STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN MERRITT SERIES TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS BUT SHOULD
BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR VAN KAMPEN MERRITT SERIES
TRUST, DATED MAY 1, 1995, AS AMENDED JUNE 1, 1995
(the "PROSPECTUS").
A COPY OF THE PROSPECTUS MAY BE OBTAINED WITHOUT CHARGE BY CALLING (800)
831-LIFE, OR WRITING
COVA LIFE SALES COMPANY AT ONE TOWER LANE, SUITE
3000, OAKBROOK TERRACE, ILLINOIS 60181-4644.
The Prospectus and this Statement of Additional Information omit certain
of the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. These items may be
obtained from the Commission upon payment of the fee prescribed, or inspected
at the Commission's office at no charge.
THIS STATEMENT OF ADDITIONAL INFORMATION IS
DATED MAY 1, 1995, AS AMENDED JUNE 1, 1995.
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TABLE OF CONTENTS
PAGE
INVESTMENT OBJECTIVES AND POLICIES
Objectives
GNMA Certificates
Government National Mortgage Association
Nature of GNMA Certificates
Life of GNMA Certificates
Yield Characteristics of GNMA Certificates
Market for GNMA Certificates
Utility Securities
Lower Grade Securities
Strategic Transactions
General Characteristics of Options
General Characteristics of Futures
Options on Securities Indices and Other Financial Indices
Currency Transactions
Risks of Currency Transactions
Combined Transactions
Swaps, Caps, Floors and Collars
Eurodollar Instruments
Risks of Strategic Transactions Outside the United States
Use of Segregated and Other Special Accounts
Growth and Income Portfolio - Debt Securities Investments
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
Monitoring Procedures
INVESTMENT LIMITATIONS
Quality Income, High Yield, Money Market, Growth and Income, Stock Index
and World Equity Portfolios
Utility Portfolio
DESCRIPTION OF SECURITIES RATINGS
Commercial Paper Ratings
Variable Rate Demand Bond Ratings
Preferred Stock Ratings (Standard & Poor's)
Preferred Stock Ratings (Moody's)
YIELD INFORMATION FOR MONEY MARKET PORTFOLIO
OFFICERS AND TRUSTEES
SUBSTANTIAL SHAREHOLDERS
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
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CUSTODIAN
LEGAL COUNSEL AND INDEPENDENT AUDITORS
INVESTMENT ADVISORY AGREEMENT
LEGAL SERVICES AGREEMENT
PORTFOLIO TRANSACTIONS
FINANCIAL STATEMENTS
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INVESTMENT OBJECTIVES AND POLICIES
OBJECTIVES
For a description of the objectives of the Portfolios, see "Prospectus -
Investment Objectives." The following information is provided for those
investors wishing to have more comprehensive information than that contained
in the Prospectus.
GNMA CERTIFICATES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National
Mortgage Association is a wholly-owned corporate instrumentality of the United
States within the U.S. Department of Housing and Urban Development. GNMA's
principal programs involve its guarantees of privately issued securities
backed by pools of mortgages.
NATURE OF GNMA CERTIFICATES. GNMA Certificates are mortgage-backed
securities. The Certificates evidence part ownership of a pool of mortgage
loans. The Certificates which the Portfolio purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
fees paid to the GNMA Certificate issuer and GNMA, regardless of whether or
not the mortgagor actually makes the payment.
GNMA Certificates are backed by mortgages and, unlike most bonds, their
principal amount is paid back by the borrower over the length of the loan
rather than in a lump sum at maturity. Principal payments received by the
Portfolio will be reinvested in additional GNMA Certificates or in other
permissible investments.
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a pool
of mortgages insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. The GNMA
guarantee is backed by the full faith and credit of the United States. GNMA
is also empowered to borrow without limitation from the U.S. Treasury if
necessary to make any payments required under its guarantee. The net asset
value and return of the Portfolio will, however, fluctuate depending on market
conditions and other factors.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is
likely to be substantially less than the original maturity of the mortgage
pools underlying the securities. Prepayments of principal by mortgagors and
mortgage foreclosures will result in the return of a portion of principal
invested before the maturity of the mortgages in the pool.
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As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
GNMA Certificates. However, statistics published by the Federal Housing
Administration are normally used as an indicator of the expected average life
of GNMA Certificates. These statistics indicate that the average life of
single-family dwelling mortgages with 25-30 year maturities (the type of
mortgages backing the vast majority of GNMA Certificates) is approximately 12
years. For this reason, it is customary for pricing purposes to consider GNMA
Certificates as 30-year mortgage-backed securities which prepay fully in the
twelfth year.
YIELD CHARACTERISTICS OF GNMA CERTIFICATES. The coupon rate of interest
of GNMA Certificates is lower than the interest rate paid on the VA-guaranteed
or FHA-insured mortgages underlying the Certificates, but only by the amount
of the fees paid to GNMA and the GNMA Certificate issuer. For the most common
type of mortgage pool, containing single-family dwelling mortgages, GNMA
receives an annual fee of 0.06 of 1% of the outstanding principal for
providing its guarantee, and the GNMA Certificate issuer is paid an annual
servicing fee of 0.44 of 1% for assembling the mortgage pool and for passing
through monthly payments of interest and principal to Certificate holders.
The coupon rate by itself, however, does not indicate the yield which
will be earned on the Certificates for the following reasons:
1. Certificates are usually issued at a premium or discount, rather than
at par.
2. After issuance, Certificates usually trade in the secondary market at
a premium or discount.
3. Interest is paid monthly rather than semi-annually as is the case for
traditional bonds. Monthly compounding has the effect of raising the
effective yield earned on GNMA Certificates.
4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate. If
mortgagors prepay their mortgages, the principal returned to Certificate
holders may be reinvested at higher or lower rates.
In quoting yields for GNMA Certificates, the customary practice is to
assume that the Certificates will have a 12-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of 1% more than
high grade corporate bonds and 1/2 of 1% more than U.S. Government and U.S.
Government agency bonds. As the life of individual pools may vary widely,
however, the actual yield earned on any issue of GNMA Certificates may differ
significantly from the yield estimated on the assumption of a 12-year life.
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MARKET FOR GNMA CERTIFICATES. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make GNMA Certificates highly liquid instruments. Quotes for GNMA
Certificates are readily available from securities dealers and depend on,
among other things, the level of market rates, the Certificate's coupon rate
and the prepayment experience of the pool of mortgages backing each
Certificate.
UTILITY SECURITIES
Entities that issue Utility Securities may be subject to a variety of
risks depending, in part, on such factors as the type of utility involved and
its geographic location. Such risks may include potential increases in
operating costs, increases in interest expenses for capital construction
programs, government regulation of rates charged to customers, costs
associated with compliance with environmental and other regulations, service
interruption due to environmental, operational or other mishaps, the effects
of economic slowdowns, surplus capacity and increased competition from other
providers of utility services. Issuers of Utility Securities generally have
their rates determined by state utility commissions or other governmental
authorities or, depending on the jurisdiction and the nature of the issuer,
such issuers may set their own rates. Changes in service rates generally lag
changes in financing costs, and thus can favorably or unfavorably affect the
ability of issuers of Utility Securities to maintain or increase dividend
rates on such securities, depending upon whether such rates and costs are
declining or rising. To the extent that rates are established or reviewed by
governmental authorities, the utility is subject to the risk that such
authority will not authorize increased rates. Issuers of Utility Securities
are subject to regulation by various authorities and may be affected by the
imposition of special tariffs and charges. There can be no assurance that
regulatory policies or accounting standard changes will not negatively affect
the ability of issuers of Utility Securities to service principal, interest
and dividend payments. The Utility Portfolio has a policy of investing at
least 80% of its total assets in Utility Securities and is therefore more
susceptible than an investment company without such a policy to economic,
political, environmental or regulatory occurrences affecting issuers of
Utility Securities.
ELECTRIC UTILITIES. Certain electric utilities ("Electric Utilities")
with uncompleted nuclear power facilities may have problems completing and
licensing such facilities, and there is public, regulatory and governmental
concern with the cost and safety of nuclear power facilities in general.
Regulatory changes with respect to nuclear and conventionally fueled
generating facilities could increase costs or impair the ability of such
Electric Utilities to operate such facilities, thus reducing their ability to
service dividend payments with respect to Utility Securities. Electric
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Utilities that utilize nuclear power facilities must apply for recommissioning
from the Nuclear Regulatory Commission after 40 years. Failure to obtain
recommissioning could result in an interruption of service or the need to
purchase more expensive power from other entities and could subject the
utility to significant capital construction costs in connection with building
new nuclear or alternative-fuel power facilities, upgrading existing
facilities or converting such facilities to alternative fuels. Electric
Utilities that utilize coal in connection with the production of electric
power are particularly susceptible to environmental regulation, including the
requirements of the federal Clean Air Act and of similar state laws. Such
regulation may necessitate large capital expenditures in order for the utility
to achieve compliance.
GAS UTILITIES. Many gas utilities ("Gas Utilities") generally have been
adversely affected by oversupply conditions, and by increased competition from
other providers of utility services. In addition, some Gas Utilities entered
into long-term contracts with respect to the purchase or sale of gas at fixed
prices, which prices have since changed significantly in the open market. In
many cases, such price changes have been to the disadvantage of the Gas
Utility. Gas Utilities are particularly susceptible to supply and demand
imbalances due to unpredictable climate conditions and other factors and are
subject to regulatory risks as well.
TELECOMMUNICATIONS UTILITIES. Telecommunications regulation typically
limits rates charged, returns earned, providers of services, types of
services, ownership, areas served and terms for dealing with competitors and
customers. Telecommunications regulation generally has tended to be less
stringent for newer services, such as mobile services, than for traditional
telephone service, although there can be no assurances that such newer
services will not be heavily regulated in the future. Regulation may limit
rates based on an authorized level of earnings, a price index, or another
formula. Telephone rate regulation may include government-mandated
cross-subsidies that limit the flexibility of existing service providers to
respond to competition. Regulation may also limit the use of new technologies
and hamper efficient depreciation of existing assets. If regulation limits
the use of new technologies by established carriers or forces cross-subsidies,
large private networks may emerge.
LOWER GRADE SECURITIES
The Utility Portfolio may invest up to 20% of its assets in lower-grade
income securities, including lower-grade fixed-income Utility Securities.
(The High Yield Portfolio may invest a substantial portion of its assets in
medium and lower grade corporate debt securities entailing certain risks. See
"Special Risks of High Yield Investing" in the Prospectus.) Such lower grade
securities are rated BB or B by S&P or Ba or B by Moody's and are commonly
referred to as "junk bonds." Investment in such securities involves special
risks, as described herein. Liquidity relates to the ability of the Portfolio
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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 Portfolio's portfolio
securities may adversely affect the ability of the Portfolio to dispose of
such securities in a timely manner and at a price which reflects the value of
such security in the Investment Advisor'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 Portfolio's net asset value will change with changes in the value of
its portfolio securities. Because the Portfolio will invest in fixed income
securities, the Portfolio'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 Portfolio's investment in lower grade
and less liquid securities. Volatility may be greater during periods of
general economic uncertainty.
The Investment Advisor values the Portfolio'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 Portfolio may invest, there may be relatively inactive trading in
such securities and the ability of the Investment Advisor 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 Portfolio's portfolio, the responsibility of the
Investment Advisor to value the Portfolio's securities becomes more difficult
and the Investment Advisor's judgment may play a greater role in the valuation
of the Portfolio's securities due to the reduced availability of reliable
objective data. To the extent that the Portfolio invests in illiquid
securities and securities which are restricted as to resale, the Portfolio 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
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the value of the lower grade securities in the Portfolio's portfolio and thus
the Portfolio's net asset value. The secondary market prices of lower grade
securities are less sensitive to changes in interest rates than are those for
higher rated securities, but are more sensitive to adverse economic changes or
individual issuer developments. Adverse publicity and investor perceptions,
whether or not based on rational analysis, may also affect the value and
liquidity of lower grade securities.
Yields on the Portfolio'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 Portfolio's portfolio and
thus in the net asset value of the Portfolio. Net asset value and market
value may be volatile due to the Portfolio's investment in lower grade and
less liquid securities. Volatility may be greater during periods of general
economic uncertainty. The Portfolio 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
Portfolio may be unable to obtain full recovery thereof. In the event that an
issuer of securities held by the Portfolio experiences difficulties in the
timely payment of principal or interest and such issuer seeks to restructure
the terms of its borrowings, the Portfolio may incur additional expenses and
may determine to invest additional capital with respect to such issuer or the
project or projects to which the Portfolio's portfolio securities relate.
The Portfolio will rely on the Investment Advisor's judgment, analysis
and experience in evaluating the credit-worthi-ness of an issue. In this
evaluation, the Investment Advisor 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 Investment Advisor 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 credit-worthiness of an issuer may change more rapidly than is
able to be timely reflected in changes in credit ratings, the Investment
Advisor continuously monitors the issuers of such securities held in the
Portfolio's portfolio. The Portfolio may, if deemed appropriate by the
Investment Advisor, retain a security whose rating has been downgraded below B
by S&P or below B by Moody's, or whose rating has been withdrawn.
Because the Portfolio may invest up to 20% of its assets in these unrated
income securities, achievement by the Portfolio of its investment objective
may be more dependent upon the Investment Advisor's investment analysis than
would be the case if the Portfolio were investing exclusively in rated
securities.
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STRATEGIC TRANSACTIONS
As described in the Prospectus, certain Portfolios of the Trust may, but
are 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 a Portfolio'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, a Portfolio may
purchase and sell 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 are hedging transactions which may be
used to attempt to protect against possible changes in the market value of
securities held in or to be purchased for a Portfolio's portfolio resulting
from securities markets or exchange rate fluctuations, to protect a
Portfolio'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 a Portfolio'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 a Portfolio to utilize
these Strategic Transactions successfully will depend on the Investment
Advisor's ability to predict pertinent market movements, which cannot be
assured. A Portfolio 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 Investment Advisor'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 a Portfolio, force the sale or purchase of portfolio
securities at inopportune times or for prices other than current market
values, limit the amount of appreciation a Portfolio can realize on its
investments or cause a Portfolio to hold a security it might otherwise sell.
<PAGE>
The use of currency transactions can result in a Portfolio incurring losses as
a result of a number of factors including the imposition of exchange controls,
suspension of settlements or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of a Portfolio creates the possibility that losses on the hedging
instrument may be greater than gains in the value of a Portfolio'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, a Portfolio 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 a Portfolio from its Strategic
Transactions will generally be taxable income of the Trust. 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 Portfolio 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, a Portfolio'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 Portfolio 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. A
Portfolio's purchase of a call option on a security, financial future, index,
currency or other instrument might be intended to protect the Portfolio
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
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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. As
described in the Prospectus, certain Portfolios of the Trust are 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.
A Portfolio's ability to close out its position as a purchaser or seller
of an OCC or exchange listed put or call option is dependent, in part, upon
the liquidity of the option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (i) insufficient trading
interest in certain options; (ii) restrictions on transactions imposed by an
exchange; (iii) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities
including reaching daily price limits; (iv) interruption of the normal
operations of the OCC or an exchange; (v) inadequacy of the facilities of an
exchange or OCC to handle current trading volume; or (vi) a decision by one or
more exchanges to discontinue the trading of options (or a particular class or
series of options), in which event the relevant market for that option on that
exchange would cease to exist, although outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options,
which generally have standardized terms and performance mechanics, all the
<PAGE>
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. A Portfolio will only sell OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Portfolio to
require the Counterparty to sell the option back to the Portfolio at a formula
price within seven days. The Portfolios expect generally to enter into OTC
options that have cash settlement provisions, although they are 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 a Portfolio or fails to make a cash
settlement payment due in accordance with the terms of that option, the
Portfolio will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the Investment Advisor
must assess the credit-worthiness 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. A Portfolio will engage
in OTC option transactions only with United States government securities
dealers recognized by the Federal Reserve Bank of New York as "primary
dealers", or broker dealers, domestic or foreign banks or other financial
institutions which have received (or the guarantors of the obligation of which
have received) a short-term credit rating of "A-1" from Standard & Poor's
Corporation or "P-1" from Moody's Investors Service, Inc. 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 a Portfolio, and portfolio securities "covering" the amount of
the Portfolio'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 each Portfolio's limitation on investing no more than 10% of its
assets in restricted securities (15% with respect to the World Equity
Portfolio and the Utility Portfolio).
If a Portfolio 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 a Portfolio's income. The sale of put options can
also provide income.
A Portfolio 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 a
Portfolio must be "covered" (i.e., the Portfolio must own the securities or
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futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though
a Portfolio will receive the option premium to help protect it against loss, a
call sold by a Portfolio exposes the Portfolio 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 Portfolio to hold a
security or instrument which it might otherwise have sold. In selling calls
on securities not owned by the Portfolio, the Portfolio may be required to
acquire the underlying security at a disadvantageous price in order to satisfy
its obligations with respect to the call.
A Portfolio 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. A Portfolio will not sell put options if, as a
result, more than 50% of the Portfolio'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 a Portfolio may be required to buy the
underlying security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. Certain Portfolios of the Trust 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 a Portfolio, as purchaser, to take delivery from
the seller of 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 Portfolio, 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 Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and, in
particular, with the rules and regulations of the Commodity Futures Trading
Commission. Typically, maintaining a futures contract or selling an option
<PAGE>
thereon requires the Portfolio 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 Portfolio. If the
Portfolio 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.
A Portfolio will not enter into a futures contract or related option
(except for closing transactions) for other than 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
Portfolio's total assets (taken at current value); however, in the case of an
option that is in-the-money at the time of the purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. The segregation
requirements with respect to futures contracts and options thereon are
described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. A Portfolio
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.
<PAGE>
CURRENCY TRANSACTIONS. Certain Portfolios of the Trust may engage in
currency transactions with Counterparties in order to hedge the value of
portfolio holdings 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. A
Portfolio 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 Investment
Advisor.
Dealings by the Portfolios 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 Portfolio, 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.
A Portfolio 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.
A Portfolio 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 Portfolio has or in which the
Portfolio expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio'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
<PAGE>
currency or currencies in which some or all of the Portfolio's portfolio
securities are or are expected to be denominated, and to buy U.S. dollars.
For example, if the Investment Advisor considers the Austrian schilling as
being linked to the German deutschemark (the "D-mark") and the Trust holds
securities denominated in schillings and the Investment Advisor believes that
the value of schillings will decline against the U.S. dollar, the Investment
Advisor 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 a Portfolio 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 Portfolio is engaging
in proxy hedging. If a Portfolio enters into a currency hedging transaction,
the Portfolio 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 a Portfolio if it is unable to deliver or
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of
futures generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS. Certain Portfolios of the Trust 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 Investment Advisor, it is in
the best interest of the Portfolio 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 Investment Advisor's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
<PAGE>
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 certain Portfolios may enter are interest rate, currency and index swaps
and the purchase or sale of related caps, floors and collars. The Portfolios
expect to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of their portfolios, to protect
against currency fluctuations, as a duration management technique or to
protect against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. The Portfolios intend to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where they do not own securities or other
instruments providing the income stream the Portfolios may be obligated to
pay. Interest rate swaps involve the exchange by the Portfolio 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.
