May 1, 1995
Securities and Exchange Commission
Division of Investment Management
Office of Insurance Products and Legal Compliance
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Document Control
Filing Desk, Room 1004
Re: Van Kampen Merritt Series Trust
Post-Effective Amendment No. 12 to Form N-1A
File Nos. 33-16005 and 811-5252
Dear Sirs:
Enclosed for filing please find one conformed copy of Post-Effective
Amendment No. 12 to Form N-1A for the above-referenced Registrant. The
purpose of this filing is to update financial and other non-material
informational.
Also enclosed is our written representation that the enclosed
Post-Effective Amendment does not contain disclosure which would render it
ineligible to become effective pursuant to Securities Act Rule 485(b).
Please contact the undersigned with any questions or comments you may
have concerning the enclosed.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ JUDITH A. HASENAUER
__________________________
Judith A. Hasenauer
JAH:s
May 1, 1995
Securities and Exchange Commission
Division of Investment Management
Office of Insurance Products and Legal Compliance
450 Fifth Street, N.W.
Washington, DC 20549
Attention: Document Control
Filing Desk, Room 1004
Re: Van Kampen Merritt Series Trust
File No. 33-16005/Rule 485 Representation
_________________________________________
Dear Sirs:
We have reviewed Post-Effective Amendment No. 12 for the above-named
Registrant. After review of such Post-Effective Amendment, we have concluded
that the changes made to the Prospectus and Statement of Additional
Information are non-material.
Therefore, we hereby represent that the amendment does not contain
disclosure which would render it ineligible to become effective pursuant to
paragraph (b) of Rule 485.
Sincerely,
BLAZZARD, GRODD & HASENAUER, P.C.
By: /s/ JUDITH A. HASENAUER
_______________________
Judith A. Hasenauer
Registration Nos. 33-16005
811-5252
______________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 12 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 13 [X]
VAN KAMPEN MERRITT SERIES TRUST
________________________________
(Exact name of registrant as specified in charter)
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
__________________________________ _________
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (708) 684-6000
Dennis J. McDonnell, President
Van Kampen Merritt Series Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
(Name and Address of Agent For Service)
Copy to: Judith A. Hasenauer
Blazzard, Grodd & Hasenauer, P.C.
P.O. Box 5108
Westport, CT 06881
(203) 226-7866
is proposed that this filing will become effective:
______ immediately upon filing pursuant to paragraph (b)
__x___ on May 1, 1995 pursuant to paragraph (b)
______ 60 days after filing pursuant to paragraph (a)(1)
______ on (date) pursuant to paragraph (a)(1)
______ 75 days after filing pursuant to paragraph (a)(2)
______ on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
______ this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has declared that it has registered an indefinite number or amount
of securities under the Securities Act of 1933 pursuant to Investment Company
Act Rule 24f-2 and the Rule 24f-2 Notice for Registrant's fiscal year 1993 was
filed on or about February 28, 1995.
<PAGE>
CROSS REFERENCE SHEET
(as required by Rule 495)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Item No. Location
- - - - -------- ----------------------------------
PART A
Item 1. Cover Page Cover Page
Item 2 Synopsis Not Applicable
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant The Trust; InvestmentObjectives;
Investment Practices
Item 5. Management of the Fund Management of the Trust
Item 6 Capital Stock and Other Securities Description of the Trust
Item 7. Purchase of Securities Being Offered Description of the Trust
Item 8. Redemption or Repurchase Description of the Trust
Item 9. Pending Legal Proceedings Not Applicable
PART B
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and History Not Applicable
Item 13. Investment Objective and Policies Investment Objectives and
Policies
Item 14. Management of the Fund Officers and Trustees
Item 15. Control Persons and Principal Holders of
Securities Officers and Trustees
Item 16. Investment Advisory and Other Services Investment Advisory Agreement
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities Description of the Trust (Part A)
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered Net Asset Values (Part A)
Item 20. Tax Status Tax Status (Part A)
Item 21. Underwriters Distribution and Redemption of
Shares (Part A)
Item 22. Calculation of Performance Data Yield Information for Money
Market Portfolio
Item 23. Financial Statements Financial Statements (Part B)
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PART A
<PAGE>
VAN KAMPEN MERRITT SERIES TRUST
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
VAN KAMPEN MERRITT SERIES TRUST (Trust) is intended to meet differing
investment objectives with its separate Portfolios: Quality Income Portfolio,
High Yield Portfolio, Growth and Income Portfolio, Money Market Portfolio,
Stock Index Portfolio, World Equity Portfolio and Utility Portfolio. SHARES
OF THE WORLD EQUITY PORTFOLIO AND THE UTILITY PORTFOLIO ARE NOT CURRENTLY
AVAILABLE FOR SALE. The Trustees may provide for additional Portfolios from
time to time. Each Portfolio issues its own class of shares which has rights
separate from the other classes of shares.
This Prospectus concisely sets forth the information about the Trust that a
prospective investor should know before investing. Investors should read and
retain this Prospectus for future reference.
A Statement of Additional Information, dated May 1, 1995, containing
information about the Trust has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. A
copy of the Statement of Additional Information may be obtained without charge
by calling (800) 831-LIFE, or writing Xerox Life Sales Company, the
distributor of the Trusts shares, at One Tower Lane, Suite 3000, Oakbrook
Terrace, Illinois 60181-4644.
PURCHASERS SHOULD BE AWARE THAT AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS
NEITHER INSURED NOR GUARANTEED BY THE U. S. GOVERNMENT. THERE CAN BE NO
ASSURANCE THAT THE MONEY MARKET PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
THE HIGH YIELD PORTFOLIO OF THE TRUST MAY INVEST A SUBSTANTIAL PORTION OF ITS
ASSETS IN LOWER GRADE CORPORATE DEBT SECURITIES COMMONLY KNOWN AS JUNK BONDS.
INVESTORS SHOULD BE AWARE THAT SUCH INVESTMENTS INVOLVE A SIGNIFICANT DEGREE
OF RISK. SEE INVESTMENT OBJECTIVES HIGH YIELD PORTFOLIO SPECIAL RISKS OF
HIGH YIELD INVESTING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THIS PROSPECTUS IS DATED: MAY 1, 1995.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PAGE
----
FINANCIAL HIGHLIGHTS 3
ADDITIONAL PERFORMANCE INFORMATION 8
THE TRUST 8
INVESTMENT OBJECTIVES 8
Money Market Portfolio 8
Investment Program 8
Quality Income Portfolio 11
High Yield Portfolio 14
Stock Index Portfolio 17
Growth and Income Portfolio 22
World Equity Portfolio 24
Utility Portfolio 27
INVESTMENT PRACTICES 33
Investment Limitations 38
RISK FACTORS 39
Tax Considerations 39
Special Considerations Relating to Foreign Securities 40
PORTFOLIO TURNOVER RATES 41
Money Market Portfolio and Quality Income Portfolio 41
High Yield Portfolio 42
Stock Index Portfolio 42
Growth and Income Portfolio, World Equity Portfolio And Utility Portfolio 42
MANAGEMENT OF THE TRUST 42
The Trustees 42
The Investment Advisor 43
Portfolio Management 45
Expenses of the Trust 45
DESCRIPTION OF THE TRUST 46
Shareholder Rights 46
Inquiries 47
Distribution and Redemption of Shares 47
Dividends 47
Tax Status 48
Net Asset Values 48
FUND PERFORMANCE 49
APPENDIX DESCRIPTION OF CORPORATE BOND RATINGS 51
</TABLE>
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1994 presented below, and their report thereon
appears in the Portfolios related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
QUALITY INCOME PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended December 31
------------- ---------- -------
1994 1993 1992 1991 1990
-------- -------- ------------- ---------- -------
Net Asset Value, Beginning of Period $10.886 $10.699 $ 10.618 $ 9.969 $9.930
-------- -------- ------------- ---------- -------
Net Investment Income .603 .641 .696 .753 .713
Net Realized and Unrealized Gain/Loss on
Investments (1.071) .518 .081 .649 .039
-------- -------- ------------- ---------- -------
Total from Investment Operations (.468) 1.159 .777 1.402 .752
-------- -------- ------------- ---------- -------
Less:
Distributions from Net Investment Income .603 .641 .696 .753 .713
Distributions from Net Realized Gain on
Investments .000 .331 .000 .000 .000
-------- -------- ------------- ---------- -------
Total Distributions .603 .972 .696 .753 .713
-------- -------- ------------- ---------- -------
Net Asset Value, End of Period $ 9.815 $10.886 $ 10.699 $ 10.618 $9.969
======== ======== ============= ========== =======
Total Investment Return (Non-Annualized) (4.33%) 11.04% 7.61% 14.71% 7.99%
Net Assets at End of Period (in millions) $ 33.9 $ 51.1 $ 24.1 $ 6.8 $ 6.1
Ratio of Expenses to Average Net Assets*
(Annualized) .59% .60% .60% .60% .74%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 5.69% 5.82% 6.87% 7.45% 7.64%
Portfolio Turnover 177.63% 318.40% 231.91% 12.86% 59.25%
*If certain expenses had not been assumed
by Xerox Life, total investment return would
have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets
(Annualized) .68% .70% .88% 1.10% 1.53%
Ratio of Net Investment Income to Average
Net Assets (Annualized) 5.60% 5.73% 6.59% 6.96% 6.85%
<S> <C>
December 11, 1989
(Commencement of
Investment Operations) to
December 31, 1989
---------------------------
Net Asset Value, Beginning of Period $10.000
---------------------------
Net Investment Income .043
Net Realized and Unrealized Gain/Loss on
Investments (.070)
---------------------------
Total from Investment Operations (.027)
---------------------------
Less:
Distributions from Net Investment Income .043
Distributions from Net Realized Gain on
Investments .000
---------------------------
Total Distributions .043
---------------------------
Net Asset Value, End of Period $ 9.930
===========================
Total Investment Return (Non-Annualized) (.27%)
Net Assets at End of Period (in millions) $ 2.5
Ratio of Expenses to Average Net Assets*
(Annualized) .70%
Ratio of Net Investment Income to Average
Net Assets* (Annualized) 7.83%
Portfolio Turnover .00%
*If certain expenses had not been assumed
by Xerox Life, total investment return would
have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets
(Annualized) 9.15%
Ratio of Net Investment Income to Average
Net Assets (Annualized) N/A
</TABLE>
See Financial Statements and Notes Thereto
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1994 presented below, and their report thereon
appears in the Portfolios related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
HIGH YIELD PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 11, 1989
(Commencement of
Year Ended December 31 Investment 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 .0533
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 Investment 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 investment return would
have been lower and the ratios would have
been as follows:
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 Financial Statements and Notes Thereto
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1994 presented below, and their report thereon
appears in the Portfolios related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
GROWTH AND INCOME PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
May 1, 1992
(Commencement of
Year Ended December 31 Investment Operations)
------------ -------------
1994 1993 to 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 Investment 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 investment 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 (Annualized) 2.68% .47% (.73%)
</TABLE>
See Financial Statements and Notes Thereto
<PAGE>
FINANCIAL HIGHTLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1994 presented below, and their report thereon
appears in the Portfolios related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
MONEY MARKET PORTFOLIO
<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 Distribuutions from Net Investment Income .041 .032 .038 .027
------ --------------- ------------- -------------------
Net Asset Value, End of Period $1.00 $ 1.00 $ 1.00 $ 1.00
====== =============== ============= ===================
Total Investment 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
Xerox Life, total investment 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 Financial Statements and Notes Thereto
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR ONE SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The following schedule presents financial highlights for one share of the
Portfolio throughout the periods indicated. The financial highlights have been
audited by KPMG Peat Marwick LLP, independent auditors, for each of the
periods through December 31, 1994 presented below, and their report thereon
appears in the Portfolios related Statement of Additional Information. This
information should be read in conjunction with the financial statements and
related notes thereto included in the Statement of Additional Information, a
copy of which may be obtained without charge as indicated elsewhere in this
Prospectus.
STOCK INDEX PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended December 31
------------ -------------
1994 1993 1992
-------- ------------ -------------
Net Asset Value, Beginning of Period $11.115 $ 10.552 $ 10.572
-------- ------------ -------------
Net Investment Income .311 .205 .172
Net Realized and Unrealized Gain/Loss on Investments (.337) .726 .477
-------- ------------ -------------
Total from Investment Operations (.026) .931 .649
-------- ------------ -------------
Less:
Distributions from Net Investment Income .311 .205 .210
Distributions from Net Realized Gain on
Investments .185 .163 .459
Return of Capital Distributions .006 .000 .000
-------- ------------ -------------
Total Distributions .502 .368 .669
-------- ------------ -------------
Net Asset Value, End of Period $10.587 $ 11.115 $ 10.552
======== ============ =============
Total Investment Return (Non-Annualized) (.11%) 8.84% 6.22%
Net Assets at End of Period (in millions) $ 36.8 $ 91.3 $ 35.0
Ratio of Expenses to Average Net Assets*
(Annualized) .58% .60% .59%
Ratio of Net Investment Income to
Average Net Assets* (Annualized) 2.23% 2.29% 2.54%
Portfolio Turnover 47.05% 44.09% 85.73%
*If certain expenses had not been assumed by Xerox Life
, total investment return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets
(Annualized) .80% .74% 1.21%
Ratio of Net Investment Income to
Average Net Assets (Annualized) 2.01% 2.15% 1.92%
<S> <C>
November 1, 1991
(Commencement of
Investment Operations) to
December 31, 1991
---------------------------
Net Asset Value, Beginning of Period $10.000
---------------------------
Net Investment Income .038
Net Realized and Unrealized Gain/Loss on Investments .534
---------------------------
Total from Investment Operations .572
---------------------------
Less:
Distributions from Net Investment Income .000
Distributions from Net Realized Gain on
Investments .000
Return of Capital Distributions .000
---------------------------
Total Distributions .000
---------------------------
Net Asset Value, End of Period $10.572
===========================
Total Investment Return (Non-Annualized) 5.70%
Net Assets at End of Period (in millions) $ 6.8
Ratio of Expenses to Average Net Assets*
(Annualized) .40%
Ratio of Net Investment Income to
Average Net Assets* (Annualized) 3.02%
Portfolio Turnover .00%
*If certain expenses had not been assumed by Xerox Life
, total investment return would have been lower and the ratios would have
been as follows:
Ratio of Expenses to Average Net Assets
(Annualized) 1.84%
Ratio of Net Investment Income to
Average Net Assets (Annualized) 1.58%
</TABLE>
See Financial Statements and Notes Thereto
<PAGE>
ADDITIONAL PERFORMANCE INFORMATION
Further information about the Trusts performance is contained in the Annual
Report to shareholders which may be obtained, without charge, by calling (800)
831-LIFE, or writing Xerox Life Sales Company, the distributor of the Trusts
shares, at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.
THE TRUST
VAN KAMPEN MERRITT SERIES TRUST (the Trust) is a diversified open-end
management investment company established as a Massachusetts business trust
under a Declaration of Trust dated July 9, 1987. The Trust is currently
comprised of seven separate Portfolios: Money Market Portfolio, Quality Income
Portfolio, High Yield Portfolio, Growth and Income Portfolio, Stock Index
Portfolio, World Equity Portfolio and Utility Portfolio. HOWEVER, SHARES OF
THE WORLD EQUITY PORTFOLIO AND THE UTILITY PORTFOLIO ARE NOT CURRENTLY BEING
OFFERED FOR SALE. The Trustees may provide for additional Portfolios from time
to time. Each Portfolio issues a separate class of shares. The Declaration of
Trust permits the Trustees to issue an unlimited number of full or fractional
shares of each class of stock.
