<PAGE> 1
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VAN KAMPEN AMERICAN CAPITAL
U.S. GOVERNMENT TRUST FOR INCOME
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Van Kampen American Capital U.S. Government Trust for Income, formerly known
as American Capital U.S. Government Trust for Income (the "Fund"), is a mutual
fund whose investment objective is to seek to provide investors with a high
level of current income. The Fund invests primarily in debt securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, including
mortgage-related securities issued by instrumentalities of the U.S. Government.
In order to hedge against changes in interest rates, the Fund may also purchase
or sell options and engage in transactions involving futures contracts and
options on such contracts. The Fund does not engage in an option writing program
for the purpose of enhancing or supporting its monthly distribution. See
"Investment Practices" for more information. There is no assurance that the Fund
will achieve its investment objective.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is 2800
Post Oak Blvd., Houston, Texas 77056, and its telephone number is
(800) 421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A STATEMENT OF ADDITIONAL INFORMATION, DATED AUGUST 7, 1995, CONTAINING
ADDITIONAL INFORMATION ABOUT THE FUND, HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC") 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) 421-5666 OR, FOR TELECOMMUNICATIONS
DEVICE FOR THE DEAF, (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
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THIS PROSPECTUS IS DATED AUGUST 7, 1995.
<PAGE> 2
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Shareholder Transaction Expenses................................. 6
Annual Fund Operating Expenses and Example....................... 7
Financial Highlights............................................. 9
The Fund......................................................... 11
Investment Objective and Policies................................ 11
Investment Practices............................................. 18
Investment Advisory Services..................................... 23
Alternative Sales Arrangements................................... 25
Purchase of Shares............................................... 28
Shareholder Services............................................. 38
Redemption of Shares............................................. 43
Distribution Plans............................................... 46
Distributions from the Fund...................................... 48
Tax Status....................................................... 49
Fund Performance................................................. 51
Description of Shares of the Fund................................ 53
Additional Information........................................... 54
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
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PROSPECTUS SUMMARY
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THE FUND. Van Kampen American Capital U.S. Government Trust for Income (the
"Fund") is a diversified open-end management investment company organized as a
Delaware business trust.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
INVESTMENT OBJECTIVE. The Fund seeks to provide a high level of current income.
INVESTMENT POLICY. Invests primarily in debt securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, including
mortgage-related securities issued by instrumentalities of the U.S. Government.
The Fund may invest in high quality debt securities issued by foreign
governments and their political subdivisions, agencies and instrumentalities,
certain debt securities which are not U.S. Government securities or in any
non-rated debt security. The Fund may sell (write) and purchase call and put
options, and may purchase and sell interest rate futures contracts and options
on such contracts since such transactions are entered into for bona fide hedging
purposes. The Fund may purchase or sell debt securities on a forward commitment
basis and enter into interest rate swaps and may purchase or sell interest rate
caps, floors and collars. The Fund may lend portfolio securities.
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to
the general public, each with its own sales charge structure: Class A shares,
Class B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Alternative
Sales Arrangements -- Factors for Consideration." Each class of shares
represents an interest in the same portfolio of investments of the Fund. The per
share dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Alternative Sales Arrangements." For
information on redeeming shares see "Redemption of Shares."
Class A Shares. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. The Fund pays an annual
service fee of up to 0.25% of its average daily net assets attributable to such
class of shares. See "Purchase of Shares -- Class A Shares" and "Distribution
Plans."
