanced Fund Prospectus") and Statement of
Additional Information containing additional information about the Balanced
Fund, each dated October 28, 1996, have been filed with the SEC and are
incorporated herein by reference. A copy of the Equity Income Fund Prospectus
accompanies this Prospectus/Proxy Statement. Copies of any of the foregoing
documents may be obtained without charge by calling or writing the Equity Income
Fund or the Balanced Fund at the telephone number or address shown above. If you
wish to request the Reorganization SAI, please ask for the "Reorganization SAI."
IN ADDITION, EACH OF THE EQUITY INCOME FUND AND THE BALANCED FUND WILL FURNISH,
WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT (AND THE MOST RECENT
SEMI-ANNUAL REPORT SUCCEEDING THE ANNUAL REPORT, IF ANY) TO A SHAREHOLDER UPON
REQUEST. ANY SUCH REQUEST SHOULD BE DIRECTED TO THE VAN KAMPEN AMERICAN CAPITAL
FUNDS BY CALLING (800) 421-5666 OR BY WRITING THE RESPECTIVE FUND AT ONE
PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181.
---------------------
No person has been authorized to give any information or make any
representation not contained in this Prospectus/Proxy Statement and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Prospectus/Proxy Statement does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
The Equity Trust on behalf of the Balanced Fund and the Equity Income Fund are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and the Investment Company Act of 1940, as amended (the "1940
Act"), and in accordance therewith file reports and other information with the
SEC. Such reports, other information and proxy statements filed by the Equity
Trust on behalf of the Balanced Fund and the Equity Income Fund can be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its Regional Office at 500 West
Madison Street, Chicago, Illinois. Copies of such material can also be obtained
from the SEC's Public Reference Branch, Office of Consumer Affairs and
Information Services, Washington, D.C. 20549, at prescribed rates. In addition,
the SEC maintains a Web site (http://www.sec.gov) that contains reports, other
information and proxy statements filed by the Equity Trust on behalf of the
Balanced Fund and the Equity Income Fund, each of which files such information
electronically with the SEC through the SEC's Electronic Data Gathering,
Analysis and Retrieval system (EDGAR).
The date of this Prospectus/Proxy Statement is January , 1997.
2
<PAGE> 12
APPROVAL OF THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Trustees of the Balanced Fund (the "Balanced Board") believes the proposed
Reorganization (as defined herein) is in the best interests of shareholders of
the Balanced Fund. As a result of the Reorganization, shareholders of the
Balanced Fund would acquire an interest in the Equity Income Fund.
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with (i) the Balanced Fund Prospectus incorporated herein by reference
and (ii) the Equity Income Fund Prospectus incorporated herein by reference and
accompanying this Prospectus/Proxy Statement. This Prospectus/Proxy Statement
constitutes an offering of Class A, B and C shares of the Equity Income Fund
only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the
Balanced Fund in connection with the proposed combination of the Balanced Fund
with and into the Equity Income Fund pursuant to the terms and conditions of the
Agreement and Plan of Reorganization between the Equity Trust, on behalf of the
Balanced Fund, and the Equity Income Fund (the "Agreement"). The Agreement
provides that the Balanced Fund would (i) transfer all of its assets to the
Equity Income Fund in exchange solely for Class A, B and C shares of the Equity
Income Fund and the Equity Income Fund's assumption of the liabilities of the
Balanced Fund, (ii) dissolve pursuant to a plan of liquidation and dissolution
to be adopted by the Balanced Board promptly following the Closing (as defined
herein) and (iii) as part of such dissolution, distribute to each shareholder of
the Balanced Fund shares of the respective class of shares of the Equity Income
Fund approximately equal in value to their existing shares of the Balanced Fund
(collectively, the "Reorganization").
The Balanced Board has unanimously determined that the Reorganization is in
the best interests of shareholders of each class of shares of the Balanced Fund
and that the interests of such shareholders will not be diluted as a result of
the Reorganization. Similarly, the Board of Trustees of the Equity Income Fund
(the "Equity Income Board") has unanimously determined that the Reorganization
is in the best interests of the Equity Income Fund and that the interests of
each class of shares of existing shareholders of the Equity Income Fund will not
be diluted as a result of the Reorganization. The Balanced Board and the Equity
Income Board unanimously approved the Reorganization and the Agreement on July
25, 1996.
3
<PAGE> 13
Management believes the shareholders of the Balanced Fund and its investment
adviser are expected to be the primary beneficiaries of the Reorganization over
time. The expenses associated with the proposed Reorganization, including the
costs associated with this Special Meeting, will be borne by Van Kampen American
Capital Investment Advisory Corp., the investment adviser of the Balanced Fund
(the "Balanced Adviser"). The Balanced Board has determined that the
arrangements regarding the payment of expenses and other charges relating to the
Reorganization are fair and equitable.
The Balanced Board is asking shareholders of the Balanced Fund to approve the
Reorganization at the Special Meeting to be held on March 13, 1997. If
shareholders of the Balanced Fund approve the Reorganization, it is expected
that the Closing will be on March 21, 1997, but it may be at a different time as
described herein.
THE BALANCED BOARD RECOMMENDS THAT YOU VOTE "FOR" THE REORGANIZATION. APPROVAL
OF THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY
OF THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND
REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
The Balanced Board believes that the proposed Reorganization would be in the
best interests of the shareholders of the Balanced Fund because it would permit
the shareholders of the Balanced Fund to (i) achieve certain economies of scale
from the Equity Income Fund's larger net asset size and the potentially lower
operating expenses associated therewith, (ii) eliminate the duplication of
services and expenses that currently exists as a result of the separate
operations of the funds, and (iii) obtain potentially greater portfolio
diversity and potentially lower portfolio transaction costs.
In determining whether to recommend approval of the Reorganization to
shareholders of the Balanced Fund, the Balanced Board considered a number of
factors, including, but not limited to: (i) the capabilities and resources of
the Equity Income Fund, its investment adviser and other service providers in
the areas of marketing, investment and shareholder services; (ii) the expenses
and advisory fees applicable to the Balanced Fund and the Equity Income Fund
before the Reorganization and the estimated expense ratios of the Equity Income
Fund after the Reorganization; (iii) the comparative investment performance of
the Balanced Fund and the Equity Income Fund; (iv) the terms and conditions of
the Agreement and whether the Reorganization would result in dilution of
Balanced Fund shareholder interests; (v) the economies of scale potentially
realized through the combination of the two funds; (vi) the compatibility of the
funds' service features available to shareholders, including the retention of
applicable holding periods and exchange privileges; (vii) the costs estimated to
be incurred to complete the
4
<PAGE> 14
Reorganization; (viii) the future growth prospects of the Balanced Fund; and
(ix) the anticipated tax consequences of the Reorganization.
In this regard, the Balanced Board reviewed information provided by the
Balanced Adviser and Van Kampen American Capital Asset Management, Inc. (the
"Equity Income Adviser") relating to the anticipated impact to the shareholders
of the Balanced Fund as a result of the Reorganization. The Balanced Board
considered the probability that the elimination of duplicative operations and
the increase in asset levels of the combined fund after the Reorganization would
result in the following potential benefits for shareholders of the Balanced
Fund, although there can, of course, be no assurances in this regard:
(1) Achievement of Economies of Scale and Reduced Per Share Expenses.
Combining the net assets of the Balanced Fund with the assets of the
Equity Income Fund should lead to reduced total operating expenses for
shareholders of the Balanced Fund, on a per share basis, by allowing fixed
and relatively fixed costs, such as accounting, legal and printing
expenses, to be spread over a larger asset base. The Equity Income Fund
also pays lower investment advisory fees than the Balanced Fund when no
expense waivers or reimbursements are in effect. The advisory fees and
other operating expenses of the Balanced Fund are currently less than
those of the Equity Income Fund but only because of such voluntary fee and
expense waivers or reimbursements from the Balanced Adviser. There can be
no assurance that such waivers or reimbursements will continue for the
Balanced Fund if the Reorganization is not completed. Management
anticipates that the reorganization would have a de minimis effect upon
current shareholders of the Equity Income Fund.
(2) Elimination of Separate Operations. Consolidating the Balanced Fund and
the Equity Income Fund should eliminate the duplication of services and
expenses that currently exists as a result of their separate operations.
For example, the Balanced Fund and the Equity Income Fund currently are
managed separately by different affiliated investment entities.
Consolidating the separate operations of the Balanced Fund with those of
the Equity Income Fund should promote more efficient operations on a more
cost-effective basis.
(3) Benefits to the Portfolio Management Process. The larger net asset size
of the Equity Income Fund generally permits it to purchase larger
individual portfolio investments that may result in reduced transaction
costs or more favorable pricing and provide the opportunity for
potentially greater portfolio diversity.
Based upon these and other factors, the Balanced Board unanimously determined
that the Reorganization is in the best interests of the shareholders of the
Balanced Fund.
5
<PAGE> 15
COMPARISON OF THE EQUITY INCOME FUND AND THE BALANCED FUND
INVESTMENT OBJECTIVES AND POLICIES. The Equity Income Fund and the Balanced
Fund have similar investment objectives. The primary investment objective of the
Equity Income Fund is to provide investors with the highest possible income
consistent with safety of principal. An important secondary investment objective
of the Equity Income Fund is to provide investors with long-term growth of
capital. The investment objective of the Balanced Fund is to seek to provide
investors with current income, while also seeking to provide investors with
capital growth. Each of the Equity Income Fund and the Balanced Fund seeks to
achieve its respective investment objective(s) by investing in a diversified
portfolio of equity and debt securities.
Under normal market conditions, the Equity Income Fund invests at least 65% of
its total assets in income-producing equity securities, which for purposes of
the Equity Income Fund includes without limitation dividend paying common and
preferred stocks, interest paying convertible debentures or bonds or zero coupon
convertible securities (on which the Equity Income Fund accrues income for tax
and accounting purposes, but receives no cash). The Equity Income Adviser seeks
attractive growth stocks and may purchase stocks which do not pay dividends.
Under normal market conditions, the Balanced Fund invests a minimum of at least
25% of its total assets in equity securities, which for purposes of the Balanced
Fund includes common and preferred stocks but does not include convertible
securities.
With respect to debt securities, the operating policy of the Equity Income
Fund is to invest up to 35% of its total assets in debt securities rated, at the
time of investment, BBB or higher by Standard & Poor's Ratings Group ("S&P") or
Baa or higher by Moody's Investors Service, Inc. ("Moody's") or, if unrated,
considered by the Equity Income Adviser to be of comparable quality. It is also
the operating policy of the Equity Income Fund to invest not more than 10% of
its total assets in debt securities rated BBB by S&P or Baa by Moody's or, if
unrated, considered by the Equity Income Adviser to be of comparable quality.
These ratings limits do not apply to convertible securities. The Balanced Fund
invests at least 25% of its total assets in fixed-income debt securities. Such
fixed-income debt securities are generally rated, at the time of investment, BBB
or higher by S&P or Baa or higher by Moody's or, if unrated, considered by the
Balanced Adviser to be of comparable quality. The Balanced Fund may, however,
invest up to 20% of its assets in fixed-income debt securities rated below BBB
by S&P or Baa by Moody's but not rated below CC by S&P or Ca by Moody's or, if
unrated, considered by the Balanced Adviser to be of comparable quality. These
ratings limits do not apply to convertible securities but the Balanced Fund may
not invest more than 35% of its total assets in fixed-income debt securities
including convertible securities rated below BBB by S&P or Baa by Moody's or, if
unrated, considered by the Balanced Adviser to be of comparable quality.
6
<PAGE> 16
Although the investment policies of the Equity Income Fund place more emphasis
on equity securities and higher quality debt securities relative to the policies
of the Balanced Fund, the actual portfolios of the funds were similar as of
September 30, 1996. Because of the portfolio similarity and the small size of
the Balanced Fund relative to the Equity Income Fund, there are no adjustments
other than ordinary course transactions anticipated to the Balanced Fund's
portfolio prior to the closing, and the combined portfolio after the closing
will comply with the Equity Income Fund's investment policies.
A summary comparison of the funds' portfolios as of September 30, 1996 is set
forth in the table below:
<TABLE>
<CAPTION>
EQUITY INCOME FUND BALANCED FUND
----------------------- --------------------
<S> <C> <C> <C> <C>
Common and Preferred Stocks
Common....................... $ 723,636,873 69.4% $ 8,674,672 51.4%
Convertible Preferred........ 21,031,338 2.0% 0 0.0%
-------------- ------ ------------ ------
744,668,211 71.4% 8,674,672 51.4%
-------------- ------ ------------ ------
Long-Term Fixed Income......... 218,198,859 20.9% 6,681,035 39.6%
Short-Term Investments......... 78,544,477 7.5% 1,440,000 8.5%
-------------- ------ ------------ ------
Total Investments.............. $1,041,411,547 99.8% $16,795,707 99.5%
-------------- ------ ------------ ------
Other Assets in Excess of
Liabilities.................. 1,638,981 0.2% 94,583 0.5%
-------------- ------ ------------ ------
Total Net Assets............... 1,043,050,528 100.0% 16,890,290 100.0%
-------------- ------ ------------ ------
</TABLE>
INVESTMENT PRACTICES. The Equity Income Fund and the Balanced Fund have
differences with respect to certain other investment practices. The Equity
Income Fund does not invest more than 15% of its assets in securities of foreign
issuers while the Balanced Fund does not invest more than 25% of its assets in
securities of foreign issuers. Each of the Equity Income Fund and the Balanced
Fund has limited ability to utilize options, futures contracts and related
options. Unlike the Equity Income Fund, the Balanced Fund also may engage in
interest rate transactions such as swaps, caps, floors or collars. While each of
the Equity Fund and the Balanced Fund may enter into repurchase agreements, the
Balanced Fund limits its investments in such transactions to 20% of its assets
whereas the Equity Income Fund has no such limit. Neither of the Equity Income
Fund nor the Balanced Fund invests in repurchase agreements maturing in more
than seven days if the amount of such investments by such fund together with
securities deemed "illiquid" held by such fund would exceed 10% or 15%,
respectively, of such fund's net assets. The Balanced Fund may engage in "when
issued" and "delayed delivery" transactions. The Balanced Fund may lend its
portfolio securities to selected commercial banks and broker-dealers up to a
maximum of 50% of its assets. The Balanced Fund may enter into dollar rolls and
reverse repurchase agreements with banks in an amount up to 33 1/3% of its total
assets (after giving effect to any such borrowing), which amount includes no
more than 5% in bank borrowings and reverse repurchase agreements with any
entity for temporary purposes. For a complete description of such investment
practices for each Fund, see the appropriate sections in the
7
<PAGE> 17
Balanced Fund Prospectus and Equity Income Fund Prospectus under the headings
entitled "Investment Practices."
INVESTMENT ADVISERS. The Equity Income Fund is managed by the Equity Income
Adviser. The Balanced Fund is managed by the Balanced Adviser. The Equity Income
Adviser and Balanced Adviser are both wholly-owned subsidiaries of Van Kampen
American Capital Inc. ("VKAC"). VKAC, which in turn 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 address of the principal office of both the Equity Income Adviser
and Balanced Adviser is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
VKAC is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $57 billion under management or supervision. VKAC's
more than 40 open-end and 38 closed-end funds and more than 2,500 unit
investment trusts are professionally distributed by leading financing advisers
nationwide.
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 AND OTHER FEES. The contractual advisory fees and total operating
expenses of the Equity Income Fund are lower than those of the Balanced Fund.
The Equity Income Fund pays the Equity Income Adviser a monthly fee based on its
average daily net asset value at the annual rates of: 0.50% of the first $150
million of average net assets; 0.45% on the next $100 million; 0.40% on the next
$100 million; and 0.35% of average net assets in excess of $350 million. As of
September 30, 1996, the Equity Income Fund's net assets were approximately
$1,043.1 million and the effective advisory fee on such assets was 0.39%. No
expense reimbursements were in effect with respect to the Equity Income Fund at
such time. For a complete description of the Equity Income Fund's advisory
services, see the sections of the Equity Income Fund Prospectus and Statement of
Additional Information entitled "Investment Advisory Services" and "Investment
Advisory Agreement", respectively.
8
<PAGE> 18
The Balanced Fund pays the Balanced Adviser a monthly fee based on its average
daily net asset value at the annual rate of: 0.70% of the first $500 million of
average net assets and 0.65% of average net assets in excess of $500 million. As
of September 30, 1996, the Balanced Fund's net assets were approximately $16.9
million and the effective advisory fee on such assets was 0.0% (after expense
reimbursement) and 0.70% (assuming no expense reimbursement). For a complete
description of the Balanced Fund's advisory services, see the sections of the
Balanced Fund Prospectus and Statement of Additional Information entitled
"Investment Advisory Services" and "Investment Advisory and Other Services",
respectively.
The total operating expenses of the Equity Income Fund for the six month
period ended June 30, 1996 (on an annualized basis), were 0.95%, 1.72% and 1.72%
of the average daily net assets attributable to Class A, B and C shares,
respectively. No expense reimbursements were in effect with respect to the
Equity Income Fund during such period.
The total operating expenses (after expense reimbursement) of the Balanced
Fund for its fiscal year ended June 30, 1996 were 0.59%, 1.34% and 1.34% of
average daily net assets attributable to Class A, B and C shares, respectively.
In the absence of expense reimbursement, total operating expenses of the
Balanced Fund would have been 3.09%, 3.84% and 3.84% with respect to Class A, B
and C shares, respectively, for that same period.
The advisory fees and other operating expenses of the Balanced Fund are
currently less than those of the Equity Income Fund but only because of
voluntary expense waivers or reimbursements from the Balanced Adviser. There can
be no assurance that the such waivers or reimbursements will continue for the
Balanced Fund if the Reorganization is not completed.
Both the Equity Income Fund and the Balanced Fund have adopted similar
distribution plans (the "Distribution Plans") pursuant to Rule 12b-1 under the
1940 Act and have adopted similar service agreements or plans (the "Service
Plans"). Both the Equity Income Fund and the Balanced Fund can pay up to 0.75%
of their respective average daily net assets attributable to Class B and C
shares for reimbursement of certain distribution-related expenses. In addition,
both the Equity Income Fund and the Balanced Fund can pay up to 0.25% of the
respective average daily net assets attributable to Class A, B and C shares for
the provision of ongoing services to shareholders. Class B shares of the Equity
Income Fund and the Balanced Fund purchased on or after June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares eight years after the end of the calendar month in which the
shares were purchased. Class B shares of the Equity Income Fund and the Balanced
Fund purchased before June 1, 1996, and any dividend reinvestment plan shares
received thereon, automatically convert to Class A shares six years after the
end of the calendar month in which the
9
<PAGE> 19
shares were purchased. Class C shares of the Equity Income Fund and the Balanced
Fund purchased before January 1, 1997, and any dividend reinvestment plan shares
received thereon, automatically convert to Class A shares ten years after the
end of the calendar month in which the shares were purchased. The distributor of
both the Balanced Fund's shares and the Equity Income Fund's shares is Van
Kampen American Capital Distributors, Inc. ("VKAC Distributors"). For a complete
description of these arrangements with respect to the Equity Income Fund, see
the sections of the Equity Income Fund Prospectus and Statement of Additional
Information entitled "Distribution Plans." For a complete description of these
arrangements with respect to the Balanced Fund, see the section of the Balanced
Fund Prospectus entitled "The Distribution and Service Plans."
The table below sets forth (i) the fees and expenses paid by the Equity Income
Fund during the six month period ended June 30, 1996 (on an annualized basis),
(ii) fees and expenses paid by the Balanced Fund during its most recently
completed fiscal year ended June 30, 1996 and (iii) pro forma expenses for the
combined fund.
10
<PAGE> 20
EXPENSE COMPARISON TABLE
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------ ------------------------
EQUITY INCOME BALANCED EQUITY INCOME BALANCED
FUND(1) FUND(2) PRO FORMA FUND(1) FUND(2)
------------- -------- --------- ------------- --------
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a
percentage of Offering Price)............................ 5.75%(3) 5.75% 5.75%(3) None None
Maximum Deferred Sales Charge (as a percentage of the
lower of the original purchase price or redemption
proceeds)................................................ None None None 5.00%(5) 4.00%(6)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................... 0.42% 0.00%(4) 0.42% 0.42% 0.00%(4)
Rule 12b-1 Fees........................................... 0.25% 0.25% 0.25% 1.00% 1.00%
Other Expenses............................................ 0.28% 0.34%(4) 0.28% 0.30% 0.34%(4)
Total Fund Operating Expenses............................. 0.95% 0.59%(4) 0.95% 1.72% 1.34%(4)
Expense Example of Total Operating Expenses Assuming
Redemption at the End of the Period(8)
One Year................................................. $ 67 $ 63 $ 67 $ 67 $ 54
Three Years.............................................. $ 86 $ 75 $ 86 $ 84 $ 77
Five Years............................................... $ 107 $ 89 $ 107 $ 108 $ 88
Ten Years................................................ $ 167 $ 127 $ 167 $ 183 $ 141
Expense Example of Total Operating Expenses Assuming No
Redemption at the End of the Period(8)
One Year................................................. $ 67 $ 63 $ 67 $ 17 $ 14
Three Years.............................................. $ 86 $ 75 $ 86 $ 54 $ 42
Five Years............................................... $ 107 $ 89 $ 107 $ 93 $ 73
Ten Years................................................ $ 167 $ 127 $ 167 $ 183 $ 141
<CAPTION>
CLASS C SHARES
-------------------------------------
EQUITY INCOME BALANCED
PRO FORMA FUND(1) FUND(2) PRO FORMA
--------- ------------- -------- ---------
<S> <C<C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchase of a Share (as a
percentage of Offering Price)............................ None None None None
Maximum Deferred Sales Charge (as a percentage of the
lower of the original purchase price or redemption
proceeds)................................................ 5.00%(5) 1.00%(7) 1.00%(7) 1.00%(7)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees........................................... 0.42% 0.42% 0.00%(4) 0.42%
Rule 12b-1 Fees........................................... 1.00% 1.00% 1.00% 1.00%
Other Expenses............................................ 0.30% 0.30% 0.34%(4) 0.30%
Total Fund Operating Expenses............................. 1.72% 1.72% 1.34%(4) 1.72%
Expense Example of Total Operating Expenses Assuming
Redemption at the End of the Period(8)
One Year................................................. $ 67 $ 27 $ 24 $ 27
Three Years.............................................. $ 84 $ 54 $ 42 $ 54
Five Years............................................... $ 108 $ 93 $ 73 $ 93
Ten Years................................................ $ 183 $ 203 $ 161 $ 203
Expense Example of Total Operating Expenses Assuming No
Redemption at the End of the Period(8)
One Year................................................. $ 17 $ 17 $ 14 $ 17
Three Years.............................................. $ 54 $ 54 $ 42 $ 54
Five Years............................................... $ 93 $ 93 $ 73 $ 93
Ten Years................................................ $ 183 $ 203 $ 161 $ 203
</TABLE>
(See notes on the following page)
11
<PAGE> 21
Notes to Expense Comparison Table:
(1) For the six month period ended June 30, 1996, on an annualized basis.
(2) For the fiscal year ended June 30, 1996.
(3) Class A shares of the Equity Income Fund received pursuant to the
Reorganization will not be subject to a sales charge upon purchase.
(4) After expense reimbursement. In the absence of expense reimbursement,
Management Fees for the Balanced Fund would have been 0.70% with respect to
Class A, B and C shares. Other Expenses would have been 2.14%, 2.14% and
2.14% with respect to Class A, B and C shares, respectively and Total Fund
Operating Expenses for the Balanced Fund would have been 3.09%, 3.84% and
3.84% with respect to Class A, B and C shares, respectively.
(5) Class B Shares of the Equity Income Fund are subject to a contingent
deferred sales charge equal to 5.00% of the lesser of the then current net
asset value or the original purchase price on Class B Shares redeemed
during the first year after purchase, which charge is reduced to zero after
a five year period as follows: Year 1 -- 5.00%; Year 2 -- 4.00%; Year
3 -- 3.00%; Year 4 -- 2.50%; Year 5 -- 1.50%; and Year 6 -- 0.00%. However,
Class B shares of the Equity Income Fund acquired in the Reorganization
will be subject to the contingent deferred sales charge schedule applicable
to Class B shares of the Balanced Fund. See Note 6.
(6) Class B shares of the Balanced Fund are subject to a contingent deferred
sales charge equal to 4.00% of the lesser of the then current net asset
value or the original purchase price on Class B shares redeemed during the
first year after purchase, which charge is reduced to zero after a six year
period as follows: Year 1 -- 4.00%; Year 2 -- 3.75%; Year 3 -- 3.50%; Year
4 -- 2.50%; Year 5 -- 1.50%; Year 6 -- 1.00% and Year 7 -- 0.00%.
(7) Class C shares are subject to a contingent deferred sales charge equal to
1.00% of the lesser of the then current net asset value or the original
purchase price on Class C shares redeemed during the first year after
purchase, which charge is reduced to zero thereafter.
(8) The expense examples reflect what an investor would pay on a $1,000
investment, assuming a 5% annual return with either redemption or no
redemption at the end of each time period as noted in the above table. The
Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization.
12
<PAGE> 22
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
Equity Income Fund and the Balanced Fund offer three classes of shares. The
Class A shares of both the Equity Income Fund and the Balanced Fund are subject
to an initial sales charge of up to 5.75%. The initial sales charge applicable
to Class A shares of the Equity Income Fund will be waived for Class A shares
acquired in the Reorganization. Any subsequent purchases of Class A shares of
the Equity Income Fund after the Reorganization will be subject to an initial
sales charge of up to 5.75%, excluding Class A shares purchased through the
dividend reinvestment plan. Purchases of Class A shares of the Equity Income
Fund or the Balanced Fund in amounts of $1,000,000 or more are not subject to an
initial sales charge, but a contingent deferred sales charge of 1.00% may be
imposed on certain redemptions made within the first year after purchase.
The Class B shares of both the Equity Income Fund and the Balanced Fund do not
incur a sales charge when they are purchased, but are subject to a contingent
deferred sales charge if redeemed within the contingent deferred sales charge
period after purchase, which charge is reduced to zero after a five year period
in the case of the Equity Income Fund and after a six year period in the case of
the Balanced Fund. Class B shares of the Equity Income Fund acquired in the
Reorganization will remain subject to the contingent deferred sales charge
schedule applicable to Class B shares of the Balanced Fund.
The Class C shares of both the Equity Income Fund and the Balanced Fund do not
incur a sales charge when purchased, but are subject to a contingent deferred
sales charge of 1.00% if redeemed within the first year after purchase.
No contingent deferred sales charge will be imposed at the time Class B shares
or Class C shares of the Equity Income Fund are received for Class B shares or
Class C shares of the Balanced Fund in connection with the Reorganization. Such
shares of the Equity Income Fund acquired in the Reorganization will remain
subject to the contingent deferred sales charge schedule applicable to such
shares of the Balanced Fund. Any subsequent purchases of Class B shares or Class
C shares of the Equity Income Fund, excluding shares purchased through the
dividend reinvestment plan, will be subject to the contingent deferred sales
charge schedule of the Equity Income Fund.
Shares of the Equity Income Fund and the Balanced Fund may be purchased by
check, by electronic transfer, by bank wire and by exchange from certain other
Van Kampen American Capital open-end mutual funds distributed by VKAC
Distributors. For a complete description regarding purchase of shares and
exchange of shares of the Equity Income Fund, see the sections of the Equity
Income Fund Prospectus entitled "Purchase of Shares" and "Shareholder
Services--Exchange Privilege" and sections of the Equity Income Fund Statement
of Additional Information entitled "Purchase and Redemption of Shares" and
"Exchange Privilege." For a complete description regarding purchase of shares
and exchange of
13
<PAGE> 23
shares of the Balanced Fund, see the sections of the Balanced Fund Prospectus
entitled "Purchase of Shares" and "Shareholder Services--Shareholder Services
Applicable to All Classes--Exchange Privilege."
Shares of the Equity Income Fund and the Balanced Fund properly presented for
redemption may be redeemed or exchanged at the next determined net asset value
per share (subject to any applicable deferred sales charge). Shares of either
the Equity Income Fund or the Balanced Fund may be redeemed or exchanged by mail
or by special redemption privileges (telephone exchange, telephone redemption,
by check or electronic transfer). If a shareholder of either fund attempts to
redeem shares within a short time after they have been purchased by check, the
respective fund may delay payment of the redemption proceeds until such fund can
verify that payment for the purchase of the shares has been (or will be)
received.
No further purchases of the shares of the Balanced Fund may be made after the
date on which the shareholders of the Balanced Fund approve the Reorganization,
and the stock transfer books of the Balanced Fund will be permanently closed as
of the date of Closing. Only redemption requests and transfer instructions
received in proper form by the close of business on the day prior to the date of
Closing will be fulfilled by the Balanced Fund. Redemption requests or transfer
instructions received by the Balanced Fund after that date will be treated by
the Balanced Fund as requests for the redemption or instructions for transfer of
the shares of the Equity Income Fund credited to the accounts of the
shareholders of the Balanced Fund. Redemption requests or transfer instructions
received by the Balanced Fund after the close of business on the day prior to
the date of Closing will be forwarded to the Equity Income Fund. For a complete
description of the redemption arrangements for the Equity Income Fund, see the
sections of the Equity Income Fund Prospectus and Statement of Additional
Information entitled "Redemption of Shares" and "Purchase and Redemption of
Shares", respectively and, for the Balanced Fund, see the section of the
Balanced Fund Prospectus entitled "Redemption of Shares".
CAPITALIZATION. The following table sets forth the capitalization of the
Equity Income Fund and the Balanced Fund as of September 30, 1996 and the pro
forma
14
<PAGE> 24
capitalization of the combined fund as if the Reorganization had occurred on
that date. These numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
EQUITY INCOME BALANCED
FUND FUND PRO FORMA
-------------- ----------- --------------
<S> <C> <C> <C>
NET ASSETS
Class A shares.......... $ 430,596,108 $ 7,056,098 $ 437,652,206
Class B shares 562,739,651 8,687,404 571,427,055
Class C shares 49,714,769 1,146,788 50,861,557
-------------- ----------- --------------
Total............ $1,043,050,528 $16,890,290 $1,059,940,818
============== =========== ==============
NET ASSET VALUE PER SHARE
Class A shares.......... $ 6.62 $ 16.18 $ 6.62
Class B shares.......... 6.59 16.17 6.59
Class C shares.......... 6.59 16.16 6.59
SHARES OUTSTANDING
Class A shares.......... 65,085,169 436,000 66,151,045
Class B shares.......... 85,349,812 537,339 86,668,083
Class C shares.......... 7,540,275 70,955 7,714,294
-------------- ----------- --------------
Total............ 157,975,256 1,044,294 160,533,422
============== =========== ==============
SHARES AUTHORIZED
Class A shares.......... Unlimited Unlimited Unlimited
Class B shares.......... Unlimited Unlimited Unlimited
Class C shares.......... Unlimited Unlimited Unlimited
</TABLE>
PERFORMANCE INFORMATION. The average annual total returns for Equity Income
Fund for the one-year, three-year, five-year and ten-year periods ended
September 30, 1996 were 7.74%, 10.48%, 12.67% and 11.64% with respect to its
Class A shares; for the one-year and three-year periods ended September 30, 1996
and for the period beginning May 1, 1992 (the date Class B shares of the Equity
Income Fund were first offered for sale to the public) through September 30,
1996 were 8.21%, 10.98% and 12.77% with respect to its Class B shares; for the
one-year and three-year periods ended September 30, 1996 and for the period
beginning July 6, 1993 (the date Class C shares of the Equity Income Fund were
first offered to the public) through September 30, 1996 were 12.21%, 11.78% and
12.88% with respect to its Class C shares.
The average annual total returns for the Balanced Fund for the one-year period
ended September 30, 1996 and for the period beginning June 24, 1994 (the date
Class A shares of the Balanced Fund were first offered for sale to the public)
through September 30, 1996 were 4.82% and 9.58% with respect to its Class A
shares; for the one-year period ended September 30, 1996 and for the period
15
<PAGE> 25
beginning June 24, 1994 (the date Class B shares of the Balanced Fund were first
offered for sale to the public) through September 30, 1996 were 6.43% and 10.37%
with respect to its Class B shares; and for the one-year period ended September
30, 1996 and for the period beginning June 24, 1994 (the date Class C shares of
the Balanced Fund were first offered for sale to the public) through September
30, 1996 were 9.36% and 11.69% with respect to its Class C shares.
The foregoing returns include the effect of the maximum sales charge
applicable to sales of shares of both the Equity Income Fund and the Balanced
Fund. The foregoing returns assume reinvestment of all dividends and
distributions. Such returns are not necessarily indicative of future results.
The performance of an investment company is the result of conditions in the
securities markets, portfolio management and operating expenses. Although
information such as that shown above is useful in reviewing a fund's performance
and in providing some basis for comparison with other investment alternatives,
it should not be used for comparison with other investments using different
reinvestment assumptions or time periods.
Management's discussion of the Equity Income Fund's performance as of December
31, 1995 and management's discussion of the Balanced Fund's performance as of
June 30, 1996 are attached hereto as Exhibit A.
B. RISK FACTORS
SIMILARITY OF RISKS
The investment objectives of the Equity Income Fund and the Balanced Fund are
similar. The investment policies of the Equity Income Fund and the Balanced Fund
are similar insofar as they each invest in a diversified portfolio of equity and
debt securities; however, the policies of the Equity Fund place more emphasis on
equity securities and higher quality debt securities relative to the policies of
the Balanced Fund as discussed in more detail below under "Differences in
Risks". Each of the Equity Income Fund and the Balanced Fund also engages in
certain common investment practices such as investing in foreign securities,
utilizing options, futures and related options and engaging in repurchase
transactions. To the extent that the investment objectives and policies of the
Equity Income Fund and the Balanced Fund are similar, the risks associated with
an investment in the funds are similar.
Investment in either of the Equity Income Fund or the Balanced Fund may not be
appropriate for all investors. Neither fund is 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
funds. An investment in either fund is intended to be a long-term investment and
should not be used as a trading vehicle.
16
<PAGE> 26
DIFFERENCES IN RISKS
The Equity Income Fund and the Balanced Fund place different emphasis on
equity and debt concentrations and engage in some dissimilar investment
practices. To the extent that the investment policies and practices of the funds
differ, the risks associated with an investment in the Equity Income Fund are
different from the risks associated with an investment in the Balanced Fund. For
a complete description of the risks of an investment in the Equity Income Fund,
see the sections of the Equity Income Fund Prospectus entitled "Investment
Objective and Policies" and "Investment Practices" and the sections of the
Equity Income Fund Statement of Additional Information entitled "Options,
Futures Contracts and Related Options," "Securities of Foreign Issuers" and
"Repurchase Agreements." For a complete description of the risks of an
investment in the Balanced Fund, see the sections in the Balanced Fund
Prospectus entitled "Investment Objective and Policies" and "Investment
Practices" and the sections of the Balanced Fund Statement of Additional
Information entitled "Investment Policies and Restrictions" and "Additional
Investment Considerations."
CONCENTRATION. The Equity Income Fund invests at least 65% of its total assets
in income-producing equity securities. The Equity Income Fund invests up to 35%
of its total assets in debt securities rated BBB or higher by S&P or Baa or
higher by Moody's or, if unrated, considered by the Equity Income Adviser to be
of comparable quality. In addition, the Equity Income Fund invests not more than
10% of its total assets in debt securities rated BBB by S&P or Baa by Moody's
or, if unrated, considered by the Equity Income Adviser to be of comparable
quality. An investment company such as the Equity Income Fund that concentrates
more of its investments in equity securities is more susceptible to the price
fluctuation and volatility inherent in such securities than an investment
company which is not required to concentrate in equity securities. An investment
company such as the Equity Income Fund that restricts its investments to higher
grade debt securities is generally less susceptible to credit risk on such
securities than an investment company that is not restricted to higher grade
debt securities. The Equity Income Fund attempts to reduce its overall risk to
decline in the prices of portfolio securities by spreading its investments over
a variety of industries and not investing more than 25% of its assets in any
industry at one time.
The Balanced Fund invests at least 25% of its total assets in equity
securities and 25% of its total assets in fixed-income debt securities. While
the Balanced Fund generally invests in fixed-income debt securities rated BBB or
higher by S&P or Baa or higher by Moody's or, if unrated, considered by the
Balanced Adviser to be of comparable quality, the Balanced Fund may invest up to
20% of its assets in fixed-income debt securities rated below BBB by S&P or Baa
by Moody's but not rated below CC by S&P or Ca by Moody's. Such lower rated
securities commonly are referred to as "junk bonds" and are regarded by Moody's
and S&P as
17
<PAGE> 27
predominantly speculative with respect to the capacity to pay interest or repay
principal in accordance with their terms. Such securities may be less liquid,
more volatile and have less publicly available information as compared to higher
grade income securities. The Balanced Fund does not limit its investment in
securities of issuers in any one industry. An investment company such as the
Balanced Fund that may concentrate its investments in any one industry generally
is more susceptible to economic, political or regulatory events that adversely
affect the industry in which such company may concentrate its investments than
an investment company that does not concentrate its investments in any one
industry. The Equity Income Fund, however, is less likely to benefit from
economic, political or regulatory events that beneficially affect issuers of any
one industry because it does not allow concentration of its investments in
issuers of any one industry.
SWAPS, CAPS, FLOORS, COLLARS, WHEN-ISSUED, DELAYED DELIVERY, PORTFOLIO
SECURITIES LENDING, DOLLAR ROLLS OR REVERSE REPURCHASE AGREEMENTS. The Balanced
Fund may enter into investment transactions involving swaps, caps, floors,
collars, when-issued securities, delay delivery securities, lending of portfolio
securities, dollar rolls or reverse repurchase agreements. The Equity Income
Fund does not engage in such transactions. Each of these transactions involve
risks unique to such transactions. For a complete description of such
transactions and the associated risks, see the appropriate subsections in the
Balanced Fund Prospectus under the heading entitled "Investment Practices."
C. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the Equity Income Fund or the Balanced Fund at (800) 421-5666
and asking for the "Reorganization SAI".
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the Equity Income Fund would acquire all of the
assets and the liabilities of the Balanced Fund, a series of the Equity Trust,
on the date of the Closing in consideration for Class A, B and C shares of the
Equity Income Fund.
Subject to the Balanced Fund's shareholders approving of the Reorganization,
the closing (the "Closing") will occur within 15 business days after the later
of the receipt of all necessary regulatory approvals and the final adjournment
of the Special Meeting or such later date as soon as practicable thereafter as
the Equity Income Fund and the Balanced Fund may mutually agree.
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<PAGE> 28
On the date of Closing, the Balanced Fund will transfer to the Equity Income
Fund all of the assets and liabilities of the Balanced Fund. The Equity Income
Fund will in turn transfer to the Balanced Fund a number of Class A, B and C
shares of the Equity Income Fund approximately equal in value to the value of
the net assets of the Balanced Fund transferred to the Equity Income Fund as of
the date of Closing, as determined in accordance with the valuation method
described in the Equity Income Fund's then current prospectus. In order to
minimize any potential for undesirable federal income and excise tax
consequences in connection with the Reorganization, the Equity Income Fund and
the Balanced Fund may distribute on or before the Closing all or substantially
all of their respective undistributed net investment income (including net
capital gains) as of such date.
The Balanced Fund expects to distribute the Class A, B and C shares of the
Equity Income Fund to the shareholders of the Balanced Fund promptly after the
Closing and then dissolve pursuant to a plan of dissolution adopted by the
Balanced Board.
The Balanced Fund and the Equity Income Fund have made certain standard
representations and warranties to each other regarding their capitalization,
status and conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the Balanced Fund's shareholders;
2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
5. the effectiveness under applicable law of the registration statement of
the Equity Income Fund of which this Prospectus/Proxy Statement forms a
part and the absence of any stop orders under the Securities Act of
1933, as amended, pertaining thereto; and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the
Balanced
19
<PAGE> 29
Fund, provided that no such amendment after such approval shall be made if it
would have a material adverse affect on the interests of Balanced Fund
shareholders. The Agreement also may be terminated by the non-breaching party if
there has been a material misrepresentation, material breach of any
representation or warranty, material breach of contract or failure of any
condition to Closing.
The Balanced Board recommends that you vote to approve the Reorganization, as
it believes the Reorganization is in the best interests of the Balanced Fund's
shareholders and that the interests of the Balanced Fund's existing shareholders
will not be diluted as a result of consummation of the proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF BENEFICIAL INTEREST. Beneficial interests in the Equity Income Fund
being offered hereby are represented by transferable Class A, B and C shares,
par value $0.01 per share. The Declaration of Trust of the Equity Income Fund
permits the trustees, as they deem necessary or desirable, to create one or more
separate investment portfolios and to issue a separate series of shares for each
portfolio and, subject to compliance with the 1940 Act, to further sub-divide
the shares of a series into one or more classes of shares for such portfolio.
VOTING RIGHTS OF SHAREHOLDERS. Holders of shares of the Equity Income Fund are
entitled to one vote per share on matters as to which they are entitled to vote;
however, separate votes generally are taken by each series on matters affecting
an individual series. The Declaration of Trust of the Equity Income Fund and the
Declaration of Trust of the Balanced Fund are substantially similar.
Each of the Equity Income Fund and the Balanced Fund operates as an open-end
management investment company registered with the SEC under the 1940 Act.
Therefore, in addition to the specific voting rights described above,
shareholders of the Equity Income Fund, as well as shareholders of the Balanced
Fund, are entitled, under current law, to vote with respect to certain other
matters, including changes in fundamental investment policies and restrictions
and the ratification of the selection of independent auditors. Moreover, under
the 1940 Act, shareholders owning not less than 10% of the outstanding shares of
the Equity Income Fund or the Balanced Fund may request that the respective
board of trustees call a shareholders' meeting for the purpose of voting upon
the removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the Equity Income Fund will establish an
account for each Balanced Fund shareholder containing the appropriate number of
shares of the Equity Income Fund. The shareholder services and shareholder
programs of the Equity Income Fund and the Balanced Fund are substantially
identical. Shareholders of the Balanced Fund who are accumulating Balanced Fund
20
<PAGE> 30
shares under the dividend reinvestment plan, or who are receiving payment under
the systematic withdrawal plan with respect to Balanced Fund shares, will retain
the same rights and privileges after the Reorganization in connection with the
Equity Income Fund Class A, B or C shares received in the Reorganization through
substantially similar plans maintained by the Equity Income Fund. Van Kampen
American Capital Trust Company will continue to serve as custodian for the
assets of Balanced Fund shareholders held in IRA accounts after the
Reorganization. Such IRA investors will be sent appropriate documentation to
confirm Van Kampen American Capital Trust Company's custodianship.
It will not be necessary for shareholders of the Balanced Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the Balanced Fund, such certificates will become null and void.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the Balanced Fund and
shareholders of the Equity Income Fund. The discussion set forth below is for
general information only and may not apply to a holder subject to special
treatment under the Internal Revenue Code of 1986, as amended (the "Code"), such
as a holder that is a bank, an insurance company, a dealer in securities, a
tax-exempt organization or that acquired its Class A, B and C shares of the
Balanced Fund pursuant to the exercise of employee stock options or otherwise as
compensation. The discussion is based upon the Code, legislative history,
Treasury regulations, judicial authorities, published positions of the Internal
Revenue Service (the "Service") and other relevant authorities, all as in effect
on the date hereof and all of which are subject to change or different
interpretations (possibly on a retroactive basis). This summary is limited to
shareholders who hold their Balanced Fund shares as capital assets. No advance
rulings have been or will be sought from the Service regarding any matter
discussed in this Prospectus/Proxy Statement. Accordingly, no assurances can be
given that the Service could not successfully challenge the intended federal
income tax treatment described below. Shareholders should consult their own tax
advisers to determine the specific federal income tax consequences of all
transactions relating to the Reorganization, as well as the effects of state,
local and foreign tax laws and possible changes to the tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
Equity Income Fund and the Balanced Fund receive an opinion from Skadden,
21
<PAGE> 31
Arps, Slate, Meagher & Flom (Illinois) ("Skadden Arps") substantially to the
effect that for federal income tax purposes:
1. The acquisition by the Equity Income Fund of the assets of the Balanced
Fund in exchange solely for Class A, B and C shares of the Equity Income
Fund and the assumption by the Equity Income Fund of the liabilities of
the Balanced Fund will qualify as a tax-free reorganization within the
meaning of Section 368(a)(1) of the Code.
2. No gain or loss will be recognized by the Balanced Fund or the Equity
Income Fund upon the transfer to the Equity Income Fund of the assets of
the Balanced Fund in exchange solely for the Class A, B and C shares of
the Equity Income Fund and the assumption by the Equity Income Fund of
the liabilities of the Balanced Fund.
3. The Equity Income Fund's basis in the Balanced Fund assets received in
the Reorganization will, in each instance, equal the basis of such assets
in the hands of the Balanced Fund immediately prior to the transfer, and
the Equity Income Fund's holding period of such assets will, in each
instance, include the period during which the assets were held by the
Balanced Fund.
4. No gain or loss will be recognized by the shareholders of the Balanced
Fund upon the exchange of their shares of the Balanced Fund for the Class
A, B or C shares of the Equity Income Fund.
5. The aggregate tax basis in the Class A, B and C shares of the Equity
Income Fund received by the shareholders of the Balanced Fund will be the
same as the aggregate tax basis of the shares of the Balanced Fund
surrendered in exchange therefor.
6. The holding period of the Class A, B and C shares of the Equity Income
Fund received by the shareholders of the Balanced Fund will include the
holding period of the shares of the Balanced Fund surrendered in exchange
therefor if such surrendered shares of the Balanced Fund are held as
capital assets by such shareholder.
In rendering its opinion, Skadden Arps may rely upon certain representations
of the management of the Equity Income Fund and the Balanced Fund and assume
that the Reorganization will be consummated as described in the Agreement and
that redemptions of shares of the Balanced Fund occurring prior to the Closing
will consist solely of redemptions in the ordinary course of business.
The Equity Income Fund intends to be taxed under the rules applicable to
regulated investment companies as defined in Section 851 of the Code, which are
the same rules currently applicable to the Balanced Fund and its shareholders.
22
<PAGE> 32
EXPENSES
Management believes the Balanced Fund's shareholders and the Balanced Adviser
are the primary beneficiaries of the Reorganization over time. The expenses of
the proposed Reorganization, estimated to be $125,000, will be borne by the
Balanced Adviser. As part of the Reorganization, the Balanced Fund will write
off the remaining unamortized organization expenses of approximately $36,500
which will be reimbursed by the Balanced Adviser.
The Balanced Board has determined that the foregoing arrangement with respect
to expenses is fair and reasonable in light of the relative benefits of the
Reorganization and that such arrangement would not be dilutive to shareholders
of the Balanced Fund.
If the Reorganization is not completed, the Balanced Adviser will bear the
costs associated with the proposed Reorganization.
As noted above, shareholders of the Balanced Fund may redeem their shares or
exchange their shares for shares of other Van Kampen American Capital mutual
funds at any time prior to the closing of the Reorganization. See "Distribution,
Purchase, Valuation, Redemption and Exchange of Shares" above. Redemptions and
exchanges of shares generally are taxable transactions, unless your account is
not subject to taxation, such as an individual retirement account or other tax-
qualified retirement plan. Shareholders should consult with their own tax
advisers regarding potential transactions.
RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND
RESTRICTIONS OF THE EQUITY INCOME FUND
Approval of the Reorganization will constitute the ratification by Balanced
Fund shareholders of the investment objective, policies and restrictions,
distribution plan and advisory agreement of the Equity Income Fund. Approval of
the Reorganization will constitute approval of amendments to any of the
fundamental investment restrictions of the Balanced Fund that might otherwise be
interpreted as impeding the Reorganization, but solely for the purpose of and to
the extent necessary for, consummation of the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A, B and C shares of the Equity Income Fund
will be passed on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois
60606, which serves as counsel to the Equity Income Fund. Wayne W. Whalen, a
partner of Skadden Arps, is a Trustee of the Equity Income Fund and the Equity
Trust.
23
<PAGE> 33
D. RECOMMENDATION OF THE BALANCED BOARD
The Balanced Board has unanimously approved the Agreement and has determined
that participation in the Reorganization is in the best interests of
shareholders of each class of shares of the Balanced Fund. THE BALANCED BOARD
RECOMMENDS VOTING "FOR" THE PROPOSED REORGANIZATION.
OTHER INFORMATION
A. SHAREHOLDERS OF THE EQUITY INCOME FUND,
THE BALANCED FUND AND VKAC
At the close of business on January , 1997, there were Class A
shares, Class B shares and Class C shares, respectively, of the
Equity Income Fund. As of such date, the trustees and officers of the Equity
Income Fund as a group own less than 1% of the shares of the Equity Income Fund.
As of such date, no person was known by the Equity Income Fund to own
beneficially or of record as much as 5% of the Class A shares or Class B shares
of the Equity Income Fund. As of such date, no person was known by the Equity
Income Fund to own beneficially or of record as much as 5% of the Class C shares
of the Equity Income Fund except as follows: [TO COME]
At the close of business on January 23, 1997, the record date with respect to
the Special Meeting, there were Class A shares, Class B shares and
Class C shares, respectively, of the Balanced Fund. As of such date, the
trustees and officers of the Balanced Fund as a group own less than 1% of the
outstanding shares of the Balanced Fund. As of such date, no person was known by
the Balanced Fund to own beneficially or of record as much as 5% of the Class A
shares of the Balanced Fund [except for:] As of such date, no person was known
by the Balanced Fund to own beneficially or of record as much as 5% of the Class
B shares or Class C shares of the Balanced Fund.
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<PAGE> 34
B. SHAREHOLDER PROPOSALS
As a general matter, the Equity Income Fund does not intend to hold future
regular annual or special meetings of its shareholders unless required by the
1940 Act. In the event the Reorganization is not consummated, the Balanced Fund
does not intend to hold future regular annual or special meetings of its
shareholders unless required by the 1940 Act. Any shareholder who wishes to
submit proposals for consideration at a meeting of shareholders of the Equity
Income Fund or the Balanced Fund should send such proposal to the respective
fund at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. To be considered
for presentation at a shareholders' meeting rules promulgated by the SEC require
that, among other things, a shareholder's proposal must be received at the
offices of the fund a reasonable time before a solicitation is made. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.
VOTING INFORMATION AND REQUIREMENTS
Holders of shares of the Balanced Fund are entitled to one vote per share on
matters as to which they are entitled to vote. The Balanced Fund does not
utilize cumulative voting.
Each valid proxy given by a shareholder of the Balanced Fund will be voted by
the persons named in the proxy in accordance with the instructions marked
thereon and as the persons named in the proxy may determine on such other
business as may come before the Special Meeting on which shareholders are
entitled to vote. If no designation is made, the proxy will be voted by the
persons named in the proxy as recommended by the Balanced Board "FOR" approval
of the Reorganization. Abstentions do not count as votes "FOR" a proposal and
are treated as votes "AGAINST". Broker non-votes (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owner or other person entitled to vote shares on a particular matter
with respect to which the broker or nominees do not have discretionary power) do
not count as votes "FOR" and are treated as votes "AGAINST" since the voting
requirement for the Reorganization proposal is based on achieving a majority of
the outstanding voting securities entitled to vote. A majority of the
outstanding shares entitled to vote on a proposal must be present in person or
by proxy to have a quorum to conduct business at the Special Meeting.
Abstentions and broker non-votes will be deemed present for quorum purposes.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Balanced Fund a written notice of revocation, by
delivering a duly executed proxy bearing a later date, or by attending the
Special Meeting and voting in person. The giving of a proxy will not affect your
right to vote in person if you attend the Special Meeting and wish to do so.
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<PAGE> 35
It is not anticipated that any action will be asked of the shareholders of the
Balanced Fund other than as indicated above, but if other matters are properly
brought before the Special Meeting, it is intended that the persons named in the
proxy will vote in accordance with their judgment.
APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF THE BALANCED FUND ENTITLED TO VOTE.
In the event that sufficient votes in favor of a proposal are not received by
the scheduled time of the Special Meeting, the persons named in the proxy may
propose and vote in favor of one or more adjournments of the Special Meeting to
permit further solicitation of proxies. If sufficient shares were present to
constitute a quorum, but insufficient votes had been cast in favor of a proposal
to approve it, proxies would be voted in favor of adjournment only if the
Balanced Board determined that adjournment and additional solicitation was
reasonable and in the best interest of the shareholders of the Balanced Fund,
taking into account the nature of the proposal, the percentage of the votes
actually cast, the percentage of negative votes, the nature of any further
solicitation that might be made and the information provided to shareholders
about the reasons for additional solicitation. Any such adjournment will require
the affirmative vote of the holders of a majority of the outstanding shares
voted at the session of the Special Meeting to be adjourned.
Proxies of shareholders of the Balanced Fund are solicited by the Balanced
Board. In order to obtain the necessary quorum at the Special Meeting,
additional solicitation may be made by mail, telephone, telegraph or personal
interview by representatives of the Balanced Adviser, the Equity Income Adviser
or VKAC, or by dealers or their representatives. In addition, such solicitation
servicing may also be provided by Applied Mailing Systems, a solicitation firm
located in Boston, Massachusetts, at a cost estimated to be approximately
$ , plus reasonable expenses.
January , 1997
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
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<PAGE> 36
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
EQUITY INCOME FUND AND BALANCED FUND
PERFORMANCE
Management's Discussion of the Equity Income Fund's Performance in its Annual
Report for the year ended December 31, 1995:
LETTER TO SHAREHOLDERS
January 24, 1996
Dear Shareholder,
For most investors, it would be hard to surpass the success enjoyed during
1995. The stock and bond markets achieved substantial gains, driven by a
combination of continuing economic growth and low inflation. The strength of
equity and fixed-income securities in 1995 was particularly impressive because
it followed a year in which both markets declined. People who remained invested
during 1995 generally shared in the growth of the markets, while investors who
retreated after 1994's downturn may have missed out on the double-digit returns.
The rebound in the markets last year reinforces the importance of maintaining
a long-term perspective for your investments. While the environment for stocks
and bonds remains positive, it is unlikely that 1996 will see a repeat of the
markets' strong 1995 performance. However, over the long-term, stocks have
outperformed virtually all other types of investments, and bonds have met the
needs of investors who seek capital preservation and regular income.
ECONOMIC OVERVIEW
The U.S. economy grew throughout 1995, though the rate of growth slowed toward
year-end. The gross domestic product (the value of all goods and services
produced in the United States) grew at an annual rate of more than 4.2 percent
in the third quarter of 1995, but slowed to an estimated 2 to 3 percent in the
fourth quarter, with retail and auto sales particularly sluggish. The slower
growth rate eased concerns about a rise in inflation and allowed the Federal
Reserve Board to lower short-term interest rates by a quarter-percentage point
in late December. The reduction in rates during the latter half of 1995 is
expected to help generate moderate economic growth in 1996, just as the Fed's
raising of short-term rates in 1994 helped slow economic growth in 1995.
The cut in short-term rates, combined with modest growth forecasts, was viewed
by the financial markets as a positive event, pushing up both stock and bond
prices.
A-1
<PAGE> 37
For the year ended December 31, 1995, the Standard & Poor's 500-Stock Index
achieved a total return of 37.45 percent. The yield on 10-year Treasury notes
was 5.57 percent on December 31, compared to 7.83 percent at the beginning of
the year. Because bond prices and yields move in opposite directions, bond
prices rose. Many observers expect the Fed to cut rates further if Congress and
the President are able to reach an agreement on the federal budget, provided
economic conditions justify further easing.
With a low inflation, low interest rate environment, corporate earnings
remained quite strong during the year, helping to push stocks to new highs. The
strongest sectors were technology and finance, as these stocks benefited from
the impact of the Internet, telecommunications deregulation and bank mergers.
U.S. companies with global operations also did well, aided by a declining U.S.
dollar.
ECONOMIC OUTLOOK
Looking ahead, we are cautiously optimistic. We expect the economy to grow at
a rate of 2 to 3 percent throughout 1996, with growth stronger in the second
half of the year as the full impact of the Fed's rate cuts take effect. Lower
rates will have the greatest impact on interest-sensitive industries, such as
housing. Although inflation appears to be under control, there probably will be
some cyclical upward pressure in 1996.
The current economic conditions are ideal for stocks, especially those of
smaller companies, because they tend to be affected less by economic cycles. The
outlook for the fixed-income market--including municipal bonds--is positive,
too. In the near-term, we believe domestic markets will benefit from a stable
U.S. dollar and increased business activity driven in part by a number of
recently announced strategic reorganizations of some of the nation's blue chip
industry leaders.
During recent months, debate over tax reform and the federal deficit has
dominated the agenda in Washington. Now that we are in a presidential election
year, tax reform likely will replace the budget battle as the top issue in
Washington. There has been varied speculation about the impact tax reform could
have on the economy and on various types of investments. We are following the
tax reform debate very closely, and we will keep you updated on this issue
throughout the year. See the winter issue of Your Portfolio for a detailed
discussion of tax reform.
On the following pages, you can read about your Fund's performance in 1995, as
well as the portfolio management team's outlook for the Fund in the coming
months. We hope that you will find this information helpful.
CORPORATE NEWS
As part of our commitment to helping you achieve your investment goals, Van
Kampen American Capital strives to provide shareholders with the best service in
A-2
<PAGE> 38
the mutual fund industry. That is why we are especially pleased to have received
the 1995 Quality Tested Service Seal, which is awarded annually by DALBAR, Inc.,
an independent research firm. The Seal, which symbolizes the achievement of the
highest tier of service in the mutual fund industry, was awarded to American
Capital annually from 1990 to 1994 and we are honored that the service provided
by Van Kampen American Capital has achieved the same level of excellence.
Sincerely,
<TABLE>
<S> <C>
/s/Don G. Powell /s/Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Asset Management Inc. Asset Management Inc.
</TABLE>
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1995
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)....................... 32.57% 31.51% 31.51%
One-year total return(2)....... 25.06% 26.51% 30.51%
Five-year average annual total
return(2).................... 14.81% N/A N/A
Ten-year average annual total
return(2).................... 11.53% N/A N/A
Life-of-Fund average annual
total return(2).............. 10.86% 13.29% 13.98%
Commencement Date.............. 08/03/60 05/01/92 07/06/93
</TABLE>
- ---------------
N/A = Not Applicable
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (5.75% for A shares) or
contingent deferred sales charge for early withdrawal (5% for B shares and
1% for C shares).
(2) Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B shares and C
shares).
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
A-3
<PAGE> 39
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Standard & Poor's 500-Stock
Index and the Lipper Equity Income Fund Index over time. These indices are
unmanaged statistical composites and do not reflect any commissions or fees
which would be incurred by an investor purchasing the securities they represent.
Similarly, their performance does not reflect any sales charges or other costs
which would be applicable to an actively managed portfolio, such as that of the
Fund.
A-4
<PAGE> 40
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Equity Income Fund vs. Standard & Poor's 500-Stock
Index and the Lipper Equity Income Fund Index (December 1985 through December
1995)
CLASS A PERF CHART
<TABLE>
<CAPTION>
VKAC Equity Standard & Poor's Lipper Equity Income
Income Fund 500 Stock Index* Fund Index
<S> <C> <C> <C>
Dec 1985 9425 10000 10000
Dec 1986 10576 11862 11823
Dec 1987 10777 12476 11886
Dec 1988 12133 14534 13911
Dec 1989 14770 19125 17064
Dec 1990 14081 18530 16189
Dec 1991 17837 24151 20491
Dec 1992 19749 25988 22489
Dec 1993 22910 28596 25828
Dec 1994 22455 28984 25596
Dec 1995 29775 39837 33204
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended December 31,
1995, and includes payment of the maximum sales charge (5.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
* The Standard & Poor's 500-Stock Index represents general stock market
performance and was initially selected as a benchmark for the Fund's
performance; additionally the Lipper Equity Income Fund Index was selected to
represent a more narrow-based comparison for the Fund.
A-5
<PAGE> 41
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
We recently spoke with the management team of the Van Kampen American Capital
Equity Income Fund about the key events and economic forces which shaped the
markets during the past fiscal year. The team includes James A. Gilligan,
portfolio manager, and Alan T. Sachtleben, executive vice president, equity
investments. The following excerpts reflect their views on the Fund's
performance during the twelve-month period ended December 31, 1995.
Q
THE STOCK AND BOND MARKETS ENJOYED STRONG RETURNS DURING 1995. WHAT
FACTORS HAD THE MOST IMPACT ON THE FUND'S PERFORMANCE DURING THE PAST
YEAR?
A
The stock market as a whole benefited from continued--although slower--
economic growth that generated strong corporate profits without
experiencing increased inflation. The Fund benefited from being heavily invested
in finance and health care stocks, as well as the strong performance of
technology stocks. Technology was one of the best performing sectors of the
market during the past year. While the Fund benefited from technology's strong
performance during most of the year, our insistence on being diversified limited
our investment in technology stocks, which benefited the Fund in the latter part
of the year as the technology sector began to show some signs of weakness.
We continued to focus on stock selection, identifying those companies that are
poised to benefit from a restructuring or repositioning. The Fund's
diversification at the end of the year is illustrated by the chart below.
pie chart
A-6
<PAGE> 42
Q CAN YOU GIVE A FEW EXAMPLES OF STOCKS THE FUND OWNED DURING THE PAST YEAR
THAT FIT THIS CRITERIA?
A In the financial services area, we owned shares of both Chemical Bank and
Chase Manhattan, which recently announced plans to merge. The price of
both stocks increased substantially before and after the merger announcement. In
the health care arena, the Fund owned shares of Merck, which enjoyed a rise in
its stock price after the company received approval from the Food and Drug
Administration for a new drug to combat osteoporosis. Ralston-Purina, which the
Fund owned during the past year, continued restructuring to focus on its core
pet food and battery businesses, pushing up the price of its stock.
Of course, not all of the securities in the portfolio performed as well and
past performance is no guarantee of future performance.
Q WHAT CHANGES DID YOU MAKE TO THE PORTFOLIO DURING THE PAST YEAR?
A During the early part of the year, we gradually reduced the Fund's
holdings of stocks that were most affected by changing economic
conditions, often called cyclical stocks. As a result, we reduced the
percentage of the Fund's assets invested in the stocks of raw materials and
manufacturing companies.
These assets were invested instead in a broader range of stocks, including
those of health care and retail companies. We expect the retail industry to be
one of the next sectors to benefit from renewed economic growth.
In anticipation of renewed economic growth, during the latter part of the year
we purchased several cyclical stocks. An example of this is Chrysler. We also
continued to look for other stocks that had underperformed the market in 1995
but should do well in 1996 in light of current economic trends.
Q HOW DID THE FUND PERFORM DURING THE YEAR ENDED DECEMBER 31, 1995?
A Class A shares of the Fund achieved a total return at net asset value of
32.57 percent(1), including reinvestment of dividends totaling $0.188 per
share and a capital gains distribution of $0.32 per share. By comparison, the
Standard & Poor's 500-Stock Index, a broad-based, unmanaged index that reflects
general stock market performance, achieved a total return of 37.45 percent for
the period. The Lipper Equity Income Fund Index, which represents the average
performance of the largest equity income funds, achieved a total return of 29.73
percent. Neither index reflects any commissions or fees that would be paid by an
investor purchasing the securities it represents. In addition, the S&P 500 is
comprised solely of equity securities, while your Fund is currently invested in
stocks, convertible and Treasury securities. (Please refer to the chart on page
three for additional Fund performance results.)
A-7
<PAGE> 43
Q
WHAT IS THE OUTLOOK FOR STOCKS?
A
The outlook is excellent, which is not to say that a correction could not
occur in the near-term. However, some very positive forces are present:
moderate economic growth, low inflation and acceptable levels of interest rates.
These should limit any decline to a modest one. Looking further into the future,
these three conditions--aided by the Federal Reserve Board's decision in
December to lower short-term interest rates--should lead to increasing corporate
profits which, in turn, should lead to higher stock prices.
<TABLE>
<S> <C>
/s/ Alan T. Sachtleben /s/ James A. Gilligan
Alan T. Sachtleben James A. Gilligan
Executive Vice President Portfolio Manager
Equity Investments
</TABLE>
Please see footnotes on page three.
A-8
<PAGE> 44
Management's Discussion of the Balanced Fund's Performance in its Annual
Report for the year ended June 30, 1996:
LETTER TO SHAREHOLDERS
August 1, 1996
Dear Shareholder,
As you may be aware, an agreement was reached in late June for VK/AC Holding,
Inc., the parent company of Van Kampen American Capital, Inc., to be acquired by
the Morgan Stanley Group Inc. While this announcement may appear commonplace in
an ever-changing financial industry, we believe it represents an exciting
opportunity for shareholders of our investment products.
With Morgan Stanley's global leadership in investment banking and asset
management and Van Kampen American Capital's reputation for competitive long-
term performance and superior investor services, together we will offer a
broader range of investment opportunities and expertise.
The new ownership will not affect our commitment to pursuing excellence in all
aspects of our business. And, we expect very little change in the way your
mutual fund account is maintained and serviced.
A proxy will be mailed to you shortly explaining the acquisition and asking
for your vote of approval. Please read it carefully and return your response for
inclusion in the shareholder vote. We value our relationship with you and look
forward to communicating more details of this transaction, which is anticipated
to be completed in November.
ECONOMIC REVIEW
The economy demonstrated an acceleration in growth during the last half of the
reporting period. After a nominal 0.3 percent growth rate in the last quarter of
1995, GDP (the nation's gross domestic product) rose by 2.0 percent in this
year's first quarter. And, as anticipated, the economy grew by 4.2 percent in
the second quarter, partly reflecting a recovery from the effects of labor
strikes earlier in the year and extreme weather conditions across the country.
Upward momentum has been assisted by consumer spending, as indicated by a 5.6
percent rise in retail sales in the first five months of this year versus the
comparable 1995 period.
Surprisingly healthy economic activity led to concerns that inflation may rise
and the Federal Reserve Board might tighten monetary policy. Inflation remains
modest, however, with consumer prices rising at about a 3 percent annual rate
over the past year. Meanwhile, the closely watched "core" Consumer Price Index,
which
A-9
<PAGE> 45
excludes volatile food and energy components, has risen year over year at rates
between 2.7 and 3.0 percent per year, with mid-1996 readings at a moderate 2.7
percent. In general, recent reports have suggested an upward creep in labor-
related costs, while indicating that prices of many commodities have begun to
decline.
MARKET REVIEW
The stock market averages posted attractive gains for the 12-month period
ended June 30, 1996, with most major averages posting all-time highs. The Dow
Jones Industrial Average rose approximately 24 percent from 4556 to 5654, and
the NASDAQ Composite Index rose approximately 27 percent from 933 to 1185.
Corporate earnings, which were an important contributor to last year's strong
stock market, continued to move ahead during the reporting period. Unexpectedly
strong economic activity helped lift reported profits above expectations for the
period. Through the rest of 1996, we expect earnings will be supportive, but
perhaps not the primary factor in the movement of the major stock market
averages.
In the fixed-income market, interest rates trended lower in the last half of
1995. However, during the first half of 1996, interest rates rose sharply, and
U.S. Treasury yields increased by 1.00 to 1.25 percent. Benchmark 10-year U.S.
Treasuries declined in value by about 7.8 percent. Signs of increasing economic
momentum, as discussed above, were a major factor contributing to this decline.
OUTLOOK
We anticipate that reasonably strong economic growth will continue during the
balance of 1996, albeit at more moderate rates than the second quarter's swift
pace. While we expect rates of inflation to remain near current levels, the Fed
may begin to lean toward greater restraint in its monetary policy in the coming
months. That suggests an upward bias for short-term interest rates and for
yields on long-term bonds to remain steady at current levels.
FUND UPDATE
The Trustees of your Fund have recently approved its reorganization into the
Van Kampen American Capital Equity Income Fund. The reorganization is subject to
shareholder approval. If approved, Balanced Fund shareholders will receive
shares of the Equity Income Fund in exchange for their current shares. The
Equity Income Fund's primary investment objective is to provide shareholders
with the highest possible income consistent with safety of principal. Long-term
capital growth is a secondary objective. The Equity Income Fund seeks to achieve
its investment objective by investing primarily in income-producing equity
instruments and other debt securities.
A-10
<PAGE> 46
You will receive a proxy statement and voting card in the near future. The
proxy is designed to provide you with information about the proposed
reorganization and to request your participation in the proxy process. We
appreciate your continued confidence in your investment with Van Kampen American
Capital.
Sincerely,
<TABLE>
<S> <C>
/s/Don G. Powell /s/Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen American Capital Van Kampen American Capital
Investment Advisory Corp. Investment Advisory Corp.
</TABLE>
A-11
<PAGE> 47
PERFORMANCE RESULTS FOR THE PERIOD ENDED JUNE 30, 1996
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One-year total return based on
NAV(1)....................... 15.07% 14.25% 14.25%
One-year total return(2)....... 8.45% 10.25% 13.25%
Life-of-Fund average annual
total return(2).............. 9.89% 10.84% 12.38%
Commencement date.............. 06/24/94 06/24/94 06/24/94
</TABLE>
- ---------------
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (5.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares).
(2) Standardized total return assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B and C shares).
See the Fund Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. Fund shares, when redeemed, may be worth more
or less than their original cost.
A-12
<PAGE> 48
PORTFOLIO HIGHLIGHTS
Van Kampen American Capital Balanced Fund
TOP TEN HOLDINGS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF % AS OF
JUNE 30, 1996 SIX MONTHS AGO
<S> <C> <C>
U.S. Treasury Bonds ........ 28.9% ........................ 24.0%
Federal Home Loan Bank
Corp...................... 7.4% ........................ 9.2%
U.S. Treasury Notes ........ 3.8% ......................... N/A
Bristol Myers Squibb Co. ... 1.7% ........................ 0.1%
WMX Technologies Inc. ...... 1.5% ........................ 2.1%
Unilever ................... 1.3% ......................... N/A
Illinova Corp. ............. 1.2% ........................ 0.3%
DTE Energy Co. ............. 1.1% ......................... N/A
Pacific Enterprises ........ 1.0% ........................ 0.2%
Philip Morris Cos., Inc. ... 1.0% ........................ 1.7%
</TABLE>
N/A = Not Applicable
TOP FIVE PORTFOLIO HOLDINGS BY SECTOR
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
<S> <C>
Government................. 40.1%
Electric Utilities......... 6.8%
Oil and Gas................ 4.7%
Pharmaceuticals............ 4.2%
Natural Gas Pipeline and
Distribution............. 3.8%
<CAPTION>
AS OF DECEMBER 31, 1995
<S> <C>
Government................. 33.2%
Oil and Gas................ 5.6%
Telecommunications......... 4.9%
Paper...................... 4.3%
Retail..................... 3.9%
</TABLE>
ASSET ALLOCATION
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
<S> <C> <C> <C>
Stocks........................ 51.8%
Bonds......................... 34.6%
Cash and Short-Term
Investments................... 11.4%
Other......................... 2.2%
Pie Chart
<CAPTION>
AS OF DECEMBER 31, 1995
<S> <C> <C> <C>
Stocks........................ 58.8%
Bonds......................... 29.2%
Cash and Short-Term
Investments................... 10.5%
Other......................... 1.5%
Pie Chart
</TABLE>
A-13
<PAGE> 49
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments
are being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Standard & Poor's 500 Composite
Stock Index over time. As a broad-based, unmanaged statistical composite, this
index does not reflect any commissions or fees which would be incurred by an
investor purchasing the securities it represents. Similarly, its performance
does not reflect any sales charges or other costs which would be applicable to
an actively managed portfolio, such as that of the Fund.
A-14
<PAGE> 50
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
VKAC Balanced Fund vs. S&P 500 Composite Stock Index and a Hybrid Index of
stocks and bonds* (June 1994 through June 1996)
class a perf chart
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions for the period ended June 30, 1996,
and includes payment of the maximum sales charge (5.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
* The Hybrid Index is a simulated composite reflecting 60% of the S&P 500 Index
return and 40% of the Lehman Brothers Intermediate Government Index return.
This index is included in addition to the S&P 500 Index as it provides a
better approximation of the Fund's asset mix of both stocks and bonds.
A-15
<PAGE> 51
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
We recently spoke with the management team of the Van Kampen American Capital
Balanced Fund about the key events and economic forces that shaped the markets
during the past fiscal year. The team includes B. Robert Baker, Jr. (equities),
and Thomas Copper (fixed income), portfolio managers, and Alan T. Sachtleben,
executive vice president for equity investments. The following excerpts reflect
their views on the Fund's performance during the 12-month period ended June 30,
1996.
Q
CAN YOU BRIEFLY DESCRIBE THE FUND'S ASSET ALLOCATION AND
THE FACTORS THAT HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE OVER
THE PAST 12 MONTHS?
A
During the last six months of 1995, we maintained the Fund's typical
asset allocation of roughly 60 percent stocks, 30 percent bonds, and 10
percent cash (60-30-10). Continued slow economic growth, minimal
inflationary fears, and strong corporate earnings helped the Fund's equity
holdings post strong returns while falling interest rates helped the Fund's bond
holdings register gains.
Our emphasis on individual stock selection and a focus on undervalued cyclical
stocks (at the time, paper companies like Boise Cascade) accounted for the
Fund's strength in the fourth quarter. While the technology sector fell victim
to dramatic price fluctuations, this did not significantly affect the Fund
because we invest in stocks from a variety of sectors. And, with our holdings in
Treasury bonds and cyclical stocks, the Fund continued its strong performance
through the remainder of the year.
At the beginning of 1996, the market was greeted by unexpectedly strong
economic growth, better corporate earnings and rising interest rates. Although
this reduced the value of some of the Fund's bond holdings, the stock market
reacted very positively for most of the first quarter.
Because we believed bonds looked more attractive as the second quarter began,
we decided to allocate more of the Fund's assets--approximately 5 percent--to
bonds, thereby shifting the asset allocation to roughly 55 percent stocks, 35
percent bonds, and 10 percent cash. Please refer to page four for Fund portfolio
highlights.
Q
OVERALL, HOW DID THE FUND PERFORM OVER THE PAST 12 MONTHS?
A
We were satisfied with the Fund's performance. Class A shares of the Fund
enjoyed a total return at net asset value of 15.07 percent(1). By
comparison, the Lipper Balanced Fund Index achieved a total return of
15.03 percent, while the Standard & Poor's 500-Stock Index returned 25.93
percent. Keep in mind that the Lipper Balanced Fund Index represents the average
performance of balanced funds
A-16
<PAGE> 52
and does not reflect any sales charges that would be paid by an investor
purchasing the funds it represents. The S&P 500-Stock Index is a broad-based,
unmanaged index that reflects general stock market performance and does not
reflect any commissions or fees that would be paid by an investor purchasing the
securities it represents. Please refer to the chart on page three for additional
Fund performance results.