INVESTMENT OBJECTIVES
Each Portfolio of the Trust has a different investment objective which it
pursues through separate investment policies as described below. Each
Portfolio is managed separately by Van Kampen American Capital Investment
Advisory Corp. (F/K/A Van Kampen Merritt Investment Advisory Corp.) (the
Investment Advisor). The risks and opportunities of each Portfolio should be
examined separately. The differences in objectives and policies among the
Portfolios can be expected to affect the return of each Portfolio and the
degree of market and financial risk of each Portfolio.
There is no assurance that the investment objectives of the various Portfolios
will be met.
MONEY MARKET PORTFOLIO
The investment objective of the Money Market Portfolio is to provide high
current income consistent with the preservation of capital and liquidity
through investment in a broad range of money market instruments that will
mature within 12 months of the date of purchase.
INVESTMENT PROGRAM
The Money Market Portfolio seeks to achieve its objective by investing only in
the following securities and instruments: (a) obligations of or guaranteed by
the U.S. government, its agencies or instrumentalities (U.S. Government
Securities); (b) obligations of banks subject to U.S. government regulation as
well as such other bank obligations as are insured by a U.S. government agency
(Bank Obligations); (c) commercial paper (including variable amount master
demand notes); and (d) debt obligations (other than commercial paper) of
corporate issuers.
U.S. Government Securities include Treasury Bills, Notes and Bonds issued by
the U.S. government and backed by the full faith and credit of the U.S.
government, as well as securities issued or guaranteed as to principal and
interest by agencies and instrumentalities of the U.S. government. Bank
Obligations include certificates of deposit and bankers acceptances of
domestic banks (or Euro-dollar obligations of foreign branches of those
domestic banks) subject to U.S. government regulation and time deposits of
federal and state banks whose accounts are insured by a government agency as
well as the accounts themselves.
See Risk Factors - Tax Considerations for a discussion of special
diversification standards which the Portfolio will meet.
The Portfolio may lend portfolio securities. The Portfolio may also enter into
repurchase agreements but only if the underlying securities are either
Government securities or First Tier Securities (see Investment Quality and
Portfolio Maturity, below). The Portfolio may purchase and sell securities on
a when issued and delayed delivery basis. The Portfolio may borrow up to 10%
of its net assets in order to pay for redemptions when liquidation of
portfolio securities is considered disadvantageous or inconvenient and may
pledge up to 10% of its net assets to secure borrowings. The Portfolio may
invest up to 10% of its net assets in restricted securities. A more complete
description of these investments and transactions is contained under
Investment Practices.
The Portfolio may also invest in Floating Rate Securities. Floating Rate
Securities provide for automatic adjustment of the interest rate whenever some
specified interest rate index changes. The interest rate on Floating Rate
Securities is ordinarily determined by reference to or is a percentage of a
banks prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure. Floating Rate Securities
often include a demand feature which entitles the holder to sell the
securities to the issuer at par. In many cases, the demand feature can be
exercised at any time on seven days notice; in other cases, the demand feature
is exercisable at any time on 30 days notice or on similar notice at intervals
of not more than one year. With respect to Floating Rate Securities, the
financial institution issuing the instrument is considered the issuer.
However, where the securities are backed by an irrevocable letter of credit or
by insurance, without which the securities would not qualify for purchase
under the Portfolios quality restrictions, the issuer of the letter of credit
will be considered the issuer of the securities.
Although the securities in which the Portfolio invests are of high quality and
the transactions which it enters into entail low risk, there is still the
possibility of loss of principal. Corporate issuers may default on their
obligations. Repurchase agreements may be deemed to be collateralized loans
and the Portfolio could experience delay and expenses in liquidating
collateral in the event of the failure of the repurchasing party to honor its
agreement to repurchase. Agencies or instrumentalities of the U.S. government
could also default on their securities which may not be guaranteed by or be
backed by the full faith and credit of the U.S. government.
INVESTMENT QUALITY
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(a) Eligible Securities
The Money Market Portfolio will invest only in United States dollar-denominated
instruments which, at the time of acquisition, are determined to be eligible
securities (Eligible Securities) by the Investment Advisor and which are
determined by the Investment Advisor to present minimal credit risks.
An Eligible Security is any security that has a remaining maturity of less than one
year and (i) which is rated in one of the two highest rating categories for short-term
debt obligations by any two nationally recognized statistical rating organizations
(NRSROs) that have issued a rating with respect to a security or class of debt
obligations of an issuer, or if only one NRSRO has issued a rating, that NRSRO
(Requisite NRSROs); or (ii) has a security that has been issued by an issuer that
has outstanding short-term debt obligations (or security within that class) that are
comparable in priority and security with the security (CPS Security) which is
rated, or the issuer of which is rated, by the Requisite NRSROs in one of the two
highest rating categories for short-term debt obligations. An unrated security may
also be an Eligible Security if it is determined by the Investment Advisor to be of
comparable quality (Comparable Quality Security) to either a First Tier Security
or Second Tier Security, as those terms are defined below.
A First Tier Security is an Eligible Security that (i) is itself rated, has a CPS
Security rated or the issuer of which security is rated by the Requisite NRSROs in
the highest rating category for short-term debt obligations or (ii) is a Comparable
Quality Security which is determined by the Investment Advisor to be of
comparable quality to a First Tier Security.
A Second Tier Security is (i) an Eligible Security that is itself rated, has a CPS
Security rated or the issuer of which security is rated by the Requisite NRSROs in
the second highest rating category for short-term debt obligations, (ii) an
instrument that has been rated in the highest rating category for short-term debt
obligations by one NRSRO and has been rated in the second highest rating
category for short-term debt obligations by one or more other NRSROs or (iii) a
Comparable Quality Security which is determined by the Investment Advisor to be
of comparable quality to a Second Tier Security.
(b) Guidelines for Purchasing Eligible Securities
The Investment Advisor, on behalf of the Money Market Portfolio, may (i) acquire
any First Tier Security that, at the time of acquisition, has received the highest
rating from any two NRSROs; (ii) acquire any Second Tier Security that, at the
time of acquisition, has received the second highest rating from any two NRSROs,
and (iii) acquire any First Tier Security or any Second Tier Security that at time of
purchase is rated by a single NRSRO, or any Comparable Quality Security, subject
to approval by the Board of Trustees of the Trust.
</TABLE>
PORTFOLIO MATURITY
The Money Market Portfolio may not purchase any instrument, other than a
Government security, with a remaining maturity of greater than one year. A
Government security is any security issued or guaranteed as to principal or
interest by the United States, or by a person controlled or supervised by and
acting as an instrumentality of the Government of the United States, or any
certificate of deposit for any of the above.
<PAGE>
The Money Market Portfolio maintains a dollar-weighted average portfolio
maturity of ninety (90) days or less. The Portfolio determines the maturity of
portfolio investments in accordance with Rule 2a-7, a valuation and pricing
rule under the Investment Company Act of 1940, as amended.
QUALITY INCOME PORTFOLIO
The investment objective of the Quality Income Portfolio is to seek a high
level of current income, consistent with safety of principal, by investing in
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.
The Investment Advisor will use the Lehman Brothers Government/Corporate Bond
Index as a benchmark against which it will gauge the performance of the
Portfolio and determine risk measurement. The Lehman Brothers
Government/Corporate Bond Index is comprised of all publicly issued,
non-convertible, domestic debt of the U.S. Government or any agency thereof,
quasi-Federal corporation, or corporate debt guaranteed by the U.S. Government
and all publicly issued, fixed-rate, non-convertible, domestic debt of the
four major corporate classifications: industrial, utility, financial and
Yankee bond. Only notes and bonds with a minimum outstanding principal amount
of $50,000,000 and a minimum maturity of one year are included. Bonds included
must have a rating of at least Baa by Moodys Investors Service, Inc. (Moodys),
BBB by Standard & Poors Corporation (S&P) or in the case of bank bonds not
rated by either Moodys or S&P, BBB by Fitch Investors Service, Inc.
Depending on market conditions and subject to the special diversification
provisions imposed on the Portfolio (see Risk Factors), the Portfolio may
invest a substantial portion of its assets in Government National Mortgage
Association (GNMA) Certificates of the modified pass-through type. These GNMA
Certificates are debt securities issued by a mortgage holder (such as a
mortgage banker) and represent an interest in a pool of mortgages insured by
the Federal Housing Administration or the Farmers Home Administration or
guaranteed by the Veterans Administration. GNMA guarantees the timely payment
of monthly installments of principal and interest on the GNMA Certificates.
These guarantees are backed by the full faith and credit of the U.S.
government.
To the extent the Portfolio acquires GNMA Certificates at par or at discount,
the GNMA Certificates offer a high degree of safety of the principal
investment because of the GNMA guarantee. If the Portfolio buys GNMA
Certificates at a premium, however, mortgage foreclosures and repayments of
principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the Portfolios principal investment to the extent of
the premium paid. To avoid loss of this premium and of any gain in value of
its GNMA Certificates resulting from a decrease in interest rates generally,
the Portfolio may sell its GNMA Certificates which are selling at a
substantial premium. This practice may increase the Portfolios portfolio
turnover rate. A more complete description of GNMA Certificates is contained
in the Statement of Additional Information.
<PAGE>
The Portfolio, subject to the limitations on investments as described in Risk
Factors, may invest in other obligations issued or guaranteed by the U.S.
government or by its agencies or instrumentalities. These instruments may be
either direct obligations of the Treasury (such as U.S. Treasury Notes, Bills
or Bonds) or securities issued or guaranteed by government agencies or
instrumentalities. Of the obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government, some are backed by the full faith
and credit of the U.S. government (such as Maritime Administration Title XI
Ship Financing Bonds) and others are backed only by the rights of the issuer
to borrow from the U.S. Treasury (such as Federal Home Loan Bank Bonds and
Federal National Mortgage Association Bonds).
The Portfolio may also invest in one or more of the following:
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(1) Marketable straight-debt securities of domestic issuers, and of foreign issuers
(payable in U.S. dollars) rated at the time of purchase within the four highest
grades assigned by Moodys (Aaa, Aa, A or Baa) or by S&P (AAA, AA, A or
BBB);
(2) Commercial paper rated at time of purchase Prime-3 by Moodys or A-3 by
S&P;
(3) Bank obligations (including repurchase agreements and those denominated in
Eurodollars) of banks having total assets in excess of $1 billion;
(4) Mortgage pass-through certificates and collateralized mortgage obligations.
</TABLE>
Securities rated Baa or BBB may have speculative characteristics and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is the case
with higher grade bonds. For a further description of the above investments
and the ratings used, see Appendix - Description of Corporate Bond Ratings
herein and Description of Securities Ratings - Commercial Paper Ratings in the
Statement of Additional Information.
The Portfolio may invest up to 35% of its assets in securities of foreign
issuers. These investments will be marketable straight-debt securities of
foreign issuers payable in U.S. dollars and rated at the time of purchase
within the four highest grades assigned by Moodys or by S&P. Investments in
foreign securities present certain risks not ordinarily found in investments
in securities of U.S. issuers. See Risk Factors - Special Considerations
Relating to Foreign Securities.
The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase
agreements, reverse repurchase agreements and may sell securities short. The
Portfolio may purchase and sell securities on a when issued and delayed
delivery basis. The Portfolio may invest in restricted securities. A more
complete description of these investments and transactions is contained under
Investment Practices.
If the Investment Advisor deems it appropriate to seek to partially hedge the
Portfolios assets against market value changes, the Portfolio may enter into
various hedging transactions, such as futures contracts, financial index
futures contracts, and the related put or call options contracts on futures
contracts. Hedging is a means of offsetting, or neutralizing, the price
movement of an investment by making another investment, the price of which
should tend to move in the opposite direction from that of the original
investment. See Investment Practices - Strategic Transactions and the
Statement of Additional Information for a more complete description of these
transactions.
The Portfolio will be affected by general changes in interest rates resulting
in increases or decreases in the value of the Portfolio securities. Market
prices of debt securities tend to rise when interest rates fall and market
prices tend to fall when interest rates rise. Repurchase agreements may be
deemed to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase. Agencies or
instrumentalities of the U.S. government could also default on their
securities which may not be guaranteed by or be backed by the full faith and
credit of the U.S. government.
See Risk Factors - Tax Considerations for a discussion of special
diversification standards which the Portfolio will meet.
HIGH YIELD PORTFOLIO
The investment objective of the High Yield Portfolio is the maximization of
total investment return through income and capital appreciation.
The High Yield Portfolio will pursue its investment objective by investing in
a portfolio substantially consisting of medium and lower grade domestic
corporate debt securities. The Portfolio may also invest up to 35% of its
assets in foreign government and foreign corporate debt securities of similar
quality. The Portfolio may also, from time to time, invest in cash or cash
equivalents due to market conditions or for other defensive purposes.
Lower grade corporate debt securities are commonly known as junk bonds and
involve a significant degree of risk. See Special Risks of High Yield
Investing, below.
Medium grade corporate securities are generally regarded as having adequate,
but not outstanding, capacity to pay interest and repay principal. Medium
grade securities are obligations that are rated A and Baa by Moodys or A and
BBB by S&P, or which are not rated by either Moodys or S&P but are considered
by the Investment Advisor to be of comparable quality. Securities rated Baa or
BBB may have speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
Lower grade corporate securities are those that are rated Ba or B by Moodys or
BB or B by S&P, or which are unrated or considered by the Investment Advisor
to be of comparable quality. If the Investment Advisor deems it appropriate,
the Portfolio may invest in domestic corporate debt securities of a higher
quality. For a further description of these ratings, see Appendix -
Description of Corporate Bond Ratings.
Many issuers of medium and lower grade securities choose not to have a rating
assigned to their obligations by one of the rating agencies. Therefore, the
Portfolios assets may at times consist of a high proportion of unrated
securities. The Portfolio will purchase only those unrated securities which
the Investment Advisor believes are comparable to rated securities that
qualify for purchase by the Portfolio pursuant to criteria established by the
Board of Trustees. Although the Portfolio will invest primarily in medium and
lower grade securities, from time to time the Portfolio may also invest in
higher grade securities if the Investment Advisor considers it appropriate, as
when the difference in return between different grades of securities is very
narrow, when the Investment Advisor expects interest rates to increase, or
when the availability of medium and lower grade securities is limited. These
investments may result in a lower current income than if the Portfolio were
fully invested in medium and lower grade securities.
The Portfolio may invest up to 35% of its assets in foreign government and
foreign corporate debt securities of similar quality. Investments in foreign
securities present certain risks not ordinarily found in investments in
securities of U.S. issuers. See Risk Factors - Special Considerations Relating
to Foreign Securities.
If the Investment Advisor deems it appropriate to seek to partially hedge the
Portfolios assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may also enter into various
hedging transactions, such as futures contracts, financial index futures
contracts, and related put or call options contracts on these contracts and
foreign currency contracts. In addition, if the Investment Advisor deems it
appropriate, the Portfolio may enter into other hedging transactions, such as
forward foreign currency contracts, currency futures contracts, and related
options contracts in order to protect the U.S. dollar equivalent values of
those foreign securities in which the Portfolio invests against declines
resulting from currency value fluctuations.