Class B Shares. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of four percent of
redemption proceeds during the first and second year, declining each year
thereafter to zero after the fifth year. See "Redemption of Shares." The Fund
pays a combined
3
<PAGE> 4
annual distribution fee and service fee of up to one percent of its average
daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class B Shares" and "Distribution Plans." Class B shares will convert
automatically to Class A shares six years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
Class C Shares. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of one percent on redemptions made
within one year of purchase. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent of its
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class C Shares" and "Distribution Plans." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
DISTRIBUTIONS FROM THE FUND. Income dividends are paid monthly; any net short-
term or long-term capital gains are distributed at least annually. The Fund does
not engage in an option writing program for the purpose of enhancing or
supporting its monthly distribution. All dividends and distributions area
automatically reinvested in shares of the Fund at net asset value per share,
without sales charge, unless payment in cash is requested. A portion of the
dividends and distributions paid may constitute a return of capital for federal
income tax purposes. See "Distributions from the Fund."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser to the Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
RISK FACTORS. The market prices of debt securities, including U.S. Government
securities, generally fluctuate with changes in interest rates so that the
Fund's net asset value can be expected to decrease as interest rates rise. As
interest rates fall, increases in the Fund's net asset value may be limited by
investments in mortgage related securities and by the sale of options. Varying
economic and market conditions may affect the value of, and yields on, debt
securities owned by the Fund. The Fund may also purchase or sell debt securities
on a forward commitment basis, purchase or sell options and engage in
transactions involving interest rate futures contracts and options on such
contracts, and may lend its portfolio securities. The Fund may enter into
interest rate swaps and may purchase or sell interest rate caps, floors and
collars. Each of such activities may subject the Fund to additional risks. See
"Investment Objective and Policies -- General, U.S. Government Securities and
Mortgage-Related Securities," "Investment Practices -- Forward Commit-
4
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ments, Lending of Securities, Options, Futures Contracts and Related Options and
Interest Rate Transactions." No assurance can be given as to the actual maturity
of a mortgage-related security because the mortgage loans underlying the
security may be prepaid by the obligor. Depending on market conditions, the Fund
may be able to reinvest pre payments passed through to it only at a lower
yielding investment rate. See "Investment Objective and
Policies -- Mortgage-Related Securities." Shares of the Fund are not insured or
guaranteed by the U.S. Government, its agencies or instrumentalities or by any
other person or entity.
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 6
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SHAREHOLDER TRANSACTION EXPENSES
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)................. 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering price)... None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or
redemption proceeds)............ None(2) Year 1--4.00% Year 1--1.00%
Year 2--4.00%
Year 3--3.00%
Year 4--2.5 %
Year 5--1.5 %
After--None
Redemption fees (as a percentage
of amount redeemed)............. None None None
Exchange fee...................... None None None
</TABLE>
---------------
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of one percent may
be imposed on certain redemptions made within one year of the purchase.
6
<PAGE> 7
------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management fees (as a percentage of average
daily net assets)........................ .60% .60% .60%
12b-1 Fees (as a percentage of average
daily net assets)(3)..................... .25% 1.00%(5) 1.00%(5)
Other Expenses (as a percentage of average
daily net assets)(4)..................... .22% .22% .22%
Total Fund Operating Expenses (as a
percentage of average daily net
assets).................................. 1.07% 1.82% 1.82%
</TABLE>
---------------
(3) Up to 0.25% for Class A shares and one percent for Class B and C shares. See
"Distribution Plans."
(4) See "Investment Advisory Services."
(5) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
7
<PAGE> 8
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of 1.07% for
Class A shares, 1.82% for Class B shares
and 1.82% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $ 58 $ 80 $104 $172
Class B............................... $ 60 $ 90 $116 $176*
Class C............................... $ 29 $ 57 $ 99 $214
An investor would pay the following
expenses on the same $1,000 investment
assuming no redemption at the end of
each time period:
Class A............................... $ 58 $ 80 $104 $172
Class B............................... $ 18 $ 57 $ 99 $176*
Class C............................... $ 18 $ 57 $ 99 $214
</TABLE>
---------------
* Based on conversion to Class A shares after six years.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and are
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required to utilize a five percent annual return
assumption. Class B shares acquired through the exchange privilege are subject
to the deferred sales charge schedule relating to the Class B shares of the fund
from which the purchase of Class B shares was originally made. Accordingly,
future expenses as projected could be higher than those determined in the above
table if the investor's Class B shares were exchanged from a fund with a higher
contingent deferred sales charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services" and "Redemption of Shares."