A Portfolio 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 Portfolio 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 Investment Advisor and the Portfolio believe such obligations do
not constitute senior securities under the Investment Company Act of 1940, as
amended, and, accordingly, will not treat them as being subject to its
borrowing restrictions. A Portfolio 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 Investment Advisor. If there is a default by the
Counter-party, the Portfolio 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
<PAGE>
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. Certain Portfolios of the Trust 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. A Portfolio might
use Eurodollar futures contracts and options thereon to hedge against changes
in LIBOR, to which many interest rate swaps and income instruments are linked.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES. When
conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantee, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in a Portfolio'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 Portfolio
segregate liquid high-grade assets with its custodian to the extent Portfolio
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 Portfolio to pay or deliver securities or
assets must be covered at all times by the securities, instruments or currency
required to be delivered, or, subject to any regulatory restrictions, an
amount of cash or liquid high-grade debt 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 a Portfolio will require the Portfolio
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid
high-grade debt securities sufficient to purchase and deliver the securities
if the call is exercised. A call option sold by a Portfolio on an index will
require the Portfolio to own portfolio securities which correlate with the
index or to segregate liquid high-grade assets equal to the excess of the
<PAGE>
index value over the exercise price on a current basis. A put option written
by a Portfolio requires the Portfolio to segregate liquid, high-grade assets
equal to the exercise price.
Except when a Portfolio 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 Portfolio to buy or sell
currency will generally require the Portfolio to hold an amount of that
currency or liquid securities denominated in that currency equal to the
Portfolio's obligations or to segregate liquid high-grade assets equal to the
amount of the Portfolio's obligation.
OTC options entered into by a Portfolio, 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 a Portfolio 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
Portfolio, 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 Portfolio sells a
call option on an index at a time when the in-the-money amount exceeds the
exercise price, the Portfolio 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 Portfolio other than those
above generally settle with physical delivery or with an election of either
physical delivery or cash settlement, and the Portfolio 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 Portfolio 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 securities or other acceptable assets.
With respect to swaps, a Portfolio will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid
high-grade securities having a value equal to the accrued excess. Caps,
floors and collars require segregation of assets with a value equal to a
Portfolio's net obligation, if any.
<PAGE>
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. A Portfolio 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, a Portfolio 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 Portfolio. Moreover, instead of segregating assets if
the Portfolio held a futures or forward contract, it could purchase a put
option on the same futures or forward contract with a strike price as high or
higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at
the time of or after the primary transaction, no segregation is required.
However, if it terminates prior to such time, assets equal to any remaining
obligation would need to be segregated.
The Trust's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code for
qualification as a regulated investment company. See "Tax Status" in the
Prospectus.
GROWTH AND INCOME PORTFOLIO - DEBT SECURITIES INVESTMENTS
The Growth and Income Portfolio may invest up to 5% of its assets in
various debt securities. These include obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities or in various
investment grade debt obligations including mortgage pass-through certificates
and collateralized mortgage obligations. These securities may also include
corporate debt securities, some of which may be medium and lower grade
quality. Lower grade corporate debt securities are commonly known as "junk
bonds" and involve a significant degree of risk.
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES
MONITORING PROCEDURES
The Board of Trustees of the Trust reviews the correlation between the
Portfolio and the Index on a quarterly basis. The Board of Trustees has
adopted monitoring procedures which it believes are reasonably designed to
assure a high degree of correlation between the performance of the Portfolio
and the S&P 500 Index. The procedures, which are reviewed and reconfirmed
annually by the Board, provide that in the event that the correlation between
the performance of the Portfolio and that of the S&P 500 Index falls below
95%, the Investment Advisor will promptly notify the Board which shall
consider what action, if any, should be taken.
<PAGE>
INVESTMENT LIMITATIONS
The Trust has adopted the following restrictions and policies relating to
the investment of assets of the Portfolios and their activities. These are
fundamental policies and may not be changed without the approval of the
holders of a majority of the outstanding voting shares of each Portfolio
affected (which for this purpose and under the Investment Company Act of 1940
means the lesser of (i) 67% of the shares represented at a meeting at which
more than 50% of the outstanding shares are present or represented by proxy
and (ii) more than 50% of the outstanding shares). A change in policy
affecting only one Portfolio may be effected with the approval of a majority
of the outstanding shares of such Portfolio.
QUALITY INCOME, HIGH YIELD, MONEY MARKET, GROWTH AND INCOME, STOCK INDEX AND
WORLD EQUITY PORTFOLIOS
Each of the Quality Income, High Yield, Money Market, Growth and Income,
Stock Index and World Equity Portfolios of the Trust may not:
1. Borrow money which is in excess of one-third of the value of its
total assets taken at market value (including the amount borrowed) (except the
Money Market Portfolio which is limited to 10% of the value of its total
assets) and then only from banks as a temporary measure for extraordinary or
emergency purposes. This borrowing provision is not for investment leverage
but solely to facilitate management of the Portfolio by enabling the Trust to
meet redemption requests where the liquidation of the Portfolio's investment
is deemed to be inconvenient or disadvantageous. Monies used to pay interest
on borrowed funds will not be available for investment. The Portfolio will
not make additional investments while it has borrowings outstanding;
2. Underwrite securities of other issuers;
3. Invest 25% or more of a Portfolio's assets taken at market value in
any one industry. Investing in cash items (including bank time and demand
deposits such as certificates of deposit), U.S. Treasury bills or securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
or instruments secured by those money market instruments, such as repurchase
agreements, will not be considered investments in any one industry;
4. Purchase or sell commodities, commodity contracts, foreign exchange
or real estate, or invest in oil, gas or other mineral development or
exploration programs, except as noted in connection with hedging transactions.
(This does not prohibit investment in the securities of corporations which
own interests in commodities, foreign exchange, real estate or oil, gas or
other mineral development or exploration programs);
<PAGE>
5. Invest more than 5% of the value of the assets of a Portfolio in
securities of any one issuer (except in the case of the securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities), or, if,
as a result, the Portfolio would hold more than 10% of the outstanding voting
securities of an issuer except that up to 25% of the Portfolio's total assets
may be invested without regard to such limitations;
6. Invest in securities of a company for the purpose of exercising
control or management;
7. Invest in securities issued by any other registered investment
company;
8. Purchase or sell real estate, except the Portfolios may purchase
securities which are issued by companies which invest in real estate or
interests therein;
9. Issue senior securities as defined in the Investment Company Act of
1940, except insofar as a Portfolio may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement; (b)
borrowing money in accordance with restrictions described above; (c) lending
Portfolio securities; (d) purchasing securities on a when-issued or delayed
delivery basis; (e) accommodating short sales; (f) implementing the hedging
transactions described above. If the asset coverage falls below 300%, when
taking into account items (a) through (e), the Portfolio may be required to
liquidate investments to be in compliance with the Investment Company Act of
1940;
10. Lend portfolio securities in excess of twenty-five percent (25%) of
the value of a Portfolio's assets. Any loans of a Portfolio's securities will
be made according to guidelines established by the Trustees, including
maintenance of collateral of the borrower at least equal at all times to the
current market value of the securities loaned;
11. Invest in securities subject to legal or contractual restrictions on
resale and repurchase agreements maturing in more than seven days if, as a
result of the investment, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
the securities;
12. Make loans (the acquisition of a portion of an issue of publicly
distributed bonds, debentures, notes and other securities as permitted by the
investment objectives of the Portfolios will not be deemed to be the making of
loans) except that the Portfolios may purchase securities subject to
repurchase agreements under policies established by the Trustees or lend
portfolio securities pursuant to restriction 10 above;
<PAGE>
13. Purchase securities on margin (but the Portfolios may obtain such
short-term credits as may be necessary for the clearance of transactions or to
implement the hedging transactions described above); and
14. Make short sales of securities or maintain a short position, unless
not more than 10% of the Portfolio's net assets (taken at current value) is
held as collateral for the sales at any one time, or unless at all times when
a short position is open the Portfolio owns an equal amount of the securities
or securities convertible into or exchangeable, without payment of any further
consideration (or for additional cash consideration held in a segregated
account by the Trust's custodian), for securities of the same issue as, and
equal in amount to, the securities sold short ("short sale against-the-box").
ADDITIONAL INVESTMENT LIMITATION - STOCK INDEX PORTFOLIO
The Stock Index Portfolio may not invest more than 5% of assets in the
securities of companies that have a continuous operating history of less than
3 years. However, such period of three years may include the operation of any
predecessor company or companies, partnership or individual enterprise if the
company whose securities are proposed as an investment for funds of the
Portfolio has come into existence as the result of a merger, consolidation,
reorganization or the purchase of substantially all of the assets of such
predecessor company or companies, partnership or individual enterprise.
ADDITIONAL INVESTMENT LIMITATIONS - MONEY MARKET PORTFOLIO
Rule 2a-7 under the Investment Company Act of 1940, which contains
certain requirements relating to the diversification, quality and maturity of
a money market fund's investments, was recently amended by the Securities and
Exchange Commission. The Board of Trustees of the Trust has modified its Rule
2a-7 procedures in order to comply with the Rule, as amended. As part of that
modification, the Board has adopted certain additional investment restrictions
pertaining to the diversification of the investments of the Money Market
Portfolio. These investment limitations, which are not fundamental policies
and which therefore may be changed without shareholder approval, are as
follows:
The Money Market Portfolio shall not acquire any instrument, including
puts, repurchase agreements and bank instruments, which, as measured at the
time of acquisition, would cause the Portfolio to:
1. invest, at any time, more than 5% of its total assets in the First
Tier Securities (as that term is defined in the Trust Prospectus) of a single
issuer (including puts written by, and repurchase agreements entered into
with, such issuer); except that the Portfolio may invest more than 5% of its
total assets in Government securities; and, for purposes of this calculation,
entering into a repurchase agreement shall be deemed to be an acquisition of
the underlying securities to the extent that the repurchase agreement is
<PAGE>
collateralized fully;
2. invest, at any time, more than 5% of its total assets in securities
which when acquired by the Portfolio were Second Tier Securities (as that term
is defined in the Trust Prospectus); or
3. invest, at any time, more than the greater of 1% of the Portfolio's
total assets or $1,000,000 in securities of a single issuer which were Second
Tier Securities when acquired by the Portfolio.
UTILITY PORTFOLIO
The Utility Portfolio of the Trust 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
Portfolio'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 Portfolio
would hold more than 10% of the outstanding voting securities of an issuer.
2. Issue senior securities, borrow money from banks or enter into
reverse repurchase agreements with banks in the aggregate in excess of 33 1/3%
of the Portfolio's total assets (after giving effect to any such borrowing);
which amount includes no more than 5% in borrowings and reverse repurchase
agreements with any entity for temporary purposes. The Portfolio 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 Portfolio may invest are considered to be
loans, (ii) through the loan of portfolio securities, and (iii) to the extent
that the Portfolio may lend money or property in connection with maintenance
of the value of, or the Portfolio's interest with respect to, the securities
owned by the Portfolio.
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
Portfolio may be deemed to be an underwriter in connection with the sale of
<PAGE>
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
Portfolio 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
Investment Company Act of 1940, as amended.
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 Portfolio of its rights under agreements relating to
portfolio securities.
10. Purchase or sell real estate, commodities or commodity contracts,
except to the extent that the securities that the Portfolio may invest in are
considered to be interests in real estate, commodities or commodity contracts
or to the extent the Portfolio exercises its rights under agreements relating
to portfolio securities (in which case the Portfolio may liquidate real estate
acquired as a result of a default on a mortgage), and except to the extent
that Strategic Transactions the Portfolio may engage in are considered to be
commodities or commodities contracts.
DESCRIPTION OF SECURITIES RATINGS
A description of Corporate Bond Ratings is found in the Appendix to the
Prospectus.
COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no
more than 365 days. Ratings are graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the lowest. The four
categories are as follows:
<TABLE>
<CAPTION>
<S> <C>
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety. Those
issues determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign designation.
<PAGE>
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for issues
designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for timely of
payment. They are, however, somewhat more vulnerable to the adverse
effects changes in circumstances than obligations carrying the higher
designations.
B Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C&D These ratings indicate that the issue is either in default or is expected
to be in default upon maturity.
</TABLE>
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
VARIABLE RATE DEMAND BOND RATINGS
Standard & Poor's assigns "dual" ratings to all long-term debt issues
that have as part of their provisions a variable rate demand or double
feature.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
<PAGE>
maturity and the commercial paper rating symbols are used to denote the put
option (for example, 'AAA/A-1') or if the nominal maturity is short, a rating
of 'SP-1+/AAA' is assigned.
NOTES
A Standard & Poor's note rating reflects the liquidity concerns and
market access risks unique to notes. Notes due in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely receive
a long-term debt rating. The following criteria will be used in making that
assignment:
- Amortization schedule (the longer the final maturity relative to
other maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
PREFERRED STOCK RATINGS (STANDARD & POOR'S)
AAA This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong capacity
to pay the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is
very strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to make payments for a
preferred stock in this category than for issues in the 'A' category.
<PAGE>
BB Preferred stock rated 'BB', 'B' and 'CCC' is regarded, on balance,
as B Predominantly speculative with respect to the issuer's capacity to
pay CCC preferred stock obligations. 'BB' indicates the lowest degree of
speculation and 'CCC' the highest degree of speculation. While such issues
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC The rating 'CC' is reserved for a preferred stock issue in arrears
on dividends or sinking fund payments, but that is currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the issuer
in default on debt instruments.
PLUS (+) or MINUS (-): To provide more detailed indications of
preferred stock quality, the ratings from 'AA' to 'B' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate
a particular type of obligation as a matter of policy.
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, INC. - A brief description of the applicable
Moody's Investors Service, Inc. rating symbols with respect to preferred stock
and their meanings (as published by Moody's Investors Service, Inc.) follows:
PREFERRED STOCK RATINGS (MOODY'S)
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.
<PAGE>
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
preferred stock. While risks are judged to be somewhat greater than in the
'aaa' and 'aa' classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue which is rated 'baa' is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
ba: An issue which is rated 'ba' is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b: An issue which is rated 'b' generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa: An issue which is rated 'caa' is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
ca: An issue which is rated 'ca' is speculative in a high degree and
is likely to be in arrears on dividends with little likelihood of eventual
payment.
c: This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NOTE: Beginning May 3, 1982, Moody's began applying numerical modifiers
1, 2 and 3 in each rating classification from aa through b in its preferred
stock rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
<PAGE>
YIELD INFORMATION FOR MONEY MARKET PORTFOLIO
There are two methods by which the Portfolio's yield for a specified
period of time is calculated. Normally a seven day period will be used in
determining yields in published or mailed advertisements.
The first method, which results in an amount referred to as the "current
yield," assumes an account containing exactly one share at the beginning of
the period. (The net asset value of this share will be $1.00 except under
extraordinary circumstances.) The net change in the value of the account
during the period is then determined by subtracting this beginning value from
the value of the account at the end of the period; however, capital changes
and unrealized appreciation or depreciation of the Portfolio's assets are
excluded from this calculation. This net change in the account value is then
divided by the value of the account at the beginning of the period (i.e.,
normally $1.00 as discussed above) and the resulting figure (referred to as
the "base period return") is then annualized by multiplying it by 365 and
dividing by the seven days of the period; the result is the "current yield,"
usually expressed to the nearest one-hundredth of one percent.
The second method results in an amount referred to as the "compounded
effective yield." This represents an annualization of the current yield with
dividends reinvested daily. This compounded effective yield, calculated again
for a seven day period, would be computed by compounding the unannualized base
period return by adding one to the base period return, raising the sum to a
power equal to 365 divided by seven and subtracting one from the result.
In addition to using the yields in advertisements or information
furnished to present or prospective stockholders, the Portfolio also may quote
rankings, yields or returns as published by recognized statistical services or
publishers, such as Lipper Analytical Services, Inc., Morningstar,
Weisenberger Investment Companies, Donoghue's Money Fund Report, or others.
Yield information may be useful to investors in reviewing the Portfolio's
performance. However, a number of factors should be taken into account before
using yield information as a basis for comparison with alternative
investments. An investment in the Portfolio is not insured and its yields are
not guaranteed. They normally will fluctuate on a daily basis. Accordingly
they cannot be compared to yields on those savings accounts or other
investment alternatives which provide a guaranteed fixed yield for a stated
period of time and which may be insured by a government agency. The yields
for any given past period are not an indication or representation by the
Portfolio of future yields or rates of return on the Portfolio's shares. In
comparing the yields of one money market fund to another, consideration should
*Intereseted persons of the Trust as defined in the Investment Company Act
of 1940.
<PAGE>
be given to each fund's investment policy, portfolio quality, portfolio
maturity, type of instruments held and operating expenses.
OFFICERS AND TRUSTEES
The officers and trustees of the Trust, their principal occupations for
the last five years and their affiliations, if any, with the Advisor, Van
Kampen American Capital Asset Management, Inc., Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc. (a financial credit
research firm), MCM Asia Pacific Company, Limited, Van Kampen American
Capital Distributors, Inc., Van Kampen American Capital, Inc. or VK/AC
Holding, Inc. (affiliates of the Advisor), are as follows:
DON G. POWELL*, CHAIRMAN AND TRUSTEE. Mr. Powell is President, Chief
Executive Officer and a Director of VK/AC Holdings, Inc. and Van Kampen
American Capital, Inc. and is Chairman, Chief Executive Officer and a Director
of Van Kampen American Capital Distributors, Inc., the Advisor and Van Kampen
American Capital Management, Inc. His address is 2800 Post Oak Blvd.,
Houston, TX 77056. He is also Chairman and a Trustee of other investment
companies advised by Advisor.
DENNIS J. MCDONNELL*, PRESIDENT, CHIEF EXECUTIVE OFFICER AND TRUSTEE. Mr.
McDonnell is President, Chief Operating Officer and a Director of Advisor and
Van Kampen American Capital Management, Inc. He is also a Director of VK/AC
Holding, Inc., The Van Kampen American Capital, Inc., McCarthy, Crisanti &
Maffei, Inc., and Chairman and Director of MCM Asia Pacific Company, Limited.
His address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr.
McDonnell is the President, Chief Executive Officer and a Trustee of other
investment companies advised by the Advisor. Prior to December, 1991, Mr.
McDonnell was Senior Vice President of Van Kampen Merritt Inc.
THEODORE A. MYERS, TRUSTEE. Mr. Myers is an Executive Vice President and
Chief Financial Officer of Qualitech Steel Corporation, a producer of high
quality engineered steels for automotive, transportation and capital goods
industries. He is also a director of McClouth Steel Co. Prior to August,
1993, Mr. Myers was Senior Vice President, Chief Financial Officer and a
Director of Doskocil Companies, Inc., a food processing and distribution
company. Prior to January, 1990, Mr. Myers was Vice President and Chief
Financial Officer of Inland Steel Industries, Inc. His address is 1940 East
6th Street, Cleveland, Ohio 44114. Mr. Myers is also a Trustee of other
investment companies advised by the Investment Advisor. Prior to October,
1989, he was a Director of First National Bank of East Chicago.
*Intereseted persons of the Trust as defined in the Investment Company Act
of 1940.