Q
WHY THE DISPARITY BETWEEN THE FUND AND THE
S&P 500-STOCK INDEX?
A
Over the most recent 12-month period, many stocks enjoyed record or near-
record returns. Because stocks only make up a portion of the Fund's
portfolio, it obviously could not match an index consisting fully of stocks. We
believe the Lipper Balanced Fund Index more accurately reflects the average
performance of funds consisting of stocks and bonds.
Q
OVER THE 12-MONTH PERIOD, WHICH OF THE FUND'S HOLDINGS HAD THE STRONGEST
PERFORMANCE?
A
During the second half of 1995, the Fund's stock holdings of AMR (parent
company of American Airlines), Exxon, and Philip Morris contributed
significantly to its performance. We also owned stock in all three major long-
distance telephone companies (AT&T, MCI, and Sprint). At first, the prices of
these stocks remained depressed because of the uncertainty surrounding the then-
pending government telecommunications reform. As the positive effects of this
reform became apparent, all three companies enjoyed gains in their stock prices.
In the first half of 1996, energy stocks performed particularly well. Because
of the long, cold winter, many natural gas reserves had to be tapped. As the
year progressed, the demand on pipeline and distribution companies to rebuild
those reserves intensified. Demand exceeded supply, and this was reflected in
the higher prices of natural gas stocks (pipelines and distribution companies)
in the Fund's portfolio.
Q
WHAT IS YOUR OUTLOOK FOR THE NEXT SIX MONTHS?
A
Contradictory economic and corporate reports continue to fuel uncertainty
about the direction of the economy. We anticipate a fairly flat market
for the remainder of the year along with the possibility of a minor
correction. These same factors should also result in a stable bond market.
The Fund utilizes a disciplined, value-oriented stock-picking approach that is
rooted in extensive research. By maintaining this approach and utilizing the
A-17
<PAGE> 53
appropriate allocation among stocks, bonds, and cash, we feel the Fund is well-
positioned going forward.
<TABLE>
<S> <C> <C>
/s/ Alan T. Sachtleben /s/ B. Robert Baker, /s/ Thomas Copper
Alan T. Sachtleben Jr. Thomas Copper
Executive Vice B. Robert Baker, Jr. Portfolio Manager
President Portfolio Manager
Equity Investments
</TABLE>
A-18
<PAGE> 54
BALANCED FUND SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE BALANCED FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
DEALERS--FOR INFORMATION
WITH RESPECT TO THE
REORGANIZATION 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
EQUITY INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser of the Equity Income Fund
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor of the Equity Income Fund
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent of the Equity Income Fund
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Equity Income Fund
Custodian of the Equity Income Fund
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Equity Income Fund
Legal Counsel of the Equity Income Fund
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (Illinois)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants of the Equity Income
Fund
PRICE WATERHOUSE LLP
1201 Louisiana, Suite 2900
Houston, TX 77002
<PAGE> 55
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
JANUARY , 1997
------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
APPROVAL OF PROPOSED REORGANIZATION...................................... 3
A. SUMMARY........................................................... 3
The Reorganization.............................................. 3
Reasons for the Proposed Reorganization......................... 4
Comparison of the Equity Income Fund and the Balanced Fund...... 6
B. RISK FACTORS...................................................... 16
Similarity of Risks............................................. 16
Differences in Risks............................................ 17
C. THE PROPOSED REORGANIZATION....................................... 18
Terms of the Agreement.......................................... 18
Description of Securities to be Issued.......................... 20
Continuation of Shareholder Accounts and Plans; Share
Certificates.................................................... 20
Federal Income Tax Consequences................................. 21
Expenses........................................................ 23
Ratification of Investment Objective, Investment Policies and
Restrictions of the Equity Income Fund........................ 23
Legal Matters................................................... 23
D. RECOMMENDATION OF THE BALANCED BOARD.............................. 24
OTHER INFORMATION........................................................ 24
A. SHAREHOLDERS OF THE EQUITY INCOME FUND, THE BALANCED FUND AND
VKAC............................................................ 24
B. SHAREHOLDER PROPOSALS............................................. 25
VOTING INFORMATION AND REQUIREMENTS...................................... 25
EXHIBIT A: MANAGEMENT'S DISCUSSION OF EQUITY INCOME FUND AND BALANCED
FUND PERFORMANCE....................................................... A-1
</TABLE>
------------------------------------------------------------------------------
-- A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH --
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------------
<PAGE> 56
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
SUPPLEMENT DATED JUNE 1, 1996, TO THE PROSPECTUS DATED APRIL 29, 1996
Class B Shares purchased on or after June 1, 1996 automatically will convert
to Class A Shares eight years after the end of the calendar month in which the
investor's order to purchase was accepted. The Fund's contingent deferred sales
charge schedule for Class B Shares is not effected by such conversion.
The section of the Prospectus captioned "ANNUAL FUND OPERATING EXPENSES AND
EXAMPLE" is hereby amended as follows:
The expenses for Class B Shares assuming redemption at the end of a ten year
period are $185 and the expenses for Class B Shares assuming no redemption at
the end of a ten year period are $185.
Effective July 1, 1996, the footnote on the sales charge table located in
the section of the Prospectus captioned "PURCHASE OF SHARES" is hereby amended
as follows:
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to brokers, dealers or 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 with respect to
contingent deferred sales charges.
<PAGE> 57
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
SUPPLEMENT DATED JULY 1, 1996, TO THE PROSPECTUS DATED
APRIL 29, 1996, AS PREVIOUSLY SUPPLEMENTED ON JUNE 1, 1996.
On June 24, 1996, VK/AC Holding, Inc. announced it had entered into an
Agreement and Plan of Merger among Morgan Stanley Group Inc., MSAM Holdings II,
Inc. and MSAM Acquisition Inc., pursuant to which MSAM Acquisition Inc. will be
merged with and into VK/AC Holding, Inc. and VK/AC Holding, Inc. will be the
surviving corporation. Van Kampen American Capital, Inc. is a wholly owned
subsidiary of VK/AC Holding, Inc. The Fund's investment adviser, Van Kampen
American Capital Asset Management, Inc. (the "Adviser"), is a wholly owned
subsidiary of Van Kampen American Capital, Inc.
The proposed transaction may be deemed to cause an assignment, within the
meaning of the Investment Company Act of 1940 and the Investment Advisers Act of
1940, of the investment advisory agreement between the Adviser and the Fund.
Accordingly, the completion of the transaction is contingent upon, among other
things and subject to certain de minimis exceptions, the approval of both the
Board of Trustees of the Fund and the shareholders of the Fund of a new
investment advisory agreement between the Fund and the Adviser. Management of
the Fund currently anticipates recommending to the Fund's board of trustees that
a special meeting of shareholders be called to obtain such approval and that the
record date for such shareholder meeting be a date in late August. Management of
the Fund also anticipates that investment advisory fees under the new investment
advisory agreement to be voted on at such meeting will be in the same amount as
those paid under the current investment advisory agreement between the Fund and
the Adviser.
MSAM Acquisition Inc. is a wholly owned subsidiary of MSAM Holdings II, Inc.
which, in turn, is a wholly owned subsidiary of Morgan Stanley Group Inc.
Subject to a number of conditions being met, it is currently anticipated that a
closing will occur on or about November 29, 1996. Thereafter, VK/AC Holding,
Inc. and its affiliated entities shall be part of Morgan Stanley Group Inc.
The section of the Prospectus captioned "Investment Practices" is hereby
supplemented as follows:
The Fund's investment policies currently permit it to make investments in
foreign securities. The Fund has obtained exemptive relief from the Securities
and Exchange Commission to make its investments in foreign securities, together
with other investment companies advised by the Adviser and its affiliates,
through Van Kampen American Capital Foreign Securities Fund (the "Foreign
Securities Fund"). Shares of the Foreign Securities Fund are available only to
investment
<PAGE> 58
companies advised by the Adviser and its affiliates. The Adviser believes that
the use of the Foreign Securities Fund will provide the Fund with a more
effective exposure to the performance of foreign securities while at the same
time minimizing costs. The Adviser charges no advisory fee for managing the
Foreign Securities Fund, nor is there any sales load or other charges associated
with the distribution of its shares. Other expenses incurred by the Foreign
Securities Fund are borne by it, and thus indirectly by the Van Kampen American
Capital funds that invest in them, including the Fund. With respect to such
other expenses, the Adviser anticipates that the efficiencies resulting from use
of the Foreign Securities Fund will result in cost savings for the Fund and for
other Van Kampen American Capital funds, including reduced administrative and
portfolio transaction costs. The Fund and each other Van Kampen American Capital
fund that invest in the Foreign Securities Fund will be deemed to own a pro rata
portion of each portfolio security owned by the Foreign Securities Fund. The
Fund anticipates that it will commence making investments through the Foreign
Securities Fund on or about the date hereof.
The section of the Prospectus captioned "Purchase of Shares" is hereby
supplemented as follows:
GROUP PURCHASES. Individuals who are members of a "qualified group" may
purchase Class A Shares of the Fund without the imposition of a front end sales
charge. For this purpose, a qualified group is one which (i) has been in
existence for more than six 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 funds in the Van Kampen American Capital Family of 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 organizational 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 contingent deferred sales charge or one percent 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.
<PAGE> 59
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
SUPPLEMENT DATED NOVEMBER 1, 1996, TO THE PROSPECTUS DATED APRIL 29, 1996,
AS PREVIOUSLY SUPPLEMENTED ON JUNE 1, 1996 AND JULY 1, 1996.
On October 31, 1996, VK/AC Holding, Inc. became a wholly owned indirect
subsidiary of Morgan Stanley Group Inc. pursuant to the closing of an Agreement
and Plan of Merger among Morgan Stanley Group Inc., MSAM Holdings II, Inc. and
MSAM Acquisition Inc., whereby MSAM Acquisition Inc. was merged with and into
VK/AC Holding, Inc. and VK/AC Holding, Inc. was the surviving corporation (the
"Acquisition"). As a result of the Acquisition, VK/AC Holding, Inc. became a
wholly owned subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly
owned subsidiary of Morgan Stanley Group Inc. VK/AC Holding, Inc. is the
indirect parent of the Fund's investment adviser, Van Kampen American Capital
Asset Management Inc. (the "Adviser").
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Asset Management Inc., an investment
adviser ("MSAM"), Morgan Stanley & Co. Incorporated, a registered broker-dealer
and investment 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. As of September
30, 1996, MSAM, together with its affiliated investment advisory companies, had
approximately $103.5 billion of assets under management and fiduciary advice.
Prior to October 31, 1996, VK/AC Holding, Inc. was controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership. References in the attached
Prospectus to The Clayton & Dubilier Private Equity IV Limited Partnership and
its management are hereby deleted. In addition, item (2) under the subheading
"Other Purchase Programs -- NAV Purchase Options" is hereby amended and restated
in its entirety to state:
"(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees
<PAGE> 60
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."
At a special meeting of shareholders of the Fund held on October 25, 1996,
shareholders approved changes to the Fund's fundamental investment restrictions
to permit the Fund to invest its assets in shares of certain investment
companies, consistent with its investment objectives and policies, in excess of
the investment limitations imposed by the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund believes that from time to time it can more
effectively and efficiently invest in certain types of securities by pooling its
assets for such securities with assets of other investment companies managed by
the Adviser and its affiliates. Prior to engaging in such transactions, the Fund
and its Adviser and affiliates together with other investment companies managed
by the Adviser and its affiliates will obtain exemptive relief from the
Securities and Exchange Commission ("SEC") to permit such transactions. In order
to take full advantage of any exemptive relief granted by the SEC, the Fund
hereby restates its fundamental investment restriction, approved by
shareholders, regarding investment in other investment companies to state:
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.
In addition, to the extent the Fund's fundamental investment restrictions
regarding diversification, control, unseasoned issuers or restricted securities
may be deemed to preclude the Fund from taking full advantage of any exemptive
relief granted by the SEC, the Fund hereby adds the following exception, as
approved by shareholders, to each applicable restriction:
..., 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.
<PAGE> 61
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital Equity Income Fund (the "Fund") is a mutual fund
seeking as its primary investment objective the highest possible income
consistent with safety of principal. Long-term growth of capital is an important
secondary investment objective. The Fund attempts to achieve these investment
objectives by investing primarily in income-producing equity instruments and
other debt securities issued by a wide group of companies in many different
industries. There is no assurance that the Fund will achieve its investment
objectives.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information 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.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR 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 POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 29, 1996, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the 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.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 29, 1996.
<PAGE> 62
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Shareholder Transaction Expenses................................. 5
Annual Fund Operating Expenses and Example....................... 6
Financial Highlights............................................. 8
The Fund......................................................... 10
Investment Objectives and Policies............................... 10
Investment Practices............................................. 12
Investment Advisory Services..................................... 16
Alternative Sales Arrangements................................... 18
Purchase of Shares............................................... 21
Shareholder Services............................................. 30
Redemption of Shares............................................. 35
Distribution Plans............................................... 38
Distributions from the Fund...................................... 40
Tax Status....................................................... 41
Fund Performance................................................. 42
Description of Shares of the Fund................................ 44
Additional Information........................................... 44
</TABLE>
NO DEALER, SALESPERSON 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.
2
<PAGE> 63
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Equity Income (the "Fund") is a
diversified, 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 OBJECTIVES. Highest possible income consistent with safety of
principal. Long-term growth of capital is a secondary investment objective.
There is, however, no assurance that the Fund will be successful in achieving
its investment objectives. See "Investment Objectives and Policies."
INVESTMENT POLICY. Invests primarily in income-producing equity instruments and
other debt securities. Because prices of common stocks and debt securities
fluctuate, the value of an investment in the Fund will vary based upon the
Fund's investment performance. The medium grade debt securities in which the
Fund may invest are subject to greater market risks and less assurance as to the
ability of the issuer to meet its principal and interest obligations than higher
rated debt securities. Use of options, futures contracts and related options may
include additional risks. See "Investment Practices -- Using Options, Futures
Contracts and Related Options."
INVESTMENT RESULTS. The investment results of the Fund during the last ten years
are shown in the table of "Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
public, each with its own sales charge structure: Class A shares, Class B shares
and Class C shares. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class of shares that best
suits their circumstances and objectives. Each class of shares represents an
interest in the same portfolio of investments of the Fund. See "Alternative
Sales Arrangements." For information on redeeming shares see "Redemption of
Shares."
Class A Shares. Class A shares are offered at net asset value per share plus a
maximum initial sales charge of 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of 1.00% may be imposed on redemptions made
within one year of the purchase. Class A shares are subject to an annual service
fee of up to 0.25% of its average daily net assets attributable to such class of
shares. See "Purchase of Shares -- Class A Shares" and "Distribution Plans."
3
<PAGE> 64
Class B Shares. Class B shares are offered at net asset value per share and
are subject to a maximum contingent deferred sales charge of 5.00% of redemption
proceeds on redemptions made within the first year after purchase, and such
charge declines each year thereafter to 0.00% after the fifth year. See
"Redemption of Shares." Class B shares are subject to a combined annual
distribution fee and service fee of up to 1.00% of its average daily net assets
attributable to such class of shares. See "Purchase of Shares -- Class B Shares"
and "Distribution Plans." Class B shares will convert automatically to Class A
shares six years after the end of the calendar month in which the shareholder's
order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
Class C Shares. Class C shares are offered at net asset value per share and
are subject to a contingent deferred sales charge of 1.00% of redemption
proceeds on redemptions made within one year of purchase. See "Redemption of
Shares." Class C shares are subject to a combined annual distribution fee and
service fee of up to 1.00% of its average daily net assets attributable to such
class of shares. See "Purchase of Shares -- Class C Shares" and "Distribution
Plans." Class C shares will convert automatically to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Alternative Sales Arrangements -- Conversion Feature."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
is the distributor of the Fund's shares.
DISTRIBUTIONS FROM THE FUND. Dividends from net investment income are
distributed on a quarterly basis, and capital gains, if any, are distributed
annually. Such distributions are automatically reinvested in shares of the Fund
at net asset value per share (without a sales charge) unless payment in cash is
requested. See "Distributions from the Fund."
The above is qualified in its entirety by reference to the more
detailed information appearing elsewhere in this Prospectus.
4
<PAGE> 65
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)............... 5.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering
price)........................ None None None
Deferred sales charge (as a
percentage of the lesser of
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 fee.................... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase. See "Purchase
of Shares -- Class A Shares."
5
<PAGE> 66
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)........................ 0.41% 0.41% 0.41%
12b-1 Fees (as a percentage of average
daily net assets)(1)..................... 0.21% 1.00%(2) 1.00%(2)
Other Expenses (as a percentage of average
daily net assets)........................ 0.33% 0.34% 0.35%
Total Fund Operating Expenses (as a
percentage of average daily net
assets).................................. 0.95% 1.75% 1.76%
</TABLE>
- ------------------------------------------------------------------------------
(1) Class A shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
shares and Class C shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Distribution Plans."
(2) Individual long-term shareholders may pay more than the economic equivalent
of the maximum front-end sales charges permitted as a fund-level expense by
NASD Rules.
6
<PAGE> 67
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 0.95% for
Class A shares, 1.75% for Class B shares
and 1.76% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $ 67 $ 86 $107 $167
Class B............................... $ 69 $ 88 $112 $166*
Class C............................... $ 28 $ 55 $ 95 $207
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $ 67 $ 86 $107 $167
Class B............................... $ 18 $ 55 $ 95 $166*
Class C............................... $ 18 $ 55 $ 95 $207
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the Securities and Exchange
Commission (the "SEC") to utilize a 5% annual return assumption. Class B shares
acquired through the exchange privilege are subject to the deferred sales charge
schedule relating to the Class B shares of the Fund from which the purchase of
Class B shares was originally made. Accordingly, future expenses as projected
could be higher than those determined in the above table if the investor's Class
B shares were exchanged from a fund with a higher contingent deferred sales
charge. 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
LESS THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Purchase of Shares," "Investment Advisory Services," "Redemption
of Shares" and "Distribution Plans."
7
<PAGE> 68
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for a share of beneficial interest
outstanding throughout each of the periods indicated)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto
included in the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------
1995 1994 1993 1992 1991 1990
--------- ---------- ---------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $5.16 $5.55 $5.15 $4.83 $4.00 $4.48
--------- ---------- ---------- --------- --------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................... .25 .27 .25 .255 .26 .255
Expenses............................................... (.05) (.06) (.06) (.05) (.045) (.035)
--------- ---------- ---------- --------- --------- --------
Net investment income................................... .20 .21 .19 .205 .215 .22
Net realized and unrealized gain (loss) on securities... 1.458 (.317) .6055 .31 .83 (.42)
--------- ---------- ---------- --------- --------- --------
Total from investment operations........................ 1.658 (.107) .7955 .515 1.045 (.20)
--------- ---------- ---------- --------- --------- --------
LESS DISTRIBUTIONS FROM
Net investment income.................................. (.188) (.1855) (.168) (.195) (.215) (.235)
Net realized gain on securities........................ (.32) (.0975) (.2275) -- -- (.045)
--------- ---------- ---------- --------- --------- --------
Total distributions..................................... (.508) (.283) (.3955) (.195) (.215) (.28)
--------- ---------- ---------- --------- --------- --------
Net asset value, end of period.......................... $6.31 $5.16 $5.55 $5.15 $4.83 $4.00
========== =========== =========== ========== ========== =========
TOTAL RETURN(3)......................................... 32.57% (1.98%) 16.00% 10.72% 26.67% (4.68%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $ 349.9 $ 240.5 $ 187.6 $ 123.8 $ 103.1 $ 85.4
Ratios to average net assets
Expenses............................................... .95% 1.02% 1.06% 1.01% 1.02% .89%
Net investment income.................................. 3.43% 3.60% 3.33% 3.95% 4.88% 5.39%
Portfolio turnover rate................................. 92% 92% 101% 74% 80% 150%
<CAPTION>
1989 1988 1987 1986
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................... $3.94 $3.92 $4.59 $4.75
--------- -------- -------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................................... .295 .33 .35 .33
Expenses............................................... (.035) (.03) (.04) (.04)
--------- -------- -------- ---------
Net investment income................................... .26 .30 .31 .29
Net realized and unrealized gain (loss) on securities... .575 .18 (.185) .29
--------- -------- -------- ---------
Total from investment operations........................ .835 .48 .125 .58
--------- -------- -------- ---------
LESS DISTRIBUTIONS FROM
Net investment income.................................. (.295) (.30) (.30) (.30)
Net realized gain on securities........................ -- (.16) (.495) (.44)
--------- -------- -------- ---------
Total distributions..................................... (.295) (.46) (.795) (.74)
--------- -------- -------- ---------
Net asset value, end of period.......................... $4.48 $3.94 $3.92 $4.59
========== ========= ========= ==========
TOTAL RETURN(3)......................................... 21.74% 12.58% 1.90% 12.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................... $ 102.4 $ 94.8 $ 93.7 $ 101.1
Ratios to average net assets
Expenses............................................... .83% .79% .76% .76%
Net investment income.................................. 6.09% 7.32% 6.04% 5.80%
Portfolio turnover rate................................. 26% 73% 90% 53%
</TABLE>
(Table continued on following page)
8
<PAGE> 69
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
SHARES
CLASS B SHARES --------
---------------------------------------------------
MAY 1, YEAR
1992(1) ENDED
YEAR ENDED DECEMBER 31 THROUGH DECEMBER 31
----------------------------------- DECEMBER 31, -----------
1995 1994 1993(2) 1992(2) 1995
--------- ---------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............................... $5.16 $5.55 $5.15 $4.83 $5.16
--------- ---------- ---------- ------------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................. .25 .21 .24 .16 .25
Expenses.......................................................... (.10) (.08) (.10) (.06) (.10)
--------- ---------- ---------- ------------- --------
Net investment income.............................................. .15 .13 .14 .10 1.15
Net realized and unrealized gain (loss) on securities.............. 1.458 (.277) .6155 .337 1.458
--------- ---------- ---------- ------------- --------
Total from investment operations................................... 1.608 (.147) .7555 .437 1.608
--------- ---------- ---------- ------------- --------
LESS DISTRIBUTIONS FROM
Net investment income............................................. (.148) (.13) (.128) (.117) (.148)
Excess of book-basis net investment income........................ -- (.0155) -- -- --
Net realized gain on securities................................... (.32) (.0975) (.2275) -- (.32)
--------- ---------- ---------- ------------- --------
Total distributions................................................ (.468) (.243) (.3555) (.117) (.468)
--------- ---------- ---------- ------------- --------
Net asset value, end of period..................................... $6.30 $5.16 $5.55 $5.15 $6.30
========== =========== =========== ================ =======
TOTAL RETURN(3).................................................... 31.51% (2.70%) 14.94% 9.17% 31.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................... $ 408.9 $ 242.0 $ 115.4 $ 13.3 $ 38.3
Ratios to average net assets (annualized)
Expenses.......................................................... 1.75% 1.82% 1.89% 1.87% 1.76%
Net investment income............................................. 2.62% 2.82% 2.45% 3.06% 2.63%
Portfolio turnover rate............................................ 92% 92% 101% 74% 92%
<CAPTION>
JULY 6,
1993(1)
THROUGH
DECEMBER 31,
1994 1993(2)
--------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............................... $5.55 $5.37
--------- -------------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................. .23 .11
Expenses.......................................................... (.09) (.05)
--------- -------------
Net investment income.............................................. .14 .06
Net realized and unrealized gain (loss) on securities.............. (.287) .379
--------- -------------
Total from investment operations................................... (.147) .439
--------- -------------
LESS DISTRIBUTIONS FROM
Net investment income............................................. (.14) (.064)
Excess of book-basis net investment income........................ (.0055) --
Net realized gain on securities................................... (.0975) (.195)
--------- -------------
Total distributions................................................ (.243) (.259)
--------- -------------
Net asset value, end of period..................................... $5.16 $5.55
========== ================
TOTAL RETURN(3).................................................... (2.70%) 8.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............................... $ 26.9 $ 10.0
Ratios to average net assets (annualized)
Expenses.......................................................... 1.82% 1.98%
Net investment income............................................. 2.83% 2.27%
Portfolio turnover rate............................................ 92% 101%
</TABLE>
- ---------------
(1) Commencement of offering of sales.
(2) Based on average month-end shares outstanding.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
9
<PAGE> 70
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company, commonly
known as a mutual fund. A mutual fund provides, for those who have similar
investment goals, a practical and convenient way to invest in a diversified
portfolio of securities by combining their resources in an effort to achieve
such goals.
Van Kampen American Capital Asset Management, Inc. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
- ------------------------------------------------------------------------------
The Fund operates under the following four fundamental investment policies
which may not be changed without approval by a majority vote (as defined in the
Investment Company Act of 1940, as amended ("1940 Act")) of the Fund's
outstanding shares.
1. The Fund invests primarily in securities which provide the highest possible
income as is consistent with safety of principal. To the extent possible,
considering its primary investment objective, the Fund seeks long-term
growth of capital as a secondary objective.
2. The Fund may invest in income-producing equity instruments (subject to
number three below), debt securities and warrants or rights to acquire such
securities, in such proportions as economic conditions indicate would best
accomplish the Fund's objectives. Although the Fund has not adopted any
fundamental investment policies specifying the rating categories for
investment in debt securities, it is the current operating policy of the
Fund to invest in debt securities rated Baa or higher by Moody's Investors
Service, Inc. ("Moody's") or BBB or higher by Standard & Poor's Corporation
("S&P") or in nonrated securities considered by the Adviser to be of
comparable quality. It is also the operating policy of the Fund to invest
not more than 10% of its total assets in debt securities rated Baa by
Moody's or BBB by S&P or in nonrated securities considered by the Adviser
to be of comparable quality. These operating policies do not apply to
convertible securities which are selected primarily on the basis of their
equity characteristics. Ratings at the time of purchase determine which
securities may be acquired, and a subsequent reduction in ratings does not
require the Fund to dispose of a security. Securities rated Baa by Moody's
or BBB by S&P are considered by the rating agencies to be medium grade
obligations which possess speculative characteristics so that changes in
economic conditions or other circumstances are more
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<PAGE> 71
likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher rated securities. Debt securities with
longer maturities generally tend to produce higher yields and are subject
to greater market price fluctuations as a result of changes in interest
rates than debt securities with shorter maturities.
3. The Fund under normal conditions invests at least 65% of its total assets
in income-producing equity investments, which may include without
limitation dividend paying common or preferred stocks, interest paying
convertible debentures or bonds, or zero coupon convertible securities (on
which the Fund accrues income for tax and accounting purposes, but receives
no cash).
4. The Fund intends to diversify its investments among various industries,
although the Fund may invest up to 25% of its total assets in a particular
industry at any one time.
In selecting common stocks, the Adviser seeks attractive growth investments on
an individual company basis which may include common stocks which do not pay
dividends. The Fund may invest in securities that have above average volatility
of price movement including warrants or rights to acquire securities. Because
prices of common stocks and debt securities fluctuate, the value of an
investment in the Fund will vary based upon the Fund's investment performance.
The Fund attempts to reduce overall exposure to risk from declines in securities
prices by spreading its investments over many different companies in a variety
of industries. There is, however, no assurance that the Fund will be successful
in achieving its objectives.
Convertible securities rank senior to common stocks in a corporation's capital
structure. They are consequently of higher quality and entail less risk than the
corporation's common stock, although the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security sells
above its value as a fixed income security. The Fund may purchase convertible
securities rated Ba or lower by Moody's or BB or lower by S&P. Although the Fund
selects these securities primarily on the basis of their equity characteristics,
investors should be aware that debt securities rated in these categories are
considered high risk securities; the rating agencies consider them speculative,
and payment of interest and principal is not considered well assured. To the
extent that such convertible securities are acquired by the Fund there is a
greater risk as to the timely repayment of the principal of, and timely payment
of interest or dividends on, such securities than in the case of higher rated
convertible securities.
For a discussion of the Fund's practices regarding investments in foreign
securities or investments in investment companies, see "Investment Practices --
Securities of Foreign Issuers," "Investment Practices -- Investment in
Investment Companies," respectively.
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<PAGE> 72
When, in the opinion of the Adviser, market conditions dictate a temporary
defensive position, the Fund may invest up to 100% of its total assets in cash,
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, prime commercial paper, certificates of deposit, bankers'
acceptances and repurchase agreements. See "Investment Practices -- Repurchase
Agreements."
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. The Fund will not invest in
repurchase agreements maturing in more than seven days if any such investment,
together with any other illiquid securities held by the Fund, exceeds 10% of the
value of its net assets. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and loss including: (a) possible decline
in the value of the underlying security during the period while the Fund seeks
to enforce its rights thereto, (b) possible lack of access to income on the
underlying security during this period and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested 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 greater 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 order
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize options, futures contracts and options thereon in several different
ways, depending upon the status of the Fund's portfolio and the Adviser's
expectations concerning the securities markets.
In times of stable or rising security prices, the Fund generally seeks to
obtain maximum exposure to the securities markets, i.e., to be "fully invested."
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<PAGE> 73
Nevertheless, even when the Fund is fully invested, prudent management requires
that at least a small portion of assets be available as cash to honor redemption
requests and for other short-term needs. The Fund may also have cash on hand
that has not yet been invested. The portion of the Fund's assets that is
invested in cash equivalents does not fluctuate with security market prices, so
that, in times of rising market prices, the Fund may underperform the market in
proportion to the amount of cash equivalents in its portfolio. By purchasing
futures contracts, however, the Fund can compensate for the cash portion of its
assets and obtain equivalent performance to investing 100% of its assets in
equity securities.
If the Adviser forecasts a market decline, the Fund may take a defensive
position, reducing its exposure to the securities markets by increasing its cash
position. By selling futures contracts instead of portfolio securities, a
similar result can be achieved to the extent that the performance of the stock
index futures contracts correlates to the performance of the Fund's portfolio
securities. Sale of futures contracts could frequently be accomplished more
rapidly and at less cost than the actual sale of securities. Once the desired
hedged position has been effected, the Fund could then liquidate securities in a
more deliberate manner, reducing its futures position simultaneously to maintain
the desired balance, or it could maintain the hedged position.
As an alternative to selling stock index futures contracts, the Fund can
purchase stock index puts (or stock index futures puts) to hedge the portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of the Fund's investment portfolio. If the market remains stable or
advances, the Fund can refrain from exercising the put and its portfolio will
participate in the advance, having incurred only the premium cost for the put.
In certain cases, the options and futures markets provide investment or risk
management opportunities that are not available from direct investments in
securities. In addition, some strategies can be performed with greater ease and
at lower cost by utilizing the options and futures markets rather than
purchasing or selling portfolio securities.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options and futures contracts involve risks different from
those involved with direct investments in underlying securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments, which
may increase the Fund's expenses and reduce its return. The Fund may write or
purchase options in privately
13
<PAGE> 74
negotiated transactions ("OTC Options") as well as listed options. OTC Options
can be closed out only by agreement with the other party to the transaction. Any
OTC Option purchased by the Fund is considered an illiquid security. Any OTC
Option written by the Fund is with a qualified dealer pursuant to an agreement
under which the Fund may repurchase the option at a formula price. Such options
are considered illiquid to the extent that the formula price exceeds the
intrinsic value of the option. The Fund may not purchase or sell futures
contracts or related options for which the aggregate initial margin and premiums
exceed 5% of the fair market value of the Fund's assets. In order to prevent
leverage in connection with the purchase of futures contracts by the Fund, an
amount of cash, cash equivalents or liquid high grade debt securities equal to
the market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the Custodian.
The Fund may not invest more than 10% of its net assets in illiquid securities
and repurchase agreements which have a maturity of longer than seven days. A
more complete discussion of the potential risks involved in transactions in
options, futures contracts and related options is contained in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuing basis. The Adviser is authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the Fund and
other Van Kampen American Capital mutual funds if it reasonably believes that
the quality of the execution and the commission are comparable to that available
from other qualified brokerage firms. The Adviser is authorized to pay higher
commissions to brokerage firms that provide it with investment research
information than to firms which do not provide such services if the Adviser
determines that such commissions are reasonable in relation to the overall
services provided. The information received may be used by the Adviser in
managing the assets of other advisory accounts as well as in the management of
the assets of the Fund.
INVESTMENT IN INVESTMENT COMPANIES. The Fund may invest in a separate
investment company, Van Kampen American Capital Small Capitalization Fund
("Small Cap Fund"), that invests in a broad selection of small capitalization
securities. The shares of the Small Cap Fund are available for investment only
by certain Van Kampen American Capital funds. The Adviser believes that the use
of the Small Cap Fund will provide the Fund with the most effective exposure to
the performance of the small capitalization sector of the stock market while at
the same time minimizing costs. The Small Cap Fund does not pay advisory fees,
nor is there any sales load or other charges associated with distribution of its
shares. Other expenses incurred by the Small Cap Fund are borne by it, and thus
indirectly by the
14
<PAGE> 75
Van Kampen American Capital funds that invest in it. With respect to such other
expenses, the Adviser anticipates that the efficiencies resulting from use of
the Small Cap Fund will result in cost savings for the Fund and other Van Kampen
American Capital funds. In large part these savings will be 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 stocks will need to be performed only once. The Adviser expects
that the Small Cap Fund will experience trading costs that will be substantially
less than the trading costs that would be incurred if small capitalization
stocks were purchased separately for the Fund and other Van Kampen American
Capital funds.
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.
For purposes of reviewing the Fund's portfolio diversification, the Fund will
be deemed to own its pro rata portion of the investments of the Small Cap 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.
SECURITIES OF FOREIGN ISSUERS. The Fund may invest up to 15% of its total
assets in securities of foreign governments and companies. Such investments may
be subject to special risks, including changes in currency exchange rates,
future political and economic developments, the possible imposition of
additional withholding taxes on dividend or interest income payable on the
securities, or the seizure or nationalization of companies, or establishment of
exchange controls or adoption of other restrictions which might adversely affect
the investment.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority vote (as defined in the 1940 Act) of the outstanding shares of the
Fund. These restrictions provide, among other things, that the Fund may not:
1. Invest more than 25% of its total net asset value in any one 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.
15
<PAGE> 76
2. Purchase a restricted security or a security for which market quotations
are not readily available if as a result of such purchase more than 5% of
the Fund's assets would be invested in such securities; 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.
In addition to the foregoing, the Fund has adopted additional investment
restrictions which may be changed by the Trustees without a vote of
shareholders. These restrictions provide that the Fund may not:
1. Invest in the securities of a foreign issuer if, at the time of
acquisition, more than 15% of the Fund's total assets would be invested in
such securities.
2. Invest more than 10% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements that have a
maturity of longer than seven days.
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INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $50 billion under management or supervision. Van Kampen American Capital's
more than 40 open-end and 38 closed-end funds and more than 2,800 unit
investment trusts are professionally distributed by leading financial advisers
nationwide. Van Kampen American Capital Distributors, Inc., the distributor of
the Fund and the sponsor of the funds mentioned above, is also a wholly-owned
subsidiary of Van Kampen American Capital.
Van Kampen American Capital is a wholly-owned subsidiary of VK/AC Holding,
Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc. a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital own, in the aggregate, not more than 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
16
<PAGE> 77
approximately an additional 13% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed on average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET
ASSETS % PER ANNUM
----------------------------------------- -------------
<S> <C>
First $150 million....................... 0.50 of 1.00%
Next $100 million........................ 0.45 of 1.00%
Next $100 million........................ 0.40 of 1.00%
Over $350 million........................ 0.35 of 1.00%
</TABLE>
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Operating expenses paid
by the Fund include shareholder service agency fees, distribution fees, service
fees, custodial fees, legal and accounting fees, the costs of reports and
proxies to shareholders, trustees' fees, and all other business expenses not
specifically assumed by the Adviser. Advisory (management) fee and total
operating expense ratios are shown under the caption "Annual Fund Operating
Expenses and Example" herein.
From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
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 directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. Mr. James Gilligan has been primarily responsible for
the day-to-day management of the Fund's investment portfolio since January 1990.
Mr. Gilligan is currently Senior Vice President of the Adviser and has been Vice
17
<PAGE> 78
President of the Adviser since March 1990 and Senior Vice President of Van
Kampen American Capital Investment Advisory Corp. since June 1995.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of 1.00% may be imposed on certain
redemptions made within one year of the purchase. Class A shares are subject to
an ongoing service fee at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Certain purchases
of Class A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within five years of purchase. Class B
shares are subject to an ongoing service fee at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class B shares
and an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class B shares. Class B
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
B Shares." Class B shares will convert automatically to Class A shares six years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to
18
<PAGE> 79
Class A shares. See "Purchase of Shares -- Class C Shares." Class C shares will
automatically convert to Class A shares ten years after the end of the calendar
month in which the shareholder's order to purchase was accepted. See "Conversion
Feature" herein for discussion on applicability of the conversion feature to
Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six or ten years, respectively, after the end of the
calendar month in which the shares were purchased and will no longer be subject
to the distribution fee. Such conversion will be on the basis of the relative
net asset values per share, without the imposition of any sales load, fee or
other charge. The purpose of the conversion feature is to relieve the holders of
the Class B shares and Class C shares that have been outstanding for a period of
time sufficient for the Distributor to have been substantially compensated for
distribution expenses related to the Class B shares or Class C shares, as the
case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A shares, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A shares, an equal pro rata portion of the Class B shares or Class C
shares in the sub-account will also convert to Class A shares.
The conversion of Class B shares and Class C 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 distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, as amended (the "Code"), and (ii) the conversion of
shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six or ten years, respectively, after the end of the calendar month in
which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such
19
<PAGE> 80
differential would be offset by the higher dividends per share on Class A
shares. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares. In this regard, Class A shares may
be more beneficial to the investor who qualifies for reduced initial sales
charges or purchases shares at net asset value, as described herein under
"Purchase of Shares -- Class A Shares." It is presently the policy of the
Distributor not to accept any order in an amount of $500,000 or more for Class B
shares or any order of $1 million or more for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds, For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
shares or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING
20
<PAGE> 81
DISTRIBUTION FEE WITH RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE
SAME AS THOSE OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See
"Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A shares, Class B
shares and Class C shares will be calculated in the same manner at the same time
on the same day, except that the distribution fees and any incremental transfer
agency costs relating to Class B shares and Class C shares will be borne by the
respective class. See "Distributions from the Fund." Shares of the Fund may be
exchanged, subject to certain limitations, for shares of the same class of other
mutual funds distributed by the Distributor. See "Shareholder
Services -- Exchange Privilege."
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application accompanying this Prospectus
and forwarding the application, through the authorized dealer, to the
shareholder service agent, ACCESS Investor Services, Inc., a wholly-owned
subsidiary of Van Kampen American Capital ("ACCESS"). When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A shares,
Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. Net asset value per share
for each class
21
<PAGE> 82
is determined once daily as of the close of trading on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m., New York time) each day the
Exchange is open. Net asset value per share for each class is determined by
dividing the value of the Fund's securities, cash and other assets (including
accrued interest) attributable to such class less all liabilities (including
accrued expenses) attributable to such class, by the total number of shares of
the class outstanding. Such computation is made by using prices as of the close
of trading on the New York Stock Exchange and (i) valuing securities listed or
traded on a national securities exchange at the last reported sale price, or if
there has been no sale that day, at the mean between the last reported bid and
asked prices, (ii) valuing over-the-counter securities for which the last sale
price is available from the National Association of Securities Dealers Automated
Quotations ("NASDAQ") at that price, (iii) valuing all other over-the-counter
securities for which market quotations are available at the mean between the
most recent bid and asked quotations supplied by NASDAQ or broker-dealers, and
(iv) valuing any securities for which market quotations are not readily
available, and any other assets, at fair value as determined in good faith by
the Trustees of the Fund. Short-term investments are valued in the manner
described in the notes to the Financial Statements included in the Statement of
Additional Information.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class A
shares, Class B shares and Class C shares may differ from one another,
reflecting the daily expense accruals of the distribution and higher transfer
agency fees applicable with respect to the Class B shares and Class C shares and
the differential in the dividends paid on the classes of shares. The price paid
for shares purchased is based on the next calculation of net asset value (plus
sales charges, where applicable) after an order is received by an authorized
dealer provided such order is transmitted to the Distributor prior to the
Distributor's close of business on such day. Orders received by authorized
dealers after the close of the Exchange are priced based on the next close
provided they are received by the Distributor prior to the Distributor's close
of business on such day. It is the responsibility of authorized dealers to
transmit orders received by them to the Distributor so they will be received
prior to such time. Orders of less than $500 are mailed by the authorized dealer
and processed at the offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments, has the same rights and is identical in all respects, except that
(i) Class B shares and Class C shares bear the expenses of the deferred sales
arrangement and any expenses (including the distribution fee and incremental
transfer agency costs) resulting from such sales arrangement, (ii) generally,
each class has exclusive voting rights with respect to approvals of the Rule
12b-1 distribution plan pursuant to which its distribution fee and/or service
fee is paid which relate to a specific
22
<PAGE> 83
class, and (iii) Class B shares and Class C shares are subject to a conversion
feature. Each class has different exchange privileges and certain different
shareholder service options available. See "Distribution Plans" and "Shareholder
Services -- Exchange Privilege." The net income attributable to Class B shares
and Class C shares and the dividends payable on Class B shares and Class C
shares will be reduced by the amount of the distribution fee and incremental
transfer agency expenses associated with such class of shares. Sales personnel
of authorized dealers distributing the Fund's shares and other persons entitled
to receive compensation for selling such shares may receive differing
compensation for selling Class A shares, Class B shares or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which an
authorized dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
authorized dealer 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 authorized dealer 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 the
Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Such fees paid for such services and activities with respect to the Fund
will not exceed in the aggregate 1.25% of the average total daily net assets of
the Fund on an annual basis. The Distributor may provide additional compensation
to Edward D. Jones & Co. or an affiliate thereof based on a combination of its
sales of shares and increases in assets under management. All of the foregoing
payments are made by the Distributor out of its own assets. These programs will
not change the price an investor will pay for shares or the amount that a Fund
will receive from such sale.
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<PAGE> 84
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED
AS % OF AS % OF TO DEALERS
SIZE OF OFFERING NET AMOUNT (AS A % OF
INVESTMENT PRICE INVESTED OFFERING PRICE)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $50,000............................ 5.75% 6.10% 5.00%
$50,000 but less than $100,000............... 4.75% 4.99% 4.00%
$100,000 but less than $250,000.............. 3.75% 3.90% 3.00%
$250,000 but less than $500,000.............. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000............ 2.00% 2.04% 1.75%
$1,000,000 or more* * * *
- ------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions within one year
of the purchase. The contingent deferred sales charge incurred upon
redemption is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to authorized
dealers who initiate and are responsible for purchases of $1 million or
more as follows: 1.00% on sales to $2 million, plus 0.80% on the next
million, plus 0.20% on the next $2 million and 0.08% on the excess over $5
million.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to authorized dealers that sell shares of the Fund. Authorized
dealers which are reallowed all or substantially all of the sales charges may be
deemed to be underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to authorized dealers described herein. Such
financial institutions, other industry professionals and authorized dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited under the Glass-Steagall Act from providing certain underwriting or
distribution services. If banking firms were prohibited from acting in any
capacity or providing any of the described services, the Distributor would
consider what action, if any, would be appropriate. The Distributor does not
believe that termination of a relationship with a bank would result in any
material adverse consequences to the Fund. State securities laws
24
<PAGE> 85
regarding registration of banks and other financial institutions may differ from
the interpretations of federal law expressed herein, and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
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 authorized dealer, 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 authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children 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 in Section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and the Govett Funds, Inc.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund,
or in any combination of shares of the Fund and shares of other Participating
Funds, although other Participating Funds may have different sales charges.
Cumulative Purchase Discount. The size of investment shown in the above table
may also be determined by combining the amount being invested in shares of the
Participating Funds plus the current offering price of all shares of the
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 investments 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 also includes purchases of
shares of the Participating Funds over a 13-month period based on the total
amount of intended purchases plus the value of all shares of the Participating
Funds previously purchased 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
25
<PAGE> 86
the total amount of the investment goal. If the goal is not achieved within the
period, the investor must pay the difference between the charges applicable to
the purchases made and the charges previously paid. The initial purchase must be
for an amount equal to at least 5% of the minimum total purchase amount of the
level selected. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provisions, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. Such adjustments in sales charge will be
used to purchase additional shares for the shareholder at the applicable
discount category. Additional information is contained in the application form
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 and 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 distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the authorized dealer,
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 authorized dealer or the
Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS' 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
26
<PAGE> 87
their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadvisor to any such fund described in (1)
above or an affiliate of such subadvisor; and such persons' families and
their beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts,"
during the 13-month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay authorized
dealers 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 $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer 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.
27
<PAGE> 88
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
in the event of redemptions within one year of the purchase other than
redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon redemptions
is paid to the Distributor in reimbursement for distribution-related
expenses. A commission will be paid to dealers who initiate and are
responsible for such purchases as follows: 1.00% on sales to $5 million,
plus 0.50% on the next $5 million, plus 0.25% on the excess over $10
million.
(9) Participants with accounts in any 403(b)(7) program of a college or
university system which permits only net asset value mutual fund
investments and for which Van Kampen American Capital Trust Company serves
as custodian. In connection with such purchases, the Distributor may pay,
out of its own assets, a commission to authorized dealers as follows:
1.00% on sales up to $5 million, plus 0.50% on the next $5 million, plus
0.25% on the excess over $10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer 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. Authorized dealers will
be paid a service fee as described herein under "Distribution Plans" on
purchases made as described in (3) through (9) above. The Fund may terminate, or
amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset
28
<PAGE> 89
value above the initial purchase price. In addition, no charge is assessed on
shares derived from reinvestment of dividends or capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
- ------------------------------------------------------------------------------
<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....................................................................None
</TABLE>
- ------------------------------------------------------------------------------
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first, of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, second, of shares held for over five years or shares acquired pursuant
to reinvestment of dividends or distributions and third, of shares held longest
during the five year period.
To provide an example, assume an investor purchased 100 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 shares upon dividend reinvestment. If at such time the investor makes
his or her 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 is subject to a deferred sales charge at a
rate of 4.00% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4.00% of the purchase amount will be paid
to authorized dealers at the time of purchase. Additionally, the Distributor
may, from time to time, pay additional promotional incentives, in the form of
cash or other compensation, to authorized dealers that sell Class B shares of
the Fund.
29
<PAGE> 90
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of 1.00%. The charge is assessed on an amount
equal to the lesser of the then current market value or the cost of the shares
being redeemed. Accordingly, no sales charge is imposed on increases in net
asset value above the initial purchase price. In addition, no charge is assessed
on shares derived from reinvestment of dividends or capital gains distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first, of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and second, of shares held for more than one year or shares acquired
pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of 1.00% of the purchase amount will be paid
to authorized dealers at the time of purchase. Authorized dealers will also be
paid ongoing commissions and transaction fees of up to 0.75% of the average
daily net assets of the Fund's Class C shares for the second through tenth year
after purchase. Additionally, the Distributor may, from time to time, pay
additional promotional incentives, in the form of cash or other compensation, to
authorized dealers that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemption of Class B shares
and Class C shares (i) following the death or disability (as defined in the
Code) of a shareholder, (ii) in connection with certain distributions from an
IRA or other retirement plan, (iii) pursuant to the Fund's systematic withdrawal
plan but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
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. The
following is a description of those services.
30
<PAGE> 91
INVESTMENT ACCOUNT. 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 who has an account in certain of the
Participating Funds may receive statements 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 dealers or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, 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 obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate no more than 2.00% of the net asset value of the issued
shares, and bill the party to whom the certificate was mailed.
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. 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.
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 predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.
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
31
<PAGE> 92
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanying 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
A, Class B or Class C account in the Fund invested into a pre-existing Class A,
Class B or Class C account in any of the Participating Funds, Tax Free Money
Fund or Reserve Fund.
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 class and of the same type of
retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and for the benefit of the
same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value as of
the payable date of the distribution only if shares of such selected funds have
been registered for sale in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of any other fund without sales
charge, provided that shares of certain Van Kampen American Capital fixed-income
funds are subject to a 30-day holding period requirement before exchange. Shares
of Government Target may be exchanged for Class A shares of the Fund without
sales charge. Class A shares of Tax Free Money Fund or Reserve Fund that were
not acquired in exchange for Class B shares or Class C shares of a Participating
Fund may be exchanged for Class A shares of the Fund upon payment of the excess,
if any, of the sales charge rate applicable to the shares being acquired over
the sales charge rate previously paid. Shares of Tax Free Money Fund or
32
<PAGE> 93
Reserve Fund acquired through an exchange of Class B shares or Class C shares
may be exchanged only for the same class of shares of a Participating Fund
without incurring a contingent deferred sales charge. Shares of any
Participating Fund, Tax Free Money Fund or Reserve Fund may be exchanged for
shares of any other Participating Fund if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other Van
Kampen American Capital fund that offers such shares ("new shares") in an amount
equal to the aggregate net asset value of the original shares, without the
payment of any contingent deferred sales charge otherwise due upon redemption of
the original shares. For purposes of computing the contingent deferred sales
charge payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B or
Class C shareholders would remain subject to the contingent deferred sales
charge imposed by the original fund upon their redemption from the Van Kampen
American Capital complex of funds. The contingent deferred sales charge is based
on the holding period requirements of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although 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. See the Statement of Additional Information.
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. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying this Prospectus. 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, 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. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See "Purchase of
Shares" and
33
<PAGE> 94
"Redemption of Shares." 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 gain options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, 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 modify,
restrict or terminate the exchange privilege at any time on 60 days' notice to
its shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder 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."
Class B and Class C shareholders who established a withdrawal plan may redeem
up to 12% annually of the shareholder's initial account balance without
incurring a contingent deferred sales charge. Initial account balance means the
amount of the shareholder's investment at the time election to participate in
the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred Sales
Charge" and the Statement of Additional Information.
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 the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
34
<PAGE> 95
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
REGULAR REDEMPTION. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS at P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized dealer.
Orders received from authorized 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 an authorized 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 authorized dealers to
transmit redemption requests received by them to the Distributor so they will be
received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B shares
or Class C shares are subject to a contingent deferred sales charge. In
addition, a contingent deferred sales charge of 1.00% may be imposed on certain
redemptions of Class A shares made within one year of purchase for investments
of $1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for distribution-related expenses. See "Purchase of
Shares." A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption 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.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany 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. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where Van Kampen
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<PAGE> 96
American Capital Trust Company serves as IRA custodian, special IRA, 403(b)(7),
or Keogh distribution forms must be obtained from and be forwarded to Van Kampen
American Capital Trust Company, P. O. Box 944, Houston, Texas 77001-0944.
Contact the Custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment 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 the purchase check has cleared, usually a
period of 15 days. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum initial investment as
specified herein. At least 60 days advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any applicable contingent deferred sales
charge will be deducted from the proceeds of this redemption. Any involuntary
redemption may only occur if the shareholder account is less than the minimum
initial investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege a
shareholder must complete the appropriate section of the application form
accompanying this Prospectus or call the Fund at (800) 421-5666 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, 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. Telephone redemptions may not be available if the shareholder cannot
reach ACCESS by telephone, whether because all telephone
36
<PAGE> 97
lines are busy or for any other reason; in such case, a shareholder would have
to use the Fund's regular redemption procedure 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 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 and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual retirement account (IRA) for which Van Kampen American Capital
Trust Company acts as custodian. The Fund reserves the right at any time to
terminate, limit or otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the contingent deferred sales charge on Class B shares
and Class C shares will be waived where the disabled person is either an
individual shareholder or owns the shares as a joint tenant with right of
survivorship or is the beneficial owner of a custodial or fiduciary account, and
where the redemption is made within one year of the initial determination of
disability. This waiver of the contingent deferred sales charge on Class B
shares and Class C shares applies to a total or partial redemption, but only to
redemptions of shares held at the time of the initial determination of
disability.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
37
<PAGE> 98
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. 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.
- ------------------------------------------------------------------------------
DISTRIBUTION PLANS
- ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's Board of Trustees and approved
by its shareholders. Pursuant to Rule 12b-1, the Trustees of the Fund and the
shareholders of each class have adopted three distribution plans hereinafter
referred to as the "Class A Plan," the "Class B Plan," and the "Class C Plan."
Each distribution plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
regulate the distribution and service charges that a mutual fund may impose on a
class of shares. The Distributor uses the Class A, Class B and Class C service
fees to compensate authorized dealers for personal service and/or the
maintenance of shareholder accounts.
Under the Class A Plan, the Fund pays a service fee to the Distributor at an
annual rate of up to 0.25% of the Fund's aggregate average daily net assets
attributable to the Class A shares.
Under the Class B Plan and Class C Plan, the Fund pays a service fee to the
Distributor at an annual rate of up to 0.25% and also pays a distribution fee at
an annual rate of up to 0.75% of the Fund's aggregate average daily net assets
attributable to the Class B shares or Class C shares to reimburse the
Distributor for service fees paid by it to authorized dealers and for its
distribution costs. Under the Class B Plan, the Distributor receives additional
payments from the Fund in the form of a distribution fee at the annual rate of
up to 0.75% of the net assets of the Class B shares as reimbursement for upfront
commissions and transaction fees of up to 4.00% of the purchase price of Class B
shares purchased by the clients of authorized dealers and other distribution
expenses as described in the Statement of
38
<PAGE> 99
Additional Information. Under the Class C Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class C shares as
reimbursement for upfront commissions and transaction fees of up to 0.75% of the
purchase price of Class C shares purchased by the clients of authorized dealers
and ongoing commissions and transaction fees of up to 0.75% of the average daily
net assets of the Fund's Class C shares and other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees
periodically for their consideration in connection with their deliberations as
to the continuance of such plans. In their review of the distribution plans, the
Trustees are asked to take into consideration expenses incurred in connection
with the distribution and servicing of each class of shares separately. The
sales charge and distribution fee, if any, of a particular class will not be
used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B shares or Class C shares is
designed to permit an investor to purchase such shares without the assessment of
a front-end sales load and at the same time permit the Distributor to compensate
authorized dealers with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect to the Class A
shares of the Fund; in both cases such charges provide for the financing of the
distribution of the Fund's shares.
Actual distribution expenses paid by the Distributor with respect to Class B
shares or Class C shares for any given year are expected to exceed the fees
received pursuant to the Class B Plan and Class C Plan and payments received
pursuant to contingent deferred sales charges. Such excess will be carried
forward and may be reimbursed by the Fund or its shareholders from payments
received through contingent deferred sales charges in future years and from
payments under the Class B Plan and Class C Plan so long as such plans are in
effect. For the year ended December 31, 1995, the unreimbursed expenses incurred
by the Distributor under the Class B Plan and carried forward were approximately
$12.4 million or 3.02% of the Class B shares' net assets. For the year ended
December 31, 1995, the
39
<PAGE> 100
unreimbursed expenses incurred by the Distributor under the Class C Plan and
carried forward were approximately $205,000 or 0.54% of the Class C shares' net
assets. If the Class B Plan or Class C Plan was terminated or not continued, the
Fund would not be contractually obligated to pay the Distributor for any
expenses not previously reimbursed by the Fund or recovered through contingent
deferred sales charges.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed quarterly as dividends to shareholders. Unless the
shareholder instructs otherwise, dividends and distributions are automatically
applied to purchase additional shares of the Fund at the next determined net
asset value. See "Shareholder Services -- Reinvestment Plan."
The per share dividends on Class B shares and Class C shares will be lower
than the per share dividends on Class A shares as a result of the distribution
fees and higher incremental transfer agency fees applicable to such classes of
shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund distributes to shareholders at
least once a year the excess, if any, of its total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years under tax laws. As in
the case of income dividends, capital gains distributions are automatically
reinvested in additional shares of the Fund at net asset value unless the
shareholder elects otherwise. See "Shareholder Services -- Reinvestment Plan."
40
<PAGE> 101
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The Fund has qualified and intends to continue to qualify and be taxed as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). By qualifying as a regulated investment company, the Fund is not
subject to federal income taxes to the extent it distributes its net investment
income and net realized capital gains. The Fund intends to distribute
substantially all of its taxable net investment income and net realized capital
gains annually. Dividends from net investment income and distributions from any
net realized short-term capital gains are taxable to shareholders as ordinary
income. Long-term capital gains distributions constitute long-term capital gains
for federal income tax purposes. All such dividends and distributions are
taxable to the shareholder whether or not reinvested in shares. However,
shareholders not subject to tax on their income generally will not be required
to pay tax on amounts distributed to them.
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions, including information as to the portion (including
short-term capital gains) taxable as ordinary income, and the portion taxable as
long-term capital gains.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution paid shortly after the purchase of shares
by an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased) even though
subject to income taxes as discussed herein.
Gains or losses on the Fund's transactions in listed options (except certain
equity options) on securities or indexes, futures and options on futures
generally are treated as 60% long-term and 40% short-term, and positions held by
the Fund at the end of its taxable year generally are required to be marked to
market, with the result that unrealized gains and losses are treated as
realized. Gains and losses realized by the Fund from writing over-the-counter
options constitute short-term capital gains or losses unless the option is
exercised, in which case the character of the gain or loss is determined by the
holding period of the underlying security. The Code contains certain "straddle"
rules which require deferral of losses incurred in certain transactions
involving hedged positions to the extent the Fund has unrealized gains in
offsetting positions and generally terminate the holding period of the subject
41
<PAGE> 102
position. Additional information is set forth in the Statement of Additional
Information.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisors for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or citizenship tax consequences of receipt of
dividends and distributions from the Fund.
PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund pays Pennsylvania foreign
franchise and corporate net income tax because of its business activities in
Pennsylvania. As a result, Fund shares are exempt from Pennsylvania personal
property taxes. The Fund maintains an office at Mellon Bank Center, Suite 1300,
173 S Market Street, Philadelphia, PA 19103.
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one, five and ten year periods. Other total return quotations,
aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the maximum public offering price (which
includes a maximum sales charge of 5.75% for Class A shares); that all income
dividends or capital gains distributions during the period are reinvested in
Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
42
<PAGE> 103
Total return is calculated separately for Class A shares, Class B shares and
Class C shares of the Fund. Class A share total return figures include the
maximum sales charge of 5.75%; Class B share and Class C share total return
figures include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. It differs from yield, which is a measure of the income
actually earned by the Fund's investments, and from total return, which is a
measure of the income actually earned by the Fund's investment plus the effect
of any realized and unrealized appreciation or depreciation of such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds or with the Consumer Price Index, Dow Jones
Industrial Average, Standard & Poor's, or NASDAQ, other appropriate indices of
investment securities, or with investment or savings vehicles. The performance
information may also include evaluations of the Fund published by nationally
recognized ranking services and by nationally recognized financial publications.
Such comparative performance information will be stated in the same terms in
which the comparative data or indices are stated. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. For these purposes, the performance of the
Fund, as well as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce Fund performance. The
Fund will include performance data for each class of shares of the Fund in any
advertisement or information including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
43
<PAGE> 104
Fund at the telephone number and address printed on the cover page of this
Prospectus.
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund was originally incorporated in Delaware on August 14, 1957 and
reincorporated by merger into a Maryland Corporation on October 22, 1991. The
Fund was reorganized as a business trust under the laws of the state of Delaware
as of August 18, 1995 and adopted its current name at that time. The Fund is
authorized to issue an unlimited number of shares of beneficial interest, par
value $0.01 per share. Classes of shares may be established from time to time in
accordance with provisions of the Fund's Declaration of Trust. Shares issued by
the Fund are fully paid, non-assessable and have no preemptive or conversion
rights, except as described herein.
The Fund currently offers three classes of shares, 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 generally 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 "Distribution Plans."
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 and
Class C shares into Class A shares as described above. In the event of
liquidation, each of the shares of the Fund is entitled to its portion of all of
the Fund's net assets after all debt and expenses of the Fund have been paid.
Since Class B shares and Class C shares pay higher distribution expenses, the
liquidation proceeds to Class B shareholders and Class C shareholders are likely
to be lower than to other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
- ------------------------------------------------------------------------------
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
44
<PAGE> 105
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.
An investment in the Fund may not be appropriate for all investors.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund.
An investment in the Fund is intended to be a long-term investment, and should
not be used as a trading vehicle.
45
<PAGE> 106
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 TELEPHONE TRANSACTIONS
DIAL (800) 421-5684
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
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
Equity Income Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Equity Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Dr.
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana, Suite 2900
Houston, TX 77002
<PAGE> 107
------------------------------------------------------------------------------
EQUITY INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
APRIL 29, 1996
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 108
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This Statement of Additional Information does not
constitute a prospectus.
SUBJECT TO COMPLETION--DATED DECEMBER 24, 1996
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(708) 684-6000
---------------------
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
DATED JANUARY , 1997
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This Statement of Additional Information provides information about the Van
Kampen American Capital Equity Income Fund (the "Equity Income Fund"), an
open-end diversified management investment company organized as a Delaware
business trust, in addition to information contained in the Prospectus/Proxy
Statement of the Equity Income Fund, dated January , 1997, which also serves
as the proxy statement of the Van Kampen American Capital Balanced Fund (the
"Balanced Fund"), an open-end diversified management investment company
organized as a series of the Van Kampen American Capital Equity Trust, a
Delaware business trust (the "Equity Trust"), in connection with the issuance of
Class A, B and C shares of the Equity Income Fund to shareholders of the
Balanced Fund. This Statement of Additional Information is not a prospectus. It
should be read in conjunction with the Prospectus/Proxy Statement, into which it
has been incorporated by reference and which may be obtained by contacting the
Equity Income Fund or Balanced Fund located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 (telephone number (630) 684-6000 or (800) 421-5666).
TABLE OF CONTENTS
PAGE
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[S] [C]
Proposed Reorganization of the Balanced Fund............................. 2
Additional Information about the Equity Income Fund...................... 2
Additional Information about the Balanced Fund........................... 2
Financial Statements..................................................... 2
The Equity Income Fund will provide, without charge, upon the written or
oral request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.
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PROPOSED REORGANIZATION OF THE BALANCED FUND
The shareholders of the Balanced Fund are being asked to approve an
acquisition of all the assets of the Balanced Fund solely in exchange for Class
A, B and C shares of the Equity Income Fund and the Equity Income Fund's
assumption of the liabilities of the Balanced Fund (the "Reorganization")
pursuant to an Agreement and Plan of Reorganization by and between Equity Income
Fund and the Equity Trust, on behalf of the Balanced Fund (the "Agreement"). A
copy of the form of the Agreement is attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE EQUITY INCOME FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Equity Income Fund, dated April 29, 1996, attached
as Appendix B to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE BALANCED FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Balanced Fund, dated October 28, 1996, attached as
Appendix C to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the Equity Income Fund for the fiscal year ended
December 31, 1995, as included in Appendix B hereto, (ii) the audited financial
statements of the Balanced Fund for fiscal year ended June 30, 1996, as included
in Appendix C hereto, and (iii) the unaudited financial statements of the Equity
Income Fund for the six months ended June 30, 1996, as included in Appendix D
hereto.
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APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 1996, by and between Van Kampen American Capital Equity Income Fund, a
business trust formed under the laws of the State of Delaware (the "Equity
Income Fund"), and Van Kampen American Capital Equity Trust, a business trust
formed under the laws of the State of Delaware (the "Equity Trust") on behalf of
its series, Van Kampen American Capital Balanced Fund (the "Balanced Fund").
WITNESSETH:
WHEREAS, the Board of Trustees of each of the Equity Trust on behalf of the
Balanced Fund and the Equity Income Fund have determined that entering into this
Agreement for the Equity Income Fund to acquire the assets and liabilities of
the Balanced Fund is in the best interests of the shareholders of each
respective fund; and
WHEREAS, the parties intend that this transaction qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTLON.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set forth
in Sections 7 and 8 hereof, the Balanced Fund will convey, transfer and deliver
to the Equity Income Fund at the closing, provided for in Section 2 hereof, all
of the existing assets of the Balanced Fund (including accrued interest to the
Closing Date) acceptable to the Equity Income Fund as more fully set forth on
Schedule 1 hereto, and as amended from time to time prior to the Closing Date
(as defined below), free and clear of all liens, encumbrances and claims
whatsoever (the assets so transferred collectively being referred to as the
"Assets").
B. CONSIDERATION. In consideration thereof, the Equity Income Fund agrees that
on the Closing Date it will (i) deliver to the Balanced Fund, full and
fractional Class A, Class B and Class C Shares of beneficial interest of the
Equity Income Fund having net asset values per share in an amount equal to the
aggregate dollar value of the Assets net of any liabilities of the Balanced Fund
described in Section 3E hereof (the "Liabilities") determined pursuant to
Section 3A of this Agreement (collectively, the "Equity Income Fund Shares") and
(ii) assume all of the Balanced Fund's Liabilities. The calculation of full and
fractional Class A, Class B and Class C Shares of beneficial interest of the
Equity Income Fund to be
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exchanged shall be carried out to no less than two (2) decimal places. All
Equity Income Fund Shares delivered to the Balanced Fund in exchange for such
Assets shall be delivered at net asset value without sales load, commission or
other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days after
the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the Balanced Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the Equity Income Fund shall deliver to the Balanced Fund
the Equity Income Fund Shares in the amount determined pursuant to Section 1B
hereof and the Balanced Fund thereafter shall, in order to effect the
distribution of such shares to the Balanced Fund stockholders, instruct the
Equity Income Fund to register the pro rata interest in the Equity Income Fund
Shares (in full and fractional shares) of each of the holders of record of
shares of the Balanced Fund in accordance with their holdings of either Class A,
Class B or Class C Shares and shall provide as part of such instruction a
complete and updated list of such holders (including addresses and taxpayer
identification numbers), and the Equity Income Fund agrees promptly to comply
with said instruction. The Equity Income Fund shall have no obligation to
inquire as to the validity, propriety or correctness of such instruction, but
shall assume that such instruction is valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the Balanced Fund to
be transferred and assumed, respectively, by the Equity Income Fund shall be
computed as of the Closing Date, in the manner set forth in the most recent
Prospectus and Statement of Additional Information of the Equity Income Fund
(collectively, the "Equity Income Fund Prospectus"), copies of which have been
delivered to the Balanced Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street Bank
and Trust Company, 225 Franklin Street, Post Office Box 1713, Boston,
Massachusetts 02105-1713, as custodian for the Equity Income Fund (the
"Custodian") for the benefit of the Equity Income Fund, duly endorsed in proper
form for transfer in such condition as to constitute a good delivery thereof,
free and clear of all liens, encumbrances and claims whatsoever, in accordance
with the custom of brokers, and shall be accompanied by all necessary state
stock transfer stamps, the cost of which shall be borne by the Van Kampen
American Capital Investment Advisory Corp. (the "Balanced Adviser").
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C. FAILURE TO DELIVER SECURITIES. If the Balanced Fund is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the Balanced
Fund's securities for the reason that any of such securities purchased by the
Equity Income Fund have not yet been delivered to it by the Balanced Fund's
broker or brokers, then, in lieu of such delivery, the Balanced Fund shall
deliver to the Custodian, with respect to said securities, executed copies of an
agreement of assignment and due bills executed on behalf of said broker or
brokers, together with such other documents as may be required by the Equity
Income Fund or Custodian, including brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The Equity Income Fund, in order to assist the
Balanced Fund in the distribution of the Equity Income Fund Shares to the
Balanced Fund shareholders after delivery of the Equity Income Fund Shares to
the Balanced Fund, will establish pursuant to the request of the Balanced Fund
an open account with the Equity Income Fund for each shareholder of the Balanced
Fund and, upon request by the Balanced Fund, shall transfer to such account the
exact number of full and fractional Class A, Class B and Class C shares of the
Equity Income Fund then held by the Balanced Fund specified in the instruction
provided pursuant to Section 2 hereof. The Equity Income Fund is not required to
issue certificates representing Equity Income Fund Shares unless requested to do
so by a shareholder. Upon liquidation or dissolution of the Balanced Fund,
certificates representing shares of beneficial interest stock of the Balanced
Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of Balanced Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated, the Balanced Adviser agrees to pay (i) for the reasonable outside
expenses for the transactions contemplated herein; including, but not by way of
limitation, the preparation of the Equity Income Fund's Registration Statement
on Form N-14 (the "Registration Statement") and the solicitation of the Balanced
Fund shareholder proxies; (ii) the Balanced Fund counsel's reasonable attorney's
fees, which fees shall be payable pursuant to receipt of an itemized statement;
and (iii) the cost of rendering the tax opinion, more fully referenced in
Section 7F below. In the event that the transactions contemplated herein are not
consummated for any reason, then all reasonable outside expenses incurred to the
date of termination of this Agreement shall be borne by the Balanced Adviser.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no event
later than one year after the Closing Date, the Balanced Fund shall voluntarily
dissolve and completely liquidate by taking, in accordance with the Delaware
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Business Trust Law and Federal securities laws, all steps as shall be necessary
and proper to effect a complete liquidation and dissolution of the Balanced
Fund. Immediately after the Closing Date, the stock transfer books relating to
the Balanced Fund shall be closed and no transfer of shares shall thereafter be
made on such books.
4. BALANCED FUND'S REPRESENTATIONS AND WARRANTIES.
The Balanced Fund, hereby represents and warrants to the Equity Income Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Equity Income Fund that:
A. ORGANIZATION. The Equity Trust is a Delaware Business Trust duly formed and
in good standing under the laws of the State of Delaware and is duly authorized
to transact business in the State of Delaware. The Balanced Fund is a separate
series of the Equity Trust duly designated in accordance with the applicable
provisions of the Equity Trust's Declaration of Trust. The Balanced Fund is
qualified to do business in all jurisdictions in which it is required to be so
qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on the Balanced Fund. The Balanced Fund has all
material federal, state and local authorizations necessary to own all of the
properties and assets and to carry on its business as now being conducted,
except authorizations which the failure to so obtain would not have a material
adverse effect on the Balanced Fund.
B. REGISTRATION. The Balanced Fund is registered under the Investment Company
Act of 1940, as amended (the "1940 Act") as an open-end, diversified management
company and such registration has not been revoked or rescinded. The Balanced
Fund is in compliance in all material respects with the 1940 Act and the rules
and regulations thereunder with respect to its activities. All of the
outstanding shares of beneficial interest of the Balanced Fund have been duly
authorized and are validly issued, fully paid and nonassessable and not subject
to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities and
the portfolio of investments and the related statements of operations and
changes in net assets of the Balanced Fund audited as of and for the year ended
June 30, 1996, true and complete copies of which have been heretofore furnished
to the Equity Income Fund, fairly represent the financial condition and the
results of operations of the Balanced Fund as of and for their respective dates
and periods in conformity with generally accepted accounting principles applied
on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The Balanced Fund shall furnish to the Equity Income
Fund within five (5) business days after the Closing Date, an unaudited
statement of assets and liabilities and the portfolio of investments and the
related
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statements of operations and changes in net assets as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results of
the Balanced Fund's operations as of, and for the period ending on, the dates of
such statements in conformity with generally accepted accounting principles
applied on a consistent basis during the period involved and the results of its
operations and changes in financial position for the period then ended; and such
financial statements shall be certified by the Treasurer of the Balanced Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be, no
contingent Liabilities of the Balanced Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the Balanced Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the Balanced Fund which would, if adversely determined, materially
affect the Balanced Fund's financial condition. All Liabilities were incurred by
the Balanced Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The Balanced Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the
Balanced Fund's Prospectus and Statement of Additional Information, there are no
material agreements outstanding relating to the Balanced Fund to which the
Balanced Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no later
than 30 calendar days after the Closing Date, KPMG Peat Marwick LLP, auditors
for the Balanced Fund, shall furnish the Equity Income Fund with a statement of
the earnings and profits of the Balanced Fund within the meaning of the Code as
of the Closing Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets of the
Balanced Fund at the date hereof are, or on the Closing Date or any subsequent
delivery date will be, "restricted securities" under the Securities Act of 1933,
(the "Securities Act") or the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, or will be securities for which
market quotations are not readily available for purposes of Section 2(a)(41)
under the 1940 Act.
I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and
other material tax returns and reports of the Balanced Fund required by law to
have been filed by such dates shall have been filed, and all Federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Balanced Fund's
knowledge no such return
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is currently under audit and no assessment has been asserted with respect to any
such return.
J. CORPORATE AUTHORITY. The Balanced Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Balanced
Fund's Board of Trustees, and except for obtaining approval of the holders of
the shares of the Balanced Fund, no other corporate acts or proceedings by the
Balanced Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
Balanced Fund and constitutes the legal, valid and binding obligation of
Balanced Fund enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar law affecting creditors' rights generally,
or by general principals of equity (regardless of whether enforcement is sought
in a proceeding at equity or law).
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Balanced Fund does not and will not (i)
violate any provision of the Equity Trust's Declaration of Trust or amendment or
restatement thereof, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Balanced Fund, (iii) result in a violation or breach of, or constitute a
default under any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument or obligation to which the Balanced Fund is subject,
or (iv) result in the creation or imposition or any lien, charge or encumbrance
upon any property or assets of the Balanced Fund. Except as set forth in
Schedule 2 to this Agreement, (i) no consent, approval, authorization, order or
filing with or notice to any court or governmental authority or agency is
required for the consummation by the Balanced Fund of the transactions
contemplated by this Agreement and (ii) no consent of or notice to any third
party or entity is required for the consummation by the Balanced Fund of the
transactions contemplated by this Agreement.
L. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:
(1) any change in the business, results of operations, assets, or financial
condition or the manner of conducting the business of the Balanced Fund, other
than changes in the ordinary course of its business, or any pending or
threatened litigation, which has had or may have a material adverse effect on
such business, results of operations, assets or financial condition;
(2) issued any option to purchase or other right to acquire shares of the
Balanced Fund granted by the Balanced Fund to any person other than
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subscriptions to purchase shares at net asset value in accordance with terms in
the Prospectus for the Balanced Fund;
(3) any entering into, amendment or termination of any contract or agreement
by Balanced Fund, except as otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of business,
by the Balanced Fund for borrowed money or any commitment to borrow money
entered into by the Balanced Fund;
(5) any amendment of the Equity Trust's Declaration of Trust; or
(6) any grant or imposition of any lien, claim, charge or encumbrance (other
than encumbrances arising in the ordinary course of business with respect to
covered options) upon any asset of the Balanced Fund other than a lien for taxes
not yet due and payable.
M. TITLE. On the Closing Date, the Balanced Fund will have good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable, and full right, power and authority to sell,
assign, transfer and deliver such Assets; upon delivery of such Assets, the
Equity Income Fund will receive good and marketable title to such Assets, free
and clear of all liens, mortgages, pledges, encumbrances, charges, claims and
equities other than a lien for taxes not yet due and payable.