8
<PAGE> 9
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FINANCIAL HIGHLIGHTS
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(Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated)
The following information for the fiscal periods ended September 30, 1993 and
1994, has been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. The information presented below for the six
months ended March 31, 1995 is unaudited. This information should be read in
conjunction with the related financial statements and notes thereto included in
the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------- -------------------------------------
OCT. 6, OCT. 6,
YEAR 1992(1) YEAR 1992(1)
SIX MONTHS ENDED THROUGH SIX MONTHS ENDED THROUGH
ENDED MARCH SEPT. 30, SEPT. 30, ENDED MARCH SEPT. 30, SEPT. 30,
31, 1995 1994 1993(4) 31, 1995 1994 1993(4)
----------- --------- --------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................ $8.17 $9.26 $9.43 $8.17 $9.26 $9.43
----------- --------- --------- ----------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................... .37 .76 .91 .37 .76 .86
Expenses............................................ (.05) (.09) (.11) (.08) (.15) (.17)
Expense reimbursement............................... -- -- 01 -- -- .01
----------- --------- --------- ----------- --------- ---------
Net investment income............................... .32 .67 .81 .29 .61 .70
Net realized and unrealized losses on securities.... .0475 (1.0085) (.1795) .0455 (1.0205) (.1475)
----------- --------- --------- ----------- --------- ---------
Total from investment operations.................... .3675 (.3385) .6305 .3355 (.4105) .5525
----------- --------- --------- ----------- --------- ---------
LESS DISTRIBUTIONS FROM
Net investment income............................... (.3225) (.674) (.8005) (.2905) (.602) (.7225)
Excess of book-basis net realized gains on
securities......................................... (.005) (.0775) -- (.005) (.0775) --
----------- --------- --------- ----------- --------- ---------
Total distributions................................. (.3275) (.7515) (.8005) (.2955) (.6795) (.7225)
----------- --------- --------- ----------- --------- ---------
Net asset value, end of period...................... $8.21 $8.17 $9.26 $8.21 $8.17 $9.26
============ ========== ========== ============ ========== ==========
TOTAL RETURN(3)..................................... 4.62% (3.82%) 8.07%(2) 4.21% (4.61%) 7.24%(2)
<CAPTION>
CLASS C
-------------------------------------
APRIL 12,
YEAR 1993(1)
SIX MONTHS ENDED THROUGH
ENDED MARCH SEPT. 30, SEPT. 30,
31, 1995 1994 1993(4)
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period................ $8.17 $9.25 $9.41
----------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................... .37 .79 .41
Expenses............................................ (.08) (.16) (.083)
Expense reimbursement............................... -- -- .003
----------- --------- ---------
Net investment income............................... .29 .63 .33
Net realized and unrealized losses on securities.... .0455 (1.0305) (.1561)
----------- --------- ---------
Total from investment operations.................... .3355 (.4005) .1739
----------- --------- ---------
LESS DISTRIBUTIONS FROM
Net investment income............................... (.2905) (.602) (.3339)
Excess of book-basis net realized gains on
securities......................................... (.005) (.0775) --
----------- --------- ---------
Total distributions................................. (.2955) (.6795) (.3339)
----------- --------- ---------
Net asset value, end of period...................... $8.21 $8.17 $9.25
============ ========== ==========
TOTAL RETURN(3)..................................... 4.21% (4.51%) 2.10%
</TABLE>
(Table continued on following page)
9
<PAGE> 10
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FINANCIAL HIGHLIGHTS -- (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------- -------------------------------------
OCT. 6, OCT. 6,
YEAR 1992(1) YEAR 1992(1)
SIX MONTHS ENDED THROUGH SIX MONTHS ENDED THROUGH
ENDED MARCH SEPT. 30, SEPT. 30, ENDED MARCH SEPT. 30, SEPT. 30,
31, 1995 1994 1993(4) 31, 1995 1994 1993(4)
----------- --------- --------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................ $71.6 $75.3 $92.4 $205.4 $226.7 $242.8
Ratios to average assets (annualized)
Expenses........................................... 1.11% 1.07% 1.07% 1.87% 1.82% 1.81%
Expenses, without expense reimbursement............ 1.11% 1.07% 1.15% 1.87% 1.82% 1.89%
Net investment income.............................. 7.93% 7.89% 8.71% 7.18% 7.11% 7.70%
Net investment income, without expense
reimbursement....................................... 7.93% 7.89% 8.64% 7.18% 7.11% 7.62%
Portfolio turnover rate............................. 107% 122% 281% 107% 122% 281%
<CAPTION>
CLASS C
-------------------------------------
APRIL 12,
YEAR 1993(1)
SIX MONTHS ENDED THROUGH
ENDED MARCH SEPT. 30, SEPT. 30,
31, 1995 1994 1993(4)
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)................ $30.9 $37.5 $37.8
Ratios to average assets (annualized)
Expenses........................................... 1.88% 1.82% 1.76%
Expenses, without expense reimbursement............ 1.88% 1.82% 1.83%
Net investment income.............................. 7.19% 7.08% 7.26%
Net investment income, without expense
reimbursement....................................... 7.19% 7.08% 7.18%
Portfolio turnover rate............................. 107% 122% 281%
</TABLE>
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(1) Commencement of operations.