<PAGE>
ROD DAMMEYER, TRUSTEE. Mr. Dammeyer is President, Chief Executive Officer and
Director of Itel Corporation, a Chicago-based transportation, distribution and
financial services company, the subsidiaries of which are engaged in supplying
wiring systems for data, voice and energy, and Great American Management &
Investment, Inc., a diversified manufacturing company. He is also a Director
of Santa Fe Energy Resources, Inc., Lomas Financial Corporation, Revco D.S.,
Inc., Falcon Building Products, Inc., Jacor Communications, Inc., Kent State
University Foundation, National Advisory Board of Chemical Bank, Capsure
Holdings Corp., The Vigoro Corporation, ANTEC Corporation. Prior to October,
1991, Mr. Dammeyer was a Director of Santa Fe Pacific Corporation, Q-TEL, S.A
de C.V. and Servicios Financieros Quadrum, S.A. His address is Two North
Riverside Plaza, Chicago, Illinois 60606. Mr. Dammeyer is also a Trustee of
other investment companies advised by the Advisor.
DAVID C. ARCH, TRUSTEE. Mr. Arch is Chairman and Chief Executive Officer of
Blistex Inc., a consumer health care products manufacturer. His address is
1800 Swift Drive, Oak Brook, Illinois 60521. Mr. Arch is also a Trustee of
other investment companies advised by the Advisor.
HOWARD J. KERR, TRUSTEE. Mr. Kerr is President and Chief Executive Officer of
Pocklington Corporation, Inc. an investment holding company. His address is
736 North Western Ave., P.O. Box 317, Lake Forest, Illinois 60045. Prior to
1991, Mr. Kerr was President, Chief Executive Officer and Chairman of the
Board of Directors of Grabill Aerospace Industries, Ltd. Mr. Kerr is also a
Director of Canbra Foods, Ltd., a Canadian oilseed crushing, refining,
processing and packaging operation. Mr. Kerr is a Trustee of other investment
companies advised by the Adviser.
HUGO F. SONNENSCHEIN, TRUSTEE. Mr. Sonnenschein is President of the
University of Chicago. Mr. Sonnenschein is a member of the Board of Trustees
of the University of Rochester and a member of its investment committee.
Prior to July, 1993, Mr. Sonnenschein was Provost of Princeton University,
and, from 1988 to 1991, he was Dean of the School of Arts and Sciences at the
University of Pennsylvania. Mr. Sonnenschein is a member of the National
Academy of Sciences and a fellow of the American Academy of Arts and Science.
His address is 5801 South Ellis Avenue, Suite 502, Chicago, Illinois 60637.
Mr. Sonnenschein is also a Trustee of other investment companies advised by
the Advisor.
WAYNE W. WHALEN*, TRUSTEE. Mr. Whalen is a Partner in the law firm of
Skadden, Arps, Slate, Meagher & Flom. His address is 333 West Wacker Drive,
Chicago, Illinois 60606. Mr. Whalen is also a Trustee of other investment
companies advised by the Advisor.
*Intereseted persons of the Trust as defined in the Investment Company Act
of 1940.
<PAGE>
PETER W. HEGEL*, VICE PRESIDENT. Mr. Hegel is Senior Vice President and
Portfolio Manager of the Investment Advisor. His address is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. Mr. Hegel is a Vice President of
other investment companies advised by the Advisor.
JEFFREY W. MAILLET*, VICE PRESIDENT. Mr. Maillet is Vice President and
Portfolio Manager of the Adviser. His address is One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.
RONALD A. NYBERG*, VICE PRESIDENT AND SECRETARY. Mr. Nyberg is Executive Vice
President, General and Secretary of Van Kampen American Capital, Inc. and
VK/AC Holding, Inc. and Executive Vice President, General Counsel and Director
of the Advisor, Van Kampen American Capital Management, Inc. and Van Kampen
American Capital Distributors, Inc. He is also General Counsel and Assistant
Secretary of McCarthy, Crisanti & Maffei, Inc., a financial credit research
firm. His address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Mr. Nyberg is a Vice President and Secretary of other investment companies
advised by the Advisor and is a Director of ICI Mutual Insurance Co. Prior to
March, 1991, Mr. Nyberg was also Secretary of Van Kampen Merritt Inc., the
Investment Advisor and McCarthy, Crisanti & Maffei, Inc.
EDWARD C. WOOD III*, VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER.
Mr. Wood is First Vice President of the Advisor. His address is One Parkview
Plaza, Oakbrook Terrace, Illinois 60181. Mr. Wood is Vice President,
Treasurer and Chief Financial Officer of other investment companies advised by
the Investment Advisor.
SCOTT E. MARTIN*, ASSISTANT SECRETARY. Mr. Martin is First Vice President,
Deputy General Counsel and Assistant Secretary of Van Kampen American Capital,
Inc., and VK/AC Holding, Inc., First Vice President, Deputy General Counsel
and Secretary Van Kampen American Capital Distributors, Inc., the Advisor, Van
Kampen American Capital Asset Management, Inc., Van Kampen American Capital
Management, Inc., and Deputy General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., a financial credit research firm. His address is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Mr. Martin is an Assistant
Secretary of other investment companies advised by the Investment Advisor.
WESTON B. WETHERELL*, ASSISTANT SECRETARY. Mr. Wetherell is Vice President,
Associate General Counsel and Assistant Secretary of Van Kampen American
Capital, Inc., Van Kampen American Capital Distributors, Inc. , Van Kampen
American Capital Asset Management, Inc. and the Adviser and an Assistant
Secretary of McCarthy, Crisanti & Maffei, Inc., a financial credit research
firm. His address is One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
*Intereseted persons of the Trust as defined in the Investment Company Act
of 1940.
<PAGE>
Mr. Wetherell is an Assistant Secretary of other investment companies advised
by the Advisor.
JOHN L. SULLIVAN*, ASSISTANT TREASURER. Mr. Sullivan is Vice President of the
Advisor. His address is One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Mr. Sullivan is the Controller of other investment companies advised
by the Advisor.
STEVEN M. HILL*, ASSISTANT TREASURER. Mr. Hill is Assistant Vice President of
Van Kampen American Capital Investment Advisory Corp. His address is one
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
*Interested persons of the Trust as defined in the Investment Company Act
of 1940.
Each of the officers of the Trust holds the same positions with the
following funds:
Kampen Merritt U.S. Government Trust
Van Kampen Merritt Tax Free Fund
Van Kampen Merritt Insured Tax Free Income Fund
Van Kampen Merritt Tax Free High Income Fund
Van Kampen Merritt California Insured Tax Free Fund
Van Kampen Merritt Municipal Income Fund
Van Kampen Merritt Limited Term Municipal Income Fund
Van Kampen Merritt Florida Insured Tax Free Income Fund
Van Kampen Merritt New Jersey Tax Free Income Fund
Van Kampen Merritt New York Tax Free Income Fund
Van Kampen Merritt Trust Van Kampen Merritt High Yield Fund
Van Kampen Merritt Short-Term Global Income Fund
Van Kampen Merritt Adjustable Rate U.S. Government Fund
Van Kampen Merritt Strategic Income Fund
Van Kampen Merritt Emerging Markets Income Fund
Van Kampen Merritt Growth Fund
Van Kampen Merritt Equity Trust
Van Kampen Merritt Growth and Income Fund
Van Kampen Merritt Utility Fund
Van Kampen Merritt Balanced Fund
Van Kampen Merritt Total Return Fund
Van Kampen Merritt Pennsylvania Tax Free Income Fund
Van Kampen Merritt Money Market Trust
Van Kampen Merritt Money Market Fund
Van Kampen Merritt Tax Free Money Fund
Van Kampen Merritt Prime Rate Income Trust
Van Kampen Merritt Series Trust American Capital Comstock Fund, Inc.
American Capital Corporate Bond Fund, Inc
American Capital Emerging Growth Fund, Inc
American Capital Enterprise Fund, Inc.
<PAGE>
American Capital Equity Income Fund, Inc
American Capital Federal Mortgage Trust
American Capital Global Managed Assets Fund, Inc.
American Capital Government Securities, Inc.
American Capital Government Target Series
American Capital Growth and Income Fund, Inc.
American Capital Harbor Fund, Inc.
American Capital High Yield Investments, Inc.
American Capital Life Investment Trust
American Capital Municipal Bond Fund, Inc.
American Capital Pace Fund, Inc
American Capital Real Estate Securities Fund, Inc
American Capital Reserve Fund, Inc.
American Capital Tax -Exempt Trust
American Capital Texas Municipal Securities, Inc.
American Capital U.S. Government Trust for Income
American Capital Utilities Income Fund, Inc.
American Capital World Portfolio Series, Inc.
Emerging Markets Municipal Income Trust Series 1
Insured Municipals Income Trust Series 1 through 348
Insured Municipals Income Trust (Discount) Series 5 through 13
Insured Municipals Income Trust (Short Intermediate Term) Series 1 through 98
Insured Municipals Income Trust (Intermediate Term) Series S through 84
Insured Municipals Income Trust (Limited Term) Series 9 through 79
Municipals Income Trust (Premium Bond Series) Series 1 through 3
Insured Municipals Income Trust (Intermediate Laddered
Maturity) Series 1 and 2
Insured Tax Free Bond Trust Series 1 through 6
Insured Tax Free Bond Trust Limited Term) Series 1
Investors' Quality Tax-Exempt Trust Series 1 through 89
Investors' Quality Tax-Exempt Trust-Intermediate Series 1
Investors' Corporate Income Trust Series 1 through 12
Investors' Governmental Securities Income Trust Series 1 through 7
Van Kampen Merritt International Bond Income Trust Series 1 through 21
Alabama Investors' Quality Tax-Exempt Trust Series 1
Alabama Insured Municipals Income Trust Series 1 through 8
Arizona Investors' Quality Tax-Exempt Trust Series 1 through 16
Arizona Insured Municipals Income Trust Series 1 through 12
Arkansas Insured Municipals Income Trust Series 1 through 2
Arkansas Investors' Quality Tax-Exempt Trust Series 1
California Insured Municipals Income Trust Series 1 through 139
California Insured Municipals Income Trust
(Premium Bond Series) Series 1
California Insured Municipals Income Trust
(1st Intermediate Series) Series 1 through 3
California Investors' Quality Tax-Exempt Trust Series 1 through 20
California Insured Municipals Income Trust
(Intermediate Laddered) Series 1 through 18
<PAGE>
Colorado Insured Municipals Income Trust Series 1 through 74
Colorado Investors' Quality Tax-Exempt Trust Series 1 through 18
Connecticut Insured Municipals Income Trust Series t through 26
Connecticut Investors' Quality Tax-Exempt Trust Series 1
Delaware Investors Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipal Income Trust - Intermediate Series 1 and 2
Florida Insured Municipals Income Trust Series 1 through 92
Florida Investors' Quality Tax-Exempt Trust Series 1 and 2
Florida Insured Municipals Income Trust
(Intermediate Laddered) Series 1 through 12
Georgia Insured Municipals Income Trust Series 1 through 75
Georgia Investors' Quality Tax-Exempt Trust Series 1 through 18
Hawaii Investors Quality Tax-Exempt Trust Series 1
Investors' Quality Municipals Trust (AMT) Series 1 through 9
Kansas Investors' Quality Tax-Exempt Trust Series 1 through 11
Kentucky Investors' Quality Tax-Exempt Trust Series 1 through 54
Louisiana Insured Municipals Income Trust Series 1 through 13
Maine Investors Quality Tax-Exempt Trust Series 1
Maryland Investors' Quality Tax-Exempt Trust Series 1 though 71
Massachusetts Insured Municipals Income Trust Series 1 though 31
Massachusetts Insured Municipals Income Trust
(Premium Bond Series) Series 1
Michigan Financial Institutions Trust Series 1
Michigan Insured Municipals Income Trust Series 1 through 127
Michigan Insured Municipals Income Trust
(Premium Bond Series) Series 1
Michigan Insured Municipals Income Trust
(1st Intermediate Series) Series 1 through 3
Michigan Investors' Quality Tax-Exempt Trust Series 1 through 30
Minnesota Insured Municipals Income Trust Series 1 through 55
Investors- Quality Tax-Exempt Trust Series 1 through 21
Missouri Insured Municipals Income Trust Series 1 through 89
Missouri Insured Municipals Income Trust
(Premium Bond Series) Series 1
Missouri Investors' Quality Tax-Exempt Trust Series 1 through 15
Missouri Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1
Nebraska Investors Quality Tax-Exempt Trust Series 1 through New
New Mexico Insured Municipals Income Trust Series 1 through 17
New Jersey Insured Municipals Income Trust Series 1 through 102
New Jersey Investors' Quality Tax-Exempt Trust Series 1 through 22
New Jersey Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 and 4
New York Insured Municipals Income Trust-Intermediate Series 1 through 6
New York Insured Municipals Income Trust (Limited Term) Series 1
New York Insured Municipals Income Trust Series 1 through 125
New York Insured Tax-Free Bond Trust Series 1
<PAGE>
New York Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 1 through 15
New York Investors' Quality Tax-Exempt Trust Series 1
North Carolina Investors' Quality Tax-Exempt Trust Series 1 through 81
Ohio Insured Municipals Income Trust Series 1 through 06
Ohio Insured Municipals Income Trust (Premium Bond Series)Series 1 and 2
Ohio Insured Municipals Income Trust (Intermediate Term) Series 1
Ohio Insured Municipals Income Trust
(Intermediate Laddered Maturity) Series 3 through 6
Ohio Investors' Quality Tax-Exempt Trust Series 1 through 16
Oklahoma Insured Municipal Income Trust Series 1 through 15
Oregon Investors' Quality Tax-Exempt Trust Series 1 through 53
Pennsylvania Insured Municipals Income Trust
Intermediate Series 1 through 6
Pennsylvania Insured Municipals Income Trust Series 1 through 201
Pennsylvania Insured Municipals Income Trust
(Premium Bond Series) Series 1
Pennsylvania Investors' Quality Tax-Exempt Trust Series 1 through 14
South Carolina Investors' Quality Tax-Exempt Trust Series 1 through 79
Tennessee Insured Municipals Income Trust Series 1-3 and 5-31
Texas Insured Municipals Income Trust Series 1 through 39
Texas Insured Municipal Income Trust (Intermediate Ladder)Series 1
Virginia Investors' Quality Tax-Exempt Trust Series 1 through 65
Van Kampen Merritt Utility Income Trust Series 1 through 6
Van Kampen Merritt Insured Income Trust Series 1 through 45
Van Kampen Merritt Insured Income Trust (Intermediate Term)Series 1 through 44
Van Kampen Merritt Select Equity Trust Series 1
Van Kampen Merritt Select Equity and Treasury Trust Series 1
Washington Insured Municipals Income Trust Series 1
West Virginia Insured Municipals Income Trust Series 1 through 5
The following table sets forth the compensation accrued for, or received
by, the Trusts outside directors for the fiscal year ended December 31, 1994.
No director of the Trust associated with Adviser and no officer of the Trust
received any compensation from the Fund for acting as a director or officer.
<PAGE>
COMPENSATION TABLE FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994(1)
<TABLE>
<CAPTION>
Pension or Total
Retirement Estimated Compensation
Aggregate Benefits Annual from the Fund
Name of Person Compensation Accrued as Part Benefits Upon Complex Paid
from the Trust of Fund Expenses/2 Retirement/3 to Trustees/4
--------------- ------------------- --------------- --------------
<S> <C> <C> <C> <C>
David C. Arch $ 18,205 $ 0 $ 2,500 $ 147,175
Howard J. Kerr $ 18,205 $ 0 $ 2,500 $ 146,675
Wayne W. Whalen $ 10,350 $ 0 $ 2,500 $ 111,975
Rod Dammeyer $ 18,205 $ 0 $ 2,500 $ 146,675
Theodore A. Myers $ 18,205 $ 0 $ 2,500 $ 147,175
Hugo F. Sonnenschein $ 18,205 $ 0 $ 2,500 $ 155,175
(since February 25,
1994)
Clyde H. Keith $ 3,850 $ 0 $ 2,500 $ 33,600
(prior to February 25,
1994)
<FN>
1. Messrs. Powell and McDonnell, Trustees of the Trust during all or a portion of its
1994 fiscal year, are affiliated persons of the Adviser and are not eligible for compensation
or retirement benefits from the Trust.
2. The Retirement Plan commenced as of August 1, 1994 for the Trust. As of the end of
the 1994 fiscal year, no amounts had been accrued for retirement benefits because such amounts
were either zero or considered to be immaterial to the net assets of the Trust. During the
Trusts 1995 fiscal year, the Trust will accrue amounts for retirement benefits and include an
amount, if any, for the Trusts 1994 fiscal year.
3. This is the estimated annual benefits payable per year for the 10-year period
commencing in the year of such Trustees retirement by the trust assuming: the Trustee has 10
or more years of service on the Board of the Trust, retires at or after attaining age of 60
and the annual retainer in the year prior to the Trustees retirement is $2,500. Trustees
retiring prior to the age of 60 or with fewer than 10 years of service for the Trust may
receive reduced retirement benefits from the Trust.
<PAGE>
4. The Fund Complex consists of 39 investment companies advised by Adviser that have the
same members on each funds Board of trustees. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 39 investment companies in the
Fund Complex during the calendar year ended December 31, 1994. the Adviser also serves as
investment adviser for 20 other investment companies: however, with exception of Messrs.
McDonnell and Whalen, the Trustees are not trustees of such investment companies. Combining
the Fund Complex with the other investment companies advised by the Adviser, Mr. Whalen
received Total Compensation of $161,850 during the calendar year ended December 31, 1994.
The compensation of the officers and Trustees who are interested persons (as defined in
the Investment Company Act of 1940, as amended) of the Investment Advisor is paid by the
Investment Advisor. The Trust pays the compensation of all other officers and Trustees of the
Trust. Each Portfolio will compensate the Trustees who are not interested persons of Advisory
Corp. or Cova Life Sales Company as follows: until the Portfolio has $25 Million in net
assets each Trustee will receive $2,000 per year and $200 per meeting of the Board of
Trustees, plus expenses; in excess of $25 Million, each Trustee will receive $2,500 per year
and $250 per meeting of the Board of Trustees, plus expenses.
</TABLE>
SUBSTANTIAL SHAREHOLDERS
Shares of the Trust are issued and redeemed only in connection with
investments in and payments under certain variable annuity contracts
("variable contracts") issued by Cova Financial Services Life Insurance
Company ("Cova Life") and its affiliated insurance companies. On April
1, 1994, Cova
Variable Annuity Account One, a separate account of
Cova Life, was known to the Board of Trustees and the management of the
Trust to own of record 100% of the shares of the Trust. Cova Life
contributed the initial capital to the Trust.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Cova Life has advised the Trust that as of April 1, 1994, there
were no persons owning variable contracts which would entitle them to instruct
Cova Life with respect to more than 5% of the voting securities of any
Portfolio of the Trust.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1912,
Boston, Massachusetts 02105, is the custodian of the Trust and has custody of
all securities and cash of the Trust. 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 Trust.
<PAGE>
LEGAL COUNSEL AND INDEPENDENT AUDITORS
Blazzard, Grodd & Hasenauer, P.C., Westport, Connecticut is counsel to
the Trust and passes upon the legality of the Trust's shares.
The independent auditors for the Trust are KPMG Peat Marwick LLP,
Chicago, Illinois. The selection of independent auditors will be subject to
ratification by the shareholders of the Trust.