N. PROSPECTUS/PROXY STATEMENT. The Balanced Fund's Prospectus/Proxy Statement,
at the time of delivery by the Balanced Fund to its shareholders in connection
with a special meeting of shareholders to approve this transaction, and the
Balanced Fund's Prospectus and Statement of Additional Information with respect
to the Balanced Fund on the forms incorporated by reference into such
Prospectus/Proxy Statement and as of their respective dates (collectively, the
"Balanced Fund's Prospectus/Proxy Statement"), and at the time the Registration
Statement becomes effective, the Registration Statement insofar as it relates to
the Balanced Fund and at all times subsequent thereto and including the Closing
Date, as amended or as supplemented if it shall have been amended or
supplemented, conform and will conform, in all material respects, to the
applicable requirements of the applicable Federal and state securities laws and
the rules and regulations of the SEC thereunder, and do not and will not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that no representations or warranties in this Section 4N apply to statements or
omissions made in reliance upon and in conformity with written information
concerning the Equity Income Fund or their affiliates furnished to the Balanced
Fund by the Equity Income Fund.
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O. BROKERS. There are no brokers or finders fees payable by the Balanced Fund
in connection with the transactions provided for herein.
P. TAX QUALIFICATION. The Balanced Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
Q. FAIR MARKET VALUE. The fair market value on a going concern basis of the
Assets will equal or exceed the Liabilities to be assumed by the Equity Income
Fund and those to which the Assets are subject.
R. BALANCED FUND LIABILITIES. Except as otherwise provided for herein, the
Balanced Fund shall use reasonable efforts, consistent with its ordinary
operating procedures, to repay in full any indebtedness for borrowed money and
have discharged or reserved against all of the Balanced Fund's known debts,
liabilities and obligations including expenses, costs and charges whether
absolute or contingent, accrued or unaccrued.
5. THE EQUITY INCOME FUND'S REPRESENTATIONS AND WARRANTIES.
The Equity Income Fund hereby represents and warrants to the Balanced Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Balanced Fund that:
A. ORGANIZATION. The Equity Income Fund's is a Delaware Business Trust duly
formed and in good standing under the laws of the State of Delaware and is
duly authorized to transact business in the State of Delaware. The Equity
Income Fund is qualified to do business in all jurisdictions in which they are
required to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Equity Income Fund.
The Equity Income Fund's has all material federal, state and local
authorizations necessary to own all of the properties and assets of the Equity
Income Fund and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have
a material adverse effect on the Equity Income Fund.
B. REGISTRATION. The Equity Income Fund is registered under the 1940 Act as
an open-end, diversified management company and such registration has not been
revoked or rescinded. The Equity Income Fund's is in compliance in all
material respects with the 1940 Act and the rules and regulations thereunder.
All of the outstanding shares of beneficial interest of the Equity Income Fund
have been duly authorized and are validly issued, fully paid and
non-assessable and not subject to pre-emptive dissenters rights.
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C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities and
the portfolio of investments and the related statements of operations and
changes in net assets of the Equity Income Fund audited as of and for the year
ended December 31, 1995, true and complete copies of which have been
heretofore furnished to the Balanced Fund fairly represent the financial
condition and the results of operations of the Equity Income Fund as of and
for their respective dates and periods in conformity with generally accepted
accounting principles applied on a consistent basis during the periods
involved.
D. FINANCIAL STATEMENTS. The Equity Income Fund shall furnish to the
Balanced Fund (i) an unaudited statement of assets and liabilities and the
portfolio of investments and the related statements of operations and changes
in net assets of the Equity Income Fund for the period ended June 30, 1996,
and (ii) within five (5) business days after the Closing Date, an unaudited
statement of assets and liabilities and the portfolio of investments and the
related statements of operations and changes in net assets as of and for the
interim period ending on the Closing Date; such financial statements will
represent fairly the financial position and portfolio of investments of the
Equity Income Fund and the results of its operations as of, and for the period
ending on, the dates of such statements in conformity with generally accepted
accounting principles applied on a consistent basis during the period involved
and fairly present the financial position of the Equity Income Fund as at the
dates thereof and the results of its operations and changes in financial
position for the periods then ended; and such financial statements shall be
certified by the Treasurer of the Equity Income Fund as complying with the
requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the Equity
Income Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the Equity Income Fund's
financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the Equity Income
Fund which would, if adversely determined, materially affect the Equity Income
Fund's financial condition.
F. MATERIAL AGREEMENTS. The Equity Income Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in
the Equity Income Fund Prospectus, there are no material agreements
outstanding to which the Equity Income Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and
other material tax returns and reports of the Equity Income Fund required by
law to have been filed by such dates shall have been filed, and all Federal
and other taxes shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Equity Income Fund's
knowledge no such
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return is currently under audit and no assessment has been asserted with
respect to any such return.
H. CORPORATE AUTHORITY. The Equity Income Fund has the necessary power under
its Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein
have been duly authorized by the Equity Income Fund's Board of Trustees, no
other corporate acts or proceedings by the Equity Income Fund are necessary to
authorize this Agreement and the transactions contemplated herein. This
Agreement has been duly executed and delivered by the Equity Income Fund and
constitutes a valid and binding obligation of the Equity Income Fund
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Equity Income Fund does not and will not
(i) result in a material violation of any provision of the Declaration of
Trust of the Equity Income Fund, (ii) result in a material violation of any
statute, law, judgment, writ, decree, order, regulation or rule of any court
or governmental authority applicable to the Equity Income Fund or (iii) result
in a material violation or breach of, or constitute a default under, or result
in the creation or imposition or any lien, charge or encumbrance upon any
property or assets of the Equity Income Fund pursuant to any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the Equity Income Fund is subject. Except as set forth
in Schedule 3 to this Agreement, (i) no consent, approval, authorization,
order or filing with notice to any court or governmental authority or agency
is required for the consummation by the Equity Income Fund of the transactions
contemplated by this Agreement and (ii) no consent of or notice to any third
party or entity is required for the consummation by the Equity Income Fund of
the transactions contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Equity Income
Fund which would materially affect its financial condition.
K. SHARES OF THE EQUITY INCOME FUND: REGISTRATION. The Equity Income Fund
Shares to be issued pursuant to Section 1 hereof will be duly registered under
the Securities Act and all applicable state securities laws.
L. SHARES OF THE EQUITY INCOME FUND: AUTHORIZATION. The shares of beneficial
interest of the Equity Income Fund to be issued pursuant to Section 1 hereof
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have been duly authorized and, when issued in accordance with this Agreement,
will be validly issued and fully paid and non-assessable by the Equity Income
Fund and conform in all material respects to the description thereof contained
in the Equity Income Fund's Prospectus furnished to the Balanced Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date, there
shall not have been any change in the business, results of operations, assets
or financial condition or the manner of conducting the business of the Equity
Income Fund, other than changes in the ordinary course of its business, which
has had a material adverse effect on such business, results of operations,
assets or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein as of the effective date of the Registration Statement, and
at all times subsequent thereto up to and including the Closing Date, as
amended or as supplemented if they shall have been amended or supplemented,
will conform, in all material respects, to the applicable requirements of the
applicable Federal securities laws and the rules and regulations of the SEC
thereunder, and will not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, except that no representations or warranties in
this Section 5N apply to statements or omissions made in reliance upon and in
conformity with written information concerning the Equity Trust or the
Balanced Fund furnished to the Equity Income Fund by the Equity Trust or the
Balanced Fund.
O. TAX QUALIFICATION. The Equity Income Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Balanced Fund and Equity Income Fund each agrees that (except
as expressly contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Balanced Fund shall operate only in the ordinary
course of business consistent with prior practice. No party shall take any
action that would, or reasonably would be expected to, result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The Balanced Fund and Equity Income Fund
shall file all reports required to be filed by the Balanced Fund and Equity
Income Fund with the SEC between the date of this Agreement and the Closing
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Date and shall deliver to the other party copies of all such reports promptly
after the same are filed. Except where prohibited by applicable statutes and
regulations, each party shall promptly provide the other (or its counsel) with
copies of all other filings made by such party with any state, local or
federal government agency or entity in connection with this Agreement or the
transactions contemplated hereby. Each of the Balanced Fund and the Equity
Income Fund shall use all reasonable efforts to obtain all consents,
approvals, and authorizations required in connection with the consummation of
the transactions contemplated by this Agreement and to make all necessary
filings with the Secretary of State of the State of Delaware.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the Balanced
Fund's Prospectus/Proxy Statement, each party hereto will cooperate with the
other and furnish to the other the information relating to the Balanced Fund
or Equity Income Fund, as the case may be, required by the Securities Act or
the Exchange Act and the rules and regulations thereunder, as the case may be,
to be set forth in the Registration Statement or the Prospectus/Proxy
Statement, as the case may be. The Balanced Fund shall promptly prepare and
file with the SEC the Prospectus/Proxy Statement and the Equity Income Fund
shall promptly prepare and file with the SEC the Registration Statement, in
which the Prospectus/Proxy Statement will be included as a prospectus. In
connection with the Registration Statement, insofar as it relates to the
Balanced Fund and its affiliated persons, the Equity Income Fund shall only
include such information as is approved by the Balanced Fund for use in the
Registration Statement. The Equity Income Fund shall not amend or supplement
any such information regarding the Equity Income Fund and such affiliates
without the prior written consent of the Balanced Fund which consent shall not
be unreasonably withheld or delayed. The Equity Income Fund shall promptly
notify and provide the Balanced Fund with copies of all amendments or
supplements filed with respect to the Registration Statement. The Equity
Income Fund shall use all reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after such filing. The Equity Income Fund shall also take any
action (other than qualifying to do business in any jurisdiction in which it
is now not so qualified) required to be taken under any applicable state
securities laws in connection with the issuance of the Equity Income Fund's
shares of beneficial interest in the transactions contemplated by this
Agreement, and the Balanced Fund shall furnish all information concerning the
Balanced Fund and the holders of the Balanced Fund's shares of beneficial
interest as may be reasonably requested in connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
Balanced Fund shall make available to the Equity Income Fund a copy of each
report, schedule, registration statement and other document (the "Documents")
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filed or received by it during such period pursuant to the requirements of
Federal or state securities laws or Federal or state banking laws (other than
Documents which such party is not permitted to disclose under applicable law
or which are not relevant to the Balanced Fund). During the period prior to
the Closing Date, the Equity Income Fund shall make available to the Balanced
Fund each Document pertaining to the transactions contemplated hereby filed or
received by it during such period pursuant to Federal or state securities laws
or Federal or state banking laws (other than Documents which such party is not
permitted to disclose under applicable law or which are not relevant to the
Equity Income Fund).
E. SHAREHOLDERS MEETING. The Balanced Fund shall call a meeting of the
Balanced Fund shareholders to be held as promptly as practicable for the
purpose of voting upon the approval of this Agreement and the transactions
contemplated herein, and shall furnish a copy of the Prospectus/Proxy
Statement and form of proxy to each shareholder of the Balanced Fund as of the
record date for such meeting of shareholders. The Balanced Fund's Board of
Trustees shall recommend to the Balanced Fund shareholders approval of this
Agreement and the transactions contemplated herein, subject to fiduciary
obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Balanced Fund and Equity Income Fund
covenant and agree to coordinate the respective portfolios of the Balanced
Fund and Equity Income Fund from the date of the Agreement up to and including
the Closing Date in order that at Closing, when the Assets are added to the
Equity Income Fund's portfolio, the resulting portfolio will meet the Equity
Income Fund's investment objective, policies and restrictions, as set forth in
the Equity Income Fund's Prospectus, a copy of which has been delivered to the
Balanced Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the Balanced Fund covenants that
it shall cause to be distributed the Equity Income Fund Shares in the proper
pro rata amount for the benefit of Balanced Fund's shareholders and such that
the Balanced Fund shall not continue to hold amounts of said shares so as to
cause a violation of Section 12(d)(1) of the 1940 Act. The Balanced Fund
covenants further that, pursuant to Section 3G, it shall liquidate and
dissolve as promptly as practicable after the Closing Date. The Balanced Fund
covenants to use all reasonable efforts to cooperate with the Equity Income
Fund and the Equity Income Fund's transfer agent in the distribution of said
shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the Balanced Fund and the Equity Income Fund
represents that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in connection with any of the
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transactions contemplated by this Agreement, and each party shall hold the
other harmless from and against any and all claims, liabilities or obligations
with respect to any such fees, commissions or expenses asserted by any person
to be due or payable in connection with any of the transactions contemplated
by this Agreement on the basis of any act or statement alleged to have been
made by such first party or its affiliate.
I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement the proper officers and trustees of each party to this
Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Balanced Fund and the Equity Income Fund
will consult with each other before issuing any press releases or otherwise
making any public statements with respect to this Agreement or the
transactions contemplated herein and shall not issue any press release or make
any public statement prior to such consultation, except as may be required by
law or the rules of any national securities exchange on which such party's
securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Equity Income Fund nor the Balanced Fund shall
take any action, or cause any action to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to
the Closing Date, the Equity Income Fund and the Balanced Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Skadden, Arps, Slate, Meagher & Flom, counsel to the Balanced Fund, to render
the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date, the
Balanced Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.
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7. CONDITIONS TO OBLIGATIONS OF THE BALANCED FUND.
The obligations of the Balanced Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Balanced Fund, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the outstanding shares of beneficial interest the Balanced Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Equity Income Fund contained herein shall be true in all
material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition, results
of operations, business properties or assets of the Equity Income Fund, and
the Balanced Fund shall have received a certificate of the President or Vice
President of the Equity Income Fund satisfactory in form and substance to the
Balanced Fund so stating. The Equity Income Fund shall have performed and
complied in all material respects with all agreements, obligations and
covenants required by this Agreement to be so performed or complied with by it
on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the transactions contemplated by
this Agreement shall be in effect, nor shall any proceeding by any state,
local or federal government agency or entity asking any of the foregoing be
pending. There shall not have been any action taken or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
transactions contemplated by this Agreement, which makes the consummation of
the transactions contemplated by this Agreement illegal or which has a
material adverse effect on business operations of the Equity Income Fund.
F. TAX OPINION. The Balanced Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom, counsel for the Balanced Fund, dated as
of the Closing Date, addressed to the Balanced Fund, that the consummation of
the transactions set forth in this Agreement comply with the requirements of a
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reorganization as described in Section 368(a) of the Code, substantially in
the form attached as Annex A.
G. OPINION OF COUNSEL. The Balanced Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the Equity Income Fund,
dated as of the Closing Date, addressed to the Balanced Fund substantially in
the form and to the effect that: (i) the Equity Income Fund is duly formed and
in good standing as a business trust under the laws of the State of Delaware;
(ii) the Equity Income Fund is registered as an open-end, diversified
management company under the 1940 Act; (iii) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized and approved by all requisite action of Equity Income
Fund and this Agreement has been duly executed and delivered by the Equity
Income Fund and (assuming the Agreement is a valid and binding obligation of
the other parties thereto) is a valid and binding obligation of the Equity
Income Fund; (iv) neither the execution or delivery by the Equity Income Fund
of this Agreement nor the consummation by the Equity Income Fund of the
transactions contemplated thereby contravene the Equity Income Fund's
Declaration of Trust, or, to the best of their knowledge, violate any
provision of any statute or any published regulation or any judgment or order
disclosed to it by the Equity Income Fund as being applicable to the Equity
Income Fund; (v) to the best of their knowledge based solely on the
certificate of an appropriate officer of the Equity Income Fund attached
hereto, there is no pending or threatened litigation which would have the
effect of prohibiting any material business practice or the acquisition of any
material property or the conduct of any material business of the Equity Income
Fund or might have a material adverse effect on the value of any assets of the
Equity Income Fund; (vi) the Equity Income Fund's Shares have been duly
authorized and upon issuance thereof in accordance with this Agreement will,
subject to certain matters regarding the liability of a shareholder of a
Delaware trust, be validly issued, fully paid and nonassessable; (vii) except
as to financial statements and schedules and other financial and statistical
data included or incorporated by reference therein and subject to usual and
customary qualifications with respect to Rule 10b-5 type opinions, as of the
effective date of the Registration Statement filed pursuant to the Agreement,
the portions thereof pertaining to the Equity Income Fund comply as to form in
all material respects with the requirements of the Securities Act, the
Securities Exchange Act and the 1940 Act and the rules and regulations of the
SEC thereunder and no facts have come to counsel's attention which would cause
them to believe that as of the effectiveness of the portions of the
Registration Statement applicable to Equity Income Fund, the Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (viii) to the best of their knowledge
and information and subject to the qualifications set forth below,
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the execution and delivery by the Equity Income Fund of the Agreement and the
consummation of the transactions therein contemplated do not require, under
the laws of the States of Delaware or Illinois or the federal laws of the
United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency or
body (except such as have been obtained). Counsel need express no opinion,
however, as to any such consent, approval, authorization, registration,
qualification, order or filing (a) which may be required as a result of the
involvement of other parties to the Agreement in the transactions contemplated
by the Agreement because of their legal or regulatory status or because of any
other facts specifically pertaining to them; (b) the absence of which does not
deprive the Balanced Fund of any material benefit under the Agreement; or (c)
which can be readily obtained without significant delay or expense to the
Balanced Fund, without loss to the Balanced Fund of any material benefit under
the Agreement and without any material adverse effect on the Balanced Fund
during the period such consent, approval, authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
filings under (a) laws which are specifically referred to in this opinion, (b)
laws of the States of Delaware and Illinois and the federal laws of the United
States which, in counsel's experience, are normally applicable to transactions
of the type provided for in the Agreement and (c) court orders and judgments
disclosed to us by the Equity Income Fund in connection with the opinion. In
addition, although counsel need not specifically considered the possible
applicability to the Equity Income Fund of any other laws, orders or
judgments, nothing has come to their attention in connection with their
representation of the Equity Income Fund in this transaction that has caused
them to conclude that any other consent, approval, authorization,
registration, qualification, order or filing is required.
H. OFFICER CERTIFICATES. The Balanced Fund shall have received a certificate
of an authorized officer of the Trust, dated as of the Closing Date, certifying
that the representations and warranties set forth in Section 5 are true and
correct on the Closing Date, together with certified copies of the resolutions
adopted by the Board of Trustees shall be furnished to the Balanced Fund.
8. CONDITIONS TO OBLIGATIONS OF THE EQUITY INCOME FUND.
The obligations of the Equity Income Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Equity Income Fund of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the outstanding shares of beneficial interest of the Balanced
Fund.
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B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Balanced Fund and the Equity Trust contained herein
shall be true in all material respects as of the Closing Date, and as of the
Closing Date there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of the
Balanced Fund since June 30, 1996 and the Equity Income Fund shall have
received a certificate of the Chairman or President of the Balanced Fund
satisfactory in form and substance to the Equity Income Fund so stating. The
Balanced Fund and the Equity Trust shall have performed and complied in all
material respects with all agreements, obligations and covenants required by
this Agreement to be so performed or complied with by them on or prior to the
Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be
any action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by
this Agreement illegal.
F. TAX OPINION. The Equity Income Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom, counsel for the Balanced Fund, dated as
of the Closing Date, addressed to the Equity Income Fund, that the
consummation of the transactions set forth in this Agreement comply with the
requirements of a reorganization as described in Section 368(a) of the Code
substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The Equity Income Fund shall have received the
opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the Balanced
Fund, dated as of the Closing Date, addressed to the Equity Income Fund,
substantially in the form and to the effect that: (i) the Equity Trust is duly
formed and existing as a trust under the laws of the State of Delaware and the
Board of Trustees of the Equity Trust has duly designated the Balanced Fund as
a series of the Equity Trust pursuant to the terms of the Declaration of Trust
of the Equity Trust; (ii) the Balanced Fund is registered as an open-end,
diversified management company under the 1940 Act; (iii) this Agreement and
the reorganization provided for herein and the execution of this Agreement
have been duly authorized by all necessary trust action of the Equity Trust
and the
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Balanced Fund and this Agreement has been duly executed and delivered by the
Equity Trust and the Balanced Fund and (assuming the Agreement is a valid and
binding obligation of the other parties thereto) is a valid and binding
obligation of the Equity Trust and the Balanced Fund (iv) neither the
execution or delivery by the Equity Trust and the Balanced Fund of this
Agreement nor the consummation by the Balanced Fund of the transactions
contemplated thereby contravene the Equity Trust's Declaration of Trust or, to
their knowledge, violate any provision of any statute, or any published
regulation or any judgment or order disclosed to them by the Equity Trust and
the Balanced Fund as being applicable to the Balanced Fund; (v) to their
knowledge based solely on the certificate of an appropriate officer of the
Balanced Fund attached thereto, there is no pending, or threatened litigation
involving the Balanced Fund except as disclosed therein (vi) except as to
financial statements and schedules and other financial and statistical data
included or incorporated by reference therein and subject to usual and
customary qualifications with respect to Rule 10b-5 type opinions as of the
effective date of the Registration Statement filed pursuant to the Agreement,
the portions thereof pertaining to the Equity Trust and the Balanced Fund
comply as to form in all material respects with their requirements of the
Securities Act, the Securities Exchange Act and the 1940 Act and the rules and
regulations of the SEC thereunder and no facts have come to counsel's
attention which cause them to believe that as of the effectiveness of the
portions of the Registration Statement applicable to the Equity Trust or the
Balanced Fund, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (vii)
to their knowledge and subject to the qualifications set forth below, the
execution and delivery by the Equity Trust and the Balanced Fund of the
Agreement and the consummation of the transactions therein contemplated do not
require, under the laws of the States of Delaware or Illinois, or the federal
laws of the United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency or
body (except such as have been obtained under the Securities Act, the 1940 Act
or the rules and regulations thereunder.) Counsel need express no opinion,
however, as to any such consent, approval, authorization, registration,
qualification, order or filing (a) which may be required as a result of the
involvement of other parties to the Agreement in the transactions contemplated
by the Agreement because of their legal or regulatory status or because of any
other facts specifically pertaining to them; (b) the absence of which does not
deprive the Equity Income Fund of any material benefit under such agreements;
or (c) which can be readily obtained without significant delay or expense to
the Equity Income Fund, without loss to the Equity Income Fund of any material
benefit under the Agreement and without any material adverse effect on them
during the period such consent, approval authorization, registration,
qualification or order was obtained. The foregoing
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opinion relates only to consents, approvals, authorizations, registrations,
qualifications, orders or filings under (a) laws which are specifically
referred to in the opinion, (b) laws of the States of Delaware and Illinois
and the federal laws of the United States which, in our experience, are
normally applicable to transactions of the type provided for in the Agreement
and (c) court orders and judgments disclosed to them by the Balanced Fund in
connection with the opinion. In addition, although counsel need not
specifically considered the possible applicability to the Equity Trust and the
Balanced Fund of any other laws, orders or judgments, nothing has come to
their attention in connection with their representation of the Equity Trust
and the Balanced Fund in this transaction that has caused them to conclude
that any other consent, approval, authorization, registration, qualification,
order or filing is required.
H. THE ASSETS. Unless waived, the Assets, as set forth in Schedule 1, as
amended, shall consist solely of cash and marketable securities which are in
conformity with the Equity Income Fund's investment objectives, policies and
restrictions as set forth in the Equity Income Fund's Prospectus, a copy of
which has been delivered to the Balanced Fund.
I. SHAREHOLDER LIST. The Balanced Fund shall have delivered to the Equity
Income Fund an updated list of all shareholders of the Balanced Fund, as
reported by the Balanced Fund's transfer agent, as of one (1) business day
prior to the Closing Date with each shareholder's respective holdings in the
Balanced Fund, taxpayer identification numbers, Form W9 and last known
address.
J. OFFICER CERTIFICATES. The Equity Income Fund shall have received a
certificate of an authorized officer of the Balanced Fund, dated as of the
Closing Date, certifying that the representations and warranties set forth in
Section 4 are true and correct on the Closing Date, together with certified
copies of the resolutions adopted by the Board of Trustees and shareholders
shall be furnished to the Equity Income Fund.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of Trustees, amend this Agreement at any time before or after
approval thereof by the shareholders of the Balanced Fund; provided, however,
that after receipt of Balanced Fund shareholder approval, no amendment shall be
made by the parties hereto which substantially changes the terms of Sections 1,
2 and 3 hereof without obtaining Balanced Fund's shareholder approval thereof.
(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part
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of either party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part of any party of
any such right, power or privilege, or any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege.
(C) This Agreement may be terminated, and the transactions contemplated herein
may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the Board of Trustees of the Balanced Fund and
the Equity Income Fund;
(ii) by the Balanced Fund, if the Equity Income Fund breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iii) by the Equity Income Fund, if the Balanced Fund breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iv) by either the Balanced Fund or Equity Income Fund, if the Closing has
not occurred on or prior to [December 31, 1996] (provided that the rights to
terminate this Agreement pursuant to this subsection (C)(iv) shall not be
available to any party whose failure to fulfill any of its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur on or before such date);
(v) by the Equity Income Fund in the event that: (a) all the conditions
precedent to the Balanced Fund's obligation to close, as set forth in Section
7 of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the Equity Income Fund gives the Balanced Fund written
assurance of its intent to close irrespective of the satisfaction or
nonsatisfaction of all conditions precedent to the Equity Income Fund's
obligation to close, as set forth in Section 8 of this Agreement; and (c) the
Balanced Fund then fails or refuses to close within the earlier of five (5)
business days or [December 31, 1996]; or
(vi) by the Balanced Fund in the event that: (a) all the conditions
precedent to the Equity Income Fund's obligation to close, as set forth in
Section 8 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the Balanced Fund gives the Equity Income Fund
written assurance of its intent to close irrespective of the satisfaction or
nonsatisfaction of all the conditions precedent to the Balanced Fund's
obligation to close, as set forth in Section 7 of this Agreement; and (c) the
Equity Income Fund then fails or refuses to close within the earlier of five
(5) business days or [December 31, 1996].
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10. REMEDIES.
In the event of termination of this Agreement by either or both of the
Balanced Fund and Equity Income Fund pursuant to Section 9(C), written notice
thereof shall forthwith be given by the terminating party to the other party
hereto, and this Agreement shall therefore terminate and become void and have no
effect, and the transactions contemplated herein and thereby shall be abandoned,
without further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
A. SURVIVAL. The representations and warranties included or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three year period except
that any representation or warranty with respect to taxes shall survive for the
expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the Equity Income Fund's and the Balanced Fund's
right to seek indemnity pursuant to this Agreement shall survive for a period of
ninety (90) days beyond the expiration of the Survival Period of the
representation, warranty, covenant or agreement upon which indemnity is sought.
In no event shall the Equity Income Fund or the Balanced Fund be obligated to
indemnify the other if indemnity is not sought within ninety (90) days of the
expiration of the applicable Survival Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and hold the
other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened, (collectively, the "Losses"): arising out of or related to any claim
of a breach of any representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall be indemnified
hereunder against any Losses arising directly from such Indemnified
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Party's (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv)
reckless disregard of the duties involved in the conduct of such Indemnified
Party's position.
C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best efforts
to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
or thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such notice, Indemnified Party may, at its option,
resist, settle or otherwise compromise, or pay such claim unless it shall have
received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which case
Indemnified Party shall have the right, at no cost or expense to Indemnitor, to
participate in such defense. If Indemnitor does not assume the defense of such
matter, and in any event until Indemnitor states in writing that it will assume
the defense, Indemnitor shall pay all costs of Indemnified Party arising out of
the defense until the defense is assumed; provided, however, that Indemnified
Party shall consult with Indemnitor and obtain Indemnitor's prior written
consent to any payment or settlement of any such claim. Indemnitor shall keep
Indemnified Party fully apprised at all times as to the status of the defense.
If Indemnitor does not assume the defense, Indemnified Party shall keep
Indemnitor apprised at all times as to the status of the defense. Following
indemnification as provided for hereunder, Indemnitor shall be subrogated to all
rights of Indemnified Party with respect to all third parties, firms or
corporations relating to the matter for which indemnification has been made.
12. SURVIVAL.
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes hereunder
if in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid. Notice to the Balanced Fund shall be addressed to the
Balanced Fund c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181; Attention: General Counsel, or
at such other address as the Balanced Fund may designate by written notice to
the Equity
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<PAGE> 133
Income Fund. Notice to the Equity Income Fund shall be addressed to the Equity
Income Fund c/o Van Kampen American Capital Asset Management, Inc., One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel, or at such
other address and to the attention of such other person as the Equity Income
Fund may designate by written notice to the Balanced Fund. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns. This Agreement shall not be assigned by
any party without the prior written consent of the other party hereto.
15. BOOKS AND RECORDS.
The Balanced Fund and the Equity Income Fund agree that copies of the books
and records of the Balanced Fund relating to the Assets including, but not
limited to all files, records, written materials; e.g., closing transcripts,
surveillance files and credit reports shall be delivered by the Balanced Fund to
the Equity Income Fund at the Closing Date. In addition to, and without limiting
the foregoing, the Balanced Fund and the Equity Income Fund agree to take such
action as may be necessary in order that the Equity Income Fund shall have
reasonable access to such other books and records as may be reasonably
requested, all for three years after the Closing Date for the three tax years
ending December 31, 1993, December 31, 1994 and December 31, 1995; namely,
general ledger, journal entries, voucher registers; distribution journal;
payroll register, monthly balance owing report; income tax returns; tax
depreciation schedules; and investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written or
oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Balanced Fund
and Equity Income Fund and delivered to each of the parties hereto. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. This Agreement is
for the sole benefit of the parties thereto, and nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. This Agreement shall be governed
by and construed in
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accordance with the laws of the State of Illinois without regard to principles
of conflicts or choice of law.
17. LIMITATION OF LIABILITY.
Copies of the Declarations of Trust of the Equity Income Fund and Equity Trust
are on file with the Secretary of the State of the State of Delaware and notice
is hereby given and the parties hereto acknowledge and agree that this
instrument is executed on behalf of the Trustees of the Equity Income Fund and
the Equity Trust, respectively, as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the Trustees or
shareholders of the Equity Income Fund or Equity Trust individually but binding
only upon the assets and property of the Equity Income Fund or the Equity Trust
the case may be.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND,
a Delaware business trust
By:
---------------------------------------
Title:
---------------------------------------
Attest:
----------------------------------------
Title:
----------------------------------------
VAN KAMPEN AMERICAN CAPITAL
EQUITY TRUST,
a Delaware business trust on behalf of
VAN KAMPEN AMERICAN CAPITAL
BALANCED FUND
By:
---------------------------------------
Title:
---------------------------------------
Attest:
----------------------------------------
Title:
----------------------------------------
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<PAGE> 135
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
Dated April 29, 1996
<PAGE> 136
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated April 29,
1996. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information................................................................... B-2
Investment Restrictions............................................................... B-3
Options, Futures Contracts and Related Options........................................ B-5
Portfolio Turnover.................................................................... B-10
Securities of Foreign Issuers......................................................... B-10
Repurchase Agreements................................................................. B-10
Trustees and Officers................................................................. B-11
Investment Advisory Agreement......................................................... B-18
Distributor........................................................................... B-20
Distribution Plans.................................................................... B-20
Transfer Agent........................................................................ B-22
Portfolio Transactions and Brokerage.................................................. B-22
Determination of Net Asset Value...................................................... B-23
Purchase and Redemption of Shares..................................................... B-23
Exchange Privilege.................................................................... B-26
Dividends, Distributions and Federal Taxes............................................ B-27
Fund Performance...................................................................... B-29
Other Information..................................................................... B-30
Report of Independent Accountants..................................................... B-31
Financial Statements.................................................................. B-32
Notes to Financial Statements......................................................... B-45
</TABLE>
This Statement of Additional Information is dated April 29, 1996.
B-1
<PAGE> 137
GENERAL INFORMATION
Van Kampen American Capital Equity Income Fund, formerly American Capital
Equity Income Fund, Inc. (the "Fund"), was originally incorporated in Delaware
under the name Provident Fund for Income, Inc. on August 14, 1957. On July 2,
1990, the Fund's name was changed from Provident Fund for Income, Inc. to
American Capital Equity Income Fund, Inc. The Fund was reincorporated by merger
into a Maryland corporation on October 22, 1991. The Fund was reorganized as a
business trust under the laws of the State of Delaware as of August 18, 1995 and
adopted its current name at that time.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital Inc. ("VKAC"), which is a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than 7% of the common stock of VK/AC
Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 13% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC manages or supervises more
than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to VKAC in more than 2 million
investor accounts. VKAC has one of the largest research teams (outside of the
rating agencies) in the country, with more than 80 analysts devoted to various
specializations.
VKAC uses a four-step investment process designed to attempt to produce
consistently good short-term results, which should help lead to superior
long-term performance.
Fully Invested: Money invested in a VKAC stock fund will normally be fully
invested in the market to attempt to maximize the potential for long-term
returns. The importance of being fully invested can be illustrated by the
following comparison. By missing fewer than 4% of the months during the past 69
years, the value of $1.00 invested in 1926 was $15.81 at the end of 1995,
compared to $1,113.92 for $1.00 that was invested for the entire period (Source:
Micropal, Inc.). During the most recent 5-year period (1991-1995), the average
annual total return for stocks, as measured by the Standard and Poor's 500 Stock
Index, a broad-based, unmanaged index, was 11.75%. However, the average annual
return for the S&P 500 for the same period excluding the 20 best days for stock
market performance, was just 1.93%. Of course, past performance is no guarantee
of future results.
Widely Varied: A widely varied portfolio usually reduces risk and increases
relative stability. Since VKAC's goal is consistency, a widely varied portfolio
across industries is emphasized. VKAC stock funds are varied both in terms of
the number of industries and the number of stocks within each industry in which
they invest. Generally, the stock funds invest in 12 broad economic sectors, and
in many individual stocks within each sector.
Clearly Defined: The basic characteristics of VKAC funds are determined by
a pre-defined profile which remains constant over time.
Blended Investment Style: Market conditions are constantly changing, which
means the stocks that perform well should be expected to change. A rigid
investment style might cause an investor to suffer when certain types of stocks
lose favor with the market. The two most common investment styles are growth,
which
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emphasizes companies that are projected to experience rapid growth in earnings,
and value, which focuses on companies whose stock is selling for less than the
company's net worth. At VKAC, our style is blended between growth and value on a
fund-specific basis. The results of our approach are constantly evaluated and
compared to other similar funds. Although past performance is no guarantee of
future results, VKAC remains committed to our belief that this approach should
help maximize potential for long-term returns.
As of March 22, 1996, no person was known by the Fund to own beneficially
or to hold of record as much as 5% of the outstanding Class A shares, Class B
shares or Class C shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT
OF OWNERSHIP AT CLASS OF PERCENTAGE OF
NAME AND ADDRESS OF HOLDER MARCH 22, 1996 SHARES OWNERSHIP
------------------------------------------------- --------------- -------- -------------
<S> <C> <C> <C>
Van Kampen American Capital Trust Company 15,390,801 A 26.46%
2800 Post Oak Blvd. 21,249,711 B 29.14%
Houston, TX 77056 678,053 C 10.19%
Merrill Lynch Pierce 852,191 C 12.80%
Fenner & Smith, Inc.
Mutual Fund Operations
Attn Book Entry
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which, along with its
investment objectives, cannot be changed without approval by the holders of a
majority vote of its outstanding shares. Such majority vote is defined by the
Investment Company Act of 1940, as amended (the "1940 Act"), as the lesser of
(i) 67% or more of the voting securities present at the meeting, if the holders
of more than 50% of the outstanding voting securities are present or represented
by proxy; or (ii) more than 50% of the outstanding voting securities. The
percentage limitations contained in the restrictions and policies set forth
herein apply at the time of purchase of securities. These restrictions provide
that the Fund shall not:
1. Invest more than 5% of its assets in the securities of any one issuer
(except the United States Government) or purchase more than 10% of the
outstanding voting securities of any one issuer. Neither limitation
shall apply to the acquisition of shares of other open-end investment
companies to the extent permitted by rule or order of the Securities
and Exchange Commission exempting the Fund from the limitations imposed
by Section 12(d)(1) of the 1940 Act;
2. Borrow money, except for a temporary purpose and then not in excess of
10% of its net assets taken at cost or market, whichever is lower, and
may not pledge more than 15% of gross assets taken at cost to secure
such borrowings; such borrowings in excess of 5% may be made from banks
only. The Fund will not purchase additional securities while any such
borrowings exceed 5% of the Fund's total assets. Notwithstanding the
foregoing, the Fund may engage in transactions in options, futures
contracts and related options, segregate or deposit assets to cover or
secure options written, and make margin deposits or payments for
futures contracts and related options;
3. Purchase securities on margin, sell securities short, or act as an
underwriter of securities except to the extent that in selling
restricted securities the Fund may be deemed to be an underwriter for
purposes of the Securities Act of 1933, but the Fund may engage in
transactions in options, futures contracts and related options and make
margin deposits and payments in connection therewith.
As used herein, "restricted securities" means securities acquired under
circumstances in which the Fund might not be free to sell such
securities without being deemed an underwriter for purposes of
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<PAGE> 139
the Securities Act of 1933 and without registration of such securities
under that Act. Where registration is required, the Fund may have to
bear the expense of registration and a considerable period may elapse
between the time when a decision is made to sell such securities and
the effectiveness of the Registration Statement. The Fund's position in
restricted securities may adversely affect the liquidity and
marketability of such securities and the Fund may not be able to
dispose of its holding in these securities at reasonable price levels;
4. Purchase or sell commodities or commodities futures, except that the
Fund may enter into transactions in futures contracts or related
options;
5. Make loans to any individual;
6. Invest in securities of other investment companies except at customary
brokerage commissions or in connection with mergers, consolidations or
exchange offers or to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the Securities
and Exchange Commission exempting the Fund from the limitations imposed
by Section 12(d)(1) of the 1940 Act;
7. Purchase or retain securities of a company if any officer or director
of the Fund or the investment adviser owns beneficially more than
one-half of one percent of the securities of such company and together
own more than 5% of the securities of such company;
8. Purchase a restricted security or a security for which market
quotations are not readily available if as a result of such purchase
more than 10% of the Fund's assets would be invested in such
securities. Notwithstanding the foregoing, 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;
9. Invest more than 10% of its net assets in real estate, but the Fund may
purchase securities issued by real estate investment trusts and
corporations engaged primarily in real estate;
10. Invest more than 5% of its assets in companies having a record,
together with predecessors, of less than three years continuous
operation; 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;
11. Invest in companies for the purpose of exercising control of
management;
12. Concentrate its investments in any single group or type of securities
except that it may, on occasion, invest up to 25% of its assets in any
one 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; or
13. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts, forward commitments and other investment strategies and
instruments that would be considered "senior securities" but for the
maintenance by the Fund of a segregated account with its custodian or
some other form of "cover."
Short-term trading is not the policy of the Fund, although a subsequent
change in the circumstances of a company, an industry, the market or the economy
may indicate that the sale of a security is desirable.
The Fund has undertaken to a certain state not to invest more than 10% of
its net assets in Van Kampen American Capital Small Capitalization Fund until it
complies with certain NASAA regulations. In addition, commitments have been made
to certain states that, while the Fund's shares are registered for sale there,
the Fund shall not purchase more than 10% of the securities (voting or
non-voting) of any one issuer; deal in puts, calls, straddles or other forms of
options; invest more than 2% of its net assets in warrants; purchase securities
of foreign issuers if such a purchase would cause the Fund's investments in all
such issuers, taken at cost, to exceed 15% of the value of its total assets;
invest in real estate, but the Fund has reserved the right to purchase
securities issued by real estate investment trusts and corporations engaged
primarily in real estate; or invest in
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<PAGE> 140
interests in oil, gas, or other mineral exploration or development programs. The
Fund does not presently intend to engage in short sales against the box.
Although the Fund has the right to pledge, mortgage or hypothecate its assets,
for purposes of compliance with certain state statutes or investment
restrictions, it will not pledge, mortgage or hypothecate its portfolio
securities to the extent that at any time the percentage of pledged securities
plus the sales load will exceed 10% of the offering price of the Fund's shares.
Consistent with its investment objectives, the Fund may make additional
commitments more restrictive than its fundamental policies. Should the Fund
determine in the future that a commitment is no longer in the best interests of
the Fund and its shareholders, it will revoke its commitment by withdrawing its
shares from sale in the state to which the commitment was made.
The Fund has an operating policy, which may be amended by its Trustees,
that the Fund shall not invest more than 10% of its net assets (determined at
the time of investment) in illiquid securities and repurchase agreements that
have a maturity of longer than seven days.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option writing program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Writing options on portfolio securities is likely to result in higher
portfolio turnover.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security for the
writer at a specified price during a certain period. The Fund would write call
options only on a covered basis, which means that, at all times during the
option period, the Fund would own or have the right to acquire securities of the
type that it would be obligated to deliver if any outstanding option were
exercised.
The purchaser of a put option pays a premium to the writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. A Fund
could close out its position as a writer of an option only if a liquid secondary
market exists for options of that series, but there is no assurance that such a
market will exist, particularly in the case of over-the-counter options, since
they can be closed out only with the other party to the transaction.
Alternatively, the Fund could purchase an offsetting option, which would not
close out its position as a writer, but would provide an asset of equal value to
its obligation under the option written. If the Fund is not able to enter into a
closing purchase transaction or to purchase an offsetting option with respect to
an option it has written, it will be required to maintain the securities subject
to the call or the collateral underlying the put until a closing purchase
transaction can be entered into (or the option is exercised or expires) even
though it might not be advantageous to do so.
B-5
<PAGE> 141
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market price.
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security (whether or not
covered) that may be written by a single investor, whether acting alone or in
concert with others, regardless of whether such options are written on one or
more accounts or through one or more brokers. An exchange may order the
liquidation of positions found to be in violation of those limits, and it may
impose other sanctions or restrictions. These position limits may restrict the
number of options the Fund may be able to write.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire.
Alternatively, call options could be purchased for capital appreciation. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. Alternatively, put options could be purchased
for capital appreciation in anticipation of a price decline in the underlying
security and a corresponding increase in the value of the put option. The
purchase of put options for capital appreciation involves the same significant
risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the options expire unexercised.
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FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund is exempt from
registration as a "commodity pool."
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
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.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalent or liquid high
grade debt securities equal to a percentage (which will normally range between
2% and 10%) of the contract amount. This amount is known as initial margin. The
nature of initial margin in futures transactions is different from that of
margin in securities transactions in that futures contract margin does not
involve the borrowing of funds by the customer to finance the transaction.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract, which is returned to the Fund upon termination of the
futures contract and satisfaction of its contractual obligations. Subsequent
payments to and from the broker, called variation margin, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to the
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could
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<PAGE> 143
be terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options futures or related options, the Fund could experience
delays and/or losses in liquidating open positions purchased and/or incur a loss
of all or part of its margin deposits with the broker. Transactions are entered
into by the Fund only with brokers or financial institutions deemed creditworthy
by the Adviser.
Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, the risk of market distortion, the
illiquidity risk and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices
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<PAGE> 144
instead advance, the Fund will lose part or all of the benefit of the increase
in value of its securities holdings because it will have offsetting losses in
futures contracts. In such cases, if the Fund has insufficient cash, it may have
to sell portfolio securities at a time when it is disadvantageous to do so in
order to meet the daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or that they meet certain
conditions as specified in CFTC regulations) and (ii) that the Fund not enter
into futures and related options for which the aggregate initial margin and
premiums exceed 5% of the fair market value of the Fund's assets. In order to
minimize leverage in connection with the purchase of futures contracts by the
Fund, an amount of cash, cash equivalents or liquid high grade debt securities
equal to the market value of the obligation under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with the
Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as, it could sell a futures contract; at the same time, it
could write put options at a lower strike price (a "put bear spread") to offset
part of the cost of the strategy to the Fund. The purchase of call options on
futures contracts would be intended to serve the same purpose as the actual
purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the level of the index or in the price of the underlying
security, when the use of an option on a future would result in a loss to the
Fund when the use of a future would not.
ADDITIONAL RISKS TO OPTIONS AND FUTURES TRANSACTIONS
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
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<PAGE> 145
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.
PORTFOLIO TURNOVER
The Fund's annual portfolio turnover rate is shown in the table of
Financial Highlights in the Prospectus. The portfolio turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio securities
for a fiscal year by the average monthly value of the portfolio securities
during such fiscal year. Securities maturing in one year or less at the time of
acquisition are not included in this computation. The portfolio turnover rate
may vary greatly from year to year and within a year. Greater portfolio activity
increases the Fund's transaction costs, including brokerage commissions. To the
extent turnover results in realization of gains on securities held less than six
months, shareholders are subject to taxes at ordinary income rates.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest up to 15% of the value of its total assets in
securities of foreign governments and companies. Such securities may be subject
to foreign government taxes which would reduce the income yield on such
securities. Foreign investments involve certain risks, such as political or
economic instability of the issuer or of the country of issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of domestic corporations or of the United States
Government. In addition, there may be less publicly available information about
a foreign company than about a domestic company. Foreign companies generally are
not subject to uniform accounting, auditing and financial reporting, standards
comparable to those applicable to domestic companies. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States, and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Finally, in the
event of a default on any such foreign debt obligations, it may be more
difficult for the Fund to obtain or to enforce a judgment against the issuers of
such securities.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
1940 Act. The Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of a custodian or
bank acting as agent. The seller under a repurchase agreement will be required
to maintain the value of the underlying securities marked-to-market daily at not
less than the repurchase price. The underlying securities (normally securities
of the U.S. Government, or its agencies and instrumentalities), may have
maturity dates exceeding one year. The Fund does not bear the risk of a decline
in value of the underlying security unless the seller defaults under its
repurchase obligation. In the event of a bankruptcy or other default of a seller
of a repurchase agreement, the Fund could experience both delays in liquidating
the underlying securities and loss including: (a) possible decline in the value
of the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible lack of access to income on the underlying security
during this period, and (c) expenses of enforcing its rights. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investments, together with any other illiquid security held by the Fund, exceeds
10% of the value of its net assets.
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<PAGE> 146
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Fund and their
principal occupations for the last five years and their affiliations, if any,
with Van Kampen American Capital Asset Management, Inc. (the "AC Adviser" or
"Adviser"), Van Kampen American Capital Investment Advisory Corp. (the "VK
Adviser"), Van Kampen American Capital Management, Inc., McCarthy, Crisanti &
Maffei, Inc., MCM Asia Pacific Company, Limited, Van Kampen American Capital
Distributors, Inc. (the "Distributor"), Van Kampen American Capital, Inc. ("Van
Kampen American Capital" or "VKAC") or VK/AC Holding, Inc. For purposes hereof,
the term "Van Kampen American Capital Funds" includes each of the open-end
investment companies advised by the VK Adviser (excluding The Explorer
Institutional Trust) and each of the open-end investment companies advised by
the AC Adviser (excluding the American Capital Exchange Fund and the Common
Sense Trust).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndston, 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
Age: 46 of La Salle National Bank. A Trustee of each of the Van
Kampen American Capital Funds.
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 76
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 Du Pont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Age: 44 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Executive Vice President and a
Age: 53 Director of VK/AC Holding, Inc. and Van Kampen American
Capital. Chief Executive Officer of McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. Executive Vice President and a Trustee of
each of the Van Kampen American Capital Funds. President
of the closed-end investment companies advised by the VK
Adviser. Prior to December, 1991, Senior Vice President
of Van Kampen Merritt Inc.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 76 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by the VK Adviser.
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 60 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 56 Distributor, the Adviser, the VK Adviser, Van Kampen
American Capital Management, Inc. and Van Kampen American
Capital Advisors, Inc. Chairman, President and a Director
of Van Kampen American Capital Exchange Corporation,
American Capital Contractual Services, Inc. and American
Capital Shareholders Corporation. Chairman and a Director
of ACCESS Investor Services, Inc. ("ACCESS"), Van Kampen
Merritt Equity Advisors Corp., Van Kampen Merritt Equity
Holdings Corp., and VCJ Inc., McCarthy, Crisanti &
Maffei, Inc., McCarthy, Crisanti & Maffei Acquisition,
and Van Kampen American Capital Trust Company. Chairman,
President and a Director of Van Kampen American Capital
Services, Inc. President, Chief Executive Officer and a
Trustee of each of the Van Kampen American Capital Funds.
Director, Trustee or Managing General Partner of other
open-end investment companies and closed-end investment
companies advised by the Adviser or the VK Adviser.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 73 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to the Van Kampen American Capital
Chicago, IL 60606 Funds. A Trustee of each of the Van Kampen American
Age: 56 Capital Funds. He also is a Trustee of The Explorer Trust
and closed-end investment companies advised by the VK
Adviser.
</TABLE>
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<PAGE> 148
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 74 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
Adviser and the Fund by reason of their positions with the Adviser. Mr. Whalen
is an interested person of the Fund by reason of his firm having acted as
legal counsel to the Fund.
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of VKAC and have
entered into employment contracts (for a term of five years) with VKAC.
The Fund's Officers other than Messrs. Hegel, Nyberg, Wood, Sullivan,
Dalmaso, Martin, Wetherell and Hill are located at 2800 Post Oak Blvd., Houston,
TX 77056. Messrs. Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin, Wetherell and
Hill are located at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
William N. Brown......... Vice President Executive Vice President of the VK Adviser,
Age: 42 AC Adviser, VK/AC Holding, Inc., VKAC, Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, ACCESS Investor Services,
Inc., and Van Kampen American Capital Trust
Company. Director of American Capital
Shareholders Corporation. Vice President of
each of the Van Kampen American Capital
Funds.
Peter W. Hegel........... Vice President Executive Vice President of the VK Adviser,
Age: 39 AC Adviser, Van Kampen American Capital
Advisors, Inc. Director of McCarthy,
Crisanti & Maffei, Inc. and McCarthy,
Crisanti & Maffei Acquisition Corporation.
Vice President of each of the Van Kampen
American Capital Funds. Vice President of
the closed-end funds advised by the VK
Adviser.
Curtis W. Morell......... Vice President and Chief Vice President and Chief Accounting Officer
Age: 49 Accounting Officer of most of the investment companies advised
by the AC Adviser.
</TABLE>
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<PAGE> 149
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg......... Vice President and Executive Vice President, General Counsel
Age: 42 Secretary and Secretary of Van Kampen American
Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor. Executive Vice
President and General Counsel of the VK
Adviser and the AC Adviser, Van Kampen
American Capital Management, Inc., VSM Inc.
VCJ, 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,
ACCESS Investor Services, Inc., American
Capital Shareholders Corporation, and Van
Kampen American Capital Trust Company.
General Counsel of McCarthy, Crisanti &
Maffei, Inc. and McCarthy, Crisanti &
Maffei Acquisition Corp. Vice President and
Secretary of each of the Van Kampen
American Capital Funds. Secretary of the
closed-end funds advised by the VK Adviser.
Director of ICI Mutual Insurance Co., a
provider of insurance to members of the
Investment Company Institute.
Robert C. Peck, Jr....... Vice President Executive Vice President of the VK Adviser.
Age: 49 Executive Vice President and Director of
the AC Adviser. Vice President of each of
the Van Kampen American Capital Funds.
Alan T. Sachtleben....... Vice President Executive Vice President of the VK Adviser.
Age: 54 Executive Vice President and a Director of
the AC Adviser. Vice President of each of
the Van Kampen American Capital Funds.
Paul R. Wolkenberg....... Vice President Executive Vice President of the VK Adviser
Age: 51 and the AC Adviser. President, Chief
Executive Officer and a Director of Van
Kampen American Capital Trust Company and
ACCESS. Vice President of each of the Van
Kampen American Capital Funds.
Edward C. Wood III....... Vice President and Chief Senior Vice President of VK Adviser and the
Age: 40 Financial Officer AC Adviser. Vice President and Chief
Financial Officer of each of the Van Kampen
American Capital Funds. Vice President,
Treasurer and Chief Financial Officer of
the closed-end funds advised by VK Adviser.
John L. Sullivan......... Treasurer First Vice President of the VK Adviser and
Age: 40 AC Adviser. Treasurer of each of the Van
Kampen American Capital Funds. Controller
of the closed-end funds advised by the VK
Adviser. Formerly Controller of open-end
funds advised by VK Adviser.
</TABLE>
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<PAGE> 150
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Tanya M. Loden........... Controller Controller of most of the investment
Age: 36 companies advised by the Adviser, formerly
Tax Manager/Assistant Controller.
Nicholas Dalmaso......... Assistant Secretary Assistant Vice President and Senior
Age: 31 Attorney of VKAC. 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, Assistant Secretary
of the closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr...... Assistant Secretary Assistant Vice President and Senior
Age: 32 Attorney of VKAC. 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, ACCESS, and American Capital
Shareholders Corporation. Assistant
Secretary of each of the Van Kampen
American Capital Funds.
Scott E. Martin.......... Assistant Secretary Senior Vice President, Deputy General
Age: 39 Counsel and Assistant Secretary of VKAC.
Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser and the Distributor, Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Advisers, Inc.,
VSM Inc., VCJ Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation,
ACCESS Investor Services, Inc., Van Kampen
Merritt Equity Advisors Corp., Van Kampen
Merritt Equity Holdings Corp., American
Capital Shareholders Corporation. Secretary
and Deputy General Counsel of McCarthy,
Crisanti, & Maffei, Inc. and McCarthy,
Crisanti & Maffei Acquisition. Chief Legal
Officer of McCarthy, Crisanti & Maffei,
S.A. Assistant Secretary of each of the Van
Kampen American Capital Funds. Assistant
Secretary of the closed-end funds advised
by the VK Adviser.
</TABLE>
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<PAGE> 151
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Weston B. Wetherell...... Assistant Secretary Vice President, Associate General Counsel
Age: 39 and Assistant Secretary of VKAC, the VK
Adviser, the AC Adviser and the
Distributor, Van Kampen American Capital
Management, Inc. Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds. Assistant Secretary of closed-end
funds advised by VK Adviser.
Steven M. Hill........... Assistant Treasurer Assistant Vice President of the VK Adviser
Age: 31 and AC Adviser. Assistant Treasurer of each
of the Van Kampen American Capital Funds.
Assistant Treasurer of the closed-end funds
advised by the VK Adviser.
Robert Sullivan.......... Assistant Controller Assistant Controller of each of the Van
Age: 63 Kampen American Capital Funds.
</TABLE>
Each of the foregoing trustees and officers holds the same position with
each of 46 other Van Kampen American Capital mutual funds (the "Fund Complex").
Each trustee who is not an affiliated person of the Adviser, the Distributor or
VKAC (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.
The compensation of each Non-Affiliated Trustee includes a retainer by the
funds in the Fund Complex advised by the AC Adviser (the "AC Funds") in an
amount equal to $35,000 per calendar year, due in four quarterly installments on
the first business day of each calendar quarter. The AC Funds pay each Non-
Affiliated Trustee a per meeting fee in the amount of $2,000 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. Payment of the annual retainer
and the regular meeting fee is allocated among the AC Funds (i) 50% on the basis
of the relative net assets of each AC Fund to the aggregate net assets of all
the AC Funds and (ii) 50% equally to each AC Fund, in each case as of the last
business day of the preceding calendar quarter. Each AC Fund participating in
any special meeting of the trustees generally pays each Non-Affiliated Trustee a
per meeting fee in the amount of $125 per special meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee, provided that no compensation will be paid in connection
with certain telephonic special meetings.
The trustees have approved an aggregate compensation cap with respect to
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 mutual funds in the Fund Complex as
of July 21, 1995 and certain other exceptions. In addition, the Adviser 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 mutual
funds in the Fund Complex as selected by the respective Non-Affiliated Trustee.
To the extent permitted by the 1940 Act, the Fund will invest in securities of
those mutual funds selected by the Non-Affiliated Trustees in order to
B-16
<PAGE> 152
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 January 25, 1996. 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. Under certain conditions, reduced benefits
are available for early retirement provided the trustee has served at least five
years. As of the date hereof the retirement plan contains a Fund Complex
retirement benefit cap of $60,000 per year. The Adviser will reimburse the Fund
for expenses related to the retirement plan through December 31, 1996.
Additional information regarding compensation before deferral paid by the
Fund and other funds in the Fund Complex is set forth below.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
COMPENSATION
AGGREGATE PENSION OR ESTIMATED BEFORE DEFERRAL
COMPENSATION RETIREMENT ANNUAL FROM FUND
BEFORE DEFERRAL BENEFITS ACCRUED BENEFITS AND FUND
FROM AS PART OF FUND UPON COMPLEX PAID TO
NAME(2) FUND(3) EXPENSES(4) RETIREMENT(5) TRUSTEE(6)
- ----------------------------------------- --------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan........................ $ 2,090 $-0- $ 2,500 $84,250
Dr. Richard E. Caruso.................... 1,520 -0- -0- 57,250
Philip P. Gaughan........................ 730 -0- -0- 76,500
Linda Hutton Heagy....................... 690 -0- 2,500 38,417
Dr. Roger Hilsman........................ 2,170 -0- 1,500 91,250
R. Craig Kennedy......................... 890 -0- 2,500 92,625
Donald C. Miller......................... 810 -0- -0- 94,625
Jack E. Nelson........................... 890 -0- 2,500 93,625
David Rees............................... 2,090 -0- 1,250 83,250
Jerome L. Robinson....................... 890 -0- -0- 89,375
Lawrence J. Sheehan...................... 2,170 -0- -0- 91,250
Dr. Fernando Sisto....................... 2,460 -0- 2,500 98,750
Wayne W. Whalen.......................... 890 -0- 2,500 93,375
William S. Woodside...................... 2,010 -0- 2,500 79,125
</TABLE>
- ---------------
(1) As indicated in the other explanatory notes, the amounts in the table relate
to the applicable trustees during the Fund's last fiscal year ended December
31, 1995 or the Fund Complex' last calendar year ended December 31, 1995.
(2) Messrs. Powell and McDonnell, trustees of the Fund, are affiliated persons
of the Adviser and are not eligible for compensation or retirement benefits
from the Registrant. Messrs. Gaughan, Kennedy, Miller, Nelson, Robinson and
Whalen were elected by shareholders to the Board of Trustees on July 21,
1995. Ms. Heagy was appointed to the Board of Trustees on September 7, 1995.
Mr. McDonnell was appointed to the Board of Trustees on January 29, 1996.
Mr. Gaughan retired from the Board of Trustees on January 26, 1996. Messrs.
Caruso, Rees, and Sheehan were removed from the Board of Trustees effective
September 7, 1995, January 29, 1996 and January 29, 1996, respectively.
(3) The amounts shown in this column are accumulated from the Aggregate
Compensation before Deferral of the Fund during its fiscal year ended
December 31, 1995. The following trustees deferred all or a portion of their
compensation from the Fund during the fiscal year ended December 31, 1995:
Dr. Caruso, $1,520; Mr. Gaughan, $370; Ms. Heagy, $450; Mr. Kennedy, $450;
Mr. Miller, $370; Mr. Nelson, $450; Mr. Robinson, $450; Dr. Sisto, $1,410;
and Mr. Whalen, $450. The cumulative deferred compensation
(See notes on following page)
B-17
<PAGE> 153
(including interest) accrued with respect to each trustee from the Fund as
of December 31, 1995 is as follows: Dr. Caruso, $8,007; Mr. Gaughan, $370;
Ms. Heagy, $450; Mr. Kennedy, $450; Mr. Miller, $370; Mr. Nelson, $450; Mr.
Rees, $18,289; Mr. Robinson, $450; Dr. Sisto, $10,255 and Mr. Whalen, $450.
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 mutual funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee. To the extent permitted by the 1940 Act, it is
anticipated that the Fund will invest in securities of those mutual funds
selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation.
(4) The amounts shown in this column are zero because the Fund did not adopt its
retirement plan until after the end of its 1995 fiscal year. The amounts in
this column will remain zero in the Fund's 1996 fiscal year the because the
Adviser has agreed to reimburse the Fund for expenses related to the
retirement plan through December 31, 1996; absent such reimbursement, the
aggregate expenses of the Fund for all trustees would be approximately
$17,000 in its 1996 fiscal year. The retirement plan is described above the
Compensation Table.
(5) The amounts shown in this column are the annual benefits payable per year
from the Fund for the 10-year period commencing in the year of such
trustee's retirement. The amounts were computed based on each trustee's
anticipated retirement date. The retirement plan is described above the
Compensation Table.
(6) The amounts shown in this column are accumulated from the Aggregate
Compensation before Deferral of each of the 46 mutual funds in the Fund
Complex as of December 31, 1995. The following trustees deferred
compensation paid by the Fund 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 mutual funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee. To the extent permitted by the 1940 Act, it is
anticipated that the Fund will invest in securities of those mutual 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 Adviser and its affiliates
also serve as investment adviser for other investment companies; however,
with the exception of Messrs. Powell, McDonnell and Whalen, the trustees
were not trustees of such investment companies. Combining the Fund Complex
with other investment companies advised by the Adviser and its affiliates,
Mr. Whalen received Total Compensation of $268,857 during the calendar year
ended December 31, 1995.
As of March 22, 1996, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund. As of March 22, 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.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objectives. The Adviser also furnishes at no cost to the Fund
B-18
<PAGE> 154
(except as noted herein) the services of sufficient executive and clerical
personnel for the Fund as are necessary to prepare registration statements,
prospectuses, shareholder reports, and notices and proxy solicitation materials.
In addition, the Adviser furnishes at no cost to the Fund the services of a
President of the Fund, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser
based in part on the number of portfolios and in part on the relative assets of
the portfolios. A portion of these amounts are paid to the Adviser or its parent
in reimbursement of personnel, office space facilities and equipment costs
attributable to the provision of accounting services to the Fund. The services
provided by the Adviser are at cost. The Fund also pays shareholder service
agency fees, distribution fees, service fees, custodian fees, legal and auditing
fees, the costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at an annual
rate of: 0.50% on the first $150 million of average net assets; 0.45% on the
next $100 million of average net assets; 0.40% on the next $100 million of
average net assets; and 0.35% on the average net assets in excess of $350
million.
The average net asset value for purposes of computing the advisory fees is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The fee
payable to the Adviser is reduced by any commissions, tender solicitation and
other fees, brokerage or similar payments received by the Adviser or any other
direct or indirect majority-owned subsidiary of VK/AC Holding, Inc., in
connection with the purchase and sale of portfolio investments of the Fund, less
any direct expenses incurred by such subsidiary of VK/AC Holding, Inc. in
connection with obtaining such payments. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Fund's benefit, and to advise the Trustees of the Fund of any other commissions,
fees, brokerage or similar payments which may be possible under applicable laws
for the Adviser or any other direct or indirect majority-owned subsidiary of
VK/AC Holding, Inc., to receive in connection with the Fund's portfolio
transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitations applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the Distribution Plans.
The Advisory Agreement also provides that the Adviser shall not be liable to the
Fund for any actions or omissions if it acted in good faith without negligence
or misconduct.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on not more than 60 days', nor less than 30 days' written notice.
During the fiscal years ended December 31, 1993, 1994 and 1995, the Adviser
received $1,016,260, $1,875,881 and $2,603,866, respectively, in advisory fees
from the Fund. For such periods the Fund paid $92,453, $97,630 and $108,597,
respectively, for accounting services. A substantial portion of these amounts
B-19
<PAGE> 155
was paid to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Underwriting Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
During the fiscal years ended December 31, 1993, 1994 and 1995, total
underwriting commissions on the sale of shares of the Fund were $1,292,157,
$1,722,966 and $2,264,941, respectively. Of such totals, the amount retained by
the Distributor was $177,667, $183,464 and $313,394, respectively. The remainder
was reallowed to dealers. Of such dealer reallowances, $162,924, $168,108 and
$188,336, respectively, was received by Advantage Capital Corporation, a former
affiliated dealer of the Fund.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" or "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "authorized dealers") for administration, servicing Fund
shareholders who are also their clients and/or distribution. Such payments are
based on an annual percentage of the value of Fund shares held in shareholder
accounts for which such authorized dealers are responsible. With respect to the
Class A Plan, the Distributor intends to make payments thereunder only to
compensate authorized dealers for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B and Class C Plans, authorized
payments by the Fund include payments at an annual rate of up to 0.25% of the
net assets of the shares of the respective class to reimburse the Distributor
for payments for personal service and/or the maintenance of shareholder
accounts. With respect to the Class B Plan, authorized payments by the Fund also
include payments at an annual rate of up to 0.75% of the net assets of the Class
B shares to reimburse the Distributor for (1) commissions and transaction fees
of up to 4.00% of the purchase price of Class B shares purchased by the clients
of authorized dealers, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to authorized dealers, (5) advertising and
promotion expenses, including conducting and organizing sales seminars,
marketing support salaries and bonuses, and travel-related expenses, and (6)
interest income thereon computed at the 3-month LIBOR rate plus one and one half
percent compounded quarterly on the unreimbursed distribution expenses. With
respect to the Class C Plan, authorized payments by the Fund also include
payments at an annual rate of up to 0.75% of the net asset of the Class C shares
to reimburse the Distributor for (1) upfront commissions and transaction fees of
up to 0.75% of the purchase price of Class C shares purchased by the clients of
authorized dealers and ongoing commissions and transaction fees paid to
authorized dealers in an amount up to 0.75% of the average daily net assets of
the
B-20
<PAGE> 156
Fund's Class C shares, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to authorized dealers, (5) advertising and
promotion expenses, including conducting and organizing sales seminars,
marketing support salaries and bonuses, and travel-related expenses, and (6)
interest income thereon computed at the 3-month LIBOR rate plus one and one half
percent compounded quarterly on the unreimbursed distribution expenses. Such
reimbursements are subject to the maximum sales charge limits specified by the
NASD for asset-based charges.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each plan and the form of
servicing agreement were approved by the Trustees, including a majority of the
Trustees who are not affiliated persons (as defined in the 1940 Act) of the Fund
and who have no direct or indirect financial interest in the operation of any of
the plans or in any agreements related to each plan ("Independent Trustees"). In
approving each plan in accordance with the requirements of Rule 12b-1, the
Trustees determined that there is a reasonable likelihood that each plan will
benefit the Fund and its shareholders.
Each plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of the
respective class of the Fund. Any change in any of the plans that would
materially increase the distribution or service expenses borne by the Fund
requires shareholder approval voting separately by class otherwise, it may be
amended by a majority of the Trustees, including a majority of the Independent
Trustees, by vote cast in person at a meeting called for the purpose of voting
upon such amendment. So long as the plans are in effect, the selection or
nomination of the Independent Trustees is committed to the discretion of the
Independent Trustees.
For the fiscal year ended December 31, 1995, the Fund's aggregate expenses
under the Class A Plan were $601,850 or 0.21% of the Class A shares' average
daily net assets. Such expenses were paid to reimburse the Distributor for
payments made to authorized dealers for servicing Fund shareholders and for
administering the Class A Plan. For the fiscal year ended December 31, 1995, the
Fund's aggregate expenses under the Class B Plan were $3,125,732 or 1.00% of the
Class B shares' average daily net assets. Such expenses were paid to reimburse
the Distributor for the following payments: $2,344,299 for commissions and
transaction fees paid to authorized dealers in respect of sales of Class B
shares of the Fund and $781,433 for fees paid to authorized dealers for
servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended December 31, 1995, the unreimbursed expenses incurred by the
Distributor under the Class B Plan and carried forward were approximately $12.4
million. For the fiscal year ended December 31, 1995, the Fund's aggregate
expenses under the Class C Plan were $318,679 or 1.00% of the Class C shares'
average daily net assets. Such expenses were paid to reimburse the Distributor
for the following payments: $239,009 for commissions and transaction fees paid
to authorized dealers in respect of sales of Class C shares of the Fund and
$79,670 for fees paid to authorized dealers for servicing Class B shareholders
and administering the Class C Plan. For the fiscal year ended December 31, 1995,
the unreimbursed expenses incurred by the Distributor under the Class C Plan and
carried forward were approximately $205,000.
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<PAGE> 157
TRANSFER AGENT
For the fiscal year ended December 31, 1995, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$1,360,426 for these services. These services are provided at cost plus a
profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions, if any, paid on such transactions. It is the policy of the Adviser
to seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. Consistent with the Rules of Fair Practice
of the NASD and subject to seeking best execution and such other policies as the
Trustees may determine, the Adviser may consider sales of shares of the Fund and
of the other Van Kampen American Capital mutual funds as a factor in the
selection of firms to execute portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the Advisory Agreement, the Fund's Trustees have
authorized the Adviser to cause the Fund to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Adviser. The Adviser is of the opinion that the continued
receipt of supplemental investment research services from dealers is essential
to its provision of high quality portfolio management services to the Fund. The
Adviser undertakes that such higher commissions will not be paid by the Fund
unless (a) the Adviser determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
the Adviser's overall responsibilities with respect to the accounts as to which
it exercises investment discretion, (b) such payment is made in compliance with
the provisions of Section 28(e) and other applicable state and federal laws, and
(c) in the opinion of the Adviser, the total commissions paid by the Fund are
reasonable in relation to the expected benefits to the Fund over the long term.
The investment advisory fee paid by the Fund under the Advisory Agreement is not
reduced as a result of the Adviser's receipt of research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
B-22
<PAGE> 158
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal years ended December 31, 1993, 1994 and 1995, totalled $680,869,
$1,190,765, and $1,274,150, respectively. During the year ended December 31,
1995 the Fund paid $461,458 in brokerage commissions on transactions totalling
$297,135,940 to brokers selected primarily on the basis of research services
provided to the Adviser.
Prior to December 20, 1994, the Fund, from time to time, placed brokerage
transactions with brokers who were considered affiliated persons of the
Adviser's former parent, The Travelers Inc. ("Travelers"). Such affiliated
persons included Smith Barney, Inc. ("Smith Barney") and Robinson Humphrey, Inc.
("Robinson Humphrey"). In addition, from 1985 to September 30, 1992, Jefferies &
Company, Inc. ("Jefferies") was an affiliate of The Travelers Inc. (then
Primerica Corporation). The negotiated commission paid to an affiliated broker
on any transaction would be comparable to that payable to a non-affiliated
broker in a similar transaction.
The Fund paid the following commissions to these brokers during the periods
shown :
<TABLE>
<CAPTION>
ROBINSON SMITH
HUMPHREY BARNEY
-------- -------
<S> <C> <C>
Commissions Paid:
Fiscal 1993 -- $51,175
Fiscal 1994 $1,400 $68,439
Fiscal 1995 -- --
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time) on each
business day on which the Exchange is open. The net asset value of Fund shares
is computed by dividing the value of all securities plus other assets, less
liabilities, by the number of shares outstanding, and adjusting to the nearest
cent per share.
Such computation is made by using prices as of the close of trading on the
Exchange and (i) valuing securities listed or traded on a national securities
exchange at the last reported sale price, or if there has been no sale that day,
at the mean between the last reported bid and asked prices, (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, (iii) valuing all other over-the-counter securities for which market
quotations are available at the mean between the most recent bid and asked
quotations supplied by NASDAQ or broker-dealers, and (iv) valuing any securities
for which market quotations are not readily available, and any other assets at
fair value as determined in good faith by the Trustees of the Fund. Short-term
investments are valued in the manner described in the notes to the Financial
Statements included in this Statement of Additional Information.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements the section in the Fund's Prospectus
captioned "Purchase of Shares."
B-23
<PAGE> 159
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares, Class B shares and
Class C shares. The three classes of shares each represent interests in the same
portfolio of investments of the Fund, have the same rights and are identical in
all respects, except that Class B shares and Class C shares bear the expenses of
the deferred sales arrangements, distribution fees, and any expenses (including
higher transfer agency costs) resulting from such sales arrangements, and have
exclusive voting rights with respect to the Rule 12b-1 distribution plan
pursuant to which the distribution fee is paid.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application accompanying this Prospectus and forwarding the application, through
the authorized dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of at least $500 per class of shares, in
the form of a check payable to the Fund, must accompany the application. This
minimum may be waived by the Distributor for plans involving continuing
investments. Minimum subsequent investments of at least $25 per class of shares
may be mailed directly to ACCESS. All such investments are made at the public
offering price of Fund shares next computed following receipt of payment by
ACCESS. Confirmations of the opening of an account and of all subsequent
transactions in the account are forwarded by ACCESS to the investor's authorized
dealer.
In processing applications and investments, ACCESS acts as agent for the
investor and for the authorized dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC - Class A") of 1.00% is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC - Class A is imposed upon
redemption, the amount of the CDSC - Class A will be equal to the lesser of
1.00% of the net asset value of the shares at the time of purchase, or 1.00% of
the net asset value of the shares at the time of redemption.
The CDSC - Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one-year period prior to the redemption. The CDSC -
Class A will be waived in connection with redemptions by certain Qualified
Purchasers (e.g., in retirement plans qualified under Section 401(a) of the Code
and deferred compensation plans under Section 457 of the Code) required to
obtain funds to pay distributions to beneficiaries pursuant to the terms of the
plans. Such
B-24
<PAGE> 160
payments include, but are not limited to, death, disability, retirement, or
separation from service. No CDSC - Class A will be imposed on exchanges between
funds. For purposes of the CDSC - Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC - Class A rather than a front-end load sales charge. In determining whether
a CDSC - Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of Van Kampen American Capital Reserve
Fund and Van Kampen American Capital Tax Free Money Fund with shares of certain
other participating funds described as "Participating Funds" in the Prospectus.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES ("CDSC - CLASS B
AND C")
The CDSC - Class B and C is waived on redemptions of Class B shares and
Class C shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC - Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC - Class B and C.
In cases of disability or death, the CDSC - Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC - Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC - Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of Van Kampen American
Capital Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held onto the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC - Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC - Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's
B-25
<PAGE> 161
investment in the Fund will be redeemed systematically by the Fund on a periodic
basis, and the proceeds mailed to the shareholder. The amount to be redeemed and
frequency of the systematic withdrawals will be specified by the shareholder
upon his or her election to participate in the Plan. The CDSC - Class B and C
will be waived on redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from the Fund without the imposition of a CDSC - Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC - Class B and C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC - Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the same class of the Fund, provided that the
reinvestment is effected within 120 days after such redemption and the
shareholder has not previously exercised this reinvestment privilege with
respect to Class C shares of the Fund. Shares acquired in this manner will be
deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC - Class C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC - Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services - Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. Van Kampen American Capital and its
subsidiaries, including ACCESS, and the Fund employ procedures considered by
them to be reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither Van
Kampen American Capital, ACCESS nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital, ACCESS and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
B-26
<PAGE> 162
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
The Fund's policy is to distribute substantially all of its taxable net
investment income in quarterly dividends to shareholders of Class A, Class B and
Class C shares. The per share dividends on Class B shares and Class C shares
will be lower than the per share dividends on Class A shares as a result of the
higher distribution fees and higher transfer agency fees applicable to the Class
B shares and Class C shares. The Fund intends to distribute to shareholders any
taxable net realized capital gains for each class at least annually. Taxable net
realized capital gains are the excess, if any, of the Fund's total profits on
the sale of securities during the year over its total losses on the sale of
securities, including capital losses carried forward from prior years in
accordance with the tax laws. All income dividends and capital gains
distributions are reinvested in shares of the Fund at net asset value without
sales charge on the record date, except that any shareholder may otherwise
instruct ACCESS in writing and receive cash.