(2) Total return from November 2, 1992 (date the Fund's investment strategy was
implemented) through September 30, 1993.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
10
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THE FUND
------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company. This type
of company is commonly known as a mutual fund. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
Fourteen Trustees have the responsibility for overseeing the affairs of the
Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines the
investment of the Fund's assets, provides administrative services and manages
the Fund's business and affairs. The Adviser together with its predecessors, has
been in the investment advisory business since 1926.
------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
------------------------------------------------------------------------------
GENERAL. The investment objective of the Fund is to seek to provide investors
with a high level of current income. The Fund invests primarily in debt
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, including mortgage-related securities issued by
instrumentalities of the U.S. Government. Under normal circumstances, at least
65% of the total assets of the Fund are invested in such securities and in
repurchase agreements fully collateralized by U.S. Government securities. The
Fund may invest up to 35% of its total assets in high quality debt securities
issued by foreign governments and their political subdivisions, agencies and
instrumentalities, certain debt securities which are not U.S. Government
securities but which are rated at the time of purchase within the two highest
grades assigned by Moody's Investors Service or Standard & Poor's Corporation or
in any non-rated debt security considered by the Adviser to be of comparable
quality, and supranational issues. The Fund may lend portfolio securities on a
fully collateralized basis. See "Investment Practices -- Lending of Securities"
herein. In order to hedge against changes in interest rates, the Fund may
purchase or sell options and engage in transactions involving futures contracts
and options on such contracts and Eurodollar instruments. See "Investment
Practices -- Options, Futures Contracts and Related Options and Eurodollar
Instruments" herein, and the Statement of Additional Information for discussion
of options, futures contracts and related options. The Fund may also purchase or
sell debt securities on a forward commitment basis and enter into interest rate
swaps and may purchase or sell interest rate caps, floors and collars. See
"Investment Practices -- Forward Commitments and Interest Rate Transactions"
herein. Shares of the Fund are not insured or guaranteed by the U.S. Government,
its agencies or instrumentalities or by any other person or entity. There is no
assurance that the Fund's objective will be achieved.
11
<PAGE> 12
In general, the prices of debt securities vary inversely with interest rates.
If interest rates rise, debt security prices generally fall; if interest rates
fall, debt security prices generally rise. In addition, for a given change in
interest rates, longer-maturity debt securities fluctuate more in price (gaining
or losing more in value) than shorter-maturity debt securities, and generally
offer higher yields than shorter-maturity debt securities, all other factors,
including credit quality, being equal. This potential for a decline in prices of
debt securities due to rising interest rates is referred to herein as "market
risk." While the Fund has no policy limiting the maturities of the debt
securities in which it may invest, the Adviser seeks to moderate market risk by
generally maintaining a portfolio duration within a range of two to six years.
Duration is a measure of the expected life of a debt security that was developed
as a more precise alternative to the concept of "term to maturity." Duration
incorporates a debt security's yield, coupon interest payments, final maturity
and call features into one measure.
Traditionally a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (which
is the "interest rate risk" or "price volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment taking no account of the pattern of the security's payments of
interest or principal prior to maturity. Duration is a measure of the expected
life of a debt security on a present value basis expressed in years. It measures
the length of the time interval between the present and the time when the
interest and principal payments are scheduled (or in the case of a callable
bond, expected to be received), weighing them by the present value of the cash
to be received at each future point in time. For any debt security with interest
payments occurring prior to the payment of principal, duration is always less
than maturity, and for zero coupon issues, duration and term to maturity are
equal. In general, the lower the coupon rate of interest or the longer the
maturity, or the lower the yield-to-maturity of a debt security, the longer its
duration; conversely, the higher the coupon rate of interest, the shorter the
maturity or the higher the yield-to-maturity of a debt security, the shorter its
duration.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
12
<PAGE> 13
The Fund may purchase debt securities at a premium over the principal or face
value in order to obtain higher current income. The amount of any premium
declines during the term of the security to zero at maturity. Such decline
generally is reflected in the market price of the security and thus in the
Fund's net asset value. Any such decline is realized for accounting purposes as
a capital loss at maturity or upon resale. Prior to maturity or resale, such
decline in value could be offset, in whole or part, or increased by changes in
the value of the security due to changes in interest rate levels.