Hedging is a means of offsetting, or neutralizing, the price movement of an
investment by making another investment, the price of which should tend to
move in the opposite direction from that of the original investment. See
Investment Practices - Strategic Transactions and the Statement of Additional
Information for a more complete discussion of these transactions.
The Portfolio may purchase and sell securities on a when issued and delayed
delivery basis. See the Statement of Additional Information for a discussion
of these transactions.
Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase agreements
and reverse repurchase agreements. Repurchase agreements may be deemed to be
collateralized loans and the Portfolio could experience delay and expenses in
liquidating such collateral in the event of the failure of the repurchasing
party to honor its agreement to repurchase. The Portfolio may invest in
restricted securities. The Portfolio may purchase and sell securities on a
when issued and delayed delivery basis. A more complete description of these
investments and transactions is contained under Investment Practices.
See Risk Factors - Tax Considerations for a discussion of special
diversification standards which the Portfolio will meet.
SPECIAL RISKS OF HIGH YIELD INVESTING
As indicated above, the High Yield Portfolio intends to invest a substantial
portion of its assets in medium and lower grade corporate debt securities.
Debt securities which are in those medium and lower grade categories generally
offer a higher current yield than is offered by securities which are in the
higher grade categories, but they also generally involve greater price
volatility and greater credit and market risk. Credit risk relates to the
issuers ability to make timely payments of principal and interest when due as
well as fundamental developments in an issuers business. Market risk relates
to the changes in market value that occur as a result of variation in the
level of prevailing interest rates and yield relationships in the securities
market. Typically, market prices tend to fall as interest rates rise and tend
to rise as interest rates fall. Generally, prices tend to fluctuate more for
lower grade issues than for higher grade issues, and, for any given change in
interest rates, prices for longer maturity issues tend to fluctuate more than
for shorter maturity issues. Yields on lower-rated securities will fluctuate
over time.
The prices of lower-grade securities, while generally less sensitive to
interest rate changes than higher-rated investments, tend to be more sensitive
to adverse economic changes or individual corporate developments. During an
economic downturn or substantial period of rising interest rates, the ability
of a highly leveraged issuer to service its principal and interest payment
obligations, to meet projected business goals and to obtain additional
financing may be adversely affected. An economic downturn could disrupt the
market for high yield bonds, adversely affect the value of outstanding bonds
and the ability of the issuers of such bonds to repay principal and interest,
cause increased volatility in the market prices of high yield bonds and the
Portfolios net asset value and may result in a higher incidence of defaults by
issuers on bond obligations. If the issuer of a bond defaults, the Portfolio
may incur additional expenses to seek recovery. The Portfolio will seek to
reduce risk through portfolio diversification, credit analysis, and attention
to current developments and trends in the industries and with the issuers
involved. The Investment Advisor will continuously monitor the condition of
the economy and the financial and credit markets.
To the extent that there is no established retail secondary market for high
yield bonds, such bonds may be thinly traded, making the bonds less liquid
than investment grade bonds. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of high yield bonds, especially in a thinly traded market. In the
event of an illiquid secondary market, or in the absence of readily available
market quotations, the responsibility of the Board of Trustees of the Trust to
value the securities becomes more difficult and will involve a greater degree
of judgment in that there is less reliable, objective data available.
If the market for high yield bonds is restricted by the enactment of
legislation, or if steps are taken to limit the use of such securities, or
other advantages of such securities, the value of the securities and the
Portfolios ability to acquire them may be adversely affected.
A description of the corporate bond ratings is contained in the Appendix.
Purchasers should be aware, however, that credit ratings evaluate the safety
of principal and interest payments and not the market value risk of high yield
bonds. In addition, credit ratings may not always be modified on a timely
basis to reflect events subsequent to the most recent ratings which may have a
material impact on the securities rated. However, the Investment Advisor will
continuously monitor the issuers of high yield bonds in the Portfolio to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments, and to assure the bonds liquidity.
Achievement of the investment objective of the Portfolio may be more dependent
on the credit analysis of the Investment Advisor than is the case with higher
quality bonds.
As described above, the Portfolio may also invest in unrated corporate
securities. Although unrated securities are not necessarily of lower quality
than rated securities, the market for them may not be as broad and,
accordingly, they may carry greater risk and higher yield than rated
securities.
ASSET COMPOSITION
At December 31, 1994, the High Yield Portfolio was invested in bonds rated by
Moodys as follows:
<TABLE>
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Moodys Ratings Percentage of Total Bond Investments in the Portfolio
Caa 6.2%
Ba1 1.2%
Ba2 1.4%
Ba3 12.3%
B1 25.2%
B2 31.0%
B3 21.5%
Other 1.2%
</TABLE>
STOCK INDEX PORTFOLIO
INVESTMENT OBJECTIVE
The investment objective of the Stock Index Portfolio is to achieve investment
results that approximate the aggregate price and yield performance of the
Standard & Poors 500 Composite Stock Price Index (the S&P 500 Index or the
Index).
The S&P 500 Index represents more than 70% of the total market value of all
publicly-traded common stocks, and is widely viewed among investors as a good
representative of the aggregate performance of publicly-traded common stocks.
Standard & Poors, S&P, S&P 500, Standard & Poors 500, and 500 are trademarks
of McGraw-Hill Inc. and have been licensed for use by Xerox Financial Services
Life Insurance Company and its affiliates (Xerox Life). The Stock Index
Portfolio is not sponsored, endorsed, sold or promoted by Standard & Poors
Corporation (S&P) and S&P makes no representation or warranty, express or
implied, to the owners of the Stock Index Portfolio or any member of the
public regarding the advisability of investing in securities generally or in
the Stock Index Portfolio particularly or the ability of the S&P 500 Index to
track general stock market performance. S&Ps only relationship to Xerox Life
is the licensing of certain trademarks and trade names of S&P and of the S&P
500 Index which is determined, composed and calculated by S&P without regard
to Xerox Life or the Stock Index Portfolio. S&P has no obligation to take the
needs of Xerox Life or the owners of the Stock Index Portfolio into
consideration in determining, composing or calculating the S&P 500 Index. S&P
is not responsible for and has not participated in the determination of the
prices and amount of the Stock Index Portfolio or the timing of the issuance
or sale of the Stock Index Portfolio or in the determination or calculation of
the equation by which the Stock Index Portfolio is to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Stock Index Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY XEROX LIFE, OWNERS OF THE STOCK INDEX
PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR
ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH
DAMAGES.
INVESTMENT POLICIES
The Stock Index Portfolio is not managed according to traditional methods of
active investment management, which involve the buying and selling of
securities based upon economic, financial and market analysis and investment
judgment. Instead, the Portfolio, utilizing a passive or indexing investment
approach, attempts to duplicate the investment performance of the respective
index through statistical procedures.
The Investment Advisor believes that the indexing approach described above is
an effective method of substantially duplicating percentage changes in the S&P
500 Index. It is a reasonable expectation that the correlation between the
performance of the Portfolio and that of the Index will be approximately 98%;
a figure of 100% would indicate perfect correlation. Perfect correlation would
be achieved when the net asset value per share of the Portfolio increases and
decreases in exact proportion to changes in the Index. The Board of Trustees
of the Trust will review the correlation between the Portfolio and the Index
on a quarterly basis. See the Statement of Additional Information for a
description of the monitoring procedures established by the Board.
In pursuing its investment objective, the Portfolio will invest in no fewer
than 100 stocks with the majority of the Portfolio consisting of those stocks
having the largest weightings in the Index. The Investment Advisor will select
stocks for the Portfolio after taking into account their individual weights in
the Index and the weights in the Index of the industry groups to which they
belong.
Although the Portfolio will attempt to remain fully invested in common stocks,
it may also invest in certain short-term fixed income securities such as cash
reserves.
As described further below under Implementation of Policies, the Portfolio may
also enter into stock index futures contracts and options on stock indexes and
stock index futures contracts for various reasons including to hedge against
changes in security prices. Hedging is a means of offsetting, or neutralizing,
the price movement of an investment by making another investment, the price of
which should tend to move in the opposite direction from that of the original
investment. See the Statement of Additional Information for a more complete
description of hedging and for a discussion of the risks involved therein.
IMPLEMENTATION OF POLICIES
The S&P 500 Index is composed of 500 common stocks which are chosen by S&P to
be included in the unmanaged Index. Market value, liquidity and industry
representation are considered in the selection process. The inclusion of a
stock in the S&P 500 Index in no way implies that S&P believes the stock to be
an attractive investment. The 500 securities, 95% of which trade on the New
York Stock Exchange, represent approximately 75% of the market value of all
U.S. common stocks. Each stock in the S&P 500 Index is weighted by its market
value: its market price per share times the number of shares outstanding.
Because of the market-value weighting, the 50 largest companies in the S&P 500
Index currently account for approximately 50% of the Index. Typically,
companies included in the S&P 500 Index are the largest and most dominant
firms in their respective industries. As of December 31, 1994, the five
largest companies in the Index
were:__________________________________________________. The largest industry
categories were: Oil, Telephone and Electric Companies.
Although the Portfolio will normally seek to remain substantially fully
invested in common stocks, the Portfolio may invest temporarily in certain
short-term fixed income securities. Such securities may be used to invest
uncommitted cash balances or to maintain liquidity to meet shareholder
redemptions. These securities include: obligations of the United States
government and its agencies or instrumentalities; commercial paper, bank
certificates of deposit and bankers acceptances; and repurchase agreements and
reverse repurchase agreements collateralized by these securities. Repurchase
agreements may be deemed to be collateralized loans and the Portfolio could
experience delay and expenses in liquidating such collateral in the event of
the failure of the repurchasing party to honor its agreement to repurchase.
The Portfolio will employ a combination of an indexing strategy known as
sampling and stock index futures contracts and options. Sampling is a method
that is used to attempt to replicate the return of the Index without having to
purchase a weighted portfolio containing all 500 stocks in the Index. This
process selects stocks for the Portfolio so that various industry weightings,
market capitalizations and fundamental characteristics (e.g. price to book,
price to earnings, debt to asset ratios and dividend yields) match those of
the Index. The use of sampling involves certain risks with respect to the
ability of the Portfolio to achieve the desired correlation with the Index.
(See Risk Factors - Stock Index Portfolio - Sampling, below).
As indicated above, the Portfolio may utilize stock index futures contracts
and options on stock indexes and stock index futures contracts. Specifically,
the Portfolio may enter into futures contracts provided that not more than 5%
of its assets are required as a futures contract deposit.
Stock index futures contracts and options may be used for several reasons: to
maintain cash reserves while remaining fully invested, to facilitate trading,
to reduce transaction costs, to hedge against changes in securities prices, or
to seek higher investment returns when a futures contract is priced more
attractively than the underlying equity security or the Index.
The Portfolio may lend its investment securities to qualified institutional
investors for the purpose of realizing additional income. Loans of securities
by the Portfolio will be collateralized by cash or securities issued or
guaranteed by the U.S. government or its agencies. The collateral will equal
at least 100% of the current market value of the loaned securities. The
Portfolio may borrow money from a bank but only for temporary or emergency
purposes. The Portfolio may borrow money up to one-third of the value of its
total assets taken at current value. The Portfolio would borrow money only to
meet redemption requests prior to the settlement of securities already sold or
in the process of being sold by the Portfolio. To the extent that the
Portfolio borrows money prior to selling securities, the Portfolio may be
leveraged; at such times, the Portfolio may appreciate or depreciate in value
more rapidly than the Index. The Portfolio may purchase and sell securities on
a when issued and delayed delivery basis. The Portfolio may invest in
restricted securities and may sell securities short. See Investment Practices
for a description of these investments and transactions.
See Risk Factors - Tax Considerations for a discussion of special
diversification standards which the Portfolio will meet.
RISK FACTORS - STOCK INDEX PORTFOLIO
FUTURES CONTRACTS AND OPTIONS
The primary risks associated with the use of futures contracts and options
are: (i) imperfect correlation between the change in market value of the
stocks held by the Portfolio and the prices of futures contracts and options;
and (ii) possible lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures position when desired. The risk of
imperfect correlation will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the Portfolios underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into such transactions on a national
exchange with an active and liquid secondary market. See the Statement of
Additional Information for a more complete discussion of the risks involved
with respect to investment in stock index futures contracts and options on
stock indexes and stock index futures contracts.
MARKET RISK
As the Portfolio invests primarily in common stocks, the Portfolio is subject
to market risk - i.e. the possibility that common stock prices will decline
over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
prices generally decline.
To illustrate the volatility of stock prices, the following table sets forth
the extremes for stock market returns as well as the average return for the
period from 1926 to 1990, as measured by the S&P 500 Index:
U.S. STOCK MARKET RETURNS (1926-1990)
OVER VARIOUS TIME HORIZONS
<TABLE>
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<S> <C> <C> <C> <C>
One Five Ten Twenty
Year Years Years Years
------ ------- ------ -------
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 -0.9 + 3.1
Average +12.0 + 9.9 +10.2 +10.3
</TABLE>
As shown, from 1926 to 1990, common stocks, as measured by the S&P 500 Index,
have provided an average annual total return (capital appreciation plus
dividend income) of +12.0%. While this average return can be used as a guide
for setting reasonable expectations for future stock market returns, it may
not be useful for forecasting future returns in any particular period, as
stock returns are quite volatile from year to year.
SAMPLING
The use of the sampling technique may, particularly under certain market
conditions, result in a lower correlation between the Portfolio and the Index
than if the Portfolio owned all 500 stocks in the Index. The sampling
technique, when employed successfully, is effective primarily due to the
existence of long-term correlations between groups of stocks and whole
industry sectors within the Index. Sampling, by definition, creates a bias
toward the purchase by the Portfolio of the stocks of larger capitalization
companies. As a result, the Portfolio can be negatively impacted by the use of
sampling in a market where the stocks of smaller capitalization companies are
outperforming those of larger capitalization companies. When this happens, it
may result in the Portfolio underperforming the Index and not achieving its
anticipated degree of correlation with the Index. The Investment Advisor will
actively monitor the effectiveness of its sampling technique and will
undertake corrective actions should the use of the sampling technique result
in underperformance or undercorrelation with respect to the Index. Such
corrective actions may include, but not necessarily be limited to, increasing
the number of companies represented in the Portfolio to incorporate more
secondary issues. As described under Investment Policies above, the Board of
Trustees of the Trust reviews the correlation between the Portfolio and the
Index on a quarterly basis. The Board has adopted monitoring procedures which
require, among other things, that the Investment Advisor notify the Board in
the event that the correlation between the performance of the Portfolio and
that of the Index falls below 95%.
GROWTH AND INCOME PORTFOLIO
The investment objective of the Growth and Income Portfolio is to seek
long-term growth of both capital and income by investing in a portfolio of
common stocks which are considered by the Investment Advisor to have potential
for capital appreciation and dividend growth. The Portfolio may also invest up
to 35% of its assets in common stocks which are considered by the Investment
Advisor to have potential for capital appreciation but which are issued by
foreign corporations.
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The Portfolio seeks to achieve its objective by investing primarily in a
diversified portfolio of dividend paying common stocks of large established
companies which are considered by the Investment Advisor to have potential for
both capital appreciation and dividend growth. The Portfolios stocks are
actively traded in U.S. domestic markets, primarily on national securities
exchanges, and are selected principally on the basis of fundamental investment
values as determined by the Investment Advisor. The Portfolios investments are
usually viewed by the Investment Advisor as having comparatively low
price-earning ratios and anticipated higher dividends than the S&P 500 average
and, at the time of purchase, are considered by the Investment Advisor to be
undervalued in the marketplace.