The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a regulated investment company, the Fund is not subject to Federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a 4% excise tax to the extent it fails to distribute
to its shareholders at least 98% of its ordinary (net investment) income for the
12 months ended December 31 plus 98% of its capital gains net income for the 12
months ended October 31 of such calendar year. The Fund intends to distribute
sufficient amounts to avoid liability for the excise tax.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. To the extent
determined each year, a portion of the dividends paid from net investment income
will qualify in the case of corporation for the dividends received deduction if,
and to the extent, the Fund receives qualifying dividends during the year and if
certain requirements are met.
Dividends and distributions declared to shareholders of record after
September 30 of any year and paid before February 1 of the following year are
considered taxable income to shareholders on the record date even though paid in
the next year.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such distributions and distributions from short-term capital gains are
not eligible for the dividends received deduction referred to above. Any loss on
the sale of Fund shares held for less than six months or less is treated as a
long-term capital loss to the extent of any long-term capital gain distribution
paid on such shares. All dividends and distributions are taxable to the
shareholder whether or not reinvested in shares. Shareholders are notified
annually by the Fund as to the federal tax status of dividends and distributions
paid by the Fund unless such amount is less than $10.00 in which case no notice
is provided.
B-27
<PAGE> 163
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax adviser
concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes. Shareholders are urged to consult their attorneys or tax advisers
regarding specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income to the Internal Revenue Service, or who fails to certify to the Fund that
he has provided a correct taxpayer identification number and that he is not
subject to withholding. (An individual's taxpayer identification number is his
social security number.) The 31% "back-up withholding tax" is not an additional
tax and may be credited against a taxpayer's regular federal income tax
liability.
TAXATION OF CERTAIN FUND INVESTMENT PRACTICES
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were sold at market value during the taxable year), which
may cause the Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy a 90% distribution requirement for
qualifications as a regulated investment company distribution requirements for
avoiding income and excise taxes. The Fund will monitor its transactions and may
make certain tax elections in order to mitigate the effect of these rules and
prevent disqualification of the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy a 90%
distribution requirement for qualification as a regulated investment company and
to avoid income and excise taxes, the Fund may have to dispose of securities
that it would otherwise have continued to hold. A portion of the discount
relating to certain stripped tax-exempt obligations may constitute taxable
income when distributed to shareholders.
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 gross income be derived from the disposition of securities
held for less than three months.
B-28
<PAGE> 164
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.
FUND PERFORMANCE
The Fund's average annual total return for Class A shares of the Fund
(computed in the manner described in the Prospectus) for (i) the one year period
ending December 31, 1995 was 25.06%; (ii) the five year period ending December
31, 1995 was 14.81%; and (iii) the ten year period ending December 31, 1995 was
11.53%. The average annual total return for Class B shares of the Fund (computed
in the manner described in the Prospectus) for (i) the one year period ending
December 31, 1995 was 26.51%; and (ii) the three year and eight month period
from May 1, 1992 (the commencement of the sales of Class B shares) to December
31, 1995 was 13.29%. The average annual total return for Class C shares of the
Fund (computed in the manner described in the Prospectus) for (i) the one year
period ending December 31, 1995 was 30.51%; and (ii) the two year and six month
period from July 6, 1993 (the commencement of the sales of Class C shares) to
December 31, 1995 was 13.98%. These results are based on historical earnings and
asset value fluctuations and are not intended to indicate future performance.
Such information should be considered in light of the Fund's investment
objectives and policies as well as the risks incurred in the Fund's investment
practices. Future results will be affected by changes in the general level of
prices of common securities available for purchase and sale by the Fund. The
past one-year, five-year, and ten year periods have been ones of fluctuating
common stock prices.
Total return is computed separately for Class A, Class B and Class C
shares.
The Fund invests primarily in securities which provide the highest possible
income as is consistent with safety of principal. To the extent possible,
considering its primary investment objective, the Fund seeks long-term growth of
capital as a secondary objective. The Fund tries to achieve capital appreciation
by investing primarily in high-dividend paying, blue chip stocks that are
recognized as household names and leaders in American industry. In addition, the
Fund attempts to remain fully invested and diversified across many industries to
achieve consistent long-term performance.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return. Such illustrations may be in the
form of charts or graphs and will not be based on historical returns experienced
by the Funds.
Since the Fund's commencement of investment operations on August 3, 1960,
the world has experienced a number of significant political and economic events.
For example, in 1971, there were wage and price freezes to attempt to control
inflation. In 1973 the dollar was devalued and the OPEC oil embargo was in
effect, 1976 saw sweeping tax law changes, and in 1979 the CPI rose over 13%,
its largest rise in 33 years. In 1982, the country was in a recession, in 1985
the U.S. deficit became the largest in the world and the U.S. was now a debtor
nation. 1987 saw the stock market crash. The Persian Gulf War began in 1991, and
the Dow Jones Industrial Average hit a record high of 4000 in 1995.
From time to time marketing materials may provide a portfolio manager
update, an adviser update and/or discuss general economic conditions and
outlooks. The Fund's marketing materials may also show the
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<PAGE> 165
Fund's asset class diversification, top five sector holdings and ten largest
holdings. Materials may also mention how Van Kampen American Capital believes
the Fund compares relative to other Van Kampen American Capital funds. Materials
may also discuss the Dalbar Financial Services study from 1984 to 1994 which
examined investor cash flow into and out of all types of mutual funds. The ten
year study found that investors who bought mutual fund shares and held such
shares outperformed investors who bought and sold. The Dalbar study conclusions
were consistent regardless if shareholders purchased their funds in direct or
sales force distribution channels. The study showed that investors working with
a professional representative have tended over time to earn higher returns than
those who invested directly. The Fund will also be marketed on the Internet.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
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<PAGE> 166
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all mate-
rial respects, the financial position of Van Kampen American Capital Equity In-
come Fund at December 31, 1995, the results of its operations, the changes in
its net assets and financial highlights for each of the fiscal periods present-
ed, in conformity with generally accepted accounting principles. These finan-
cial statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibil-
ity is to express an opinion on these financial statements based on our audits.
We conducted our audits of these financial statements in accordance with gener-
ally accepted auditing standards which require that we plan and perform the au-
dit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by man-
agement, and evaluating the overall financial statement presentation. We be-
lieve that our audits, which included confirmation of securities at December
31, 1995 by correspondence with the custodian and brokers and the application
of alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
January 31, 1996
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<PAGE> 167
PORTFOLIO OF INVESTMENTS
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
DOMESTIC COMMON STOCK 55.9%
CONSUMER DISTRIBUTION 3.2%
*52 Ann Taylor Stores, Inc................................. $ 533,000
30 Dayton Hudson Corp..................................... 2,250,000
*145 Federated Department Stores, Inc....................... 3,987,500
48 Gap, Inc............................................... 2,016,000
37 Home Depot, Inc........................................ 1,771,375
14 Interstate Bakeries Co................................. 308,775
145 May Department Stores Co............................... 6,126,250
*27 Nine West Group, Inc................................... 1,001,250
75 Nordstrom, Inc......................................... 3,037,500
82 Sears, Roebuck & Co.................................... 3,198,000
*54 Vons Companies, Inc.................................... 1,525,500
------------
25,755,150
------------
CONSUMER DURABLES 1.5%
68 Chrysler Corp.......................................... 3,765,500
18 Eastman Kodak Co....................................... 1,206,000
105 General Motors Corp.................................... 5,551,875
92 Sunbeam-Oster Inc...................................... 1,403,000
------------
11,926,375
------------
CONSUMER NON-DURABLES 5.8%
43 Coca-Cola Co........................................... 3,192,750
30 CPC International, Inc................................. 2,058,750
71 Gillette Co............................................ 3,700,875
241 Nabisco Holdings Corp., Class A........................ 7,862,625
30 Nike, Inc., Class B.................................... 2,088,750
111 Philip Morris Companies, Inc........................... 10,045,500
66 Procter & Gamble Co.................................... 5,478,000
106 Quaker Oats Co......................................... 3,657,000
87 Ralston-Purina Group................................... 5,426,625
80 RJR Nabisco Holdings Corp.............................. 2,470,000
------------
45,980,875
------------
CONSUMER SERVICES 2.3%
25 Capital Cities ABC, Inc................................ 3,084,375
63 Disney (Walt) Co....................................... 3,717,000
104 McDonald's Corp........................................ 4,693,000
52 Omnicom Group, Inc..................................... 1,937,000
*53 Viacom, Inc., Class B.................................. 2,510,875
118 Wendy's International, Inc............................. 2,507,500
------------
18,449,750
------------
</TABLE>
See Notes to Financial Statements
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<PAGE> 168
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
ENERGY 5.1%
134 Exxon Corp............................................. $ 10,736,750
116 Mobil Corp............................................. 12,992,000
203 Pacific Enterprises.................................... 5,734,750
83 Panhandle Eastern Corp................................. 2,313,625
120 Texaco, Inc............................................ 9,420,000
------------
41,197,125
------------
FINANCE 11.3%
50 Ahmanson (H. F.) & Co.................................. 1,325,000
62 American International Group, Inc...................... 5,735,000
90 Banc One Corp.......................................... 3,397,500
72 Bank of Boston Corp.................................... 3,330,000
110 Bankers Trust New York Corp............................ 7,315,000
27 BayBanks, Inc.......................................... 2,613,450
59 Beacon Properties Corp................................. 1,357,000
51 Chemical Banking Corp.................................. 2,996,250
35 Chubb Corp............................................. 3,386,250
8 Citicorp............................................... 559,520
45 CoreStates Financial Corp.............................. 1,704,375
119 Debartolo Realty Corp.................................. 1,547,000
31 Duke Realty Investments, Inc........................... 972,625
123 Federal National Mortgage Association.................. 15,267,375
28 Health Care Property Investors, Inc.................... 983,500
105 Horace Mann Educators Corp............................. 3,281,250
125 Morgan (J. P.) & Co., Inc.............................. 10,031,250
70 Northern Trust Corp.................................... 3,920,000
187 Prudential Reinsurance Holdings........................ 4,371,125
163 State Street Boston Corp............................... 7,335,000
105 Travelers Group, Inc................................... 6,601,875
48 Weingarten Realty Investors............................ 1,824,000
------------
89,854,345
------------
HEALTH CARE 4.8%
*104 Amgen, Inc............................................. 6,175,000
*75 Magellan Health Services, Inc.......................... 1,800,000
132 Merck & Co., Inc....................................... 8,679,000
74 Pfizer, Inc............................................ 4,662,000
118 Pharmacia & Upjohn, Inc................................ 4,572,500
95 Schering Plough Corp................................... 5,201,250
*130 Tenet Healthcare Corp.................................. 2,697,500
32 United Healthcare Corp................................. 2,096,000
*74 Vencor, Inc............................................ 2,405,000
------------
38,288,250
------------
</TABLE>
See Notes to Financial Statements
B-33
<PAGE> 169
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
PRODUCER MANUFACTURING 3.8%
84 Allied-Signal, Inc..................................... $ 3,990,000
56 Fluor Corp............................................. 3,696,000
62 Foster Wheeler Corp.................................... 2,635,000
57 General Electric Co.................................... 4,104,000
79 Honeywell, Inc......................................... 3,841,375
52 Illinois Tool Works, Inc............................... 3,068,000
72 Stewart & Stevenson Services, Inc...................... 1,818,000
154 WMX Technologies, Inc.................................. 4,600,750
51 York International Corp................................ 2,397,000
------------
30,150,125
------------
RAW MATERIALS/PROCESSING INDUSTRIES 3.7%
66 Aluminum Co. of America................................ 3,489,750
92 Bemis, Inc............................................. 2,357,500
*30 Crown Cork & Seal Co., Inc............................. 1,252,500
44 Grace (W. R.) & Co..................................... 2,601,500
65 James River Corp....................................... 1,568,125
59 Kimberly Clark Corp.................................... 4,905,420
56 Monsanto Co............................................ 6,860,000
128 Praxair, Inc........................................... 4,304,000
42 Sigma-Aldrich Corp..................................... 2,079,000
------------
29,417,795
------------
TECHNOLOGY 5.9%
47 Adobe Systems, Inc..................................... 2,914,000
63 Boeing Co.............................................. 4,937,625
105 Computer Associates International, Inc................. 5,971,875
*75 Digital Equipment Corp................................. 4,809,375
69 General Signal Corp.................................... 2,233,875
42 Harris Corp............................................ 2,294,250
25 Hewlett-Packard Co..................................... 2,093,750
20 International Business Machines Corp................... 1,835,000
74 Loral Corp............................................. 2,617,750
36 McDonnell Douglas Corp................................. 3,312,000
*30 Microsoft Corp......................................... 2,632,500
39 Motorola, Inc.......................................... 2,223,000
*33 Newbridge Networks Corp................................ 1,365,375
64 Perkin-Elmer Corp...................................... 2,416,000
40 Xerox Corp............................................. 5,480,000
------------
47,136,375
------------
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 170
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
TRANSPORTATION 0.5%
57 Union Pacific Corp.................................... $ 3,762,000
------------
UTILITIES 8.0%
75 Ameritech Corp........................................ 4,425,000
120 AT&T Corp............................................. 7,770,000
85 Cincinnati Bell, Inc.................................. 2,953,750
150 CMS Energy Group...................................... 4,481,250
110 Duke Power Co......................................... 5,211,250
156 Frontier Corp......................................... 4,680,000
100 General Public Utilities Corp......................... 3,400,000
208 MCI Communications Corp............................... 5,434,000
140 NIPSCO Industries, Inc................................ 5,355,000
240 Pacificorp............................................ 5,100,000
143 Peco Energy Co........................................ 4,307,875
105 Public Service Enterprise Group....................... 3,215,625
51 Southern New England Telecommunications Corp.......... 2,027,250
100 U S West Communications Group......................... 3,575,000
*100 U S West Media Group.................................. 1,900,000
------------
63,836,000
------------
TOTAL DOMESTIC COMMON STOCK (Cost $365,843,306)..... 445,754,165
============
FOREIGN COMMON STOCK 5.5%
*85 Adidas, ADS........................................... 2,279,062
124 Astra, AB, Series A, ADR.............................. 4,929,000
38 British Petroleum Co., ADR............................ 3,880,750
31 Canadian National Railway............................. 462,000
135 Canadian Pacific, Ltd................................. 2,446,875
*47 GCR Holdings, Ltd..................................... 1,046,250
156 National Power, ADR................................... 1,443,000
49 Nokia Corp., ADS...................................... 1,904,875
129 PowerGen, PLC, ADR.................................... 1,693,125
75 Royal Dutch Petroleum Co., ADR........................ 10,584,375
149 Telefonos de Mexico, S.A., ADR........................ 4,749,375
70 Teva Pharmaceutical, Ltd., ADR........................ 3,246,250
72 Total, S.A., ADR...................................... 2,448,000
37 Zeneca Group, PLC, ADR................................ 2,159,875
------------
TOTAL FOREIGN COMMON STOCK (Cost $39,424,429)....... 43,272,812
============
</TABLE>
See Notes to Financial Statements
B-35
<PAGE> 171
\
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------
<C> <S> <C>
CONVERTIBLE PREFERRED STOCK 3.9%
136 Browning-Ferris Industries, Inc., ACES, 7.25%,... $ 4,267,000
70 Corning Glassworks, MIPS, 6.00%,................. 3,526,250
85 Delta Air Lines, Inc., $3.50..................... 5,046,875
145 James River Corp., DECS, $1.55,.................. 3,389,375
50 SCI Finance NV, LLC, 6.25%....................... 3,700,000
110 Time Warner, Inc., PERCS, $1.24,................. 3,437,500
104 Williams Companies, Inc., $3.50.................. 7,683,000
------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost
$28,532,604)..................................... 31,050,000
============
</TABLE>
<TABLE>
<CAPTION>
Par
Amount
(000)
- ---------
<C> <S> <C> <C> <C>
NON-CONVERTIBLE CORPORATE
OBLIGATIONS 11.0%
CONSUMER DISTRIBUTION 0.6%
$ 4,000 May Department Stores Co.............. 8.375% 08/01/24 4,504,960
-----------
CONSUMER DURABLES 0.8%
3,000 Ford Motor Co......................... 9.000 09/15/01 3,428,100
3,000 General Motors Corp................... 7.000 06/15/03 3,156,600
-----------
6,584,700
-----------
CONSUMER SERVICES 1.6%
5,000 Cox Communications, Inc............... 7.250 11/15/15 5,206,500
3,000 Hertz Corp............................ 7.000 04/15/01 3,142,800
2,000 Tele-Communications, Inc.............. 9.800 02/01/12 2,399,600
1,500 Time Warner Entertainment Co.......... 9.625 05/01/02 1,741,845
-----------
12,490,745
-----------
ENERGY 3.4%
5,000 Enron Corp............................ 9.125 04/01/03 5,832,500
4,000 Occidental Petroleum Corp............. 10.125 11/15/01 4,788,800
6,000 Sonat, Inc............................ 6.875 06/01/05 6,295,200
1,500 Texaco Capital, Inc................... 8.250 10/01/06 1,759,950
5,500 Texas Eastern Transport Corp.......... 8.250 10/15/04 6,244,975
2,000 Western Atlas, Inc.................... 7.875 06/15/04 2,213,800
-----------
27,135,225
-----------
FINANCE 0.3%
2,000 General Electric Capital Corp......... 8.900 09/15/04 2,392,200
-----------
PRODUCER MANUFACTURING 0.2%
1,500 Reliance Electric Co.................. 6.800 04/15/03 1,572,750
-----------
RAW MATERIALS/PROCESSING
INDUSTRIES 2.9%
5,000 Carter Holt Harvey, Ltd............... 8.875 12/01/04 5,874,800
5,000 Crown Cork & Seal Co.................. 8.375 01/15/05 5,712,000
5,000 Georgia Pacific Corp.................. 9.500 05/15/22 5,845,750
5,000 James River Corp...................... 8.375 11/15/01 5,537,150
-----------
22,969,700
-----------
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 172
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TECHNOLOGY 0.5%
$ 4,000 Philips Electronics, NV.............. 7.750% 04/15/04 $ 4,393,880
------------
TRANSPORTATION 0.4%
3,000 Union Pacific Corp................... 7.600 05/01/05 3,277,650
------------
UTILITIES 0.3%
2,500 MCI Communications Corp.............. 7.125 01/20/00 2,626,300
------------
TOTAL NON-CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $81,708,465).................................... 87,948,110
============
DOMESTIC CONVERTIBLE CORPORATE
OBLIGATIONS 7.8%
CONSUMER DISTRIBUTION 0.4%
3,300 Federated Department Stores, Inc..... 5.000 10/01/03 3,341,250
------------
CONSUMER NON-DURABLES 1.2%
8,000 Grand Metropolitan................... 6.500 01/31/00 9,280,000
------------
CONSUMER SERVICES 1.7%
17,000 ADT Operations, Inc.................. (1) 07/06/10 8,075,000
1,074 Time Warner, Inc..................... 8.750 01/10/15 1,113,088
9,700 Time Warner, Inc..................... (1) 06/22/13 3,977,000
------------
13,165,088
------------
ENERGY 0.3%
2,710 Ensearch Corp........................ 6.375 04/01/02 2,655,800
------------
FINANCE 1.1%
1,100 American Travellers Corp............. 6.500 10/01/05 1,520,750
6,600 Equitable Companies, Inc............. 6.125 12/15/24 7,491,000
------------
9,011,750
------------
HEALTH CARE 0.7%
4,000 United Technologies Corp., PEN....... (2) 09/08/97 5,215,000
------------
RAW MATERIALS/PROCESSING
INDUSTRIES 0.7%
3,100 Albany International Co.............. 5.250 03/15/02 2,759,000
7,500 RPM, Inc............................. (1) 09/30/12 3,220,313
------------
5,979,313
------------
TECHNOLOGY 1.2%
40 American Express Co., DECKS.......... 6.250 10/15/96 2,194,035
50 Salomon, Inc., ELKS.................. 6.500 02/01/97 3,232,395
2,500 3Com Corp............................ 10.250 11/01/01 3,887,500
------------
9,313,930
------------
UTILITIES 0.5%
11,000 U.S. Cellular Corp................... (1) 06/15/15 3,850,000
------------
TOTAL DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $54,322,282).................................... 61,812,131
============
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 173
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS 2.9%
$ 5,000 Aegon NV............................................ 4.750% 11/01/04 $ 7,825,000
1,700 Ciba-Geigy Corp..................................... 6.250 03/15/16 1,708,500
8,000 News America Holdings............................... (1) 03/11/13 3,720,000
18,500 Roche Holdings, Inc................................. (1) 04/20/10 8,209,375
2,090 Sandoz, Ltd......................................... 2.000 10/06/02 1,982,888
------------
TOTAL FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $18,824,499)........................................................ 23,445,763
============
UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS 4.8%
1,000 Federal Farm Credit Banks........................... 9.000 03/07/97 1,043,680
30,000 United States Treasury Bonds........................ 7.875 02/15/21 36,923,400
------------
TOTAL UNITED STATES AGENCY AND GOVERNMENT OBLIGATIONS
(Cost $35,310,156)....................................................... 37,967,080
------------
SHORT-TERM INVESTMENTS 9.0%
COMMERCIAL PAPER 5.7%
20,295 Associates Corp. of North America................... 6.004 01/02/96 20,281,470
**25,230 General Electric Capital Corp....................... 5.854 01/02/96 25,213,600
------------
45,495,070
------------
REPURCHASE AGREEMENT 1.6%
12,555 Lehman Government Securities, Inc., dated 12/29/95
(collateralized by U.S. Government obligations in a
pooled cash account) repurchase proceeds
$12,563,196......................................... 5.875 01/02/96 12,555,000
------------
UNITED STATES GOVERNMENT OBLIGATIONS 1.7%
**14,000 United States Treasury Bills........................ 5.441 to 02/15/96 to
5.578 04/18/96 13,819,947
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $71,861,996)........................... 71,870,017
============
TOTAL INVESTMENTS (Cost $695,827,737) 100.8%....................................... 803,120,078
OTHER ASSETS AND LIABILITIES, NET (0.8%)........................................... (6,055,502)
------------
NET ASSETS 100%.................................................................... $797,064,576
============
</TABLE>
<TABLE>
<S> <C>
ACES-Automatically convertible equity security ELKS-Equity linked security, traded in shares
DECKS-Debt exchangeable for common stock MIPS-Monthly income paying security
DECS-Dividend enhanced convertible stock PEN-Pharmaceutical exchange note
* Non-income producing security PERCS-Preferred equity redeemable cumulative stock
** Securities with a market value of $31.8 million were placed as collateral for futures contracts
(see Note 1B)
(1) Liquid yield option note, zero coupon
(2) Zero coupon
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 174
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $695,827,737)................ $803,120,078
Cash............................................................ 33,151
Dividends and interest receivable............................... 4,522,355
Receivable for Fund shares sold................................. 2,192,915
Receivable for investments sold................................. 1,766,181
Receivable for broker-variation margin.......................... 35,700
Other assets.................................................... 49,576
------------
Total Assets................................................... 811,719,956
------------
LIABILITIES
Payable for Fund shares purchased............................... 8,535,980
Payable for investments purchased............................... 2,722,955
Dividends payable............................................... 2,045,361
Due to Distributor.............................................. 661,137
Due to Adviser.................................................. 260,895
Due to shareholder service agent................................ 154,000
Deferred Trustees' compensation................................. 49,829
Accrued expenses................................................ 225,223
------------
Total Liabilities.............................................. 14,655,380
------------
NET ASSETS, equivalent to $6.31 per share for Class A and $6.30
per share for Class B and C shares............................. $797,064,576
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 55,458,931 Class A,
64,941,985 Class B, and 6,074,199
Class C shares outstanding..................................... $ 1,264,751
Capital surplus................................................. 680,692,507
Undistributed net realized gain on securities................... 7,516,630
Net unrealized appreciation (depreciation) of securities
Investments.................................................... 107,292,341
Futures contracts.............................................. (524,008)
Undistributed net investment income............................. 822,355
------------
NET ASSETS...................................................... $797,064,576
============
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 175
STATEMENT OF OPERATIONS
Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest......................................................... $ 15,597,136
Dividends........................................................ 12,266,253
------------
Investment income............................................... 27,863,389
------------
EXPENSES
Management fees.................................................. 2,603,866
Shareholder service agent's fees and expenses.................... 1,588,953
Accounting services.............................................. 108,597
Service fees--Class A............................................ 601,850
Distribution and service fees--Class B........................... 3,125,732
Distribution and service fees--Class C........................... 318,679
Trustees' fees and expenses...................................... 25,854
Audit fees....................................................... 41,503
Custodian fees................................................... 33,793
Legal fees....................................................... 8,083
Reports to shareholders.......................................... 119,149
Registration and filing fees..................................... 158,575
State franchise taxes............................................ 65,833
Miscellaneous.................................................... 21,890
------------
Total expenses.................................................. 8,822,357
------------
NET INVESTMENT INCOME............................................ 19,041,032
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities
Investments..................................................... 40,048,629
Futures contracts............................................... 7,636,912
Net unrealized appreciation (depreciation) of securities during
the period
Investments..................................................... 108,545,531
Futures contracts............................................... (700,687)
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES................... 155,530,385
------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................. $174,571,417
============
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 176
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period.................... $509,399,385 $312,995,062
------------ ------------
OPERATIONS
Net investment income............................. 19,041,032 13,791,828
Net realized gain on securities................... 47,685,541 4,024,901
Net unrealized appreciation (depreciation) of
securities during the period..................... 107,844,844 (27,909,442)
------------ ------------
Increase (decrease) in net assets resulting from
operations........................................ 174,571,417 (10,092,713)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A........................................... (9,417,089) (7,565,034)
Class B........................................... (8,073,838) (5,449,845)
Class C........................................... (805,374) (616,081)
------------ ------------
(18,296,301) (13,630,960)
------------ ------------
Net realized gain on securities
Class A........................................... (17,024,616) (3,994,687)
Class B........................................... (19,392,670) (3,771,623)
Class C........................................... (1,831,288) (421,966)
------------ ------------
(38,248,574) (8,188,276)
------------ ------------
Excess of book-basis net investment income (see
Note 1F)
Class A........................................... -- --
Class B........................................... -- (203,788)
Class C........................................... -- (26,526)
------------ ------------
-- (230,314)
------------ ------------
Total distributions.............................. (56,544,875) (22,049,550)
------------ ------------
NET EQUALIZATION CREDITS (SEE NOTE 1G)............. -- 818,258
------------ ------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A........................................... 100,960,071 94,769,448
Class B........................................... 127,455,590 158,314,454
Class C........................................... 12,700,237 22,343,775
------------ ------------
241,115,898 275,427,677
------------ ------------
Proceeds from shares issued for distributions
reinvested
Class A........................................... 22,648,505 9,530,860
Class B........................................... 25,073,357 8,619,248
Class C........................................... 2,071,625 853,040
------------ ------------
49,793,487 19,003,148
------------ ------------
Cost of shares redeemed
Class A........................................... (69,303,217) (35,662,551)
Class B........................................... (42,499,849) (26,416,978)
Class C........................................... (9,467,670) (4,622,968)
------------ ------------
(121,270,736) (66,702,497)
------------ ------------
Increase in net assets resulting from capital
transactions..................................... 169,638,649 227,728,328
------------ ------------
INCREASE IN NET ASSETS............................. 287,665,191 196,404,323
------------ ------------
NET ASSETS, end of period (including undistributed
net investment income of $822,355 and accumulated
net investment loss of $8,642, respectively)..... $797,064,576 $509,399,385
============ ============
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 177
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------
Year Ended December 31
--------------------------------------
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period... $ 5.16 $ 5.55 $ 5.15 $ 4.83 $ 4.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .25 .27 .25 .255 .26
Expenses.............................. (.05) (.06) (.06) (.05) (.045)
------ ------ ------ ------ ------
Net investment income.................. .20 .21 .19 .205 .215
Net realized and unrealized gain (loss)
on securities......................... 1.458 (.317) .6055 .31 .83
------ ------ ------ ------ ------
Total from investment operations....... 1.658 (.107) .7955 .515 1.045
------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
Net investment income................. (.188) (.1855) (.168) (.195) (.215)
Net realized gain on securities....... (.32) (.0975) (.2275) -- --
------ ------ ------ ------ ------
Total distributions.................... (.508) (.283) (.3955) (.195) (.215)
------ ------ ------ ------ ------
Net asset value, end of period......... $ 6.31 $ 5.16 $ 5.55 $ 5.15 $ 4.83
====== ====== ====== ====== ======
TOTAL RETURN (/1/)..................... 32.57% (1.98%) 16.00% 10.72% 26.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)... $349.9 $240.5 $187.6 $123.8 $103.1
Average net assets (millions).......... $292.4 $214.4 $152.1 $109.6 $ 93.7
Ratios to average net assets
Expenses.............................. .95% 1.02% 1.06% 1.01% 1.02%
Net investment income................. 3.43% 3.60% 3.33% 3.95% 4.88%
Portfolio turnover rate................ 92% 92% 101% 74% 80%
</TABLE>
(1) Total return does not consider the effect of sales charges.
See Notes to Financial Statements
B-42
<PAGE> 178
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------
May 1,
1992(/1/)
Year Ended December 31 through
---------------------------- December 31,
1995 1994 1993(/2/) 1992(/2/)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of peri-
od................................ $ 5.16 $ 5.55 $ 5.15 $ 4.83
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income................. .25 .21 .24 .16
Expenses.......................... (.10) (.08) (.10) (.06)
------- ------- ------- ------
Net investment income.............. .15 .13 .14 .10
Net realized and unrealized gain
(loss) on securities.............. 1.458 (.277) .6155 .337
------- ------- ------- ------
Total from investment operations... 1.608 (.147) .7555 .437
------- ------- ------- ------
LESS DISTRIBUTIONS FROM
Net investment income............. (.148) (.13) (.128) (.117)
Excess of book-basis net invest-
ment income (see Note 1F)........ -- (.0155) -- --
Net realized gain on securities... (.32) (.0975) (.2275) --
------- ------- ------- ------
Total distributions................ (.468) (.243) (.3555) (.117)
------- ------- ------- ------
Net asset value, end of period..... $ 6.30 $ 5.16 $ 5.55 $ 5.15
======= ======= ======= ======
TOTAL RETURN (/3/)................. 31.51% (2.70%) 14.94% 9.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (mil-
lions)............................ $ 408.9 $ 242.0 $ 115.4 $ 13.3
Average net assets (millions)...... $ 312.6 $ 192.9 $ 56.2 $ 4.4
Ratios to average net assets
(annualized)
Expenses.......................... 1.75% 1.82% 1.89% 1.87%
Net investment income............. 2.62% 2.82% 2.45% 3.06%
Portfolio turnover rate............ 92% 92% 101% 74%
</TABLE>
(1) Commencement of offering of sales.
(2) Based on average month-end shares outstanding.
(3) Total return for a period of less than one full year is not annualized and
does not consider the effect of sales charges.
See Notes to Financial Statements
B-43
<PAGE> 179
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------
July 6,
Year Ended 1993(/1/)
December 31 through
---------------- December 31,
1995 1994 1993(/2/)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 5.16 $ 5.55 $ 5.37
------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................ .25 .23 .11
Expenses..................................... (.10) (.09) (.05)
------- ------- ------
Net investment income......................... .15 .14 .06
Net realized and unrealized gain (loss) on
securities................................... 1.458 (.287) .379
------- ------- ------
Total from investment operations.............. 1.608 (.147) .439
------- ------- ------
LESS DISTRIBUTIONS FROM
Net investment income........................ (.148) (.14) (.064)
Excess of book-basis net investment income
(see Note 1F)............................... -- (.0055) --
Net realized gain on securities.............. (.32) (.0975) (.195)
------- ------- ------
Total distributions........................... (.468) (.243) (.259)
------- ------- ------
Net asset value, end of period................ $ 6.30 $ 5.16 $ 5.55
======= ======= ======
TOTAL RETURN (/3/)............................ 31.51% (2.70%) 8.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).......... $ 38.3 $ 26.9 $ 10.0
Average net assets (millions)................. $ 31.9 $ 21.8 $ 3.4
Ratios to average net assets (annualized)
Expenses..................................... 1.76% 1.82% 1.98%
Net investment income........................ 2.63% 2.83% 2.27%
Portfolio turnover rate....................... 92% 92% 101%
</TABLE>
(1) Commencement of offering of sales.
(2) Based on average month-end shares outstanding.
(3) Total return for a period of less than one full year is not annualized and
does not consider the effect of sales charges.
See Notes to Financial Statements
B-44
<PAGE> 180
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Equity Income Fund (the "Fund", formerly American
Capital Equity Income Fund, Inc.) is registered under the Investment Company
Act of 1940, as amended, as a diversified, open-end management investment com-
pany. The Fund seeking as its primary objective, the highest possible income
consistent with safety of principal by investing primarily in income producing
equity and debt securities issued by a wide range of companies in many differ-
ent industries.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The prepa-
ration of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported. Actual amounts may differ from the estimates.
A. INVESTMENT VALUATIONS-Securities, listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities for which the last sale price is not available are valued at the mean
between the last reported bid and asked price.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
B. FUTURES CONTRACTS-Transactions in futures contracts are utilized in strate-
gies to manage the market risk of the Fund's investments. The purchase of a
futures contract increases the impact on net asset value of changes in the mar-
ket price of investments. There is a risk that the market movement of such in-
struments may not be in the direction forecasted. Note 3- Investment Activity
contains additional information.
Upon entering into futures contracts, the Fund maintains, in a segregated ac-
count with its custodian, securities with a value equal to its obligation under
the futures contracts. A portion of these funds is held as collateral in an ac-
count in the name of the broker, the funds agent in acquiring the futures posi-
tion. During the period the futures contract is open, changes in the value of
the contract ("variation margin") are recognized by marking the contract to
market on a daily basis. As unrealized gains or losses are incurred, variation
margin payments are received from or made to the broker. Upon the closing or
cash settlement of a contract, gains or losses are realized. The cost of secu-
rities acquired through delivery under a contract is adjusted by the unrealized
gain or loss on the contract.
B-45
<PAGE> 181
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
C. REPURCHASE AGREEMENTS-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 in-
vest independently in repurchase agreements, or transfer uninvested cash bal-
ances into a pooled cash account along with other investment companies advised
by Van Kampen American Capital Asset Management, Inc. (the "Adviser"), the
daily aggregate of which is invested in repurchase agreements. Repurchase
agreements are collateralized by the underlying debt securities. 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 re-
quired to maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.
D. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized gains on investments to its shareholders.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily.
F. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
G. EQUALIZATION-At December 31, 1994, the Fund discontinued the accounting
practice of equalization, which it had used since its inception. Equalization
is a practice whereby a portion of the proceeds from sales and costs of re-
demptions of Fund shares, equivalent on a per-share basis to the amount of the
undistributed net investment income, is charged or credited to undistributed
net investment income.
The balance of equalization included in undistributed net investment income
at the date of change, which was $99,049, was reclassified to capital surplus.
Such reclassification had no effect on net assets, results of operations, or
net asset value per share of the Fund.
B-46
<PAGE> 182
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
H. DEBT DISCOUNT AND PREMIUM-The Fund accounts for discounts and premiums on
the same basis as is used for federal income tax reporting. Accordingly, orig-
inal issue debt discounts are amortized over the life of the security. Premi-
ums on debt securities are not amortized. Market discounts are recognized at
the time of sale as realized gains for book purposes and ordinary income for
tax purposes.
NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as the investment manager of the Fund. Management fees are
paid monthly, based on the average daily net assets of the Fund at an annual
rate of .50% of the first $150 million, .45% of the next $100 million, .40% of
the next $100 million, and .35% of the amount in excess of $350 million.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised by the Adviser. For the period, these
charges included $15,383 as the Fund's share of the employee costs attribut-
able to the Fund's accounting officers. A portion of the accounting services
expense was paid to the Adviser in reimbursement of personnel, facilities and
equipment costs attributable to the provision of accounting services to the
Fund. The services provided by the Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period, the fees for these services aggregated $1,360,426.
The Fund was advised that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $313,394 and $188,336, respectively, as
their portion of the commissions charged on sales of Fund shares during the
period.
Under the Distribution Plans, each class of shares pays up to .25% per annum
of its average net assets to reimburse the Distributor for expenses and serv-
ice fees incurred. The Class B and Class C shares pay an additional fee up to
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B and Class C shares may exceed the amounts reimbursed
to the Distributor by the Fund. At the end of the period, the unreimbursed ex-
penses incurred by the Distributor under the Class B and Class C plans aggre-
gated approximately $12.4 million and $205,000, respectively, and may be
carried forward and reimbursed through either the collection of the contingent
deferred sales charges from share redemptions or, subject to the annual re-
newal of the plans, future Fund reimbursements of distribution fees.
Legal fees of $8,056 during the period were for services rendered by former
counsel of the Fund, O'Melveny & Myers. A former trustee was of counsel to
that firm.
B-47
<PAGE> 183
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
Certain officers and directors of the Fund are officers and trustees of the
Adviser, the Distributor, the Retail Dealer, and the shareholder service
agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $674,263,396 and $539,686,337,
respectively.
For federal income tax purposes, the identified cost of investments owned at
the end of the period was $696,397,497. Net unrealized appreciation of invest-
ments aggregated $106,722,581, gross unrealized appreciation of investments
aggregated $112,562,445, and gross unrealized depreciation of investments ag-
gregated $5,839,864.
At the end of the period, the Fund held 102 long Standard & Poor's 500 Index
futures contracts expiring in March 1996. The market value of such contracts
was $31,540,950, and the unrealized depreciation was $524,008.
NOTE 4--TRUSTEE COMPENSATION
Fund trustees who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,416 plus a fee of $40 per day for Board and Com-
mittee meetings attended. During the period, such fees aggregated $24,144.
The trustees may participate in a voluntary Deferred Compensation Plan ("the
Plan"). The Plan is not funded and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each trustee covered under the Plan elects to be credited
with an earnings component on amounts deferred equal to the income earned by
the Fund on its short-term investments or equal to the total return of the
Fund.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred ba-
sis (the Class B and Class C shares). All classes of shares have the same
rights, except that Class B and Class C shares bear the cost of distribution
fees and certain other class specific expenses. Realized and unrealized gains
or losses, investment income and expenses (other than class specific expenses)
are allocated to each class of shares based upon the relative proportion of
net assets of each class. Class B and Class C shares automatically convert to
Class A shares six years and ten years after purchase, respectively, subject
to certain conditions.
B-48
<PAGE> 184
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
The Fund has an unlimited number of shares of $.01 par value beneficial in-
terest authorized. Transactions in shares of beneficial interest were as fol-
lows:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A.............................................. 16,719,414 17,663,518
Class B.............................................. 21,177,056 29,471,357
Class C.............................................. 2,124,439 4,133,514
----------- -----------
40,020,909 51,268,389
----------- -----------
Shares issued for distributions reinvested
Class A.............................................. 3,676,431 1,805,958
Class B.............................................. 4,062,779 1,635,157
Class C.............................................. 336,096 161,557
----------- -----------
8,075,306 3,602,672
----------- -----------
Shares redeemed
Class A.............................................. (11,541,742) (6,664,087)
Class B.............................................. (7,228,073) (4,963,223)
Class C.............................................. (1,610,373) (871,369)
----------- -----------
(20,380,188) (12,498,679)
----------- -----------
Increase in shares outstanding........................ 27,716,027 42,372,382
=========== ===========
</TABLE>
NOTE 6--FUND REORGANIZATION
On July 21, 1995, the shareholders approved the reorganization of the Fund to
a Delaware Business Trust and the election of fourteen trustees. On August 18,
1995, the reorganization became effective.
B-49
<PAGE> 185
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN AMERICAN CAPITAL
BALANCED FUND
October 28, 1996
<PAGE> 186
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
Van Kampen American Capital Balanced Fund (the "Fund") seeks to provide its
shareholders with current income, while also seeking to provide shareholders
with capital growth. The Fund will seek to achieve its investment objective by
investing in a diversified portfolio of common stocks, fixed-income securities,
(including preferred stock, government securities, corporate debt securities and
convertible securities) and cash and cash equivalents. There can be no assurance
that the Fund will achieve its investment objective.
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the current Prospectus for the Fund (the "Prospectus")
dated as of the date hereof. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund, and investors should obtain and read the
Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained
without charge, by calling (800) 421-5666. This Statement of Additional
Information incorporates by reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-3
Additional Investment Considerations.................................................. B-4
Description of Securities Ratings..................................................... B-14
Trustees and Officers................................................................. B-20
Investment Advisory and Other Services................................................ B-28
Custodian and Independent Accountants................................................. B-30
Portfolio Transactions and Brokerage Allocation....................................... B-30
Tax Status of the Fund................................................................ B-31
The Distributor....................................................................... B-31
Legal Counsel......................................................................... B-32
Performance Information............................................................... B-32
Independent Accountants' Report....................................................... B-35
Financial Statements.................................................................. B-36
Notes to Financial Statements......................................................... B-46
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 28, 1996
<PAGE> 187
THE FUND AND THE TRUST
The Fund is a diversified series of Van Kampen American Capital Equity Trust
(the "Trust"), an open-end management investment company. The Fund was
established pursuant to a Designation of Series dated May 10, 1995. At present,
the Fund, Van Kampen American Capital Utility Fund, Van Kampen American Capital
Growth Fund, Van Kampen American Capital Value Fund, Van Kampen American Capital
Great American Companies Fund, Van Kampen American Capital Prospector Fund and
Van Kampen American Capital Aggressive Growth Fund are the only series of the
Trust, although other series may be organized and offered in the future. Each
series of the Trust will be treated as a separate corporation for federal income
tax purposes.
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust dated as of May
10, 1995 (the "Declaration of Trust"). The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares for each portfolio. The Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. The Trust can
issue an unlimited number of shares at par value $0.01 per share (prior to July
31, 1995, the shares had no par value). Each share represents an equal
proportionate interest in the assets of the series with each other share in such
series and no interest in any other series. No series is subject to the
liabilities of any other series. The Declaration of Trust provides that
shareholders are not liable for any liabilities of the Trust or any of its
series, requires inclusion of a clause to that effect in every agreement entered
into by the Trust or any of its series and indemnifies shareholders against any
such liability.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Except as described in the
Prospectus, shares do not have cumulative voting rights, preemptive rights or
any conversion or exchange rights. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting. The Trust
will assist such holders in communicating with other shareholders of the Fund to
the extent required by the Investment Company Act of 1940, as amended (the "1940
Act").
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
The Trust originally was organized as the Van Kampen Merritt Equity Trust, a
Massachusetts business trust, created by a Declaration of Trust dated March 26,
1987 (the "Massachusetts Trust"). The Massachusetts Trust was reorganized into
the Trust on July 31, 1995 pursuant to an Agreement and Plan of Reorganization
and Liquidation. The Trust was formed pursuant to an Agreement and Declaration
of Trust dated May 10, 1995 for the purpose of facilitating the Massachusetts
Trust's reorganization into a Delaware business trust. The Trust filed a
Certificate of Trust with the Delaware Secretary of State on July 28, 1995.
The Fund originally was organized under the name Van Kampen Merritt Balanced
Fund, as a sub-trust of the Massachusetts Trust. In connection with the
Massachusetts Trust's reorganization into a Delaware business trust, the Fund
was reorganized into a series of the Trust and renamed Van Kampen American
Capital Balanced Fund.
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> 188
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (determined at the time of investment) would then be
invested in securities of a single issuer or, if, as a result, the Fund
would hold more than 10% of the outstanding voting securities of an
issuer.
2. Issue senior securities, enter into reverse repurchase agreements with
banks or engage in dollar rolls in the aggregate in excess of 33 1/3% of
the Fund's total assets (after giving effect to any such borrowing); which
amount includes no more than 5% in bank borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Fund will not
mortgage, pledge or hypothecate any assets other than in connection with
issuances, borrowings, hedging transactions and risk management
techniques.
3. Make loans of money or property to any person, except (i) to the extent
the securities in which the Fund may invest are considered to be loans,
(ii) through the loan of portfolio securities, and (iii) to the extent
that the Fund may lend money or property in connection with maintenance of
the value of, or the Fund's interest with respect to, the securities owned
by the Fund.
4. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions nor short
term credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
5. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except in connection with
Strategic Transactions.
6. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
7. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to portfolio securities would be deemed to
constitute such control or participation.
8. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except as permitted under
the 1940 Act.
9. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs except pursuant to
the exercise by the Fund of its rights under agreements relating to
portfolio securities.
10. Purchase or sell real estate (including real estate limited partnership
interests), commodities or commodity contracts, except to the extent that
the securities that the Fund may invest in are considered to be interests
in real estate, commodities or commodity contracts or to the extent the
Fund exercises its rights under agreements relating to portfolio
securities (in which case the Fund may liquidate real estate acquired as a
result of a default on a mortgage), and except to the extent that
Strategic Transactions the Fund may engage in are considered to be
commodities or commodities contracts.
The Fund may not change any of these investment restrictions as they apply to
the Fund without the approval of the lesser of (i) more than 50% of the Fund's
outstanding shares or (ii) 67% of the Fund's outstanding Shares present at a
meeting at which the holders of more than 50% of the outstanding shares are
present in person or by proxy. As long as the percentage restrictions described
above are satisfied at the time of the investment or borrowing, the Fund will be
considered to have abided by those restrictions even if, at a later time, a
change in values or net assets causes an increase or decrease in percentage
beyond that allowed.
B-3
<PAGE> 189
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. The Fund anticipates that its
annual portfolio turnover rate will normally be less than 100%. Portfolio
turnover will be calculated by dividing the lesser of purchases or sales of
portfolio securities by the monthly average value of the securities in the
portfolio during the year. Securities, including options, whose maturity or
expiration date at the time of acquisition were one year or less will be
excluded from such calculation.
ADDITIONAL INVESTMENT CONSIDERATIONS
LOWER GRADE SECURITIES
The Fund may invest up to 20% of its assets in lower-grade fixed-income
securities (not including convertible securities). Such lower grade securities
are rated at least CC by Standard & Poor's Ratings Group ("S&P") or at least Ca
by Moody's Investor Services, Inc. ("Moody's"). Investment in such securities
involves special risks, as described herein. Liquidity relates to the ability of
a Fund to sell a security in a timely manner at a price which reflects the value
of that security. As discussed below, the market for lower grade securities is
considered generally to be less liquid than the market for investment grade
securities. The relative illiquidity of some of the Fund's portfolio securities
may adversely affect the ability of the Fund to dispose of such securities in a
timely manner and at a price which reflects the value of such security in the
Adviser's judgment. The market for less liquid securities tends to be more
volatile than the market for more liquid securities and market values of
relatively illiquid securities may be more susceptible to change as a result of
adverse publicity and investor perceptions than are the market values of higher
grade, more liquid securities.
The Fund's net asset value will change with changes in the value of its
portfolio securities. Because the Fund will invest in fixed income securities,
the Fund's net asset value can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in fixed income securities can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities can be expected to decline. Net asset value and market value may be
volatile due to the Fund's investment in lower grade and less liquid securities.
Volatility may be greater during periods of general economic uncertainty.
The Adviser values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Fund may
invest, there may be relatively inactive trading in such securities and the
ability of the Adviser to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Fund's portfolio,
the responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the valuation of
the Fund's securities due to the reduced availability of reliable objective
data. To the extent that the Fund invests in illiquid securities and securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities are particularly difficult to dispose
of.
Lower grade securities generally involve greater credit risk than higher grade
securities. A general economic downturn or a significant increase in interest
rates could severely disrupt the market for lower grade securities and adversely
affect the market value of such securities. In addition, in such circumstances,
the ability of issuers of lower grade securities to repay principal and to pay
interest, to meet projected financial goals and to obtain additional financing
may be adversely affected. Such consequences could lead to an increased
incidence of default for such securities and adversely affect the value of the
lower grade securities in the Fund's portfolio and thus the Fund's net asset
value. The secondary market prices of lower grade securities are less sensitive
to changes in interest rates than are those for higher rated securities, but are
more sensitive to adverse economic changes or individual issuer developments.
Adverse publicity and investor perceptions, whether or not based on rational
analysis, may also affect the value and liquidity of lower grade securities.
B-4
<PAGE> 190
Yields on the Fund's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade securities in the Fund's portfolio and thus in the net asset value
of the Fund. Net asset value and market value may be volatile due to the Fund's
investment in lower grade and less liquid securities. Volatility may be greater
during periods of general economic uncertainty. The Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of interest or a repayment of principal on its portfolio holdings, and
the Fund may be unable to obtain full recovery thereof. In the event that an
issuer of securities held by the Fund experiences difficulties in the timely
payment of principal or interest and such issuer seeks to restructure the terms
of its borrowings, the Fund may incur additional expenses and may determine to
invest additional capital with respect to such issuer or the project or projects
to which the Fund's portfolio securities relate.
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating fixed-income securities. Such ratings
evaluate only the safety of principal and interest payments, not market value
risk. Additionally, because the creditworthiness of an issuer may change more
rapidly than is able to be timely reflected in changes in credit ratings, the
Adviser continuously monitors the issuers of such securities held in the Fund's
portfolio. The Fund may, if deemed appropriate by the Adviser, retain a security
whose rating has been downgraded by S&P or Moody's, or whose rating has been
withdrawn.
Because the Fund may invest in unrated fixed-income securities, achievement by
the Fund of its investment objective may be more dependent upon the Adviser's
investment analysis than would be the case if the Fund were investing
exclusively in rated securities.
CONVERTIBLE SECURITIES
Convertible securities are fixed income securities (such as bonds, debentures,
notes and preferred stock) that may, at the holder's option, be converted into
or exchanged for a prescribed amount of common stock of the same or a different
issuer within a particular period of time at a specified price or in accordance
with a prescribed formula. A convertible security entitles the holder to receive
interest paid or accrued on convertible debt, or the dividend paid on
convertible preferred stock, until the convertible security matures or is
redeemed, converted or exchanged. Convertible securities, until converted, have
the same general characteristics as other non-convertible, fixed income
securities, insofar as they generally provide a stable stream of income with
generally higher yields than those of common equity securities of the same or
similar issuers. By permitting the holder to exchange its investment for common
stock, convertible securities may also enable the investor to benefit from
appreciation in the market price of the underlying common stock. Therefore,
convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. Convertible securities rank
senior to common stock in a corporation's capital structure and, therefore,
generally entail less risk than the corporation's common stock, although the
extent to which such risk is reduced depends in a large measure upon the degree
to which the convertible security sells based on its value as a fixed income
security rather than that of the underlying common stock.
As with other fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The credit standing of the issuer and other
factors may also have an effect on the value of a convertible security. The
unique feature of the convertible security is that, as the market price of the
underlying common stock declines, a convertible security tends to trade
increasingly in a manner similar to a fixed income security, and may not
experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock approaches or
exceeds the conversion price, the price of a convertible security increasingly
reflects the value of the underlying common stock and may rise accordingly,
although gains may be less for the convertible security than for the underlying
common stock to the extent of any "conversion premium." A convertible security
generally will sell at a premium over its conversion value (i.e., the security's
worth, at market value, if converted into the underlying common stock)
determined by the extent to which
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investors place value on the right to acquire the underlying common stock while
holding the fixed income security. Thus, appreciation of the underlying common
stock will result in substantial appreciation of the convertible security only
after the conversion premium has been eliminated.
Holders of fixed income securities (including convertible securities) have a
claim on the assets of the issuer prior to the holders of common stock in case
of liquidation. However, convertible securities are typically subordinated to
non-convertible, fixed income securities of the same issuer.
The Adviser believes that the characteristics of convertible securities make
them particularly appropriate vehicles to achieve the Fund's investment
objective. Convertible securities have unique investment characteristics because
(i) they have relatively high yields as compared to common stocks, (ii) they
have defensive characteristics since they provide a fixed return even if the
market price of the underlying common stock declines, and (iii) they provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by the
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or sell it
to a third party. Any of these actions could have an adverse effect on the
Fund's ability to achieve its investment objective. If the Fund surrenders the
security for redemption, it will receive the face amount of the security, and
possibly a redemption premium. However, the amount received may be less than the
value of the security before the redemption. Moreover, since a call for
redemption is most likely to occur in a declining interest rate environment, the
Fund may not be able to earn as high a rate of return when it reinvests the
proceeds. Selling or converting the security might be more advantageous than
surrendering for redemption, but the reinvestment risk would remain. Before the
Fund purchases a convertible security, it will review carefully the redemption
provisions of the security.
Convertible securities are generally not investment grade, that is, not rated
within the four highest categories by S&P and Moody's. To the extent that
convertible securities acquired by the Fund are rated lower than investment
grade or are not rated, there is a greater risk as to the timely repayment of
the principal of, and timely payment of interest or dividends on, such
securities. The Fund expects that many convertible securities which it purchases
will be rated below investment grade. Such securities generally are considered
to be predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal and to involve major risk exposures to adverse
conditions that outweigh any quality and protective characteristics. See
"Additional Investment Considerations -- Lower Grade Securities". Under current
market conditions, not more than 35% of the Fund's total assets may be invested
in all fixed income securities that are rated below investment grade, or if
unrated, deemed by the Adviser to be of comparable quality.
In selecting convertible securities for the Fund, the Adviser will consider
the following factors, among others, (1) the Adviser's own evaluation of the
creditworthiness of the issuers of the securities; (2) the interest or dividend
income generated by the securities; (3) the potential for capital appreciation
of the securities and the underlying common stock; (4) the prices of the
securities relative to the underlying common stock; (5) the prices of the
securities relative to other comparable securities; (6) whether the securities
have unfavorable redemption provisions or are entitled to the benefits of
sinking funds or other protective conditions; (7) diversification of the Fund's
portfolio as to issuers and industries; (8) whether the securities are rated by
Moody's and/or S&P and, if so, the ratings assigned; and (9) whether the
underlying common stock can be sold short, although the Fund is not limited to
buying convertible securities the underlying common stock of which may be sold
short.
MONEY MARKET INSTRUMENTS
Money market instruments include (a) obligations of or guaranteed by the U.S.
government, its agencies or instrumentalities ("Government Money Market
Securities"), (b) obligations of banks subject to U.S. government regulation as
well as such other bank obligations as are insured by a U.S. government agency
("Bank Obligations"), (c) commercial paper (including variable amount master
demand notes) rated at least A-3 by S&P or Prime-3 by Moody's or, if not so
rated, issued by a corporation which has outstanding debt obligations rated at
least AA by S&P or Aa by Moody's and (d) debt obligations (other than commercial
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paper) of corporate issuers which obligations are rated at least AA by S&P or Aa
by Moody's. Money market securities are subject, however, to the limitation that
they mature within one year of the date of their purchase or are subject to
repurchase agreements maturing within one year. Government Money Market
Securities include treasury bills, notes and bonds issued by the U.S. government
and backed by the full faith and credit of the United States, as well as
securities issued or guaranteed as to principal and interest by agencies and
instrumentalities of the U.S. government. Bank Obligations include certificates
of deposit and banker's acceptances of domestic banks (or Euro-dollar
obligations of foreign branches of such domestic banks) subject to U.S.
government regulation and time deposits of federal and state banks whose
accounts are insured by a government agency as well as such accounts themselves.
The Fund's policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Fund will not be
required to dispose of a security in the event that S&P or Moody's (or any other
nationally recognized statistical rating organization) or, in the case of
unrated income securities, the Adviser, downgrades its assessment of the credit
characteristics of a particular issuer. In determining whether the Fund will
retain or sell such a security, in addition to the factors described in the
Prospectus under the heading "Investment Objective and Policies," the Adviser
may consider such factors as the Adviser's assessment of the credit quality of
the issuer of such security, the price at which such security could be sold and
the rating, if any, assigned to such security by other nationally recognized
statistical rating organizations.
STRATEGIC TRANSACTIONS.
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates and broad or specific market movements) or to
manage the effective maturity or duration of the Fund's income securities. Such
strategies are generally accepted by modern portfolio managers and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, equity and income indices
and other financial instruments, purchase and sell financial futures contracts
and options thereon, enter into various interest rate transactions such as
swaps, caps, floors or collars and enter into various currency transactions such
as currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to attempt
to protect against possible changes in the market value of securities held in or
to be purchased for the Fund's portfolio resulting from securities markets or
exchange rate fluctuations, to protect the Fund's unrealized gains in the value
of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition
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of exchange controls, suspension of settlements or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, currency or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect the Fund
against an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (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
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exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although outstanding options on that exchange would
generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with United
States government securities dealers recognized by the Federal Reserve Bank of
New York as "primary dealers", or broker dealers, domestic or foreign banks or
other financial institutions which have received (or the guarantors of the
obligation of which have received) a short-term credit rating of "A-1" from S&P
or "P-1" from Moody's or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that, in general, OTC options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets and or securities
indices, currencies and futures contracts. All calls sold by the Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though the Fund will receive the option
premium to help protect it against loss, a call sold by the Fund exposes the
Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold. In selling calls on securities not owned by the Fund, the Fund may be
required to acquire the underlying security at a disadvantageous price in order
to satisfy its obligations with respect to the call.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio) and on securities indices, currencies and futures
contracts other than futures or individual corporate debt and individual equity
securities. The Fund will not sell put options if, as a result, more than 50% of
the
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Fund's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Fund may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency, equity or income market changes,
for duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) for other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Certain state securities laws to
which the Fund may be subject may further restrict the Fund's ability to engage
in transactions in futures contracts and related options. The segregation
requirements with respect to futures contracts and options thereon are described
below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
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CURRENCY TRANSACTIONS. The Fund may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holding denominated in
particular currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional difference among two
or more currencies and operates similarly to an interest rate swap, which is
described below. The Fund may enter into currency transactions with
Counterparties which have received (or the guarantors of the obligations of such
Counterparties have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
currency options) are determined to be of equivalent credit quality by the
Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency
other than with respect to cross hedging and proxy hedging as described below.
The Fund may cross-hedge currencies by entering into transactions to purchase
or sell one or more currencies that are expected to decline in value relative to
other currencies to which the Fund has or in which the Fund expects to have
portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. For example, if the Adviser
considers the Austrian schilling is linked to the German deutschemark (the
"D-mark"), the Fund holds securities denominated in schillings and the Adviser
believes that that the value of schillings will decline against the U.S. dollar,
the Adviser may enter into a contract to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
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COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts), multiple interest
rate transactions and any combination of futures, options, currency and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser, it is in the best interest of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A currency swap is an agreement
to exchange cashflows on a notional amount of two or more currencies based on
the relative value differential among them. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS. The Fund may make investments in Eurodollar
instruments. Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to the London Interbank Offered
Rate ("LIBOR"), although foreign currency-denominated instruments are available
from time to time. Eurodollar futures contracts enable purchasers to obtain a
fixed rate for the lending of funds and sellers to obtain a fixed rate for
borrowings. The Fund might use Eurodollar futures contracts and options thereon
to hedge against changes in LIBOR, to which many interest rate swaps and income
instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When conducted
outside the United States, Strategic Transactions may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantee, and are subject to the risk of governmental actions affecting
trading in, or
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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 or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures
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or forward contract, it could purchase a put option on the same futures or
forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of the Code for qualification as a regulated investment company.
See "Tax Status" in the Prospectus.
DESCRIPTION OF SECURITIES RATINGS
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 in accordance with the terms
of the obligation:
2. Nature of and provisions of the obligation:
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in the higher rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debt rated "BB", "B", "CCC", "CC" and "C" is regarded as
having significantly speculative characteristics with respect to capacity to pay
interest and repay principal . "BB" indicates the
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<PAGE> 200
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.
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.
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A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as
overwhelming as for issues designated "A-1".
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects
of changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having significant speculative
characteristics.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on
the date due, even if the applicable grace period has not expired,
unless Standard & Poor's believes that such payments will be made
during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
3. VARIABLE RATE DEMAND BONDS
S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.
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
A S&P note rating reflects the liquidity concerns and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. The following criteria will be used in making that
assignment:
-- Amortization schedule (the longer the final maturity relative to other
maturities, the more likely the issue is to be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined
to possess very strong characteristics will be given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the
term of the notes.
SP-3 Speculative capacity to pay principal and interest.
5. PREFERRED STOCK
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.
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<PAGE> 202
The Preferred stock ratings are based on the following considerations:
1. Likelihood of payment-capacity and willingness to the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
<TABLE>
<CAPTION>
<S> <C>
AAA This is the highest rating that may be assigned by S&P to a preferred stock issue
and indicates an extremely strong capacity to pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality, fixed income
security. The capacity to pay preferred stock obligations is very strong, although
not as overwhelming as for issues rated "AAA".
A An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a preferred stock in this
category than for issues in the "A" category.
BB Preferred stock rated "BB", "B", and "CCC" are regarded, on balance, as
B predominantly speculative with respect to the issuer's capacity to pay preferred
CCC stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest. While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on dividends or
sinking fund payments, but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in default on
debt instruments.
NR: This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular type
of obligation as a matter of policy.
PLUS (+) or MINUS (-): To provide more detailed indications of preferred stock
quality, ratings from "AA" to "CCC" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
</TABLE>
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
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<PAGE> 203
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may by lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies the numerical modifiers 1, 2, and 3 in each generic
rating classification from AA to B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
2. SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers.
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Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
--Leading market positions in well-established industries.
--High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issues rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earning,
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternative liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternative liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
AAA: An issue which is rated "AAA" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least
risk of dividend impairment within the universe of preferred stocks.
AA: An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
A: An issue which is rated "A" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
BAA: An issue which is rated "BAA" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
BA: An issue which is rated "BA" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this class.
B: An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
CAA: An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
CA: An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
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 "B" in its preferred stock rating system: the modifier 1
indicates that the security ranks in the higher end of its generic
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<PAGE> 205
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser"), Van Kampen American Capital Asset
Management, Inc. (the "AC Adviser"), Van Kampen American Capital Distributors,
Inc. (the "Distributor"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital"), VK/AC Holding, Inc. or ACCESS Investor Services, Inc.
("ACCESS"). For purposes hereof, the terms "Van Kampen American Capital Funds"
or "Fund Complex" includes each of the open-end investment companies advised by
the VK Adviser (excluding The Explorer Institutional Trust) and each of the
open-end investment companies advised by the AC Adviser (excluding the Van
Kampen American Capital Exchange Fund and the Common Sense Trust).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
1632 Morning Mountain Road President of MDT Corporation, a company which develops
Raleigh, NC 27614 manufactures, markets and services medical and scientific
Date of Birth: 07/14/32 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Linda Hutton Heagy................. Managing Partner, Paul Ray Berndtson, an executive
10 South Riverside Plaza recruiting and management consulting firm. Formerly,
Suite 720 Executive Vice President of ABN AMRO, N.A., a Dutch bank
Chicago, IL 60606 holding company. Prior to 1992, Executive Vice President
Date of Birth: 06/03/49 of La Salle National Bank. Trustee of each of the Van
Kampen American Capital Funds.
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 Kampen American Capital Funds.
Date of Birth: 11/23/19
R. Craig Kennedy................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser, Van Kampen American Capital
Oakbrook Terrace, IL 60181 Advisors, Inc. and Van Kampen American Capital
Date of Birth: 05/20/42 Management, Inc. Executive Vice President and a Director
of VK/AC Holding, Inc. and Van Kampen American Capital.
President and Director of Van Kampen Merritt Equity
Advisors Corp. Director of Van Kampen Merritt Equity
Holdings Corp. Director of McCarthy, Crisanti & Maffei,
Inc. Prior to September 1996, Chief Executive Officer
McCarthy, Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company, Limited. Prior to
July 1996, President, Chief Operating Officer and Trustee
of VSM Inc. and VCJ Inc. President, Chief Executive
Officer and Trustee of each of the Van Kampen American
Capital Funds. President, Chairman of the Board and
Trustee of other investment companies advised by the VK
Adviser. Executive Vice President of other investment
companies advised by the AC Adviser.
</TABLE>
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<PAGE> 206
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Date of Birth: 03/31/20 Trust Company of Chicago and Continental Illinois
Corporation. Trustee and Co-Chairman of each of the Van
Kampen American Capital Funds.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Date of Birth: 02/13/36 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. ("SIPC"). Trustee of each of
the Van Kampen American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Date of Birth: 10/10/22 software programming company specializing in white collar
productivity. Director of Panasia Bank. Trustee of each
of the Van Kampen American Capital Funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
155 Hickory Lane of Graduate School and Chairman, Department of Mechanical
Closter, NJ 07624-2322 Engineering, Stevens Institute of Technology. Director of
Date of Birth: 08/02/24 Dynalysis of Princeton, a firm engaged in engineering
research. Trustee and Co-Chairman of each of the Van
Kampen American Capital Funds.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the Van Kampen
Chicago, IL 60606 American Capital Funds, The Explorer Institutional Trust
Date of Birth: 08/22/39 and the closed-end investment companies advised by the VK
Adviser. Trustee of each of the Van Kampen American
Capital Funds, The Explorer Institutional Trust and the
closed-end investment companies advised by the VK
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Date of Birth: 01/31/22 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
- ---------------
* Such trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. McDonnell is an interested person of the VK Adviser, the
AC Adviser and the Fund by reason of his positions with the VK Adviser and the
AC Adviser. Mr. Whalen is an interested person of the Fund by reason of his
firm acting as legal counsel to the Fund.
B-21
<PAGE> 207
OFFICERS
The address for William N. Brown, Curtis W. Morell, Robert C. Peck, Jr., Alan
T. Sachtleben, Paul R. Wolkenberg, Tanya M. Loden, Huey P. Falgout, Jr. and
Robert Sullivan is 2800 Post Oak Blvd., Houston, TX 77056. The address for Peter
W. Hegel, Ronald A. Nyberg, Edward C. Wood III, John L. Sullivan, Nicholas
Dalmaso, Scott E. Martin, Weston B. Wetherell and Steven M. Hill is One Parkview
Plaza, Oakbrook Terrace, IL 60181.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
William N. Brown........ Vice President Executive Vice President of the AC Adviser,
Date of Birth: VK/AC Holding, Inc., Van Kampen American
05/26/53 Capital, and American Capital Contractual
Services, Inc. Executive Vice President and
Director of Van Kampen American Capital
Trust Company, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Exchange Corporation, ACCESS and Van Kampen
American Capital Services, Inc. Prior to
September 1996, Director of American
Capital Shareholders Corporation. Vice
President of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and the
AC Adviser.
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.
</TABLE>
B-22
<PAGE> 208
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg........ Vice President and Executive Vice President, General Counsel
Date of Birth: Secretary and Secretary of Van Kampen American
07/29/53 Capital and VK/AC Holding, Inc. Executive
Vice President, General Counsel and a
Director of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen Merritt Equity Advisors Corp., and
Van Kampen Merritt Equity Holdings Corp.
Executive Vice President, General Counsel
and Assistant Secretary of Van Kampen
American Capital Advisors, Inc., American
Capital Contractual Services, Inc., Van
Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc. and ACCESS. Executive Vice
President, General Counsel, Assistant
Secretary and Director of Van Kampen
American Capital Trust Company. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to September 1996,
General Counsel of McCarthy, Crisanti &
Maffei, Inc. Prior to July 1996, Executive
Vice President and General Counsel of VSM
Inc. and VCJ Inc. Vice President and
Secretary of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Robert C. Peck, Jr...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
10/01/46 Inc. Executive Vice President and Director
of the AC Adviser and Van Kampen American
Capital Advisors, Inc. Vice President of
each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Alan T. Sachtleben...... Vice President Executive Vice President of the VK Adviser
Date of Birth: and Van Kampen American Capital Management,
04/20/42 Inc. Executive Vice President and a
Director of the AC Adviser and Van Kampen
American Capital Advisors, Inc. Vice
President of each of the Van Kampen
American Capital Funds and other investment
companies advised by the VK Adviser and AC
Adviser.
Paul R. Wolkenberg...... Vice President Executive Vice President of VK/AC Holding,
Date of Birth: Inc., Van Kampen American Capital, the
11/10/44 Distributor and the AC Adviser. President,
Chief Executive Officer and a Director of
Van Kampen American Capital Trust Company
and ACCESS. Director of American Capital
Contractual Services, Inc. Vice President
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Edward C. Wood III...... Vice President and Senior Vice President of the VK Adviser,
Date of Birth: Chief Financial Officer the AC Adviser and Van Kampen American
01/11/56 Capital Management, Inc. Vice President and
Chief Financial Officer of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>
B-23
<PAGE> 209
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
John L. Sullivan........ Treasurer First Vice President of the VK Adviser and
Date of Birth: the AC Adviser. Treasurer of each of the
08/20/55 Van Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
Tanya M. Loden.......... Controller Vice President of the VK Adviser and the AC
Date of Birth: Adviser. Controller of each of the Van
11/19/59 Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and AC Adviser.
Nicholas Dalmaso........ Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
03/01/65 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser and Van Kampen
American Capital Management, Inc. Assistant
Vice President of Van Kampen American
Capital Advisors, Inc. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and the AC
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Huey P. Falgout, Jr..... Assistant Secretary Assistant Vice President and Senior
Date of Birth: Attorney of Van Kampen American Capital.
11/15/63 Assistant Vice President and Assistant
Secretary of the Distributor, the VK
Adviser, the AC Adviser, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation and ACCESS. Assistant Secretary
of each of the Van Kampen American Capital
Funds and other investment companies
advised by the VK Adviser and AC Adviser.
Scott E. Martin......... Assistant Secretary Senior Vice President, Deputy General
Date of Birth: Counsel and Assistant Secretary of Van
08/20/56 Kampen American Capital and VK/AC Holding,
Inc. Senior Vice President, Deputy General
Counsel and Secretary of the VK Adviser,
the AC Adviser, the Distributor, Van Kampen
American Capital Management, Inc., Van
Kampen American Capital Advisors, Inc.,
American Capital Contractual Services,
Inc., Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Services, Inc., ACCESS, Van Kampen Merritt
Equity Advisors Corp. and Van Kampen
Merritt Equity Holdings Corp. Prior to
September 1996, Deputy General Counsel and
Secretary of McCarthy, Crisanti & Maffei,
Inc. Prior to July 1996, Senior Vice
President, Deputy General Counsel and
Secretary of VSM Inc. and VCJ Inc.
Assistant Secretary of each of the Van
Kampen American Capital Funds and other
investment companies advised by the VK
Adviser and the AC Adviser.
</TABLE>
B-24
<PAGE> 210
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
- ------------------------ ----------------------- -------------------------------------------
<S> <C> <C>
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 attended by the Non-Affiliated Trustee, due on the date
of such meeting, plus reasonable expenses incurred by the Non-Affiliated Trustee
in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
The trustees have approved an aggregate compensation cap with respect to funds
in the Fund Complex of $84,000 per Non-Affiliated Trustee per year (excluding
any retirement benefits) for the period July 22, 1995 through December 31, 1996,
subject to the net assets and the number of funds in the Fund Complex as of July
21, 1995 and certain other exceptions. In addition, each of the VK Adviser or
the AC Adviser, as the case may be, has agreed to reimburse each fund in the
Fund Complex through December 31, 1996 for any increase in the aggregate
trustee's compensation over the aggregate compensation paid by such fund in its
1994 fiscal year, provided that if a fund did not exist for the entire 1994
fiscal year appropriate adjustments will be made.
Each Non-Affiliated Trustee can elect to defer receipt of all or a portion of
the compensation earned by such Non-Affiliated Trustee until retirement. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to the return on the common shares of the Fund or other funds in the
Fund Complex as selected by the respective Non-Affiliated Trustee. To the extent
permitted by the 1940 Act, the Fund may invest in securities of those funds
selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
B-25
<PAGE> 211
The Fund adopted a retirement plan on July 21, 1994. Under the Fund's
retirement plan, a Non-Affiliated Trustee who is receiving trustee's fees from
the Fund prior to such Non-Affiliated Trustee's retirement, has at least ten
years of service and retires at or after attaining the age of 60, is eligible to
receive a retirement benefit equal to $2,500 per year for each of the ten years
following such trustee's retirement. Trustees retiring prior to the age of 60 or
with fewer than 10 years but more than 5 years of service may receive reduced
retirement benefits from a series. The retirement plan contains a Fund Complex
retirement benefit cap of $60,000 per year.
Additional information regarding compensation and benefits for trustees is set
forth below. The "Registrant" is the Trust, which currently consists of seven
operating series. As indicated in the notes accompanying the table, the amounts
relate to either the Registrant's last fiscal year ended June 30, 1996 or the
Fund Complex' last calendar year ended December 31, 1995.
COMPENSATION TABLE
<TABLE>
<CAPTION>
ESTIMATED TOTAL
PENSION OR ANNUAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS BEFORE DEFERRAL
COMPENSATION BENEFITS ACCRUED FROM FROM REGISTRANT
BEFORE DEFERRAL AS PART OF REGISTRANT AND FUND
FROM REGISTRANT UPON COMPLEX PAID TO
NAME(1) REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
- ------------------------------------- --------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan.................... $ 6,250 $1,815 $ 6,500 $84,250
Dr. Richard E. Caruso................ 2,875 -0- -0- 57,250
Philip P. Gaughan.................... 2,875 -0- -0- 76,500
Linda Hutton Heagy................... 6,250 216 7,500 38,417
Dr. Roger Hilsman.................... 6,250 -0- -0- 91,250
R. Craig Kennedy..................... 7,000 146 7,500 92,625
Donald C. Miller..................... 7,000 -0- -0- 94,625
Jack E. Nelson....................... 7,000 932 7,500 93,625
David Rees........................... 4,375 -0- -0- 83,250
Jerome L. Robinson................... 7,000 2,065 -0- 89,375
Lawrence J. Sheehan.................. 6,250 -0- -0- 91,250
Dr. Fernando Sisto................... 6,250 2,952 2,500 98,750
Wayne W. Whalen...................... 7,000 647 7,500 93,375
William S. Woodside.................. 6,250 -0- -0- 79,125
</TABLE>
- ---------------
(1) Mr. McDonnell, a trustee of the Trust, is an affiliated person of the VK
Adviser and AC Adviser and is not eligible for compensation or retirement
benefits from the Registrant. Messrs. Branagan, Caruso, Hilsman, Powell,
Rees, Sheehan, Sisto and Woodside were elected by shareholders to the Board
of Trustees on July 21, 1995. Ms. Heagy was appointed to the Board of
Trustees on September 7, 1995. Mr. Don G. Powell resigned from the Board of
Trustees on August 15, 1996, and did not receive any compensation or
benefits from the Fund while a trustee because he was an affiliated person
of the VK Adviser and AC Adviser. Messrs. Gaughan and Rees retired from the
Board of Trustees on January 26, 1996 and January 29, 1996, respectively.