The principal reason for selling call or put options is to obtain, through the
receipt of premiums, a greater return than would be realized on the underlying
securities alone. By selling options, the Fund reduces its potential for capital
appreciation on debt securities if interest rates decline. Thus if market prices
of debt securities increase, the Fund receives less total return from its
optioned positions than it would have received if the options had not been sold.
The purpose of selling options is intended to improve the Fund's total return
and not to support or "enhance" monthly distributions. During periods when the
Fund has capital loss carry forwards any capital gains generated from such
transactions will be retained in the Fund. See "Investment Practices -- Options,
Futures Contracts and Related Options" and "Distributions from the Fund" herein,
and the Statement of Additional Information for discussion of options, futures
contracts and related options.
The purchase and sale of options may result in a high portfolio turnover rate.
The Fund's turnover rate is shown in the Financial Highlights table. See
"Investment Practices -- Portfolio Turnover" herein.
The investment objective of the Fund cannot be changed without shareholder
approval; however, the investment policies set forth in this section of the
Prospectus may be changed by the Trustees of the Fund without shareholder
approval.
U.S. GOVERNMENT SECURITIES. Securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities include: (1) U.S. Treasury
obligations, which differ in their interest rates, maturities and times of
issuance: U.S. Treasury bills (maturity of one year or less), U.S. Treasury
notes (maturity of one to ten years), and U.S. Treasury bonds (generally
maturities of greater than ten years), [including the principal components or
the interest components issued by the U.S. Government under the Separate Trading
of Registered Interest and Principal of Securities program (i.e., "STRIPS")] all
of which are backed by the full faith and credit of the United States; and (2)
obligations issued or guaranteed by U.S. Government agencies or
instrumentalities, including government guaranteed mortgage-related securities,
some of which are backed by the full faith and credit of the U.S. Treasury, some
of which are supported by the right of the issuer to borrow from the U.S.
Government and some of which are backed only by the credit of the issuer itself
(as described below).
13
<PAGE> 14
U.S. Government securities include obligations issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States whose
securities and guarantees are backed by the full faith and credit of the United
States. FNMA, a federally chartered and privately-owned corporation, and FHLMC,
a federal corporation, are instrumentalities of the United States. The
securities and guarantees of FNMA and FHLMC are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. Securities of GNMA, FNMA and FHLMC
may include, but are not limited to, collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs") which are
described below under "Mortgage-Related Securities."
MORTGAGE-RELATED SECURITIES. Mortgage loans made by banks, savings and loan
institutions, and other lenders are often assembled into pools, which are issued
by private entities. Interests in such pools are what this Prospectus calls
"Private Mortgage-Related Securities." Interests in pools of mortgage loans are
also issued or guaranteed by an agency or instrumentality of the U.S. Government
("Government Mortgage-Related Securities").
Both Private and Government Mortgage-Related Securities are characterized by
monthly payments to the holder, reflecting the monthly payments made by the
borrowers who received the underlying mortgage loans. The payments to the
security holders (such as the Fund), like the payments on the underlying loans,
represent both principal and interest. Although the underlying mortgage loans
are for specified periods of time, such as 20 or 30 years, the borrowers can,
and typically do, pay them off sooner. Thus, the security holders frequently
receive prepayments of principal, in addition to the principal which is part of
the regular monthly payment. A borrower is more likely to prepay a mortgage
which bears a relatively high rate of interest. This means that in times of
declining interest rates, some of the Fund's higher yielding securities might be
converted to cash, and the Fund will be forced to accept lower interest rates
when that cash is used to purchase additional securities. The increased
likelihood of prepayment when interest rates decline also limits market price
appreciation of mortgage-related securities. If the Fund buys mortgage-related
securities at a premium, mortgage foreclosures or mortgage prepayments may
result in a loss to the Fund of up to the amount of the premium paid since only
timely payment of principal and interest is guaranteed.
The Fund may invest in private mortgage pass-through securities ("Private
Pass-Throughs") which are structured similarly to the GNMA, FNMA, and FHLMC
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mortgage-related securities described above and are issued by originators of and
investors in mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. Private Pass-Throughs are usually backed by a pool of
conventional fixed rate or adjustable rate mortgage loans. The Fund intends to
invest in such debt securities only if they are rated at the time of purchase in
the two highest grades by a nationally-recognized rating agency or in any
non-rated debt security considered by the Adviser to be of comparable quality.