The Portfolio may invest up to 35% of its assets in dividend paying common
stocks of large established companies which are considered by the Investment
Advisor to have potential for both capital appreciation and dividend growth
but which are issued by foreign corporations of the same type as the U.S.
securities described above. There is no current intention that these
investments will exceed 20% of the Portfolios assets. Investments in foreign
securities present certain risks not ordinarily found in investments in
securities of U.S. issuers. See Risk Factors - Special Considerations Relating
to Foreign Securities.
If the Investment Advisor deems it appropriate to seek to partially hedge the
Portfolios assets against market value changes resulting from changes in
interest rates or (with respect to the foreign securities which the Portfolio
invests in) currency fluctuations, the Portfolio may enter into various
hedging transactions, such as futures contracts, financial index futures
contracts, and related put or call options contracts on these contracts and
foreign currency contracts. In addition, if the Investment Advisor deems it
appropriate, the Portfolio may enter into other hedging transactions, such as
forward foreign currency contracts, currency futures contracts, and related
options contracts in order to protect the U.S. dollar equivalent values of
those foreign securities in which the Portfolio invests against declines
resulting from currency value fluctuations. Hedging is a means of offsetting,
or neutralizing, the price movement of an investment by making another
investment, the price of which should tend to move in the opposite direction
from that of the original investment. See Investment Practices - Strategic
Transactions and the Statement of Additional Information for a more complete
description of these transactions.
The Portfolio may lend portfolio securities. The Portfolio may borrow under
certain circumstances. The Portfolio may also enter into repurchase
agreements, reverse repurchase agreements and may sell securities short. The
Portfolio may also invest in restricted securities. The Portfolio may purchase
and sell securities on a when issued and delayed delivery basis. A more
complete description of these investments and transactions is contained under
Investment Practices.
See Risk Factors - Tax Considerations for a discussion of special
diversification standards which the Portfolio will meet.
As the Portfolio invests primarily in common stocks, the Portfolio is subject
to market risk - i.e. the possibility that common stock prices will decline
over short or even extended periods. Stock markets tend to be cyclical, with
periods when stock prices generally rise and periods when prices generally
decline.
The Portfolios policy of investing in securities that have a potential for
growth means that the assets of the Portfolio generally will be subject to
greater risk than may be involved in investing in securities which are not
selected for such growth characteristics. Repurchase agreements may be deemed
to be collateralized loans and the Portfolio could experience delay and
expenses in liquidating such collateral in the event of the failure of the
repurchasing party to honor its agreement to repurchase.
WORLD EQUITY PORTFOLIO
The investment objective of the World Equity Portfolio is to seek maximum
long-term total return normally by investing at least 65% of its total assets
in an internationally diversified portfolio of equity securities consisting of
common and preferred stock, securities (bonds or preferred stock) convertible
into common stock, warrants and securities representing underlying
international securities such as American Depository Receipts (ADRs) and
European Depository Receipts (EDRs). In selecting portfolio securities, the
Portfolio attempts to take advantage of the difference between economic trends
and the anticipated performance of securities and securities markets in
various countries. Warrants entitle the holder to buy equity securities at a
specific price for a specified period of time. Warrants tend to be more
volatile than their underlying securities. Also, the value of the warrant does
not necessarily change with the value of the underlying securities, and a
warrant ceases to have value if it is not exercised prior to its expiration
date. ADRs are dollar-denominated receipts issued generally by domestic banks
and representing the deposit with the bank of a security of a foreign issuer.
ADRs are publicly traded on exchanges or over-the-counter in the United
States. EDRs are receipts issued by a European financial institution
evidencing a similar arrangement and generally are designed for use in
European securities markets.
The Portfolio may invest in securities of issuers in, but not limited to, the
following countries: Australia, Austria, Belgium, Canada, Denmark, France,
Germany, Hong Kong, Indonesia, Italy, Japan, Korea, Malaysia, the Netherlands,
New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, Taiwan, Thailand,
the United Kingdom and the United States. Normally, the Portfolio will invest
at least 65% of its total assets in securities traded in at least three
foreign countries, including the countries listed herein. It is anticipated
that the Portfolio will initially invest primarily in securities traded in
securities markets located in Germany, Japan and the United States.
The Portfolio may invest the remainder of its assets in securities of the U.S.
Government or of any foreign government or any supranational entity, in debt
securities of any issuer rated A or better at the time of purchase by Standard
& Poors Corporation or Moodys Investors Service, Inc. or of comparable quality
as determined by the Investment Advisor, and in cash and money market
instruments. Examples of supranational entities include the International Bank
for Reconstruction and Development (the World Bank), the European Steel and
Coal Community, the Asian Development Bank and the InterAmerican Development
Bank.
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The Investment Advisor will use various indices as benchmarks against which it
will gauge the performance of the different equity segments of the Portfolio
and determine risk measurement. The index used will depend upon the Portfolio
composition at the time of comparison with respect to the various countries.
Since the assets of the Portfolio initially will be primarily invested in
securities traded in Germany, Japan and the United States, it is anticipated
that the Investment Advisor will initially use the DAX 30-Stock Index
(Germany), the Nikkei 225- Stock Index (Japan) and the S&P 500 (the United
States) as benchmark indices. The DAX 30-Stock Index is a total rate of return
index of 30 selected German blue chip stocks traded on the Frankfurt Stock
Exchange. The Nikkei 225-Stock Index is a price-weighted index of 225
top-rated Japanese companies listed in the First Section of the Tokyo Stock
Exchange. For a description of the S&P 500 Index, see Stock Index Portfolio -
Investment Objective. As the Portfolio begins to expand its international
diversification, other relevant indices may be used as benchmarks. Such
indices include, but are not limited to, the Morgan Stanley Capital
International Europe (Free) Index (a diversified, capitalization weighted
index comprised of companies located in thirteen European countries), the
Morgan Stanley Capital International Pacific Index (a diversified,
capitalization weighted index consisting of companies located in Australia,
Japan, Hong Kong, New Zealand and Singapore) and the Morgan Stanley Capital
International Europe, Australia and Far East (Free) Index (a broadly
diversified international index consisting of more than 1000 equity securities
of companies located outside of the United States). (The Portfolio is neither
sponsored by nor affiliated with Morgan Stanley Capital International).
The Investment Advisor, in managing the investments of the 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.
Investments in foreign securities present certain risks not ordinarily found
in investments in securities of U.S. issuers. See Risk Factors - Special
Considerations Relating to Foreign Securities.
The Portfolio may seek to hedge its portfolio against currency fluctuations
(with respect to the foreign securities the Portfolio may invest in) by
entering into various hedging transactions, such as foreign currency
contracts, forward foreign currency contracts, currency futures contracts, and
related options contracts in order to protect the U.S. dollar equivalent
values of those foreign securities against declines resulting from currency
value fluctuations. Hedging is a means of offsetting, or neutralizing, the
price movement of an investment by making another investment, the price of
which should tend to move in the opposite direction from that of the original
investment. See Investment Practices - Strategic Transactions and the
Statement of Additional Information for a more complete description of
strategic and foreign currency transactions.
The Portfolio may enter into various additional hedging transactions such as
futures contracts, financial index futures contracts, stock index futures
contracts, and the related put or call options contracts on futures contracts.
The Portfolio may purchase and write call and put options on stock indexes.
See Investment Practices - Strategic Transactions and the Statement of
Additional Information for a more complete description of these strategic
transactions including a discussion of the risks involved therein.
To help protect the value of its Portfolio from interest rate and currency
fluctuations, the Portfolio may enter into interest rate and currency swap
agreements and may purchase and sell interest rate caps, floors and collars.
The Portfolio will enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities it anticipates
purchasing. The Portfolio intends to use these transactions as a hedge and not
as a speculative investment. Swap agreements typically involve leverage, may
be highly volatile and involve risks depending upon the other partys
creditworthiness and ability to perform, as well as the Portfolios ability to
terminate its swap agreements or reduce its exposure through offsetting
transactions. See Investment Practices - Strategic Transactions and the
Statement of Additional Information for a more complete description of these
strategic transactions including a discussion of the risks involved therein.
The Portfolios engagement in certain strategic transactions, such as the
purchase and sale of options, futures and currency contracts as described
above involves certain risks. It is likely that during its initial phase of
operations the Portfolio may engage in such strategic transactions to a
greater degree than when the assets of the Portfolio have grown to a
sufficient size as to allow the Investment Advisor to make direct purchases of
equity securities in accordance with the Portfolios investment objective. See
Investment Practices - Strategic Transactions and the Statement of Additional
Information for a more complete discussion of strategic transactions and the
risks involved in engaging in these transactions. The Portfolio may lend
portfolio securities. The Portfolio may borrow under certain circumstances.
The Portfolio may purchase and sell securities on a when issued and delayed
delivery basis. The Portfolio may also enter into repurchase agreements,
reverse repurchase agreements and may sell securities short. Repurchase
agreements may be deemed to be collateralized loans and the Portfolio could
experience delay and expenses in liquidating such collateral in the event of
the failure of the repurchasing party to honor its agreement to repurchase.
The Portfolio may also invest in restricted securities. A more complete
description of these investments and transactions is contained under
Investment Practices.
See Risk Factors - Tax Considerations for a discussion of special
diversification standards which the Portfolio will meet.
UTILITY PORTFOLIO
The investment objective of the Utility Portfolio is capital appreciation and
current income. The Portfolio will seek to achieve its investment objective by
investing in a diversified portfolio of common stock and income securities
issued by companies engaged in the utilities industry (Utility Securities).
Companies engaged in the utilities industry include those engaged in the
production, transmission, or distribution of electric energy, gas,
telecommunications services or the provision of other utility or utility
related goods or services. Under normal market conditions, at least 80% of the
Portfolios assets will be invested in Utility Securities. Under normal market
conditions, the Portfolio may invest up to 20% of its assets in other than
Utility Securities, including common stock and income securities of issuers
not engaged in the utilities industry, cash and money market instruments.
Income securities include preferred stock and debt securities of various
maturities. The Portfolios investments in income securities will be rated, at
the time of investment, at least BBB by S&P, or at least Baa by Moodys or
comparably rated by any other nationally recognized statistical rating
organization; provided, however, the Portfolio may invest up to 20% of its
assets in income securities that are rated BB or B by S&P or Ba or B by Moodys
(or comparably rated by any other nationally recognized statistical rating
service) or unrated income securities determined by the Portfolios investment
adviser to be of comparable or higher quality. Such lower rated or unrated
income securities are commonly referred to as junk bonds and are regarded by
the rating agencies, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of
the obligation; assurance of interest and principal payments or maintenance of
other terms of the securities over any long period of time may be small. While
offering opportunities for higher yields, lower- grade securities are
considered below investment grade and involve a greater degree of credit risk
than investment grade income securities; although the lower-grade income
securities of an issuer generally involve a lower degree of credit risk than
its common stock. The Portfolio may invest up to 35% of its assets in
securities issued by non-U.S. issuers. The foregoing policies are fundamental
and cannot be changed without approval of the shareholders. There can be no
assurance that the Portfolio will achieve its investment objective.
The Investment Advisor believes that the historical performance of Utility
Securities, together with ongoing developments in the utilities industry,
indicate the potential for achieving both capital appreciation and current
income from investment in a diversified portfolio of Utility Securities. The
Investment Advisor believes that the historical characteristics of Utility
Securities which are common stocks indicate potential for capital
appreciation. The Investment Advisor also believes that many companies engaged
in the utilities industry have established a reputation for paying regular
quarterly dividends and for increasing their common stock dividends over time,
despite fluctuations in interest rates over time. The annual dividends per
share of the Utility Securities comprising the S&P Utilities Index, for the 10
year period 1982 through 1992, have increased while interest rates during such
period, as measured by the six month U.S. Treasury rate, have fluctuated
widely. The Investment Advisor believes that the historical characteristics of
Utility Securities which are income securities indicate the potential for
current income.
In evaluating particular issuers of Utility Securities, the Investment Advisor
will consider a number of factors, including historical growth rates, rates of
return on capital, financial condition and resources, geographic location and
service area, management skills and such utilities industry factors as
regulatory environment, energy sources, the costs of alternative fuels and, in
the case of electric energy utilities, the extent and nature of their
involvement with nuclear power. The Investment Advisor will place special
emphasis on the potential for capital appreciation, current and projected
yields, prospective growth in earnings and dividends in relation to
price/earnings ratios and risk. The Investment Advisor believes that Utility
Securities provide above-average dividend returns and below-average
price/earnings ratios which in the view of the Investment Advisor are factors
that not only provide current income but also generally tend to moderate risk.
The Investment Advisor will buy and sell securities for the Portfolio with a
view toward seeking capital appreciation together with current income and will
select securities which the Investment Advisor believes entail reasonable
credit risk considered in relation to the investment policies of the
Portfolio. As a result, the Portfolio will not necessarily invest in the
highest yielding Utility Securities permitted by the investment policies if
the Investment Advisor determines that market risks or credit risks associated
with such investments would subject the Portfolio to excessive risk. Other
than for tax purposes, frequency of portfolio turnover generally will not be a
limiting factor if the Portfolio considers it advantageous to purchase or sell
securities. See Investment Objectives and Policies and Investment Limitations
in the Statement of Additional Information.
UTILITY PORTFOLIO SECURITIES
UTILITY SECURITIES. Utility Securities are common stocks and income securities
of companies engaged in the utilities industry. Companies engaged in the
utilities industry include a variety of entities involved in (i) the
production, transmission or distribution of electric energy, (ii) the
provision of natural gas, (iii) the provision of telephone, mobile
communication and other telecommunications services or (iv) the provision of
other utility or utility related goods or services, including entities engaged
in cogeneration, waste disposal system provision, solid waste electric
generation, independent power producers and non- utility generators.
The public utilities industry has experienced significant changes in recent
years. Many issuers of Utility Securities have been favorably affected by
lower fuel and financing costs, deregulation, the full or near completion of
major construction programs and an increasing customer base. In addition, many
utility companies have generated cash flows in excess of current operating
expenses and construction expenditures, permitting some degree of
diversification into unregulated businesses. Some electric utilities have also
taken advantage of the right to sell power outside of their historical
territories.
The rates of return of issuers of Utility Securities generally are subject to
review and limitation by state public utilities commissions and tend to
fluctuate with marginal financing costs. Rate changes generally lag changes in
financing costs, and thus can favorably or unfavorably affect the earnings or
dividend payments on Utility Securities depending upon whether such rates and
costs are declining or rising.
Companies engaged in the public utilities industry historically have been
subject to a variety of risks depending, in part, on such factors as the type
of utility company involved and its geographic location. Such risks include
increases in fuel and other operating costs, high interest expenses for
capital construction programs, costs associated with compliance with
environmental and nuclear safety regulations, service interruption due to
environmental, operational or other mishaps, the effects of economic
slowdowns, surplus capacity, competition and changes in the overall regulatory
climate. In particular, regulatory changes with respect to nuclear and
conventionally fueled generating facilities could increase costs or impair the
ability of utility companies to operate such facilities, thus reducing utility
companies earnings or resulting in losses. There can be no assurance that
regulatory policies or accounting standard changes will not negatively affect
utility companies earnings or dividends. Companies engaged in the public
utilities industry are subject to regulation by various authorities and may be
affected by the imposition of special tariffs and changes in tax laws. To the
extent that rates are established or reviewed by governmental authorities,
companies engaged in the public utilities industry are subject to the risk
that such authority will not authorize increased rates. In addition, because
of the Portfolios policy of concentrating its investments in Utility
Securities, the Portfolio may be more susceptible than an investment company
without such a policy to any single economic, political or regulatory
occurrence affecting the public utilities industry. Under market conditions
that are unfavorable to the utilities industry, the Investment Advisor may
significantly reduce the Portfolios investment in that industry.