Messrs. Caruso and Sheehan were removed from the Board of Trustees effective
September 7, 1995 and January 29, 1996, respectively.
(2) The amounts shown in this column are aggregated from the compensation paid
by each series in operation during the Registrant's fiscal year ended June
30, 1996 before deferral by the trustees under the deferred compensation
plan. The following trustees deferred all or a portion of their compensation
from the Registrant during the fiscal year ended June 30, 1996: Dr. Caruso,
$0; Mr. Gaughan, $2,875; Ms. Heagy, $1,250; Mr. Kennedy, $7,000; Mr. Miller,
$7,000; Mr. Nelson, $7,000; Mr. Rees, $2,750; Mr. Robinson, $7,000; Dr.
Sisto, $0; and Mr. Whalen, $7,000. The cumulative deferred compensation
(including interest) accrued with respect to each trustee from the
Registrant as of June 30, 1996 is as follows: Dr. Caruso, $0; Mr. Gaughan,
$7,342; Ms. Heagy, $1,279; Mr. Kennedy, $15,714; Mr. Miller, $14,933; Mr.
Nelson, $15,714; Mr. Rees, $4,292; Mr. Robinson, $15,133; Dr. Sisto, $0; and
Mr. Whalen, $12,244. The deferred compensation plan is described above the
Compensation Table. Amounts deferred are retained by the Fund and earn a
rate of return determined by reference to either the return on the common
shares of the Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee. To the extent permitted by the 1940 Act,
the Fund may invest in securities of those funds selected by the Non-
Affiliated Trustees in order to match the deferred compensation obligation.
B-26
<PAGE> 212
(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-27
<PAGE> 213
As of October 17, 1996, no person was known by the Fund to own beneficially or
to hold of record as much as 5% of the Outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT CLASS OF PERCENTAGE OF
NAME AND ADDRESS OF HOLDER OCTOBER 17, 1996 SHARES OWNERSHIP
- ---------------------------------------------------------------- ---------------- -------- -------------
<S> <C> <C> <C>
Van Kampen American Capital Trust Company....................... 51,791 A 11.74%
2800 Post Oak Blvd. 56,293 B 10.20%
Houston, TX 77056 5,063 C 7.18%
Parker Hunter Incorporated FBO.................................. 20,941 C 29.89%
Frank Esparraguera IRA
Parker/Hunter Custodian
9 Glenview Avenue
Oil City, PA 16301-2137
Parker Hunter Incorporated FBO.................................. 18,534 C 26.27%
Dolores M.L. Esparraguera IRA
Parker/Hunter Custodian
9 Glenview Avenue
Oil City, PA 16301-2137
Donaldson Lufkin Jenrette....................................... 3,792 C 5.38%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-2052
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefit plans and individual retirement accounts.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
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. VK/AC Holding, Inc. is controlled, through the ownership of
a substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P., are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
Van Kampen American Capital own, in the aggregate, not more than 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 12% of the common stock of
VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own 5% or more of the
common stock of VK/AC Holding, Inc.
The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. The Adviser also administers the business
affairs of the Fund, furnishes offices, necessary facilities and equipment,
provides administrative
B-28
<PAGE> 214
services, and permits its officers and employees to serve without compensation
as officers of the Fund and trustees of the Trust if duly elected to such
positions.
The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The investment advisory agreement for the Fund will continue in effect from
year to year if specifically approved by the trustees of the Trust, of which the
Fund is a separate series (or by the Fund's shareholders), and by the
disinterested trustees in compliance with the requirements of the 1940 Act. The
agreement may be terminated without penalty upon 60 days' written notice by
either party thereto and will automatically terminate in the event of
assignment.
The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.
For the year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized advisory expenses of $0 and $0, respectively.
OTHER AGREEMENTS
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 the Fund received support
services for shareholders, including the handling of all written and telephonic
communications, except initial order entry and other distribution related
communications. Payment by the Fund for such services was made on cost basis for
the employment of the personnel and the equipment necessary to render the
support services. At such time, the Fund, and the other Van Kampen American
Capital mutual funds distributed by the Distributor, shared such costs
proportionately among themselves based upon their respective net asset values.
For the year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized expenses of approximately $0 and $4,200, respectively, representing
the Distributor's cost of providing certain support services.
ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares equally, together with the other Van Kampen American Capital
mutual funds advised by the Adviser and distributed by the Distributor, in 25%
of the cost of providing such services, with the remaining 75% of such cost
being paid by the Fund and such other funds based proportionally on their
respective net assets.
B-29
<PAGE> 215
For the year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized expenses of approximately $0 and $3,900, respectively, representing
the Adviser's cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital Funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: maintenance of
the fund's minute books and records, preparation and oversight of the fund's
regulatory reports, and other information provided to shareholders, as well as
responding to day-to-day legal issues on behalf of the funds. Payment by the
Fund for such services is made on a cost basis for the salary and salary related
benefits, including but not limited to bonuses, group insurances and other
regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to Funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.
For the year ended June 30, 1996 and the period ended June 30, 1995, the Fund
recognized expenses of approximately $7,100 and $5,900, respectively,
representing Van Kampen American Capital's cost of providing legal services.
CUSTODIAN AND INDEPENDENT ACCOUNTANTS
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.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security), than would be the case if no
weight were given to the broker's furnishing of those research services. This
will be done, however, only if, in the opinion of the Fund's Adviser, the amount
of additional commission or increased cost is reasonable in relation to the
value of the such services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters. If
purchases or sales of securities of the Fund and of one or more other investment
companies or clients supervised by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Adviser, taking into account the respective sizes of the Fund and other
investment companies and
B-30
<PAGE> 216
clients and the amount of securities to be purchased or sold. Although it is
possible that in some cases this procedure could have a detrimental effect on
the price or volume of the security as far as the Fund is concerned, it is also
possible that the ability to participate in volume transactions and to negotiate
lower brokerage commissions will be beneficial to the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.
The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to affiliated brokers.
State securities laws may differ from the interpretations of federal law
expressed herein, and banks and financial institutions may be required to
register as dealers pursuant to state law.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund will be subject to tax
if, among other things, it fails to distribute net capital gains, or if its
annual distributions, as a percentage of its income, are less than the
distributions required by tax laws.
THE DISTRIBUTOR
The Distributor offers one of the industry's broadest lines of investments --
encompassing mutual funds, closed-end funds and unit investment trusts -- and is
currently the nation's 5th largest broker-sold mutual fund group according to
Strategic Insight. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $57 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
more than 80 analysts devoted to various specializations.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Plans are being implemented through an agreement (the
"Distribution and Service Agreement") with the Distributor, sub-agreements
between the Distributor and members of the NASD who are acting as securities
dealers and NASD members or eligible non-members who are acting as brokers or
agents and similar agreements between the Fund and financial intermediaries who
are acting as brokers (collectively, "Selling Agreements") that may provide for
their customers or clients certain services or assistance, which may include,
but not be limited to, processing purchase and redemption transactions,
establishing and maintaining shareholder accounts regarding the Fund, and such
other services as may be agreed to from time to time and as may be permitted by
applicable statute, rule or regulation. Brokers, dealers and financial
intermediaries that have entered into sub-agreements with the Distributor and
sell shares of the Fund are referred to herein as "financial intermediaries."
B-31
<PAGE> 217
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that it will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. The Plans may not be amended to increase materially the
amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments of the Plans must be
approved by the Trustees and also by the disinterested Trustees. The Plans may
be terminated with respect to either class of shares at any time by a vote of a
majority of the disinterested Trustees or by a vote of a majority of the
outstanding voting shares of such class.
For the period ended June 30, 1995, the Fund recognized expenses under the
Plans of $12,732, $58,308 and $4,287 for the Class A Shares, Class B Shares and
Class C Shares, respectively, of which $10,718, $14,491 and $0 represent
payments to financial intermediaries under the Selling Agreements for Class A
Shares, Class B Shares and Class C Shares, respectively. For the period ended
June 30, 1995, the Fund reimbursed the Distributor $947, $1,820 and $0 for
advertising expenses, and $1,288, $1,331 and $0 for compensation of the
Distributor's sales personnel for the Class A Shares, Class B Shares and Class C
Shares, respectively.
For the year ended June 30, 1996, the Fund recognized expenses under the Plans
of $13,183, $70,267 and $8,345 for the Class A Shares, Class B Shares and Class
C Shares, respectively, of which $10,558, $14,037 and $3,332 represent payments
to financial intermediaries under the Selling Agreements for Class A Shares,
Class B Shares and Class C Shares, respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
PERFORMANCE INFORMATION
FUND PERFORMANCE INFORMATION
The Fund's yield quotation is determined on a daily basis with respect to the
immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge of the
lesser of the then current net asset value of the shares redeemed or their
initial purchase price from the Fund. Yield quotations do not reflect the
imposition of a contingent deferred sales charge, and if any such contingent
deferred sales charge imposed at the time of redemption were reflected, it would
reduce the performance quoted.
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.
B-32
<PAGE> 218
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC Shares imposed at the time of redemption were reflected, it would
reduce the performance quoted.
From time to time marketing materials may provide a portfolio manager update,
an adviser update and discuss general economic conditions and outlooks. The
Fund's marketing materials may also show the Fund's asset class diversification,
top five sector holdings and ten largest holdings. Materials may also mention
how Van Kampen American Capital believes the Fund compares relative to other Van
Kampen American Capital funds. Materials may also discuss the Dalbar Financial
Services study from 1984 to 1994 which examined investor cash flow into and out
of all types of mutual funds. The ten year study found that investors who bought
mutual fund shares and held such shares outperformed investors who bought and
sold. The Dalbar study conclusions were consistent regardless if shareholders
purchased their funds in direct or sales force distribution channels. The study
showed that investors working with a professional representative have tended
over time to earn higher returns than those who invested directly. The Fund will
also be marketed on the Internet.
BALANCED INVESTING
The Adviser believes that various asset classes have performed differently
overtime after adjusting for inflation. This performance difference among
various asset classes is further reflected in the relative performance of
certain market indices such as certificates of deposit, stock indices and bond
indices.
The Adviser believes a balanced approach to investing provides the opportunity
to benefit from the differing performance described above and that an investment
in a mutual fund which has a balanced investment objective forms a prudent part
of an investor's portfolio.
CLASS A SHARES
The average total return, including payment of the maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended June 30, 1996
was 8.45% and (ii) the period from June 24, 1994 (the commencement of investment
operations of the Fund) through June 30, 1996 was 9.89%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from their inception
through June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 20.98%.
CLASS B SHARES
The average total return, including payment of the maximum CDSC, with respect
to the Class B Shares for (i) the one year period ended June 30, 1996 was 10.25%
and (ii) the period from June 24, 1994 (the commencement of investment
operations of the Fund) through June 30, 1996 was 10.84%.
The Fund's cumulative non-standardized total return, including payment of the
maximum CDSC, with respect to the Class B Shares from their inception through
June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 23.10%.
B-33
<PAGE> 219
CLASS C SHARES
The average total return, including payment of the maximum CDSC, with respect
to the Class C Shares for (i) the one year period ended June 30, 1996 was 13.25%
and (ii) the period from June 24, 1994 (the commencement of operations of the
Class C Shares) through June 30, 1996 was 12.38%.
The Fund's cumulative non-standardized total return, including payment of the
maximum CDSC, with respect to the Class C Shares from their inception through
June 30, 1996 (as calculated in the Prospectus under the heading "Fund
Performance") was 26.60%.
B-34
<PAGE> 220
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Trustees and Shareholders of
Van Kampen American Capital Balanced Fund:
We have audited the accompanying statement of assets and liabilities of Van
Kampen American Capital Balanced Fund (the "Fund"), including the portfolio of
investments, as of June 30, 1996, and the related statement of operations for
the year then ended, and the statement of changes in net assets and the
financial highlights for the year then ended and for the period from June 24,
1994 (commencement of investment operations) through June 30, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1996, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen American Capital Balanced Fund as of June 30, 1996, the results of its
operations for the year then ended, the changes in its net assets and financial
highlights for the year then ended and for the period from June 24, 1994
(commencement of investment operations) through June 30, 1995, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
August 2, 1996
B-35
<PAGE> 221
PORTFOLIO OF INVESTMENTS
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 52.5%
AEROSPACE & DEFENSE 0.6%
General Dynamics Corp.......................................... 900 $ 55,800
Rockwell International Corp.................................... 700 40,075
------------
95,875
------------
AUTOMOBILE 1.1%
Chrysler Corp.................................................. 900 55,800
Daimler Benz SA (Germany)...................................... 700 37,712
Fiat SA (Italy)................................................ 1,600 27,200
General Motors Corp............................................ 600 31,425
TRW Inc........................................................ 300 26,963
------------
179,100
------------
BANKING 2.7%
Bankamerica Corp............................................... 600 45,450
Bankers Trust NY Corp.......................................... 400 29,550
Chase Manhattan Corp........................................... 1,800 127,125
Corporacion Bancaria De Espana - ADR (Spain)................... 3,500 77,000
Fleet Financial Group Inc...................................... 800 34,800
Morgan, J.P. & Co. Inc......................................... 1,100 93,087
PNC Bank Corp.................................................. 900 26,775
------------
433,787
------------
BEVERAGE 0.3%
Anheuser Busch Cos., Inc....................................... 600 45,000
------------
BROADCAST, RADIO & TELEVISION 1.1%
Cox Communications Inc. (b).................................... 3,900 84,338
Tele Communications Inc. (b)................................... 4,900 88,812
------------
173,150
------------
CAPITAL GOODS 0.5%
Cooper Industries Inc.......................................... 700 29,050
Dover Corp..................................................... 400 18,450
Honeywell Inc.................................................. 500 27,250
------------
74,750
------------
CHEMICAL 1.8%
Betz Laboratories Inc.......................................... 1,000 43,875
Dow Chemical Co................................................ 900 68,400
Du Pont (E.I.) De Nemours Co................................... 300 23,738
Lyondell Petrochemical Co. .................................... 2,600 62,725
Praxair Inc. .................................................. 2,000 84,500
------------
283,238
------------
CONSUMER DURABLES 1.8%
Alco Standard Corp. ........................................... 800 36,200
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 222
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER DURABLES (CONTINUED)
Caterpillar Inc. .............................................. 400 $ 27,100
Cooper Tire & Rubber........................................... 1,500 33,375
Ingersoll Rand Co. ............................................ 1,000 43,750
Johnson Controls Inc. ......................................... 200 13,900
Masco Corp. ................................................... 800 24,200
Maytag Corp. .................................................. 1,600 33,400
Newell Co. .................................................... 1,500 45,937
Sunbeam Oster Inc. ............................................ 2,100 30,975
------------
288,837
------------
CONTAINERS, PACKAGING & GLASS 0.4%
Crown Cork & Seal Inc.......................................... 800 36,000
Temple Inland Inc. ............................................ 500 23,375
------------
59,375
------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING 0.5%
General Electric Co. .......................................... 915 79,148
------------
ELECTRIC UTILITIES 6.0%
Carolina Power & Light Co. .................................... 200 7,600
Central & South West Corp. .................................... 1,600 46,400
Cilcorp Inc. .................................................. 400 17,100
DTE Energy Co. ................................................ 5,000 154,375
Florida Progress Corp. ........................................ 800 27,800
FPL Group Inc. ................................................ 1,400 64,400
Houston Industries Inc. ....................................... 3,000 73,875
Idaho Power Co. ............................................... 1,800 56,025
Illinova Corp. ................................................ 5,600 161,000
Minnesota Power & Light Co. ................................... 900 26,100
Northern STS Power Co. ........................................ 400 19,750
Ohio Edison Co. ............................................... 300 6,563
Oklahoma Gas & Electric Co. ................................... 400 15,850
Pacificorp..................................................... 1,300 28,925
Peco Energy Co. ............................................... 980 25,480
Portland General Corp. ........................................ 2,400 74,100
Southwestern Public Service Co. ............................... 1,300 42,412
Texas Utilities Co. ........................................... 1,300 55,575
Unicorn Corp. ................................................. 1,400 39,025
------------
942,355
------------
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 223
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY 1.1%
Norsk Hydro AS - ADR (Norway).................................. 900 $ 43,987
Repsol SA - ADR (Spain)........................................ 2,000 69,500
Total SA (France).............................................. 1,100 40,838
YPF Sociedad Anonima - ADR (Argentina)......................... 1,100 24,750
------------
179,075
------------
ENGINEERING & CONSTRUCTION 0.7%
Fluor Corp..................................................... 400 26,150
Foster Wheeler Corp............................................ 800 35,900
J. Ray McDermott SA (b)........................................ 1,900 47,500
------------
109,550
------------
ENVIRONMENTAL 2.2%
Browning Ferris Industries Inc................................. 4,600 133,400
WMX Technologies Inc........................................... 6,500 212,875
------------
346,275
------------
FINANCIAL SERVICES 0.9%
Bear Stearns Cos., Inc......................................... 2,625 62,016
Franklin Resources Inc......................................... 800 48,800
Great Western Financial Corp................................... 1,000 23,875
------------
134,691
------------
FOOD 1.8%
CPC International Inc.......................................... 300 21,600
Heinz, H.J. & Co............................................... 1,600 48,600
Quaker Oats Co................................................. 500 17,062
Sara Lee Corp.................................................. 800 25,900
Unilever....................................................... 1,200 174,150
------------
287,312
------------
HEALTHCARE 1.1%
Johnson & Johnson.............................................. 1,000 49,500
Mallinckrodt Group Inc......................................... 3,300 128,288
------------
177,788
------------
INSURANCE 3.2%
Aetna Life & Casualty Co....................................... 1,200 85,800
AFLAC Inc. .................................................... 1,200 35,850
Allmerica Financial Corp. ..................................... 500 14,875
Allstate Corp. ................................................ 900 41,062
AMBAC Inc. .................................................... 600 31,275
American Bankers Insurance Group............................... 1,500 65,437
American General Corp. ........................................ 700 25,463
Cigna Corp. ................................................... 200 23,575
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 224
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE (CONTINUED)
MBIA Inc. ..................................................... 800 $ 62,300
Providian Corp. ............................................... 600 25,725
St. Paul Cos., Inc. ........................................... 700 37,450
Sunamerica Inc................................................. 950 53,675
------------
502,487
------------
LEISURE/ENTERTAINMENT 0.8%
International Game Technology.................................. 1,600 27,000
Time Warner Inc. .............................................. 1,800 70,650
Trump Hotels & Casino Resorts (b).............................. 1,000 28,500
------------
126,150
------------
MINING, STEEL, IRON & NON-PRECIOUS METAL 0.3%
Bethleham Steel Corp. (b)...................................... 4,000 47,500
------------
NATURAL GAS PIPELINE AND DISTRIBUTION 3.4%
Coastal Corp. ................................................. 2,100 87,675
El Paso Natural Gas Co. ....................................... 700 26,950
Pacific Enterprises............................................ 4,900 145,162
Panenergy Corp. ............................................... 4,100 134,788
Sonat Inc. .................................................... 3,000 135,000
------------
529,575
------------
OIL & GAS 4.1%
Amoco Corp. ................................................... 550 39,806
Atlantic Richfield Co. ........................................ 300 35,550
British Petroleum PLC - ADR (UK)............................... 200 21,375
Burlington Resources Inc. ..................................... 700 30,100
Chevron Corp. ................................................. 600 35,400
Enron Oil & Gas Co. ........................................... 700 19,513
Exxon Corp. ................................................... 300 26,063
Louisiana Land & Exploration Co. .............................. 400 23,050
Mobil Corp. ................................................... 400 44,850
Noble Affiliates Inc. ......................................... 800 30,200
Occidental Petroleum Corp. .................................... 1,900 47,025
Phillips Petroleum Co. ........................................ 600 25,125
Pogo Producing Co. ............................................ 1,100 41,937
Royal Dutch Petroleum Co. (Netherlands)........................ 300 46,125
Schlumberger Ltd............................................... 300 25,275
Seagull Energy Corp. (b)....................................... 1,500 37,500
Shell Transport & Trading PLC - ADR (UK)....................... 400 35,200
Texaco Inc..................................................... 700 58,712
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 225
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
- ---------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS (CONTINUED)
USX Marathon Group............................................. 1,600 $ 32,200
------------
655,006
------------
PAPER 2.1%
Boise Cascade Corp............................................. 3,500 128,187
Champion International Corp.................................... 600 25,050
Consolidated Papers Inc........................................ 300 15,600
Georgia Pacific Corp........................................... 500 35,500
International Paper Co......................................... 1,400 51,625
Mead Corp...................................................... 500 25,938
Willamette Industries Inc...................................... 900 53,550
------------
335,450
------------
PERSONAL & NON-DURABLE 1.4%
Bausch & Lomb Inc.............................................. 400 17,000
Colgate Palmolive Co........................................... 700 59,325
Dial Corp...................................................... 1,400 40,075
Kimberly Clark Corp............................................ 400 30,900
Tambrands Inc.................................................. 1,900 77,663
------------
224,963
------------
PHARMACEUTICALS 3.7%
Abbott Labs.................................................... 1,100 47,850
American Home Products Corp.................................... 1,200 72,150
Astra AB - ADR (Sweden)........................................ 600 26,250
Bristol Myers Squibb Co........................................ 2,640 237,600
Merck & Co. Inc................................................ 700 45,237
Schering Plough Corp........................................... 600 37,650
Smithkline Beecham PLC - ADR (UK).............................. 500 27,188
Warner Lambert Co.............................................. 1,600 88,000
------------
581,925
------------
PRINTING & PUBLISHING 0.3%
Gannett Inc.................................................... 300 21,225
New York Times Co. ............................................ 800 26,100
------------
47,325
------------
RETAIL 2.4%
Dayton Hudson Corp............................................. 300 30,938
Dillard Department Stores Inc. ................................ 2,100 76,650
Federated Department Stores Inc. (b)........................... 1,100 37,537
Harcourt General Inc. ......................................... 1,200 60,000
Kroger Co. (b)................................................. 1,500 59,250
Sears Roebuck & Co. ........................................... 1,300 63,212
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 226
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Shares Market Value
------------------------------------------------------------------------------------
<S> <C> <C>
RETAIL (CONTINUED)
Toys R Us Inc. (b)............................................. 900 $ 25,650
Wal-Mart Stores Inc. .......................................... 700 17,763
------------
371,000
------------
TECHNOLOGY 2.5%
3Com Corp. .................................................... 400 18,300
Avnet Inc. .................................................... 1,000 42,125
BMC Software Inc. (b).......................................... 400 23,900
Cadence Design Systems Inc. ................................... 600 20,250
Cisco Systems Inc. (b)......................................... 500 28,312
Computer Associates International Inc. ........................ 500 35,625
Gateway 2000 Inc. (b).......................................... 800 27,200
Intel Corp. ................................................... 200 14,688
International Rectifier Corp. (b).............................. 1,100 17,738
Lucent Technologies Inc. (b)................................... 500 18,937
Microsoft Corp. (b)............................................ 200 24,025
Motorola Inc. ................................................. 600 37,725
Newbridge Networks Corp. (b)................................... 200 13,100
SCI Systems Inc. (b)........................................... 600 24,375
Sun Guard Data Systems (b)..................................... 1,300 52,162
------------
398,462
------------
TELECOMMUNICATIONS 2.5%
Ameritech Corp. ............................................... 875 51,953
Bellsouth Corp. ............................................... 900 38,138
Ericsson L M Telephone Co. - ADR (Sweden)...................... 900 19,350
Nynex Corp. ................................................... 2,400 114,000
Sprint Corp. .................................................. 1,000 42,000
Tele Danmark AS - ADR (Denmark)................................ 3,900 98,962
Telefonica de Espana - ADR (Spain)............................. 500 27,563
------------
391,966
------------
TOBACCO 1.0%
Philip Morris Cos., Inc. ...................................... 1,300 135,200
RJR Nabisco Holdings Corp. .................................... 800 24,800
------------
160,000
------------
TRANSPORTATION 0.2%
Illinois Central Corp. ........................................ 1,200 34,050
------------
TOTAL COMMON STOCKS............................................ 8,295,165
------------
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 227
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Security
Description Market Value
------------------------------------------------------------------------------------
<S> <C>
GOVERNMENT AND AGENCY FIXED-INCOME SECURITIES (U.S.) 35.1%
Federal Home Loan Bank Corp. Series P2 ($1,000,000 par, 8.50% coupon,
02/08/02 maturity, S&P rating AAA)..................................... $ 1,027,850
U.S. Treasury Bond ($3,900,000 par, 7.25% coupon, 05/15/16 maturity)... 3,995,238
U.S. Treasury Note ($500,000 par, 7.50% coupon, 02/15/05 maturity)..... 526,205
-----------
TOTAL GOVERNMENT AND AGENCY FIXED-INCOME SECURITIES (U.S.)............. 5,549,293
-----------
TOTAL LONG-TERM INVESTMENTS 87.6%
(Cost $13,472,057) (a)............................................... 13,844,458
SHORT-TERM INVESTMENTS AT AMORTIZED COST 11.5%
Student Loan Marketing Disc Note ($1,820,000 par, yielding 5.45%,
maturing 07/01/96)................................................... 1,820,000
OTHER ASSETS IN EXCESS OF LIABILITIES 0.9%............................ 143,713
-----------
NET ASSETS 100%....................................................... $15,808,171
===========
</TABLE>
(a) At June 30, 1996, cost for federal income tax purposes is $13,472,057; the
aggregate gross unrealized appreciation is $699,999 and the aggregate gross
unrealized depreciation is $327,598, resulting in net unrealized
appreciation of $372,401.
(b) Non-income producing security as this stock currently does not declare
dividends.
See Notes to Financial Statements
B-42
<PAGE> 228
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $13,472,057) (Note 1)................. $13,844,458
Short-Term Investments (Note 1).......................................... 1,820,000
Cash..................................................................... 7,589
Receivables:
Securities Sold........................................................ 155,366
Interest............................................................... 83,990
Fund Shares Sold....................................................... 48,750
Dividends.............................................................. 19,904
Unamortized Organizational Expenses (Note 1)............................. 47,648
-----------
Total Assets......................................................... 16,027,705
-----------
LIABILITIES:
Payables:
Securities Purchased................................................... 149,688
Distributor and Affiliates (Notes 2 and 5)............................. 33,464
Income Distributions................................................... 25,084
Fund Shares Repurchased................................................ 1,121
Deferred Compensation and Retirement Plans (Note 2)...................... 9,722
Accrued Expenses......................................................... 455
-----------
Total Liabilities.................................................... 219,534
-----------
NET ASSETS............................................................... $15,808,171
===========
NET ASSETS CONSIST OF:
Capital (Note 3)......................................................... $14,428,476
Accumulated Net Realized Gain on Securities.............................. 999,594
Net Unrealized Appreciation on Securities................................ 372,401
Accumulated Undistributed Net Investment Income.......................... 7,700
-----------
NET ASSETS............................................................... $15,808,171
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets
of $6,514,423 and 405,826 shares of capital stock issued and
outstanding) (Note 3)................................................ $ 16.05
Maximum sales charge (5.75%* of offering price)...................... .98
-----------
Maximum offering price to public..................................... $ 17.03
===========
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$8,227,046 and 512,997 shares of capital stock issued and
outstanding) (Note 3)................................................ $ 16.04
===========
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$1,066,702 and 66,511 shares of capital stock issued and outstanding)
(Note 3)............................................................. $ 16.04
===========
</TABLE>
* On sales of $50,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
B-43
<PAGE> 229
STATEMENT OF OPERATIONS
For the Year Ended June 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................................. $ 371,050
Dividends (Net of foreign withholding taxes of $2,156).................... 183,927
----------
Total Income.......................................................... 554,977
----------
EXPENSES:
Investment Advisory Fee (Note 2).......................................... 91,893
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of
$13,183, $70,267 and $8,345, respectively) (Note 5)..................... 91,795
Custody................................................................... 82,553
Registration.............................................................. 68,699
Printing.................................................................. 41,455
Shareholder Services (Note 2)............................................. 23,504
Audit..................................................................... 18,620
Amortization of Organizational Expenses (Note 1).......................... 16,045
Trustees Fees and Expenses (Note 2)....................................... 12,699
Legal (Note 2)............................................................ 11,966
Other..................................................................... 5,984
----------
Total Expenses........................................................ 465,213
Less Fees Waived and Expenses Reimbursed ($91,893 and $236,400,
respectively)....................................................... 328,293
----------
Net Expenses........................................................ 136,920
----------
NET INVESTMENT INCOME..................................................... $ 418,057
==========
REALIZED AND UNREALIZED GAIN/LOSS ON SECURITIES:
Net Realized Gain on Investments.......................................... $1,765,158
----------
Unrealized Appreciation/Depreciation on Securities:
Beginning of the Period................................................. 808,706
End of the Period:
Investments........................................................... 372,401
----------
Net Unrealized Depreciation on Securities During the Period............... (436,305)
----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............................ $1,328,853
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS................................ $1,746,910
==========
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 230
STATEMENT OF CHANGES IN NET ASSETS
For the Year Ended June 30, 1996 and the Period June 24, 1994
(Commencement of Investment Operations) to June 30, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
From June 24, 1994
(Commencement of
Year Ended Investment Operations)
June 30, 1996 to June 30, 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 418,057 $ 375,863
Net Realized Gain/Loss on Securities.................. 1,765,158 (9,560)
Net Unrealized Appreciation/Depreciation on
Securities.......................................... (436,305) 808,706
--------- ---------
Change in Net Assets from Operations.................. 1,746,910 1,175,009
--------- ---------
Distributions from Net Investment Income:
Class A Shares...................................... (197,797) (156,268)
Class B Shares...................................... (216,743) (177,438)
Class C Shares...................................... (25,849) (13,922)
Class D Shares...................................... -0- (49)
--------- ---------
(440,389) (347,677)
--------- ---------
Distributions from Net Realized Gain on Securities
(Note 1):
Class A Shares...................................... (297,718) -0-
Class B Shares...................................... (408,895) -0-
Class C Shares...................................... (49,391) -0-
--------- ---------
(756,004) -0-
--------- ---------
Total Distributions................................... (1,196,393) -0-
--------- ---------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... 550,517 827,332
--------- ---------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold............................. 5,236,767 13,761,643
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................ 972,782 264,667
Cost of Shares Repurchased............................ (3,021,589) (2,789,668)
--------- ---------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.... 3,187,960 11,236,642
--------- ---------
TOTAL INCREASE IN NET ASSETS.......................... 3,738,477 12,063,974
NET ASSETS:
Beginning of the Period............................... 12,069,694 5,720
--------- ---------
End of the Period (Including undistributed net
investment income of $7,700 and $28,186,
respectively)....................................... $15,808,171 $12,069,694
=========== ===========
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 231
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Balanced Fund (the "Fund") is organized as a series
of the Van Kampen American Capital Equity Trust, a Delaware business trust and
is registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide its shareholders with current income, while also seeking to provide
shareholders with capital growth. The Fund commenced investment operations on
June 24, 1994, and has outstanding three classes of common shares, Classes A, B
and C. On May 2, 1995, all Class D shareholders redeemed their shares and the
class was eliminated. The Fund will no longer offer Class D shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments in securities listed on a securities exchange
shall be valued at their sale price as of the close of such securities exchange.
Investments in securities not listed on a securities exchange shall be valued
based on their last quoted bid price or, if not available, their fair value as
determined by the Board of Trustees or its delegate. Fixed income investments
are stated at value using market quotations or, if such valuations are not
available, estimates obtained from yield data relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Trustees. Short-term securities with
remaining maturities of less than 60 days are valued at amortized cost.
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At June 30, 1996, there were no when
issued or delayed delivery purchase commitments.
B-46
<PAGE> 232
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
A repurchase agreement is a short-term investment in which the Fund acquires
ownership of a debt security and the seller agrees to repurchase the security at
a future time and specified price. Repurchase agreements are collateralized by
the underlying debt security. The Fund will make payment for such securities
only upon physical delivery or evidence of book entry transfer to the account of
the custodian bank. The seller is required to maintain the value of the
underlying security at not less than the repurchase proceeds due the Fund.
C. INVESTMENT INCOME--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Bond discount is amortized over
the expected life of each applicable security.
D. ORGANIZATIONAL EXPENSES--The Fund has agreed to reimburse Van Kampen American
Capital Distributors, Inc. or its affiliates (collectively "VKAC") for costs
incurred in connection with the Fund's organization in the amount of $80,000.
These costs are being amortized on a straight line basis over the 60 month
period ending June 23, 1999. Van Kampen American Capital Investment Advisory
Corp. (the "Adviser") has agreed that in the event any of the initial shares of
the Fund originally purchased by VKAC are redeemed during the amortization
period, the Fund will be reimbursed for any unamortized organizational expenses
in the same proportion as the number of shares redeemed bears to the number of
initial shares held at the time of redemption.
E. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post October 31 losses which are not
recognized for tax purposes until the first day of the following fiscal year.
F. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays quarterly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains which are included in ordinary income for
tax purposes. Permanent book and tax basis differences relating to expenses that
are not deductible for tax purposes totaling $1,846 were reclassified from
accumulated undistributed net investment income to capital.
B-47
<PAGE> 233
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
For the year ended June 30, 1996, 14.3% of the distributions from net
realized gains on securities was considered long-term capital gains for Federal
income tax purposes. Since this distribution was made in December of 1995, it
was reported to shareholders along with other 1995 calendar year distributions.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ----------------------------------------------------------------------
<S> <C>
First $500 million...................................... .70 of 1%
Over $500 million....................................... .65 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom,
counsel to the Fund, of which a trustee of the Fund is an affiliated person.
For the year ended June 30, 1996, the Fund incurred expenses of
approximately $11,200 representing VKAC's cost of providing accounting, cash
management and legal services to the Fund all of which was waived by VKAC.
In July, 1995, the Fund began using ACCESS Investor Services, Inc.
("ACCESS"), an affiliate of the Adviser, as the shareholder servicing agent of
the Fund. For the year ended June 30, 1996, the Fund incurred expenses of
approximately $15,400, representing ACCESS' cost of providing transfer agency
and shareholder services plus a profit, all of which was assumed by VKAC.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund has implemented deferred compensation and retirement plans for its
trustees. Under the deferred compensation plan, trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those trustees who are not officers of VKAC.
At June 30, 1996, VKAC owned 106 shares each of Classes A, B and C.
B-48
<PAGE> 234
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of common shares, Classes A, B and C each
with a par value of $.01 per share. There are an unlimited number of shares of
each class authorized.
At June 30, 1996, capital aggregated $5,958,597, $7,493,118 and $976,761 for
Classes A, B and C, respectively. For the year ended June 30, 1996, transactions
were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- -------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 160,539 $ 2,556,624
Class B....................................... 149,768 2,395,715
Class C....................................... 17,813 284,428
-------- -----------
Total Sales..................................... 328,120 $ 5,236,767
======== ===========
Dividend Reinvestment:
Class A....................................... 27,877 $ 437,407
Class B....................................... 33,104 518,661
Class C....................................... 1,066 16,714
-------- -----------
Total Dividend Reinvestment..................... 62,047 $ 972,782
======== ===========
Repurchases:
Class A....................................... (91,336) $(1,459,621)
Class B....................................... (96,683) (1,543,634)
Class C....................................... (1,160) (18,334)
-------- -----------
Total Repurchases............................... (189,179) $(3,021,589)
======== ===========
</TABLE>
B-49
<PAGE> 235
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
At June 30, 1995, capital aggregated $4,424,914, $6,123,381 and $694,067 for
Classes A, B and C, respectively. For the period ended June 30, 1995,
transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- ------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A...................................... 375,263 $ 5,399,046
Class B...................................... 532,317 7,659,184
Class C...................................... 49,426 703,213
Class D...................................... 14 200
-------- -----------
Total Sales.................................... 957,020 $13,761,643
======== ===========
Dividend Reinvestment:
Class A...................................... 8,285 $ 121,482
Class B...................................... 9,487 139,212
Class C...................................... 273 3,968
Class D...................................... -0- 5
-------- -----------
Total Dividend Reinvestment.................... 18,045 $ 264,667
======== ===========
Repurchases:
Class A...................................... (74,902) $(1,097,044)
Class B...................................... (115,096) (1,676,445)
Class C...................................... (1,007) (14,544)
Class D...................................... (114) (1,635)
-------- -----------
Total Repurchases.............................. (191,119) $(2,789,668)
======== ===========
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear
B-50
<PAGE> 236
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1996
- --------------------------------------------------------------------------------
the expense of their respective deferred sales arrangements, including higher
distribution and service fees and incremental transfer agency costs.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
- ------------------------------------------------------------------------
<S> <C> <C>
First........................................... 4.00% 1.00%
Second.......................................... 3.75% None
Third........................................... 3.50% None
Fourth.......................................... 2.50% None
Fifth........................................... 1.50% None
Sixth........................................... 1.00% None
Seventh and Thereafter.......................... None None
</TABLE>
For the period ended June 30, 1996, VKAC, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$10,100 and received CDSC on redeemed shares of approximately $31,200. Sales
charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales, excluding U.S.
Government Securities and short-term investments were $16,905,770 and
$17,212,426, respectively.
5. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% for Class A shares and 1.00% each
for Class B and Class C shares are accrued daily. Included in these fees for the
year ended June 30, 1996, are payments to VKAC of approximately $54,000.
B-51
<PAGE> 237
APPENDIX D
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
FINANCIAL STATEMENTS
June 30, 1996 (Unaudited)
<PAGE> 238
PORTFOLIO OF INVESTMENTS
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
DOMESTIC COMMON STOCK 63.4%
CONSUMER DISTRIBUTION 5.5%
115 Dillard Dept Stores Inc................................ $ 4,197,500
*313 Federated Dept Stores Inc.............................. 10,681,125
59 Gap Inc................................................ 1,895,375
*112 Gymboree Corp.......................................... 3,416,000
91 Home Depot Inc......................................... 4,914,000
133 May Department Stores Co............................... 5,818,750
87 Nordstrom Inc.......................................... 3,871,500
99 Sears Roebuck & Co..................................... 4,813,875
104 Talbots Inc............................................ 3,367,000
61 Tandy Corp............................................. 2,889,875
*144 Toys R Us Inc.......................................... 4,104,000
*88 Vons Companies Inc..................................... 3,289,000
------------
53,258,000
------------
CONSUMER DURABLES 2.1%
166 Chrysler Corp.......................................... 10,292,000
22 Eastman Kodak Co....................................... 1,710,500
36 General Motors Corp.................................... 1,885,500
105 Masco Corp............................................. 3,176,250
240 Sunbeam Oster Inc...................................... 3,535,575
------------
20,599,825
------------
CONSUMER NON-DURABLES 5.6%
45 Campbell Soup Co....................................... 3,172,500
90 Coca Cola Co........................................... 4,398,750
40 Colgate Palmolive Co................................... 3,390,000
*95 Donnkenny Inc.......................................... 1,852,500
23 Kellogg Co............................................. 1,684,750
339 Nabisco Holdings Corp, Class A......................... 11,992,125
137 Philip Morris Companies Inc............................ 14,248,000
127 Quaker Oats Co......................................... 4,333,875
68 Ralston Purina Group................................... 4,360,500
178 Rubbermaid Inc......................................... 4,850,500
------------
54,283,500
------------
CONSUMER SERVICES 2.9%
96 Block (H & R) Inc...................................... 3,132,000
134 Deluxe Corp............................................ 4,757,000
51 Disney (Walt) Co....................................... 3,206,625
57 Dun & Bradstreet Corp.................................. 3,562,500
68 McDonald's Corp........................................ 3,179,000
91 Omnicom Group.......................................... 4,231,500
</TABLE>
See Notes to Financial Statements
D-1
<PAGE> 239
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
47 Tribune Co............................................. $ 3,413,375
165 Wendy's International Inc.............................. 3,073,125
------------
28,555,125
------------
ENERGY 6.8%
91 Amerada Hess Corp...................................... 4,879,875
193 Apache Corp............................................ 6,344,875
120 Burlington Resources Inc............................... 5,160,000
108 Chevron Corp........................................... 6,372,000
128 Exxon Corp............................................. 11,120,000
65 Mobil Corp............................................. 7,276,913
179 Pacific Enterprises.................................... 5,302,875
140 PanEnergy Corp......................................... 4,609,075
183 Texaco Inc............................................. 15,332,350
------------
66,397,963
------------
FINANCE 10.3%
203 Allstate Corp.......................................... 9,261,875
87 American International Group Inc....................... 8,580,375
120 Bank America Corp...................................... 9,090,000
62 Beacon Properties Corp................................. 1,588,750
54 Beneficial Corp........................................ 3,030,750
65 Chase Manhattan Corp................................... 4,590,625
50 Citicorp............................................... 4,131,250
150 Comerica Inc........................................... 6,693,750
125 Debartolo Realty Corp.................................. 2,015,625
58 Duke Realty Investments Inc............................ 1,754,500
172 Everest Re Holdings.................................... 4,450,500
215 Federal National Mortgage Association.................. 7,202,500
100 First Bank System Inc.................................. 5,800,000
113 Fleet Financial Group Inc.............................. 4,915,500
30 Health Care Properties Investors Inc................... 1,012,500
111 Horace Mann Educators Corp............................. 3,524,250
56 MBIA Inc............................................... 4,361,000
57 NationsBank Corp....................................... 4,709,625
90 Student Loan Marketing Association..................... 6,660,000
106 Travelers Group Inc.................................... 4,859,062
51 Weingarten Realty Investors............................ 1,976,250
------------
100,208,687
------------
HEALTH CARE 4.0%
119 Abbott Laboratories.................................... 5,176,500
*91 Amgen Inc.............................................. 4,914,000
</TABLE>
See Notes to Financial Statements
D-2
<PAGE> 240
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Market Value
- --------------------------------------------------------------------------------
<C> <S> <C>
54 Baxter International Inc............................... $ 2,551,500
75 Bristol Myers Squibb Co................................ 6,750,000
58 Merck & Co., Inc....................................... 3,748,250
86 Pfizer Inc............................................. 6,138,250
152 Pharmacia & Upjohn Inc................................. 6,745,000
41 Schering Plough Corp................................... 2,572,750
------------
38,596,250
------------
PRODUCER MANUFACTURING 5.1%
115 Allied Signal Inc...................................... 6,569,375
75 Cooper Industries Inc.................................. 3,112,500
52 Fluor Corp............................................. 3,399,500
89 Foster Wheeler Corp.................................... 3,993,875
97 General Electric Co.................................... 8,390,500
100 Honeywell Inc.......................................... 5,450,000
64 Illinois Tool Works Inc................................ 4,328,000
122 Stewart & Stevenson Services Inc....................... 2,775,500
35 TRW Inc................................................ 3,145,625
150 WMX Technologies Inc................................... 4,912,500
74 York International Corp................................ 3,829,500
------------
49,906,875
------------
RAW MATERIALS/PROCESSING INDUSTRIES 4.5%
143 Crown Cork & Seal Inc.................................. 6,435,000
66 Grace (WR) & Co........................................ 4,677,750
60 Hercules Inc........................................... 3,315,000
86 Mead Corp.............................................. 4,461,250
239 Monsanto Co............................................ 7,767,500
56 Olin Corp.............................................. 4,998,000
49 Phelps Dodge Corp...................................... 3,056,375
129 Praxair Inc............................................ 5,450,250
69 Sigma Aldrich Corp..................................... 3,691,500
------------
43,852,625
------------
TECHNOLOGY 7.9%
*38 BMC Software Inc....................................... 2,270,500
86 Boeing Co.............................................. 7,492,750
*55 Cisco Systems Inc...................................... 3,114,375
76 Computer Associates International Inc.................. 5,415,000
*84 Dynatech Corp.......................................... 2,730,000
*201 General Instrument Corp................................ 5,803,875
118 General Signal Corp.................................... 4,469,250
29 Harris Corp............................................ 1,769,000
</TABLE>
See Notes to Financial Statements
D-3
<PAGE> 241
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
30 Hewlett Packard Co.................................... $ 2,988,750
65 Intel Corp............................................ 4,773,437
39 Linear Technology Corp................................ 1,170,000
*91 Loral Corp............................................ 1,239,875
129 Lucent Technologies Inc............................... 4,885,875
*41 Microsoft Corp........................................ 4,925,125
*105 Newbridge Networks Corp............................... 6,877,500
41 Oak Industries Inc.................................... 1,220,550
87 Perkin-Elmer Corp..................................... 4,197,750
*148 Softkey International Inc............................. 2,802,750
+*43 Tellabs Inc........................................... 2,875,625
117 Xerox Corp............................................ 6,259,500
------------
77,281,487
------------
TRANSPORTATION 1.0%
88 Conrail Inc........................................... 5,841,000
52 Union Pacific Corp.................................... 3,633,500
------------
9,474,500
------------
UTILITIES 7.7%
100 Allegheny Power Systems Inc........................... 3,087,500
79 Ameritech Corp........................................ 4,690,625
178 AT & T Corp........................................... 11,036,000
90 Cincinnati Bell Inc................................... 4,691,250
158 CMS Energy Group...................................... 4,878,250
116 Duke Power Co......................................... 5,945,000
107 Edison International.................................. 1,887,637
164 Frontier Corp......................................... 5,022,500
110 GTE Corp.............................................. 4,922,500
220 Houston Industries Inc................................ 5,417,500
113 MCI Communications Corp............................... 2,895,625
148 NIPSCO Industries Inc................................. 5,957,000
253 Pacificorp............................................ 5,629,250
151 Peco Energy Co........................................ 3,926,000
51 Southern New England Telecommunications Corp.......... 2,142,000
121 Teleport Communications Group, Class A................ 2,314,125
------------
74,442,762
------------
TOTAL DOMESTIC COMMON STOCK (Cost $529,307,850)....... 616,857,599
------------
</TABLE>
See Notes to Financial Statements
D-4
<PAGE> 242
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number
of Shares
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<C> <S> <C>
FOREIGN COMMON STOCK 6.6%
136 Adidas ADS (Germany)............................. $ 5,712,000
195 Argenteria Bancaria Espana ADR (Spain)........... 4,290,000
102 Astra AB, Series A, ADR (Sweden)................. 4,462,500
170 Cable & Wireless, ADR (United Kingdom)........... 3,357,500
186 Canadian National Railway (Canada)............... 3,417,750
262 Canadian Pacific Ltd. (Canada)................... 5,764,000
*120 Coca Cola Femsa, SA, ADS (Mexico)................ 3,435,000
160 Ericsson (LM), Class B, ADR (Sweden)............. 3,440,000
81 Magna International Inc, Class A (Canada)........ 3,726,000
156 National Power, ADR (United Kingdom)............. 3,802,500
91 Nokia Corp, ADS (Finland)........................ 3,367,000
129 PowerGen, PLC, ADR (United Kingdom).............. 2,676,750
58 Royal Dutch Petroleum Corp., ADR (Netherlands)... 8,917,500
157 Telefonos de Mexico, SA, ADR (Mexico)............ 5,259,500
61 Teva Pharmaceutical Ltd, ADR (Israel)............ 2,310,375
------------
TOTAL FOREIGN COMMON STOCK (Cost $64,498,522).... 63,938,375
------------
CONVERTIBLE PREFERRED STOCK 2.8%
85 Delta Air Lines Inc, $3.50....................... 5,355,000
*74 Kmart Financing, 7.75%........................... 3,998,225
*70 MFS Communications, 8.00%........................ 4,445,000
50 SCI Finance NV, LLC, 6.25%....................... 4,831,250
104 Williams Companies Inc, $3.50.................... 8,177,000
------------
TOTAL CONVERTIBLE PREFERRED STOCK (Cost
$21,356,331).................................... 26,806,475
------------
<CAPTION>
Par
Amount
(000)
---------
<C> <S> <C> <C> <C>
CORPORATE OBLIGATIONS 8.5%
CONSUMER DISTRIBUTION 0.4%
$ 4,000 May Department Stores........... 8.375% 08/01/24 4,075,200
------------
CONSUMER DURABLES 0.7%
3,000 Ford Motor Co................... 9.000 09/15/01 3,256,860
3,000 General Motors Corp............. 7.000 06/15/03 2,989,020
------------
6,245,880
------------
CONSUMER SERVICES 1.2%
5,000 Cox Communications Inc.......... 7.250 11/15/15 4,785,500
3,000 Hertz Corp...................... 7.000 04/15/01 3,018,600
2,000 Tele Communications Inc......... 9.800 02/01/12 2,168,600
1,500 Time Warner Entertainment Co.... 9.625 05/01/02 1,657,260
------------
11,629,960
------------
ENERGY 2.6%
5,000 Enron Corp...................... 9.125 04/01/03 5,485,000
4,000 Occidental Petroleum Corp....... 10.125 11/15/01 4,553,400
</TABLE>
See Notes to Financial Statements
D-5
<PAGE> 243
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
$6,000 Sonat Inc.............................. 6.875% 06/01/05 $ 5,879,520
1,500 Texaco Capital Inc..................... 8.250 10/01/06 1,626,765
5,500 Texas Eastern Transmission Corp........ 8.250 10/15/04 5,858,380
2,000 Western Atlas Inc...................... 7.875 06/15/04 2,080,000
-----------
25,483,065
-----------
FINANCE 0.2%
2,000 General Electric Capital Corp.......... 8.900 09/15/04 2,234,220
-----------
PRODUCER MANUFACTURING 0.2%
1,500 Reliance Electric Co................... 6.800 04/15/03 1,466,700
-----------
RAW MATERIALS/PROCESSING
INDUSTRIES 2.2%
5,000 Carter Holt Harvey Ltd................. 8.875 12/01/04 5,482,000
5,000 Crown Cork & Seal Co................... 8.375 01/15/05 5,363,450
5,000 Georgia Pacific Corp................... 9.500 05/15/22 5,306,750
5,000 James River Corp....................... 8.375 11/15/01 5,277,200
-----------
21,429,400
-----------
TECHNOLOGY 0.4%
4,000 Philips Electronics, NV (Netherlands).. 7.750 04/15/04 4,105,640
-----------
TRANSPORTATION 0.3%
3,000 Union Pacific Corp..................... 7.600 05/01/05 3,054,900
-----------
UTILITIES 0.3%
2,500 MCI Communications Corp................ 7.125 01/20/00 2,533,400
-----------
TOTAL CORPORATE OBLIGATIONS
(Cost $81,708,465).................... 82,258,365
-----------
DOMESTIC CONVERTIBLE CORPORATE
OBLIGATIONS 6.3%
CONSUMER NON-DURABLES 0.9%
8,000 Grand Metropolitan..................... 6.500 01/31/00 8,710,000
-----------
CONSUMER SERVICES 1.6%
17,000 ADT Operations Inc..................... (1) 07/06/10 9,222,500
95 Merrill Lynch, STRYPES................. 6.000 06/01/99 2,080,240
8,000 News American Holdings................. (1) 03/11/13 3,860,000
-----------
15,162,740
-----------
ENERGY 0.3%
2,710 Ensearch Corp.......................... 6.375 04/01/02 2,625,313
-----------
FINANCE 0.6%
1,100 American Travellers Corp............... 6.500 10/01/05 1,730,437
3,600 Equitable Companies Inc................ 6.125 12/15/24 4,050,000
-----------
5,780,437
-----------
HEALTH CARE 0.6%
4,000 United Technologies Corp., PEN......... (2) 09/08/97 5,760,000
-----------
RAW MATERIALS/PROCESSING
INDUSTRIES 0.3%
7,500 Rpm Inc................................ (1) 09/30/12 3,225,000
-----------
TECHNOLOGY 0.6%
40 American Express Co, DECKS............. 6.250 10/15/96 2,628,534
50 Salomon Inc, ELKS...................... 6.500 02/01/97 3,311,103
-----------
5,939,637
-----------
TRANSPORTATION 0.6%
5,000 Continental Airlines Inc............... 6.750 04/15/06 5,962,500
-----------
</TABLE>
See Notes to Financial Statements
D-6
<PAGE> 244
PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTILITIES 0.8%
$ 105 Sprint Corp, DECKS........ 8.250% 03/31/00 $ 4,225,500
11,000 U. S. Cellular Corp....... (1) 06/15/15 3,740,000
------------
7,965,500
------------
TOTAL DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $52,621,844)............................... 61,131,127
------------
FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS 2.9%
5,000 Aegon, NV (Netherlands)... 4.750 11/01/04 8,125,000
9,000 MBL International 3.000 11/30/02 10,496,250
(Bermuda).................
18,500 Roche Holdings Inc. (1) 04/20/10 7,885,625
(Switzerland).............
2,090 Sandoz Ltd. 2.000 10/06/02 2,233,687
(Switzerland).............
------------
TOTAL FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS
(Cost $23,843,157)............................... 28,740,562
------------
UNITED STATES AGENCIES AND
OBLIGATIONS 1.6%
1,000 Federal Farm Credit Banks. 9.000 03/07/97 1,025,370
15,000 United States Treasury
Notes..................... 6.375 07/15/99 15,030,450
------------
TOTAL UNITED STATES AGENCIES AND OBLIGATIONS
(Cost $15,941,406)................................ 16,055,820
------------
SHORT-TERM
INVESTMENTS 7.8%
COMMERCIAL PAPER 2.1%
20,000 General Electric Capital 5.560 07/01/96 19,990,733
Corp......................
------------
REPURCHASE AGREEMENT 0.4%
4,050 BA Securities, dated
06/28/96 (collateralized
by U.S. Government
obligations in a pooled
cash account) repurchase
proceeds $4,051,839....... 5.450 07/01/96 4,050,000
------------
UNITED STATES AGENCIES AND
OBLIGATIONS 5.3%
**12,370 Federal Home Loan Banks... 5.106 07/11/96 12,351,139
**16,715 Federal Home Loan Mtg
Corp...................... 5.313 to 5.338 Various 16,645,625
**5,000 Federal National Mtg
Association............... 5.332 07/25/96 4,963,333
**18,000 Treasury Bills............ 4.942 to 5.137 Various 17,821,863
------------
51,781,960
------------
TOTAL SHORT-TERM INVESTMENTS (Cost $75,829,031).... 75,822,693
------------
TOTAL INVESTMENTS (Cost $865,106,606) 99.9%................. 971,611,016
OTHER ASSETS AND LIABILITIES, NET 0.1%...................... 1,318,189
------------
NET ASSETS 100%............................................. $972,929,205
------------
</TABLE>
*Non-income producing security
**Securities with a market value of $48.2 million were placed as collateral for
futures contracts (see Note 1B)
+All or a portion of this security is subject to call options written (see Note
3)
(1) Liquid yield option note, zero coupon
(2) Zero coupon
DECKS--debt exchangeable for common stock, traded in shares
ELKS--equity linked security, traded in shares
PEN--pharmaceutical exchange note
STRYPES--structured yield product exchangeable for stock, traded in shares
See Notes to Financial Statements
D-7
<PAGE> 245
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at market value (Cost $865,106,606).................. $971,611,016
Cash.............................................................. 11,838
Receivable for investments sold................................... 14,707,833
Receivable for Fund shares sold................................... 3,869,767
Dividends and interest receivable................................. 3,818,228
Receivable for broker-variation margin............................ 228,750
Other assets and receivables...................................... 48,763
------------
Total Assets..................................................... 994,296,195
------------
LIABILITIES
Payable for investments purchased................................. 16,994,105
Payable for Fund shares purchased................................. 2,835,627
Due to Distributor................................................ 694,138
Due to Adviser.................................................... 312,281
Dividends payable................................................. 192,290
Due to shareholder service agent.................................. 184,510
Deferred Trustees' compensation................................... 62,664
Options contracts written......................................... 9,021
Accrued expenses.................................................. 82,354
------------
Total Liabilities................................................ 21,366,990
------------
NET ASSETS, equivalent to $6.51 per share for Class A and $6.49
per share for Class B and C shares............................... $972,929,205
------------
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 62,177,518 Class A,
80,294,134 Class B, and 7,258,412
Class C shares outstanding....................................... $ 1,497,301
Capital surplus................................................... 829,917,091
Undistributed net realized gain on securities..................... 33,963,504
Net unrealized appreciation of securities
Investments...................................................... 106,504,410
Futures contracts................................................ 375,829
Options contracts written........................................ 118
Undistributed net investment income............................... 670,952
------------
NET ASSETS........................................................ $972,929,205
------------
</TABLE>
See Notes to Financial Statements
D-8
<PAGE> 246
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1996 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest............................................................ $7,961,629
Dividends........................................................... 7,280,821
----------
Investment income.................................................. 15,242,450
----------
EXPENSES
Management fees..................................................... 1,744,759
Shareholder service agent's fees and expenses....................... 1,052,808
Accounting services................................................. 102,162
Service fees--Class A............................................... 434,254
Distribution and service fees--Class B.............................. 2,346,802
Distribution and service fees--Class C.............................. 214,447
Trustees' fees and expenses......................................... 27,612
Audit fees.......................................................... 20,065
Custodian fees...................................................... 20,550
Legal fees.......................................................... 3,771
Reports to shareholders............................................. 60,000
Registration and filing fees........................................ 109,377
State franchise taxes............................................... 13,105
Miscellaneous....................................................... 55,111
Retirement plan expense reimbursement (see Note 4).................. (7,500)
----------
Total expenses................................................... 6,197,323
----------
NET INVESTMENT INCOME............................................. 9,045,127
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain on securities
Investments...................................................... 32,753,478
Futures contracts................................................ 1,391,192
Net unrealized appreciation (depreciation) of securities during
the period
Investments...................................................... (787,931)
Futures contracts................................................ 899,837
Options contracts................................................ 118
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES.................... 34,256,694
-----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $43,301,821
-----------
</TABLE>
See Notes to Financial Statements
D-9
<PAGE> 247
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period................ $797,064,576 $509,399,385
------------ ------------
OPERATIONS
Net investment income......................... 9,045,127 19,041,032
Net realized gain on securities............... 34,144,670 47,685,541
Net unrealized appreciation of securities
during the period............................ 112,024 107,844,844
------------ ------------
Increase in net assets resulting from
operations.................................... 43,301,821 174,571,417
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income
Class A....................................... (4,542,077) (9,417,089)
Class B....................................... (4,265,600) (8,073,838)
Class C....................................... (388,853) (805,374)
------------ ------------
(9,196,530) (18,296,301)
------------ ------------
Net realized gain on securities
Class A....................................... (3,245,040) (17,024,616)
Class B....................................... (4,079,005) (19,392,670)
Class C....................................... (373,751) (1,831,288)
------------ ------------
(7,697,796) (38,248,574)
------------ ------------
Total distributions.......................... (16,894,326) (56,544,875)
------------ ------------
CAPITAL TRANSACTIONS
Proceeds from shares sold
Class A....................................... 78,546,665 100,960,071
Class B....................................... 122,630,958 127,455,590
Class C....................................... 11,976,991 12,700,237
------------ ------------
213,154,614 241,115,898
------------ ------------
Proceeds from shares issued for distributions
reinvested
Class A....................................... 6,830,576 22,648,505
Class B....................................... 7,610,781 25,073,357
Class C....................................... 603,452 2,071,625
------------ ------------
15,044,809 49,793,487
------------ ------------
Cost of shares redeemed
Class A....................................... (42,059,058) (69,303,217)
Class B....................................... (31,702,756) (42,499,849)
Class C....................................... (4,980,475) (9,467,670)
------------ ------------
(78,742,289) (121,270,736)
------------ ------------
Increase in net assets resulting from capital
transactions................................. 149,457,134 169,638,649
------------ ------------
INCREASE IN NET ASSETS......................... 175,864,629 287,665,191
------------ ------------
NET ASSETS, end of period (including
undistributed net investment income of
$670,952 and $822,355, respectively)......... $972,929,205 $797,064,576
------------ ------------
</TABLE>
See Notes to Financial Statements
D-10
<PAGE> 248
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
--------------------------------------------------
Six Months
Ended Year Ended December 31
June 30, --------------------------------------
1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period.................. $ 6.31 $ 5.16 $ 5.55 $ 5.15 $ 4.83 $ 4.00
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Investment income......... .11 .25 .27 .25 .255 .26
Expenses.................. (.03) (.05) (.06) (.06) (.05) (.045)
------ ------ ------ ------ ------ ------
Net investment income...... .08 .20 .21 .19 .205 .215
Net realized and unrealized
gain (loss) on securities. .254 1.458 (.317) .6055 .31 .83
------ ------ ------ ------ ------ ------
Total from investment
operations................. .334 1.658 (.107) .7955 .515 1.045
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM
(see Note 1F)
Net investment income..... (.077) (.188) (.1855) (.168) (.195) (.215)
Net realized gain on
securities................ (.057) (.32) (.0975) (.2275) -- --
------ ------ ------ ------ ------ ------
Total distributions........ (.134) (.508) (.283) (.3955) (.195) (.215)
------ ------ ------ ------ ------ ------
Net asset value, end of
period..................... $ 6.51 $ 6.31 $ 5.16 $ 5.55 $ 5.15 $ 4.83
------ ------ ------ ------ ------ ------
TOTAL RETURN (/1/)......... 5.34% 32.57% (1.98%) 16.00% 10.72% 26.67%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)................. $404.7 $349.9 $240.5 $187.6 $123.8 $103.1
Average net assets
(millions)................. $377.6 $292.4 $214.4 $152.1 $109.6 $ 93.7
Ratios to average net
assets (annualized)(/2/)
Expenses.................. .95% .95% 1.02% 1.06% 1.01% 1.02%
Expenses, without expense
reimbursement............. .95% -- -- -- -- --
Net investment income..... 2.48% 3.43% 3.60% 3.33% 3.95% 4.88%
Net investment income,
without expense
reimbursement............ 2.48% -- -- -- -- --
Portfolio turnover rate.... 52% 92% 92% 101% 74% 80%
Average commission rate per
equity stock traded....... $0.047 -- -- -- -- --
</TABLE>
(1) Total return for a period of less than one year is not annualized.
Total return does not consider the effect of sales charges.
(2) See Note 4.
See Notes to Financial Statements
D-11
<PAGE> 249
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------
Six May 1,
Months 1992(/1/)
Ended Year Ended December 31 through
June 30, --------------------------- Dec 31,
1996 1995 1994 1993(/2/) 1992(/2/)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of
period...................... $ 6.30 $ 5.16 $ 5.55 $ 5.15 $ 4.83
------ ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Investment income........... .11 .25 .21 .24 .16
Expenses.................... (.06) (.10) (.08) (.10) (.06)
------ ------- ------- ------- ------
Net investment income........ .05 .15 .13 .14 .10
Net realized and unrealized
gain (loss) on securities... .254 1.458 (.277) .6155 .337
------ ------- ------- ------- ------
Total from investment
operations.................. .304 1.608 (.147) .7555 .437
------ ------- ------- ------- ------
LESS DISTRIBUTIONS FROM (see
Note 1F)
Net investment income....... (.057) (.148) (.13) (.128) (.117)
Excess of book-basis net in-
vestment income............ -- -- (.0155) -- --
Net realized gain on securi-
ties....................... (.057) (.32) (.0975) (.2275) --
------ ------- ------- ------- ------
Total distributions.......... (.114) (.468) (.243) (.3555) (.117)
------ ------- ------- ------- ------
Net asset value, end of
period...................... $ 6.49 $ 6.30 $ 5.16 $ 5.55 $ 5.15
------ ------- ------- ------- ------
TOTAL RETURN (/3/)........... 4.86% 31.51% (2.70%) 14.94% 9.17%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions).................. $521.1 $ 408.9 $ 242.0 $ 115.4 $ 13.3
Average net assets
(millions).................. $469.4 $ 312.6 $ 192.9 $ 56.2 $ 4.4
Ratios to average net assets
(annualized)(/4/)
Expenses.................... 1.72% 1.75% 1.82% 1.89% 1.87%
Expenses, without expense
reimbursement.............. 1.72% -- -- -- --
Net investment income....... 1.70% 2.62% 2.82% 2.45% 3.06%
Net investment income,
without expense
reimbursement.............. 1.70% -- -- -- --
Portfolio turnover rate...... 52% 92% 92% 101% 74%
Average commission rate per
equity stock traded.......... $0.047 -- -- -- --
</TABLE>
(1)Commencement of offering of sales.
(2)Based on average month-end shares outstanding.
(3) Total return for a period of less than one year is not annualized. Total
return does not consider the effect of sales charges.
(4)See Note 4.
See Notes to Financial Statements
D-12
<PAGE> 250
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated. (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------
Six July 6,
Months Year Ended 1993(/1/)
Ended December 31 through
June 30, ---------------- Dec 31,
1996 1995 1994 1993(/2/)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.... $ 6.30 $ 5.16 $ 5.55 $ 5.37
------ ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Investment income...................... .11 .25 .23 .11
Expenses............................... (.06) (.10) (.09) (.05)
------ ------- ------- ------
Net investment income................... .05 .15 .14 .06
Net realized and unrealized gain (loss)
on securities.......................... .254 1.458 (.287) .379
------ ------- ------- ------
Total from investment operations........ .304 1.608 (.147) .439
------ ------- ------- ------
LESS DISTRIBUTIONS FROM (see Note 1F)
Net investment income.................. (.057) (.148) (.14) (.064)
Excess of book-basis net investment in-
come.................................. -- -- (.0055) --
Net realized gain on securities........ (.057) (.32) (.0975) (.195)
------ ------- ------- ------
Total distributions..................... (.114) (.468) (.243) (.259)
------ ------- ------- ------
Net asset value, end of period.......... $ 6.49 $ 6.30 $ 5.16 $ 5.55
------ ------- ------- ------
TOTAL RETURN (/3/)...................... 4.86% 31.51% (2.70%) 8.27%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).... $ 47.1 $ 38.3 $ 26.9 $ 10.0
Average net assets (millions)........... $ 42.9 $ 31.9 $ 21.8 $ 3.4
Ratios to average net assets
(annualized)(/4/)
Expenses............................... 1.72% 1.76% 1.82% 1.98%
Expenses, without expense
reimbursement......................... 1.72% -- -- --
Net investment income.................. 1.70% 2.63% 2.83% 2.27%
Net investment income, without expense
reimbursement......................... 1.70% -- -- --
Portfolio turnover rate................. 52% 92% 92% 101%
Average commission rate per equity stock
traded.................................. $0.047 -- -- --
</TABLE>
(1)Commencement of offering of sales.
(2)Based on average month-end shares outstanding.
(3) Total return for a period of less than one year is not annualized. Total
return does not consider the effect of sales charges.
(4)See Note 4.
See Notes to Financial Statements
D-13
<PAGE> 251
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES Van Kampen American Capital Equity
Income Fund (the "Fund") is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end man- agement investment company.
The Fund seeking as its primary objective, the highest possible income
consistent with safety of principal by investing pri- marily in income
producing equity and debt securities issued by a wide range of companies in
many different industries.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The prepa-
ration of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported. Actual amounts may differ from the estimates.
A. INVESTMENT VALUATIONS-Securities, listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities for which the last sale price is not available are valued at the mean
between the last reported bid and asked price.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
B. FUTURES AND OPTIONS CONTRACTS-Transactions in futures and options contracts
are utilized in strategies to manage the market risk of the Fund's investments.
The purchase of a futures contract or call option (or the writing of a put op-
tion) increases the impact on net asset value of changes in the market price of
investments. There is a risk that the market movement of such instruments may
not be in the direction forecasted. Note 3-Investment Activity contains addi-
tional information.
Upon entering into futures contracts, the Fund maintains, in a segregated ac-
count with its custodian, securities with a value equal to its obligation under
the futures contracts. A portion of these funds is held as collateral in an ac-
count in the name of the broker, the Fund's agent in acquiring the futures po-
sition. During the period the futures contract is open, changes in the value of
the contract ("variation margin") are recognized by marking the contract to
market on a daily basis. As unrealized gains or losses are incurred, variation
margin payments are received from or made to the broker. Upon the closing or
cash settlement of a contract, gains or losses are realized. The cost of secu-
rities acquired through delivery under a contract is adjusted by the unrealized
gain or loss on the contract.
D-14
<PAGE> 252
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
Call and Put Options--The Fund may write covered call options and collater-
alized put options. Options written on futures contracts require initial mar-
gin deposits. Options purchased are recorded as investments; options written
(sold) are accounted for as liabilities. When an option expires, the premium
(original option value) is realized as a gain if the option was written or re-
alized as a loss if the option was purchased. When the exercise of an option
results in a cash settlement, the difference between the premium and the set-
tlement proceeds is realized as a gain or loss. When securities are acquired or
delivered upon exercise of an option, the acquisition cost or sale proceeds are
adjusted by the amount of the premium. When an option is closed, the dif-
ference between the premium and the cost to close the position is realized as a
gain or loss.
C. REPURCHASE AGREEMENTS-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 in-
vest independently in repurchase agreements, or transfer uninvested cash bal-
ances into a pooled cash account along with other investment companies advised
by Van Kampen American Capital Asset Management, Inc. (the "Adviser"), the
daily aggregate of which is invested in repurchase agreements. Repurchase
agreements are collateralized by the underlying debt securities. 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 re-
quired to maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.
D. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized gains on investments to its shareholders.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily.
F. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
D-15
<PAGE> 253
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
G. DEBT DISCOUNT AND PREMIUM-The Fund accounts for discounts and premiums on
the same basis as is used for federal income tax reporting. Accordingly, orig-
inal issue debt discounts are amortized over the life of the security. Premi-
ums on debt securities are not amortized. Market discounts are recognized at
the time of sale as realized gains for book purposes and ordinary income for
tax purposes.
NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as the investment manager of the Fund. Management fees are
paid monthly, based on the average daily net assets of the Fund at an annual
rate of .50% of the first $150 million, .45% of the next $100 million, .40% of
the next $100 million, and .35% of the amount in excess of $350 million.
Accounting services include the salaries and overhead expenses of the Fund's
Chief Accounting Officer and the personnel operating under his direction.
Charges are allocated among investment companies advised by the Adviser. For
the period, these charges included $5,589 as the Fund's share of the employee
costs attributable to the Fund's accounting officers. A portion of the ac-
counting services expense was paid to the Adviser in reimbursement of person-
nel, facilities and equipment costs attributable to the provision of accounting
services to the Fund. The services provided by the Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period, the fees for these services aggregated $880,763.
The Fund was advised that Van Kampen American Capital Distributors, Inc.
(the "Distributor"), an affiliate of the Adviser, received $4,642,358, as its
portion of the commissions charged on sales of Fund shares during the period.
Under the Distribution Plans, each class of shares pays up to .25% per annum
of its average net assets to reimburse the Distributor for expenses and serv-
ice fees incurred. The Class B and C shares pay an additional fee up to .75%
per annum of their average daily net assets to reimburse the Distributor for
its distribution expenses. Actual distribution expenses incurred by the Dis-
tributor for Class B and C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At the end of the period, the unreimbursed expenses
incurred by the Distributor under the Class B and C plans aggregated approxi-
mately $15.1 million and $137,000, respectively, and may be carried forward and
reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.
D-16
<PAGE> 254
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
Certain officers and trustees of the Fund are officers and trustees of the
Adviser, the Distributor, and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $549,900,788 and $418,136,738,
respectively.
For federal income tax purposes, the identified cost of investments owned at
the end of the period was $865,559,814. Net unrealized appreciation of invest-
ments aggregated $106,051,202, gross unrealized appreciation of investments
aggregated $119,024,801, and gross unrealized depreciation of investments ag-
gregated $12,973,599.
At the end of the period, the Fund held the following long Futures contracts
expiring in September 1996 and Call options written:
FUTURES CONTRACTS
<TABLE>
<CAPTION>
MARKET UNREALIZED
CONTRACTS SECURITY VALUE APPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C>
122 S & P 500................................. $41,284,800 $303,775
30 Simex Nikkei 225 (Japan).................. 3,087,250 72,054
----------- --------
$44,372,050 $375,829
----------- --------
</TABLE>
CALL OPTIONS WRITTEN
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
- --------------------------------------------------------------------------------
<S> <C> <C>
Beginning balance............................................ 0 $ 0
Written...................................................... 3,700 9,139
----- ------
Ending balance............................................... 3,700 $9,139
----- ------
</TABLE>
<TABLE>
<CAPTION>
MARKET UNREALIZED
CONTRACTS SECURITY VALUE APPRECIATION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
3,700 Tellabs Inc. (expiring July 1996/exercise price
$70)........................................... $9,021 $118
------ ----
</TABLE>
NOTE 4--TRUSTEE COMPENSATION
Fund trustees who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,579 plus a fee of $90 per day for Board and Com-
mittee meetings attended. During the period, such fees aggregated $14,788.
D-17
<PAGE> 255
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
The Fund has a deferred compensation plan and a defined benefits retirement
plan for its trustees not affiliated with the Adviser. These plans are not
funded, and obligations under the plans will be paid solely out of the Fund's
general accounts. The Fund will not reserve or set aside funds for the payment
of its obligations under the plans by any form of trust or escrow.
Under the deferred compensation plan, trustees may elect to defer all or a
portion of their compensation to a later date. Each trustee covered under the
plan elects to earn on the deferred balances an amount equal to the total re-
turn of the Fund or equal to the income earned by the Fund on its short-term
investments.
Under the retirement plan which became effective in January, 1996, benefits
which are based on years of service will be received by the trustee for a ten
year period. The maximum annual benefit for each trustee is $2,500. Retirement
plan expenses for the period aggregated $7,500. During the calendar year 1996,
the Adviser has agreed to reimburse the Fund for these plan expenses.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(Class A) or at the time of redemption on a contingent deferred basis (Class B
and C). All classes of shares have the same rights, except that Class B and C
shares bear the cost of distribution fees and certain other class specific ex-
penses. Realized and unrealized gains or losses, investment income and ex-
penses (other than class specific expenses) are allocated to each class of
shares based upon the relative proportion of net assets of each class. Class B
and C shares automatically convert to Class A shares six years and ten years
after purchase, respectively, subject to certain conditions.