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "Investment
Advisor") is the Trust's investment adviser. The Investment Advisor was
incorporated as a Delaware corporation in 1982 (and through December 31, 1987
transacted business under the name American Portfolio Advisory Service Inc.).
The Investment Advisor's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181. The Investment Advisor is a wholly-owned
subsidiary of Van Kampen American Capital, Inc., which in turn is a
wholly-owned subsidiary of VK/AC Holding, Inc.
VK/AC Holding, Inc. is controlled, through the ownership of a substantial
majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV
Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P.
is managed by Clayton, Dubilier & Rice, Inc., a New York based private
investment firm. The General Partner of C&D L.P. is Clayton & Dubilier
Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
Alberto Cribiore, Donald J. Gogel and Hubbard C. Howe, each of whom is a
principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers,
directors and employees of Van Kampen American Capital, Inc. own, in the
aggregate, not more than 8% of the common stock of VK/AC Holding, Inc. and
have the right to acquire, upon the exercise of options, approximately an
additional 10% of the common stock of VK/AC Holding, Inc.
The investment advisory agreement ("Investment Advisory Agreement") dated
March 9, 1993 and approved by shareholders of the Trust at a meeting held on
January 14, 1993 (and amended as of January 14, 1994 for purposes of the
addition of the World Equity Portfolio and the Utility Portfolio), between the
Investment Advisor and the Trust provides that the Trust will supply
investment research and portfolio management, including the selection of
securities for the Trust to purchase. The Investment Advisor also administers
the business affairs of the Trust, furnishes offices, necessary facilities and
equipment, provides administrative services, and permits its officers and
employees to serve without compensation as officers of the Trust and trustees
of the Trust if duly elected to such position.
<PAGE>
The Investment Advisory Agreement provides that the Investment Advisor
will not be liable for any error of judgment or of law, or for any loss
suffered by the Trust 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 Investment Advisor in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under the Agreement.
The Investment Advisor's activities are subject to the review and
supervision of the Trust's Trustees to whom the Investment Advisor renders
periodic reports of the Trust's investment activities.
The Investment Advisory Agreement may be terminated without penalty upon
60 days written notice by either party and will automatically terminate in the
event of assignment.
LEGAL SERVICES AGREEMENT
The Trust has entered into a Legal Services Agreement pursuant to which
Van Kampen American Capital Companies, Inc. provides legal services, including
without limitation: maintenance of the Trust's minute books and records,
preparation and oversight of the Trust's regulatory reports, and other
information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the Trust. Payment by the Trust for such services
is made on a cost basis for the salary and salary related benefits, including
but not limited to bonuses, group insurance and other regular wages for the
employment of personnel, as well as overhead and the expenses related to the
office space and the equipment necessary to render the legal services. The
Trust and the mutual funds distributed by Van Kampen American Capital
Distributors, Inc. share one half (50%) of such costs equally. The remaining
one half (50%) of such costs is allocated to specific funds based on specific
time allocations, or in the event services are attributable only to types of
funds (i.e., closed-end or open-end), the relative amount of time spent on
each type of fund and then further allocated between funds of that type based
upon their respective net asset values.
PORTFOLIO TRANSACTIONS
The Investment Advisor will place orders for portfolio transactions for
the Trust 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 Trust or the
Investment Advisor, including quotations necessary to determine the value of
the Trust's net assets. Any research benefits derived are available for all
clients of the Investment Advisor and the Investment Advisor may not use all
the research it receives from broker-dealers in connection with the Trust.
Since statistical and other research information is only supplementary to the
<PAGE>
research efforts of the Investment Advisor and still must be analyzed and
reviewed by its staff, the receipt of research information is not expected to
materially reduce its expenses. In selecting among the firms believed to meet
the criteria for handling a particular transaction, the Investment Advisor may
take into consideration that certain firms have sold or are selling the
variable contracts and that certain firms provide market, statistical or other
research information to the Trust and the Investment Advisor, and may select
firms that are affiliated with the Trust, its Investment Advisor or its
distributor.
If it is believed to be in the best interests of the Trust, the
Investment Advisor may place portfolio transactions with brokers who provide
the types of services described above, even if it means the Trust 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 services.
This will be done, however, only if, in the opinion of the Investment
Advisor, the amount of additional commission or increased cost is reasonable
in relation to the value of the services.
If purchases or sales of securities of the Trust and of one or more other
investment companies or clients advised by the Investment Advisor 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 by the Investment Advisor, to each such investment company or
client, taking into account their respective sizes 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 paid for the
security by the Trust or the volume of the security purchased by the Trust, it
is also possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the Trust.
The Investment Adviser, in managing the investments of the World Equity
Portfolio, may purchase various forms of research including computer models to
assist it in achieving a balance between the various indices to achieve the
most growth potential.
While the Investment Advisor will be primarily responsible for the
management of the Trust's portfolios, 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.
The Trustees have adopted certain policies incorporating the standards of
Rule 17e-1 issued by the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended, which requires that the
commissions paid to affiliates of the Trust, or to affiliates of such persons,
must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
<PAGE>
comparable trans-actions involving similar securities during a comparable
period of time. The Rule and procedures also contain review requirements and
require the Investment Advisor to furnish reports to the Board of Trustees and
to maintain records in connection with such reviews. After consideration of
all factors deemed relevant, the Board of Trustees will consider from time to
time whether the investment advisory fees of the Portfolios of the Trust will
be reduced by all or a portion of the brokerage commission given to brokers
that are affiliated with the Trust.
FINANCIAL STATEMENTS
The financial statements, notes and report of Independent Auditors for
each of the Portfolios of the Trust are included herein.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Growth and Income Portfolio
of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Growth and Income Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust ) (the "Fund"), including the portfolio of investments,
as of December 31, 1994, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
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 December 31, 1994, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Growth and Income Portfolio of the Van Kampen Merritt Series Trust as of
December 31, 1994, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 31, 1995
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
------------------------------------ ------ -------------
COMMON AND PREFERRED STOCK 97.7%
AUTOMOBILE 6.4%
Borg Warner Automotive Inc. (c) 5,000 $ 125,625
Chrysler Corp. (c) 2,750 134,750
General Motors Corp. - Preferred (c) 3,250 186,469
Standard Products Co. 4,550 109,200
Volvo Aktiebolaget - ADR (Sweden) 7,500 140,625
-------------
696,669
-------------
BASIC INDUSTRIES 4.0%
Corning Inc. 5,975 178,503
Cyprus Amax Minerals Co. 3,700 96,663
National Gypsum Co. (b) (c) 4,000 163,000
-------------
438,166
-------------
BEVERAGE, FOOD & TOBACCO 2.2%
Pepsico Inc. (c) 5,080 184,150
Sara Lee Corp. 2,200 55,550
-------------
239,700
-------------
BUILDINGS & REAL ESTATE 0.7%
Triangle Pacific Corp. (b) 6,270 76,808
-------------
CHEMICAL 2.9%
Hercules Inc. 1,500 173,063
IMC Global Inc. 3,300 142,725
-------------
315,788
-------------
<PAGE>
COMPUTERS 6.5%
Compuware Corp. (b) 3,900 140,400
Lotus Development Corp. (b) 4,500 184,500
Parametric Technology Corp. (b) 3,750 129,375
Platinum Technology Inc. (b) 3,300 74,662
Sybase Inc. (b) 3,500 182,000
-------------
710,937
-------------
CONSUMER NON-DURABLES 2.9%
Mattel Inc. 5,065 127,258
Procter & Gamble Co. (c) 3,160 195,920
-------------
323,178
-------------
CONSUMER SERVICES 3.3%
Automatic Data Processing Inc. 3,090 180,765
Service Corp. International 6,450 178,987
-------------
359,752
-------------
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
------------------------------------------------------------- ------ -------------
DIVERSIFIED/CONGLOMERATE MANUFACTURING 8.6%
Asea AB - ADR (Sweden) 2,500 $ 180,312
Eastman Kodak Co. 3,575 170,706
Electrolux-ADR (Sweden) 2,300 117,013
Hanson PLC - ADR (United Kingdom) 6,750 121,500
Thermo Electron Corp. (b) 3,830 171,871
Trinity Inds Inc. 5,670 178,605
-------------
940,007
-------------
DIVERSIFIED/CONGLOMERATE SERVICE 1.8%
ITT Corp. 2,195 194,532
-------------
ECOLOGICAL 2.1%
Waste Management International PLC - ADR (United Kingdom) (b) 6,000 68,250
WMX Technologies Inc. (c) 5,995 157,369
-------------
225,619
-------------
ELECTRONICS 4.1%
AMP Inc. 2,100 152,775
Avnet Inc. 4,810 177,970
Intel Corp. 1,775 113,378
-------------
444,123
-------------
<PAGE>
ENERGY 7.5%
Burlington Resources Inc. 4,540 158,900
Norsk Hydro A S - ADR (Norway) 4,450 174,106
Texaco Inc. 3,010 180,224
Triton Energy Corp. (b) (c) 4,600 156,400
Unocal Corp. 5,525 150,556
-------------
820,186
-------------
FINANCIAL SERVICES 2.1%
Capital One Financial Corp. (b) 7,275 116,400
Federal Home Loan Mortgage Corp. 2,210 111,605
-------------
228,005
-------------
HEALTHCARE 4.4%
Health & Retirement Property Trust 7,500 100,313
Healthcare Realty Trust Inc. 4,950 103,950
Living Centers of America Inc. (b) 4,150 138,506
Sybron International Corp. (b) 3,900 134.550
-------------
477,319
-------------
INSURANCE 3.9%
American International Group Inc. (c) 2,200 215,600
Mid Ocean Ltd. (b) (c) 6,750 183,937
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
---------------------------------------- ------ -------------
INSURANCE (CONTINUED)
Reliance Group Holdings Inc. 6,325 $ 32,416
-------------
431 ,953
-------------
LEISURE 2.7%
Carnival Corp. 8,200 174,250
International Game Technology 8,100 125,550
-------------
299,800
-------------
MACHINERY 1.6%
Case Equipment Corp. 8,120 174,580
-------------
MEDICAL SUPPLIES 2.4%
Hafslund Nycomed - ADR (Norway) 5,085 104,878
Merck& Co. Inc. (c) 4,080 155,550
-------------
260,428
-------------
MINING & STEEL 1.8%
Bethlehem Steel Corp. (b) 6,850 123,300
WHX Corp. (b) (c) 5,640 74,730
-------------
198,030
-------------
PAPER 1.3%
James River Corp. 6,800 137,700
-------------
PRINTING, PUBLISHING & BROADCASTING 1.3%
Time Warner Inc. 4.190 147,174
-------------
<PAGE>
RETAIL 5.6%
Barnes & Noble Inc. (b) 4,250 132,812
Dayton Hudson Corp. 1,965 139,024
Nordstrom Inc. 3,160 132,720
Tractor Supply Co. (b) 2,600 54,600
Wal Mart Stores Inc. (c) 7,120 151,300
-------------
610,456
-------------
TECHNOLOGY 2.6%
Motorola Inc. (c) 2,630 152,211
National Semiconductor Corp. (b) 6,675 130,163
-------------
282,374
-------------
TELECOMMUNICATIONS 4.9%
AT & T Corp. 2,000 100,500
DSC Communications Corp. (b) 5,500 197,312
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
----------------------------------------------------------- ------ --------------
TELECOMMUNICATIONS (CONTINUED)
Tele Communications Inc (b) 5,600 $ 121,800
Vodafone Group PLC - ADR (United Kingdom) 3,600 121,050
--------------
540,662
--------------
TRANSPORTATION 3.5%
Burlington Northern Inc. 1,400 67,375
Burlington Northern Inc. - Preferred 2,150 114,487
Hunt J B Transport Services Inc. 7,175 109,419
Southern Pacific Rail Corp. (b) 5,150 93,344
--------------
384,625
--------------
UTILITIES 6.6%
Bellsouth Corp. (c) 3,085 166,976
Enron Corp. 6,250 190,625
Georgia Power Co. - Preferred (c) 3,500 71,750
Nynex Corp. 3,750 137,812
Sonat Inc. 5,665 158,620
--------------
725,783
--------------
TOTAL COMMON AND PREFERRED STOCK 10,684,354
CONVERTIBLE BONDS 0.7%
AMR Corp. ($100,000 par, 6.125% coupon, 11/01/24
maturity, S&P Rating BB-) 79,500
--------------
TOTAL LONG-TERM INVESTMENTS 98.4%
(Cost $10,986,345) (a) 10,763,854
<PAGE>
REPURCHASE AGREEMENTS 8.7%
J.P. Morgan Securities, U.S. T-Note, $1,045,000 par,
5.125% coupon, due 12/31/98, dated 12/30/94, to be sold on
01/03/95 at $955,557 955,000
LIABILITIES IN EXCESS OF OTHER ASSETS -7.1% (776,918)
--------------
NET ASSETS 100% $ 10,941,936
==============
</TABLE>
(a) At December 31, 1994, cost for federal income tax purposes is
$10,986,345; the aggregate gross unrealized appreciation is
$1,018,439 and the aggregate gross unrealized depreciation is $1,240,930,
resulting in net unrealized depreciation of $222,491.
(b) Non-income producing security as this stock currently does not declare
dividend(s). Assets segregated for open option transactions.
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $10,986,345) (Note 1) $10,763,854
Repurchase Agreements (Note 1) 955,000
Receivables:
Dividends 125,810
Investments Sold 8,678
Interest 1,362
Other 433
------------
Total Assets 11,855,137
------------
LIABILITIES:
Market Value of Options (Net premiums received of $491,415) (Note 5) 493,750
Payables:
Investments Purchased 408,339
Investment Advisory Fee (Note 2) 5,634
Custodian Bank 5,478
------------
Total Liabilities 913,201
------------
NET ASSETS $10,941,936
============
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $11,476,692
Accumulated Undistributed Net Investment Income 8,412
<PAGE>
Net Unrealized Depreciation on Investments (224,826)
Accumulated Net Realized Loss on Investments (318,342)
------------
NET ASSETS $10,941,936
============
NET ASSET VALUE PER SHARE ($10,941,936 divided by
1,061,698 shares outstanding; an unlimited number of shares without
par value are authorized) (Note 3) $ 10.31
============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $1,402) $ 358,218
Interest 47,689
-------------
Total Income 405,907
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 58,701
Custody 43,488
Trustees Fees and Expenses (Note 2) 17,957
Audit 13,300
Legal (Note 2) 7,411
Other 4,454
-------------
Total Expenses 145,311
Less Expenses Reimbursed by Xerox Life 76,816
-------------
Net Expenses 68,495
-------------
NET INVESTMENT INCOME $ 337,412
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 28,028,324
Cost of Securities Sold (28,346,666)
-------------
<PAGE>
Net Realized Loss on Investments (Including realized loss on closed and expired option and
futures transactions of $58,196 and $13,072, respectively) (318,342)
-------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period 258,733
End of the Period (Including unrealized depreciation on open option
transactions of $2,335) (224,826)
-------------
Net Unrealized Depreciation on Investments During the Period (483,559)
-------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS $ (801,901)
=============
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (464,489)
=============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended Year Ended
December 31, 1994 December 31, 1993
------------------- -------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 337,412 $ 74,278
Net Realized Gain/Loss on Investments (318,342) 290,908
Net Unrealized Appreciation/Depreciation
on Investments During the Period (483,559) 182,538
------------------- -------------------
Change in Net Assets from Operations (464,489) 547,724
Distributions from Net Investment Income (329,231) (74,047)
Distributions from Net Realized Gain on Investments (8,412) (282,496)
------------------- -------------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES (802,132) 191,181
------------------- -------------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold 6,301,797 4,903,144
Net Asset Value of Shares Issued
Through Dividend Reinvestment 337,642 356,544
Cost of Shares Repurchased (1,423,903) (1,551,186)
------------------- -------------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS 5,215,536 3,708,502
------------------- -------------------
TOTAL INCREASE IN NET ASSETS 4,413,404 3,899,683
NET ASSETS:
Beginning of the Period 6,528,532 2,628,849
<PAGE> ------------------- -------------------
End of the Period (Including undistributed
net investment income of $8,412 and
$231, respectively) $ 10,941,936 $ 6,528,532
=================== ===================
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST GROWTH AND INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
May 1, 1992
(Commencement of
Investment
Year Ended December 31, Operations) to
1994 1993 December 31, 1992
------------ -------------- -------------------
Net Asset Value, Beginning of Period $ 11.170 $ 10.282 $ 10.000
------------ -------------- -------------------
Net Investment Income .331 .182 .125
Net Realized and Unrealized Gain/Loss on Investments (.864) 1.371 .444
------------ -------------- -------------------
Total from Investment Operations (.533) 1.553 .569
------------ -------------- -------------------
Less:
Distributions from Net Investment Income .323 .182 .125
Distributions from Net Realized Gain on Investments .008 .483 .162
------------ -------------- -------------------
Total Distributions .331 .665 .287
------------ -------------- -------------------
Net Asset Value, End of Period $ 10.306 $ 11.170 $ 10.282
============ ============== ===================
Total Return (Non-Annualized) (4.54%) 15.01% 5.67%
Net Assets at End of Period (In millions) $ 10.9 $ 6.5 $ 2.6
Ratio of Expenses to Average Net Assets*
Annualized) .70% .69% .70%
Ratio of Net Investment Income to Average Net Assets*
(Annualized) 3.47% 1.84% 2.27%
Portfolio Turnover 326.01% 135.92% 99.93%
*If certain expenses had not been assumed by Xerox Life,
total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets (Annualized) 1.49% 2.05% 3.69%
Ratio of Net Investment Income to Average Net Assets
<PAGE>
(Annualized) 2.68% .47% (.73%)
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT
SERIES TRUST GROWTH AND INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Merritt Series Trust (the "Trust"), under which the Growth and
Income Portfolio (the "Fund') is organized as a separate sub-trust, is
registered as a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Trust commenced operations on
December 11, 1989. The Fund commenced investment operations on May 1, 1992.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A. SECURITY VALUATION - Investments in securities listed on a securities
exchange are valued at their sale price as of the close of such securities
exchange. Investments in securities not listed on a securities exchange are
valued based on their last quoted bid price or, if not available, their fair
value as determined by the Board of Trustees. Fixed income investments are
stated at values using market quotations or, if such valuations are not
available, estimates obtained from yield data relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Trustees. Short-term securities with
remaining maturities of less than 60 days are valued at amortized cost.
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. INVESTMENT INCOME - Dividend income is recorded on the ex-dividend date
and interest income is recorded on an accrual basis.
D. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At December 31, 1994, the Fund had an accumulated
capital loss carryforward for tax purposes of $320,677 which will expire on
December 31, 2002. Net realized gains or losses may differ for financial and
tax reporting purposes primarily as a result of timing differences related to
open option and futures transactions at year end.
<PAGE>
E. DISTRIBUTION OF INCOME AND GAINS - The Fund declares and pays dividends
semi-annually from net investment income. Net realized gains, if any, are
distributed annually. Distributions are automatically reinvested in Fund
shares. Distributions from net realized gains for book purposes mat include
short-term capital gains and gains on option and futures transactions. All
short-term capital gains and a portion of option and futures gains are
included in ordinary income for tax purposes.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
<CAPTION>
<S> <C>
Average Net Assets % Per Annum
------------------ ------------
First $500 million .60 of 1%
Over $500 million .50 of 1%
</TABLE>
Xerox Variable Annuity Account One is a separate investment account
established by Xerox Financial Services Life Insurance Co. ("Xerox Life"). At
December 31, 1994 Xerox Variable Annuity Account One owned all shares of
beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates ("VKAC').