GAS AND TELECOMMUNICATIONS UTILITIES. Gas transmission companies, gas
distribution companies and telecommunications companies are undergoing
significant changes. Gas utilities have been adversely affected by declines in
the prices of alternative fuels, oversupply conditions and competition.
Telephone utilities are still experiencing the effects of the break-up of
American Telephone & Telegraph Company, including increased competition and
rapidly developing technologies with which traditional telephone companies now
compete. Potential sources of competition and new products are cable
television systems, shared tenant services and other noncarrier systems which
are capable of by-passing traditional telephone services providers local
plants, either completely or partially, through substitutions of special
access for switched access or through concentration of telecommunications
traffic on fewer of the traditional telephone services providers lines.
Although there can be no assurance that increased competition and other
structural changes will not adversely affect the profitability of such
utilities, or that other negative factors will not develop in the future, in
the Investment Advisors opinion, competition and technological advances may
over time result in providing better-positioned utility companies with
opportunities for enhanced profitability.
ELECTRIC UTILITIES. Electric utility companies in general have been favorably
affected by lower fuel costs, the full or near completion of major
construction programs and lower financing costs. Some electric utilities have
also taken advantage of the right to sell power outside of their historical
territories. Certain electric utilities with uncompleted nuclear power
facilities may have problems completing and licensing such facilities, and
there is increasing public, regulatory and governmental concern with the cost
and safety of nuclear power facilities in general. At this time, there are
certain institutional impediments to the wide-scale deregulation of electric
utilities including among other things, limitations on the redistribution of
power.
OTHER UTILITIES. Other issuers of Utility Securities are emerging as new
technologies develop and as old technologies are refined. Such issuers include
entities engaged in cogeneration, waste disposal system provision, solid waste
electric generation, independent power producers and non-utility generators.
COMMON STOCK. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
after making required payments to holders of such entitys preferred stock and
other senior equity. Common stock usually carries with it the right to vote
and frequently an exclusive right to do so. In selecting common stocks for
investment, the Portfolio will focus both on the securitys potential for
appreciation and on its dividend paying capacity.
The average dividend yield of Utility Securities which are common stocks
historically has exceeded the average dividend yield of common stocks of
industrial issuers by a significant amount. For example, the common stocks
comprising the S&P Utilities Index for calendar year 1992 had an average
dividend yield of 5.72%, or more than twice the 2.63% average dividend yield
for the common stocks comprising the S&P 400 Industrials Index. However, the
Portfolio will not necessarily reflect the securities which comprise the S&P
Utilities Index and there can be no assurance that the historical investment
performance for any industry (including the public utilities industry) is
indicative of future performance.
INCOME SECURITIES AND RISKS OF LOWER GRADE INCOME SECURITIES. The Portfolio
may invest its assets in income securities, which include preferred stocks,
debt securities of various maturities and securities convertible into, or
ultimately exchangeable for, Utility Securities. The Portfolios investments in
income securities will be rated, at the time of investment, at least BBB by
S&P, or at least Baa by Moodys or comparably rated by any other nationally
recognized statistical rating organization; provided, however, the Portfolio
may invest up to 20% of its assets in income securities that are rated BB or B
by S&P or Ba or B by Moodys (or comparably rated by any other nationally
recognized statistical rating service) or unrated income securities determined
by the Portfolios Investment Advisor to be of comparable or higher quality. In
normal circumstances, the Portfolio may invest up to 20% of its assets in
lower grade income securities (including downgraded securities) or in unrated
income securities considered by the Investment Advisor to be of comparable or
higher quality to such lower grade securities or of comparable quality to
investment grade securities. Lower grade income securities in which the
Portfolio may invest are rated between BB and B by S&P or between Ba and B by
Moodys. Income securities with such ratings from S&P and Moodys are commonly
referred to as junk bonds and are regarded by S&P and Moodys as predominantly
speculative with respect to the capacity to pay interest and/or repay
principal in accordance with their terms. Investment in lower grade securities
involves special risks as compared with investment in higher grade securities.
The market for lower grade securities is considered to be less liquid than the
market for investment grade securities which may adversely affect the ability
of the Portfolio to dispose of such securities in a timely manner at a price
which reflects the value of such security in the Investment Advisors judgment.
Because issuers of lower grade securities frequently choose not to seek a
rating of their securities, the Portfolio will rely more heavily on the
Investment Advisors ability to determine the relative investment quality of
such securities than if the Portfolio invested exclusively in higher grade
securities. For a description of the ratings assigned to income securities,
including lower grade income securities, please see the Appendix.
The net asset value of the Portfolio will change with changes in the value of
its portfolio securities. The values of income securities may change as
interest rate levels fluctuate. To the extent that the Portfolio invests in
income securities, the net asset value of the Portfolio can be expected to
change as general levels of interest rates fluctuate. When interest rates
decline, the value of a portfolio invested in income securities generally can
be expected to rise. Conversely, when interest rates rise, the value of a
portfolio invested in income securities generally can be expected to decline.
Volatility may be greater during periods of general economic uncertainty.
The foregoing policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Portfolio will
not be required to dispose of a security in the event that S&P or Moodys (or
any other nationally recognized statistical rating organization) or, in the
case of unrated income securities, the Investment Advisor, downgrades its
assessment of the credit characteristics of a particular issuer. In
determining whether the Portfolio will retain or sell such a security, in
addition to the factors described above, the Investment Advisor may consider
such factors as the Investment Advisors assessment of the credit quality of
the issuer of such security, the price at which such security could be sold
and the rating, if any, assigned to such security by other nationally
recognized statistical rating organizations.
FOREIGN SECURITIES. The Portfolio may invest up to 35% of its assets in
securities issued by non-U.S. issuers of similar quality as the securities
described above as determined by the Investment Advisor. Investments in
foreign securities present certain risks not ordinarily found in investments
in securities of U.S. issuers. See Risk Factors - Special Considerations
Relating to Foreign Securities.
The Investment Advisor believes that many foreign issuers of Utility
Securities have yet to experience the growth that certain issuers of Utility
Securities located in the United States have experienced and that as such
foreign issuers develop their domestic markets, they may become attractive
investments. In addition, the Investment Advisor believes that certain foreign
governments may engage in programs of privatization of issuers of Utility
Securities and that the Utility Securities issued by privatized companies may
offer attractive investment opportunities with the potential for long-term
growth. However, it is not possible to predict the terms of offerings by
privatized companies or the effect of privatizations in the domestic
securities market of such privatized companies. There can be no assurance that
securities of privatized companies will be offered to the public or to foreign
companies such as the Portfolio.
DEFENSIVE STRATEGIES. At times, conditions in the markets for Utility
Securities may, in the Investment Advisors judgment, make pursuing the
Portfolios basic investment strategy inconsistent with the best interests of
its shareholders. At such times, the Investment Advisor may use alternative
strategies primarily designed to reduce fluctuations in the value of the
Portfolios assets. In implementing these defensive strategies, the Portfolio
may invest to a substantial degree in high-quality, short-term obligations.
Such taxable obligations may include: obligations of the U.S. Government, its
agencies or instrumentalities; other debt securities rated within the four
highest grades by either S&P or Moodys (or comparably rated by any other
nationally recognized statistical rating organization); commercial paper rated
in the highest grade by either rating service (or comparably rated by any
other nationally recognized statistical rating organization); certificates of
deposit and bankers acceptances; repurchase agreements with respect to any of
the foregoing investments; or any other fixed-income securities that the
Investment Advisor considers consistent with such strategy.
The Utility Portfolio may engage in strategic transactions, enter currency
transactions, purchase and sell securities on a when issued and delayed
delivery basis, enter into repurchase and reverse repurchase agreements, lend
its portfolio securities and purchase restricted securities. See Investment
Practices below for a description of these investments and transactions.
INVESTMENT PRACTICES
In connection with the investment policies of the Portfolios described above,
the Portfolios may engage in certain investment practices subject to the
limitations set forth below. These investments entail risks.
STRATEGIC TRANSACTIONS. The Quality Income Portfolio, Growth and Income
Portfolio, High Yield Portfolio, World Equity Portfolio and Utility Portfolio
may purchase and sell exchange-listed and over-the-counter put and call
options on securities, financial futures, fixed-income indices and other
financial instruments and purchase and sell financial futures contracts. The
Growth and Income Portfolio, High Yield Portfolio, World Equity Portfolio and
Utility Portfolio may enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures. The Stock Index Portfolio may enter
into stock index futures contracts and options on stock indexes and stock
index futures contracts. Collectively, all of the above are referred to as
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, to protect a
Portfolios unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective interest rate exposure of a Portfolio, to protect against changes in
currency exchange rates, or to establish a position in the derivatives markets
as a temporary substitute for purchasing or selling particular securities. Any
or all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous
variables including market conditions. The ability of a Portfolio to utilize
these Strategic Transactions successfully will depend on the Investment
Advisors ability to predict pertinent market movements, which cannot be
assured. The Portfolios 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 Advisors 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 of portfolio securities at
inopportune times or for prices other than at 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. 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 Portfolios 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 contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to
a decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if
the Strategic Transactions had not been utilized. The Strategic Transactions
that the Portfolios may use and some of their risks are described more fully
in the Statement of Additional Information.
Income earned or deemed to be earned, if any, by a Portfolio from its
Strategic Transactions will generally be taxable income of a Portfolio.
REPURCHASE AGREEMENTS. All of the Portfolios may enter into repurchase
agreements with selected commercial banks and broker-dealers, under which the
Portfolio acquires securities and agrees to resell the securities at an agreed
upon time and at an agreed upon price. The Portfolio accrues as interest the
difference between the amount it pays for the securities and the amount it
receives upon resale. At the time the Portfolio enters into a repurchase
agreement, the value of the underlying security including accrued interest
will be equal to or exceed the value of the repurchase agreement and, for
repurchase agreements that mature in more than one day, the seller will agree
that the value of the underlying security including accrued interest will
continue to be at least equal to the value of the repurchase agreement. The
Investment Advisor will monitor the value of the underlying security in this
regard. The Portfolio will enter into repurchase agreements only with
commercial banks whose deposits are insured by the Federal Deposit Insurance
Corporation and whose assets exceed $500 million or broker-dealers who are
registered with the SEC. In determining whether the Portfolio should enter
into a repurchase agreement with a bank or broker-dealer, the Investment
Advisor will take into account the credit-worthiness of the party and will
monitor its credit-worthiness on an ongoing basis in accordance with standards
established by the Board of Trustees. In the event of a default by the party,
the delays and expenses potentially involved in establishing the Portfolios
rights to, and in liquidating, the security may result in a loss to the
Portfolio. The Portfolios ability to invest in repurchase agreements that
mature in more than seven days is subject to an investment restriction that
limits the Portfolios investment in restricted securities, including
repurchase agreements, to 10% of the Portfolios net assets (15% with respect
to the World Equity Portfolio and Utility Portfolio). The Money Market
Portfolio may not invest in repurchase agreements which mature in more than
seven days.
There are additional limitations and restrictions relating to the ability of
the Money Market Portfolio to invest in repurchase agreements which have been
adopted by the Board of Trustees of the Trust and which relate primarily to
investment quality and diversification.
WHEN ISSUED AND DELAYED DELIVERY TRANSACTIONS. All Portfolios may purchase and
sell securities on a when issued and delayed delivery basis, that is, obligate
themselves to purchase or sell securities with delivery and payment to occur
at a later date in order to secure what is considered to be an advantageous
price and yield to the Portfolio at the time of entering into the obligation.
When a Portfolio engages in when issued and delayed delivery transactions, the
Portfolio relies on the buyer or seller, as the case may be, to consummate the
sale. Failure to do so may result in the Portfolio missing the opportunity of
obtaining a price or yield considered to be advantageous. No income accrues to
or is earned by the Portfolio on portfolio securities in connection with such
transactions prior to the date the Portfolio actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
such securities at delivery may be more or less than their purchase price, and
yields generally available on such securities when delivery occurs may be
higher than yields on such securities obtained pursuant to such transactions.
Because the Portfolio relies on the buyer or seller, as the case may be, to
consummate the transaction, failure by the other party to complete the
transaction may result in the Portfolio missing the opportunity of obtaining a
price or yield considered to be advantageous. When the Portfolio is the buyer
in such a transaction, however, it will maintain, in a segregated account with
its custodian, cash or high-grade portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made.
The Portfolio will make commitments to purchase securities on such basis only
with the intention of actually acquiring these securities, but the Portfolio
may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Portfolio engages in when issued
and delayed delivery transactions, it will do so for the purpose of acquiring
securities for the Portfolio consistent with the Portfolios investment
objectives and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of any Portfolios assets which
may be used to acquire securities on a when issued or delayed delivery basis.
RESTRICTED SECURITIES. The Portfolios may each invest up to 10% (15% with
respect to the World Equity and Utility Portfolios) of their respective net
assets in securities the disposition of which is subject to substantial legal
or contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted securities often requires more time and
results in higher brokerage charges or dealer discounts and other selling
expenses than does the sale of securities eligible for trading on national
securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to
restrictions on resale. Restricted securities in all Portfolios will be valued
at fair value as determined in good faith by or at the direction of the
Trustees for the purposes of determining the net asset value of each
Portfolio. Restricted securities salable among qualified institutional buyers
without restriction pursuant to Rule 144A under the Securities Act of 1933
that are determined to be liquid by the Investment Advisor under guidelines
adopted by the Board of Trustees of the Trust (under which guidelines the
Investment Advisor will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted
securities by the Portfolios pursuant to such rules.
LOANS OF PORTFOLIO SECURITIES. Consistent with applicable regulatory
requirements, all of the Portfolios may lend their securities to selected
commercial banks or broker-dealers up to a maximum of 25% of the assets of
each Portfolio (but up to 50% with respect to the Utility Portfolio). Such
loans must be callable at any time and be continuously secured by collateral
deposited by the borrower in a segregated account with the Trusts custodian
consisting of cash or of securities issued or guaranteed by the U.S.
Government or its agencies, which collateral is equal at all times to at least
100% of the value of the securities loaned, including accrued interest. A
Portfolio will receive amounts equal to earned income for having made the
loan. Any cash collateral pursuant to these loans will be invested in
short-term instruments. A Portfolio is the beneficial owner of the loaned
securities in that any gain or loss in the market price during the loan inures
to the Portfolio and its shareholders. Thus, when the loan is terminated, the
value of the securities may be more or less than their value at the beginning
of the loan. In determining whether to lend its portfolio securities to a bank
or broker-dealer, a Portfolio will take into account the credit-worthiness of
such borrower and will monitor such credit-worthiness on an ongoing basis in
as much as a default by the other party may cause delays or other collection
difficulties. A Portfolio may pay finders fees in connection with loans of its
portfolio securities.