D-18
<PAGE> 256
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
The Fund has an unlimited number of shares of $.01 par value beneficial in-
terest authorized. Transactions in shares of beneficial interest were as fol-
lows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A........................................ 12,183,094 16,719,414
Class B........................................ 19,096,253 21,177,056
Class C........................................ 1,864,644 2,124,439
----------- -----------
33,143,991 40,020,909
----------- -----------
Shares issued for distributions reinvested
Class A........................................ 1,067,713 3,676,431
Class B........................................ 1,194,367 4,062,779
Class C........................................ 94,686 336,096
----------- -----------
2,356,766 8,075,306
----------- -----------
Shares redeemed
Class A........................................ (6,532,220) (11,541,742)
Class B........................................ (4,938,471) (7,228,073)
Class C........................................ (775,117) (1,610,373)
----------- -----------
(12,245,808) (20,380,188)
----------- -----------
Increase in shares outstanding.................. 23,254,949 27,716,027
----------- -----------
</TABLE>
D-19
<PAGE> 257
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, the decision by the
Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
The Registrant has purchase insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately that he or
she is entitled to the indemnification and only if the following conditions are
met: (1) the trustee or officer provides security for the undertaking; (2) the
Registrant is insured against losses arising from lawful advances; or (3) a
majority of a quorum of the Registrant's disinterested, non-party trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that a recipient of the advance ultimately
will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by the trustee, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<C> <C> <S> <C>
(1) -- (a) First Amended and Restated Agreement and Declaration of Trust(72)
-- (b) Certificate of Amendment(72)
-- (c) Certificate of Designation for
Van Kampen American Capital Equity Income Fund(72)
(2) -- Amended and Restated Bylaws(72)
(4) -- Form of Agreement and Plan of Reorganization for Van Kampen American Capital Equity
Income Fund and the Van Kampen American Capital Equity Trust, on behalf of the Van
Kampen American Capital Balanced Fund+
(5) -- Specimen Stock Certificate for:
-- (a) Class A Shares+
</TABLE>
C-1
<PAGE> 258
<TABLE>
<S> <C>
-- (b) Class B Shares+
-- (c) Class C Shares+
(6) -- Investment Advisory Agreement+
(7) -- (a) Distribution and Service Agreement+
-- (b) Dealer Agreement+
-- (c) Broker Fully Disclosed Clearing Agreement+
-- (d) Bank Fully Disclosed Clearing Agreement+
(9) -- (a) Custodian Agreement(a)
-- (b) Transfer Agency and Service Agreement(72)
(10) -- (a) Plan of Distribution pursuant to 12b-1+
-- (b) Service Plan+
(11) -- Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) relating to
Van Kampen American Capital Equity Income Fund++
(12) -- Form of Tax Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois) relating to
the Reorganization++
(14) -- (a) Consent of Price Waterhouse LLP relating to
Van Kampen American Capital Equity Income Fund+
-- (b) Consent of KPMG Peat Marwick LLP relating to
Van Kampen American Capital Balanced Fund+
(16) -- Power of Attorney+
(17) -- (a) Copy of 24f-2 Election of Registrant+
-- (b) Form of proxy card for Van Kampen American Capital Balanced Fund+
-- (c) Prospectus of Van Kampen American Capital Balanced Fund dated October 28, 1996+
</TABLE>
- ---------------
+ Filed herewith.
++ To be filed by amendment.
(a) Incorporated herein by reference to Post-Effective Amendment No. 2 to the
Registration Statement on Form N-1A of Van Kampen American Capital Global
Managed Assets Fund, File No. 33-74024, filed May 6, 1994.
(72) Incorporated herein by reference to Post-Effective Amendment No. 72 to
Registrant's Registration Statement on Form N1-A, File No. 2-15957, filed
April 19, 1996.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the registrant shall file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.
C-2
<PAGE> 259
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED ON BEHALF OF THE REGISTRANT IN THE CITY OF OAKBROOK TERRACE AND
STATE OF ILLINOIS, ON THE 20TH DAY OF DECEMBER, 1996.
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
By /s/ RONALD A. NYBERG
------------------------------------
Ronald A. Nyberg
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED, ON DECEMBER 20, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ----------------------------------------------
<C> <S>
Principal Executive Officer:
/s/ DENNIS J. MCDONNELL* President and Trustee
- ---------------------------------------------
Dennis J. McDonnell
Principal Financial Officer:
/s/ EDWARD C. WOOD III* Vice President and Chief Financial Officer
- ---------------------------------------------
Edward C. Wood III
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- ---------------------------------------------
J. Miles Branagan
/s/ LINDA HUTTON HEAGY* Trustee
- ---------------------------------------------
Linda Hutton Heagy
/s/ ROGER HILSMAN* Trustee
- ---------------------------------------------
Roger Hilsman
/s/ R. CRAIG KENNEDY* Trustee
- ---------------------------------------------
R. Craig Kennedy
/s/ DONALD C. MILLER* Trustee
- ---------------------------------------------
Donald C. Miller
/s/ JACK E. NELSON* Trustee
- ---------------------------------------------
Jack E. Nelson
/s/ JEROME L. ROBINSON* Trustee
- ---------------------------------------------
Jerome L. Robinson
/s/ FERNANDO SISTO* Trustee
- ---------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- ---------------------------------------------
Wayne W. Whalen
/s/ WILLIAM S. WOODSIDE* Trustee
- ---------------------------------------------
William S. Woodside
- ------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney filed herewith.
/s/ RONALD A. NYBERG* December 20, 1996
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
C-3
<PAGE> 260
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
<TABLE>
<CAPTION>
EXHIBIT
- -------
<S> <C>
(4) -- Form of Agreement and Plan of Reorganization for Van Kampen American Capital Equity
Income Fund and the Van Kampen American Capital Equity Trust, on behalf of the Van
Kampen American Capital Balanced Fund
(5) -- Specimen Stock Certificate for:
-- (a) Class A Shares
-- (b) Class B Shares
-- (c) Class C Shares
(6) -- Investment Advisory Agreement
(7) -- (a) Distribution and Service Agreement
-- (b) Dealer Agreement
-- (c) Broker Fully Disclosed Clearing Agreement
-- (d) Bank Fully Disclosed Clearing Agreement
(10) -- (a) Plan of Distribution pursuant to 12b-1
-- (b) Service Plan
(14) -- (a) Consent of Price Waterhouse LLP relating to
Van Kampen American Capital Equity Income Fund
-- (b) Consent of KPMG Peat Marwick LLP relating to
Van Kampen American Capital Balanced Fund
(16) -- Power of Attorney
(17) -- (a) Copy of 24f-2 Election of Registrant
-- (b) Form of proxy card for Van Kampen American Capital Balanced Tax Free Income
Fund
</TABLE>
<PAGE> 1
EXHIBIT 4
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 1996, by and between Van Kampen American Capital Equity Income Fund, a
business trust formed under the laws of the State of Delaware (the "Equity
Income Fund") and Van Kampen American Capital Equity Trust, a business trust
formed under the laws of the State of Delaware (the "Equity Trust") on behalf of
its series, Van Kampen American Capital Balanced Fund (the "Balanced Fund").
WITNESSETH:
WHEREAS, the Board of Trustees of each of the Equity Trust on behalf of the
Balanced Fund and the Equity Income Fund have determined that entering into this
Agreement for the Equity Income Fund to acquire the assets and liabilities of
the Balanced Fund is in the best interests of the shareholders of each
respective fund; and
WHEREAS, the parties intend that this transaction qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTLON.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set forth
in Sections 7 and 8 hereof, the Balanced Fund will convey, transfer and deliver
to the Equity Income Fund at the closing, provided for in Section 2 hereof, all
of the existing assets of the Balanced Fund (including accrued interest to the
Closing Date) acceptable to the Equity Income Fund as more fully set forth on
Schedule 1 hereto, and as amended from time to time prior to the Closing Date
(as defined below), free and clear of all liens, encumbrances and claims
whatsoever (the assets so transferred collectively being referred to as the
"Assets").
B. CONSIDERATION. In consideration thereof, the Equity Income Fund agrees that
on the Closing Date it will (i) deliver to the Balanced Fund, full and
fractional Class A, Class B and Class C Shares of beneficial interest of the
Equity Income Fund having net asset values per share in an amount equal to the
aggregate dollar value of the Assets net of any liabilities of the Balanced Fund
described in Section 3E hereof (the "Liabilities") determined pursuant to
Section 3A of this Agreement (collectively, the "Equity Income Fund Shares") and
(ii) assume all of the Balanced Fund's Liabilities. The calculation of full and
fractional Class A, Class B and Class C Shares of beneficial interest of the
Equity Income Fund to be
1
<PAGE> 2
exchanged shall be carried out to no less than two (2) decimal places. All
Equity Income Fund Shares delivered to the Balanced Fund in exchange for such
Assets shall be delivered at net asset value without sales load, commission or
other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days after
the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the Balanced Fund at which this
Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the Equity Income Fund shall deliver to the Balanced Fund
the Equity Income Fund Shares in the amount determined pursuant to Section 1B
hereof and the Balanced Fund thereafter shall, in order to effect the
distribution of such shares to the Balanced Fund stockholders, instruct the
Equity Income Fund to register the pro rata interest in the Equity Income Fund
Shares (in full and fractional shares) of each of the holders of record of
shares of the Balanced Fund in accordance with their holdings of either Class A,
Class B or Class C Shares and shall provide as part of such instruction a
complete and updated list of such holders (including addresses and taxpayer
identification numbers), and the Equity Income Fund agrees promptly to comply
with said instruction. The Equity Income Fund shall have no obligation to
inquire as to the validity, propriety or correctness of such instruction, but
shall assume that such instruction is valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the Balanced Fund to
be transferred and assumed, respectively, by the Equity Income Fund shall be
computed as of the Closing Date, in the manner set forth in the most recent
Prospectus and Statement of Additional Information of the Equity Income Fund
(collectively, the "Equity Income Fund Prospectus"), copies of which have been
delivered to the Balanced Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street Bank
and Trust Company, 225 Franklin Street, Post Office Box 1713, Boston,
Massachusetts 02105-1713, as custodian for the Equity Income Fund (the
"Custodian") for the benefit of the Equity Income Fund, duly endorsed in proper
form for transfer in such condition as to constitute a good delivery thereof,
free and clear of all liens, encumbrances and claims whatsoever, in accordance
with the custom of brokers, and shall be accompanied by all necessary state
stock transfer stamps, the cost of which shall be borne by the Van Kampen
American Capital Investment Advisory Corp. (the "Balanced Adviser").
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<PAGE> 3
C. FAILURE TO DELIVER SECURITIES. If the Balanced Fund is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the Balanced
Fund's securities for the reason that any of such securities purchased by the
Equity Income Fund have not yet been delivered to it by the Balanced Fund's
broker or brokers, then, in lieu of such delivery, the Balanced Fund shall
deliver to the Custodian, with respect to said securities, executed copies of an
agreement of assignment and due bills executed on behalf of said broker or
brokers, together with such other documents as may be required by the Equity
Income Fund or Custodian, including brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The Equity Income Fund, in order to assist the
Balanced Fund in the distribution of the Equity Income Fund Shares to the
Balanced Fund shareholders after delivery of the Equity Income Fund Shares to
the Balanced Fund, will establish pursuant to the request of the Balanced Fund
an open account with the Equity Income Fund for each shareholder of the Balanced
Fund and, upon request by the Balanced Fund, shall transfer to such account the
exact number of full and fractional Class A, Class B and Class C shares of the
Equity Income Fund then held by the Balanced Fund specified in the instruction
provided pursuant to Section 2 hereof. The Equity Income Fund is not required to
issue certificates representing Equity Income Fund Shares unless requested to do
so by a shareholder. Upon liquidation or dissolution of the Balanced Fund,
certificates representing shares of beneficial interest stock of the Balanced
Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of Balanced Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated, the Balanced Adviser agrees to pay (i) for the reasonable outside
expenses for the transactions contemplated herein; including, but not by way of
limitation, the preparation of the Equity Income Fund's Registration Statement
on Form N-14 (the "Registration Statement") and the solicitation of the Balanced
Fund shareholder proxies; (ii) the Balanced Fund counsel's reasonable attorney's
fees, which fees shall be payable pursuant to receipt of an itemized statement;
and (iii) the cost of rendering the tax opinion, more fully referenced in
Section 7F below. In the event that the transactions contemplated herein are not
consummated for any reason, then all reasonable outside expenses incurred to the
date of termination of this Agreement shall be borne by the Balanced Adviser.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no event
later than one year after the Closing Date, the Balanced Fund shall voluntarily
dissolve and completely liquidate by taking, in accordance with the Delaware
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<PAGE> 4
Business Trust Law and Federal securities laws, all steps as shall be necessary
and proper to effect a complete liquidation and dissolution of the Balanced
Fund. Immediately after the Closing Date, the stock transfer books relating to
the Balanced Fund shall be closed and no transfer of shares shall thereafter be
made on such books.
4. BALANCED FUND'S REPRESENTATIONS AND WARRANTIES.
The Balanced Fund, hereby represents and warrants to the Equity Income Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Equity Income Fund that:
A. ORGANIZATION. The Equity Trust is a Delaware Business Trust duly formed and
in good standing under the laws of the State of Delaware and is duly authorized
to transact business in the State of Delaware. The Balanced Fund is a separate
series of the Equity Trust duly designated in accordance with the applicable
provisions of the Equity Trust's Declaration of Trust. The Balanced Fund is
qualified to do business in all jurisdictions in which it is required to be so
qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on the Balanced Fund. The Balanced Fund has all
material federal, state and local authorizations necessary to own all of the
properties and assets and to carry on its business as now being conducted,
except authorizations which the failure to so obtain would not have a material
adverse effect on the Balanced Fund.
B. REGISTRATION. The Balanced Fund is registered under the Investment Company
Act of 1940, as amended (the "1940 Act") as an open-end, diversified management
company and such registration has not been revoked or rescinded. The Balanced
Fund is in compliance in all material respects with the 1940 Act and the rules
and regulations thereunder with respect to its activities. All of the
outstanding shares of beneficial interest of the Balanced Fund have been duly
authorized and are validly issued, fully paid and nonassessable and not subject
to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities and
the portfolio of investments and the related statements of operations and
changes in net assets of the Balanced Fund audited as of and for the year ended
June 30, 1996, true and complete copies of which have been heretofore furnished
to the Equity Income Fund, fairly represent the financial condition and the
results of operations of the Balanced Fund as of and for their respective dates
and periods in conformity with generally accepted accounting principles applied
on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The Balanced Fund shall furnish to the Equity Income
Fund within five (5) business days after the Closing Date, an unaudited
statement of assets and liabilities and the portfolio of investments and the
related
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<PAGE> 5
statements of operations and changes in net assets as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results of
the Balanced Fund's operations as of, and for the period ending on, the dates of
such statements in conformity with generally accepted accounting principles
applied on a consistent basis during the period involved and the results of its
operations and changes in financial position for the period then ended; and such
financial statements shall be certified by the Treasurer of the Balanced Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be, no
contingent Liabilities of the Balanced Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the Balanced Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the Balanced Fund which would, if adversely determined, materially
affect the Balanced Fund's financial condition. All Liabilities were incurred by
the Balanced Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The Balanced Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and except as referred to in the
Balanced Fund's Prospectus and Statement of Additional Information, there are no
material agreements outstanding relating to the Balanced Fund to which the
Balanced Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no later
than 30 calendar days after the Closing Date, KPMG Peat Marwick LLP, auditors
for the Balanced Fund, shall furnish the Equity Income Fund with a statement of
the earnings and profits of the Balanced Fund within the meaning of the Code as
of the Closing Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets of the
Balanced Fund at the date hereof are, or on the Closing Date or any subsequent
delivery date will be, "restricted securities" under the Securities Act of 1933,
(the "Securities Act") or the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, or will be securities for which
market quotations are not readily available for purposes of Section 2(a)(41)
under the 1940 Act.
I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and
other material tax returns and reports of the Balanced Fund required by law to
have been filed by such dates shall have been filed, and all Federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Balanced Fund's
knowledge no such return
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<PAGE> 6
is currently under audit and no assessment has been asserted with respect to any
such return.
J. CORPORATE AUTHORITY. The Balanced Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Balanced
Fund's Board of Trustees, and except for obtaining approval of the holders of
the shares of the Balanced Fund, no other corporate acts or proceedings by the
Balanced Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
Balanced Fund and constitutes the legal, valid and binding obligation of
Balanced Fund enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar law affecting creditors' rights generally,
or by general principals of equity (regardless of whether enforcement is sought
in a proceeding at equity or law).
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Balanced Fund does not and will not (i)
violate any provision of the Equity Trust's Declaration of Trust or amendment or
restatement thereof, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Balanced Fund, (iii) result in a violation or breach of, or constitute a
default under any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument or obligation to which the Balanced Fund is subject,
or (iv) result in the creation or imposition or any lien, charge or encumbrance
upon any property or assets of the Balanced Fund. Except as set forth in
Schedule 2 to this Agreement, (i) no consent, approval, authorization, order or
filing with or notice to any court or governmental authority or agency is
required for the consummation by the Balanced Fund of the transactions
contemplated by this Agreement and (ii) no consent of or notice to any third
party or entity is required for the consummation by the Balanced Fund of the
transactions contemplated by this Agreement.
L. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:
(1) any change in the business, results of operations, assets, or financial
condition or the manner of conducting the business of the Balanced Fund, other
than changes in the ordinary course of its business, or any pending or
threatened litigation, which has had or may have a material adverse effect on
such business, results of operations, assets or financial condition;
(2) issued any option to purchase or other right to acquire shares of the
Balanced Fund granted by the Balanced Fund to any person other than subscrip-
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<PAGE> 7
tions to purchase shares at net asset value in accordance with terms in the
Prospectus for the Balanced Fund;
(3) any entering into, amendment or termination of any contract or agreement
by Balanced Fund, except as otherwise contemplated by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of business,
by the Balanced Fund for borrowed money or any commitment to borrow money
entered into by the Balanced Fund;
(5) any amendment of the Equity Trust's Declaration of Trust; or
(6) any grant or imposition of any lien, claim, charge or encumbrance (other
than encumbrances arising in the ordinary course of business with respect to
covered options) upon any asset of the Balanced Fund other than a lien for taxes
not yet due and payable.
M. TITLE. On the Closing Date, the Balanced Fund will have good and marketable
title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable, and full right, power and authority to sell,
assign, transfer and deliver such Assets; upon delivery of such Assets, the
Equity Income Fund will receive good and marketable title to such Assets, free
and clear of all liens, mortgages, pledges, encumbrances, charges, claims and
equities other than a lien for taxes not yet due and payable.
N. PROSPECTUS/PROXY STATEMENT. The Balanced Fund's Prospectus/Proxy Statement,
at the time of delivery by the Balanced Fund to its shareholders in connection
with a special meeting of shareholders to approve this transaction, and the
Balanced Fund's Prospectus and Statement of Additional Information with respect
to the Balanced Fund on the forms incorporated by reference into such
Prospectus/Proxy Statement and as of their respective dates (collectively, the
"Balanced Fund's Prospectus/Proxy Statement"), and at the time the Registration
Statement becomes effective, the Registration Statement insofar as it relates to
the Balanced Fund and at all times subsequent thereto and including the Closing
Date, as amended or as supplemented if it shall have been amended or
supplemented, conform and will conform, in all material respects, to the
applicable requirements of the applicable Federal and state securities laws and
the rules and regulations of the SEC thereunder, and do not and will not include
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, except
that no representations or warranties in this Section 4N apply to statements or
omissions made in reliance upon and in conformity with written information
concerning the Equity Income Fund or their affiliates furnished to the Balanced
Fund by the Equity Income Fund.
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<PAGE> 8
O. BROKERS. There are no brokers or finders fees payable by the Balanced Fund
in connection with the transactions provided for herein.
P. TAX QUALIFICATION. The Balanced Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
Q. FAIR MARKET VALUE. The fair market value on a going concern basis of the
Assets will equal or exceed the Liabilities to be assumed by the Equity Income
Fund and those to which the Assets are subject.
R. BALANCED FUND LIABILITIES. Except as otherwise provided for herein, the
Balanced Fund shall use reasonable efforts, consistent with its ordinary
operating procedures, to repay in full any indebtedness for borrowed money and
have discharged or reserved against all of the Balanced Fund's known debts,
liabilities and obligations including expenses, costs and charges whether
absolute or contingent, accrued or unaccrued.
5. THE EQUITY INCOME FUND'S REPRESENTATIONS AND WARRANTIES.
The Equity Income Fund hereby represents and warrants to the Balanced Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Balanced Fund that:
A. ORGANIZATION. The Equity Income Fund's is a Delaware Business Trust duly
formed and in good standing under the laws of the State of Delaware and is
duly authorized to transact business in the State of Delaware. The Equity
Income Fund is qualified to do business in all jurisdictions in which they are
required to be so qualified, except jurisdictions in which the failure to so
qualify would not have a material adverse effect on the Equity Income Fund.
The Equity Income Fund's has all material federal, state and local
authorizations necessary to own all of the properties and assets of the Equity
Income Fund and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have
a material adverse effect on the Equity Income Fund.
B. REGISTRATION. The Equity Income Fund is registered under the 1940 Act as
an open-end, diversified management company and such registration has not been
revoked or rescinded. The Equity Income Fund's is in compliance in all
material respects with the 1940 Act and the rules and regulations thereunder.
All of the outstanding shares of beneficial interest of the Equity Income Fund
have been duly authorized and are validly issued, fully paid and
non-assessable and not subject to pre-emptive dissenters rights.
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<PAGE> 9
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities and
the portfolio of investments and the related statements of operations and
changes in net assets of the Equity Income Fund audited as of and for the year
ended December 31, 1995, true and complete copies of which have been
heretofore furnished to the Balanced Fund fairly represent the financial
condition and the results of operations of the Equity Income Fund as of and
for their respective dates and periods in conformity with generally accepted
accounting principles applied on a consistent basis during the periods
involved.
D. FINANCIAL STATEMENTS. The Equity Income Fund shall furnish to the
Balanced Fund (i) an unaudited statement of assets and liabilities and the
portfolio of investments and the related statements of operations and changes
in net assets of the Equity Income Fund for the period ended June 30, 1996,
and (ii) within five (5) business days after the Closing Date, an unaudited
statement of assets and liabilities and the portfolio of investments and the
related statements of operations and changes in net assets as of and for the
interim period ending on the Closing Date; such financial statements will
represent fairly the financial position and portfolio of investments of the
Equity Income Fund and the results of its operations as of, and for the period
ending on, the dates of such statements in conformity with generally accepted
accounting principles applied on a consistent basis during the period involved
and fairly present the financial position of the Equity Income Fund as at the
dates thereof and the results of its operations and changes in financial
position for the periods then ended; and such financial statements shall be
certified by the Treasurer of the Equity Income Fund as complying with the
requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the Equity
Income Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the Equity Income Fund's
financial condition, and there are no legal, administrative, or other
proceedings pending or, to its knowledge, threatened against the Equity Income
Fund which would, if adversely determined, materially affect the Equity Income
Fund's financial condition.
F. MATERIAL AGREEMENTS. The Equity Income Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in
the Equity Income Fund Prospectus, there are no material agreements
outstanding to which the Equity Income Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and
other material tax returns and reports of the Equity Income Fund required by
law to have been filed by such dates shall have been filed, and all Federal
and other taxes shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Equity Income Fund's
knowledge no such
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<PAGE> 10
return is currently under audit and no assessment has been asserted with
respect to any such return.
H. CORPORATE AUTHORITY. The Equity Income Fund has the necessary power under
its Declaration of Trust to enter into this Agreement and to consummate the
transactions contemplated herein. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein
have been duly authorized by the Equity Income Fund's Board of Trustees, no
other corporate acts or proceedings by the Equity Income Fund are necessary to
authorize this Agreement and the transactions contemplated herein. This
Agreement has been duly executed and delivered by the Equity Income Fund and
constitutes a valid and binding obligation of the Equity Income Fund
enforceable in accordance with its terms, except as such enforceability may be
limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Equity Income Fund does not and will not
(i) result in a material violation of any provision of the Declaration of
Trust of the Equity Income Fund, (ii) result in a material violation of any
statute, law, judgment, writ, decree, order, regulation or rule of any court
or governmental authority applicable to the Equity Income Fund or (iii) result
in a material violation or breach of, or constitute a default under, or result
in the creation or imposition or any lien, charge or encumbrance upon any
property or assets of the Equity Income Fund pursuant to any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the Equity Income Fund is subject. Except as set forth
in Schedule 3 to this Agreement, (i) no consent, approval, authorization,
order or filing with notice to any court or governmental authority or agency
is required for the consummation by the Equity Income Fund of the transactions
contemplated by this Agreement and (ii) no consent of or notice to any third
party or entity is required for the consummation by the Equity Income Fund of
the transactions contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Equity Income
Fund which would materially affect its financial condition.
K. SHARES OF THE EQUITY INCOME FUND: REGISTRATION. The Equity Income Fund
Shares to be issued pursuant to Section 1 hereof will be duly registered under
the Securities Act and all applicable state securities laws.
L. SHARES OF THE EQUITY INCOME FUND: AUTHORIZATION. The shares of beneficial
interest of the Equity Income Fund to be issued pursuant to Section 1 hereof
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<PAGE> 11
have been duly authorized and, when issued in accordance with this Agreement,
will be validly issued and fully paid and non-assessable by the Equity Income
Fund and conform in all material respects to the description thereof contained
in the Equity Income Fund's Prospectus furnished to the Balanced Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date, there
shall not have been any change in the business, results of operations, assets
or financial condition or the manner of conducting the business of the Equity
Income Fund, other than changes in the ordinary course of its business, which
has had a material adverse effect on such business, results of operations,
assets or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus
contained therein as of the effective date of the Registration Statement, and
at all times subsequent thereto up to and including the Closing Date, as
amended or as supplemented if they shall have been amended or supplemented,
will conform, in all material respects, to the applicable requirements of the
applicable Federal securities laws and the rules and regulations of the SEC
thereunder, and will not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading, except that no representations or warranties in
this Section 5N apply to statements or omissions made in reliance upon and in
conformity with written information concerning the Equity Trust or the
Balanced Fund furnished to the Equity Income Fund by the Equity Trust or the
Balanced Fund.
O. TAX QUALIFICATION. The Equity Income Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of
its taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Balanced Fund and Equity Income Fund each agrees that (except
as expressly contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Balanced Fund shall operate only in the ordinary
course of business consistent with prior practice. No party shall take any
action that would, or reasonably would be expected to, result in any of its
representations and warranties set forth in this Agreement being or becoming
untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The Balanced Fund and Equity Income Fund
shall file all reports required to be filed by the Balanced Fund and Equity
Income Fund with the SEC between the date of this Agreement and the Closing
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<PAGE> 12
Date and shall deliver to the other party copies of all such reports promptly
after the same are filed. Except where prohibited by applicable statutes and
regulations, each party shall promptly provide the other (or its counsel) with
copies of all other filings made by such party with any state, local or
federal government agency or entity in connection with this Agreement or the
transactions contemplated hereby. Each of the Balanced Fund and the Equity
Income Fund shall use all reasonable efforts to obtain all consents,
approvals, and authorizations required in connection with the consummation of
the transactions contemplated by this Agreement and to make all necessary
filings with the Secretary of State of the State of Delaware.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the Balanced
Fund's Prospectus/Proxy Statement, each party hereto will cooperate with the
other and furnish to the other the information relating to the Balanced Fund
or Equity Income Fund, as the case may be, required by the Securities Act or
the Exchange Act and the rules and regulations thereunder, as the case may be,
to be set forth in the Registration Statement or the Prospectus/Proxy
Statement, as the case may be. The Balanced Fund shall promptly prepare and
file with the SEC the Prospectus/Proxy Statement and the Equity Income Fund
shall promptly prepare and file with the SEC the Registration Statement, in
which the Prospectus/Proxy Statement will be included as a prospectus. In
connection with the Registration Statement, insofar as it relates to the
Balanced Fund and its affiliated persons, the Equity Income Fund shall only
include such information as is approved by the Balanced Fund for use in the
Registration Statement. The Equity Income Fund shall not amend or supplement
any such information regarding the Equity Income Fund and such affiliates
without the prior written consent of the Balanced Fund which consent shall not
be unreasonably withheld or delayed. The Equity Income Fund shall promptly
notify and provide the Balanced Fund with copies of all amendments or
supplements filed with respect to the Registration Statement. The Equity
Income Fund shall use all reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after such filing. The Equity Income Fund shall also take any
action (other than qualifying to do business in any jurisdiction in which it
is now not so qualified) required to be taken under any applicable state
securities laws in connection with the issuance of the Equity Income Fund's
shares of beneficial interest in the transactions contemplated by this
Agreement, and the Balanced Fund shall furnish all information concerning the
Balanced Fund and the holders of the Balanced Fund's shares of beneficial
interest as may be reasonably requested in connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
Balanced Fund shall make available to the Equity Income Fund a copy of each
report, schedule, registration statement and other document (the "Documents")
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<PAGE> 13
filed or received by it during such period pursuant to the requirements of
Federal or state securities laws or Federal or state banking laws (other than
Documents which such party is not permitted to disclose under applicable law
or which are not relevant to the Balanced Fund). During the period prior to
the Closing Date, the Equity Income Fund shall make available to the Balanced
Fund each Document pertaining to the transactions contemplated hereby filed or
received by it during such period pursuant to Federal or state securities laws
or Federal or state banking laws (other than Documents which such party is not
permitted to disclose under applicable law or which are not relevant to the
Equity Income Fund).
E. SHAREHOLDERS MEETING. The Balanced Fund shall call a meeting of the
Balanced Fund shareholders to be held as promptly as practicable for the
purpose of voting upon the approval of this Agreement and the transactions
contemplated herein, and shall furnish a copy of the Prospectus/Proxy
Statement and form of proxy to each shareholder of the Balanced Fund as of the
record date for such meeting of shareholders. The Balanced Fund's Board of
Trustees shall recommend to the Balanced Fund shareholders approval of this
Agreement and the transactions contemplated herein, subject to fiduciary
obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Balanced Fund and Equity Income Fund
covenant and agree to coordinate the respective portfolios of the Balanced
Fund and Equity Income Fund from the date of the Agreement up to and including
the Closing Date in order that at Closing, when the Assets are added to the
Equity Income Fund's portfolio, the resulting portfolio will meet the Equity
Income Fund's investment objective, policies and restrictions, as set forth in
the Equity Income Fund's Prospectus, a copy of which has been delivered to the
Balanced Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the Balanced Fund covenants that
it shall cause to be distributed the Equity Income Fund Shares in the proper
pro rata amount for the benefit of Balanced Fund's shareholders and such that
the Balanced Fund shall not continue to hold amounts of said shares so as to
cause a violation of Section 12(d)(1) of the 1940 Act. The Balanced Fund
covenants further that, pursuant to Section 3G, it shall liquidate and
dissolve as promptly as practicable after the Closing Date. The Balanced Fund
covenants to use all reasonable efforts to cooperate with the Equity Income
Fund and the Equity Income Fund's transfer agent in the distribution of said
shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the Balanced Fund and the Equity Income Fund
represents that no agent, broker, investment banker, financial advisor or
other firm or person is or will be entitled to any broker's or finder's fee or
any other commission or similar fee in connection with any of the transactions
contem-
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<PAGE> 14
plated by this Agreement, and each party shall hold the other harmless from
and against any and all claims, liabilities or obligations with respect to any
such fees, commissions or expenses asserted by any person to be due or payable
in connection with any of the transactions contemplated by this Agreement on
the basis of any act or statement alleged to have been made by such first
party or its affiliate.
I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement the proper officers and trustees of each party to this
Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Balanced Fund and the Equity Income Fund
will consult with each other before issuing any press releases or otherwise
making any public statements with respect to this Agreement or the
transactions contemplated herein and shall not issue any press release or make
any public statement prior to such consultation, except as may be required by
law or the rules of any national securities exchange on which such party's
securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Equity Income Fund nor the Balanced Fund shall
take any action, or cause any action to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to
the Closing Date, the Equity Income Fund and the Balanced Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Skadden, Arps, Slate, Meagher & Flom, counsel to the Balanced Fund, to render
the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date, the
Balanced Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.
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<PAGE> 15
7. CONDITIONS TO OBLIGATIONS OF THE BALANCED FUND.
The obligations of the Balanced Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Balanced Fund, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the outstanding shares of beneficial interest the Balanced Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Equity Income Fund contained herein shall be true in all
material respects as of the Closing Date, and as of the Closing Date there
shall have been no material adverse change in the financial condition, results
of operations, business properties or assets of the Equity Income Fund, and
the Balanced Fund shall have received a certificate of the President or Vice
President of the Equity Income Fund satisfactory in form and substance to the
Balanced Fund so stating. The Equity Income Fund shall have performed and
complied in all material respects with all agreements, obligations and
covenants required by this Agreement to be so performed or complied with by it
on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the transactions contemplated by
this Agreement shall be in effect, nor shall any proceeding by any state,
local or federal government agency or entity asking any of the foregoing be
pending. There shall not have been any action taken or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to the
transactions contemplated by this Agreement, which makes the consummation of
the transactions contemplated by this Agreement illegal or which has a
material adverse effect on business operations of the Equity Income Fund.
F. TAX OPINION. The Balanced Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom, counsel for the Balanced Fund, dated as
of the Closing Date, addressed to the Balanced Fund, that the consummation of
the transactions set forth in this Agreement comply with the requirements of a
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<PAGE> 16
reorganization as described in Section 368(a) of the Code, substantially in
the form attached as Annex A.
G. OPINION OF COUNSEL. The Balanced Fund shall have received the opinion of
Skadden, Arps, Slate, Meagher & Flom, counsel for the Equity Income Fund,
dated as of the Closing Date, addressed to the Balanced Fund substantially in
the form and to the effect that: (i) the Equity Income Fund is duly formed and
in good standing as a business trust under the laws of the State of Delaware;
(ii) the Equity Income Fund is registered as an open-end, diversified
management company under the 1940 Act; (iii) this Agreement and the
reorganization provided for herein and the execution of this Agreement have
been duly authorized and approved by all requisite action of Equity Income
Fund and this Agreement has been duly executed and delivered by the Equity
Income Fund and (assuming the Agreement is a valid and binding obligation of
the other parties thereto) is a valid and binding obligation of the Equity
Income Fund; (iv) neither the execution or delivery by the Equity Income Fund
of this Agreement nor the consummation by the Equity Income Fund of the
transactions contemplated thereby contravene the Equity Income Fund's
Declaration of Trust, or, to the best of their knowledge, violate any
provision of any statute or any published regulation or any judgment or order
disclosed to it by the Equity Income Fund as being applicable to the Equity
Income Fund; (v) to the best of their knowledge based solely on the
certificate of an appropriate officer of the Equity Income Fund attached
hereto, there is no pending or threatened litigation which would have the
effect of prohibiting any material business practice or the acquisition of any
material property or the conduct of any material business of the Equity Income
Fund or might have a material adverse effect on the value of any assets of the
Equity Income Fund; (vi) the Equity Income Fund's Shares have been duly
authorized and upon issuance thereof in accordance with this Agreement will,
subject to certain matters regarding the liability of a shareholder of a
Delaware trust, be validly issued, fully paid and nonassessable; (vii) except
as to financial statements and schedules and other financial and statistical
data included or incorporated by reference therein and subject to usual and
customary qualifications with respect to Rule 10b-5 type opinions, as of the
effective date of the Registration Statement filed pursuant to the Agreement,
the portions thereof pertaining to the Equity Income Fund comply as to form in
all material respects with the requirements of the Securities Act, the
Securities Exchange Act and the 1940 Act and the rules and regulations of the
SEC thereunder and no facts have come to counsel's attention which would cause
them to believe that as of the effectiveness of the portions of the
Registration Statement applicable to Equity Income Fund, the Registration
Statement contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (viii) to the best of their knowledge
and information and subject to the qualifications set forth below,
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<PAGE> 17
the execution and delivery by the Equity Income Fund of the Agreement and the
consummation of the transactions therein contemplated do not require, under
the laws of the States of Delaware or Illinois or the federal laws of the
United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency or
body (except such as have been obtained). Counsel need express no opinion,
however, as to any such consent, approval, authorization, registration,
qualification, order or filing (a) which may be required as a result of the
involvement of other parties to the Agreement in the transactions contemplated
by the Agreement because of their legal or regulatory status or because of any
other facts specifically pertaining to them; (b) the absence of which does not
deprive the Balanced Fund of any material benefit under the Agreement; or (c)
which can be readily obtained without significant delay or expense to the
Balanced Fund, without loss to the Balanced Fund of any material benefit under
the Agreement and without any material adverse effect on the Balanced Fund
during the period such consent, approval, authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
filings under (a) laws which are specifically referred to in this opinion, (b)
laws of the States of Delaware and Illinois and the federal laws of the United
States which, in counsel's experience, are normally applicable to transactions
of the type provided for in the Agreement and (c) court orders and judgments
disclosed to us by the Equity Income Fund in connection with the opinion. In
addition, although counsel need not specifically considered the possible
applicability to the Equity Income Fund of any other laws, orders or
judgments, nothing has come to their attention in connection with their
representation of the Equity Income Fund in this transaction that has caused
them to conclude that any other consent, approval, authorization,
registration, qualification, order or filing is required.
H. OFFICER CERTIFICATES. The Balanced Fund shall have received a certificate
of an authorized officer of the Trust, dated as of the Closing Date, certifying
that the representations and warranties set forth in Section 5 are true and
correct on the Closing Date, together with certified copies of the resolutions
adopted by the Board of Trustees shall be furnished to the Balanced Fund.
8. CONDITIONS TO OBLIGATIONS OF THE EQUITY INCOME FUND.
The obligations of the Equity Income Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Equity Income Fund of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the outstanding shares of beneficial interest of the Balanced
Fund.
17
<PAGE> 18
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Balanced Fund and the Equity Trust contained herein
shall be true in all material respects as of the Closing Date, and as of the
Closing Date there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of the
Balanced Fund since June 30, 1996 and the Equity Income Fund shall have
received a certificate of the Chairman or President of the Balanced Fund
satisfactory in form and substance to the Equity Income Fund so stating. The
Balanced Fund and the Equity Trust shall have performed and complied in all
material respects with all agreements, obligations and covenants required by
this Agreement to be so performed or complied with by them on or prior to the
Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be
any action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by
this Agreement illegal.
F. TAX OPINION. The Equity Income Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom, counsel for the Balanced Fund, dated as
of the Closing Date, addressed to the Equity Income Fund, that the
consummation of the transactions set forth in this Agreement comply with the
requirements of a reorganization as described in Section 368(a) of the Code
substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The Equity Income Fund shall have received the
opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the Balanced
Fund, dated as of the Closing Date, addressed to the Equity Income Fund,
substantially in the form and to the effect that: (i) the Equity Trust is duly
formed and existing as a trust under the laws of the State of Delaware and the
Board of Trustees of the Equity Trust has duly designated the Balanced Fund as
a series of the Equity Trust pursuant to the terms of the Declaration of Trust
of the Equity Trust; (ii) the Balanced Fund is registered as an open-end,
diversified management company under the 1940 Act; (iii) this Agreement and
the reorganization provided for herein and the execution of this Agreement
have been duly authorized by all necessary trust action of the Equity Trust
and the
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<PAGE> 19
Balanced Fund and this Agreement has been duly executed and delivered by the
Equity Trust and the Balanced Fund and (assuming the Agreement is a valid and
binding obligation of the other parties thereto) is a valid and binding
obligation of the Equity Trust and the Balanced Fund (iv) neither the
execution or delivery by the Equity Trust and the Balanced Fund of this
Agreement nor the consummation by the Balanced Fund of the transactions
contemplated thereby contravene the Equity Trust's Declaration of Trust or, to
their knowledge, violate any provision of any statute, or any published
regulation or any judgment or order disclosed to them by the Equity Trust and
the Balanced Fund as being applicable to the Balanced Fund; (v) to their
knowledge based solely on the certificate of an appropriate officer of the
Balanced Fund attached thereto, there is no pending, or threatened litigation
involving the Balanced Fund except as disclosed therein (vi) except as to
financial statements and schedules and other financial and statistical data
included or incorporated by reference therein and subject to usual and
customary qualifications with respect to Rule 10b-5 type opinions as of the
effective date of the Registration Statement filed pursuant to the Agreement,
the portions thereof pertaining to the Equity Trust and the Balanced Fund
comply as to form in all material respects with their requirements of the
Securities Act, the Securities Exchange Act and the 1940 Act and the rules and
regulations of the SEC thereunder and no facts have come to counsel's
attention which cause them to believe that as of the effectiveness of the
portions of the Registration Statement applicable to the Equity Trust or the
Balanced Fund, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (vii)
to their knowledge and subject to the qualifications set forth below, the
execution and delivery by the Equity Trust and the Balanced Fund of the
Agreement and the consummation of the transactions therein contemplated do not
require, under the laws of the States of Delaware or Illinois, or the federal
laws of the United States, the consent, approval, authorization, registration,
qualification or order of, or filing with, any court or governmental agency or
body (except such as have been obtained under the Securities Act, the 1940 Act
or the rules and regulations thereunder.) Counsel need express no opinion,
however, as to any such consent, approval, authorization, registration,
qualification, order or filing (a) which may be required as a result of the
involvement of other parties to the Agreement in the transactions contemplated
by the Agreement because of their legal or regulatory status or because of any
other facts specifically pertaining to them; (b) the absence of which does not
deprive the Equity Income Fund of any material benefit under such agreements;
or (c) which can be readily obtained without significant delay or expense to
the Equity Income Fund, without loss to the Equity Income Fund of any material
benefit under the Agreement and without any material adverse effect on them
during the period such consent, approval authorization, registration,
qualification or order was obtained. The foregoing
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<PAGE> 20
opinion relates only to consents, approvals, authorizations, registrations,
qualifications, orders or filings under (a) laws which are specifically
referred to in the opinion, (b) laws of the States of Delaware and Illinois
and the federal laws of the United States which, in our experience, are
normally applicable to transactions of the type provided for in the Agreement
and (c) court orders and judgments disclosed to them by the Balanced Fund in
connection with the opinion. In addition, although counsel need not
specifically considered the possible applicability to the Equity Trust and the
Balanced Fund of any other laws, orders or judgments, nothing has come to
their attention in connection with their representation of the Equity Trust
and the Balanced Fund in this transaction that has caused them to conclude
that any other consent, approval, authorization, registration, qualification,
order or filing is required.
H. THE ASSETS. Unless waived, the Assets, as set forth in Schedule 1, as
amended, shall consist solely of cash and marketable securities which are in
conformity with the Equity Income Fund's investment objectives, policies and
restrictions as set forth in the Equity Income Fund's Prospectus, a copy of
which has been delivered to the Balanced Fund.
I. SHAREHOLDER LIST. The Balanced Fund shall have delivered to the Equity
Income Fund an updated list of all shareholders of the Balanced Fund, as
reported by the Balanced Fund's transfer agent, as of one (1) business day
prior to the Closing Date with each shareholder's respective holdings in the
Balanced Fund, taxpayer identification numbers, Form W9 and last known
address.
J. OFFICER CERTIFICATES. The Equity Income Fund shall have received a
certificate of an authorized officer of the Balanced Fund, dated as of the
Closing Date, certifying that the representations and warranties set forth in
Section 4 are true and correct on the Closing Date, together with certified
copies of the resolutions adopted by the Board of Trustees and shareholders
shall be furnished to the Equity Income Fund.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by their
respective Boards of Trustees, amend this Agreement at any time before or after
approval thereof by the shareholders of the Balanced Fund; provided, however,
that after receipt of Balanced Fund shareholder approval, no amendment shall be
made by the parties hereto which substantially changes the terms of Sections 1,
2 and 3 hereof without obtaining Balanced Fund's shareholder approval thereof.
(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part
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<PAGE> 21
of either party in exercising any right, power or privilege hereunder shall
operate as a waiver thereof, nor shall any waiver on the part of any party of
any such right, power or privilege, or any single or partial exercise of any
such right, power or privilege, preclude any further exercise thereof or the
exercise of any other such right, power or privilege.
(C) This Agreement may be terminated, and the transactions contemplated herein
may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the Board of Trustees of the Balanced Fund and
the Equity Income Fund;
(ii) by the Balanced Fund, if the Equity Income Fund breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iii) by the Equity Income Fund, if the Balanced Fund breaches in any
material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iv) by either the Balanced Fund or Equity Income Fund, if the Closing has
not occurred on or prior to [December 31, 1996] (provided that the rights to
terminate this Agreement pursuant to this subsection (C)(iv) shall not be
available to any party whose failure to fulfill any of its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur on or before such date);
(v) by the Equity Income Fund in the event that: (a) all the conditions
precedent to the Balanced Fund's obligation to close, as set forth in Section
7 of this Agreement, have been fully satisfied (or can be fully satisfied at
the Closing); (b) the Equity Income Fund gives the Balanced Fund written
assurance of its intent to close irrespective of the satisfaction or
nonsatisfaction of all conditions precedent to the Equity Income Fund's
obligation to close, as set forth in Section 8 of this Agreement; and (c) the
Balanced Fund then fails or refuses to close within the earlier of five (5)
business days or [December 31, 1996]; or
(vi) by the Balanced Fund in the event that: (a) all the conditions
precedent to the Equity Income Fund's obligation to close, as set forth in
Section 8 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the Balanced Fund gives the Equity Income Fund
written assurance of its intent to close irrespective of the satisfaction or
nonsatisfaction of all the conditions precedent to the Balanced Fund's
obligation to close, as set forth in Section 7 of this Agreement; and (c) the
Equity Income Fund then fails or refuses to close within the earlier of five
(5) business days or [December 31, 1996].
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<PAGE> 22
10. REMEDIES.
In the event of termination of this Agreement by either or both of the
Balanced Fund and Equity Income Fund pursuant to Section 9(C), written notice
thereof shall forthwith be given by the terminating party to the other party
hereto, and this Agreement shall therefore terminate and become void and have no
effect, and the transactions contemplated herein and thereby shall be abandoned,
without further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
A. SURVIVAL. The representations and warranties included or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three year period except
that any representation or warranty with respect to taxes shall survive for the
expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the Equity Income Fund's and the Balanced Fund's
right to seek indemnity pursuant to this Agreement shall survive for a period of
ninety (90) days beyond the expiration of the Survival Period of the
representation, warranty, covenant or agreement upon which indemnity is sought.
In no event shall the Equity Income Fund or the Balanced Fund be obligated to
indemnify the other if indemnity is not sought within ninety (90) days of the
expiration of the applicable Survival Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and hold the
other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened, (collectively, the "Losses"): arising out of or related to any claim
of a breach of any representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall be indemnified
hereunder against any Losses arising directly from such Indemnified
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<PAGE> 23
Party's (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv)
reckless disregard of the duties involved in the conduct of such Indemnified
Party's position.
C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best efforts
to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
or thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such notice, Indemnified Party may, at its option,
resist, settle or otherwise compromise, or pay such claim unless it shall have
received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which case
Indemnified Party shall have the right, at no cost or expense to Indemnitor, to
participate in such defense. If Indemnitor does not assume the defense of such
matter, and in any event until Indemnitor states in writing that it will assume
the defense, Indemnitor shall pay all costs of Indemnified Party arising out of
the defense until the defense is assumed; provided, however, that Indemnified
Party shall consult with Indemnitor and obtain Indemnitor's prior written
consent to any payment or settlement of any such claim. Indemnitor shall keep
Indemnified Party fully apprised at all times as to the status of the defense.
If Indemnitor does not assume the defense, Indemnified Party shall keep
Indemnitor apprised at all times as to the status of the defense. Following
indemnification as provided for hereunder, Indemnitor shall be subrogated to all
rights of Indemnified Party with respect to all third parties, firms or
corporations relating to the matter for which indemnification has been made.
12. SURVIVAL.
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes hereunder
if in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid. Notice to the Balanced Fund shall be addressed to the
Balanced Fund c/o Van Kampen American Capital Investment Advisory Corp., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181; Attention: General Counsel, or
at such other address as the Balanced Fund may designate by written notice to
the Equity
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<PAGE> 24
Income Fund. Notice to the Equity Income Fund shall be addressed to the Equity
Income Fund c/o Van Kampen American Capital Asset Management, Inc., One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel, or at such
other address and to the attention of such other person as the Equity Income
Fund may designate by written notice to the Balanced Fund. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns. This Agreement shall not be assigned by
any party without the prior written consent of the other party hereto.
15. BOOKS AND RECORDS.
The Balanced Fund and the Equity Income Fund agree that copies of the books
and records of the Balanced Fund relating to the Assets including, but not
limited to all files, records, written materials; e.g., closing transcripts,
surveillance files and credit reports shall be delivered by the Balanced Fund to
the Equity Income Fund at the Closing Date. In addition to, and without limiting
the foregoing, the Balanced Fund and the Equity Income Fund agree to take such
action as may be necessary in order that the Equity Income Fund shall have
reasonable access to such other books and records as may be reasonably
requested, all for three years after the Closing Date for the three tax years
ending December 31, 1993, December 31, 1994 and December 31, 1995; namely,
general ledger, journal entries, voucher registers; distribution journal;
payroll register, monthly balance owing report; income tax returns; tax
depreciation schedules; and investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written or
oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Balanced Fund
and Equity Income Fund and delivered to each of the parties hereto. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. This Agreement is
for the sole benefit of the parties thereto, and nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. This Agreement shall be governed
by and construed in
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accordance with the laws of the State of Illinois without regard to principles
of conflicts or choice of law.
17. LIMITATION OF LIABILITY.
Copies of the Declarations of Trust of the Equity Income Fund and Equity Trust
are on file with the Secretary of the State of the State of Delaware and notice
is hereby given and the parties hereto acknowledge and agree that this
instrument is executed on behalf of the Trustees of the Equity Income Fund and
the Equity Trust, respectively, as Trustees and not individually and that the
obligations of this instrument are not binding upon any of the Trustees or
shareholders of the Equity Income Fund or Equity Trust individually but binding
only upon the assets and property of the Equity Income Fund or the Equity Trust
the case may be.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND,
a Delaware business trust
By:
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Title:
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Attest:
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Title:
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VAN KAMPEN AMERICAN CAPITAL
EQUITY TRUST,
a Delaware business trust on behalf of
VAN KAMPEN AMERICAN CAPITAL
BALANCED FUND
By:
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Title:
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Attest:
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Title:
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<PAGE> 1
EXHIBIT 5(a)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 92113D102
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Equity Income Fund, transferable
on the books of the Fund by the holder thereof in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate
is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 5(b)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 92113D021
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Equity Income Fund, transferable
on the books of the Fund by the holder thereof in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate
is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
NUMBER CLASS B SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 5(c)
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP 92113D300
_________________
fully paid and nonassessable shares of beneficial interest of the par value of
$0.01 per share of Van Kampen American Capital Equity Income Fund, transferable
on the books of the Fund by the holder thereof in person or by duly authorized
attorney upon surrender of this certificate properly endorsed. This certificate
is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
EQUITY INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
- --------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
- --------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
NUMBER CLASS C SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE SIGNATURE(S) MUST BE GUARANTEED BY ONE OF THE FOLLOWING:
A BANK OR TRUST COMPANY; A BROKER/DEALER; A CREDIT UNION; A NATIONAL SECURITIES
EXCHANGE, REGISTERED SECURITIES ASSOCIATION OR CLEARING AGENCY; A SAVINGS AND
LOAN ASSOCIATION; OR A FEDERAL SAVINGS BANK.
- --------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
- --------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
- --------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 6
INVESTMENT ADVISORY AGREEMENT
AGREEMENT (herein so called) made this 31st day of October, 1996, by and
between VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND, a Delaware business
trust (hereinafter referred to as the "FUND"), and VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC., a Delaware corporation (hereinafter referred to as the
"ADVISER").
The FUND and the ADVISER agree as follows:
(1.) Services Rendered and Expenses Paid by ADVISER
The ADVISER, subject to the control, direction and supervision of the FUND's
Trustees and in conformity with applicable laws, the FUND's Agreement and
Declaration of Trust ("Declaration of Trust"), By-laws, registration statements,
prospectus and stated investment objectives, policies and restrictions, shall:
a. manage the investment and reinvestment of the FUND's assets including, by way
of illustration, the evaluation of pertinent economic, statistical, financial
and other data, determination of the industries and companies to be represented
in the FUND's portfolio, and formulation and implementation of investment
programs;
b. maintain a trading desk and place all orders for the purchase and sale of
portfolio investments for the FUND's account with brokers or dealers selected by
the ADVISER;
c. conduct and manage the day-to-day operations of the FUND including, by way of
illustration, the preparation of registration statements, prospectuses, reports,
proxy solicitation materials and amendments thereto, the furnishing of routine
legal services except for services provided by outside counsel to the FUND
selected by the Trustees, and the supervision of the FUND's Treasurer and the
personnel working under his direction; and
d. furnish to the FUND office space, facilities, equipment and personnel
adequate to provide the services described in paragraphs a., b., and c. above
and pay the compensation of each FUND trustee and FUND officer who is an
affiliated person of the ADVISER, except the compensation of the FUND's
Treasurer and related expenses as provided below.
In performing the services described in paragraph b. above, the ADVISER shall
use its best efforts to obtain for the FUND the most favorable price and
execution available and shall maintain records adequate to demonstrate
compliance with this requirement. Subject to prior authorization by the FUND's
Trustees of appropriate policies and procedures, the ADVISER may, to the extent
authorized by law, cause the FUND to pay a broker or dealer that provides
brokerage and research services to the ADVISER an amount of commission for
effecting a portfolio investment transaction in
<PAGE> 2
excess of the amount of commission another broker or dealer would have charged
for effecting that transaction. In the event of such authorization and to the
extent authorized by law, the ADVISER shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of such action.
Except as otherwise agreed, or as otherwise provided herein, the FUND shall pay,
or arrange for others to pay, all its expenses other than those expressly stated
to be payable by the ADVISER hereunder, which expenses payable by the FUND shall
include (i) interest and taxes; (ii) brokerage commissions and other costs in
connection with the purchase and sale of portfolio investments; (iii)
compensation of its trustees and officers other than those who are affiliated
persons of the ADVISER; (iv) compensation of its Treasurer, compensation of
personnel working under the Treasurer's direction, and expenses of office space,
facilities, and equipment used by the Treasurer and such personnel in the
performance of their normal duties for the FUND which consist of maintenance of
the accounts, books and other documents which constitute the record forming the
basis for the FUND's financial statements, preparation of such financial
statements and other FUND documents and reports of a financial nature required
by federal and state laws, and participation in the production of the FUND's
registration statement, prospectuses, proxy solicitation materials and reports
to shareholders; (v) fees of outside counsel to and of independent accountants
of the FUND selected by the Trustees; (vi) custodian, registrar and shareholder
service agent fees and expenses; (vii) expenses related to the repurchase or
redemption of its shares including expenses related to a program of periodic
repurchases or redemptions; (viii) expenses related to the issuance of its
shares against payment therefor by or on behalf of the subscribers thereto; (ix)
fees and related expenses of registering and qualifying the FUND and its shares
for distribution under state and federal securities laws; (x) expenses of
printing and mailing of registration statements, prospectuses, reports, notices
and proxy solicitation materials of the FUND; (xi) all other expenses incidental
to holding meetings of the FUND's shareholders including proxy solicitations
therefor; (xii) expenses for servicing shareholder accounts; (xiii) insurance
premiums for fidelity coverage and errors and omissions insurance; (xiv) dues
for the FUND's membership in trade associations approved by the Trustees; and
(xv) such nonrecurring expenses as may arise, including those associated with
actions, suits or proceedings to which the FUND is a party and the legal
obligation which the FUND may have to indemnify its officers and trustees with
respect thereto. To the extent that any of the foregoing expenses are allocated
between the FUND and any other party, such allocations shall be pursuant to
methods approved by the Trustees.
(2.) Role of ADVISER
The ADVISER, and any person controlled by or under common control with the
ADVISER, shall be free to render similar services to others and engage in other
activities, so long as the services
2
<PAGE> 3
rendered to the FUND are not impaired.
Except as otherwise required by the Investment Company Act of 1940 (the "1940
Act"), any of the shareholders, trustees, officers and employees of the FUND may
be a shareholder, trustee, director, officer or employee of, or be otherwise
interested in, the ADVISER, and in any person controlled by or under common
control with the ADVISER, and the ADVISER, and any person controlled by or under
common control with the ADVISER, may have an interest in the FUND.
Except as otherwise agreed, in the absence of willful misfeasance, bad faith,
negligence or reckless disregard of obligations or duties hereunder on the part
of the ADVISER, the ADVISER shall not be subject to liability to the FUND, or to
any shareholder of the FUND, for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security.
(3.) Compensation Payable to ADVISER
The FUND shall pay to the ADVISER, as compensation for the services rendered,
facilities furnished and expenses paid by the ADVISER, a monthly fee computed at
the following annual rate(s):
.50% on the first $150 million of the Fund's average daily net assets, .45% on
the next $100 million, .40% on the next $100 million and .35% over $350 million
Average daily net assets shall be determined by taking the average of the net
assets for each business day during a given calendar month calculated in the
manner provided in the FUND's Declaration of Trust. Such fee shall be payable
for each calendar month as soon as practicable after the end of that month.
The fees payable to the ADVISER by the FUND pursuant to this Section 3 shall be
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the ADVISER, or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the FUND, less any direct expenses
incurred by such person, in connection with obtaining such commissions, fees,
brokerage or similar payments. The ADVISER shall use its best efforts to
recapture all available tender offer solicitation fees and exchange offer fees
in connection with the FUND's portfolio transactions and shall advise the
Trustees of any other commissions, fees, brokerage or similar payments which may
be possible for the ADVISER or any other direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. to receive in connection with the FUND's
portfolio transactions or other arrangements which may benefit the FUND.
In the event that the ordinary business expenses of the FUND for any fiscal year
should exceed 1% of average daily net assets, the compensation due the ADVISER
for such fiscal year shall be reduced
3
<PAGE> 4
by the amount of such excess. The ADVISER's compensation shall be so reduced by
a reduction or a refund thereof, at the time such compensation is payable after
the end of each calendar month during such fiscal year of the FUND, and if such
amount should exceed such monthly compensation, the ADVISER shall pay the FUND
an amount sufficient to make up the deficiency, subject to readjustment during
the FUND's fiscal year. For purposes of this paragraph, all ordinary business
expenses of the FUND shall include the investment advisory fee and other
operating expenses paid by the FUND except (i) for interest and taxes; (ii)
brokerage commissions; (iii) as a result of litigation in connection with a suit
involving a claim for recovery by the FUND; (iv) as a result of litigation
involving a defense against a liability asserted against the FUND, provided
that, if the ADVISER made the decision or took the actions which resulted in
such claim, it acted in good faith without negligence or misconduct; (v) any
indemnification paid by the FUND to its officers and trustees and the ADVISER in
accordance with applicable state and federal laws as a result of such
litigation; and (vi) amounts paid to Van Kampen American Capital Distributors,
Inc., the distributor of the FUND's shares, in connection with a distribution
plan adopted by the FUND's Trustees pursuant to Rule 12b-1 under the Investment
Company Act of 1940.
If the ADVISER shall serve for less than the whole of any month, the foregoing
compensation shall be prorated.
(4.) Books and Records
In compliance with the requirements of Rule 31a-3 under the 1940 Act, the
ADVISER hereby agrees that all records which it maintains for the FUND are the
property of the FUND and further agrees to surrender promptly to the FUND any of
such records upon the FUND's request. The ADVISER further agrees to preserve for
the periods prescribed by Rule 31a-2 under the 1940 Act the records required to
be maintained by Rule 31a-1 under the Act.
(5.) Duration of Agreement
This Agreement shall become effective of the date hereof, and shall remain in
full force until May 30, 1997 unless sooner terminated as hereinafter provided.
This Agreement shall continue in force from year to year thereafter, but only so
long as such continuance is approved at least annually by the vote of a majority
of the FUND's Trustees who are not parties to this Agreement or interested
persons of any such parties, cast in person at a meeting called for the purpose
of voting on such approval, and by a vote of a majority of the FUND's Trustees
or a majority of the FUND's outstanding voting securities.
This Agreement shall terminate automatically in the event of its assignment. The
Agreement may be terminated at any time by the FUND's Trustees, by vote of a
majority of the FUND's outstanding voting securities, or by the ADVISER, on 60
days' written notice, or upon such shorter notice as may be mutually agreed
upon. Such termination shall be without payment of any penalty.
4
<PAGE> 5
(6.) Miscellaneous Provisions
For the purposes of this Agreement, the terms "affiliated person,"assignment,"
"interested person," and "majority of the outstanding voting securities" shall
have their respective meanings defined in the 1940 Act and the Rules and
Regulations thereunder, subject, however, to such exemptions as may be granted
to either the ADVISER or the FUND by the Securities and Exchange Commission (the
"Commission"), or such interpretive positions as may be taken by the Commission
or its staff, under the 1940 Act, and the term "brokerage and research services"
shall have the meaning given in the Securities Exchange Act of 1934 and the
Rules and Regulations thereunder.
The execution of this Agreement has been authorized by the FUND's Trustees and
by the sole shareholder. This Agreement is executed on behalf of the Fund or the
Trustees of the FUND as Trustees and not individually and that the obligations
of this Agreement are not binding upon any of the Trustees, officers or
shareholders of the FUND individually but are binding only upon the assets and
property of the FUND. A Certificate of Trust in respect of the Fund is on file
with the Secretary of State of Delaware.
The parties hereto each have caused this Agreement to be signed in duplicate on
its behalf by its duly authorized officer on the above date.
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME
By: /s/ Dennis J. McDonnell
----------------------------
Name: Dennis J. McDonnell
----------------------------
Its: President
----------------------------
VAN KAMPEN AMERICAN CAPITAL ASSET MANAGEMENT, INC.
By: /s/ Peter W. Hegel
----------------------------
Name: Peter W. Hegel
----------------------------
Its: Executive Vice President
----------------------------
5
<PAGE> 1
EXHIBIT 7(a)
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT dated as of October 31, 1996
(the "Agreement") by and between VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
(the "Fund"), and VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware
corporation (the "Distributor").
1. Appointment of Distributor. The Fund appoints the Distributor as a
principal underwriter and exclusive distributor of each class of its shares of
beneficial interest (the "Shares") offered for sale from time to time pursuant
to the then current prospectus of the Fund, subject to different combinations
of front-end sales charges, distribution fees, service fees and contingent
deferred sales charges. Classes of shares, if any, subject to a front-end
sales charge and a distribution and/or service fee are referred to herein as
"FESC Classes" and the Shares of such classes are referred to herein as "FESC
Shares." Classes of shares, if any, subject to a contingent-deferred sales
charge and a distribution and/or a service fee are referred to herein as "CDSC
Classes" and Shares of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge, a
contingent-deferred sales charge and a distribution and/or service fee are
referred to herein as "Combination Classes" and Shares of such class are
referred to herein as "Combination Shares." The Fund reserves the right to
refuse at any time or times to sell Shares hereunder for any reason deemed
adequate by the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares which the
Distributor has the right to purchase under Section 2 hereof, but the
Distributor does not undertake to sell any specific number of Shares.
The Distributor agrees that it will not take any long or short
positions in the Shares, except for long positions in those Shares purchased by
the Distributor in accordance with any systematic sales plan described in the
then current Prospectus of the Fund and except as permitted by Section 2
hereof, and that so far as it can control the situation, it will prevent any of
its trustees, officers or shareholders from taking any long or short positions
in the Shares, except for legitimate investment purposes.
2. Sale of Shares to Distributor. The Fund hereby grants to the
Distributor the exclusive right, except as herein otherwise provided, to
purchase Shares directly from the Fund upon the terms herein set forth. Such
exclusive right hereby granted shall not apply to Shares issued or transferred
or sold at net asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition by the Fund of
all or substantially all of the assets of or the outstanding Shares of any
investment company; (b) in connection with a pro rata distribution directly to
the holders of Fund Shares in the nature of a stock dividend or stock split or
in connection with any other recapitalization approved by the Board of
Trustees; (c) upon the exercise of purchase or subscription rights granted to
the holders of Shares on a pro rata basis; (d) in connection with the automatic
reinvestment of dividends and distributions from the Fund; or (e) in connection
with the issue and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment adviser of the
Fund or any principal underwriter (including the Distributor) of the Fund; to
retirees of the Distributor that purchased shares of any mutual fund
distributed by the Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van Kampen Merritt
Companies, Inc.) (the parent of the Distributor), VK/AC Holding, Inc. (formerly
VKM Holdings, Inc.)(the parent of The Van Kampen Merritt Companies, Inc.) and
to the subsidiaries of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid persons as
permitted by Rule 22d-1 under the Investment Company Act of 1940 (the "1940
Act").
The Distributor shall have the right to buy from the Fund the Shares needed,
but not more than the Shares needed (except for reasonable allowances for
clerical errors, delays and errors of transmission and cancellation of orders)
to fill unconditional orders for Shares received by the Distributor from
dealers, agents and investors during each period when particular net asset
values and public offering prices are in
1
<PAGE> 2
effect as provided in Section 3 hereof; and the price which the Distributor
shall pay for the Shares so purchased shall be the respective net asset
value used in determining the public offering price on which such orders were
based. The Distributor shall notify the Fund at the end of each such period,
or as soon thereafter on that business day as the orders received in such
period have been compiled, of the number of Shares of each class that the
Distributor elects to purchase hereunder.
3. Public Offering Price. The public offering price per Share shall
be determined in accordance with the then current Prospectus of the Fund. In
no event shall the public offering price exceed the net asset value per Share,
plus, with respect to the FESC Shares, a front-end sales charge not in excess
of the applicable maximum sales charge permitted under the Rules of Fair
Practice of the National Association of Securities Dealers, Inc., as in effect
from time to time. The net asset value per share for each class of Shares,
respectively, shall be determined in the manner provided in the Declaration of
Trust and By-Laws of the Trust as then amended, the Certificate of Designation
with respect to the Fund, as amended, and in accordance with the then current
Prospectus of the Fund consistent with the terms and conditions of the
exemptive order with respect to the Fund (Release No. IC-19600) issued by the
Securities and Exchange Commission on July 28, 1993, as it may be amended from
time to time or succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund will cause
immediate notice to be given to the Distributor of each change in net asset
value as soon as it is determined. Discounts to dealers purchasing FESC Shares
from the Distributor for resale and to brokers and other eligible agents making
sales of FESC Shares to investors and compensation payable from the Distributor
to dealers, brokers and other eligible agents making sales of CDSC Shares and
Combination Shares shall be set forth in the selling agreements between the
Distributor and such dealers or agents, respectively, as from time to time
amended, and, if such discounts and compensation are described in the then
current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling Fund
Shares, the Distributor will in all respects duly comply with all state and
federal laws relating to the sale of such securities and with all applicable
rules and regulations of all regulatory bodies, including without limitation
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and all applicable rules and regulations of the Securities and Exchange
Commission under the 1940 Act, and will indemnify and save the Fund harmless
from any damage or expense on account of any unlawful act by the Distributor or
its agents or employees. The Distributor is not, however, to be responsible
for the acts of other dealers or agents, except to the extent that they shall
be acting for the Distributor or under its direction or authority. None of the
Distributor, any dealer, any agent or any other person is authorized by the
Fund to give any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore or hereafter
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "1933 Act") (as any such Registration Statement and
Prospectus may have been or may be amended from time to time), covering the
Shares, and in any supplemental information to any such Prospectus approved by
the Fund in connection with the offer or sale of Shares. None of the
Distributor, any dealer, any broker or any other person is authorized to act as
agent for the Fund in connection with the offering or sale of Shares to the
public or otherwise. All such sales shall be made by the Distributor as
principal for its own account.
In selling Shares to investors, the Distributor will adopt and comply
with certain standards, as set forth in Exhibit III attached hereto as to when
each respective class of Shares may appropriately be sold to particular
investors. The Distributor will require every broker, dealer and other
eligible agent participating in the offering of the Shares to agree to adopt
and comply with such standards as a condition precedent to their participation
in the offering.
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<PAGE> 3
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration of
Shares under the federal securities laws, and the Fund
will exercise its best efforts to obtain said
registration and qualification;
(ii) all expenses in connection with the printing of any
notices of shareholders' meetings, proxy and proxy
statements and enclosures therewith, as well as any
other notice or communication sent to shareholders
in connection with any meeting of the shareholders or
otherwise, any annual, semiannual or other reports or
communications sent to the shareholders, and the
expenses of sending prospectuses relating to the Shares
to existing shareholders;
(iii) all expenses of any federal or state original-issue tax
or transfer tax payable upon the issuance, transfer or
delivery of Shares from the Fund to the Distributor;
and
(iv) the cost of preparing and issuing any Share
certificates which may be issued to represent Shares.
(b) The Distributor will also permit its officers and employees
to serve without compensation as trustees and officers of the Fund if duly
elected to such positions.
(c) The Fund shall reimburse the Distributor for out-of-pocket
costs and expenses actually incurred by it in connection with distribution of
each class of Shares respectively in accordance with the terms of a plan (the
"12b-1 Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940 Act as
such 12b-1 Plan may be in effect from time to time; provided, however, that no
payments shall be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been approved for
each such class by a majority of the Board of Trustees of the Fund and by a
majority of the "Disinterested Trustees" (as such term is defined in such 12b-1
Plan) by vote cast in person at a meeting called for the purpose of voting on
this Agreement. A copy of such 12b-1 Plan as in effect on the date of this
Agreement is attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at any time, as
specified in the Plan. The persons authorized to direct the payment of funds
pursuant to this Agreement and the 12b-1 Plan shall provide to the Fund's Board
of Trustees, and the Trustees shall review, at least quarterly, a written
report with respect to each of the classes of Shares of the amounts so paid and
the purposes for which such expenditures were made for each such class of
Shares.
(d) The Fund shall compensate the Distributor for providing
services to, and the maintenance of, shareholder accounts in the Fund
(including prepaying service fees to eligible brokers, dealers and financial
intermediaries and expenses incurred in connection therewith) and the
Distributor may pay as agent for and on behalf of the Fund a service fee with
respect to each class of Shares to brokers, dealers and financial
intermediaries for the provision of shareholder services and the maintenance of
shareholder accounts in the Fund in the amount with respect to each class of
Shares set forth from time to time in the Fund's prospectus. The Fund shall
compensate the Distributor for such expenses in accordance with the terms of a
service plan (the "Service Plan"), as such Service Plan may be in effect from
time to time; provided, however, that no service fee payments shall be due or
paid to the Distributor hereunder with respect to a class of Shares unless and
until this Agreement shall have been approved for each such class by a majority
of the Board of Trustees of the Fund and by a majority of the Disinterested
Trustees by vote cast in person at a meeting called for the purpose of voting
on this Agreement. A copy of such Service Plan as in effect on the date of
this Agreement is attached as Exhibit II hereto. The Fund reserves the right
to terminate such Service Plan with respect to a class of Shares at any time,
as specified in the Plan. The persons authorized to direct the payment of
funds pursuant to this Agreement and the Service Plan shall provide to the
Fund's Board of Trustees, and the Trustees shall
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<PAGE> 4
review, at least quarterly, a written report with respect to each of the
classes of Shares of the amounts paid as service fees for each such class of
Shares.
6. Redemption of Shares. In connection with the Fund's redemption of
its Shares, the Fund hereby authorizes the Distributor to repurchase, upon the
terms and conditions hereinafter set forth, as the Fund's agent and for the
Fund's account, such Shares as may be offered for sale to the Fund from time to
time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal
and state legislation, any applicable rules of the National Association of
Securities Dealers, Inc., and any applicable rules and regulations of the
Securities and Exchange Commission under the 1940 Act, the Distributor may
accept offers of holders of Shares to resell such Shares to the Fund on such
terms and conditions and at such prices as described and provided for in the
then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times as
the Fund may specify of the number of each class of Shares, respectively,
repurchased for the Fund's account and the time or times of such repurchases,
and the Fund shall notify the Distributor of the prices and, in the case of a
class of CDSC Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of such class.
(c) The Fund shall have the right to suspend or revoke the
foregoing authorization at any time; unless otherwise stated, any such
suspension or revocation shall be effective forthwith upon receipt of notice
thereof by telegraph or by written instrument from any of the Fund's officers.
In the event that the Distributor's authorization is, by the terms of such
notice, suspended for more than twenty-four hours or until further notice, the
authorization given by this Section 6 shall not be revived except by vote of
the Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares made
by the Distributor shall be made only as agent for the Fund's account and
pursuant to the terms and conditions herein set forth.
(e) The Fund agrees to authorize and direct its Custodian to
pay, for the Fund's account, the repurchase price (together with any applicable
contingent deferred sales charge) of any Shares so repurchased for the Fund
against the authorized transfer of book shares from an open account and against
delivery of any other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of the
certificates representing such Shares in proper form for transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for the Fund under
the foregoing authorization and appointment as agent. With respect to any
repurchase of CDSC Shares or Combination Shares, the Distributor shall receive
the deferred sales charge, if any, applicable to the respective class of Shares
that have been held for less than a specified period of time with respect to
such class as set forth from time to time in the Fund's Prospectus. The
Distributor shall receive no other commission or other compensation in respect
of any repurchases of CDSC Shares or Combination Shares for the Fund under the
foregoing authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the terms
of this Agreement are redeemed or repurchased by the Fund or by the Distributor
as agent or are tendered for redemption within seven business days after the
date of the Distributor's confirmation of the original purchase by the
Distributor, the Distributor shall forfeit the amount above the net asset value
received by it in respect of such Shares, provided that the portion, if any, of
such amount re-allowed by the Distributor to dealers or agents shall be
repayable to the Fund only to the extent recovered by the Distributor from the
dealer or agent concerned. The Distributor shall include in agreements with
such dealers and agents a corresponding provision for the forfeiture by them of
their concession with respect to FESC Shares
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<PAGE> 5
purchased by them or their principals and redeemed or repurchased by the Fund
or by the Distributor as agent within seven business days after the date of the
Distributor's confirmation of such initial purchases.
7. Indemnification. The Fund agrees to indemnify and hold harmless
the Distributor and each of its trustees and officers and each person, if any,
who controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, claim, damage,
or expense and reasonable counsel fees incurred in connection therewith),
arising by reason of any person acquiring any Shares, based upon the ground
that the registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to time amended)
included an untrue statement of a material fact or omitted to state a material
fact required to be stated or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading under the 1933 Act or any other statute or the common law. However,
the Fund does not agree to indemnify the Distributor or hold it harmless to the
extent that the statement or omission was made in reliance upon, and in
conformity with, information furnished to the Fund by or on behalf of the
Distributor. In no case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect the Distributor
or any person against any liability to the Fund or its securityholders to which
the Distributor or such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under this
Agreement, or (ii) is the Fund to be liable under its indemnity agreement
contained in this Section with respect to any claim made against the
Distributor or any person indemnified unless the Distributor or any such person
shall have notified the Fund in writing of the claim within a reasonable time
after the summons or other first written notification giving information of the
nature of the claim shall have been served upon the Distributor or any such
person (or after the Distributor or the person shall have received notice of
service on any designated agent). However, failure to notify the Fund of any
claim shall not relieve the Fund from any liability which it may have to the
Distributor or any person against whom such action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. The Fund shall
be entitled to participate at its own expense in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce any claims, but
if the Fund elects to assume the defense, the defense shall be conducted by
counsel chosen by it and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund elects to assume
the defense of any suit and retain counsel, the Distributor, officers or
trustees or controlling person or persons, defendant or defendants in the suit,
shall bear the fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it will reimburse
the Distributor, officers or trustees or controlling person or persons,
defendant or defendants in the suit for the reasonable fees and expenses of any
counsel retained by them. The Fund agrees to notify the Distributor promptly
of the commencement of any litigation or proceedings against it or any of its
officers or directors in connection with the issuance or sale of any of the
Shares.