The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund has implemented a retirement plan which covers those Trustees
who are not officers of VKAC.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $8,500 representing VKAC's cost of providing accounting and
legal services.
3. CAPITAL TRANSACTIONS
At December 31, 1994 and 1993, paid in surplus aggregated $11,476,692 and
$6,261,156, respectively.
<PAGE>
Transactions in shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Year
Ended Ended
December 31, December 31,
1994 1993
------------- -------------
Beginning Shares 584,482 255,676
------------- -------------
Shares Sold 576,486 439,612
------------- -------------
Shares Issued through
Dividend Reinvestment 32,783 31,957
Shares Repurchased (132,053) (142,763)
------------- -------------
Net Increase in Shares
Outstanding 477,216 328,806
------------- -------------
Ending Shares 1,061,698 584,482
============= =============
</TABLE>
4. INVESTMENT TRANSACTIONS
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994, were $34,720,974 and
$28,346,666, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as
to attempt to protect the Fund against possible changes in the market value of
its portfolio or generate potential gain. All of the Fund's portfolio
holdings, including derivative instruments, are marked to market each day with
the change in value reflected in the unrealized appreciation/depreciation on
investments. Upon disposition, a realized gain or loss is recognized
accordingly, except for exercised option contracts where the recognition of
gain or loss is postponed until the disposal of the security underlying the
option contract.
<PAGE>
A. OPTION CONTRACTS - An option contract gives the buyer the right, but not
the obligation to buy (call) or sell (put) an underlying item at a fixed
exercise price during a specified period. These contracts are generally used
by the Fund to provide the return of an index without purchasing all of the
securities underlying the index or as a substitute for purchasing specific
securities.
Transactions in options for the year ended December 31, 1994, were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Contracts Premium
---------- --------
Outstanding at
December 31, 1993 0 $ 0
Options Written and
Purchased (Net) 5,452 238,878
Options Terminated in Closing
Transactions (Net) (1,402) 245,012
Options Expired (Net) (50) 7,525
---------- --------
Outstanding at
December 31, 1994 4,000 $491,415
========== ========
</TABLE>
The related futures contracts of the outstanding option transactions as
of December 31, 1994, and the descriptions and market values are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Expiration
Month/ Market
Exercise Value of
Contracts Price of Options
--------- ---------- ------------
S&P 500
Index Futures
Purchased Call 500 Jan/445 $ 787,500
Purchased Call 500 Jan/435 1,253,125
Purchased Put 500 Jan/440 54,688
Purchased Put 500 Jan/430 23,438
<PAGE>
Written Call 500 Jan/440 (1,009,375)
Written Call 500 Jan/430 (1,496,875)
Written Put 500 Jan/445 (73,438)
Written Put 500 Jan/435 (32,813)
--------- ------------
4,000 ($493,750)
========= ============
</TABLE>
B. FUTURES CONTRACTS - A futures contract is an agreement involving the
delivery of a particular asset on a specified future date at an agreed upon
price. The Fund generally invests in financial and stock index futures. These
contracts are generally used to provide the return of an index without
purchasing all of the securities underlying the index or as a substitute for
purchasing specific securities.
The fluctuation in market value of the contracts is settled daily through
a cash margin account. Realized gains and losses are recognized when the
contracts are closed or expire.
Transactions in futures contracts for the year ended December 31, 1994,
were as follows:
<TABLE>
<CAPTION>
<S> <C>
Contracts
----------
Outstanding at
December 31, 1993 0
Futures Opened 27
Futures Closed (27)
----------
Outstanding at
December 31, 1994 0
==========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the High Yield Portfolio
of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
High Yield Portfolio (one of the portfolios comprising the Van Kampen Merritt
Series Trust ) (the "Fund"), including the portfolio of investments, as of
December 31, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
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 December 31, 1994, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
High Yield Portfolio of the Van Kampen Merritt Series Trust as of December 31,
1994, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1995
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Par
Amount S & P Moody's
($000) Description Rating Rating Coupon(%) Maturity Market Value
------- ------------------------------------------- ------ ------- ----------- -------- -------------
Corporate Bonds
Aerospace & Defense 1.2%
100 Talley Industries Inc. (b) B- B2 0/12.250% 10/15/05 $ 51,000
200 Talley Manufacturing & Technology Inc.. B B2 10.750 10/15/03 176,000
-------------
227,000
-------------
Beverage, Food & Tobacco 2.4%
200 Fleming Cos. lnc. Var. Rate Cpn. BB+ Ba1 8.688 12/15/01 200,000
300 Pilgrims Pride Corp. B- B3 10.875 08/01/03 282,000
-------------
482,000
-------------
Buildings & Real Estate 3.2%
500 Building Material Corp. (b) BB B1 0/11.750 07/01/04 251,250
200 Doman Industries Ltd. BB- Ba3 8.750 03/15/04 176,000
200 Schuller International Group Inc. BB- Ba3 10.875 12/15/04 204,500
-------------
631,750
-------------
Chemicals, Plastics & Rubber 6.3%
500 Atlantis Group Inc. B- B2 11.000 02/15/03 480,000
150 Foamex L.P. B B1 11.250 10/01/02 144,000
500 G l Holding Inc. B+ Ba3 * 10/01/98 305,000
300 Rexene Corp. B+ B1 11.750 12/01/04 306,750
-------------
1,235,750
-------------
Containers, Packaging & Glass 12.4%
250 Anchor Glass Container Corp. B+ Ba3 10.250 06/30/02 242,500
250 Anchor Glass Container Corp. B B2 9.875 12/15/08 218,750
100 Indah Kiat International Co. BV BB Ba3 11.875 06/15/02 99,000
500 Malette Inc. BB- Ba3 12.250 07/15/04 506,250
<PAGE>
300 S.D. Warren Co. B+ B1 12.000 12/15/04 307,500
270 Silgan Holdings Inc. (b) B- B3 0/13.250 12/15/02 229,500
600 Sola Group Ltd. (b) B B1 6.00/9.675 12/15/03 459,000
400 Stone Container Corp. B B1 9.875 02/01/01 378,000
-------------
2,440,500
-------------
Diversified/Conglomerate Manufacturing 1.4%
300 Jordan Industries Inc. B+ B3 10.375 08/01/03 267,000
-------------
Diversified/Conglomerate Service 2.1%
400 Card Establishment Services Inc. B B2 10.000 10/01/03 416,000
-------------
Ecological 2.0%
120 Envirosource lnc. B- B3 9.750 06/15/03 104,400
355 Envirotest Systems Corp. B+ B1 9.125 03/15/01 294,650
-------------
399,050
-------------
Farming & Agriculture 2.3%
500 Trans Resources Inc. B- B2 11.875 07/01/02 455,000
-------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Par
Amount S & P Moody's
($000) Description Rating Rating Coupon(%) Maturity Market Value
------- --------------------------------------------- ------ ------- ----------- -------- -------------
Government 1.8%
350 Argentina (Fed. Republic of) Var. Rate Cpn. NR B2 4.250% 03131/23 $ 149,625
408 Brazil (Fed. Republic of) (c) NR NR 8.000 04/15/14 196,381
-------------
346,006
-------------
Healthcare & Education 3.6%
200 Healthtrust Inc. The Hospital Co. B B1 8.750 03/15/05 193,000
500 Ornda HealthCorp B- B2 11.375 08/15/04 512,500
-------------
705,500
-------------
Home & Office Furnishings 1.1%
250 Health O Meter Inc. B- B3 13.000 08/15/02 225,000
-------------
Hotel, Motel, Inns & Gaming 5.1%
300 Aztar Corp. B B2 13.750 10/01/04 304,500
250 Casino America lnc. B B1 11.500 11/15/01 207,500
180 Claridge Hotel & Casino Corp. B B2 11.750 02/01/02 117,000
500 Trump Plaza Funding Inc. B B3 10.875 06/15/01 377,500
-------------
1,006,500
-------------
Insurance 2.8%
275 America Life lnc. BB+ Ba2 9.250 06/01/05 233,750
350 Nacolah Holding Corp. BB- B1 9.500 12/01/03 309,750
-------------
543,500
-------------
Leisure 1.7%
260 Ballys Heath & Tennis Corp. B+ B3 13.000 01/15/03 196,300
<PAGE>
145 Plitt Theaters Inc. B B3 10.875 06/15/04 134,850
-------------
331,150
-------------
Mining, Steel, Iron & Non-Precious Metal 6.3%
500 Carbide/Graphite Group Inc. B+ B3 11.500 09/01/03 508,750
300 Easco Corp. B B1 10.000 03/15/01 279,000
500 Northwestern Steel & Wire Co. B B1 9.500 06/15/01 460,000
-------------
1,247,750
-------------
Oil & Gas 3.2%
500 Petroleum Heat & Power Inc. B+ B2 9.375 02/01/06 427,500
200 Plains Resources Inc. B- B3 12.000 10/01/99 194,000
-------------
621,500
-------------
Personal/Food 1.3%
270 Flagstar Corp. B B2 10.750 09/15/01 252,450
-------------
Personal &Non-Durable 2.9%
300 Playtex Family Products Corp. B B3 9.000 12/15/03 261,000
335 Revlon Consumer Products Corp. B B2 9.375 04/01/01 299,825
-------------
560,825
-------------
Printing, Publishing & Broadcasting 8.4%
224 American Telecasting Inc. (b) CCC+ Caa 0/12.500 06/15/04 100,800
350 Echostar Communications Corp. (b) B- Caa 0/12.875 06/01/04 181,125
500 Insight Communications Co. L.P. (b) B- Caa 8.25/11.25 03/01/00 475,000
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Par
Amount S & P Moody's
($000) Description Rating Rating Coupon(%) Maturity Market Value
------- ------------------------------------------------ ------ ------- ----------- -------- --------------
Printing, Publishing & Broadcasting (Continued)
300 Storer Communications Inc. B+ B1 10.000% 05/15/03 $ 286,500
80 Viacom International Inc. B+ B2 10.250 09/15/01 82,400
350 Webcraft Technologies Inc. B B3 9.375 02/15/02 304,500
225 Young Broadcasting Inc. B B2 11.750 11/15/04 228,937
--------------
1,659,262
--------------
Rail & Shipping 1.0%
200 Trism Inc. B B2 10.750 12/15/00 189,000
--------------
Retail 4.7%
200 Florist Transworld Delivery B- B3 14.000 12/15/01 200,000
250 Hosiery Corp. America Inc. B- B3 13.750 08/01/02 245,000
500 Waban Inc. BB- Ba3 11.000 05/15/04 485,000
--------------
930,000
--------------
Telecommunications 2.6%
250 Mobile Telecommunications Tech. BB- B2 13.500 12/15/02 253,750
400 Pricellular Wireless Corp. (b) CCC+ Caa 0.50/14.00 11/15/01 265,000
--------------
518,750
--------------
Textiles 1.3%
250 Florsheim Shoe Co. B+ B1 12.750 09/01/02 246,250
--------------
Utilities 2.4%
500 Midland Funding Corp. ll B- B2 11.750 07/23/05 465,000
--------------
Total Corporate Bonds 83.5% 16,402,493
<PAGE> --------------
Equities 0.0%
American Telecasting Inc. (1,120 common stock
warrants) 0
Casino America Inc.(653 common stock warrants) 1,958
--------------
Total Equities 1,958
--------------
Total Long-Term Investments 83.5%
(Cost $17,184,450) (a) 16,404,451
--------------
Repurchase Agreement 17.0%
J.P. Morgan Securities, U.S. T-Note, $3,654,000
par, 5.125% coupon, due 12/31/98, dated
12/30/94, to be sold on 01/03/95
at $3,341,948 3,340,000
Liabilities in Excess of Other Assets (0.5%) (88,867)
--------------
Net Assets 100% $ 19,655,584
==============
</TABLE>
* Zero coupon bond
(a) At December 31, 1994, cost for federal income tax purposes is
$17,184,450; the aggregate gross unrealized appreciation is $130,183 and the
gross unrealized depreciation is $910,182, resulting in net unrealized
depreciation of $779,999.
(b) Security is a "Step-up" bond where the coupon increases or steps up at
a predetermined date.
(c) Payment-in-Kind Security.
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $17,184,450) (Note 1) $16,404,451
Repurchase Agreements (Note 1) 3,340,000
Cash 93,861
Receivables:
Interest 423,350
Fund Shares Sold 5,032
------------
Total Assets 20,266,694
------------
LIABILITIES:
Payables:
Investments Purchased 597,687
Investment Advisory Fee (Note 2) 12,393
Accrued Expenses 1,030
------------
Total Liabilities 611,110
------------
NET ASSETS $19,655,584
============
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $22,090,383
Net Unrealized Depreciation on Investments (779,999)
Accumulated Net Realized Loss on Investments (1,654,800)
------------
NET ASSETS $19,655,584
============
<PAGE>
NET ASSET VALUE PER SHARE
($19,655,584 divided by 2,000,944 shares outstanding; an
unlimited number of shares without par value are authorized) (Note 3) $ 9.82
============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 2,001,107
Accretion of Discount 38,550
Dividends 32,245
Other 3,000
-------------
Total Income 2,074,902
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 153,084
Custody 33,791
Trustees Fees and Expenses (Note 2) 19,101
Audit 14,800
Legal (Note 2) 9,604
Other 2,256
-------------
Total Expenses 232,636
Less Expenses Reimbursed by Xerox Life 59,115
-------------
Net Expenses 173,521
-------------
NET INVESTMENT INCOME $ 1,901,381
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 33,840,493
<PAGE>
Cost of Securities Sold (35,495,293)
-------------
Net Realized Loss on Investments (1,654,800)
-------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period 453,658
End of the Period (779,999)
-------------
Net Unrealized Depreciation on Investments During the Period (1,233,657)
-------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS $ (2,888,457)
=============
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (987,076)
=============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31 ,1994 AND 1993
<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31,1993
------------------- ------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net investment income $ 1,901,381 $ 883,904
Net Realized Gain/Loss on Investments (1,654,800) 527,671
Net Unrealized Appreciation/Depreciation on
Investments During the Period (1,233,657) 348,409
------------------- ------------------
Change in Net Assets from Operations (987,076) 1,759,984
------------------- ------------------
Distributions from Net Investment Income (1,901,381) (883,904)
Distributions from Net Realized Gain on Investments 0 (527,671)
------------------- ------------------
Total Distributions (1,901,381) (1,411,575)
------------------- ------------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES (2,888,457) 348,409
------------------- ------------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold 10,939,186 14,201,091
Net Asset Value of Shares Issued Through
Dividend Reinvestment 1,901,381 1,411,575
Cost of Shares Repurchased (9,145,332) (2,531,575)
------------------- ------------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS 3,695,235 13,081,091
------------------- ------------------
<PAGE>
TOTAL INCREASE IN NET ASSETS 806,778 13,429,500
NET ASSETS:
Beginning of the Period 18,848,806 5,419,306
------------------- ------------------
End of the Period $ 19,655,584 $ 18,848,806
=================== ==================
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST HIGH YIELD PORTFOLIO
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 11, 1989
(Commencement of
Investment
Year Ended December 31, Operations) to
1994 1993 1992 1991 1990 December 31, 1989
-------- ------------ -------------- -------- ------- -------------------
Net Asset Value, Beginning of Period $11.287 $ 10.445 $ 10.410 $ 9.073 $9.974 $ 10.000
-------- ------------ -------------- -------- ------- -------------------
Net Investment Income .978 1.028 1.250 1.124 1.085 .053
Net Realized and Unrealized Gain/Loss
on Investments (1.464) 1.170 .658 1.337 (.901) (.026)
-------- ------------ -------------- -------- ------- -------------------
Total from Investment Operations (.486) 2.198 1.908 2.461 .184 .027
-------- ------------ -------------- -------- ------- -------------------
Less:
Distributions from Net investment Income .978 1.028 1.250 1.124 1.085 .053
Distributions from Net Realized Gain
on Investments .000 .328 .623 .000 .000 .000
-------- ------------ -------------- -------- ------- -------------------
Total Distributions .978 1.356 1.873 1.124 1.085 .053
-------- ------------ -------------- -------- ------- -------------------
Net Asset Value, End of Period $ 9.823 $ 11.287 $ 10.445 $10.410 $9.073 $ 9.974
======== ============ ============== ======== ======= ===================
Total Return *(Non-Annualized) (4.52%) 21.98% 19.12% 28.31% 1.86% .23%
Net Assets at End of Period (In millions) $ 19.7 $ 18.8 $ 5.4 $ 3.8 $ 2.9 $ 2.5
Ratio of Expenses to Average Net Assets*
(Annualized) .86% .84% .87% .86% 1.01% .95%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 9.48% 8.97% 11.67% 11.31% 11.43% 9.67%
Portfolio Turnover 200.06% 213.09% 157.42% 147.57% 28.32% .00%
*If certain expenses had not been assumed
by Xerox Life, total return would have been
lower and the ratios would have been as
follows:
<PAGE>
Ratio of Expenses to Average Net Assets
(Annualized) 1.16% 1.38% 1.79% 1.91% 2.42% 9.42%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 9.18% 8.43% 10.75% 10.25% 10.01% 1.19%
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT
SERIES TRUST HIGH YIELD PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Merritt Series Trust (the "Trust"), under which the High Yield
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Trust and Fund commenced investment
operations on December 11, 1989.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A. SECURITY VALUATION - Investments are stated at value using market
quotations, or if such valuations are not available, estimates obtained from
yield data relating to instruments or securities with similar characteristics
in accordance with procedures established in good faith by the Board of
Trustees. Short-term securities with remaining maturities of less than 60 days
are valued at amortized cost.
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" and "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period.
The Fund will maintain in a segregated account with its custodian assets
having an aggregate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made. At December 31,
1994, there were no when issued or delayed delivery purchase commitents.
C. INVESTMENT INCOME - Interest income is recorded on an accrual basis.
Dividend income is recorded on the ex-dividend date. Bond discount is
amortized over the expected life of each applicable security.
D. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the Federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At December 31, 1994 the Fund had an accumulated
capital loss carryforward for tax purposes of $1,654,800 which will expire on
December 31, 2002.
<PAGE>
E. DISTRIBUTION OF INCOME AND GAINS - The Fund declares and pays dividends
monthly from net investment income. Net realized gains, if any, are
distributed annually. All distributions are automatically reinvested in Fund
shares. Distributions from net realized gains for book purposes may include
short-term capital gains, which are included in ordinary income for tax
purposes.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
<CAPTION>
<S> <C>
Average Net Assets % Per Annum
------------------ ------------
First $500 million .75 of 1%
Over $500 million .65 of 1%
</TABLE>
Xerox Variable Annuity Account One is a separate investment account
established by Xerox Financial services Life Insurance Co. ("Xerox Life"). At
December 31, 1994, Xerox Variable Annuity Account One owned all shares of the
Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates 'VKAC').