REVERSE REPURCHASE AGREEMENTS AND BORROWINGS. All of the Portfolios may enter
into reverse repurchase agreements with selected commercial banks or
broker-dealers with respect to securities which could otherwise be sold by the
Portfolios. Reverse repurchase agreements involve sales by a Portfolio of
Portfolio assets concurrently with an agreement by the Portfolio to repurchase
the same assets at a later date at a fixed price which is greater than the
sales price. The difference between the amount the Portfolio receives for the
securities and the amount it pays on repurchase is deemed to be a payment of
interest by the Portfolio. The Portfolio will maintain, in a segregated
account with its custodian, cash, Treasury bills, or other U.S. government
securities having an aggregate value equal to the amount of commitment to
repurchase, including accrued interest, until payment is made. The Portfolio
will enter into reverse repurchase agreements only with commercial banks whose
deposits are insured by the Federal Deposit Insurance Corporation and whose
assets exceed $500 million or broker-dealers who are registered with the SEC.
In determining whether the Portfolio should enter into a reverse repurchase
agreement with a bank or broker-dealer, the Investment Advisor will take into
account the credit-worthiness of the party and will monitor the
credit-worthiness on an ongoing basis. During the reverse repurchase agreement
period, the Portfolio continues to receive principal and interest payments on
these securities. Reverse repurchase agreements involve the risk that the
market value of the securities retained by the Portfolio may decline below the
price of the securities the Portfolio has sold but is obligated to repurchase
under the agreement. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Portfolios
use of the proceeds of the agreement may be restricted pending a determination
by the other party, or its trustee or receiver, whether to enforce the
Portfolios obligation to repurchase the securities. Reverse repurchase
agreements create leverage and will be treated as borrowings for the purposes
of each Portfolios investment restriction on borrowings.
The Quality Income Portfolio, High Yield Portfolio, Growth and Income
Portfolio, Stock Index Portfolio and World Equity Portfolio are permitted to
borrow money up to one-third of the value of their net assets taken at current
value. The Money Market Portfolio may borrow up to 10% of its net assets.
Borrowing by these Portfolios may be only from banks as a temporary measure
for extraordinary or emergency purposes and not for investment leverage. The
Portfolios (with the exception of the Utility Portfolio) may each enter into
reverse repurchase agreements in an amount not exceeding 5% of the net assets
of each such Portfolio at the time of entering into any agreement.
The Utility Portfolio is authorized to borrow money from banks or enter into
reverse repurchase agreements with banks in an amount up to 331/3% of the
Portfolios total assets (after giving effect to any such borrowing) which
amount includes no more than 5% in borrowings and reverse repurchase
agreements from any entity for temporary purposes, such as clearances of
portfolio transactions, share repurchases and payment of dividends and
distributions. The Utility Portfolio has no current intention to borrow money
other than for such temporary purposes. Accordingly, the Utility Portfolio
will not acquire additional Utility Securities during any period in which its
borrowings exceed 5% of the Portfolios total assets. The Utility Portfolio
will borrow only when the Investment Advisor believes that such borrowings
will benefit the Portfolio.
As a matter of operating policy, the Money Market Portfolio, the Quality
Income Portfolio, the Stock Index Portfolio and the Growth and Income
Portfolio will not borrow more than 10% of their net asset value when
borrowing is for any general purpose and 25% of their net asset value when
borrowing is a temporary measure to facilitate redemptions.
Borrowing by a Portfolio creates an opportunity for increased net income but,
at the same time, creates special risk considerations such as changes in the
net asset value of the shares and in the yield on the Portfolio. Although the
principal of such borrowings will be fixed, the Portfolios assets may change
in value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Portfolio which can exceed the income from the
assets retained. To the extent the income derived from securities purchased
with borrowed funds exceeds the interest the Portfolio will have to pay, the
Portfolios net income will be greater than if borrowing were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of borrowing, the net income of the Portfolio
will be less than if borrowing were not used.
SHORT SALES. The Quality Income Portfolio, Stock Index Portfolio, World Equity
Portfolio, and the Growth and Income Portfolio may utilize short sales on
securities to implement their investment objectives. The Utility Portfolio may
engage in short sales only in connection with Strategic Transactions. A short
sale is effected when it is believed that the price of a particular investment
will decline, and involves the sale of an investment which the Portfolio does
not own in the hope of purchasing the same investment at a later date at a
lower price. To make delivery to the buyer, the Portfolio must borrow the
investment, and the Portfolio is obligated to return the investment to the
lender, which is accomplished by a later purchase of the investment by the
Portfolio.
The Portfolio will incur a loss as a result of the short sale if the price of
the investment increases between the date of the short sale and the date on
which the Portfolio purchases the investment to replace the borrowed
investment. The Portfolio will realize a gain if the investment declines in
price between those dates. The amount of any gain will be decreased and the
amount of any loss increased by any premium or interest the Portfolio may be
required to pay in connection with a short sale. It should be noted that
possible losses from short sales differ from those that could arise from a
cash investment in that the former may be limitless while the latter can only
equal the total amount of the Portfolios investment in the investment. For
example, if the Portfolio purchases a $10 investment, the most that can be
lost is $10. However, if the Portfolio sells a $10 investment short, it may
have to purchase the investment for return to the lender when the market value
is $50, thereby incurring a loss of $40. The amount of any gain or loss on a
short sale transaction is also dependent on brokerage and other transaction
costs.
INVESTMENT LIMITATIONS
In addition to the investment policies set forth above, certain additional
restrictive policies relating to the investment of assets of the Portfolios
have been adopted by the Trust. The Investment Limitations of the Trust are
deemed fundamental 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 the Portfolio. Details as to the policies are set forth
in the Statement of Additional Information.
RISK FACTORS
TAX CONSIDERATIONS
The Trust was established as the underlying investment for variable contracts
issued by Xerox Financial Services Life Insurance Company and any affiliated
insurance companies.
Section 817(h) of the Internal Revenue Code of 1986, as amended (the Code),
imposes certain diversification standards on the underlying assets of variable
contracts held in the Portfolios of the Trust. The Code provides that a
variable contract shall not be treated as an annuity contract for any period
(and any subsequent period) for which the investments are not, in accordance
with regulations prescribed by the Treasury Department, adequately
diversified. Disqualification of the variable contract as an annuity contract
would result in imposition of federal income tax on contract owners with
respect to earnings allocable to the variable contract prior to the receipt of
payments under the variable contract. Section 817(h)(2) of the Code is a safe
harbor provision which provides that contracts such as the variable contracts
meet the diversification requirements if, as of the close of each quarter, the
underlying assets meet the diversification standards for a regulated
investment company and no more than fifty-five percent (55%) of the total
assets consists of cash, cash items, U.S. government securities and securities
of other regulated investment companies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the investment
portfolios underlying variable contracts. The Regulations amplify the
diversification requirements for variable contracts set forth in Section
817(h) of the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if (i) no more than 55 percent of the value of the
total assets of the portfolio is represented by any one investment; (ii) no
more than 70 percent of such value is represented by any two investments;
(iii) no more than 80 percent of such value is represented by any three
investments; and (iv) no more than 90 percent of such value is represented by
any four investments. For purposes of these Regulations, all securities of the
same issuer are treated as a single investment.
The Code provides that for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable
contracts by Section 817(h) of the Code have been met, each United States
government agency or instrumentality shall be treated as a separate issuer.
Each Portfolio of the Trust will be managed in such a manner as to comply with
these diversification requirements. It is possible that in order to comply
with the diversification requirements, less desirable investment decisions may
be made which would affect the investment performance of the Portfolios.
SPECIAL CONSIDERATIONS RELATING TO FOREIGN SECURITIES
All of the Portfolios may invest in foreign securities. The Stock Index
Portfolio, however, may only invest in foreign securities to the extent that
it invests in American Depository Receipts (ADRs) for foreign securities. ADRs
are dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer. ADRs
are publicly traded on exchanges or over-the-counter in the United States. The
Growth and Income Portfolio, High Yield Portfolio and Quality Income Portfolio
may invest up to 35% in foreign securities. The World Equity Portfolio may
invest without limitation in foreign securities. However, the Trust has no
current intention that these investments will exceed 20% of a Portfolios
assets except with respect to the World Equity Portfolio. Investments in the
securities of foreign entities and securities denominated in foreign
currencies involve risks not typically involved in domestic investment,
including fluctuations in foreign exchange rates, future foreign political and
economic developments, and the possible imposition of exchange controls or
other foreign or United States governmental laws or restrictions applicable to
such investments. Where a Portfolio invests in securities denominated or
quoted in currencies other than the United States dollar, changes in foreign
currency exchange rates may affect the value of investments in the Portfolio
and the accrued income and unrealized appreciation or depreciation of
investments. Changes in foreign currency exchange rates relative to the U.S.
dollar will affect the U.S. dollar value of a Portfolios assets denominated in
that currency and the Portfolios yield on such assets. With respect to certain
foreign countries, there is the possibility of expropriation of assets,
confiscatory taxation, political or social instability or diplomatic
developments which could affect investment in those countries. There may be
less publicly available information about a foreign security than about a
United States security, and foreign entities may not be subject to accounting,
auditing and financial reporting standards and requirements comparable to
those of United States entities. In addition, certain foreign investments made
by a Portfolio may be subject to foreign withholding taxes, which would reduce
the Portfolios total return on such investments and the amounts available for
distributions by the Portfolio to its shareholders. Foreign financial markets,
while growing in volume, have, for the most part, substantially less volume
than United States markets, and securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable domestic
companies. The foreign markets also have different clearance and settlement
procedures and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Portfolio are not invested and no return is
earned thereon. The inability of a Portfolio to make intended security
purchases due to settlement problems could cause the Portfolio to miss
attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to a
Portfolio due to subsequent declines in value of the portfolio security or, if
a Portfolio has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage
commissions, are generally higher than with transactions in United States
securities. In addition, a Portfolio will incur costs in connection with
conversions between various currencies. There is generally less government
supervision and regulation of exchanges, financial institutions and issuers in
foreign countries than there is in the United States.
As a matter of operating policy, the Money Market Portfolio, the Quality
Income Portfolio, the Stock Index Portfolio and the Growth and Income
Portfolio will comply with the following:
<TABLE>
<CAPTION>
<C> <S>
1. a Portfolio will be invested in a minimum of five different foreign countries at all
times. However, this minimum is reduced to four when foreign country
investments comprise less than 80% of the Portfolios net asset value; to three
when less than 60% of such value; to two when less than 40% of such value
and to one when less than 20% of such value.
2. except as set forth in items 3 and 4 below, a Portfolio will have no more than
20% of its net asset value invested in securities of issuers located in any one
country.
3. a Portfolio may have an additional 15% of its value invested in securities of
issuers located in any one of the following countries: Australia, Canada,
France, Japan, the United Kingdom or West Germany.
4. a Portfolios investments in United States issuers are not subject to the
foregoing operating policies.
</TABLE>
PORTFOLIO TURNOVER RATES
MONEY MARKET PORTFOLIO AND QUALITY INCOME PORTFOLIO
Although the Money Market and Quality Income Portfolios are not subject to
specific restrictions on portfolio turnover, they generally do not seek
profits by short-term trading. However, they may dispose of a portfolio
security prior to its maturity where disposition seems advisable because of a
revised credit evaluation of the issuer or other considerations. Because
brokerage commissions are not customarily charged on the investments invested
in by each of the two Portfolios, a high turnover rate should not affect the
net asset value.
<PAGE>
HIGH YIELD PORTFOLIO
The Portfolio will not generally engage in trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
it deems advisable in view of prevailing or anticipated market conditions to
accomplish the Portfolios investment objectives. For example, the Portfolio
may sell securities in anticipation of a movement in interest rates or to
avoid loss of premiums paid and unrealized capital gains earned on GNMA
Certificates selling at a substantial premium. Frequency of portfolio turnover
will not be a limiting factor if the Investment Advisor considers it
advantageous to purchase or sell securities. The Portfolio anticipates that
the portfolio turnover rate of the Portfolio will normally be less than 100%,
and may be significantly less in a period of stable or rising interest rates.
For the years ended December 31, 1994 and 1993, the portfolio turnover rates
for the High Yield Portfolio were 200.06% and 213.09%, respectively. A high
rate of portfolio turnover involves correspondingly higher brokerage
commissions and transaction expenses than a lower rate, which expenses must be
borne by the Portfolio and its shareholders.
STOCK INDEX PORTFOLIO
Although the Portfolio generally seeks to invest for the long term, the
Portfolio retains the right to sell securities irrespective of how long they
have been held. However, because of the passive investment management approach
of the Portfolio, the portfolio turnover rate is expected to be under 50%, a
generally lower turnover rate than for most other investment companies. A
portfolio turnover rate of 50% would occur if one-half of the Portfolios
securities were sold within one year. Ordinarily, securities will be sold from
the Portfolio only to reflect certain administrative changes in the Index
(including mergers or changes in the composition of the Index) or to
accommodate cash flows into and out of the Portfolio while maintaining the
similarity of the Portfolio to the Index. For the years ended December 31,
1994 and 1993, the portfolio turnover rates of the Stock Index Portfolio were
47.05% and 44.09%, respectively.
GROWTH AND INCOME PORTFOLIO
The Portfolio will not generally engage in trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
it deem advisable in view of prevailing or anticipated market conditions to
accomplish the Portfolios investment objjectives. For example, the Portfolio
may sell portfolio securities in anticipation of a movement in interest rates.
Other than for tax purposes, frequency of portfolio turnover will not be a
limiting factor if the Portfolio considers it advantageous to purchase or sell
securities. The Portfolio anticipates that its annual portfolio turnover rate
will normally be less than 200%. A high rate of portfolio turnover involves
correspondingly higher brokerage commissions and transaction expenses than a
lower rate, which expenses must be borne by the Portfolio and its
shareholders. For the years ended December 31, 1994 and 1993, the portfolio
turnover rate of the Growth and Income Portfolio were 326.01% and 135.92%.
The increase was dictated by market conditions during 1994.
<PAGE>
WORLD EQUITY PORTFOLIO AND UTILITY PORTFOLIO
The Portfolios anticipate that their annual portfolio turnover rates will
generally be less than 100%. If their turnover rates do reach or exceed 100%
the Portfolios brokerage costs may increase.
MANAGEMENT OF THE TRUST
THE TRUSTEES
The Trust is organized as a Massachusetts business trust. The overall
responsibility for the supervision of the affairs of the Trust vests in the
Trustees. The Trustees have entered into an Investment Advisory Agreement with
the Investment Advisor to handle the day-to-day affairs of the Trust (see
below). The Trustees meet periodically to review the affairs of the Trust and
to establish certain guidelines which the Investment Advisor is expected to
follow in implementing the investment policies and objectives of the Trust.
THE INVESTMENT ADVISOR
Van Kampen American Capital Investment Advisory Corp. (the Advisor) is the
Trusts investment adviser. The Adviser is a wholly-owned subsidiary of Van
Kampen American Capital, Inc. which in turn is a wholly-owned subsidiary of
VK/AC Holding, Inc. VK/AC Holding, Inc. is indirectly controlled by Clayton &
Dubilier Associates IV Limited Partnership, the general partners of which are
Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore,
Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson,
each of whom is a principal of Clayton, Dublier & Rice, Inc., a New York based
private investment partnership. The Advisors principal office is located at
One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital, Inc. is a diversified asset management company
with more than two million retail investor accounts, extensive capabilities
for managing institutional portfolios, and nearly $50 billion under under
management or supervision. Van Kampen American Capital, Inc.s over 40
open-end and 38 closed-end funds and more than 2,700 unit investment trusts
are professionally distributed by leading financial advisers nationwide. In
connection with advising the Trust, the Adviser will utilize at its own
expense credit analysis and research services provided by its sffiliate,
McCarthy, Crisanti & Maffei.