The Distributor also covenants and agrees that it will indemnify and
hold harmless the Fund and each of its trustees and officers and each person,
if any, who controls the Fund within the meaning of Section 15 of the 1933 Act
against any loss, liability, damage, claim or expense (including the reasonable
cost of investigating or defending any alleged loss, liability, damage, claim
or expense and reasonable counsel fees incurred in connection therewith)
arising by reason of any person acquiring any Shares, based upon the 1933 Act
or any other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the registration
statement, Prospectus, shareholder reports or other information filed or made
public by the Fund (as from time to time amended) included an untrue statement
of a material fact or omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, insofar as the
statement or omission was made in reliance upon, and in conformity with,
information furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person against any
liability to which the Fund or such person would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be liable under its
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<PAGE> 6
indemnity agreement contained in this paragraph with respect to any claim made
against the Fund or any person indemnified unless the Fund or person, as the
case may be, shall have notified the Distributor in writing of the claim within
a reasonable time after the summons or other first written notification giving
information of the nature of the claim shall have been served upon the Fund or
person (or after the Fund or such person shall have received notice of service
on any designated agent). However, failure to notify the Distributor of any
claim shall not relieve the Distributor from any liability which it may have to
the Fund or any person against whom the action is brought otherwise than on
account of its indemnity agreement contained in this paragraph. In the case of
any notice to the Distributor, it shall be entitled to participate, at its own
expense, in the defense, or, if it so elects, to assume the defense, of any
suit brought to enforce the claim, but if the Distributor elects to assume the
defense, the defense shall be conducted by counsel chosen by it and
satisfactory to the Fund, to its officers and trustees and to any controlling
person or persons, defendant or defendants in the suit. In the event that the
Distributor elects to assume the defense of any suit and retain counsel, the
Fund or controlling persons, defendants in the suit, shall bear the fees and
expenses of any additional counsel retained by them. If the Distributor does
not elect to assume the defense of any suit, it will reimburse the Fund,
officers and trustees or controlling person or persons, defendant or defendants
in the suit, for the reasonable fees and expenses of any counsel retained by
them. The Distributor agrees to notify the Fund promptly of the commencement
of any litigation or proceedings against it in connection with the issue and
sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement. This
Agreement shall become effective on the Effective Date and thereafter shall
continue in full force and effect year to year with respect to each class of
Shares so long as such continuance is approved at least annually (i) by the
Board of Trustees of the Fund or by a vote of a majority of the outstanding
voting securities of the respective class of Shares of the Fund, and (ii) by
vote of a majority of the Trustees who are not parties to this Agreement or
interested persons in any such party (the "Independent Trustee") cast in person
at a meeting called for the purpose of voting on such approval, provided,
however, that (a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any penalty either by
vote of a majority of the Disinterested Trustees, or by vote of a majority of
the outstanding voting securities of the respective class of Shares of the
Fund, on written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c) this Agreement
may be terminated by the Distributor on ninety (90) days' written notice to the
Fund. Upon termination of this Agreement with respect to either class of
Shares of the Fund, the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of such
termination, except for any obligation to respond for a breach of this
Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of Shares at
any time by mutual consent of the parties, provided that such consent on the
part of the Fund shall have been approved (i) by the Board of Trustees of the
Fund, or by a vote of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a majority of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such amendment.
For the purpose of this section, the terms "vote of a majority of the
outstanding voting securities", "interested persons" and "assignment" shall
have the meanings defined in the 1940 Act, as amended.
9. Limited Liability of Shareholder. Notwithstanding anything to the
contrary contained in this Agreement, you acknowledge and agree that, as
provided by Section 8.1 of the Agreement and Declaration of Trust of the Trust,
this Agreement is executed by the Trustees of the Trust and/or Officers of the
Fund by them not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of the Trustees,
Officers or Shareholders individually, but bind only the trust estate.
10. Notice. Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed postpaid, to the other party at any
office of such party or at such other address as such party shall have
designated in writing.
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<PAGE> 7
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE
LAW OF THE STATE OF ILLINOIS WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF
LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
By: /s/ Dennis J. McDonnell
--------------------------------
Name: Dennis J. McDonnell
Title: President
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
By: /s/ Ronald A. Nyberg
--------------------------------
Name: Ronald A. Nyberg
Title: Executive Vice President
7
<PAGE> 1
EXHIBIT 7(b)
-------------------------------------------------------
DEALER AGREEMENT
WITH VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
REGARDING VAN KAMPEN AMERICAN CAPITAL
OPEN-END AND CLOSED-END INVESTMENT COMPANIES
-------------------------------------------------------
Ladies and Gentlemen:
As dealer for our own account, we offer to sell to you shares
of any of the Van Kampen American Capital open-end investment companies (the
"Open-End Funds" or, individually, an "Open-End Fund") and Van Kampen American
Capital closed-end investment companies (the "Closed-End Funds" or,
individually, a "Closed-End Fund") distributed by Van Kampen American Capital
Distributors, Inc. ("VKAC") pursuant to the terms and conditions contained
herein. Collectively, the Open-End Funds and Closed-End Funds sometimes are
referred to herein as the "Funds" or, individually, as a "Fund".
VKAC acts as the principal underwriter (as such term is
defined in the Investment Company Act of 1940, as amended) for each Fund with
respect to its offering of one or more classes of shares as described in each
Fund's Prospectus. Pursuant to this Agreement, VKAC offers to sell to you
shares of each Open-End Fund and each Closed-End Fund prior to the Effective
Date (as defined herein) of each Fund's Registration Statement (as defined
herein) (the "Initial Offering Period") and after the Effective Date of each
Fund's Registration Statement (the "Continuous Offering Period") (if any) as
described in each respective Fund's Prospectus.
As used herein unless otherwise indicated, the term
"Prospectus" means the final prospectus and Statement of Additional Information
included in the registration statement for the fund on the effective date and
as from time to time thereafter amended or supplemented. As used herein unless
otherwise indicated, the term "Preliminary Prospectus" means any preliminary
prospectus and any preliminary Statement of Additional Information included at
any time as a part of the registration statement for any Fund prior to the
effective date and which is authorized by VKAC for use in connection with the
offering of shares.
In consideration of the mutual obligations contained herein,
the sufficiency of which is hereby acknowledged by you, the terms of the
Agreement are as follows:
GENERAL TERMS AND CONDITIONS
1. Your acceptance of this Agreement constitutes a
representation that you are a broker-dealer registered with the Securities and
Exchange Commission (the "SEC") and a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") or, in the alternative,
that you are a foreign dealer or bank, not required to be registered as a
broker-dealer with the SEC and not required or eligible for membership in the
NASD. If you are such an NASD member, you agree that in making sales of shares
of the one or more classes of shares of each Fund you will comply with all
applicable rules of the NASD, including without limitation rules pertaining to
the opening, approval, supervision and monitoring of customer accounts, the
NASD's Interpretation with Respect to Free-Riding and Withholding and Sections
8, 24 and 36 of Article III of the NASD's Rules of Fair Practice. If you are
such an unregistered foreign dealer or bank, you agree not to offer or sell, or
to agree to offer or sell, directly or indirectly, except through VKAC, any
shares to any party to whom such shares may not be sold unless you are so
registered and a member of the NASD, and in making sales of such shares you
agree to comply with the NASD's Interpretation with Respect to Free-Riding and
Withholding and Sections 8, 24 and 36 of Article III of the NASD's Rules of
Fair Practice as though you were a member in
1
<PAGE> 2
good standing of the NASD and to comply with Section 25 of such Article III as
it applies to a nonmember broker or dealer in a foreign country. You and we
agree to abide by all other Rules and Regulations of the NASD, including
Section 26 of its Rules of Fair Practice, and all applicable state and Federal
laws, rules and regulations. Your acceptance also constitutes a representation
that you have been duly authorized by proper corporate or partnership action to
enter into this Agreement and to perform your obligations hereunder. You will
not accept any orders from any broker, dealer or financial institution who is
purchasing from you with a view toward distribution unless you have obtained
such person's or entity's written consent to be bound by the terms of this
Agreement.
2. In all sales of shares of the Funds to the public you
shall act as dealer for your own account, and you shall have no authority in
any transaction to act as agent for the Fund or for VKAC.
3. Each Fund has filed with the SEC and the securities
commissions of one or more states a Registration Statement (the "Registration
Statement") on the SEC Form applicable to the respective Fund. The date on
which the Registration Statement is declared effective by the SEC is referred
to herein as the "Effective Date". Prior to the Effective Date of the
Registration Statement with respect to a particular Fund, you expressly
acknowledge and understand that with respect to such Fund:
(a) Shares of such Fund may not be sold, nor may
offers to buy be accepted, (i) in any state prior to the Effective Date of the
Registration Statement with respect thereto or (ii) in any state in which such
offer or sale would be unlawful prior to registration or qualification under
the securities laws of such state.
(b) The Fund's Preliminary Prospectus, together with
any sales material distributed for use in connection with the offering of
shares of such Fund, does not constitute an offer to sell or the solicitation
of an offer to buy shares of such Fund and is subject to completion and
modification by the Prospectus. You agree that you will distribute to the
public only (a) the Preliminary Prospectus, the Prospectus and any amendment or
supplement thereto and (b) sales literature or other documents expressly
authorized for such distribution by VKAC.
(c) In the event that you transmit indications of
interest to VKAC for accumulation prior to the Effective Date, you will be
responsible for confirming such indications of interest with your customers
following the Effective Date. Indications of interest with respect to shares
of a class of a Fund's shares transmitted to VKAC prior to the Effective Date
will be conditioned upon the occurrence of the Effective Date and the
registration or qualification of the respective class of shares in the
respective state.
(d) Indications of interest with respect to shares
of a class of a Fund's shares which are not canceled by you prior to the latter
of the Effective Date and the registration or qualification of the respective
class of the Fund's shares in the respective state, and accepted by VKAC will
be deemed by VKAC to be orders for shares of such class of shares of the Fund.
(e) All indications of interest and orders
transmitted to VKAC are subject to the terms and conditions of the Prospectus
and this Agreement.
4. After the Effective Date, you will not offer shares of a
class of the Fund's shares for sale in any state where they are not qualified
for sale under the "blue sky" laws and regulations of such state or where you
are not qualified to act as a dealer, except for states in which they are
exempt from qualification.
5. In the event that you offer shares of the Fund for sale
outside the United States, you agree to comply with the applicable laws, rules
and regulations of the foreign government having jurisdiction over such sales,
including any regulations of the United States military authorities applicable
to solicitations to military personnel.
2
<PAGE> 3
6. Upon application to VKAC, VKAC will inform you as to the
jurisdictions in which VKAC believes shares of a Fund have been qualified for
sale under the respective securities or "blue sky" laws of such jurisdictions.
VKAC understands and agrees that qualification of any shares of a Fund for sale
in such jurisdictions shall be solely VKAC's responsibility and that you assume
no responsibility or obligation with respect to such eligibility. You
understand and agree that your compliance with the requirements of the
securities or "blue sky" laws in each jurisdiction with respect to your right
to sell the shares in such jurisdiction shall be solely your responsibility.
7. No person is authorized to make any representations
concerning any class of shares of a Fund except those contained in the Fund's
current Preliminary Prospectus or Prospectus, as the case may be. In
purchasing shares from us you shall rely solely on the representations
contained in such Prospectus. VKAC will furnish additional copies of a Fund's
current Prospectus and sales literature issued by VKAC in reasonable quantities
upon request.
8. Orders received from you will be accepted by VKAC only at
the public offering price applicable to each order as specified in the
then-current Fund Prospectus. The minimum dollar purchase of any shares of
each Fund by any person shall be the applicable minimum dollar amount described
in the then-current Fund Prospectus for that class of shares, and no order for
less than such amount will be accepted hereunder. The procedures relating to
the handling of orders shall be subject to instructions that VKAC shall
communicate from time to time to you. All orders are subject to acceptance or
rejection by VKAC in its sole discretion.
9. Payment for Fund shares shall be made on or before the
settlement date specified in the VKAC confirmation at the office of VKAC's
clearing agent, by check payable to the order of the Fund which reserves VKAC's
right to delay issuance or transfer of shares until such check has cleared. If
such payment is not received by VKAC, VKAC reserves the right, without notice,
forthwith either to cancel the sale or, at its option, to sell the shares
ordered back to the Fund, and in either case, VKAC may hold you responsible for
any loss suffered by the Fund. You agree that in transmitting investors'
funds, you will comply with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended.
10. You shall not withhold placing orders with VKAC from your
customers so as to profit yourself as a result of such withholding; e.g., by a
change in the net asset value from that used in determining the public offering
price to your customers.
11. VKAC will not accept from you any conditioned orders for
shares, except at a definite, specified price.
12. You represent that you are familiar with Release No. 4968
under the Securities Act of 1933, as amended, and Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended, as it relates to the distribution
of Preliminary Prospectuses (and not Statements of Additional Information) and
Prospectuses (and not Statements of Additional Information) for each Fund and
agree that you will comply therewith. You agree that if an investor or
potential investor places a request with you to receive a Statement of
Additional Information, you will (i) provide such person with a Statement of
Additional Information without charge and notify the Fund that you have done
so, (ii) notify the Fund of the request so that the Fund can fulfill the
request or (iii) tell such person to request a Statement of Additional
Information by telephoning the Fund at the number set forth on the cover of the
current Prospectus or Preliminary Prospectus. You also agree to keep an
accurate record of your distribution (including dates, number of copies and
persons to whom sent) of copies of any Preliminary Prospectus (and any
Statement of Additional Information) and/or Prospectus (and any Statement of
Additional Information) for each Fund (or any amendment or supplement to
either) and, promptly upon request by VKAC, to bring all subsequent changes to
such Preliminary Prospectus or Prospectus to the attention of anyone to whom
such material shall have been distributed. You further agree to furnish to
persons who receive a confirmation of sale of shares of any Fund a copy of the
Prospectus (and not the Statement of Additional Information) for such Fund
filed pursuant to Rule 497 under the Securities Act of 1933, as amended.
3
<PAGE> 4
13. Unless otherwise indicated in a Fund's Prospectus, stock
certificates for shares of Funds sold to you shall be issued only if
specifically requested.
14. VKAC will have no liability to you, except for lack of
good faith and for obligations expressly assumed by VKAC in this Agreement.
15. All communications to VKAC shall be sent to One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: Mutual Fund Department.
Any notice to you shall be duly given if sent to you at the address specified
by you below or such other address as you may designate to VKAC in writing.
16. Neither this Agreement nor the performance of the
services hereunder shall be considered to create a joint venture or partnership
between VKAC and you.
17. This Agreement shall be construed in accordance with the
laws of the State of Illinois without reference to the choice-of-law principles
thereof.
18. The Fund reserves the right in its discretion and VKAC
reserves the right in its discretion, without notice, to suspend or withdraw
the offering of any shares of a Fund entirely. VKAC reserves the right,
without notice, to amend, modify or cancel the Agreement. The Agreement may
not be assigned by either party without prior written consent of the other
party.
19. This Agreement may be terminated at any time by either
party.
TERMS AND CONDITIONS APPLICABLE ONLY TO OPEN-END FUNDS
20. Each of the Open-End Fund's is subject to an alternative
distribution plan (the "Alternative Distribution Plan") as described in such
Fund's then-current Prospectus pursuant to which the Open-End Fund may sell
multiple classes of its shares with varying combinations of front-end service
charges (each a "FESC"), distributions fees, service fees, contingent deferred
sales charges (each a "CDSC"), exchange features, conversion rights, voting
rights, expenses allocations and investment requirements. As used herein,
classes of shares of a Fund subject to a FESC will be referred to as FESC
Shares, and classes of shares of a Fund subject to a CDSC will be referred to
as CDSC Shares.
21.(a) With respect to any shares of a class of FESC Shares
of an Open-End Fund, the public offering price for such shares shall be the net
asset value per share plus a FESC, expressed as a percentage of the applicable
public offering price, as determined and effective as of the time specified in
the then-current Prospectus of such Open-End Fund. The dealer discount
applicable to any sale of shares of a class of FESC Shares of an Open-End Fund
shall be a percentage of the applicable public offering price for such shares
as provided for in the then-current Prospectus of such Open-End Fund or, if not
so provided, as provided to you from time to time in writing by VKAC.
(b) With respect to any shares of a class of CDSC
Shares of an Open-End Fund, the public offering price for such shares shall be
the net asset value per share as determined and effective as of the time
specified in the then-current Prospectus of such Open-End Fund. The dealer
sales compensation payable by VKAC applicable to any sale of shares of a class
of CDSC Shares of an Open-End Fund shall be the percentage of the applicable
public offering price for such shares as provided for in the then-current
Prospectus of such Open-End Fund or, if not so provided, as provided to you
from time to time in writing by VKAC.
22. Should you wish to participate in the Distribution Plan
with respect to a class of shares adopted by an Open-End Fund pursuant to Rule
12b-1 ("Rule 12b-1 Plan") under the Investment Company Act of 1940, as amended,
or the Service Plan with respect to a class of shares, it is understood that
you must be approved by the Board of Directors of such Open-End Fund and
execute a Distribution Assistance Agreement.
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<PAGE> 5
23. With respect to the Open-End Funds, your acceptance of
this Agreement constitutes a representation that you will adopt policies and
procedures to comply with Rule 18f-3 under the Investment Company Act of 1940,
with respect to when you may appropriately sell the various classes of shares
of the Open-End Funds to investors and that you will sell such shares only in
accordance therewith.
24.(a) You agree to purchase shares of an Open-End Fund only
from VKAC or from your customers. If you purchase shares of an Open-End Fund
from VKAC, you agree that all such purchases shall be made only: (i) to cover
orders already received by you from your customers or (ii) for your own bona
fide investment. If you purchase shares of an Open-End Fund from your
customers, you agree to pay such customers not less than the applicable
repurchase price for such shares as established by the then-current Prospectus
for such Open-End Fund. VKAC in turn agrees that it will not purchase any
shares from an Open-End Fund except for the purpose of covering purchase orders
that it has already received.
(b) With respect to shares of a class of CDSC Shares
of an Open-End Fund purchased from your customers, you additionally agree to
resell such shares only to VKAC as agent for the Fund at the repurchase price
for such shares as established by the then-current Prospectus of such Open-End
Fund. You acknowledge and understand that shares of a class of CDSC Shares of
an Open-End Fund may be subject to a CDSC payable to VKAC as set forth in the
Prospectus for such Open-End Fund in effect at the time of the original
purchase of such shares from the Open-End Fund and that the repurchase price
for such shares that will be paid by VKAC will reflect the imposition of any
applicable CDSC.
25.(a) You shall sell shares of a class of shares of an
Open-End Fund only: (i) to customers at the applicable public offering price
or (ii) to VKAC as agent for the Open-End Fund at the repurchase price in the
then-current Prospectus of such Open-End Fund. In such a sale to VKAC, you may
act either as principal for your own account or as agent for your customer. If
you act as principal for your own account in purchasing shares of a class of
shares of an Open-End Fund for resale to VKAC, you agree to pay your customer
not less than the price that you receive from VKAC. If you act as agent for
your customer in selling shares of a class of shares of an Open-End Fund to
VKAC, you agree not to charge your customer more than a fair commission for
handling the transaction. You acknowledge and understand that CDSC Shares of
an Open-End Fund may be subject to a CDSC payable to VKAC as set forth in the
Prospectus of such Open-End Fund in effect at the time of the original purchase
of such CDSC Shares and that the repurchase price that will be paid by VKAC for
such CDSC Shares will reflect the imposition of any such CDSC.
26. If any shares of a class of FESC Shares of an Open-End
Fund sold to or by you under the terms of this Agreement are repurchased by the
Fund or by VKAC as agent for the Fund or are tendered for redemption within
seven business days after the date of VKAC's confirmation of the original
purchase, it is agreed that you shall forfeit your right to any dealer discount
received by you on such FESC Shares. VKAC will notify you of any such
repurchase or redemption within ten business days from the date on which the
repurchase or redemption order in proper form is delivered to VKAC or to the
Fund, and you shall forthwith refund to VKAC the full dealer discount allowed
to you on such sale. VKAC agrees, in the event of any such repurchase or
redemption, to refund to the Fund its share of any discount allowed to VKAC
and, upon receipt from you of the refund of the discount allowed to you, to pay
such refund forthwith to the Fund.
TERMS AND CONDITIONS APPLICABLE TO CLOSED END-FUNDS
27. No Closed-End Fund will issue fractional shares.
28. VKAC may, in its sole discretion, allocate shares of a
Closed-End Fund among brokers and dealers participating in the Initial Offering
Period or among brokers, dealers and banks in the Continuous Offering Period,
as the case may be, on other than a pro rata basis, which may result in
5
<PAGE> 6
certain brokers, dealers and banks not being allocated the full amount of
shares of such fund sold by them while certain other brokers, dealers and banks
may receive their full allocation.
29. You agree that with respect to orders for shares of a
Closed-End Fund, you will transmit such orders received during the Initial
Offering Period to VKAC within the time period as specified in such Closed-End
Fund's Prospectus (or in the time period as extended by VKAC in writing). You
also agree to transmit any customer order received during the Continuous
Offering Period to VKAC prior to the time that the public offering price for
such Closed-End Fund is next determined after your receipt of such order as set
forth in the Closed-End Fund's Prospectus. There is no assurance that each
Closed-End Fund will engage in a continuous offering of shares.
30. On each order accepted by VKAC for shares of a Closed-End
Fund, you will be entitled to receive a concession paid out of VKAC's own
assets as set forth in the then-current Prospectus of such Closed-End Fund
(exclusive of additional compensation that may be payable pursuant to sales
programs, if any, that may be established from time to time as described in the
Prospectus for such Closed-End Fund, which will be payable only as and to the
extent the requirements of such programs are satisfied). In no event will any
Closed-End Fund reimburse VKAC for any such sales concessions or other
additional compensation or pay any such concession or other additional
compensation or allowance directly to you. VKAC will specify for each
Closed-End Fund a period after the date that the shares of such Closed-End Fund
are listed on the New York Stock Exchange, the American Stock Exchange or
another national securities market system (which period will end no later that
the first dividend payment date with respect to such Closed-End Fund) during
which sales concessions and other additional compensation are subject to
forfeiture as provided in the following sentence (the "Forfeiture Period").
During the Forfeiture Period for any Closed-End Fund, physical delivery of
certificates representing shares will be required to transfer ownership of such
shares. In the event that any shares of a Closed-End Fund sold through an
order received from you in the Initial Offering Period or the Continuous
Offering Period are resold in the open market or otherwise during the
Forfeiture Period, VKAC reserves the right to require you to forfeit any sales
concessions and other additional compensation with respect to such shares. In
the event of a forfeiture, VKAC may withhold any forfeited sales concessions
and other additional compensation that has not yet been paid or from other
amounts yet to be paid to you (whether or not payable with respect to such
shares) and you agree to repay to VKAC, promptly upon demand, any forfeited
sales concessions and other compensation that has been paid. Determinations of
the amounts to be paid to you or by you to VKAC shall be made by VKAC and shall
be conclusive.
31. During the Initial Offering Period and any Continuous
Offering Period for any Closed-End Fund, you agree to supply VKAC, not less
frequently than once a week by Friday, 5:00 p.m. Eastern Time, during such
Closed-End Fund's Initial Offering Period, a list setting forth by state and in
the aggregate all indications of interest and, during any Continuous Offering
Period, all shares sold by you of such Closed-End Fund during such week (or
lesser period of time), and a list setting forth by name and location each
registered representative making said sales and indicating the amount of all
sales per Closed-End Fund to date.
32. You expressly acknowledge and understand that there is no
Rule 12b-1 Plan for the Closed-End Funds.
33. You expressly acknowledge and understand that shares of
the Closed-End Funds will not be repurchased by either the Closed-End Funds
(other than through tender offers from time to time, if any) or by VKAC and
that no secondary market for such shares is expected to develop until the
shares have begun trading on a national exchange or national market system.
You hereby covenant that, until notified by VKAC that the distribution of such
shares has been completed or that the Forfeiture Period has ended, you (a) will
not make a secondary market in any shares of such a Closed-End Fund, (b) will
not purchase or hold shares of such Closed-End Fund in inventory for the
purpose of resale in the open market or to your customers and (c) without
VKAC's consent, will not repurchase shares of such Closed-End Fund in the open
market or from your customers for any account in which you have a beneficial
interest.
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<PAGE> 7
34. Unlike the other Closed-End Funds, the Continuous
Offering period with respect to the Van Kampen American Capital Prime Rate
Income Trust (the "Prime Rate Fund") may continue indefinitely. The offer to
sell shares of the Prime Rate Fund is subject to further terms and conditions
in addition to those set forth above as follows:
(a) You expressly acknowledge and understand that
shares of the Prime Rate Fund will not be repurchased by either the Prime Rate
Fund (other than through tender offers from time to time, if any) or VKAC, and
that no secondary market for the shares of the Prime Rate Fund exists
currently, or is expected to develop. You also expressly acknowledge and agree
that, in the event your customer cancels their order for shares after
confirmation, such shares may not be repurchased, remarketed or otherwise
disposed of by or through VKAC.
(b) You acknowledge and understand that, while the
Board of Trustees of the Prime Rate Fund intends to consider tendering for all
or a portion of the Prime Rate Fund's shares on a quarterly basis, there is no
assurance the Prime Rate Fund will tender for shares at any time or, following
such a tender offer, that shares so tendered will be repurchased by the Prime
Rate Fund. You acknowledge and understand that an early withdrawal charge
payable to VKAC will be imposed on most shares accepted for tender by the Prime
Rate Fund which have been held for less than five years, as set forth in the
Prime Rate Fund's Prospectus. ANY REPRESENTATION AS TO A TENDER OFFER BY THE
PRIME RATE FUND, OTHER THAN THAT WHICH IS SET FORTH IN THE PRIME RATE FUND'S
CURRENT PROSPECTUS IS EXPRESSLY PROHIBITED.
Please accept the foregoing by signing this Dealer Agreement,
keeping a copy for your files and returning the original to us.
Accepted and Agreed to:
(PRINT OR TYPE)
Dated: ________________________________________ By:
Its:
________________________________________
Broker-Dealer Name
________________________________________
Broker-Dealer Taxpayer ID Number
VAN KAMPEN AMERICAN CAPITAL
________________________________________ DISTRIBUTORS, INC.
Address
________________________________________
City, State, Zip
By: ________________________________________
Signature
________________________________________
Name
________________________________________
Title
_________________________________________
Phone
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<PAGE> 8
EXHIBIT A
POLICIES AND PROCEDURES
WITH RESPECT TO SALES UNDER THE
ALTERNATIVE DISTRIBUTION PLAN
As certain Van Kampen American Capital open-end investment
companies (the "funds") offer multiple classes of shares subject to either
front-end sales charges ("FESC Shares") or contingent deferred sales charges
("CDSC Shares"), it is important for an investor not only to choose the Fund
that best suits his or her investment objectives, but also to choose the
alternative distribution method that best suits his or her particular
situation. To assist investors in these decisions, we (the selling firm) are
instituting the following policy.
1. Any purchase order for $1 million or more must be for
Class A Shares.
2. Any purchase order for $100,000 but less than $1
million is subject to approval by [appropriate selling firm supervisor], who
must approve the purchase order ticket for the appropriate class of shares in
light of the relevant facts and circumstances, including:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold
his shares; and
(c) any other relevant circumstances, such as the
availability of purchase price discounts under a Letter of Intent or a Quantity
Discount.
There are instances when one financing method may be more
appropriate than the other. For example, investors who would qualify for a
significant purchase price discount from the maximum sales charge on shares of
a class of FESC Shares that has such purchase price discounts may determine
that payment of such a reduced front-end sales charge is superior to electing
to purchase shares of a class of CDSC Shares with no front-end service charge
but subject to a higher aggregate distribution and service fee. On the other
hand, an investor whose order would not qualify for such purchase price
discounts and intends to remain invested until after the expiration of the
applicable CDSC may wish to defer the sales charge and have all his funds
invested in Class B Shares initially. In addition if such 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, depending on the
amount of his purchase, wish to acquire Class C Shares. However, investors who
intend to hold their shares for a significantly long time may not wish to
continue to bear the ongoing distribution and service expenses of shares of
Class C Shares, irrespective of the fact that a contingent deferred sales
charge would eventually not apply to a redemption of such shares.
[The appropriate selling firm supervisor] must ensure that all
employees receiving investor inquiries about the purchase of shares from funds
subject to Van Kampen American Capital Distributors, Inc.'s alternative
distribution plan advise the investor of the available alternative distribution
methods offered by such funds and the impact of choosing one method over
another. It may be appropriate for [the appropriate selling firm supervisor]
to discuss the purchase with the investor.
This policy is effective immediately with respect to any order
for the purchase of shares from a fund subject to Van Kampen American Capital
Distributors, Inc.'s alternative distribution plan.
Questions relating to this policy should be directed to
[appropriate selling firm supervisor].
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<PAGE> 1
EXHIBIT 7(c)
---------------------------------------------------------
BROKER FULLY DISCLOSED CLEARING AGREEMENT
WITH VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
REGARDING VAN KAMPEN AMERICAN CAPITAL
OPEN-END AND CLOSED-END INVESTMENT COMPANIES
---------------------------------------------------------
Ladies and Gentlemen:
As dealer for our own account, we offer to make available to
you shares of any of the Van Kampen American Capital open-end investment
companies (the "Open-End Funds" or, individually, an "Open-End Fund") and Van
Kampen American Capital closed-end investment companies (the "Closed-End Funds"
or, individually, a "Closed-End Fund") distributed by Van Kampen American
Capital Distributors, Inc. ("VKAC") pursuant to the terms and conditions
contained herein. Collectively, the Open-End Funds and Closed-End Funds
sometimes are referred to herein as the "Funds" or, individually, as a "Fund".
You are a broker-dealer that desires to make available shares of such Funds to
your customers on a fully disclosed basis wherein VKAC would confirm
transactions of your customers in a Fund directly to them.
VKAC acts as the principal underwriter (as such term is
defined in the Investment Company Act of 1940, as amended) for each Fund with
respect to its offering of one or more classes of shares as described in each
Fund's Prospectus. Pursuant to this Agreement, VKAC offers to make available
to you shares of each Open-End Fund and each Closed-End Fund, prior to the
Effective Date (as defined herein) of each Fund's Registration Statement (the
"Initial Offering Period") and after the Effective Date of each Fund's
Registration Statement (as defined herein) (the "Continuous Offering Period")
(if any) as described in each respective Fund's Prospectus.
As used herein unless otherwise indicated, the term
"Prospectus" means the final prospectus and Statement of Additional Information
included in the registration statement for the fund on the effective date and
as from time to time thereafter amended or supplemented. As used herein unless
otherwise indicated, the term "Preliminary Prospectus" means any preliminary
prospectus and any preliminary Statement of Additional Information included at
any time as a part of the registration statement for any Fund prior to the
effective date and that is authorized by VKAC for use in connection with the
offering of shares.
In consideration of the mutual obligations contained herein,
the sufficiency of which is hereby acknowledged by you, the terms of the
Agreement are as follows:
GENERAL TERMS AND CONDITIONS
1. Your acceptance of this Agreement constitutes a
representation that you are a securities broker-dealer registered with the
Securities and Exchange Commission (the "SEC") and a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD"). You agree
to abide by the laws, rules and regulations of the SEC and NASD, including
without limitation rules pertaining to the opening, approval, supervision and
monitoring of customer accounts, the NASD's Interpretation with Respect to
Free-Riding and Withholding and Sections 8, 24 and 36 of Article III of the
NASD's Rules of Fair Practice. You and we agree to abide by all other Rules
and Regulations of the NASD, including Section 26 of its Rules of Fair
Practice. Your acceptance also constitutes a representation that you have been
duly authorized by proper corporate or partnership action to enter into this
Agreement and to perform your obligations hereunder. You will not accept any
orders from any broker, dealer or financial institution who is purchasing from
you with a view toward distribution unless you have obtained such person's or
entity's written consent to be bound by the terms of this Agreement.
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<PAGE> 2
2. For the purposes of the Securities and Exchange
Commission's Financial Responsibility Rules and the Securities Investor's
Protection Act, your customers will be considered customers of VKAC and not of
your firm. VKAC has been granted an exemption from the NASD rules of Fair
Practice, Article III Section 45 requirements to send customer statements and
thus will not due so. Customer statements showing account activity and
balances will be mailed to the customer by the Funds each time a financial
transaction occurs in their account and on a monthly basis. Nothing herein
shall cause your firm's customers to be interpreted as customers of VKAC for
any other purpose, or to negate the intent of any other section of this
agreement, including, but not limited to, the delineation of responsibilities
as set forth elsewhere in this agreement.
3. In transactions where you make available shares of the
Funds to the public, you shall have no authority to act as agent for the Fund
or for VKAC.
4. Each Fund has filed with the SEC and the securities
commissions of one or more states a Registration Statement (the "Registration
Statement") on the SEC form applicable to the respective Fund. The date on
which the Registration Statement is declared effective by the SEC is referred
to herein as the "Effective Date". Prior to the Effective Date of the
Registration Statement with respect to a particular Fund, you expressly
acknowledge and understand that with respect to such Fund:
(a) Shares of such Fund may not be sold, nor may
offers to buy be accepted, (i) prior to the Effective Date of the Registration
Statement or (ii) in any state in which such offer or sale would be unlawful
prior to registration or qualification under the securities laws of such state.
(b) The Fund's Preliminary Prospectus, together with
any sales material distributed for use in connection with the offering of
shares of such Fund, does not constitute an offer to sell or the solicitation
of an offer to buy shares of such Fund and is subject to completion and
modification by the Prospectus.
(c) In the event that you transmit indications of
interest to VKAC for accumulation prior to the Effective Date, upon your
instruction VKAC will send confirmation of such indications of interest
directly to your customers in writing, together with copies of the Preliminary
Prospectus for the Fund, and send copies of the confirmations to you.
Indications of interest with respect to shares of a class of a Fund's shares
transmitted to VKAC prior to the Effective Date are subject to acceptance or
rejection by VKAC in its sole discretion and are conditioned upon the
occurrence of (i) the Effective Date and (ii) the registration or qualification
of the respective class of shares in the respective state.
(d) Indications of interest with respect to shares
of a class of a Fund's shares not cancelled by you prior to or on the later of
(i) the Effective Date and (ii) the registration or qualification of the
respective class of shares in the respective state, and accepted by VKAC will
be deemed by VKAC to be orders for Shares.
(e) Upon your instruction, VKAC will send
confirmations of orders accepted by VKAC (including indications of interest
deemed orders) directly to your customers in writing, together with copies of
the Prospectus for the Fund, and send copies of the confirmations to you.
(f) Upon receipt of duplicate confirmations you will
examine the same and promptly notify VKAC of any errors or discrepancies that
you discover and will promptly bring to VKAC's attention any errors in such
confirmations claimed by your customers. All confirmations to your customers
will indicate that orders were placed on a fully disclosed basis.
(g) All indications of interest and orders
transmitted to VKAC are subject to the terms and conditions of the Fund's
Prospectus and this Agreement and are subject to acceptance or rejection by
VKAC in its sole discretion.
5. After the Effective Date, you will not make shares of a
class of the Fund's shares available in any state where they are not qualified
for sale under the "blue sky" laws and regulations of such state, except for
states in which they are exempt from qualification.
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<PAGE> 3
6. In the event that you make shares of the Fund available
outside the United States, you agree to comply with the applicable laws, rules
and regulations of the foreign government having jurisdiction over such sales,
including any regulations of the United States military authorities applicable
to solicitations to military personnel.
7. Upon application to VKAC, VKAC will inform you as to the
jurisdictions in which VKAC believes shares of a Fund have been qualified for
sale under the respective securities or "blue sky" laws of such jurisdictions.
VKAC understands and agrees that qualification of any shares of a Fund for sale
in such jurisdictions shall be solely VKAC's responsibility and that you assume
no responsibility or obligation with respect to such eligibility. You
understand and agree that your compliance with the requirements of the
securities or "blue sky" laws in each jurisdiction with respect to your right
to make the shares available in such jurisdiction shall be solely your
responsibility.
8. No person is authorized to make any representations
concerning any class of shares of a Fund except those contained in the Fund's
current Preliminary Prospectus or Prospectus, as the case may be. In
purchasing shares from us you shall rely solely on the representations
contained in such Prospectus. VKAC will furnish additional copies of a Fund's
current Prospectus and sales literature issued by VKAC in reasonable quantities
upon request.
9. You agree that you will distribute to the public only (a)
the Preliminary Prospectus, the Prospectus and any amendment or supplement
thereto and (b) sales literature or other documents expressly authorized for
such distribution by VKAC.
10. Orders received from you will be accepted by VKAC only at
the public offering price applicable to each order as specified in the
then-current Fund Prospectus. The minimum dollar purchase of any shares of
each Fund by any person shall be the applicable minimum dollar amount described
in the then-current Fund Prospectus for that class of shares, and no order for
less than such amount will be accepted hereunder. The procedures relating to
the handling of orders shall be subject to instructions that VKAC shall
communicate from time to time to you. All orders are subject to acceptance or
rejection by VKAC in its sole discretion. Upon acceptance of an order, we
shall confirm directly to the customer in writing upon your instruction and
send a copy of the confirmation to you. In addition, we will send a Fund
Prospectus with the confirmation. You agree that upon receipt of duplicate
confirmations you will examine the same and promptly notify VKAC of any errors
or discrepancies that you discover and shall promptly bring to VKAC's attention
any errors in such confirmations claimed by your customers. All confirmations
to your customers will indicate that orders were placed on a fully disclosed
basis.
11. Payment for Fund shares shall be made on or before the
settlement date specified in the VKAC confirmation at the office of VKAC's
clearing agent, by check payable to the order of the Fund which reserves VKAC's
right to delay issuance of transfer of shares until such check has cleared. If
such payment is not received by VKAC, VKAC reserves the right, without notice,
forthwith either to cancel the trade at our option or as required by the
provisions of Regulation T, and in either case, VKAC may hold you responsible
for any loss suffered by the Fund. You agree that in transmitting investors'
funds, you will comply with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended.
12. You shall not withhold placing orders with VKAC from your
customers so as to profit yourself as a result of such withholding; e.g., by a
change in the net asset value from that used in determining the public offering
price to your customers.
13. VKAC will not accept from you any conditioned orders for
shares, except at a definite, specified price.
14. You represent that you are familiar with Release No. 4968
under the Securities Act of 1933, as amended, and Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended, as it relates to the distribution
of Preliminary Prospectuses (and not Statements of Additional Information) and
Prospectuses (and not Statements of Additional Information) for each Fund and
agree that you will comply therewith. You agree that if an investor or
potential investor places a request with you to receive a Statement of
Additional Information, you will (i) provide such person with a Statement of
Additional Information without charge and notify the Fund that you have done
so, (ii) notify the Fund of the request so that the Fund can fulfill the
request or (iii) tell such person to request a Statement of Additional
Information by telephoning the Fund at the number set forth on the cover of the
current Prospectus or Preliminary Prospectus. You also agree to keep an
accurate record of your distribution (including dates,
3
<PAGE> 4
number of copies and persons to whom sent) of copies of any Preliminary
Prospectus (and any Statement of Additional Information) and/or Prospectus (and
any Statement of Additional Information) for each Fund (or any amendment or
supplement to either) and, promptly upon request by VKAC, to bring all
subsequent changes to such Preliminary Prospectus or Prospectus to the
attention of anyone to whom such material shall have been distributed. You
further agree to furnish to persons who receive a confirmation of sale of
shares of any Fund a copy of the Prospectus for such Fund filed pursuant to
Rule 497 under the Securities Act of 1933, as amended. Upon your request, VKAC
will furnish to such persons a copy of the Prospectus for such Fund filed
pursuant to Rule 497 under the Securities Act of 1993, as amended.
15. The names of your customers shall remain your sole
property and shall not be used by VKAC for any purpose except for servicing and
informational mailings in the normal course of business to Fund shareholders.
16. Unless otherwise indicated in a Fund's Prospectus, stock
certificates for shares sold will be issued to your customers only if
specifically requested.
17. VKAC will have no liability to you, except for lack of
good faith and for obligations expressly assumed by VKAC in this Agreement.
18. All communications to VKAC shall be sent to One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: Mutual Fund Department.
Any notice to you shall be duly given if sent to you at the address specified
by you below or such other address as you may designate to VKAC in writing.
19. Neither this Agreement nor the performance of the
services hereunder shall be considered to create a joint venture or partnership
between VKAC and you.
20. This Agreement shall be construed in accordance with the
laws of the State of Illinois without reference to the choice-of-law principles
thereof.
21. The Fund reserves the right in its discretion and VKAC
reserves the right in its discretion, without notice, to suspend or withdraw
the offering of any shares of a Fund entirely. VKAC reserves the right,
without notice, to amend, modify or cancel the Agreement. The Agreement may
not be assigned by either party without prior written consent of the other
party.
22. This Agreement may be terminated at any time by either
party.
TERMS AND CONDITIONS APPLICABLE TO OPEN-END FUNDS
23. Each of the Open-End Funds is subject to an alternative
distribution plan (the "Alternative Distribution Plan") as described in such
Fund's then-current Prospectus pursuant to which the Open-End Fund may sell
multiple classes of its shares with varying combinations of front-end service
charges (each a "FESC"), distributions fees, service fees, contingent deferred
sales charges (each a "CDSC"), exchange features, conversion rights, voting
rights, expenses allocations and investment requirements. As used herein,
classes of shares of a Fund subject to a FESC will be referred to as FESC
Shares, and classes of shares of a Fund subject to a CDSC will be referred to
as CDSC Shares.
24.(a) With respect to any shares of a class of FESC Shares
of an Open-End Fund, the public offering price for such shares shall be the net
asset value per share plus a FESC, expressed as a percentage of the applicable
public offering price, as determined and effective as of the time specified in
the then-current Prospectus of such Open-End Fund. On each order for shares of
a class of FESC Shares of an Open-End Fund accepted by us, you will be entitled
to receive the applicable agency commission for such shares as provided for in
the then-current Prospectus of such Open-End Fund or, if not so provided, as
provided to you from time to time in writing by VKAC.
(b) With respect to any shares of a class of CDSC
Shares of an Open-End Fund, the public offering price for such shares shall be
the net asset value per share as determined and effective as of the time
specified in the then-current Prospectus of such Open-End Fund. You will remit
payment of the aggregate public offering price to VKAC for the CDSC Shares
sold, and on each order accepted by us, you will be entitled to receive the
applicable selling compensation for such shares as
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<PAGE> 5
provided for in the then-current Prospectus of such Open-End Fund or, if not so
provided, as provided to you from time to time in writing by VKAC.
25. Should you wish to participate in the Distribution Plan
with respect to a class of shares adopted by an Open-End Fund pursuant to Rule
12b-1 ("Rule 12b-1 Plan") under the Investment Company Act of 1940, as amended,
or the Service Plan with respect to a class of shares, it is understood that
you must be approved by the Board of Directors of such Open-End Fund and
execute a Distribution Assistance Agreement.
26. With respect to the Open-End Funds, your acceptance of
this Agreement constitutes a representation that you will adopt policies and
procedures to comply with Rule 18f-3 under the Investment Company Act of 1940,
with respect to when you may appropriately make available the various classes
of shares of the Open-End Funds to investors and that you will make available
such shares only in accordance therewith.
27. You agree to make shares of an Open-End Fund available to
your customers only: (i) at the applicable public offering price, (ii) from
VKAC and (iii) to cover orders already received by you from your customers.
VKAC in turn agrees that it will not purchase any shares from an Open-End Fund
except for the purpose of covering purchase orders that it has already
received.
28.(a) If any shares of a class of FESC Shares of an Open-End
Fund sold to your customers under the terms of this Agreement are repurchased
by the Fund or by VKAC as agent for the Fund or are tendered for redemption
within seven business days after the date of VKAC's confirmation of the
original purchase, it is agreed that you shall forfeit your right to any agency
commission received by you on such FESC Shares. VKAC will notify you of any
such repurchase or redemption within ten business days from the date on which
the repurchase or redemption order in proper form is delivered to VKAC or to
the Fund, and you shall forthwith refund to VKAC the full agency commission
allowed to you on such sale. VKAC agrees, in the event of any such repurchase
or redemption, to refund to the Fund its share of any discount allowed to VKAC
and, upon receipt from you of the refund of the agency commission allowed to
you, to pay such refund forthwith to the Fund.
(b) If any shares of a class of CDSC Shares sold to
your customers under the terms of this Agreement are repurchased by the Fund or
by VKAC as agent for the Fund or are tendered for redemption within seven
business days after the date of VKAC's confirmation of the original purchase,
it is agreed that you shall forfeit your right to any sales compensation
received by you on such CDSC Shares. We will notify you of any such repurchase
or redemption within ten business days from the date on which the repurchase or
redemption order in proper form is delivered to VKAC or to the Fund, and you
shall forthwith refund to VKAC the full sales compensation paid to you.
TERMS AND CONDITIONS APPLICABLE TO CLOSED END-FUNDS
29. No Closed-End Fund will issue fractional shares.
30. VKAC may, in its sole discretion, allocate shares of a
Closed-End Fund among brokers, dealers and, if permitted by applicable laws,
banks participating in the Initial Offering Period or among brokers, dealers
and banks in the Continuous Offering Period, as the case may be, on other than
a pro rata basis, which may result in certain brokers, dealers and banks not
being allocated the full amount of shares of such Fund sold by them while
certain other brokers, dealers and banks may receive their full allocation.
31. You agree that with respect to orders for shares of a
Closed-End Fund, you will transmit such orders received during the Initial
Offering Period to VKAC within the time period as specified in such Closed-End
Fund's Prospectus (or in the time period as extended by VKAC in writing). You
also agree to transmit any customer order received during the Continuous
Offering Period to VKAC prior to the time that the public offering price for
such Closed-End Fund is next determined after your receipt of such order, as
set forth in the Closed-End Fund's Prospectus. There is no assurance that each
Closed-End Fund will engage in a continuous offering of shares.
32. On each order accepted by VKAC for shares of a Closed-End
Fund, you will be entitled to receive a concession paid out of VKAC's own
assets as set forth in the then-current Prospectus of such Closed-End Fund
(exclusive of additional compensation that may be payable pursuant to sales
programs, if any, that may be established from time to time as described in the
Prospectus for such Closed-End Fund, which will be payable only as and to the
extent the requirements
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<PAGE> 6
of such programs are satisfied). In no event will any Closed-End Fund
reimburse VKAC for any such sales concessions or other additional compensation
or pay any such concession or other additional compensation or allowance
directly to you. VKAC will specify for each Closed-End Fund a period after the
date that the shares of such Closed-End Fund are listed on the New York Stock
Exchange, the American Stock Exchange or another national securities market
system (which period will end no later than the first dividend payment date
with respect to such Closed-End Fund) during which sales concessions and other
additional compensation are subject to forfeiture as provided in the following
sentence (the "Forfeiture Period"). During the Forfeiture Period for any
Closed-End Fund, physical delivery of certificates representing shares will be
required to transfer ownership of such shares. In the event that any shares of
a Closed-End Fund sold through an order received from you in the Initial
Offering Period or the Continuous Offering Period are resold in the open market
or otherwise during the Forfeiture Period, VKAC reserves the right to require
you to forfeit any sales concessions and other additional compensation with
respect to such shares. In the event of a forfeiture, VKAC may withhold any
forfeited sales concessions and other additional compensation that has not yet
been paid or from other amounts yet to be paid to you (whether or not payable
with respect to such shares), and you agree to repay to VKAC, promptly upon
demand, any forfeited sales concessions and other compensation that has been
paid. Determinations of the amounts to be paid to you or by you to VKAC shall
be made by VKAC and shall be conclusive.
33. During the Initial Offering Period and any Continuous
Offering Period for any Closed-End Fund, you agree to supply VKAC, not less
frequently than once a week by Friday, 5:00 p.m. Eastern Time, during such
Closed-End Fund's Initial Offering Period, a list setting forth by state and in
the aggregate all indications of interest and, during any Continuous Offering
Period, all shares sold by you of such Closed-End Fund during such week (or
lesser period of time) and a list setting forth by name and location each
registered representative making said sales and indicating the amount of all
sales per Closed-End Fund to date.
34. You expressly acknowledge and understand that there is no
Rule 12b-1 Plan for the Closed-End Funds.
35. You expressly acknowledge and understand that shares of
the Closed-End Funds will not be repurchased by either the Closed-End Funds
(other than through tender offers from time to time, if any) or by VKAC and
that no secondary market for such shares is expected to develop until the
shares have begun trading on a national exchange or national market system.
You hereby covenant that, until notified by VKAC that the distribution of such
shares has been completed or that the Forfeiture Period has ended, you (a) will
not make a secondary market in any shares of such a Closed-End Fund, (b) will
not purchase or hold shares of such Closed-End Fund in inventory for the
purpose of resale in the open market or to your customers and, (c) without
VKAC's consent, will not repurchase shares of such Closed-End Fund in the open
market or from your customers for any account in which you have a beneficial
interest.
36. Unlike the other Closed-End Funds, the Continuous
Offering period with respect to the Van Kampen American Capital Prime Rate
Income Trust (the "Prime Rate Fund") may continue indefinitely. The offer to
make available to you shares of the Prime Rate Fund is subject to further terms
and conditions in addition to those set out above, as follows:
(a) You expressly acknowledge and understand that
shares of the Prime Rate Fund will not be repurchased by either the Prime Rate
Fund (other than through tender offers from time to time, if any) or VKAC and
that no secondary market for the shares of the Prime Rate Fund exists currently
or is expected to develop. You also expressly acknowledge and agree that, in
the event your customer cancels their order for shares after confirmation, such
shares may not be repurchased, remarketed or otherwise disposed of by or
through VKAC.
(b) You acknowledge and understand that, while the
Board of Trustees of the Prime Rate Fund intends to consider tendering for all
or a portion of the Prime Rate Fund's shares on a quarterly basis, there is no
assurance the Prime Rate Fund will tender for shares at any time or, following
such a tender offer, that shares so tendered will be repurchased by the Prime
Rate Fund. You acknowledge and understand that an early withdrawal charge
payable to VKAC will be imposed on most shares accepted for tender by the Prime
Rate Fund that have been held for less than five years, as set forth in the
Prime Rate Fund's Prospectus. ANY REPRESENTATION AS TO A TENDER OFFER BY
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<PAGE> 7
THE PRIME RATE FUND, OTHER THAN THAT WHICH IS SET FORTH IN THE PRIME RATE
FUND'S CURRENT PROSPECTUS, IS EXPRESSLY PROHIBITED.
Please accept the foregoing by signing this Broker Fully
Disclosed Clearing Agreement, keeping a copy for your files and returning the
original to us.
Accepted and Agreed to: (PRINT OR TYPE)
Dated: ___________________________________________ By:
___________________________________________ Its:
VAN KAMPEN AMERICAN CAPITAL
__________________________________________ DISTRIBUTORS, INC.
Broker-Dealer Name
________________________________________
Broker-Dealer Taxpayer ID Number
________________________________________
Address
________________________________________
City, State, Zip
By: ________________________________________
Signature
________________________________________
Name
________________________________________
Title
________________________________________
Phone
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<PAGE> 8
EXHIBIT A
POLICIES AND PROCEDURES
WITH RESPECT TO SALES UNDER THE
ALTERNATIVE DISTRIBUTION PLAN
As certain Van Kampen American Capital open-end investment
companies (the "funds") offer multiple classes of shares subject to either
front-end sales charges ("FESC Shares") or contingent deferred sales charges
("CDSC Shares"), it is important for an investor not only to choose the Fund
that best suits his or her investment objectives, but also to choose the
alternative distribution method that best suits his or her particular
situation. To assist investors in these decisions, we (the selling firm) are
instituting the following policy.
1. Any purchase order for $1 million or more must be for
Class A Shares.
2. Any purchase order for $100,000 but less than $1
million is subject to approval by [appropriate selling firm supervisor], who
must approve the purchase order ticket for the appropriate class of shares in
light of the relevant facts and circumstances, including:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold
his shares; and
(c) any other relevant circumstances, such as the
availability of purchase price discounts under a Letter of Intent or a Quantity
Discount.
There are instances when one financing method may be more
appropriate than the other. For example, investors who would qualify for a
significant purchase price discount from the maximum sales charge on shares of
a class of FESC Shares that has such purchase price discounts may determine
that payment of such a reduced front-end sales charge is superior to electing
to purchase shares of a class of CDSC Shares with no front-end service charge
but subject to a higher aggregate distribution and service fee. On the other
hand, an investor whose order would not qualify for such purchase price
discounts and intends to remain invested until after the expiration of the
applicable CDSC may wish to defer the sales charge and have all his funds
invested in Class B Shares initially. In addition if such 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, depending on the
amount of his purchase, wish to acquire Class C Shares. However, investors who
intend to hold their shares for a significantly long time may not wish to
continue to bear the ongoing distribution and service expenses of shares of
Class C Shares, irrespective of the fact that a contingent deferred sales
charge would eventually not apply to a redemption of such shares.
[The appropriate selling firm supervisor] must ensure that all
employees receiving investor inquiries about the purchase of shares from funds
subject to Van Kampen American Capital Distributors, Inc.'s alternative
distribution plan advise the investor of the available alternative distribution
methods offered by such funds and the impact of choosing one method over
another. It may be appropriate for [the appropriate selling firm supervisor]
to discuss the purchase with the investor.
This policy is effective immediately with respect to any order
for the purchase of shares from a fund subject to Van Kampen American Capital
Distributors, Inc.'s alternative distribution plan.
Questions relating to this policy should be directed to
[appropriate selling firm supervisor].
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<PAGE> 1
EXHIBIT 7(d)
----------------------------------------------------------------------
BANK FULLY DISCLOSED CLEARING AGREEMENT
WITH VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
REGARDING VAN KAMPEN AMERICAN CAPITAL
OPEN-END AND CLOSED-END INVESTMENT COMPANIES
-----------------------------------------------------------------------
Ladies and Gentlemen:
As dealer for our own account, we offer to make available to
you shares of any of the Van Kampen American Capital open-end investment
companies (the "Open-End Funds" or, individually, an "Open-End Fund") and Van
Kampen American Capital closed-end investment companies (the "Closed-End Funds"
or, individually, a "Closed-End Fund") distributed by Van Kampen American
Capital Distributors, Inc. ("VKAC") pursuant to the terms and conditions
contained herein. Collectively, the Open-End Funds and Closed-End Funds
sometimes are referred to herein as the "Funds" or, individually, as a "Fund".
You are a bank that desires to make available shares of such Funds to your
customers on a fully disclosed basis wherein VKAC would confirm transactions of
your customers in a Fund directly to them. You agree not to make available
shares of such Funds during any fixed price offering of such shares.
VKAC acts as the principal underwriter (as such term is
defined in the Investment Company Act of 1940, as amended) for each Fund with
respect to its offering of one or more classes of shares as described in each
Fund's Prospectus. Pursuant to this Agreement, VKAC offers to make available
to you shares of each Open-End Fund and each Closed-End Fund prior to the
Effective Date (as defined herein) of each Fund's Registration Statement (as
defined herein) (the "Initial Offering Period"), to the extent permitted by
applicable law, and after the Effective Date of each Fund's Registration
Statement (the "Continuous Offering Period") (if any) as described in such
Closed-End Fund's Prospectus.
As used herein unless otherwise indicated, the term
"Prospectus" means the final prospectus and Statement of Additional Information
included in the Registration Statement for the Fund on the Effective Date and
as from time to time thereafter amended or supplemented. As used herein unless
otherwise indicated, the term "Preliminary Prospectus" means any preliminary
prospectus and any Statement of Additional Information included at any time as
a part of the Registration Statement for any Fund prior to the Effective Date
and that is authorized by VKAC for use in connection with the offering of
shares.
In consideration of the mutual obligations contained herein,
the sufficiency of which is hereby acknowledged by you, the terms of the
Agreement are as follows:
GENERAL TERMS AND CONDITIONS
1. Your acceptance of this Agreement constitutes a
representation that you are a bank as defined in Section 3(a)(6) of the
Securities Exchange Act of 1934, as amended, and have been duly authorized to
enter into this Agreement and perform your obligations hereunder. This
Agreement as well as your authority to make shares available to your customers
will automatically terminate if you shall cease to be a bank as defined above.
You agree not to offer or sell shares of any Fund except through VKAC. You
will not accept any orders from any broker, dealer or financial institution who
is purchasing from you with a view toward distribution unless you have obtained
such person's or entity's written consent to be bound by the terms of this
Agreement.
2. For the purposes of the Securities and Exchange
Commission's Financial Responsibility Rules and the Securities Investor's
Protection Act, your customers will be considered customers of VKAC and not of
your firm. VKAC has been granted an exemption from the NASD rules of Fair
Practice, Article III Section 45 requirements to send customer statements and
thus will not due so. Customer statements showing account activity and
balances will be mailed to the customer by the Funds each time a financial
transaction occurs in their account and on a monthly basis. Nothing herein
shall cause your firm's customers to be interpreted as customers of VKAC for
any other purpose, or to negate
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<PAGE> 2
the intent of any other section of this agreement, including, but not limited
to, the delineation of responsibilities as set forth elsewhere in this
agreement.
3. In transactions where you make available shares of the
Funds to the public, you shall have no authority to act as agent for the Fund
or for VKAC. The customers in question are for all purposes your customers and
not customers of VKAC. We will clear transactions for each of your customers
only upon your authorization, it being understood in all cases that (a) you are
acting as the agent for the customer; (b) the transactions are without recourse
against you by the customer except to the extent that your failure to transmit
orders in a timely fashion results in a loss to your customer; (c) as between
you and the customer, the customer will have full beneficial ownership of the
Fund shares; (d) each transaction is initiated solely upon the order of the
customer; and (e) each transaction is for the account of the customer and not
for your account.
4. Each Fund has filed with the Securities and Exchange
Commission (the "SEC") and the securities commissions of one or more states a
Registration Statement (the "Registration Statement") on the SEC form
applicable to the respective Fund. The date on which the Registration
Statement is declared effective by the SEC is hereinafter referred to as the
"Effective Date". Prior to the Effective Date of the Registration Statement
with respect to a particular Fund, you expressly acknowledge and understand
that with respect to such Fund:
(a) Shares of such Fund may not be sold, nor may
offers to buy be accepted, (i) prior to the Effective Date of the Registration
Statement or (ii) in any state in which such offer or sale would be unlawful
prior to registration or qualification under the securities laws of such state.
(b) Except to the extent permitted by law, you will
not solicit or transmit to VKAC any indications of interest to purchase shares
during any fixed-price offering.
(c) The Fund's Preliminary Prospectus, together with
any sales material distributed for use in connection with the offering of
shares of such Fund, does not constitute an offer to sell or the solicitation
of an offer to buy shares of such Fund and is subject to completion and
modification by the Prospectus.
(d) In the event and to the extent permitted by
applicable law you transmit indications of interest to VKAC for accumulation
prior to the Effective Date, upon your instruction VKAC will send confirmation
of such indications of interest directly to your customers in writing, together
with copies of the Preliminary Prospectus for the Fund, and send copies of the
confirmations to you. Indications of interest with respect to shares of a
class of a Fund's shares transmitted to VKAC prior to the Effective Date are
subject to acceptance or rejection by VKAC in its sole discretion and are
conditioned upon the occurrence of (i) the Effective Date and (ii) the
registration or qualification of the respective class of shares in the
respective state.
(e) Indications of interest with respect to shares
of a class of a Fund's shares not canceled by you prior to or on the later of
(i) the Effective Date and (ii) the registration or qualification of the
respective class of shares in the respective state, and accepted by VKAC will
be deemed by VKAC to be orders for Shares solely to the extent permitted by
applicable law.
(f) Upon your instruction, VKAC will send
confirmations of orders accepted by VKAC (including indications of interest
deemed orders) directly to your customers in writing, together with copies of
the Prospectus for the Fund, and send copies of the confirmations to you.
(g) Upon receipt of duplicate confirmations you will
examine the same and promptly notify VKAC of any errors or discrepancies that
you discover and will promptly bring to VKAC's attention any errors in such
confirmations claimed by your customers. All confirmations to your customers
will indicate that orders were placed on a fully disclosed basis.
(h) All indications of interest and orders
transmitted to VKAC are subject to the terms and conditions of the Fund's
Prospectus and this Agreement and are subject to acceptance or rejection by
VKAC in its sole discretion.
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<PAGE> 3
5. After the Effective Date, you will not make shares of a
class of the Fund's shares available in any state where they are not qualified
for sale under the "blue sky" laws and regulations of such state, except for
states in which they are exempt from qualification.
6. In the event that you make shares of the Fund available
outside the United States, you agree to comply with the applicable laws, rules
and regulations of the foreign government having jurisdiction over such sales,
including any regulations of the United States military authorities applicable
to solicitations to military personnel.
7. Upon application to VKAC, VKAC will inform you as to the
jurisdictions in which VKAC believes shares of a Fund have been qualified for
sale under the respective securities or "blue sky" laws of such jurisdictions.
VKAC understands and agrees that qualification of any shares of a Fund for sale
in such jurisdictions shall be solely VKAC's responsibility and that you assume
no responsibility or obligation with respect to such eligibility. You
understand and agree that your compliance with the requirements of the
securities or "blue sky" laws in each jurisdiction with respect to your right
to make the shares available in such jurisdiction shall be solely your
responsibility.
8. No person is authorized to make any representations
concerning any class of shares of a Fund except those contained in the Fund's
current Preliminary Prospectus or Prospectus, as the case may be. In
purchasing shares from us you shall rely solely on the representations
contained in such Prospectus. VKAC will furnish additional copies of a Fund's
current Prospectus and sales literature issued by VKAC in reasonable quantities
upon request.
9. You agree that you will distribute to the public only (i)
the Prospectus and any amendment or supplement thereto and (ii) sales
literature or other documents expressly authorized for such distribution by
VKAC.
10. Orders received from you will be accepted by VKAC only at
the public offering price applicable to each order as specified in the
then-current Fund Prospectus. The minimum dollar purchase of any shares of
each Fund by any person shall be the applicable minimum dollar amount described
in the then-current Fund Prospectus for that class of shares, and no order for
less than such amount will be accepted hereunder. The procedures relating to
the handling of orders shall be subject to instructions that VKAC shall
communicate from time to time to you. All orders are subject to acceptance or
rejection by VKAC in its sole discretion. Upon acceptance of an order, we
shall confirm directly to the customer in writing upon your instruction and
send a copy of the confirmation to you. In addition, we will send a Fund
Prospectus with the confirmation. You agree that upon receipt of duplicate
confirmations you will examine the same and promptly notify VKAC of any errors
or discrepancies that you discover and shall promptly bring to VKAC's attention
any errors in such confirmations claimed by your customers. All confirmations
to your customers will indicate that orders were placed on a fully disclosed
basis.
11. Payment for Fund shares shall be made on or before the
settlement date specified in the VKAC confirmation at the office of VKAC's
clearing agent, by check payable to the order of the Fund which reserves VKAC's
right to delay issuance or transfer of shares until such check has cleared. If
such payment is not received by VKAC, VKAC reserves the right, without notice,
forthwith either to cancel the trade at our option or as required by the
provisions of Regulation T, and in either case, VKAC may hold you responsible
for any loss suffered by the Fund. You agree that in transmitting investors'
funds, you will comply with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended.
12. You shall not withhold placing orders with VKAC from your
customers so as to profit yourself as a result of such withholding; e.g., by a
change in the net asset value from that used in determining the public offering
price to your customers.
13. VKAC will not accept from you any conditioned orders for
shares, except at a definite, specified price.
14. You represent that you are familiar with Release No. 4968
under the Securities Act of 1933, as amended, and Rule 15c2-8 under the
Securities Exchange Act of 1934, as amended, as it relates to the distribution
of Preliminary Prospectuses (and not Statements of Additional Information) and
Prospectuses (and not Statements of Additional Information) for each Fund and
agree that you will comply therewith. You agree that if an investor or
potential investor places a request with you to receive
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<PAGE> 4
a Statement of Additional Information, you will (i) provide such person with a
Statement of Additional Information without charge and notify the Fund that you
have done so, (ii) notify the Fund of the request so that the Fund can fulfill
the request or (iii) tell such person to request a Statement of Additional
Information by telephoning the Fund at the number set forth on the cover of the
current Prospectus or Preliminary Prospectus. You also agree to keep an
accurate record of your distribution (including dates, number of copies and
persons to whom sent) of copies of any Preliminary Prospectus (and any
Statement of Additional Information) and/or Prospectus (and any Statement of
Additional Information) for each Fund (or any amendment or supplement to
either) and, promptly upon request by VKAC, to bring all subsequent changes to
such Preliminary Prospectus or Prospectus to the attention of anyone to whom
such material shall have been distributed. You further agree to furnish to
persons who receive a confirmation of sale of shares of any Fund a copy of the
Prospectus for such Fund filed pursuant to Rule 497 under the Securities Act of
1933, as amended. Upon your request, VKAC will furnish to such persons a copy
of the Prospectus for such Fund filed pursuant to Rule 497 Under the Securities
Act of 1993, as amended.
15. The names of your customers shall remain your sole
property and shall not be used by VKAC for any purpose except for servicing and
informational mailings in the normal course of business to Fund shareholders.
16. Unless otherwise indicated in a Fund's Prospectus, stock
certificates for shares sold will be issued to your customers only if
specifically requested.
17. VKAC will have no liability to you, except for lack of
good faith and for obligations expressly assumed by VKAC in this Agreement.
18. All communications to VKAC shall be sent to One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: Mutual Fund Department.
Any notice to you shall be duly given if sent to you at the address specified
by you below or such other address as you may designate to VKAC in writing.
19. Neither this Agreement nor the performance of the
services hereunder shall be considered to create a joint venture or partnership
between VKAC and you.
20. This Agreement shall be construed in accordance with the
laws of the State of Illinois without reference to the choice-of-law principles
thereof.
21. The Fund reserves the right in its discretion and VKAC
reserves the right in its discretion, without notice, to suspend or withdraw
the offering of any shares of a Fund entirely. VKAC reserves the right,
without notice, to amend, modify or cancel the Agreement. The Agreement may
not be assigned by either party without prior written consent of the other
party.
22. This Agreement may be terminated at any time by either
party.
TERMS AND CONDITIONS APPLICABLE TO OPEN-END FUNDS
23. Each of the Open-End Funds is subject to an alternative
distribution plan (the "Alternative Distribution Plan") as described in such
Fund's then-current Prospectus pursuant to which the Open-End Fund may sell
multiple classes of its shares with varying combinations of front-end service
charges (each a "FESC"), distributions fees, service fees, contingent deferred
sales charges (each a "CDSC"), exchange features, conversion rights, voting
rights, expenses allocations and investment requirements. As used herein,
classes of shares of a Fund subject to a FESC will be referred to as FESC
Shares, and classes of shares of a Fund subject to a CDSC will be referred to
as CDSC Shares.
24. (a) With respect to any shares of a class of FESC Shares
of an Open-End Fund, the public offering price for such shares shall be the net
asset value per share plus a FESC, expressed as a percentage of the applicable
public offering price, as determined and effective as of the time specified in
the then-current Prospectus of such Open-End Fund. On each order for shares of
a class of FESC Shares of an Open-End Fund accepted by us, you will be entitled
to receive the applicable agency commission for such shares as provided for in
the then-current Prospectus of such Open-End Fund or, if not so provided, as
provided to you from time to time in writing by VKAC.
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<PAGE> 5
(b) With respect to any shares of a class of CDSC
Shares of an Open-End Fund, the public offering price for such shares shall be
the net asset value per share as determined and effective as of the time
specified in the then-current Prospectus of such Open-End Fund. You will remit
payment of the aggregate public offering price to VKAC for the CDSC Shares
sold, and on each order accepted by us, you will be entitled to receive the
applicable selling compensation for such shares as provided for in the
then-current Prospectus of such Open-End Fund or, if not so provided, as
provided to you from time to time in writing by VKAC.
25. Should you wish to participate in the Distribution Plan
with respect to a class of shares adopted by an Open-End Fund pursuant to Rule
12b-1 ("Rule 12b-1 Plan") under the Investment Company Act of 1940, as amended,
or the Service Plan with respect to a class of shares, it is understood that
you must be approved by the Board of Directors of such Open-End Fund and
execute an Administrative Service Agreement.
26. With respect to the Open-End Funds, your acceptance of
this Agreement constitutes a representation that you will adopt policies and
procedures to comply with Rule 18f-3 under the Investment Company Act of 1940,
with respect to when you may appropriately make available the various classes
of shares of the Open-End Funds to investors and that you will make available
such shares only in accordance therewith.
27. You agree to make shares of an Open-End Fund available to
your customers only: (i) at the applicable public offering price, (ii) from
VKAC and (iii) to cover orders already received by you from your customers.
VKAC in turn agrees that it will not purchase any shares from an Open-End Fund
except for the purpose of covering purchase orders that it has already
received.
28. (a) If any shares of a class of FESC Shares of an
Open-End Fund sold to your customers under the terms of this Agreement are
repurchased by the Fund or by VKAC as agent for the Fund or are tendered for
redemption within seven business days after the date of VKAC's confirmation of
the original purchase, it is agreed that you shall forfeit your right to any
agency commission received by you on such FESC Shares. VKAC will notify you of
any such repurchase or redemption within ten business days from the date on
which the repurchase or redemption order in proper form is delivered to VKAC or
to the Fund, and you shall forthwith refund to VKAC the full agency commission
allowed to you on such sale. VKAC agrees, in the event of any such repurchase
or redemption, to refund to the Fund its share of any discount allowed to VKAC
and, upon receipt from you of the refund of the agency commission allowed to
you, to pay such refund forthwith to the Fund.
(b) If any shares of a class of CDSC Shares sold to
your customers under the terms of this Agreement are repurchased by the Fund or
by VKAC as agent for the Fund or are tendered for redemption within seven
business days after the date of VKAC's confirmation of the original purchase,
it is agreed that you shall forfeit your right to any sales compensation
received by you on such CDSC Shares. We will notify you of any such repurchase
or redemption within ten business days from the date on which the repurchase or
redemption order in proper form is delivered to VKAC or to the Fund, and you
shall forthwith refund to VKAC the full sales compensation paid to you.
TERMS AND CONDITIONS APPLICABLE TO CLOSED END-FUNDS
29. No Closed-End Fund will issue fractional shares.
30. VKAC may, in its sole discretion, allocate shares of a
Closed-End Fund among brokers, dealers and, to the extent permitted by
applicable law, banks participating in the Initial Offering Period or among
brokers, dealers and banks participating in the Continuous Offering Period, as
the case may be, on other than a pro rata basis, which may result in certain
brokers, dealers and banks not being allocated the full amount of shares of
such Fund sold by them while certain other brokers, dealers and banks may
receive their full allocation.
31. You agree that with respect to orders for shares of a
Closed-End Fund, you will transmit such orders received, to the extent
permitted by applicable law, during the Initial Offering Period to VKAC within
the time period as specified in such Closed-End Fund's Prospectus (or in the
time period as extended by VKAC in writing). You also agree to transmit any
customer order received during the
5
<PAGE> 6
Continuous Offering Period to VKAC prior to the time that the public offering
price for such Closed-End Fund is next determined after your receipt of such
order, as set forth in the Closed-End Fund's Prospectus. There is no assurance
that each Closed-End Fund will engage in a continuous offering of shares.
32. On each order accepted by VKAC for shares of a Closed-End
Fund, you will be entitled to receive a concession paid out of VKAC's own
assets as set forth in the then-current Prospectus of such Closed-End Fund
(exclusive of additional compensation that may be payable pursuant to sales
programs, if any, that may be established from time to time as described in the
Prospectus for such Closed-End Fund, which will be payable only as and to the
extent the requirements of such programs are satisfied). In no event will any
Closed-End Fund reimburse VKAC for any such sales concessions or other
additional compensation or pay any such concession or other additional
compensation or allowance directly to you. VKAC will specify for each
Closed-End Fund a period after the date that the shares of such Closed-End Fund
are listed on the New York Stock Exchange, the American Stock Exchange or
another national securities market system (which period will end no later than
the first dividend payment date with respect to such Closed-End Fund) during
which sales concessions and other additional compensation are subject to
forfeiture as provided in the following sentence (the "Forfeiture Period").
During the Forfeiture Period for any Closed-End Fund, physical delivery of
certificates representing shares will be required to transfer ownership of such
shares. In the event that any shares of a Closed-End Fund sold through an
order received from you, to the extent permitted by applicable law, in the
Initial Offering Period or the Continuous Offering Period are resold in the
open market or otherwise during the Forfeiture Period, VKAC reserves the right
to require you to forfeit any sales concessions and other additional
compensation with respect to such shares. In the event of a forfeiture, VKAC
may withhold any forfeited sales concessions and other additional compensation
that has not yet been paid or from other amounts yet to be paid to you (whether
or not payable with respect to such shares), and you agree to repay to VKAC,
promptly upon demand, any forfeited sales concessions and other compensation
that has been paid. Determinations of the amounts to be paid to you or by you
to VKAC shall be made by VKAC and shall be conclusive.
33. During the Initial Offering Period or any Continuous
Offering Period for any Closed-End Fund, you agree to supply VKAC, not less
frequently than once a week by Friday, 5:00 p.m. Eastern Time, during such
Closed-End Fund's Initial Offering Period, a list setting forth by state and in
the aggregate all indications of interest and, during any Continuous Offering
Period, all shares sold by you of such Closed-End Fund during such week (or
lesser period of time) and a list setting forth by name and location each
registered representative making said sales and indicating the amount of all
sales per Closed-End Fund to date.
34. You expressly acknowledge and understand that there is no
Rule 12b-1 Plan for the Closed-End Funds.
35. You expressly acknowledge and understand that shares of
the Closed-End Funds will not be repurchased by either the Closed-End Funds
(other than through tender offers from time to time, if any) or by VKAC and
that no secondary market for such shares is expected to develop until the
shares have begun trading on a national exchange or national market system.