The Fund does lot compensate its officers or affiliated trustees who are
officers of VKAC. The Fund has implemented a retirement plan which covers
those Trustees who are not officers of VKAC.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $9,600 representing VKAC's cost of providing legal services.
3. CAPITAL TRANSACTIONS
At December 31, 1994 and 1993, paid in surplus aggregated $22,090,383 and
$18,395,148, respectively.
Transactions in shares were as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Year Year
Ended Ended
December 31, December 31,
1994 1993
------------- -------------
Beginning Shares 1,669,943 518,857
------------- -------------
Shares Sold 1,006,022 1,257,528
Shares Issued Through
Dividend Reinvestment 182,215 125,454
Shares Repurchased (857,236) (231,896)
------------- -------------
Net Increase in Shares
Outstanding 331,000 1,151,086
------------- -------------
Ending Shares 2,000,944 1,669,943
============= =============
</TABLE>
4. INVESTMENT TRANSACTIONS
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994, were $36,875,044 and
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Quality Income Portfolio
of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Quality Income Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust) (the "Fund"), including the portfolio of investments, as
of December 31, 1994, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
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 December 31, 1994, by correspondence with the custodian. 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 the
Quality Income Portfolio of the Van Kampen Merritt Series Trust as of December
31, 1994, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
KMPG Peat Marwick LLP
Chicago, Illinois
January 31, 1995
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Par
Value
($000) Description Coupon(%) Maturity ($)Market Value
------ ------------------------------------------------------------- --------- -------- ----------------
ASSET BACKED SECURITIES 7.9%
1,721 Olympic Automobile Receivable Trust 1994 B 5.560% 09/15/95 $ 1,718,621
500 Signet Master Trust Ser 94-4A 6.800 12/15/00 486,170
500 Standard Credit Card 5.875 07/07/95 496,619
----------------
2,701,410
----------------
BONDS 46.5%
2,000 Allegheny Generating Co. 6.875 09/01/23 1,620,056
1,110 American Airlines 6.870 11/26/95 1,096,918
1,000 AMR Corp. (b) 6.813 11/15/95 1,003,119
100 Anheuser Busch Inc. 8.750 12/01/99 101,916
500 Baxter International Inc. 7,500 05/01/97 492,057
1,500 CRA Finance USA Ltd. 6.500 12/01/03 1,309,560
2,000 Florida Gas Transmission Co. 7.750 11/01/97 1,966,360
1,000 General Electric Capital Corp. 5.800 04/01/08 944,260
630 Greyhound Financial Corp. 8.500 02/15/99 628,689
1,000 GTE Corp. 7.830 05/01/23 877,296
1,928 Jet Equipment Trust Series A3 8.160 12/15/96 1,925,764
2,000 Korea Development Bank 8.090 10/06/04 1,959,774
500 Liberty National Bank & Trust Co. 6.750 06/01/03 447,354
1,500 New York Telephone Co. 7.250 02/15/24 1,258,125
150 Philip Morris 8.875 07/01/96 151,398
----------------
15,782,646
----------------
MEDIUM-TERM SECURITIES 9.4%
100 Beneficial Corp. 8.930 12/16/96 101,327
750 General Motors Acceptance Corp. 7.800 04/10/97 741,014
500 General Motors Acceptance Corp. 6.000 12/30/98 456,589
1,700 Sears Roebuck & Co. 10.000 02/03/12 1,881,502
----------------
3,180,432
----------------
<PAGE>
MORTGAGE-BACKED SECURITIES 21.2%
793 AFC Mortgage #93-4B2A1 (b) 7.415 03/25/25 793,906
1,908 Citicorp Mortgage Secs Inc. #94-11A2 6.250 08/25/24 1,822,600
835 FHLB 4.140 06/04/98 738,390
365 FHLMC (lnverse Fltg)(c) 4.737 12/15/97 305,583
87 FHLMC 8.000 09/01/08 83,339
250 FNMA (b) 6.310 06/17/99 247,067
108 FNMA 8.000 09/01/03 105,706
89 FNMA 8.500 07/01/19 87,365
100 FNMA REMIC #89-94G PAC 7.500 12/25/19 93,073
266 FNMA REMIC #91 -134H PAC 7.950 03/25/20 263,295
3,589 FNMA REMIC #G93-11S - Interest Only (b) 3.581 12/25/08 269,177
1,345 GE Capital Mortgage Svcs Inc REMIC #94-18A3 PAC (b) 7.000 05/25/24 1,214,283
209 GNMA 9.000 01/15/20 210,926
458 GNMA (b) 6.500 05/20/23 443,033
600 Prudential Home Mortgage Securities Co. #93-28A7 7,375 08/25/23 517,781
----------------
7,195,524
----------------
U.S. TREASURY SECURITIES 13.1%
3,000 US T-Bonds 6.250 08/15/23 2,437,500
1,500 US T-Notes 4.250 01/31/95 1,499,062
500 US T-Notes 8.500 08/15/95 504,375
----------------
4,440,937
----------------
TOTAL LONG-TERM INVESTMENTS 98.1%
(Cost $35,093,223) (a) 33,300,949
REPURCHASE AGREEMENTS 0.6%
J.P. Morgan Securities, US T-Note, $205,000 par, 5.125%
coupon, due 12/31/98, dated 12/30/94, to be sold on 01/03/95
at $187,109 187,000
OTHER ASSETS IN EXCESS OF LIABILITIES 1.3% 448,468
----------------
NET ASSETS 100% $ 33,936,417
================
</TABLE>
<PAGE>
(a) At December 31, 1994, cost for federal income tax purposes is
$35,093,223; the aggregate gross unrealized appreciation is $82,927 and the
aggregate gross unrealized depreciation is $1,875,201, resulting in net
unrealized depreciation of $1,792,274.
(b) Security has a variable rate coupon.
(c) An Inverse Floating security is one where the coupon is inversely indexed
to a short-term floating interest rate multiplied by a specified factor. As
the floating rate rises, the coupon is reduced. Conversely, as the floating
rate declines, the coupon is increased. The price of these securities may be
more volatile than the price of a comparable fixed rate security. These
instruments are typically used by the Fund to enhance the yield of the
portfolio.
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO RATINGS
-------------------------------------
U.S. Govt and Govt Backed Obligations 13.8%%
U.S. Govt Agency Obligations 8.5%
AAA 23.9%
AA 1.6%
A 20.6%
BBB 22.8%
BB 3.0%
NR 5.8%
------
100.0%
======
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $35,093,223) (Note 1) $33,300,949
Repurchase Agreements (Note 1) 187,000
Cash 253
Interest Receivable 483,051
------------
Total Assets 33,971,253
------------
LIABILITIES:
Accrued Expenses 15,523
Payables:
Investment Advisory Fee (Note 2) 14,607
Fund Shares Repurchased 4,706
------------
Total Liabilities 34,836
------------
NET ASSETS $33,936,417
============
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $37,487,535
Accumulated Net Realized Loss on Investments (1,758,844)
Net Unrealized Depreciation on Investments (1,792,274)
------------
NET ASSETS $33,936,417
============
NET ASSET VALUE PER SHARE ($33,936,417 DIVIDED BY
3,457,435 SHARES OUTSTANDING; AN UNLIMITED NUMBER OF SHARES
<PAGE>
WITHOUT PAR VALUE ARE AUTHORIZED) (NOTE 3) $ 9.82
============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 2,598,323
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 200,948
Custody 25,958
Trustees Fees and Expenses (Note 2) 21,354
Audit 17,800
Legal (Note 2) 9,616
Other 6,404
-------------
Total Expenses 282,080
Less Expenses Reimbursed by Xerox Life 39,622
-------------
Net Expenses 242,458
-------------
NET INVESTMENT INCOME $ 2,355,865
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 69,402,697
Cost of Securities Sold (71,161,541)
-------------
Net Realized Loss on Investments (1,758,844)
-------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period 491,707
End of the Period (1,792,274)
-------------
<PAGE>
Net Unrealized Depreciation on Investments During the Period (2,283,981)
-------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS $ (4,042,825)
=============
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (1,686,960)
=============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended Year Ended
December 31, 1994 December 31, 1993
------------------- -------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 2,355,865 $ 2,196,320
Net Realized Gain/Loss on Investments (1,758,844) 1,436,572
Net Unrealized Depreciation on Investments
During the Period (2,283,981) (110,251)
------------------- -------------------
Change in Net Assets from Operations (1,686,960) 3,522,641
Distributions from Net Investment Income (2,355,865) (2,196,320)
Distributions from Net Realized Gain on Investments 0 (1,493,800)
------------------- -------------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES (4,042,825) (167,479)
------------------- -------------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold 40,415,842 48,985,898
Net Asset Value of Shares Issued Through
Dividend Reinvestment 2,355,865 3,690,120
Cost of Shares Repurchased (55,910,839) (25,528,568)
------------------- -------------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS (13,139,132) 27,147,450
------------------- -------------------
TOTAL INCREASE/DECREASE IN NET ASSETS (17,181,957) 26,979,971
<PAGE>
NET ASSETS:
Beginning of the Period 51,118,374 24,138,403
------------------- -------------------
End of the Period $ 33,936,417 $ 51,118,374
=================== ===================
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST QUALITY INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 11,1989
(Commencement of
Investment
Year Ended December 31, Operations) to
1994 1993 1992 1991 1990 December 31, 1989
-------- -------- -------- -------------- ------- -------------------
Net Asset Value, Beginning of Period $10.886 $10.699 $10.618 $ 9.969 $9.930 $ 10.000
-------- -------- -------- -------------- ------- -------------------
Net Investment Income .603 .641 .696 .753 .713 .043
Net Realized and Unrealized Gain/Loss on
Investments (1.071) .518 .081 .649 .039 (.070)
-------- -------- -------- -------------- ------- -------------------
Total from Investment Operations (.468) 1.159 .777 1.402 .752 (.027)
-------- -------- -------- -------------- ------- -------------------
Less:
Distributions from Net Investment Income .603 .641 .696 .753 .713 .043
Distributions from Net Realized Gain on
Investments .000 .331 .000 .000 .000 .000
-------- -------- -------- -------------- ------- -------------------
Total Distributions .603 .972 .696 .753 .713 .043
-------- -------- -------- -------------- ------- -------------------
Net Asset Value, End of Period $ 9.815 $10.886 $10.699 $ 10.618 $9.969 $ 9.930
======== ======== ======== ============== ======= ===================
Total Return (Non-Annualized) (4.33%) 11.04% 7.61% 14.71% 7.99% (.27%)
Net Assets at End of Period (In millions) $ 33.9 $ 51.1 $ 24.1 $ 6.8 $ 6.1 $ 2.5
atio of Expenses to Average Net Assets*
(Annualized) .59% .60% .60% .60% .74% .70%
Ratio of Net Investment Income to
Average Net Assets* (Annualized) 5.69% 5.82% 6.87% 7.45% 7.64% 7.83%
Portfolio Turnover 177.63% 318.40% 231.91% 12.86% 59.25% .00%
*If certain expenses had not been assumed
by Xerox Life, total return would have been
lower and the ratios would have been as
follows:
<PAGE>
Ratio of Expenses to Average Net Assets
(Annualized) .68% .70% .88% 1.10% 1.53% 9.15%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 5.60% 5.73% 6.59% 6.96% 6.85% NA
NA - Not Applicable
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT
SERIES TRUST QUALITY INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Merritt Series Trust (the "Trust"), under which the Quality Income
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Trust and Fund commenced investment
operations on December 11, 1989.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. SECURITY VALUATION - Investments are stated at value using market
quotations, or if such valuations are not available, estimates obtained from
yield data relating to instruments or securities with similar characteristics
in accordance with procedures established in good faith by the Board of
Trustees. Short-term securities with remaining maturities of less than 60 days
are valued at amortized cost.
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may purchase and sell securities on a "when issued" and "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period.
The Fund will maintain in a segregated account with its custodian assets
having an aggregate value at least equal to the amount of the when issued or
delayed delivery purchase commitments until payment is made. At December 31,
1994, there were no when issued or delayed delivery purchase commitments.
C. INVESTMENT INCOME - Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.
D. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following
the year of the loss and offset such losses against any future realized
capital gains. At December 31, 1994, the Fund had an accumulated capital loss
carryforward for tax purposes of $1,758,844 which will expire on December 31,
2002.
<PAGE>
E. DISTRIBUTION OF INCOME AND GAINS - The Fund declares and pays dividends
monthly from net investment income. Net realized gains, if any, are
distributed annually. Distributions are automatically reinvested in Fund
Shares. Distributions from net realized gains for book purposes may include
short-term capital gains which are included in ordinary income for tax
purposes.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser') will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<TABLE>
<CAPTION>
<S> <C>
Average Net Assets % Per Annum
------------------ ------------
First $500 million .50 of 1%
Over $500 million .45 of 1%
</TABLE>
Xerox Variable Annuity Account One is a separate investment account
established by Xerox Financial Services Life Insurance Co. ("Xerox Life"). At
December 31, 1994, Xerox Variable Annuity Account One owned all shares of
beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen American Capital Distributors, Inc. or its affiliates ("VKAC'). The
Fund does not compensate its officers or trustees who are officers of VKAC.
The Fund has implemented a retirement plan which covers those Trustees who are
not officers of VKAC.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $11,400, representing VKAC's cost of providing accounting and
legal services.
3. CAPITAL TRANSACTIONS
At December 31, 1994, and 1993, paid in surplus aggregated $37,487,535 and
$50,626,667, respectively.
<PAGE>
Transactions in shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Year
Ended Ended
December 31, December 31,
1994 1993
------------- -------------
Beginning Shares 4,695,907 2,256,184
Shares Sold 3,968,977 4,371,387
Shares Issued through
Dividend Reinvestment 231,691 333,761
Shares Repurchased (5,439,140) (2,265,425)
------------- -------------
Net Increase/Decrease in
Shares Outstanding (1,238,472) 2,439,723
------------- -------------
Ending Shares 3,457,435 4,695,907
============= =============
</TABLE>
4. INVESTMENT TRANSACTIONS
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994, were $61,769,566 and
$67,175,298, respectively.
5. MORTGAGE AND ASSET BACKED SECURITIES
A Mortgage Backed Security (MBS) is a pass-through security created by pooling
mortgages and selling participations in the principal and interest payments
received from borrowers. Most of these securities are guaranteed by federally
sponsored agencies - Government National Mortgage Agency (GNMA), Federal
National Mortgage Agency (FNMA), Federal Home Loan Mortgage Corporation
(FHLMC) or Federal Home Loan Bank (FHLB).
A Collateralized Mortgage Obligation (CMO) is a bond which is
collateralized by a pool of MBS's. The Fund also invests in REMIC's (Real
Estate Mortgage Investment Conduit) which are another form of CMO. These MBS
pools are divided into classes or tranches with each class having its own
characteristics. For instance, a PAC (Planned Amortization Class) is a
specific class of mortgages which over its life will generally have the most
stable cash flows and the lowest prepayment risk.
<PAGE>
An Interest Only security is another class of MBS representing ownership
in the cash flows of the interest payments made from a specified pool of MBS.
The cash flow on this instrument decreases as the mortgage principal balance
is repaid by the borrower.
Asset Backed Securities are similar to MBS but made up of pools of other
assets, such as credit card receivables, which are grouped together for
investment purposes. Payments of principal and interest on the securities are
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Money Market Portfolio
of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Money Market Portfolio (one of the portfolios comprising the Van Kampen
Merritt Series Trust) (the "Fund"), including the portfolio of investments, as
of December 31, 1994, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
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 December 31, 1994, by correspondence with the custodian. 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 the
Money Market Portfolio of the Van Kampen Merritt Series Trust as of December
31, 1994, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1995
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Discount
Par Yield on
Amount Maturity Date of Amortized
($000) Security Description Date Purchase Cost
------- ------------------------------------ -------- --------- -----------
U.S. TREASURY SECURITIES 2.6%
2,000 United States Treasury Bills 01/12/95 3.385% $ 1,997,931
-----------
AGENCY 6.1%
386 Small Business Administration 01/03/95 5.750 386,116
220 Student Loan Marketing Assn. 01/03/95 6.070 220,924
2,000 Federal Home Loan Mortgage Corp. (b) 01/05/95 6.013 1,998,689
2,000 Federal Farm Credit Bank 01/09/95 5.300 1,997,644
-----------
TOTAL AGENCY 4,603,373
-----------
BANKERS ACCEPTANCES 13.9%
3,100 Natiorsbank Corp. 01/19/95 5.850 3,090,933
3,000 Sanwa Bank 01/19/95 5.870 2,991,195
2,000 Bank of New York 01/23/95 5.450 1,993,339
2,500 Northern Trust Co. 01/26/95 6.000 2,489,583
-----------
TOTAL BANKERS ACCEPTANCES 10,565,050
-----------
CERTIFICATES OF DEPOSIT 8.2%
3,000 Societe Generale Bank Yankee 02/03/95 6.150 3,000,000
250 Chemical Bank 02/06/95 5.960 250,043
3,000 Chemical Bank 02/06/95 6.100 3,000,439
-----------
TOTAL CERTIFICATES OF DEPOSIT 6,250,482
-----------
COMMERCIAL PAPER 59.2%
1,000 General Electric Capital Corp. 01/03/95 5.531 1,000,000
3,000 J. P. Morgan & Co. Inc. 01/03/95 6.000 2,999,000
<PAGE>
3,000 Exxon Asset Management 01/04/95 5.800 2,998,550
1,000 AT&T Capital Corp. 01/05/95 5.480 999,391
3,000 Southern California Edison Co. 01/05/95 5.930 2,998,023
3,000 Chevron Oil Finance Co. 01/06/95 5.533 3,000,000
2,000 Credit Suisse First Boston Inc. 01/09/95 5.030 1,997,764
2,000 Merill Lynch & Co. lnc. 01/12/95 5.136 2,000,000
2,000 State Street Boston Corp. 01/12/95 5.138 2,000,000
3,000 IBM Credit Corp. 01/13/95 6.050 2,993,953
2,000 ClT Group Holdings Inc. 01/17/95 5.455 2,000,000
2,000 Ford Motor Credit Co. 01/20/95 5.457 2,000,000
1,000 Ford Motor Credit Co. 01/20/95 5.565 1,000,000
2,000 Commercial Credit Corp. 01/23/95 5.525 2,000,000
3,000 American General Finance Corp. 01/25/95 5.809 3,000,000
3,000 Associates Corp. 01/27/95 6.120 2,986,740
3,000 Norwest Financial Inc. 01/27/95 6.050 2,986,892
3,000 American Express Credit Corp. 01/30/95 5.850 2,985,863
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Discount
Par Yield on
Amount Maturity Date of Amortized
($000) Security Description Date Purchase Cost
------- --------------------------------------------------------- -------- --------- -----------
COMMERCIAL PAPER (CONTINUED)
3,000 John Deere Capital Corp. 02/09/95 6.000% $ 2,980,500
-----------
TOTAL COMMERCIAL PAPER 44,926,673
-----------
VARIABLE RATE DEMAND OBLIGATIONS 7.7%
1,300 Virginia St Housing Development Authority 01/03/95 6.000 1,300,000
3,100 Catholic Healthcare West (Gtd: Toronto Dominion Bank) 01/04/95 7.000 3,100,000
300 Florida Housing Finance Agency (L.O.C Credit Suisse) 01/04/95 6.100 300,000
300 Heath Insurance Plan Greater New York (L.O.C. Morgan Gty) 01/04/95 6.450 300,000
800 Mississippi Business Finance Corp. 01/04/95 6.400 800,000
-----------
TOTAL VARIABLE RATE DEMAND OBLIGATIONS 5,800,000
-----------
REPURCHASE AGREEMENT 2.0%
UBS Securities, U.S.T-Note $1,545,000 par, 3.875%
coupon, due 10/31/95, dated 12/30/94, to be sold on
01/03/95 at $1,485,949 1,485,000
-----------
TOTAL INVESTMENTS (a)- 99.7% 75,628,509
OTHER ASSETS IN EXCESS OF LIABILITIES 0.3% 258,012
-----------
NET ASSETS -100.0% $75,886,521
===========
</TABLE>
<PAGE>
(a) At December 31, 1994, cost is identical for both book and federal income
tax purposes.