Pursuant to its investment advisory agreement with the Investment Advisor
(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), the Trust will pay the Investment
Advisor the following fees (accrued daily and paid monthly) equal to a
percentage of the average daily net assets of the Portfolios:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Average Daily
Portfolio Net Assets % Per Annum
Money Market Portfolio First $500 million .500 of 1%
Over $500 million .400 of 1%
Quality Income Portfolio First $500 million .500 of 1%
Over $500 million .450 of 1%
High Yield Portfolio First $500 million .750 of 1%
Over $500 million .650 of 1%
Growth and Income Portfolio First $500 million .600 of 1%
Over $500 million .500 of 1%
Stock Index Portfolio .500 of 1%
World Equity Portfolio First $500 million .750 of 1%
Over 500 million .650 of 1%
Utility Portfolio First $500 million .650 of 1%
Over $500 million
but less than
$ 1 billion .600 of 1%
Over $1 billion .550 of 1%
</TABLE>
The advisory fee of .750 of 1% to be deducted on the first $500 million of
assets of the High Yield Portfolio is higher than fees paid by many other
investment companies with similar investment objectives.
Under the Investment Advisory Agreement, the Investment Advisor regularly
provides each Portfolio of the Trust with investment advice and
recommendations and continuously furnishes the Portfolios of the Trust with an
investment program for each Portfolios assets. Under the Investment Advisory
Agreement, the Trust has agreed to assume and pay the charges and expenses of
the Trusts operation, including the compensation of the Trustees of the Trust
(other than those who are interested persons, as defined in the Investment
Company Act of 1940, as amended, of the Investment Advisor or Xerox Life Sales
Company), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees
for safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Trust, costs of share certificates, membership
dues in the Investment Company Institute or any similar organization, reports
and notices to shareholders, costs of registering shares of the Trust under
the federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies.
PORTFOLIO MANAGEMENT
The day to day management of all Portfolios of the Trust except for the
Utility Portfolio is the responsibility of a committee composed of persons who
are officers or employees of the Investment Advisor and includes officers of
the Trust. Daniel Smith is an Assistant Vice President of the Investment
Advisor and is primarily responsible for the day to day management of the
Utility Portfolio. Mr. Smith has been employed by the Investment Advisor for
the past five years.
For the year ended December 31, 1994, the Investment Advisor was paid advisory
fees as follows: $200,948 with respect to the Quality Income Portfolio,
$153,084 with respect to the High Yield Portfolio, $266,474 with respect to
the Stock Index Portfolio and $58,701 with respect to the Growth and Income
Portfolio. The Investment Advisor waived its advisory fee of $293,512 with
respect to the Money Market Portfolio. There were no advisory fees paid with
respect to the World Equity Portfolio or the Utility Portfolio in that they
have not yet commenced investment operations.
EXPENSES OF THE TRUST
Although each Portfolio must bear the expenses directly attributable to it,
the Portfolios are expected to experience cost savings over the aggregate
amount that would be payable if each Portfolio were a separate fund, because
they have the same Trustees, accountants, attorneys and other general and
administrative expenses. Any expenses which are not directly attributable to a
specific Portfolio are allocated on the basis of the net assets of the
respective Portfolios.
For the year ended December 31, 1994, the expenses, taking into account the
waivers and expense assumptions, borne by the Quality Income Portfolio
amounted to $242,458 or .59% of its average net assets on an annualized basis;
the net expenses borne by the High Yield Portfolio amounted to $173,521 or
.86% of its average net assets on an annualized basis; the expenses borne by
the Money Market Portfolio amounted to $58,739 or .10% of its average net
assets on an annualized basis; the net expenses borne by the Stock Index
Portfolio amounted to $319,899 or .58% of its average net assets on an
annualized basis and the net expenses borne by the Growth and Income Portfolio
amounted to $68,495 or .70% of its average net assets on an annualized basis.
Xerox Financial Services Life Insurance Company may at its discretion, but is
not obligated to, assume all or any portion of Trust expenses. For the year
ended December 31, 1993,
<PAGE>
Xerox Financial Services Life Insurance Company assumed expenses of $39,622
with respect to the Quality Income Portfolio; $59,115 with respect to the High
Yield Portfolio; $38,836 with respect to the Money Market Portfolio; $118,434
with respect to the Stock Index Portfolio and $76,816 with respect to the
Growth and Income Portfolio.
DESCRIPTION OF THE TRUST
SHAREHOLDER RIGHTS
The Trust is an unincorporated business trust established under the laws of
the Commonwealth of Massachusetts by a Declaration of Trust dated July 9,
1987. The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares.
Each Portfolio issues its own class of shares. Each share represents an equal
proportionate interest in the assets of the Portfolio with each other share in
the Portfolio. On any matter submitted to a vote of shareholders, all shares
of the Trust then issued and outstanding and entitled to vote will be voted in
the aggregate and not by class except for matters concerning only one class.
The holders of each share of stock of the Trust will be entitled to one vote
for each full share and a fractional vote for each fractional share of stock.
Shares of one class may not bear the same economic relationship to the Trust
as another class.
In accordance with its view of present applicable law, the separate account(s)
of Xerox Financial Services Life Insurance Company and its affiliates (Xerox
Life), as shareholder(s) of the Trust, have the right to vote Trust shares at
any meeting of shareholders and will provide pass-through voting privileges to
all contract owners. Xerox Life will vote shares of the Trust held in the
separate account(s) for which no timely voting instructions from contract
owners are received, as well as shares it owns, in the same proportion as
those shares for which voting instructions are received. Additional
information concerning voting rights is described in the Variable Account
Prospectus attached hereto under the caption, The Variable Account - Voting
Rights.
The Trust is not required to hold annual meetings of shareholders and does not
plan to do so. The Trustees may call special meetings of shareholders for
action by shareholder vote as may be required by the Investment Company Act of
1940, as amended, or the Declaration of Trust. The Trust will hold a
shareholder meeting to fill existing vacancies on the Board in the event that
less than a majority of Trustees were elected by the shareholders. The
Trustees shall also call a meeting of shareholders for the purpose of voting
upon the question of removal of any Trustee when requested in writing to do so
by the record holders of not less than 10 percent of the outstanding shares.
The Trust has an obligation to assist shareholder communications.
The Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust, requires inclusion of a clause to that effect in
every agreement entered into by the Trust and indemnifies shareholders against
any liability. Although shareholders of an unincorporated business trust
established under Massachusetts law may, under certain limited circumstances,
be held personally liable for the obligations of the Trust as though they were
general partners in a partnership, the provisions of the Declaration of Trust
described in the foregoing sentence make the likelihood of personal liability
remote.
The Trustees may amend the Declaration of Trust in any manner without
shareholder approval, except that the Trustees may not adopt any amendment
adversely affecting the rights of shareholders without approval by a majority
of the shares present at a meeting of shareholders (or higher vote as may be
required by the Investment Company Act of 1940, as amended, or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares,
or impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
INQUIRIES
Any inquiries should be directed to Xerox Financial Services Life Insurance
Company, One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644.
The telephone number is (800) 831-LIFE.
DISTRIBUTION AND REDEMPTION OF SHARES
The distribution of Trust shares is through Xerox Life Sales Company, an
affiliate of Xerox Financial Services Life Insurance Company. Prior to May 1,
1993, the Trusts shares were distributed through Van Kampen Merritt Inc.
Shares of the Trust are currently issued and redeemed only in connection with
investment in and payments under certain variable annuity contracts (variable
contracts) issued by Xerox Financial Services Life Insurance Company and its
affiliated insurance companies (Xerox Life). The shares of the Trust are
purchased and redeemed at net asset value (see below). Redemptions will be
effected by the separate accounts to meet obligations under the variable
contracts. Contract Owners do not deal directly with the Trust with respect to
acquisition or redemption of shares.
DIVIDENDS
All dividends are distributed to the separate accounts and will be
automatically reinvested in Trust shares. Dividends and distributions made by
the Portfolios are taxable, if at all, to Xerox Life; they are not taxable to
variable annuity contract owners.
TAX STATUS
It is the intention of the Trust to qualify as a regulated investment company
under Sub-chapter M of the Internal Revenue Code. If the Trust so qualifies
and distributes each year to its shareholders at least 90% of its net
investment income in each year, it will not be required to pay federal income
taxes on any income distributed to shareholders. Each Portfolio of the Trust
distributes all of its net income and gains to its shareholders (the separate
accounts). Each Portfolio is treated as a separate entity for Federal income
tax purposes and, therefore, the investments and results of the Portfolio are
determined separately for purposes of determining whether the Trust qualifies
as a regulated investment company and for purposes of determining net ordinary
income (or loss) and net realized capital gains (or losses).
Some of the Trusts investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Trust and affect the holding period of the securities held by the Trust and
the character of the gains or losses realized by the Trust. These provisions
may also require the Trust to mark-to-market some of the positions in its
portfolio (i.e., treat them as if they were closed out), which may cause the
Trust to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The
Trust will monitor its transactions and may make certain tax elections in
order to mitigate the effect of these rules and prevent disqualification of
the Trust as a regulated investment company.
Investments of the Trust in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount,
the Trust will be required to accrue as income each year a portion of the
discount and to distribute such income each year in order to maintain its
qualification as a regulated investment company and to avoid income and excise
taxes. In order to generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Trust may have to dispose of securities that it would otherwise have
continued to hold.
The Trusts ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Trusts annual gross income be derived from the disposition of
securities held for less than three months.
NET ASSET VALUES
Portfolio shares are sold and redeemed at a price equal to the shares net
asset value. The net asset value of a Portfolio is determined by calculating
the total value of the Portfolios assets, deducting its total liabilities, and
dividing the result by the number of shares outstanding. The net asset value
for each Portfolio is computed once daily as of the close of the New York
Stock Exchange, Monday through Friday, except on customary business holidays,
or except on any day on which no purchase or redemption orders are received,
or there is not a sufficient degree of trading in the Portfolios investments
so that the Portfolios net asset value per share might be materially affected.
The Trust reserves the right to calculate the net asset value and to adjust
the public offering price based thereon more frequently than once a day if
deemed desirable.
<PAGE>
Securities that are listed on a securities exchange are valued at their
closing sales price on the day of the valuation. Price valuations for listed
securities are based on market quotations where the security is primarily
traded or, if not available, are valued at the mean of the bid and asked
prices on any valuation date. Unlisted securities in a Portfolio are primarily
valued based on their latest quoted bid price or, if not available, are valued
by a method determined by the Trustees to accurately reflect fair value. Money
market instruments maturing in 60 days or less are valued on the basis of
amortized cost, which means that securities are valued at their acquisition
cost to reflect a constant amortization rate to maturity of any premium or
discount, rather than at current market value.
The Money Market Portfolio values its securities on the basis of amortized
cost, which means that securities are valued at their acquisition cost to
reflect a constant amortized rate to maturity of any premium or discount,
rather than at current market value. Calculations are made to compare the
amortized cost valuation of the securities with current market values. Money
market valuations are obtained by using market quotations provided by market
makers, estimates of market values, or values obtained from published yield
data of money market instruments. If a deviation of 1/2 of 1% or more were to
occur between the net asset value calculated by reference to market values and
the Portfolios $1.00 per share net asset value, or if there were any other
deviation which the Trustees believe would result in a material dilution to
shareholders, the Trustees would promptly consider what action, if any, should
be initiated. Other assets are valued at fair value as determined in good
faith by the Trustees. The method of calculating yields is described in the
Statement of Additional Information.
FUND PERFORMANCE
From time to time advertisements and other sales materials for the Trust may
include information concerning the historical performance of the Trust. Such
advertisements will also describe the performance of the relevant insurance
company separate accounts. Any such information will include the average total
return of the Trust calculated on a compounded basis for specified periods of
time. Total return information will be calculated pursuant to rules
established by the Securities and Exchange Commission. In lieu of or in
addition to total return calculations, such information may include
performance rankings and similar information from independent organizations
such as Lipper Analytical Services, Inc., Morningstar, Business Week, Forbes
or other industry publications.
The Trust calculates average compounded total return by determining the
redemption value at the end of specified periods (assuming reinvestment of all
dividends and distributions) of a $1,000 investment in the Trust at the
beginning of the period, deducting the initial $1,000 investment, annualizing
the increase or decrease over the specified period and expressing the result
as a percentage.
Total return figures utilized by the Trust are based on historical performance
and are not intended to indicate future performance. Total return and net
asset value per share can be expected to fluctuate over time, and accordingly,
upon redemption, shares may be worth more or less than their original cost.
<PAGE>
APPENDIX DESCRIPTION OF CORPORATE BOND RATINGS
Standard & Poors Corporation. A brief description of the applicable Standard &
Poors Corporation (S&P) rating symbols and their meanings (as published by
S&P) follows:
An S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligers such as guarantors, insurers,
or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as
a result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
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1. Likelihood of default - capacity and willingness of the obligor as to the timely
payment of interest and repayment of principal in accordance with the terms of
the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors rights.
</TABLE>
LONG-TERM CORPORATE BONDS.
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<S> <C>
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
BB Debt rated BB, B, CCC, or CC is regarded,
B on balance, as predominantly speculative with
CCC respect to capacity to pay interest and repay
CC principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
C This rating is reserved for income bonds on which no interest is being paid.
D Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from A to B may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS: The letter p indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood
of, or the risk of default upon failure of, such completion. The investor should
exercise judgment with respect to such likelihood and risk.
L The letter L indicates that the rating pertains to the principal amount of
those bonds where the underlying deposit collateral is fully insured by the
Federal Deposit Insurance Corp.
I Continuance of the rating is contingent upon S&Ps receipt of closing
documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&Ps receipt of an
executed copy of the escrow agreement.
NR Indicates 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.
</TABLE>
Moodys Investors Service, Inc. A brief description of the applicable Moodys
Investors Service, Inc. rating symbols and their meanings (as published by
Moodys Investors Service, Inc.) follows:
LONG-TERM CORPORATE BONDS.
AAA Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
gilt edge. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA Bonds which are rated Baa are considered as medium grade obligations,
i.e. they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moodys believes
possess the strongest investment attributes are designated by the symbols Aa
1, A 1, Baa 1, Ba 1 and B 1.
<PAGE>
PART B
<PAGE>
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 (the "PROSPECTUS"). A COPY OF THE PROSPECTUS MAY BE
OBTAINED WITHOUT CHARGE BY CALLING (800) 831-LIFE, OR WRITING XEROX 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.