You hereby covenant that, until notified by VKAC that the distribution of such
shares has been completed or that the Forfeiture Period has ended, you (a) will
not make a secondary market in any shares of such a Closed-End Fund, (b) will
not purchase or hold shares of such Closed-End Fund in inventory for the
purpose of resale in the open market or to your customers and, (c) without
VKAC's consent, will not repurchase shares of such Closed-End Fund in the open
market or from your customers for any account in which you have a beneficial
interest.
36. Unlike the other Closed-End Funds, the Continuous
Offering period with respect to the Van Kampen American Capital Prime Rate
Income Trust (the "Prime Rate Fund") may continue indefinitely. The offer to
make available to you shares of the Prime Rate Fund is subject to further terms
and conditions in addition to those set out above, as follows:
(a) You expressly acknowledge and understand that
shares of the Prime Rate Fund will not be repurchased by either the Prime Rate
Fund (other than through tender offers from time to time, if any) or VKAC and
that no secondary market for the shares of the Prime Rate Fund exists currently
or is expected to develop. You also expressly acknowledge and agree that, in
the event your
6
<PAGE> 7
customer cancels their order for shares after confirmation, such shares may not
be repurchased, remarketed or otherwise disposed of by or through VKAC.
(b) You acknowledge and understand that, while the
Board of Trustees of the Prime Rate Fund intends to consider tendering for all
or a portion of the Prime Rate Fund's shares on a quarterly basis, there is no
assurance the Prime Rate Fund will tender for shares at any time or, following
such a tender offer, that shares so tendered will be repurchased by the Prime
Rate Fund. You acknowledge and understand that an early withdrawal charge
payable to VKAC will be imposed on most shares accepted for tender by the Prime
Rate Fund that have been held for less than five years, as set forth in the
Prime Rate Fund's Prospectus. ANY REPRESENTATION AS TO A TENDER OFFER BY THE
PRIME RATE FUND, OTHER THAN THAT WHICH IS SET FORTH IN THE PRIME RATE FUND'S
CURRENT PROSPECTUS, IS EXPRESSLY PROHIBITED.
Please accept the foregoing by signing this Bank Fully
Disclosed Clearing Agreement, keeping a copy for your files and returning the
original to us.
Accepted and Agreed to: (PRINT OR TYPE)
Dated: ________________________________________ By:
Its:
________________________________________
Bank Name VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
________________________________________
Bank Taxpayer ID Number
________________________________________
Address
________________________________________
City, State, Zip
________________________________________
Phone
________________________________________
Signature
________________________________________
Name
________________________________________
Title
7
<PAGE> 8
EXHIBIT A
POLICIES AND PROCEDURES
WITH RESPECT TO SALES UNDER THE
ALTERNATIVE DISTRIBUTION PLAN
As certain Van Kampen American Capital open-end investment
companies (the "funds") offer multiple classes of shares subject to either
front-end sales charges ("FESC Shares") or contingent deferred sales charges
("CDSC Shares"), it is important for an investor not only to choose the Fund
that best suits his or her investment objectives, but also to choose the
alternative distribution method that best suits his or her particular
situation. To assist investors in these decisions, we (the selling firm) are
instituting the following policy.
1. Any purchase order for $1 million or more must be for
Class A Shares.
2. Any purchase order for $100,000 but less than $1
million is subject to approval by [appropriate selling firm supervisor], who
must approve the purchase order ticket for the appropriate class of shares in
light of the relevant facts and circumstances, including:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold
his shares; and
(c) any other relevant circumstances, such as the
availability of purchase price discounts under a Letter of Intent or a Quantity
Discount.
There are instances when one financing method may be more
appropriate than the other. For example, investors who would qualify for a
significant purchase price discount from the maximum sales charge on shares of
a class of FESC Shares that has such purchase price discounts may determine
that payment of such a reduced front-end sales charge is superior to electing
to purchase shares of a class of CDSC Shares with no front-end service charge
but subject to a higher aggregate distribution and service fee. On the other
hand, an investor whose order would not qualify for such purchase price
discounts and intends to remain invested until after the expiration of the
applicable CDSC may wish to defer the sales charge and have all his funds
invested in Class B Shares initially. In addition if such 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, depending on the
amount of his purchase, wish to acquire Class C Shares. However, investors who
intend to hold their shares for a significantly long time may not wish to
continue to bear the ongoing distribution and service expenses of shares of
Class C Shares, irrespective of the fact that a contingent deferred sales
charge would eventually not apply to a redemption of such shares.
[The appropriate selling firm supervisor] must ensure that all
employees receiving investor inquiries about the purchase of shares from funds
subject to Van Kampen American Capital Distributors, Inc.'s alternative
distribution plan advise the investor of the available alternative distribution
methods offered by such funds and the impact of choosing one method over
another. It may be appropriate for [the appropriate selling firm supervisor]
to discuss the purchase with the investor.
This policy is effective immediately with respect to any order
for the purchase of shares from a fund subject to Van Kampen American Capital
Distributors, Inc.'s alternative distribution plan.
Questions relating to this policy should be directed to
[appropriate selling firm supervisor].
8
<PAGE> 1
Exhibit 10(a)
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
The plan set forth below (the "Distribution Plan") is the written plan
contemplated by Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), for the VAN KAMPEN AMERICAN CAPITAL EQUITY
INCOME FUND (the "Fund"). This Distribution Plan describes the material terms
and conditions under which assets of the Fund may be used in connection with
financing distribution related activities with respect to each of its classes
of shares of beneficial interest (the "Shares"), each of which is offered and
sold subject to a different combination of front-end sales charges,
distribution fees, service fees and contingent deferred sales charges.1
Classes of shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "Front-End Classes"
and the Shares of such classes are referred to herein as "Front-End Shares."
Classes of shares, if any, subject to a contingent-deferred sales charge and a
distribution and/or a service fee are referred to herein as "CDSC Classes" and
Shares of such classes are referred to herein as "CDSC Shares." Classes of
shares, if any, subject to a front-end sales charge, a contingent-deferred
sales charge and a distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to herein as
"Combination Shares."
The Fund has adopted a service plan (the "Service Plan") pursuant to
which the Fund is authorized to expend on an annual basis a portion of its
average net assets attributable to any or each class of Shares in connection
with the provision by the principal underwriter (within the meaning of the 1940
Act) of the Shares and by brokers, dealers and other financial intermediaries
(collectively, "Financial Intermediaries") of personal services to holders of
Shares and/or the maintenance of shareholder accounts. The Fund also has
entered into a distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Inc. (the "Distributor"),
pursuant to which the Distributor acts as the principal underwriter with
respect to each class of Shares and provides services to the Fund and acts as
agent on behalf of the Fund in connection with the implementation of the
Service Plan. The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement the
Distribution and Services Agreement, the Service Plan and this Distribution
Plan.
1. The Fund hereby is authorized to pay the Distributor a distribution
fee with respect to each class of its Shares to compensate the Distributor for
activities which are primarily intended to result in the sale of such Shares
("distribution related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such distribution related
activities include without limitation: (a) printing and distributing copies of
any prospectuses and annual and interim reports of the Fund (after the Fund has
prepared and set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing or otherwise
manufacturing and distributing any other literature or materials of any nature
used by such Distributor in connection with promoting, distributing or offering
the Shares; (c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the provision of
information programs and shareholder services intended to enhance the
attractiveness of investing in the Fund; (e) incurring initial outlay expenses
in connection with compensating Financial Intermediaries for (i) selling CDSC
Shares and Combination Shares and (ii) providing personal services to
shareholders and the maintenance of
____________________
1 The Fund is authorized to offer multiple classes of shares pursuant to a
Rule 18f-3 Plan adopted under the 1940 Act.
1
<PAGE> 2
shareholder accounts of all classes of Shares, including paying interest on and
incurring other carrying costs on funds borrowed to pay such initial outlays;
and (f) acting as agent for the Fund in connection with implementing this
Distribution Plan pursuant to the Selling Agreements.
2. The amount of the distribution fee hereby authorized with respect to
each class of Shares of the Fund shall be as follows:
a. With respect to Class A Shares, the distribution fee authorized hereby
and the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.15% of the Fund's average daily net
assets attributable to Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A Shares. The
Fund may pay a distribution fee as determined from time to time by its Board of
Trustees in an annual amount not to exceed the lesser of (i) (A) 0.15% of the
Fund's average daily net asset value during such year attributable to Class A
Shares sold on or after the date on which this Distribution Plan was first
implemented with respect to Class A Shares minus (B) the amount of the service
fee with respect to the Class A Shares actually expended during such year by
the Fund pursuant to the Service Plan and (ii) the actual amount of
distribution related expenses incurred by the Distributor with respect to Class
A Shares.
b. With respect to Class B Shares, the distribution fee authorized hereby
and the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.90% of the Fund's average daily net
assets attributable to Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class B Shares. The
Fund may pay a distribution fee with respect to the Class B Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class B
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class B Shares.
c. With respect to Class C Shares, the distribution fee authorized hereby
and the service fee authorized pursuant to the Service Plan, in the aggregate,
shall not exceed on an annual basis 0.90% of the Fund's average daily net
assets attributable to Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class C Shares. The
Fund may pay a distribution fee with respect to the Class C Shares as
determined from time to time by its Board of Trustees in an annual amount not
to exceed the lesser of (A) 0.75% of the Fund's average daily net asset value
during such year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect to the Class C
Shares and (B) the actual amount of distribution related expenses incurred by
the Distributor during such year plus prior unreimbursed distribution related
expenses less the amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares sold on or after
the date on which this Distribution Plan is first implemented with respect to
the Class C Shares.
3. Payments pursuant to this Distribution Plan shall not be made more
often than monthly upon receipt by the Fund of a separate written expense
report with respect to each class of Shares setting forth the expenses
qualifying for such reimbursement allocated to each class of Shares and the
purposes thereof.
4. In the event that amounts payable hereunder with respect to shares of
a Front-End Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of such class, there
is no carryforward of reimbursement obligations to succeeding years. In the
event the amounts payable hereunder with respect to shares of a CDSC Class or a
Combination Class do not fully reimburse the Distributor for its actual
distribution related expenses with respect to the Shares of the respective
class, such unreimbursed distribution expenses will be carried forward and paid
by the Fund hereunder in future years so long as this Distribution Plan remains
in effect, subject to applicable laws
2
<PAGE> 3
and regulations. Reimbursements for distribution related expenses payable
hereunder with respect to a particular class of Shares may not be used to
subsidize the sale of Shares of any other class of Shares.
5. The Fund shall not compensate the Distributor, and neither the Fund
nor the Distributor shall compensate any Financial Intermediary, for any
distribution related expenses incurred with respect to a class of Shares prior
to the later of (a) the implementation of this Distribution Plan with respect
to such class of Shares or (b) the date that such Financial Intermediary enters
into a Selling Agreement with the Distributor.
6. The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Trust and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries as
compensation for the above-mentioned activities and services. Such
reallocation shall be in an amount as set forth from time to time in the Fund's
prospectus. Such Selling Agreements shall provide that the Financial
Intermediaries shall provide the Distributor with such information as is
reasonably necessary to permit the Distributor to comply with the reporting
requirements set forth in Paragraphs 3 and 8 hereof.
7. Subject to the provisions of this Distribution Agreement, the Fund is
hereby authorized to pay a distribution fee to any person that is not an
"affiliated person" or "interested person" of the Fund or its "investment
adviser" or "principal underwriter" (as such terms are defined in the 1940 Act)
who provides any of the foregoing services for the Fund. Such fee shall be
paid only pursuant to written agreements between the Fund and such other person
the terms of which permit payments to such person only in accordance with the
provisions of this Distribution Agreement and which have the approval of a
majority of the Disinterested Trustees by vote cast separately with respect to
each class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
8. The Fund and the Distributor shall prepare separate written reports
for each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Distribution Plan, the Service
Plan and the agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of Trustees or the
Disinterested Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
9. This Distribution Plan shall become effective upon its approval by (a)
a majority of the Board of Trustees and a majority of the Disinterested
Trustees by vote cast separately with respect to each class of Shares cast in
person at a meeting called for the purpose of voting on this Distribution Plan,
and (b) with respect to each class of Shares, a "majority of the outstanding
voting securities" (as such phrase is defined in the 1940 Act) of such class of
Shares voting separately as a class.
10. This Distribution Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption by the Board of
Trustees of the Fund only so long as (a) its continuation is approved at least
annually in the manner set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
11. This Distribution Plan may be terminated with respect to a class of
Shares without penalty at any time by a majority of the Disinterested Trustees
or by a "majority of the outstanding voting securities" of the respective
class of Shares of the Fund.
12. This Distribution Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting securities" of the respective class of
Shares of the Fund and may not be amended in any other material
3
<PAGE> 4
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Distribution Plan to changes in the Rule or
to other changes in the 1940 Act or the rules and regulations thereunder shall
not be deemed to be material amendments.
13. To the extent any service fees paid by the Fund pursuant to the
Service Plan are deemed to be payments for the financing of any activity
primarily intended to result in the sale of Shares issued by the Fund within
the meaning of the Rule, the terms and provisions of such plan and any payments
made pursuant to such plan hereby are authorized pursuant to this Distribution
Plan in the amounts and for the purposes authorized in the Service Plan without
any further action by the Board of Trustees or the shareholders of the Fund.
To the extent the terms and provisions of the Service Plan conflict with the
terms and provisions of this Distribution Plan, the terms and provisions of the
Service Plan shall prevail with respect to amounts payable pursuant thereto.
This paragraph 13 is adopted solely due to the uncertainty that may exist with
respect to whether payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of Shares issued
by the Fund within the meaning of the Rule.
14. The Trustees of the Trust have adopted this Distribution Plan as
trustees under the Declaration of Trust of the Fund and the policies of the
Fund adopted hereby are not binding upon any of the Trustees or shareholders
of the Fund individually, but bind only the trust estate.
4
<PAGE> 1
Exhibit 10(b)
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN KAMPEN
AMERICAN CAPITAL EQUITY INCOME FUND (the "Fund") describes the material terms
and conditions under which assets of the Fund may be used to compensate the
Fund's principal underwriter, within the meaning of the Investment Company Act
of 1940, as amended (the "1940 Act"), brokers, dealers and other financial
intermediaries (collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder accounts with
respect to each of its Class A Shares of beneficial interest (the "Class A
Shares"), its Class B Shares of beneficial interest (the "Class B Shares"), and
its Class C Shares of beneficial interest (the "Class C Shares") The Class A
Shares, Class B Shares and Class C Shares sometimes are referred to herein
collectively as the "Shares." Each class of Shares is offered and sold subject
to a different combination of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges.1 Classes of shares, if any,
subject to a front-end sales charge and a distribution and/or service fee are
referred to herein as "Front-End Classes" and the Shares of such classes are
referred to herein as "Front-End Shares." Classes of shares, if any, subject to
a contingent-deferred sales charge and a distribution and or a service fee are
referred to herein as "CDSC Classes" and Shares of such classes are referred to
herein as "CDSC Shares." Classes of shares, if any, subject to a front-end
sales charge, a contingent-deferred sales charge and a distribution and/or
service fee are referred to herein as "Combination Classes" and Shares of such
class are referred to herein as "Combination Shares."
The Fund has adopted a distribution plan (the "Distribution Plan")
pursuant to which the Fund is authorized to expend on an annual basis a portion
of its average net assets attributable to each class of Shares in connection
with financing distribution related activities. The Fund also has entered into
a distribution and services agreement (the "Distribution and Services
Agreement") with Van Kampen American Capital Distributors, Inc. (the
"Distributor"), pursuant to which the Distributor acts as agent on behalf of
the Fund in connection with the implementation of the Service Plan and acts as
the principal underwriter with respect to each class of Shares. The
Distributor may enter into selling agreements (the "Selling Agreements") with
brokers, dealers and other financial intermediaries ("Financial
Intermediaries") in order to implement the Distribution Agreement, the
Distribution Plan and this Service Plan.
1. The Fund hereby is authorized to pay a service fee with respect to its
Class A Shares, Class B Shares and Class C Shares to any person who sells such
Shares and provides personal services to shareholders and/or maintains
shareholder accounts in an annual amount not to exceed 0.15% of the average
annual net asset value of the Shares maintained in the Fund by such person that
were sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments with respect to
each such class of Shares may not exceed 0.15% of the Fund's average annual net
assets attributable to the respective class of Shares sold on or after the date
on which this Service Plan was first implemented and maintained in the Fund
more than one year.
2. Payments pursuant to this Service Plan may be paid or prepaid on
behalf of the Fund by the Distributor acting as the Fund's agent.
____________________
1 The Fund is authorized to offer multiple classes of shares pursuant to a
Rule 18f-3 Plan adopted under the 1940 Act.
1
<PAGE> 2
3. Payments by the Fund to the Distributor pursuant to this Service Plan
shall not be made more often than monthly upon receipt by the Fund of a
separate written expense report with respect to each class of Shares setting
forth the expenses qualifying for such reimbursement allocated to each class of
Shares and the purposes thereof.
4. In the event that amounts payable hereunder with respect to a class of
Shares do not fully reimburse the Distributor for pre-paid service fees, such
unreimbursed service fee expenses will be carried forward and paid by the Fund
hereunder in future years so long as this Service Plan remains in effect,
subject to applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular class of Shares
may not be used to subsidize services provided with respect to any other class
of Shares.
5. The Fund shall not compensate the Distributor, and neither the Fund
nor the Distributor shall compensate any Financial Intermediary, for any
service related expenses incurred with respect to a class of Shares prior to
the later of (a) the implementation of this Service Plan with respect to such
class of Shares or (b) the date that such Financial Intermediary enters into a
Selling Agreement with the Distributor.
6. The Fund hereby authorizes the Distributor to enter into Selling
Agreements with certain Financial Intermediaries to provide compensation to
such Financial Intermediaries for activities and services of the type referred
to in Paragraph 1 hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of Trustees of the
Fund and a majority of the Disinterested Trustees (within the meaning of the
1940 Act) by a vote cast in person at a meeting called for the purpose of
voting on such Selling Agreements. Such Selling Agreements shall provide that
the Financial Intermediaries shall provide the Distributor with such
information as is reasonably necessary to permit the Distributor to comply with
the reporting requirements set forth in Paragraphs 3 and 8 hereof.
7. Subject to the provisions of this Service Agreement, the Fund is
hereby authorized to pay a service fee to any person that is not an "affiliated
person" or "interested person" of the Fund or its "investment adviser" or
"principal underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee shall be paid
only pursuant to written agreements between the Fund and such other person the
terms of which permit payments to such person only in accordance with the
provisions of this Service Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with respect to each
class of Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
8. The Fund and the Distributor shall prepare separate written reports
for each class of Shares and shall submit such reports to the Fund's Board of
Trustees on a quarterly basis summarizing all payments made by them with
respect to each class of Shares pursuant to this Service Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board of Trustees
shall review such reports and other information.
9. This Service Plan may be terminated with respect to a class of Shares
without penalty at any time by a majority of the Disinterested Trustees or by a
"majority of the outstanding voting securities" of the respective class of
Shares of the Fund.
10. This Service Plan shall become effective upon its approval by (a) a
majority of the Board of Trustees and a majority of the Disinterested Trustees
by vote cast separately with respect to each class of Shares cast in person at
a meeting called for the purpose of voting on this Distribution Plan, and (b)
with respect to each class of Shares, a "majority of the outstanding voting
securities" (as such phrase is defined in the 1940 Act) of such class of Shares
voting separately as a class.
2
<PAGE> 3
11. This Service Plan and any agreement contemplated hereby shall continue
in effect beyond the first anniversary of its adoption by the Board of Trustees
of the Fund only so long as (a) its continuation is approved at least annually
in the manner set forth in clause (a) of paragraph 10 above and (b) the
selection and nomination of those trustees of the Fund who are not "interested
persons" of the Fund are committed to the discretion of such trustees.
12. This Service Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with the approval of
a "majority of the outstanding voting securities" of the respective class of
Shares of the Fund. This Service Plan may not be amended in any material
respect except with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in Rule 12b-1 under
the 1940 Act, the rules and regulations thereunder or the Rules of Fair
Practice of the National Association of Securities Dealers, Inc. shall not be
deemed to be material amendments.
13. The Trustees of the Fund have adopted this Service Plan as trustees
under the Declaration of Fund of the Fund and the policies of the Fund
adopted hereby are not binding upon any of the Trustees or shareholders of the
Fund individually, but bind only the trust estate.
3
<PAGE> 1
EXHIBIT 14(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this registration
statement on Form N-14 (the "Registration Statement") and to the incorporation
by reference in the April 29, 1996 Prospectus which is incorporated by
reference in the Registration Statement of our report dated January 31, 1996,
relating to the financial statements and financial highlights of the Van Kampen
American Capital Equity Income Fund which appears in the April 29, 1996
Statement of Additional Information which is also incorporated by reference
into the Registration Statement. We also consent to the references to us under
the headings "Financial Highlights" and "Independent Accountants" in the April
29, 1996 Prospectus, under the heading "Independent Accountants" in the April
29, 1996 Statement of Additional Information and under the heading "Independent
Accountants of the Equity Income Fund" in the Prospectus.
PRICE WATERHOUSE LLP
Houston, Texas
December 19, 1996
<PAGE> 1
EXHIBIT 14(B)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees and Shareholders
Van Kampen American Capital Balanced Fund:
We consent to the use of our report included herein.
/s/ KPMG PEAT MARWICK LLP
Chicago, Illinois
December 20, 1996
<PAGE> 1
EXHIBIT 17(A)
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 19, 1996
REGISTRATION NO. 2-15957
811-919
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [X]
POST-EFFECTIVE AMENDMENT NO. 72 [X]
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 22 [X]
</TABLE>
VAN KAMPEN AMERICAN CAPITAL EQUITY INCOME FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (708) 684-6000
RONALD A. NYBERG, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
VAN KAMPEN AMERICAN CAPITAL, INC.
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, IL 60181
(NAME AND ADDRESS OF AGENT FOR SERVICE)
---------------------
COPIES TO:
WAYNE W. WHALEN, ESQ.
THOMAS A. HALE, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
---------------------
Approximate Date of Proposed Public Offering: As soon as practicable following
effectiveness of this Registration Statement.
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 29, 1996 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate check the following:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
DECLARATION PURSUANT TO RULE 24F-2
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES AND INTENDS TO FILE
WITH THE SECURITIES AND EXCHANGE COMMISSION A FORM 24F-2 FOR ITS FISCAL YEAR
ENDING DECEMBER 31, 1996 YEAR ON OR ABOUT MARCH 1, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 17(B)
PROXY
VAN KAMPEN AMERICAN CAPITAL BALANCED FUND
SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned holder of shares of beneficial interest, par value $.01 per
share (the "Shares"), of the VAN KAMPEN AMERICAN CAPITAL BALANCED FUND (the
"Balanced Fund"), a series of Van Kampen American Capital Equity Trust organized
as a Delaware business trust, hereby appoints Dennis J. McDonnell, Ronald A.
Nyberg and Edward C. Wood III, and each of them, with full power of substitution
and revocation, as proxies to represent the undersigned at the Special Meeting
of Shareholders to be held at the offices of Van Kampen American Capital, Inc.,
One Parkview Plaza, Oakbrook Terrace, Illinois 60181, on March 13, 1997 at
p.m., and any and all adjournments thereof (the "Special Meeting"), and thereat
to vote all Shares which the undersigned would be entitled to vote, with all
powers the undersigned would possess if personally present, in accordance with
the following instructions.
If more than one of the proxies, or their substitutes, are present at the
Special Meeting or any adjournment thereof, they jointly (or, if only one is
present and voting then that one) shall have authority and may exercise all
powers granted hereby. This Proxy, when properly executed, will be voted in
accordance with the instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS
DESCRIBED HEREIN AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING.
Account No. No. of Shares Class of Shares Proxy No.
<TABLE>
<S><C>
1. FOR AGAINST ABSTAIN
------ ------ ------ The proposal to approve the Agreement and Plan of
Reorganization pursuant to which the Balanced Fund would
------ ------ ------ (i) transfer all of its assets to the Van Kampen American
Capital Equity Income Fund (the "Equity Income Fund") in
exchange solely for Class A, B and C shares of beneficial
interest of the Equity Income Fund and the Equity Income
Fund's assumption of the liabilities of the Balanced
Fund, (ii) distribute such shares of the Equity Income
Fund to the holders of shares of the Balanced Fund and
(iii) be dissolved, all as more fully described in the
Prospectus/Proxy Statement.
2. FOR AGAINST ABSTAIN
------ ------ ------ To act upon any and all other business which may come
before the Special Meeting or any adjournment thereof.
------ ------ ------
</TABLE>
The undersigned hereby acknowledges receipt of the accompanying Notice of
Special Meeting and Proxy Statement for the Special Meeting to be held on March
13, 1997.
Please sign this Proxy exactly as your name or names appear on the books of
the Balanced Fund. When signing as attorney, trustee, executor, administrator,
custodian, guardian or corporate officer, please give full title. If shares are
held jointly, each holder should sign.
<TABLE>
<S> <C>
- ----------------------------------------------------- ----------------------------------- ,
Shareholder signature 1997
Date
- ----------------------------------------------------- ----------------------------------- ,
Co-owner signature (if applicable) 1997
Date
</TABLE>
<PAGE> 1
VAN KAMPEN AMERICAN CAPITAL
BALANCED FUND
SUPPLEMENT DATED NOVEMBER 1, 1996, TO THE PROSPECTUS DATED OCTOBER 28, 1996.
On October 31, 1996, VK/AC Holding, Inc. became a wholly owned indirect
subsidiary of Morgan Stanley Group Inc. pursuant to the closing of an Agreement
and Plan of Merger among Morgan Stanley Group Inc., MSAM Holdings II, Inc. and
MSAM Acquisition Inc., whereby MSAM Acquisition Inc. was merged with and into
VK/AC Holding, Inc. and VK/AC Holding, Inc. was the surviving corporation (the
"Acquisition"). As a result of the Acquisition, VK/AC Holding, Inc. became a
wholly owned subsidiary of MSAM Holdings II, Inc. which, in turn, is a wholly
owned subsidiary of Morgan Stanley Group Inc. VK/AC Holding, Inc. is the
indirect parent of the Fund's investment adviser, Van Kampen American Capital
Investment Advisory Corp. (the "Adviser").
Morgan Stanley Group Inc. and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Asset Management Inc., an investment
adviser ("MSAM"), Morgan Stanley & Co. Incorporated, a registered broker-dealer
and investment 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. As of September
30, 1996, MSAM, together with its affiliated investment advisory companies, had
approximately $103.5 billion of assets under management and fiduciary advice.
Prior to October 31, 1996, VK/AC Holding, Inc. was controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership. References in the attached
Prospectus to The Clayton & Dubilier Private Equity IV Limited Partnership and
its management are hereby deleted. In addition, item (2) under the subheading
"Other Purchase Programs -- NAV Purchase Options" is hereby amended and restated
in its entirety to state:
"(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees
<PAGE> 2
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."
At a special meeting of shareholders of the Fund held on October 25, 1996,
shareholders approved changes to the Fund's fundamental investment restrictions
to permit the Fund to invest its assets in shares of certain investment
companies, consistent with its investment objectives and policies, in excess of
the investment limitations imposed by the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund believes that from time to time it can more
effectively and efficiently invest in certain types of securities by pooling its
assets for such securities with assets of other investment companies managed by
the Adviser and its affiliates. Prior to engaging in such transactions, the Fund
and its Adviser and affiliates together with other investment companies managed
by the Adviser and its affiliates will obtain exemptive relief from the
Securities and Exchange Commission ("SEC") to permit such transactions. In order
to take full advantage of any exemptive relief granted by the SEC, the Fund
hereby restates its fundamental investment restriction, approved by
shareholders, regarding investment in other investment companies to state:
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.
In addition, to the extent the Fund's fundamental investment restrictions
regarding diversification, control, unseasoned issuers or restricted securities
may be deemed to preclude the Fund from taking full advantage of any exemptive
relief granted by the SEC, the Fund hereby adds the following exception, as
approved by shareholders, to each applicable restriction:
..., 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.
<PAGE> 3
On July 25, 1996, the Trustees of the Fund, a series of the Van Kampen
American Capital Equity Trust (the "Equity Trust"), approved an Agreement and
Plan of Reorganization between the Fund and the Van Kampen American Capital
Equity Income Fund (the "Equity Income Fund"), a fund advised by Van Kampen
American Capital Asset Management, Inc., providing for the transfer of assets
and liabilities of the Fund to the Equity Income Fund in exchange for shares of
beneficial interest of the Equity Income Fund at its net asset value per share
(the "Reorganization").
The Adviser and Van Kampen American Capital Asset Management, Inc. are
wholly owned subsidiaries of Van Kampen American Capital, Inc., which is a
wholly owned subsidiary of VK/AC Holding, Inc.
The Reorganization is subject to approval by the holders of a majority of
the outstanding shares of the Fund. Further details of the proposed
Reorganization will be contained in the prospectus/proxy statement expected to
be mailed to shareholders in 1997.
The Equity Income Fund's net assets as of November 1, 1996 were
approximately $1,080.9 million. Its primary investment objective is to provide
investors with the highest possible income consistent with safety of principal.
An important secondary investment objective is to provide investors with
long-term growth of capital. The investment objective of the Fund is to seek to
provide investors with current income, while seeking to provide investors with
capital growth. Each of the funds seeks to achieve its respective investment
objective(s) by investing in a diversified portfolio of equity and debt
securities. Under normal market conditions, the Equity Income Fund invests at
least 65% of its total assets in income-producing equity securities, which for
purposes of the Equity Income Fund includes without limitation dividend paying
common and preferred stocks, interest paying convertible debentures or bonds or
zero coupon convertible securities. Under normal market conditions, the Fund
invests at least 25% of its total assets in equity securities, which for
purposes of the Fund includes common and preferred stocks but does not include
convertible securities, and at least 25% of its total assets in investment grade
fixed-income debt securities.
The Fund will continue its normal operations prior to the Reorganization.
<PAGE> 4
- ------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
BALANCED FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Balanced 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 to provide its shareholders with current
income, while also seeking to provide shareholders with capital growth. The Fund
will seek to achieve its investment objective by investing in a diversified
portfolio of common stocks, fixed income securities (including preferred stock,
government securities, corporate debt securities and convertible securities) and
cash and cash equivalents. There can be no assurance that the Fund will achieve
its investment objective. The Fund is organized as a separate 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.
------------------
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.
------------------
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, containing
additional information about the Fund is hereby incorporated by reference in its
entirety into this Prospectus. A copy of the Fund's Statement of Additional
Information may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device For the Deaf at (800) 772-8889. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is available along with other related materials at
the SEC's internet web site (http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED OCTOBER 28, 1996.
<PAGE> 5
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 3
Shareholder Transaction Expenses............................... 5
Annual Fund Operating Expenses and Example..................... 6
Financial Highlights........................................... 8
The Fund....................................................... 9
Investment Objective and Policies.............................. 9
Investment Practices........................................... 14
Investment Advisory Services................................... 19
Alternative Sales Arrangements................................. 21
Purchase of Shares............................................. 23
Shareholder Services........................................... 33
Redemption of Shares........................................... 37
The Distribution and Service Plans............................. 40
Distributions from the Fund.................................... 42
Tax Status..................................................... 43
Fund Performance............................................... 46
Description of Shares of the Fund.............................. 47
Additional Information......................................... 47
</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.
2
<PAGE> 6
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Balanced 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 Fund's investment objective is to provide its
shareholders with current income, while also seeking to provide shareholders
with capital growth. There can be no assurance that the Fund will achieve its
investment objective.
INVESTMENT POLICIES AND RISKS. The Fund will seek to achieve its investment
objective by investing in a diversified portfolio of equity securities
consisting of common and preferred stocks, fixed-income securities (including
government securities, corporate debt securities and convertible securities) and
cash and cash equivalents. The mix of these securities is determined by the
Fund's investment adviser on the basis of existing and anticipated market
conditions. The relative percentages of each type of security in the portfolio
can be expected to fluctuate and at times the Fund may be invested primarily in
debt securities or primarily in equity securities.
The Fund's investments in fixed-income securities will be, at the time of
investment, of investment grade quality. Investment grade securities are those
rated at least BBB by Standard & Poor's Ratings Group ("S&P"), or at least Baa
by Moody's Investor Services, Inc. ("Moody's") or comparably rated by any other
nationally recognized statistical rating organization or, if unrated, considered
by the Fund's investment adviser to be of comparable quality. The Fund may,
however, invest up to 20% of its assets in fixed-income securities that are
rated below investment grade but not rated lower than CC by S&P or Ca by Moody's
or comparably rated by any other nationally recognized statistical rating
organization or, if unrated, considered by the Fund's investment adviser to be
of comparable or higher quality. The foregoing 20% limit shall not apply to
convertible securities. The Fund may not, however, invest more than 35% of its
total assets in all fixed-income securities, including convertible securities,
rated below investment grade or, if unrated, deemed by the Adviser to be of
comparable quality. Such lower rated or unrated income securities are commonly
referred to as "junk bonds" and are regarded by S&P and Moody's as predominately
speculative with respect to the capacity to pay interest or repay principal in
accordance with their terms. While offering opportunities for higher yields,
lower-grade securities are considered below investment grade and involve a
greater degree of credit risk than investment grade income securities; although
the lower-grade income securities of an issuer generally involve a lower degree
of credit risk than its common stock.
3
<PAGE> 7
The Fund may invest up to 25% of its assets in securities issued by non-U.S.
issuers. Under current market conditions, the Fund anticipates that at least one
half of the Fund's investments in such foreign securities will be U.S.
dollar-denominated. Investments in foreign securities involve certain risks not
ordinarily associated with investments in securities of domestic issuers,
including fluctuations in foreign exchange rates, future political and economic
developments, confiscatory taxation and the possible imposition of exchange
controls or other foreign governmental laws or restrictions.
The Fund's net asset value per share will fluctuate depending on market
conditions and other factors.
The Fund also may use various investment techniques including options,
futures, swaps and other derivatives, entering into when-issued or delayed
delivery transactions, lending portfolio securities, repurchase agreements and
reverse repurchase agreements. Such transactions entail certain risks. See
"Investment Objective and Policies" and "Investment Practices."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table
of "Financial Highlights."
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
different classes of shares permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares and other circumstances. See "Purchase of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. distributes the
Fund's shares.
DISTRIBUTIONS FROM THE FUND. Distributions from net investment income are
declared daily and paid quarterly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner on the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class of shares. See "Distributions from the Fund."
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
4
<PAGE> 8
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- -------------- --------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases (as
a percentage of the
offering price).......... 5.75%(1) None None
Maximum sales charge
imposed on reinvested
dividends (as a
percentage of the
offering price).......... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................ None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................ None None None
Exchange fees.............. None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced on investments of $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
<PAGE> 9
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
--------- --------- ---------
<S> <C> <C> <C>
Management fees(1) (as a percentage of
average daily net assets)................ 0.00% 0.00% 0.00%
12b-1 fees(2) (as a percentage of average
daily
net assets).............................. 0.25% 1.00% 1.00%
Other expenses(1) (as a percentage of
average daily net assets)................ 0.34% 0.34% 0.34%
Total expenses(1) (as a percentage of
average daily
net assets).............................. 0.59% 1.34% 1.34%
</TABLE>
- ------------------------------------------------------------------------------
(1) Absent the Adviser's waiver of its fee and assumption of a portion of the
expenses of the Fund, "Management fees" would have been 0.70% for each of
the Class A Shares, Class B Shares and Class C Shares, "Other expenses"
would have been 2.14% for Class A Shares, 2.14% for Class B Shares and 2.14%
for Class C Shares and "Total expenses" would have been 3.09% for Class A
Shares, 3.84% for Class B Shares and 3.84% for Class C Shares.
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. See "The
Distribution and Service Plans."
6
<PAGE> 10
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 0.59% for Class
A Shares, 1.34% for Class B Shares and
1.34% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................. $63 $75 $89 $ 127
Class B Shares............................. $54 $77 $88 $ 141*
Class C Shares............................. $24 $42 $73 $ 161
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................. $63 $75 $89 $ 127
Class B Shares............................. $14 $42 $73 $ 141*
Class C Shares............................. $14 $42 $73 $ 161
</TABLE>
- ------------------------------------------------------------------------------
* Based on conversion to Class A Shares after eight years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. As Fund
assets increase, the fees waived or expenses reimbursed by the Adviser are
expected to decrease. Accordingly, it is unlikely that future expenses as
projected will remain consistent with those determined based on the "Annual Fund
Operating Expenses" table. The ten year amount with respect to Class B Shares of
the Fund reflects the lower 12b-1 and service fees applicable to such shares
after conversion to Class A Shares. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Redemption of
Shares," "Investment Advisory Services" and "The Distribution and Service
Plans."
7
<PAGE> 11
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the periods indicated)
- --------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for the periods indicated
and their report thereon appears in the Fund's related Statement of Additional
Information. This information should be read in conjunction with the financial
statements and related notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
CLASS B
CLASS A SHARES SHARES
----------------------------- -----------
JUNE 24, 1994
(COMMENCEMENT
OF INVESTMENT
YEAR ENDED OPERATIONS) YEAR ENDED
JUNE 30, TO JUNE 30,
1996 JUNE 30, 1995 1996
----------- ------------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period................................... $15.388 $14.300 $15.389
----------- ------ -----------
Net Investment Income..................................................... .572 .572 .459
Net Realized and Unrealized Gain on Securities............................ 1.678 1.041 1.667
----------- ------ -----------
Total from Investment Operations........................................... 2.250 1.613 2.126
----------- ------ -----------
Less:
Distributions from Net Investment Income.................................. .600 .525 .492
Distributions from Net Realized Gain on Securities........................ .986 -0- .986
----------- ------ -----------
Total Distributions........................................................ 1.586 .525 1.478
----------- ------ -----------
Net Asset Value, End of the Period......................................... $16.052 $15.388 $16.037
=========== ====== ===========
Total Return*(a)........................................................... 15.07% 11.53%** 14.25%
Net Assets at End of the Period (in millions).............................. $ 6.5 $ 4.8 $ 8.2
Ratio of Expenses to Average Net Assets*................................... .59% 1.15% 1.34%
Ratio of Net Investment Income to Average Net Assets*...................... 3.63% 4.01% 2.88%
Portfolio Turnover......................................................... 177% 121%** 177%
Average Commission Paid Per Equity Share Trade(b).......................... $ .048 -- $ .048
- ----------------
* 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................................. 3.09% 2.76% 3.84%
Ratio of Net Investment Income to Average Net Assets.................... 1.13% 2.40% .38%
** Non-annualized.
<CAPTION>
CLASS B SHARES CLASS C SHARES
-------------- -----------------------------
JUNE 24, 1994 JUNE 24, 1994
(COMMENCEMENT (COMMENCEMENT
OF INVESTMENT OF INVESTMENT
OPERATIONS) YEAR ENDED OPERATIONS)
TO JUNE 30, TO
JUNE 30, 1995 1996 JUNE 30, 1995
------------- ----------- -------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period................................... $14.300 $15.388 $14.300
------ ----------- ------
Net Investment Income..................................................... .464 .466 .426
Net Realized and Unrealized Gain on Securities............................ 1.056 1.662 1.093
------ ----------- ------
Total from Investment Operations........................................... 1.520 2.128 1.519
------ ----------- ------
Less:
Distributions from Net Investment Income.................................. .431 .492 .431
Distributions from Net Realized Gain on Securities........................ -0- .986 -0-
------ ----------- ------
Total Distributions........................................................ .431 1.478 .431
------ ----------- ------
Net Asset Value, End of the Period......................................... $15.389 $16.038 $15.388
====== =========== ======
Total Return*(a)........................................................... 10.82%** 14.25% 10.82%**
Net Assets at End of the Period (in millions).............................. $ 6.6 $ 1.1 $ .8
Ratio of Expenses to Average Net Assets*................................... 1.88% 1.34% 1.90%
Ratio of Net Investment Income to Average Net Assets*...................... 3.27% 2.88% 3.19%
Portfolio Turnover......................................................... 121%** 177% 121%**
Average Commission Paid Per Equity Share Trade(b).......................... -- $ .048 --
- ----------------
* If certain expenses had not been assumed by the Adviser, total return w
been as follows:
Ratio of Expenses to Average Net Assets................................. 3.48% 3.84% 3.48%
Ratio of Net Investment Income to Average Net Assets.................... 1.67% .38% 1.61%
** Non-annualized.
</TABLE>
(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) Represents the average brokerage commissions paid on equity transactions
entered into during the period where commissions were applicable. This
disclosure is not applicable for periods prior to June 30, 1996.
See Financial Statements and Notes Thereto
8
<PAGE> 12
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
Van Kampen American Capital Balanced Fund (the "Fund") is a mutual fund. A
mutual fund allows investors to pool their money with that of other investors in
order to obtain professional investment management. Mutual funds generally make
it possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping. 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.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The Fund's investment objective is to provide its shareholders with current
income, while also seeking to provide shareholders with capital growth. The Fund
will seek to achieve its investment objective by investing in a diversified
portfolio of equity securities consisting of common and preferred stocks,
fixed-income securities (including government securities, corporate debt
securities and convertible securities) and cash and cash equivalents. The mix of
these securities is determined by the Adviser on the basis of existing and
anticipated market conditions. The relative percentages of each type of security
in the portfolio can be expected to fluctuate and at times the Fund may be
invested primarily in debt securities or primarily in equity securities.
In normal market conditions, the Fund will have at least 25% of its total
assets invested in equity securities and 25% of its total assets invested in
investment grade fixed-income debt securities. The Fund's investments in
fixed-income securities will be, at the time of investment, of investment grade
quality. Investment grade rated securities are those rated at least BBB by
Standard & Poor's Ratings Group ("S&P"), or at least Baa by Moody's Investors
Services, Inc. ("Moody's") or comparably rated by any other nationally
recognized statistical rating organization ("NRSRO") or, if unrated, considered
by the Adviser to be of comparable quality. The Fund may, however, invest up to
20% of its assets in fixed-income securities that are rated below investment
grade but not rated lower than CC by S&P or Ca by Moody's or comparably rated by
any other NRSRO or, if unrated, considered by the Adviser to be of comparable
quality. The foregoing 20% limit shall not apply to convertible securities. The
Fund may not, however, invest more than 35% of its total assets in all
fixed-income securities, including convertible securities, which are rated
9
<PAGE> 13
below investment grade or, if unrated, deemed by the Adviser to be of comparable
quality.
The Fund may invest up to 25% of its assets in securities issued by non-U.S.
issuers. Under current market conditions, the Fund anticipates that at least one
half of the Fund's investments in foreign securities will be U.S.
dollar-denominated.
The Fund's investment objective is fundamental and may not be changed without
the approval of the holders of a majority of the Fund's outstanding voting
securities, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"). There can be no assurance that the Fund will achieve its investment
objective. An investment in the Fund may not be appropriate for all investors.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.
ALLOCATION OF INVESTMENTS
The relative proportion of securities held by the Fund at any particular time
in the fixed-income and equity sectors of the market will be based on the
Adviser's views on market and economic conditions at such time and on the
Adviser's assessment of the relative investment opportunities and investment
risks presented in such sectors. In making such assessment, the Adviser will
consider such factors as actual or perceived changes in interest rate cycles,
business or economic conditions, rates of inflation, political factors, currency
relationships, investor demand, new issue or secondary market supply and other
factors. The Adviser applies a fundamental investment analysis in selecting
particular fixed-income and equity securities, including the macroeconomic
factors referenced above and, with respect to the particular issuers of such
securities, factors such as the creditworthiness and overall financial condition
of the issuer, the strength of management, product lines and competitive
positions of such issuer.
Alan T. Sachtleben, Executive Vice President of the Adviser, makes investment
allocation decisions for the Fund between the fixed-income and equity sectors
based on the recommendations of investment professionals of the Adviser. Once
the investment allocation decisions have been made, the Fund's portfolio
manager, B. Robert Baker, makes selections of particular securities consistent
with the foregoing and in consultation with the other investment professionals
of the Adviser. Allocations within the Fund's portfolio between fixed-income and
equity investment may be adjusted at any time and are formally reviewed at least
monthly. See also "Investment Advisory Services -- Portfolio Management."
Other than for tax purposes, frequency of portfolio turnover generally will
not be a limiting factor if the Fund considers it advantageous to purchase or
sell securities. The Fund does not anticipate having annual portfolio turnover
rates in excess of 200% with respect to either the equity portfolio or the
fixed-income portfolio. A
10
<PAGE> 14
high rate of portfolio turnover involves correspondingly greater brokerage
commission expenses or dealer costs than a lower rate, which expenses and costs
must be borne by the Fund and its shareholders. A high portfolio turnover rate
may result in the realization of more capital gains taxes than if the Fund had a
lower portfolio turnover rate. See "Investment Policies and Restrictions" in the
Statement of Additional Information.
PORTFOLIO SECURITIES
COMMON STOCK. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
after making required payments to holders of such entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so. In selecting common stocks for
investment, the Fund will focus both on the security's potential for
appreciation and on its dividend paying capacity.
FIXED-INCOME SECURITIES. The Fund may invest its assets in fixed-income
securities, which include preferred stocks, government securities, corporate
debt securities of various maturities and convertible securities. Convertible
securities are bonds, debentures, notes, preferred stocks or other securities
that may be converted into or exchanged for a specified amount of common stock
of the same or a different issuer within a particular period of time and at a
specified price or formula. A convertible security entitles the holder to
receive interest generally paid or accrued on debt or the dividend paid on
preferred stock until the convertible security matures or is redeemed, converted
or exchanged. The Fund's investments in fixed-income securities will be, at the
time of investment, rated investment grade. Investment grade rated securities
are those rated at least BBB by S&P, or at least Baa by Moody's or comparably
rated by any other NRSRO or, if unrated, considered by the Adviser to be of
comparable quality. The Fund may, however, invest up to 20% of its assets in
income securities that are rated at least CC by S&P or at least Ca by Moody's or
comparably rated by any other NRSRO or, if unrated, considered by the Fund's
investment adviser to be of comparable quality. The foregoing 20% limit shall
not apply to convertible securities. The Fund may not, however, invest more than
35% of its total assets in all fixed-income securities, including convertible
securities, which are rated below investment grade or, if unrated, deemed by the
Adviser to be of comparable quality.
Investment in lower grade securities involve a greater degree of credit risk
as compared with investment in higher grade securities. Such lower rated or
unrated income securities are commonly referred to as "junk bonds" and are
regarded by S&P and Moody's as predominately speculative with respect to the
capacity to pay interest and/or repay principal in accordance with their terms.
While offering opportunities for higher yields, lower-grade securities are
considered below investment grade and involve a greater degree of credit risk
that investment grade income
11
<PAGE> 15
securities; although the lower-grade income securities of an issuer generally
involve a lower degree of credit risk than its common stock. Such securities are
regarded by the rating agencies, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation; assurance of interest and principal payments or
maintenance of other terms of the securities over any long period of time may be
small. The market for lower grade securities is considered to be less liquid
than the market for investment grade securities which may adversely affect the
ability of the Fund to dispose of such securities in a timely manner at a price
which reflects the value of such security in the Adviser's judgment. Because
issuers of lower grade securities frequently choose not to seek a rating of
their securities, the Fund will rely more heavily on the Adviser's ability to
determine the relative investment quality of such securities than if the Fund
invested exclusively in higher grade securities. For a description of the
ratings assigned to income securities, including lower grade income securities,
please see "Description of Securities Ratings" in the Statement of Additional
Information.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. The values of income securities may change as interest
rate levels fluctuate. To the extent that the Fund invests in income securities,
the net asset value of the Fund can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in income securities generally can be expected to rise. Conversely,
when interest rates rise, the value of a portfolio invested in income securities
generally can be expected to decline. Volatility may be greater during periods
of general economic uncertainty.
The foregoing policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Fund will not be
required to dispose of a security in the event that S&P or Moody's (or any other
NRSRO or, in the case of unrated income securities, the Adviser) downgrades its
assessment of the credit characteristics of a particular issuer. In determining
whether the Fund will retain or sell such a security, in addition to the factors
described above, the Adviser may consider such factors as the Adviser's
assessment of the credit quality of the issuer of such security, the price at
which such security could be sold and the rating, if any, assigned to such
security by any other NRSRO.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in securities
issued by non-U.S. issuers of similar quality as the securities described above
as determined by the Adviser. Under current market conditions, the Fund
anticipates that at least one half of the Fund's investments in foreign
securities will be U.S. dollar-denominated. Investments in securities of foreign
entities and securities denominated in foreign currencies involve risks not
typically involved in domestic investment, including fluctuations in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since the Fund
may invest in securities denominated or quoted in
12
<PAGE> 16
currencies other than the United States dollar, changes in foreign currency
exchange rates may affect the value of investments in the portfolio and the
accrued income and unrealized appreciation or depreciation of investments.
Changes in foreign currency exchange rates relative to the U.S. dollar will
affect the U.S. dollar value of the Fund's assets denominated in that currency
and the Fund's yield on such assets. With respect to certain foreign countries,
there is the possibility of expropriation of assets, confiscatory taxation,
political or social instability or diplomatic developments which could affect
investment in those countries. There may be less publicly available information
about a foreign security than about a United States security, and foreign
entities may not be subject to accounting, auditing and financial reporting
standards and requirements comparable to those of United States entities. In
addition, certain foreign investments made by the Fund may be subject to foreign
withholding taxes, which would reduce the Fund's total return on such
investments and the amounts available for distributions by the Fund to its
shareholders. See "Tax Status." Foreign financial markets, while growing in
volume, have, for the most part, substantially less volume than United States
markets, and securities of many foreign companies are less liquid and their
prices more volatile than securities of comparable domestic companies. The
foreign markets also have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of the Fund are not invested and no return is earned thereon. The
inability of the Fund to make intended security purchases due to settlement
problems could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities due to settlement problems could
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. Costs associated
with transactions in foreign securities, including custodial costs and foreign
brokerage commissions, are generally higher than with transactions in United
States securities. In addition, the Fund will incur costs in connection with
conversions between various currencies. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the United States.
DEFENSIVE STRATEGIES. In certain circumstances market conditions may, in the
Adviser's judgment, make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, the
Adviser may use alternative strategies primarily designed to reduce fluctuations
in the value of the Fund's assets. In implementing these "defensive" strategies,
the Fund may invest to a substantial degree in high-quality, short-term
obligations. Such taxable obligations may include: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
within the four highest grades by either S&P or Moody's (or comparably rated by
any other NRSRO); commercial paper rated in the highest grade by either rating
service (or comparably rated by any other
13
<PAGE> 17
NRSRO); certificates of deposit and bankers' acceptances; repurchase agreements
with respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategy.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions, enter into currency transactions, purchase and
sell securities on a "when issued" and "delayed delivery" basis, enter into
repurchase and reverse repurchase agreements and lend its portfolio securities
in each case, subject to the limitations set forth below. These investments
entail risks.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into interest rate transactions such as swaps, caps, floors or collars and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures. Collectively, all of the above are referred to as "Strategic
Transactions." Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio, to protect the Fund's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective interest rate exposure of the
Fund's portfolio, to protect against changes in currency exchange rates, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements or the inability to
14
<PAGE> 18
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the
contemplated use of these futures contracts and options thereon should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Certain Strategic Transactions may provide the
opportunity for increased income, but may have characteristics similar to
leverage. As a result, increases and decreases in the net asset value of the
Fund may be larger than comparable changes in the net asset value of the Fund if
the Fund did not engage in such Strategic Transactions. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized. The Strategic Transactions that the Fund may use and some of
their risks are described more fully in the Fund's Statement of Additional
Information.
Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable income of the Fund. See "Tax Status."
REPURCHASE AGREEMENTS. The Fund may use up to 20% of its assets to enter into
repurchase agreements with selected commercial banks and broker-dealers, under
which the Fund acquires securities and agrees to resell the securities at an
agreed upon time and at an agreed upon price. The Fund accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Fund enters into a repurchase agreement,
the value of the underlying security including accrued interest will be equal to
or exceed the value of the repurchase agreement and, for repurchase agreements
that mature in more than one day, the seller will agree that the value of the
underlying security including accrued interest will continue to be at least
equal to the value of the repurchase agreement. The Adviser will monitor the
value of the underlying security in this regard. The Fund will enter into
repurchase agreements only with commercial banks whose deposits are insured by
the Federal Deposit Insurance Corporation and whose assets exceed $500 million
or broker-dealers who are registered with the SEC. In determining whether to
enter into a repurchase agreement with a bank or broker-dealer, the Fund will
take into account the credit-worthiness of such party and will monitor its
credit-worthiness on an ongoing basis. In the event of default by such party,
the delays and expenses potentially involved in establishing the Fund's rights
to, and in liquidating, the security may result in loss to the Fund. The Fund's
15
<PAGE> 19
ability to invest in repurchase agreements that mature in more than seven days
is subject to an investment restriction that limits the Fund's investments in
"illiquid" securities, including such repurchase agreements, to 15% of the
Fund's net assets.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that funds advised or subadvised by the Adviser or its
affiliates 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
exemptive order authorizing this practice, which conditions are designed to
ensure the fair administration of the joint account and to protect the amounts
in that account.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell portfolio securities on a "when issued" and "delayed delivery" basis.
No income accrues to or is earned by the Fund on portfolio securities in
connection with such purchase transactions prior to the date the Fund actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of such securities at delivery may be more or less than
their purchase price, and yields generally available on such securities when
delivery occurs may be higher or lower than yields on the such securities
obtained pursuant to such transactions. Because the Fund relies on the buyer or
seller, as the case may be, to consummate the transaction, failure by the other
party to complete the transaction may result in the Fund missing the opportunity
of obtaining a price or yield considered to be advantageous. When the Fund is
the buyer in such a transaction, however, it will maintain, in a segregated
account with its custodian, cash or high-grade portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase securities on such basis
only with the intention of actually acquiring these securities, but the Fund may
sell such securities prior to the settlement date if such sale is considered to
be advisable. To the extent the Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purposes of investment leverage. No specific limitation
exists as to the percentage of the Fund's assets which may be used to acquire
securities on a "when issued" or "delayed delivery" basis.
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 15% of its net
assets in illiquid securities including securities the disposition of which is
subject to substantial legal or contractual restrictions on resale and
securities that are not readily marketable. The sale of restricted and illiquid
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of securities
eligible for trading on national securities
16
<PAGE> 20
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, as
amended, that are determined to be liquid by the Adviser under guidelines
adopted by the Board of Trustees of the Trust (under which guidelines the
Adviser will consider factors such as trading activities and the availability of
price quotations), will not be treated as restricted securities by the Fund
pursuant to such rules.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, the Fund may lend its portfolio securities to selected commercial
banks or broker-dealers up to a maximum of 50% of the assets of the Fund. Such
loans must be callable at any time and be continuously secured by collateral
deposited by the borrower in a segregated account with the Fund's custodian
consisting of cash or of securities issued or guaranteed by the U.S. Government
or its agencies, which collateral is equal at all times to at least 100% of the
value of the securities loaned, including accrued interest. The Fund will
receive amounts equal to earned income for having made the loan. Any cash
collateral pursuant to these loans will be invested in short-term instruments.
The Fund is the beneficial owner of the loaned securities in that any gain or
loss in the market price during the loan inures to the Fund and its
shareholders. Thus, when the loan is terminated, the value of the securities may
be more or less than their value at the beginning of the loan. In determining
whether to lend its portfolio securities to a bank or broker-dealer, the Fund
will take into account the credit-worthiness of such borrower and will monitor
such credit-worthiness on an ongoing basis in as much as default by the other
party may cause delays or other collection difficulties. The Fund may pay
finders' fees in connection with loans of its portfolio securities.
DOLLAR ROLLS. In order to seek a high level of current income, the Fund may
enter into dollar rolls in which the Fund sells securities for delivery in the
current month and simultaneously contracts to repurchase, typically in 30 or 60
days, substantially similar (same type and coupon) securities on a specified
future date from the same party at an agreed upon price which is less than the
sales price. During the roll period, the Fund forgoes principal and interest
paid on the securities. The Fund is compensated by the difference between the
current sales price and the forward price for the future purchase (often
referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale. The cash proceeds from the sale will be maintained
by the Fund in a segregated account with its custodian in which cash, U.S.
Government Securities or other liquid securities will be equal in value to its
obligations. Because such assets are maintained in a segregated account, the
Fund will not treat such obligations as senior securities for purposes of the
1940 Act. A "covered roll" is a specific type of dollar roll for which there is
an offsetting cash position or cash equivalent security position which matures
on or before the forward settlement date of the dollar roll transaction.
"Covered rolls" are not subject to these segregation requirements.
17
<PAGE> 21
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreements with respect to securities which could otherwise be sold by the Fund.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price which is greater than the sales price. During the
reverse repurchase agreement period, the Fund continues to receive principal and
interest payments on these securities. Reverse repurchase agreements involve the
risk that the market value of the securities retained by the Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities. Reverse repurchase
agreements create leverage and will be treated as borrowings for the purposes of
the Fund's investment restriction on borrowings.
The Fund is authorized to enter into dollar rolls and reverse repurchase
agreements with banks in an amount up to 33 1/3% of the Fund's total assets
(after giving effect to any such dollar rolls and reverse repurchase
agreements), which amount includes no more than 5% in borrowings and reverse
repurchase agreements from any entity for temporary purposes, such as clearances
of portfolio transactions, share repurchases and payment of dividends and
distributions. The Fund has no current intention to borrow money other than for
such temporary purposes. Accordingly, the Fund will not acquire additional
securities during any period in which its borrowings exceed 5% of the Fund's
total assets. The Fund will borrow only when the Adviser believes that such
borrowings will benefit the Fund.
Borrowing by the Fund creates an opportunity for increased net income but, at
the same time, creates special risk considerations such as changes in the net
asset value of the Shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Fund which can exceed the income from the assets
retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Fund will be less than if borrowing
were not used, and therefore the amount available for distribution to
stockholders as dividends will be reduced.
RISKS. The Fund's investment in certain portfolio securities and other
investment practices entail certain risks. Please see the discussion of such
risks contained under "Investment Objective and Policies -- Portfolio
Securities" and "Investment Practices."
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed
18
<PAGE> 22
without the approval of the holders of a majority of the Fund's outstanding
voting securities, as defined in the 1940 Act. See "Investment Policies and
Restrictions" in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The fixed-income securities in which the Fund may invest
are traded principally in the over-the-counter market. In the over-the-counter
market, securities generally are traded on a net basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a mark-up to the dealer. Securities purchased
in underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances when, in the judgment of the Adviser, more than
one firm can offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and 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.
- ------------------------------------------------------------------------------
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
19
<PAGE> 23
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 2,800 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 controlled, through the ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is
managed by Clayton, Dubilier & Rice, Inc., a New York based private investment
firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV
Limited Partnership ("C&D Associates L.P."). The general partners of C&D
Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe,
Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and
Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice,
Inc. In addition, certain officers, directors and employees of Van Kampen
American Capital and its subsidiaries (some of whom are officers or trustees of
the Fund) own, in the aggregate, not more than 6% of the common stock of VK/AC
Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 12% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc. The address of the Adviser is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.
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 % PER ANNUM
- -------------------------------------------------------- -------------
<S> <C>
First $500 million...................................... 0.70 of 1.00%
Over $500 million....................................... 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
20
<PAGE> 24
share certificates, membership dues in the Investment Company Institute or any
similar organization, reports and notices to shareholders, costs of registering
shares of the Fund under the federal and state securities laws, miscellaneous
expenses 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. B. Robert Baker has been primarily responsible for the
day-to-day management of the Fund's investment portfolio since August 1995. Mr.
Baker is currently a Vice President of the Adviser and has been an associate
portfolio manager with Van Kampen American Capital Asset Management, Inc., an
affiliate of Van Kampen American Capital, since November 1991.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and the
aggregate distribution and services fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund.
The Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Shares of each class are offered at a price
equal to their net asset value per share plus a sales charge which, at the
election of the purchaser, may be imposed (a) at the time of purchase (the
"Class A Shares") or (b) on a contingent deferred basis (Class A Share accounts
over $1 million, "Class B Shares" and "Class C Shares"). Class A Share accounts
over $1 million or otherwise subject to a contingent deferred sales charge (a
"CDSC"), Class B Shares and Class C Shares sometimes are referred to herein
collectively as "Contingent Deferred Sales Charge Shares" or "CDSC Shares."
21
<PAGE> 25
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 amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC (and a higher aggregate distribution and service fee). However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of such Class A Shares would not have all
of his or her funds invested initially and, therefore, would initially own fewer
shares than if Class B Shares or Class C Shares had been purchased. On the other
hand, an investor whose purchase would not qualify for price discounts
applicable to Class A Shares and intends to remain invested until after the
expiration of the applicable CDSC period may wish to defer the sales charge and
have all his or her funds initially invested in Class B Shares or Class C
Shares. If such an investor anticipates that he or she will redeem such shares
prior to the expiration of the CDSC period applicable to Class B Shares, the
investor may wish to acquire Class C Shares (discussed below). Investors 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 distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. 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 and services fee or
not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares,
22
<PAGE> 26
which expenses typically will be higher with respect to classes of shares
subject to the conversion feature; (ii) printing and postage expenses related to
preparing and distributing materials such as shareholder reports, prospectuses
and proxy statements to current shareholders of a specific class; (iii) SEC
registration fees incurred by a class of shares; (iv) the expense of
administrative personnel and services as required to support the shareholders of
a specific class; (v) Trustees' fees or expense incurred as a result of issues
relating to one class of shares; (vi) accounting expenses relating solely to one
class of shares; and (vii) any other incremental expenses subsequently
identified that should be properly allocated to one or more classes of shares.
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 are also offered through members of the National Association of
Securities Dealers, Inc. ("NASD") acting as securities dealers ("dealers") and
through NASD members acting as brokers for investors ("brokers") or eligible
non-NASD members acting as agents for investors ("financial intermediaries").
The Fund reserves the right to suspend or terminate the continuous public
offering of its shares at any time and without prior notice.
The Fund's shares are offered at net asset value per share next computed after
an investor places an order to purchase with the investor's broker, dealer or
financial intermediary or with the Distributor, plus any applicable sales
charge. Sales personnel of brokers, dealers and financial intermediaries
distributing the Fund's shares may receive differing compensation for selling
different classes of shares. It is the responsibility of the investor's broker,
dealer or financial intermediary to transmit the order to the Distributor.
Because the Fund generally will determine net asset value once each business day
as of the close of business, purchase orders placed through an investor's
broker, dealer or financial intermediary must be transmitted to the Distributor
by such broker, dealer or financial intermediary prior to such time in order for
the investor's order to be fulfilled on the basis of the net asset value to be
determined that day. Any change in the purchase price due to the failure of the
Distributor to receive a purchase order prior to such time must be settled
between the investor and the broker, dealer or financial intermediary submitting
the order.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
23
<PAGE> 27
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it, pay fees to, and sponsor business seminars
for, qualifying brokers, dealers or financial intermediaries for certain
services or activities which are primarily intended to result in sales of shares
of the Fund. Fees may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. Such payments to brokers, dealers and
financial intermediaries for sales contests, other sales programs and seminars
are made by the Distributor out of its own assets and not out of the assets of
the Fund. These programs will not change the price an investor will pay for
shares or the amount that the Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between the investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor, the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial intermediaries who receive more than 90% or more
of the sales charge may be deemed to be "underwriters" as that term is defined
in the Securities Act of 1933, as amended.
24
<PAGE> 28
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
-------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000....................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000.......... 4.75 4.99 4.00
$100,000 but less than $250,000......... 3.75 3.90 3.00
$250,000 but less than $500,000......... 2.75 2.83 2.25
$500,000 but less than $1,000,000....... 2.00 2.04 1.75
$1,000,000 or more*..................... * * *
</TABLE>
- ------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% on redemptions made within one
year of the purchase. A commission will be paid to 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
with respect to contingent deferred sales charges.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) and any corporation, partnership, or sole proprietorship
which is 100% owned, either alone or in combination, by any of the foregoing; a
trustee or other fiduciary purchasing for a single fiduciary account; or a
"company" as defined is section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Tax
25
<PAGE> 29
Free Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve
Fund ("Reserve Fund") and The Govett Funds, Inc.
VOLUME DISCOUNTS. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of the Fund or in combination with shares of 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
26
<PAGE> 30
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 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/directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
27
<PAGE> 31
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a 12-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Tax Free Money Fund or Reserve Fund. For such
investments the Fund imposes a contingent deferred sales charge of 1.00%
in the event of redemptions within one year of the purchase other than
redemptions required to make payments to participants under the terms of
the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
(9) Participants in any 403(b)(7) program of a college or university system
which permits only net asset value mutual fund investments and for which
Van Kampen American Capital Trust Company serves as custodian. In
connection with such purchases, the Distributor may pay, out of its own
assets, a commission to brokers, dealers, or financial intermediaries as
follows: one percent on sales up to $5 million, plus 0.50% on the next $5
million, plus 0.25% on the excess over $10 million.
(10) Individuals who are members of a "qualified group" may purchase Class A
Shares of the Fund without the imposition of a front end sales charge. For
this
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<PAGE> 32
purpose, a qualified group is one which (i) has been in existence for more
than six 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 funds in the Van Kampen American Capital
Family of 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, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor compensates 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
29
<PAGE> 33
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
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 CDSC 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 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 the charge because of dividend reinvestment. With respect
to the remaining 40 shares, the charge is applied only to the original cost of
$10 per share and not to the increase in net asset value of $2 per share.
Therefore, $400 of the $600 redemption proceeds will be charged at a rate of
3.75% (the applicable rate in the second year after purchase).
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<PAGE> 34
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 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 six 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> <C>
First............................................ 4.00%
Second........................................... 3.75%
Third............................................ 3.50%
Fourth........................................... 2.50%
Fifth............................................ 1.50%
Sixth............................................ 1.00%
Seventh and after................................ 0.00%
</TABLE>
The 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 and Class C Shares automatically will
convert to Class A Shares eight years or ten years, respectively, 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 fees applicable to
Class B Shares and Class C Shares. The purpose of the conversion feature is to
relieve the holders of Class B Shares and Class C 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-elated expenses. The Fund does not expect to issue
any share certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares and Class C
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 or Class C 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.
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<PAGE> 35
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
determined by reference to the date such share originally was purchased from a
Van Kampen American Capital fund.
The conversion of Class B Shares and Class C Shares to Class A Shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the higher distribution and service fees and transfer
agency costs with respect to 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 or Class C 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 certain
distributions from an IRA or other retirement plan, (iii) pursuant to the Fund's
systematic withdrawal plan but limited to 12% annually of the initial value of
the account, and (iv) effected pursuant to the right of the Fund to liquidate a
shareholder's account as described herein under "Redemption of Shares." The 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 outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon more
frequently than once a day if deemed desirable. The net asset value per share of
the different classes of shares are expected to be substantially the same; from
32
<PAGE> 36
time to time, however, the per share net asset value of the different classes of
shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.
- ------------------------------------------------------------------------------
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
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<PAGE> 37
value of the issued shares and bill the party to whom the replacement
certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. 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 any other
Participating Fund, Tax Free Money Fund or Reserve Fund so long as a
pre-existing account for such class of shares exists for such shareholder. 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 another
Participating Fund, Tax Free Money Fund or Reserve Fund, subject to
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<PAGE> 38
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
LEGALLY AVAILABLE FOR SALE IN THEIR STATE.
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 requests.
Class A Shares of Van Kampen American Capital funds that generally impose an
initial sales charge 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 charge 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
35
<PAGE> 39
unauthorized or fraudulent instructions if reasonable procedures are not
followed. If the exchanging shareholder does not have an account in the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gains options (except dividend
diversification options) and broker, dealer or financial intermediary of record
as the account from which shares are exchanged, unless otherwise specified by
the shareholder. In order to establish a systematic withdrawal plan for the new
account or dividend diversification options for the new account, an exchanging
shareholder must file a specific written request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
may restrict or terminate the exchange privilege at any time on 60 days' notice
to its shareholders of any termination or material amendment.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25. Such a systematic withdrawal plan
may also be maintained by an investor purchasing shares for a retirement plan
established on a form made available by the Fund. See "Shareholder Services --
Retirement Plans."
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with 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
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<PAGE> 40
of Automated Clearing House. In addition, the shareholder must fill out the
appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable CDSC) 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.
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<PAGE> 41
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received by a dealer provided such order is
transmitted to the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application 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'
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<PAGE> 42
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. The Fund reserves the right at any time to terminate, limit
or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the CDSC 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 CDSC 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
39
<PAGE> 43
determined after the order is received, which must be within 120 days after the
date of the redemption. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge." Reinstatement at net asset value is also offered to participants
in those eligible retirement plans held or administered by Van Kampen American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.
- ------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount of up to 0.25% per year
of the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and the Service Plan. From such amount, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries as a service fee or the amount of the
Distributor's actual distribution-related expense.
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
40
<PAGE> 44
attributable to Class C Shares maintained in the Fund more than one year by such
brokers, dealers or financial intermediary's customers. The Fund pays the
Distributor the lesser of the balance of the 0.75% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution-related expense attributable to the Class C Shares. In addition,
the Fund may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class C Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual distribution-related expenses with respect to a class
of CDSC Shares for any given year may exceed the 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 $294,044 and
$2,102 of unreimbursed distribution-related expenses with respect to Class B
Shares and Class C Shares, respectively, representing 3.60% and 0.20% of the
Fund's net assets attributable 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 contingent deferred sales
charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the CDSC applicable to a particular class of
shares to defray distribution-related expenses attributable to any other class
of shares. Various
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<PAGE> 45
federal and state laws prohibit national banks and some state-chartered
commercial banks from underwriting or dealing in the Fund's shares. In addition,
state securities laws on this issue may differ from the interpretations of
federal law, and banks and financial institutions may be required to register as
dealers pursuant to state law. In the unlikely event that a court were to find
that these laws prevent such banks from providing such services described above,
the Fund would seek alternate providers and expects that shareholders would not
experience any disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay quarterly to holders of each class of
shares distributions of all or substantially all net investment income of the
Fund attributable to the respective class. Net investment income consists of all
interest income, dividends, other ordinary income earned by the Fund on its
portfolio assets and net short-term capital gains, less all expenses of the Fund
attributable to the class of shares in question. Expenses of the Fund are
accrued each day. Net realized long-term capital gains, if any, are expected to
be distributed, to the extent permitted by applicable law, to shareholders at
least annually. Distributions cannot be assured, and the amount of each
quarterly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to 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. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
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<PAGE> 46
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund automatically will
credit quarterly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment plan is automatic. This instruction may be made by
telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or
in writing to ACCESS.
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
The following federal income tax discussion is based on the advice of Skadden,
Arps, Slate, Meagher & Flom, and reflects applicable tax laws as of the date of
this Prospectus.
FEDERAL INCOME TAXATION. The Fund intends to qualify each year and to elect to
be treated as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses) in
each year, it will not be required to pay federal income taxes on any income
distributed to shareholders. The Fund intends to distribute at least the minimum
amount of net investment income necessary to satisfy the 90% distribution
requirement. The Fund will not be subject to federal income tax on any net
capital gains distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its net capital gains (the
latter of which generally is computed on the basis of the one-year period ending
on October 31 of such year), plus any amounts that were not distributed in
previous taxable years. For purposes of the excise tax, any ordinary income or
net capital gains retained by, and subject to federal income tax in the hands
of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to Shareholders (less any interest charge). In addition, if
the Fund failed to
43
<PAGE> 47
qualify as a regulated investment company for its first taxable year or, if
immediately after qualifying as a regulated investment company for any taxable
year, it failed to qualify for a period greater than one taxable year, the Fund
would be required to recognize any net built-in gains (the excess of aggregate
gains, including items of income, over aggregate losses that would have been
realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirements for avoiding income and excise taxes. The Fund will monitor its
transactions and may make certain tax elections in order to mitigate the effect
of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's annual gross income be derived from the disposition of
securities held for less than three months.
DISTRIBUTIONS. Distributions of the Fund's net investment income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional Shares. Distributions
of the Fund's net capital gains ("capital gains dividends"), if any, are taxable
to shareholders at the rates applicable to long-term capital gains regardless of
the length of time shares of the Fund have been held by such shareholders.
Distributions in excess of the Fund's earnings and profits will first reduce the
adjusted tax basis of a holder's shares and, after such adjusted tax basis is
reduced to zero, will constitute capital gains to such holder (assuming such
Shares are held as a capital asset). The Fund will inform shareholders of the
source and tax status of all distributions promptly after the close of each
calendar year. Some portion of the distributions from the
44
<PAGE> 48
Fund will be eligible for the dividends received deduction for corporations if
the Fund receives qualifying dividends during the year and if certain other
requirements of the Code are satisfied.
Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such Shares will equal the
fair market value on the distribution date.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to Shareholders of
record on a specified date in such quarter and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the Shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
Shareholders.
The Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling Shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such shares
have been held for more than one year. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as a long-term
capital loss to the extent of any capital gains dividends received with respect
to such shares. For purposes of determining whether shares have been held for
six months or less, the holding period is suspended for any periods during which
the shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their advisors regarding
the specific federal tax consequences of holding and disposing of shares, as
well as the effects of state, local and foreign tax law and any proposed tax law
changes.
45
<PAGE> 49
- ------------------------------------------------------------------------------
FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. In
addition the Fund may include in advertisements or other sales literature
information regarding the past performance of certain types of investments or
market indices. Any historical performance information regarding the Fund will
include the average total return of the Fund calculated on a compounded basis
for specified periods of time. Such advertisements and sales material may also
include a yield quotation as of a current period. In each case, such total
return and yield information, if any, will be calculated pursuant to rules
established by the SEC and will be computed separately for each class of the
Fund's shares. In lieu of or in addition to total return and yield calculations,
such information may include performance rankings and similar information from
independent organizations such as Lipper Analytical Services, Inc. or nationally
recognized financial publications. From time to time, the Fund may compare its
performance to certain securities and unmanaged indices which may have different
risk/reward characteristics than the Fund. Such characteristics may include, but
are not limited to, tax features, guarantees, insurance and the fluctuation of
principal or return. In addition, from time to time, the Fund may utilize sales
literature that includes hypotheticals.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
46
<PAGE> 50
- ------------------------------------------------------------------------------
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 represent an interest in the
same assets of the Fund and are identical in all respects except that each class
bears certain distribution expenses and has exclusive voting rights with respect
to its distribution fee. See "The Distribution and Service Plans."
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 and Class C 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 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
47
<PAGE> 51
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 Van Kampen American Capital
Balanced 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.
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<PAGE> 52
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
BALANCED FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital
Balanced Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital
Balanced 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> 53
- ------------------------------------------------------------------------------
BALANCED FUND
------------------------------------------------------------------------------
P R O S P E C T U S
OCTOBER 28, 1996
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