(b) This is a Mortgage Backed Security (MBS) which is a pass-through
instrument created by pooling mortgages and selling participations in the
principal and interest payments received from borrowers. This security is
guaranteed by Federal Home Loan Mortgage Corporation (FHLMC) a federally
sponsored agency .
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at Amortized Cost which approximates Market (Note 1) $75,628,509
Cash 117
Interest Receivable 439,549
------------
Total Assets 76,068,175
------------
LIABILITIES:
Payable for Fund Shares Repurchased 163,656
Accrued Expenses 17,998
------------
Total Liabilities 181,654
------------
NET ASSETS $75,886,521
============
NET ASSETS CONSIST OF:
Paid In Surplus $75,996,424
Accumulated Realized Loss on Investments (109,903)
------------
NET ASSETS
(Equivalent to $1.00 per share on 75,996,424 shares outstanding;
an unlimited number of shares without par value are authorized) (Note 3) $75,886,521
============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 2,591,753
Amortization of Premium (4,188)
------------
Total Income 2,587,565
------------
EXPENSES:
Investment Advisory Fee (Note 2) 293,512
Custody 26,407
Trustees Fees and Expenses (Note 2) 22,621
Registration 20,823
Legal (Note 2) 12,538
Other 15,186
------------
Total Expenses 391,087
Less Fees Waived by the Adviser and Expenses Reimbursed by Xerox Life
($293,512 and $38,836, respectively) 332,348
------------
Net Expenses 58,739
------------
NET INVESTMENT INCOME $ 2,528,826
============
Realized Gain/Loss on Investments:
Proceeds from Sales $ 2,422,400
Cost of Securities Sold (2,500,017)
------------
<PAGE>
NET REALIZED LOSS ON INVESTMENTS
(Including $1,175 reimbursement by the
Adviser for losses incurred on variable rate securities) $ (77,617)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 2,451,209
============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended Year Ended
December 31,1994 December 31,1993
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 2,528,826 $ 409,313
Net Realized Loss on Investments (77,617) (32,286)
------------------ ------------------
Change in Net Assets from Operations 2,451,209 377,027
Distributions from Net Investment Income (2,528,826) (409,313)
------------------ ------------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES (77,617) (32,286)
------------------ ------------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold 127,080,727 62,673,709
Net Asset Value of Shares Issued
through Dividend Reinvestment 2,528,826 409,313
Cost of Shares Repurchased (60,198,925) (60,530,372)
------------------ ------------------
NET CHANGE IN NET ASSETS FROM
CAPITAL TRANSACTIONS 69,410,628 2,552,650
------------------ ------------------
TOTAL INCREASE IN NET ASSETS 69,333,011 2,520,364
NET ASSETS:
Beginning of the Period 6,553,510 4,033,146
------------------ ------------------
<PAGE>
End of the Period $ 75,886,521 $ 6,553,510
================== ==================
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
July 1, 1991
(Commencement of
Investment
Year Ended December 31, Operations) to
1994 1993 1992 December 31, 1991
------ ------------ -------------- -------------------
Net Asset Value, Beginning of Period $1.00 $ 1.00 $ 1.00 $ 1.00
------ ------------ -------------- -------------------
Net Investment Income .041 .032 .038 .027
Less Distributions from Net Investment Income .041 .032 .038 .027
------ ------------ -------------- -------------------
Net Asset Value, End of Period $1.00 $ 1.00 $ 1.00 $ 1.00
====== ============ ============== ===================
Total Return *(Non-Annualized) 4.23% 3.24% 3.88% 2.75%
Net Assets at End of Period (In millions) $75.9 $ 6.6 $ 4.0 $ 5.4
Ratio of Expenses to Average Net Assets *(Annualized) .10% .10% .10% .09%
Ratio of Net Investment Income to Average Net Assets
*(Annualized) 4.37% 3.23% 3.63% 5.11%
*If certain expenses had not been assumed by the
Adviser and Xerox Life, total return would have been
lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets (Annualized) .68% .86% 1.30% 1.11%
Ratio of Net Investment Income to Average Net Assets
(Annualized) 3.79% 2.47% 2.43% 4.10%
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT
SERIES TRUST MONEY MARKET PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Merritt Series Trust (the "Trust"), under which the Money Market
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Trust commenced investment operations on
December 11, 1989 and the Fund commenced investment operations on July 1,
1991.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A. SECURITY VALUATION - Investments are valued at amortized cost, which
approximates market. Under this valuation method, a portfolio instrument is
valued at cost and any discount or premium is amortized on a straight line
basis to the maturity of the instrument.
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
Interest income is recorded on an accrual basis.
C. DISTRIBUTION OF INCOME AND GAINS - The Fund declares dividends from net
investment income daily and automatically reinvests such dividends daily. Net
realized gains, if any, are distributed annually.
D. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The Fund intends to utilize the provisions of the federal income tax laws
which allow it to carry a realized capital loss forward for eight years
following the year of the loss and offset such losses against any future
realized capital gains. At December 31, 1994 the Fund had an accumulated
capital loss carryforward of $109,903 of which $32,286 and $77,617 will expire
on December 31, 2001 and 2002, respectively.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser) will provide
investment advice and facilities to the Fund for an annual fee payable monthly
as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Average Net Assets % Per Annum
------------------ ------------
First $500 million .500 of 1%
Over $500 million .400 of 1%
</TABLE>
Xerox Variable Annuity Account One is a separate investment account
established by Xerox Financial Services Life Insurance Co. ("Xerox Life"). At
December 31, 1994, Xerox Variable Annuity Account One owned all shares of
beneficial interest of the Fund.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates ("VKAC").
The Fund does not compensate its officers or trustees who are officers of
VKAC. The Fund has implemented a retirement plan which covers those Trustees
who are not officers of VKAC.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $14,600, representing VKAC's cost of providing accounting and
legal services to the Fund.
3. CAPITAL TRANSACTIONS
At December 31, 1994 and 1993, paid in surplus aggregated $75,996,424 and
$6,585,796, respectively.
in shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Year
Ended Ended
December 31, December 31,
1994 1993
------------- -------------
Beginning Shares 6,585,796 4,033,146
------------- -------------
Shares Sold 127,080,727 62,673,709
Shares Issued Through
Dividend Reinvestment 2,528,826 409,313
<PAGE>
Shares Repurchased (60,198,925) (60,530,372)
------------- -------------
Net Increase
in Shares Outstanding 69,410,628 2,552,650
------------- -------------
Ending Shares 75,996,424 6,585,796
============= =============
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of the Stock Index Portfolio
of the Van Kampen Merritt Series Trust:
We have audited the accompanying statement of assets and liabilities of the
Stock Index Portfolio (one of the portfolios comprising the Van Kampen Merritt
Series Trust ) (the "Fund"), including the portfolio of investments, as of
December 31, 1994, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
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 December 31, 1994, by correspondence with the custodian and
brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Stock Index Portfolio of the Van Kampen Merritt Series Trust as of December
31, 1994, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1995
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
----------------------------------- ------ -------------
COMMON AND PREFERRED STOCKS
BASIC INDUSTRIES 7.4%
Air Products & Chemicals Inc. 1,300 $ 58,012
Alcan Aluminum Ltd. 2,600 65,975
Allied Signal Inc. 3,200 108,800
Aluminum Company America 1,100 95,287
American Barrick Resources Corp. 3,800 84,550
Armco Inc. (c) 1,800 11,925
Asarco Inc. 700 19,950
Bethlehem Steel Corp. (c) 1,400 25,200
Crown Cork & Seal Inc. (c) 1,100 41,525
Cyprus Amax Minerals Co. 1,300 33,963
Dow Chemical Co. 3,200 215,200
Du Pont (E. I.) De Nemours Co. 7,200 405,000
Eastman Chemical Co. 1,000 50,500
Eaton Corp. 1,000 49,500
Echo Bay Mines Ltd. 1,200 12,750
Georgia Pacific Corp. 1,100 78,650
Grace, W. R. & Co. 1,300 50,212
Homestake Mining Co. 1,700 29,113
Inco Ltd. 1,300 37,213
Ingersoll Rand Co. 1,400 44,100
Inland Steel Inds Inc. (c) 600 21,075
International Paper Co. 1,600 120,600
James River Corp. 900 18,225
Kimberly Clark Corp. 1,800 90,900
Louisiana Pacific Corp. 1,300 35,425
Monsanto Co. 1,300 91,650
Morton International Inc. 1,800 51,300
Newmont Mining Corp. 1,500 54,000
Nucor Corp. 900 49,950
Pall Corp. 1,500 28,125
Phelps Dodge Corp. 1,000 61,875
Pioneer Hi Bred International Inc. 1,000 34,500
Placer Dome Inc. 2,600 56,550
<PAGE>
PPG Inds Inc. 2,500 92,812
Reynolds Metals Co. 800 39,200
Santa Fe Pacific Gold Corp. (c) 1,000 12,875
Scott Paper Co. 800 55,300
Sigma Aldrich 600 19,800
Temple Inland Inc. 700 31,588
Union Carbide Corp. 1,700 49,938
USX U.S. Steel 800 28,400
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
--------------------------------- ------ -------------
BASIC INDUSTRIES (CONTINUED)
Wachovia Corp. 2,200 $ 70,950
Weyerhaeuser Co. 2,500 93,750
-------------
2,726,213
-------------
CAPITAL GOODS 6.1%
Armstrong World Inds Inc. 500 19,250
Boeing Co. 3,700 172,975
Browning Ferris Inds Inc. 2,300 65,262
Brunswick Corp. 1,400 26,425
Caterpillar Inc. 2,300 126,787
Champion International Corp. 1,200 43,800
Cooper Inds Inc. 1,300 44,363
Dana Corp. 1,500 35,063
Deere & Co. 900 59,625
Echlin Inc. 800 24,000
Emerson Electric Co. 2,600 162,500
General Dynamics Corp. 700 30.450
General Electric Co. 18,000 918,000
General Signal Corp. 800 25,500
Giddings& Lewis Inc. 600 8,850
Harnishfeger Inds Inc. 700 19,688
Martin Marietta Corp. 1,100 48,812
Navistar International Corp. (c) 800 12,100
Owens Coming Fiberglass Corp. (c) 500 16,000
Pitney Bowes Inc. 2,000 63,500
Praxair Inc. 1,700 34,850
Raytheon Co. 1,600 102,200
Rockwell International Corp. 2,500 89,375
Stone Container Corp. (c) 700 12,075
Textron Inc. 1,200 60,450
Varity Corp. (c) 500 18,125
<PAGE>
Zenith Electronics Corp. (c) 500 5,813
-------------
2,245,838
-------------
CONSUMER DURABLES 3.0%
Black & Decker Corp. 1,100 26,125
Chrysler Corp. 3,700 181,300
Fleetwood Enterprises Inc. 500 9,375
Ford Motor Co. 9,900 277,200
General Motors Corp. 7,900 333,775
Goodyear Tire & Rubber Co. 1,800 60,525
Masco Corp. 1,900 42,988
Maytag Corp. 1,600 24,000
Newell Co. 2,000 42,000
</TABLE>
See Notes to Financial Statements:
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
----------------------------- ------ -------------
CONSUMER DURABLES (CONTINUED)
Westinghouse Electric Corp. 4,100 $ 50,225
Whirlpool Corp. 800 40,600
-------------
1,088,113
-------------
CONSUMER NON-DURABLES 12.3%
American Brands Inc. 2,100 78,750
American Greetings Corp. 900 24,300
American Stores Co. 1,700 45,687
Anheuser Busch Cos. Inc 3,000 152,625
Archer Daniels Midland Co. 5,700 117,562
Avon Products Inc. 800 47,800
Borden Inc. 1,800 22,275
Campbell Soup Co. 2,700 119,137
Coca Cola Co. 13,500 695,250
Colgate Palmolive Co. 1,400 88,725
ConAgra Inc. 2,700 84,375
Conrail Inc. 900 45,450
CPC International Inc. 1,600 85,200
Dial Corp. 1,100 23,375
Eastman Kodak Co. 3,600 171,900
General Mills Inc. 1,700 96,900
Gillette Co. 2,300 171,925
Hasbro Inc. 1,200 35,100
Heinz, H. J. & Co. 2,700 99,225
Kellogg Co. 2,400 139,500
Liz Clairborne 1,000 16,875
Mattel Inc. 2,200 55,275
Mead Corp. 700 34,038
Melville Corp. 1,600 49,400
Nike Inc. 800 59,700
Pepsico Inc. 8,300 300,875
Pet Inc. 1,100 21,725
Philip Morris Cos. Inc. 8,800 506,000
<PAGE>
Premark International Inc. 700 31,325
Procter & Gamble Co. 7,100 440,200
Quaker Oats Co. 1,500 46,125
Ralston Purina Co. 1,000 44,625
Rubbermaid Inc. 1,800 51,750
Sara Lee Corp. 4,800 121,200
Seagram Ltd. 3,900 115,050
Stride Rite Corp 700 7,788
Unilever 1,700 198,050
UST Inc. 2,100 58,275
V.F. Corp. 800 38,900
-------------
4,542,237
-------------
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
---------------------------------- ------ -------------
CONSUMER SERVICES 11.2%
Albertsons Inc. 2,800 $ 81,200
Automatic Data Processing Inc. 1,700 99,450
Bally Entertainment Group (c) 900 5,513
Block H & R Inc. 1,200 44,550
Capital Cities/ABC Inc. 1,700 144,925
CBS Inc. 700 38,762
Ceridian Corp. (c) 700 18,813
Charming Shoppes Inc. 1,300 8,613
Circuit City Stores Inc. 1,100 24,475
Comcast Corp. (c) 1,900 29,806
Data General Corp.(c) 500 5,000
Dayton Hudson Corp. 900 63,675
Dillard Department Stores Inc. 1,300 34,775
Disney, Walt Co. 5,600 258,300
Donnelley R.R. & Sons Co. 1,900 56.050
Dun & Bradstreet Corp. 2,400 132,000
Federal Express Corp. (c) 700 42,175
Gannett Inc. 1,900 101,175
Gap Inc 1,600 48,800
Hilton Hotels Corp. 500 33,688
Home Depot Inc. 4,800 220,800
Interpublic Group Cos. Inc. 800 25,700
Kmart Corp. 5,100 66,300
Kroger Co. (c) 1,500 36,187
Limited Inc. 3,800 68,875
Lowes Cos. Inc. 1,700 59,075
Marriot International Inc. 1,500 42,187
May Department Stores Co. 3,000 101,250
McDonalds Corp. 7,500 219,375
MCI Communications Corp. 7,300 134,137
Moore Corp. Ltd. 1,100 20,763
New York Times Co. 1,600 35,400
Nordstrom Inc. 900 37,800
Penney, J.C. Inc. 2,500 111,562
<PAGE>
Pep Boys 800 24,800
Price Costco Inc. (c) 2,700 34,763
Promus Cos. Inc. (c) 1,100 34,100
Rite Aid Corp. 1,300 30,388
Ryans Family Steak Houses Inc. (c) 1,300 9,750
Safety Kleen Corp. 800 11,800
Sears Roebuck & Co. 3,700 170,200
Service Corp. International 1,500 41,625
Supervalu Inc. 1,200 29,400
Tele Communications Inc. (c) 3,600 78,300
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
----------------------------- ------ -------------
CONSUMER SERVICES (CONTINUED)
Time Warner Inc. 4,000 $ 140,500
TJX Companies Inc. 1,000 15,625
Toys R Us Inc. (c) 2,900 88,450
Tribune Co. (c) 900 49,275
Viacom Inc. (c) 2,900 117,812
Wal Mart Stores inc. 24,200 514,250
Walgreen Co. 1,400 61,250
Wendys International Inc. 1,600 23,000
Whitman Corp. 1,900 32,775
WMX Technologies Inc. 5,100 133,875
Woolworth Corp. 1,500 22,500
-------------
4,115,594
-------------
ENERGY 10.1%
Amerada Hess Corp. 900 41,062
Amoco Corp. 5,300 313,362
Ashland Oil Co. 800 27,600
Atlantic Richfield Co. 1,800 183,150
Baker Hughes Inc. 1,800 32,850
Burlington Resources inc. 1,400 49,000
Chevron Corp. 6,900 307,912
Coastal Corp. 1,300 33,475
Dresser Inds Inc. 2,600 49,075
Enron Corp. 2,700 82,350
Enserch Corp. 700 9,188
Exxon Corp. 13,400 814,050
Haliburton Co. 1,400 46,375
Maxus Energy Corp. (c) 1,100 3,713
Mobil Corp. 4,200 353,850
Occidental Petroleum Corp. 3,700 71,225
Oryx Energy Co. (c) 1,000 11,875
Phillips Petroleum Co. 2,800 91,700
Rowan Cos. Inc. (c) 900 5,513
<PAGE>
Royal Dutch Petroleum Co. 5,800 623,500
Schlumberger Ltd. 3,600 181,350
Sonat Inc. 900 25,200
Sun Inc. 1,200 34,500
Texaco Inc. 3,200 191,600
Unocal Corp. 2,400 65,400
USX Marathon Group 3,100 50,762
Williams Cos. Inc. 1,200 30,150
-------------
3,729,787
-------------
FINANCIAL SERVICES 9.5%
Aetna Life & Casualty Co. (c) 1,400 65,975
Ahmanson H.F. & Co. 1,600 25,800
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRIT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
---------------------------------- ------ -------------
FINANCIAL SERVICES (CONTINUED)
American Express Co. 5,500 $ 162,250
American General Corp. 2,500 70,625
American International Group Inc. 3,500 343,000
BancOne Corp. 4,400 111,650
Bank of Boston Corp. 1,400 36,225
Bankamerica Corp. 4,000 158,000
BankersTrust NY Corp. 1,000 55,375
Barnett Banks Inc. 1,300 49,888
Boatmens Bancshares Inc. 1,400 37,975
Chase Manhattan Corp. 1,800 61,875
Chemical Banking Corp. 3,000 107,625
Chubb Corp. 1,100 85,112
Citicorp 3,900 161,362
Continental Corp. 600 11,400
Corestates Financial Corp. 1,900 49.400
Dean water Discover & Co. 1,800 60,975
Federal Home Loan Mortgage Corp. 2,100 106,050
Federal National Mortgage Assn. 3,000 218,625
First Chicago Corp. 1,100 52,525
First Interstate Bancorp 900 60,862
First Union Corp. 2,000 82,750
Feet Financial Group Inc. 1,700 55,250
General Reinsurance Corp. 1,000 123,750
Great Western Financial Corp. 1,500 24,000
Household International Inc. 1,100 40,838
Keycorp 2,800 70,000
Lincoln National Corp. Inc. 1,200 42,000
MBNA Corp. 1,500 35,063
Melon Bank Corp. 1,700 52,063
Merrill Lynch & Co. Inc. 1,900 67,925
Morgan, J.P. & Co. Inc. 2,200 123,200
National City Corp. 2,300 59,513
NationsBank Corp. 2,600 117,325
NBD Bancorp Inc. 2,500 68,437
<PAGE>
Norwest Corp. (c) 3,600 84,150
PNC Bank Corp. 3,100 65,487
Safeco Corp. 800 41,600
Salomon Inc. 1,200 45,000
Shawmut National Corp. 1,800 29,475
Travelers Inc. 3,300 107,250
U.S. Bancorp 1,400 31,675
Unum Corp. 800 30,200
USF&G Corp. 1,000 13,625
-------------
3,503,150
-------------
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
------------------------------------- ------ -------------
HEALTHCARE 8.7%
Abbott Labs 8,300 $ 270,787
Alza Corp. (c) 700 12,600
American Home Products Corp. 3,300 207,075
Amgen Inc. (c) 1,400 82,600
Bausch & Lomb Inc. 800 27,100
Baxter International Inc. 3,100 87,575
Becton Dickinson & Co. 800 38,400
Beverly Enterprises Inc. (c) 1,400 20,125