<PAGE>
TABLE OF CONTENTS
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Page
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INVESTMENT OBJECTIVES AND POLICIES 1
Objectives 1
GNMA Certificates 1
Government National Mortgage Association 1
Nature of GNMA Certificates 1
Life of GNMA Certificates 1
Yield Characteristics of GNMA Certificates 2
Market for GNMA Certificates 3
Utility Securities 3
Lower Grade Securities 4
Strategic Transactions 6
General Characteristics of Options 8
General Characteristics of Futures 11
Options on Securities Indices and Other Financial Indices 12
Currency Transactions 12
Risks of Currency Transactions 13
Combined Transactions 14
Swaps, Caps, Floors and Collars 14
Eurodollar Instruments 15
Risks of Strategic Transactions Outside the United States 15
Use of Segregated and Other Special Accounts 16
Growth and Income Portfolio - Debt Securities Investments 17
STOCK INDEX PORTFOLIO - MONITORING PROCEDURES 18
Monitoring Procedures 18
INVESTMENT LIMITATIONS 18
Quality Income, High Yield, Money Market, Growth
and Income, Stock Index and World Equity Portfolios 18
Utility Portfolio 21
DESCRIPTION OF SECURITIES RATINGS 23
Commercial Paper Ratings 23
Variable Rate Demand Bond Ratings 24
Preferred Stock Ratings (Standard & Poor's) 25
Preferred Stock Ratings (Moody's) 26
YIELD INFORMATION FOR MONEY MARKET PORTFOLIO 28
OFFICERS AND TRUSTEES 29
SUBSTANTIAL SHAREHOLDERS 33
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS 33
CUSTODIAN 33
LEGAL COUNSEL AND INDEPENDENT AUDITORS 33
INVESTMENT ADVISORY AGREEMENT 34
LEGAL SERVICES AGREEMENT 35
PORTFOLIO TRANSACTIONS 35
FINANCIAL STATEMENTS 37
</TABLE>
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.
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.
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
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
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
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.
STRATEGIC TRANSACTIONS
-nvestments 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 restric-tions, 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 con-sideration) 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
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.
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.
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);
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;
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:
<TABLE>
<CAPTION>
<C> <S>
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 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.
</TABLE>
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
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.
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 payment. They are,
however, somewhat more vulnerable to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
B Issues rated "B" are regarded as having only 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 institu-tions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institu-tions) have a strong
capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institu-tions) 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
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:
<TABLE>
<CAPTION>
<C> <S>
- - - - - 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).
</TABLE>
Note rating symbols are as follows:
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
PREFERRED STOCK RATINGS (STANDARD & POOR'S)
<TABLE>
<CAPTION>
<S> <C>
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated 'AA' also qualifies as a high-quality fixed
income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated 'AAA'.
A An issue rated 'A' is backed by a sound capacity to pay the preferred stock obligations,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB An issue rated 'BBB' is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity to make payments for a preferred stock in this category
than for issues in the 'A' category.
BB Preferred stock rated 'BB', 'B' and 'CCC' 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.
</TABLE>
A preferred stock rating is not a recommendation to purchase, sell, or
hold a security inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
MOODY'S INVESTORS SERVICE, 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.
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.
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
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:
*Interested persons of the Trust as defined in the Investment Company Act
of 1940.
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.
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.
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.
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.
Each of the officers of the Trust holds the same positions with the
following funds:
<TABLE>
<CAPTION>
<S> <C>Van 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.
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
Insured 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-lntermediate 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
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
Minnesota 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-lntermediate 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
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
</TABLE>
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.
Compensation Table for the Fiscal Year Ended December 31, 1994 1
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pension or Total Compensation
Aggregate Retirement Benefits Estimated Annual from the Fund
Name of Person Compensation Accrued as Part Benefits Upon Complex Paid
from the Trust of Fund Expenses2 Retirement3 to Trustees4
--------------- -------------------- --------------------
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)
</TABLE>
<TABLE>
<CAPTION>
<C> <S>
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.
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.
</TABLE>
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 Xerox 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.
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 Xerox Financial Services Life Insurance
Company ("Xerox Life") and its affiliated insurance companies. On April 1,
1994, Xerox Variable Annuity Account One, a separate account of Xerox 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. Xerox Life contributed the initial
capital to the Trust.
OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
Xerox Life has advised the Trust that as of April 1, 1994, there were no
persons owning variable contracts which would entitle them to instruct Xerox
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.
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.
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
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
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
-------------
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
-------------
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
-------------
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
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
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)
-------------
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
------------------- -------------------
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
(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.
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.
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>
<PAGE>
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.
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:
<PAGE>
<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
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:
<PAGE>
<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
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
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
--------------
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>
<PAGE>
* 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
============
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
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
------------------- ------------------
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:
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.
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>
<PAGE>
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:
<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
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
----------------
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
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)
-------------
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
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:
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.
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:
<PAGE>
<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.
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.
<PAGE>
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.
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
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>
(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)
------------
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
------------------ ------------------
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:
<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.
<PAGE>
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
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>
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
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
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
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
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
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
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
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
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
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
============
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)
-------------
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)
------------------ ------------------
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:
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.
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.
<PAGE>
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
------------- -------------
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:
<PAGE>
<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
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>
PART C
<PAGE>
PART C
OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 24. Financial Statements and Exhibits
-----------------------------------------------------------------------------------------
(a) Financial Statements
-----------------------------------------------------------------------------------------
The following financial statements of the Portfolios of the Trust are included in Part A
hereof:
Financial Highlights.
The following financial statements of the Portfolios of the Trust are included in Part B
hereof:
Statements of Assets and Liabilities, December 31, 1994.
Statements of Operations, For the Year Ended December 31, 1994.
Statements of Changes in Net Assets, For the Year Ended December 31, 1994 and
December 31, 1993
Portfolios of Investments, December 31, 1994.
Notes to Financial Statements, December 31, 1994.
Independent Auditors' Reports for the Portfolios as of and for the Period Ending December
31, 1994.
(b) Exhibits
</TABLE>
<TABLE>
<CAPTION>
<C> <S>
(1) Declaration of Trust*
(2) By-laws of Trust*
(3) Not Applicable
(4) Not Applicable
(5)(a) Investment Advisory Agreement**
(5)(b) Form of Sub-Advisory Agreement
(6)(a) Principal Underwriters Agreement**
(6)(b) Form of Addendum to Principal Underwriters Agreement****
(7) Not Applicable
(8)(a) Form of Custodian Contract*
(8)(b) Form of Transfer Agency Agreement*
(9) Agency and Service Agreement*
(10) Consent and Opinion of Counsel****
(11) Consent of Independent Auditors
(12) Not Applicable
(13) Agreement Governing Contribution of Capital*
(14) Not Applicable
(15) Not Applicable
(16) Not Applicable
(17) Financial Data Schedules
</TABLE>
<TABLE>
<CAPTION>
<C> <S>
* incorporated by reference to Registrant's initial registration on Form
N-1A filed on July 23, 1987.
** incorporated by reference to Registrant's Post-Effective Amendment
No. 8 filed on May 1, 1993.
**** incorporated by reference to Registrant's Post-Effective Amendment
No. 10 filed on January 14, 1994.
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Item 25. Persons Controlled by or under Common
--------------------------------------------------------------------------------------------
Control with Registrant
--------------------------------------------------------------------------------------------
The shares of the Trust are currently sold to Xerox Variable Annuity Account One and
Xerox Variable Annuity Account Four of Xerox Financial Services Life Insurance
Company. Xerox Variable Annuity Account One currently controls all Portfolios of the
Trust through its share ownership thereof.
Item 26. Number of Holders of Securities
--------------------------------------------------------------------------------------------
Xerox Variable Annuity Account One owns all shares of beneficial interest of the Trust.
Item 27. Indemnification
--------------------------------------------------------------------------------------------
Please see Article 5.3 of the Registrant's Agreement and Declaration of Trust (Exhibit
1) for indemnification of officers and trustees. Registrant's trustees and officers are
also covered by an Errors and Omissions Policy. Section 5 of the Investment Advisory
Agreement between the Registrant and Van Kampen American Capital Investment
Advisory Corp.(F/K/A Van Kampen Merritt Investment Advisory Corp. ("Advisor")
provides that in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of the obligations or duties under the Investment Advisory
Agreement on the part of the Advisor, the Advisor shall not be liable to the Registrant
or to any shareholder of the Registrant for any error in judgment or of law, or for any
loss suffered by the Registrant in connection with the matters to which the Investment
Advisory Agreement relates. The Principal Underwriters Agreement provides that the
Registrant will indemnify the Distributor and certain persons related thereto for any loss
or liability arising from any alleged misstatement of a material fact (or alleged omission
to state a material fact) contained in, among other things, the Registration Statement or
Prospectus except to the extent the misstated fact or omission was made in reliance
upon information provided by or on behalf of such Distributor.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to trustees, officers and controlling persons of the Registrant and the Advisor
and Distributor pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a trustee,
officer, or controlling person of the Registrant, Advisor and the Distributor in connection
with the successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person, Advisor or the Distributor in
connection with the shares being registered the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of such
issue.
Item 28. Business and other Connections of Investment Adviser
--------------------------------------------------------------------------------------------
See "Management of the Trust" in the Prospectus and "Officers and Trustees" in the
Statement of Additional Information for information regarding the Investment Advisor.
For information as to the business, profession, vocation or employment of a substantial
nature of each of the officers and directors of the Investment Advisor, reference is
made to the Investment Advisor's current Form ADV filed under the Investment
Advisers Act of 1940, incorporated herein by reference.
Item 29. Principal Underwriter
--------------------------------------------------------------------------------------------
(a) Xerox Life Sales Company acts as the principal underwriter for Xerox Variable
Annuity Account One, Xerox Variable Annuity Account Four and Xerox Variable
Annuity Account Five.
</TABLE>
<TABLE>
<CAPTION>
<C> <S> <C>
(b) Name and Principal Positions and Offices
Business Address with Underwriter
------------------ -----------------------------------
Judy M. Drew President, Chief Operations Officer
and Director
Lorry J. Stensrud Director
Patricia E. Gubbe Vice President and Chief
Compliance Officer
Patrice L. Peltier Vice President
William C. Mair Director
Jeffery K. Hoelzel Secretary
Philip A. Haley Vice President
Owen Stryker Vice President
</TABLE>
None of the officers and directors of Xerox Life Sales Company have any
positions or offices with the Registrant. Prior to May 1, 1993, Van Kampen
Merritt Inc. was the principal underwriter of the Trust's shares.
<TABLE>
<CAPTION>
<S> <C> <C>
(c) Not Applicable.
Item 30. Location of Accounts and Records
--------------------------------------------------------------------------------------------------
All accounts, books and other documents required by Section 31(a) of the Investment
Company Act of 1940 and the Rules thereunder to be maintained (i) by Registrant will
be maintained at its offices, located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181or at the State Street Bank and Trust Company, 1776 Heritage Drive, North
Quincy,Massachusetts 02105; (ii) by the Advisor will be maintained at its offices,
located at One Tower Lane, Suite 3000, Oakbrook Terrace, Illinois 60181-4644; and
(iii) all such accounts, books and other documents required to be maintained by Xerox
Life Sales Company, the principal underwriter, will be maintained at its offices located
at One Tof the Registrant's latest Annual Report upon request and without charge. ower Lane, Suite
3000, Oakbrook Terrace, Illinois 60181-4644.
Item 31. Management Services
--------------------------------------------------------------------------------------------------
Not Applicable.
Item 32. Undertakings
--------------------------------------------------------------------------------------------------
The Registrant will furnish each person to whom a prospectus is delivered with a copy
of the Registrant's latest Annual Report upon request and without charge.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized in the City of Oakbrook Terrace and the State of Illinois on
the 28th day of April, 1995.
<TABLE>
<CAPTION>
<S> <C>
VAN KAMPEN MERRITT SERIES TRUST
By: /s/ RONALD A. NYBERG
--------------------------------------------
Ronald A. Nyberg, Vice President & Secretary
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on April , 1995 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
<S> <C>
Signature Title
- - - - -------------------- ------------------------------------
Chairman of the Board and Trustee
Don G. Powell
DENNIS J. MCDONNELL* President (Chief Executive Officer)
Dennis J. McDonnell and Trustee
EDWARD C. WOOD, III* Vice President and Treasurer (Chief
Edward C. Wood, III Financial and Accounting Officer)
THEODORE A. MYERS* Trustee
Theodore A. Myers
ROD DAMMEYER* Trustee
Rod Dammeyer
DAVID C. ARCH* Trustee
David C. Arch
Trustee
Hugo F. Sonnenschein
WAYNE W. WHALEN* Trustee
Wayne W. Whalen
HOWARD J. KERR* Trustee
Howard J. Kerr
/s/ RONALD A. NYBERG
- - - - --------------------
Ronald A. Nyberg
Attorney-in-fact
</TABLE>
*Signed by Ronald A. Nyberg pursuant to a power of attorney.
<PAGE>
EXHIBITS
TO
POST-EFFECTIVE AMENDMENT NO. 12
TO
FORM N-1A
FOR
VAN KAMPEN MERRITT SERIES TRUST
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit Page
- - - - -------- ----
(11) Consent of Independent Auditors
(27) Financial Data Schedules
</TABLE>
<PAGE>
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Growth and Income Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings Financial Highlights in the
Prospectus and Legal Counsel and Independent Auditors in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 21, 1995
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the High Yield Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings Financial Highlights in the
Prospectus and Legal Counsel and Independent Auditors in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 21, 1995
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Money Market Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings Financial Highlights in the
Prospectus and Legal Counsel and Independent Auditors in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 21, 1995
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Quality Income Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings Financial Highlights in the
Prospectus and Legal Counsel and Independent Auditors in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 21, 1995
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders of the Stock Index Portfolio
of the Van Kampen Merritt Series Trust:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings Financial Highlights in the
Prospectus and Legal Counsel and Independent Auditors in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
April 21, 1995
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULES
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Quality Income Portfolio
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 35093223
<INVESTMENTS-AT-VALUE> 33487949
<RECEIVABLES> 483051
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 253
<TOTAL-ASSETS> 33971253
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34836
<TOTAL-LIABILITIES> 34836
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37487535
<SHARES-COMMON-STOCK> 3457435
<SHARES-COMMON-PRIOR> 4695907
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1758844)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1792274)
<NET-ASSETS> 33936417
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2598323
<OTHER-INCOME> 0
<EXPENSES-NET> (242458)
<NET-INVESTMENT-INCOME> 2355865
<REALIZED-GAINS-CURRENT> (1758844)
<APPREC-INCREASE-CURRENT> (2283981)
<NET-CHANGE-FROM-OPS> (1686960)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2355865
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3968977
<NUMBER-OF-SHARES-REDEEMED> (5439140)
<SHARES-REINVESTED> 231691
<NET-CHANGE-IN-ASSETS> (17181957)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 200948
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 282080
<AVERAGE-NET-ASSETS> 41376839
<PER-SHARE-NAV-BEGIN> 10.886
<PER-SHARE-NII> .603
<PER-SHARE-GAIN-APPREC> (1.071)
<PER-SHARE-DIVIDEND> (.603)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.815
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> High Yield
<CAPTION>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 20524450
<INVESTMENTS-AT-VALUE> 19744451
<RECEIVABLES> 428382
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 93861
<TOTAL-ASSETS> 20226694
<PAYABLE-FOR-SECURITIES> 597687
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 13423
<TOTAL-LIABILITIES> 611110
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 22090383
<SHARES-COMMON-STOCK> 2000944
<SHARES-COMMON-PRIOR> 1669943
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1654800)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (779999)
<NET-ASSETS> 19655584
<DIVIDEND-INCOME> 32245
<INTEREST-INCOME> 2039657
<OTHER-INCOME> 3000
<EXPENSES-NET> 173521
<NET-INVESTMENT-INCOME> 1901381
<REALIZED-GAINS-CURRENT> (1654800)
<APPREC-INCREASE-CURRENT> (1233657)
<NET-CHANGE-FROM-OPS> (987076)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1901381)
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