Biomet Inc. (c) 1,500 21,000
Bristol Myers Squibb Co. (b) 5,500 318,312
Columbia / HCA Healthcare Corp. 3,900 142,350
Community Psychiatric Centers (c) 600 6,600
Johnson & Johnson 6,700 366,825
Lilly Eli & Co. 3,100 203,437
Mallinckrodt Group Inc. 900 26,888
Medtronic Inc. 1,200 66,750
Merck & Co. Inc. 13,100 499,437
National Medical Enterprises Inc. (c) 1,900 26,838
Pfizer Inc. 3,200 247,200
Schering Plough Corp. 2,000 148,000
Shared Medical Systems 300 9,825
St. Jude Medical Inc. 600 23,850
U.S. Healthcare Inc. 1,700 70,125
U.S. Surgical Corp. 600 11,400
United Healthcare Corp. 1,900 85,738
Upjohn Co. 1,900 58,425
Warner Lambert Co. 1,400 107,800
-------------
3,187,062
-------------
PUBLIC UTILITIES 9.9%
American Electric Power Inc. 2,000 65,750
Ameritech Corp. 5,900 238,212
Baltimore Gas & Electric Co. 1,700 37,613
<PAGE>
Bell Atlantic Corp. 4,800 238,800
Bellsouth Corp. 5,500 297,687
Carolina Power & Light Co. 1,600 42,600
Central & South West Corp. 1,900 42,988
Cinergy Corn. 1,401 32,744
Consolidated Edison Co. 2,600 66,950
Consolidated Natural Gas Co. 1,100 39,050
Detroit Edison Co. 2,000 52,250
Dominion Resources inc. 2,300 82,225
Duke Power Co. 2,400 91,500
Entergy Corp. 2,500 54,687
FPL Group Inc. 2,100 73,762
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
--------------------------------------- ------ -------------
PUBLIC UTILITIES (CONTINUED)
GTE Corp. 9,600 $ 291,600
Houston Inds Inc. 1,500 53,438
Niagara Mohawk Power Corp. 1,600 22,800
Noram Energy Corp. 1,300 6,988
Nynex Corp. 4,800 176,400
Ohio Edison Co. 2,000 37,000
Pacific Gas & Electric Co. 4,600 112,125
Pacific Telesis Group 4,400 125,400
Pacificorp 3,100 56,187
Panhandle Eastern Corp. 1,700 33,575
Peco Energy Co. 2,500 61,250
Public Service Enterprise Group 2,600 68,900
SCE Corp. 5,000 73,125
Southern Co. 7,400 148,000
Southwestern Bell Corp. 6,600 266,475
Sprint Corp. 3,800 104,975
Tenneco Inc. 1,800 76,500
Texas Utilities Co. 2,600 83,200
Transco Energy Co. 900 14,963
U.S. West Inc. 5,100 181,687
Unicom Corp. 2,500 60,000
Union Electric Co. 1,500 53,063
United Technologies Corp. 1,500 94,312
-------------
3,658,781
-------------
TECHNOLOGY 12.9%
Advanced Micro Devices Inc. (c) 1,100 27,363
Airtouch Communications Inc. (c) 5,200 151,450
Amdahl Corp. (c) 1,900 20,900
AMP Inc. 1,300 94,575
Apple Computer 1,300 50,700
AT&T Corp. 16,300 819,075
Autodesk Inc. 600 23,775
<PAGE>
Cisco Systems Inc. (c) 2,700 94,837
Compaq Computer Corp. (c) 2,700 106,650
Computer Associates International Inc. 1,700 82,450
Corning Inc. 2,600 77,675
Digital Equipment Corp. (c) 1,600 53,200
DSC Communications Corp. (c) 1,200 43,050
First Data Corp. 1,200 56,850
Fluor Corp. 1,000 43,125
Foster Wheeler Corp. 500 14,875
Great Lakes Chemical Corp. 700 39,900
Hewlett Packard Co. 2,800 279,650
Honeywell Inc. 1,600 50,400
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Security
Description Shares Market Value
------------------------------------------ ------ -------------
TECHNOLOGY (CONTINUED)
Intel Corp. 4,400 $ 281,050
International Business Machines 6,100 448,350
ITT Corp. 1,200 106,350
Loral Corp. 900 34,088
Lotus Development Corp. (c) 500 20,500
Micron Technology Inc. 1,100 48,538
Microsoft Corp. (c) 6,100 372,862
Minnesota Mining & Manufacturing Co. 4,700 250,862
Motorola Inc. 6,200 358,825
National Semiconductor Corp. (c) 1,500 29,250
Northam Telecom Ltd. 2,600 86,775
Novell Inc. (c) 4,100 70,212
Oracle Systems Corp. (c) 3,000 132,375
Scientific Atlanta Inc. 900 18,900
Sun Microsystems Inc. (c) 1,000 35,500
Sysco Corp. 2,000 51,500
Tandem Computers Inc. (c) 1,200 20,550
Tandy Corp. 700 35,088
Texas instruments Inc. 1,100 82,362
Unisys Corp. (c) 2,100 18,113
Xerox Corp. 1,300 128,700
-------------
4,761,250
-------------
TRANSPORTATION 1.6%
AMR Corp. 900 47,925
Burlington Northern Inc. 1,200 57,750
Consolidated Freightways Inc. 700 15,663
CSX Corp. 1400 97,475
Delta Air Lines Inc. 600 30,300
Norfolk Southern Corp. 1,700 103,062
Roadway Services Inc. 600 34,050
Ryder Systems Inc. 1,300 28,600
Santa Fe Pacific Corp. 1,900 33,250
<PAGE>
Southwest Airlines Co. 1,500 25,125
U.S. Air Group Inc. (c) 1,100 4,813
Union Pacific Corp. 2,300 104,937
-------------
582,950
-------------
TOTAL LONG-TERM INVESTMENTS 92.7%
(Cost $34,483,145) (a) 34,140,975
-------------
OTHER ASSETS IN EXCESS OF LIABILITIES 7.3% 2,669,948
-------------
NET ASSETS 100% $ 36,810,923
=============
</TABLE>
(a) At December 31, 1994, cost for federal income tax purposes is
$34,483,145; the aggregate gross unrealized appreciation is
$1,718,651 and the aggregate gross unrealized depreciation is $2,060.821,
resulting in net unrealized depreciation of $342,170.
(b) Assets segregated as collateral for open option and futures
transactions.
(c) Non-income producing security as this stock currently does not declare
dividends.
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at Market Value (Cost $34,483,145) (Note 1) $34,140,975
Cash 2,595,005
Receivables:
Dividends 107,231
Investments Sold 22,378
------------
Total Assets 36,865,589
------------
LIABILITIES:
Payables:
Margin on Futures (Note 5) 17,875
Fund Shares Repurchased 15,456
Investment Advisory Fee (Note 2) 16,411
Accrued Expenses 3,874
Options at Market Value (Net premiums received of $169) 1,050
------------
Total Liabilities 54,666
------------
NET ASSETS $36,810,923
============
NET ASSETS CONSIST OF:
Paid In Surplus (Note 3) $37,153,093
Accumulated Net Realized Gain on Investments 20,956
Net Unrealized Depreciation on Investments (363,126)
------------
NET ASSETS $36,810,923
============
<PAGE>
NET ASSET VALUE PER SHARE
($36,810,923 divided by 3,477,141 shares outstanding; an unlimited
number of shares without par value are authorized) (Note 3) $ 10.59
============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends (Net of withholding taxes of $10,129) $ 1,513,788
Interest 24,894
-------------
Total Income 1,538,682
-------------
EXPENSES:
Investment Advisory Fee (Note 2) 266,474
Custody 111,977
Trustees Fees and Expenses (Note 2) 24,099
Legal (Note 2) 13,986
Other 21,797
-------------
Total Expenses 438,333
Less Expenses Reimbursed by Xerox Life 118,434
-------------
Net Expenses 319,899
-------------
NET INVESTMENT INCOME $ 1,218,783
=============
REALIZED AND UNREALIZED GAIN/LOSS ON INVESTMENTS:
Realized Gain/Loss on Investments:
Proceeds from Sales $ 78,122,427
Cost of Securities Sold (77,811,426)
-------------
<PAGE>
Net Realized Gain on Investments (Including realized loss on closed and expired option
and futures transactions of $1,955 and $162,787, respectively) 311,001
-------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period 2,030,851
End of the Period (Including unrealized depreciation on open option
and futures transactions of $881 and $20,075, respectively) (363,126)
-------------
Net Unrealized Depreciation on Investments During the Period (2,393,977)
-------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS $ (2,082,976)
=============
NET DECREASE IN NET ASSETS FROM OPERATIONS $ (864,193)
=============
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended Year Ended
December 31,1994 December 31,1993
------------------ ------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income $ 1,218,783 $ 1,443,997
Net Realized Gain on Investments 311,001 1,639,880
Net Unrealized Appreciation/Depreciation
on Investments During the Period (2,393,977) 1,968,239
------------------ ------------------
Change in Net Assets from Operations (864,193) 5,052,116
------------------ ------------------
Distributions from Net Investment Income (1,218,783) (1,443,997)
Distributions from Net Realized Gain on Investments (623,624) (1,306,301)
Return of Capital Distribution (20,956) 0
------------------ ------------------
Total Distributions (1,863,363) (2,750,298)
------------------ ------------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES (2,727,556) 2,301,818
------------------ ------------------
FROM CAPITAL TRANSACTIONS (NOTE 3):
Proceeds from Shares Sold 14,386,901 74,102,826
Net Asset Value of Shares Issued
through Dividend Reinvestment 1,863,363 2,750,298
Cost of Shares Repurchased (67,994,792) (22,871,813)
------------------ ------------------
<PAGE>
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS (51,744,528) 53,981,311
------------------ ------------------
TOTAL INCREASE/DECREASE IN NET ASSETS (54,472,084) 56,283,129
NET ASSETS:
Beginning of the Period 91,283,007 34,999,878
------------------ ------------------
End of the Period $ 36,810,923 $ 91,283,007
================== ==================
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST STOCK INDEX PORTFOLIO
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
November 1, 1991
(Commencement of
Investment
Year Ended December 31, Operations) to
1994 1993 1992 December 31, 1991
-------- ------------ -------------- -------------------
Net Asset Value, Beginning of Period $11.115 $ 10.552 $ 10.572 $ 10.000
-------- ------------ -------------- -------------------
Net Investment Income .311 .205 .172 .038
Net Realized and Unrealized Gain/Loss on Investments (.337) .726 .477 .534
-------- ------------ -------------- -------------------
Total from investment Operations (.026) .931 .649 .572
-------- ------------ -------------- -------------------
Less:
Distributions from Net Investment Income .311 .205 .210 .000
Distributions from Net Realized Gain on Investments .185 .163 .459 .000
Return of Capital Distributions .006 .000 .000 .000
-------- ------------ -------------- -------------------
Total Distributions .502 .368 .669 .000
-------- ------------ -------------- -------------------
Net Asset Value, End of Period $10.587 $ 11.115 $ 10.552 $ 10.572
======== ============ ============== ===================
Total Return *(Non-Annualized) (.11%) 8.84% 6.22% 5.70%
Net Assets at End of Period (In millions) $ 36.8 $ 91.3 $ 35.0 $ 6.8
Ratio of Expenses to Average Net Assets *(Annualized) .58% .60% .59% .40%
Ratio of Net Investment Income to Average Net
Assets *(Annualized) 2.23% 2.29% 2.54% 3.02%
Portfolio Turnover 47.05% 44.09% 85.73% .00%
*If certain expenses had not been assumed by Xerox
Life, total return would have been lower and the ratios
would have been as follows:
<PAGE>
Ratio of Expenses to Average Net Assets (Annualized) .80% .74% 1.21% 1.84%
Ratio of Net Investment Income to Average Net Assets
(Annualized) 2.01% 2.15% 1.92% 1.58%
</TABLE>
See Notes to Financial Statements
<PAGE>
VAN KAMPEN SERIES MERRITT
SERIES TRUST STOCK INDEX PORTFOLIO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Merritt Series Trust (the "Trust"), under which the Stock Index
Portfolio (the "Fund") is organized as a separate sub-trust, is registered as
a diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Trust commenced investment operations on
December 11, 1989. The Fund commenced investment operations on November 1,
1991.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A. SECURITY VALUATION - Investments in securities listed on a securities
exchange are valued at their sale price as of the close of such securities
exchange. Investments in securities not listed on a securities exchange are
valued based on their last quoted bid price or, if not available, their fair
value as determined by the Board of Trustees. Short-term securities with
remaining maturities of less than 60 days are valued at amortized cost.
B. SECURITY TRANSACTIONS - Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
C. DIVIDEND AND INTEREST INCOME - Dividend income is recorded on the
ex-dividend date and interest income is recorded on an accrual basis.
D. FEDERAL INCOME TAXES - It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no provision for federal income taxes is required.
The return of capital distribution resulted from a permanent difference
between the book and tax treatment related to recognition of losses on certain
open option and futures transactions at year end. Accordingly, $20,956 was
reclassified from paid in surplus to accumulated net realized gain/loss on
investments.
E. DISTRIBUTION OF INCOME AND GAINS - The Fund declares and pays dividends
semi-annually from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains and gains on option and futures
transactions. All short-term capital gains and a portion of option and futures
gains are included in ordinary income for tax purposes. Distributions are
automatically reinvested in Fund shares.
<PAGE>
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
American Capital Investment Advisory Corp. (the "Adviser") will provide
investment advice and facilities to the Fund for an annual fee payable monthly
of .50% of the average net assets of the Fund.
Xerox Variable Annuity Account One is a separate investment account
established by Xerox Financial Services Life Insurance Co. ("Xerox Life"), a
subsidiary of Xerox Corporation. At December 31, 1994, Xerox Variable Annuity
Account One owned all shares of the Fund. At December 31, 1994, the Fund owned
1,300 shares of Xerox Corp.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen American Capital Distributors, Inc. or its affiliates ("VKAC').
The Fund does not compensate its officers or affiliated trustees who are
officers of VKAC. The Fund has implemented a retirement plan which covers
those Trustees who are not officers of VKAC.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $15,900 representing VKAC's cost of providing accounting and
legal services.
3. CAPITAL TRANSACTIONS
At December 31, 1994 and 1993, paid in surplus aggregated $37,174,049 and
$88,918,577, respectively.
Transactions in shares were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Year Year
Ended Ended
December 31, December 31,
1994 1993
------------- -------------
Beginning Shares 8,212,885 3,316,883
------------- -------------
Shares Sold 1,323,458 6,777,467
Shares Issued through
Dividend Reinvestment 176,442 248,652
Shares Repurchased (6,235,644) (2,130,117)
------------- -------------
Net Increase/Decrease
in Shares outstanding (4,735,744) 4,896,002
------------- -------------
<PAGE>
Ending Shares 3,477,141 8,212,885
============= =============
</TABLE>
4. INVESTMENT TRANSACTIONS - Aggregate purchases and cost of sales of
investment securities, excluding short-term notes, for the year ended December
31, 1994, were $24,662,958 and $77,811,426, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS - A derivative financial instrument in
very general terms refers to a security whose value is "derived" from the
value of an underlying asset, reference rate or index.
The Fund has a variety of reasons to use derivative instruments, such as
to attempt to protect the Fund against possible changes in the market value of
its portfolio or generate potential gain. All of the Fund's portfolio
holdings, including derivative instruments, are marked to market each day with
the change in value reflected in the unrealized appreciation/depreciation on
investments. Upon disposition, a realized gain or loss is recognized
accordingly, except for exercised option contracts where the recognition of
gain or loss is postponed until the disposal of the security underlying the
option contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. OPTION CONTRACTS - An option contract gives the buyer the right, but not
the obligation to buy (call) or sell (put) an underlying item at a fixed
exercise price during a specified period. These contracts are generally used
by the Fund to provide the return of an index without purchasing all of the
securities underlying the index or as a substitute for purchasing specific
securities.
Transactions in options for the year ended December 31,1994, were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Contracts Premium
---------- ---------
Outstanding at
December, 1993 2 $ 58
Options Written
and Purchased (Net) 68 (1,864)
Options Expired (Net) (1) 978
Options Terminated
<PAGE>
in Closing
Transactions (Net) (63) 997
---------- ---------
Outstanding at
December 31, 1994 6 $ 169
========== =========
</TABLE>
The related futures contracts of the options outstanding at December 31, 1994,
and their descriptions and market values are as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Expiration
Month/ Market
Exercise Value
Contracts Price of Options
--------- ---------- ------------
S&P 500
Index Futures
Written Puts 3 Mar/465 $ (3,469)
Purchased Calls 3 Mar/465 2,419
--------- ------------
6 $ (1,050)
========= ============
</TABLE>
B. FUTURES CONTRACTS - A futures contract is an agreement involving the
delivery of a particular asset on a specified future date at an agreed upon
price. The Fund generally invests in futures on the S&P 500 Index and
typically closes the contract prior to the delivery date. These contracts are
generally used to provide the return of an index without purchasing all of the
securities underlying the index.
The fluctuation in market value of the contracts is settled daily through
a cash margin account. Realized gains and losses are recognized when the
contracts are closed or expire.
Transactions in futures contracts, each with a par value of $100,000, for
the year ended December 31, 1994, were as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Contracts
----------
Outstanding at
December 31, 1993 1
Futures Opened 260
Futures Closed (250)
----------
Outstanding at
December 31, 1994 11
</TABLE>
The futures contracts outstanding at December 31, 1994, and the description
and unrealized depreciation is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Unrealized
Contracts Depreciation
--------- --------------
S&P 500 Index Futures
March 1995 - Buys to Open 11 $ (20,075)
========= ==============
</TABLE>
<PAGE>