CMOs are debt obligations collateralized by Mortgage-Related Securities or by
whole loans. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage bankers, commercial banks,
investment banks and special purpose subsidiaries of the foregoing. An issuer of
CMOs may elect to be treated, for federal income tax purposes, as a REMIC. An
issuer of CMOs issued after 1991 must elect to be treated as a REMIC or it will
be taxable as a corporation under rules regarding taxable mortgage pools. CMOs
are issued in a number of classes or series with different maturities. The
classes or series are retired in sequence as the underlying mortgages are
repaid. Prepayment may shorten the stated maturity of the obligation and can
result in a loss of premium, if any has been paid. Certain of these securities
may have variable or floating interest rates and others may be stripped
(securities which provide only the principal or interest feature of the
underlying security).
CMOs and REMICs issued by private entities are not government securities and
are not directly guaranteed by any government agency. They are secured by the
underlying collateral of the private issuer. The Fund will treat such privately
issued securities as U.S. Government securities only if they are 100%
collateralized at the time of issuance by securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. The Fund intends to invest
in privately issued CMOs and REMICs only if they are rated at the time of
purchase in the two highest grades by a nationally-recognized rating agency.
ZERO COUPON AND OTHER STRIPPED SECURITIES. The Fund may also invest in the
interest only or principal only components of debt securities described above.
This includes "zero coupon" Treasury securities and stripped securities.
The Fund may invest in "zero coupon" Treasury securities which are U.S.
Treasury bills, notes and bonds which have been stripped of their unmatured
interest coupons and receipts or certificates representing interests in such
stripped debt obligations and coupons. A "zero coupon" security pays no interest
in cash to its holder during its life although interest is accrued during that
period. Its value to an investor consists of the difference between its face
value at the time of maturity and the price for which it was acquired, which is
generally an amount significantly less than its face value (sometimes referred
to as a "deep discount" price).
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<PAGE> 16
Currently the principal U.S. Treasury security issued without coupons is the
Treasury bill. The Treasury has also recently made wire transferable "zero
coupon" Treasury securities available. However, in the last few years a number
of banks and brokerage firms have separated ("stripped") the principal portions
("corpus") from the coupon portions of the U.S. Treasury bonds and notes and
sold them separately in the form of receipts or certificates representing
undivided interests in these instruments (which instruments are generally held
by a bank in a custodial or trust account). Such custodial receipts or
certificates are not considered by the Fund to be U.S. Government securities.
"Zero coupon" Treasury securities do not entitle the holder to any periodic
payments of interest prior to maturity. Accordingly, such securities usually
trade at a deep discount from their face or par value and will be subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make periodic distributions of
interest. On the other hand, because there are no periodic interest payments to
be reinvested prior to maturity, "zero coupon" securities eliminate the
reinvestment risk and lock in a rate of return to maturity. Current federal tax
law requires that a holder (such as the Fund) of a "zero coupon" security accrue
a portion of the discount at which the security was purchased as income each
year even though the Fund received no interest payment in cash on the security
during the year. For additional discussion of the tax treatment of "zero coupon"
Treasury securities, see "Distributions from the Fund."
Stripped Mortgage-Related Securities (hereinafter referred to as "Stripped
Mortgage Securities") are derivative multiclass mortgage securities. Stripped
Mortgage Securities may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
Stripped Mortgage Securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of Stripped Mortgage Securities will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and a rapid
rate of principal payments may have a material adverse effect on the securities'
yield to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Fund may fail to fully recoup its
initial investment in these securities even if the
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<PAGE> 17
security is rated AAA or Aaa. Holders of PO securities are not entitled to any
periodic payments of interest prior to maturity. Accordingly, such securities
usually trade at a deep discount from their face or par value and are subject to
greater fluctuations of market value in response to changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest. Current federal tax law requires that a holder (such as the Fund) of
such securities accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment in cash on the certificate during the year. Such securities may involve
greater risk than securities issued directly by the U.S. Government, its
agencies or instrumentalities.
Although the market for government-issued IO and PO securities backed by
fixed-rate mortgages is increasingly liquid, certain of such securities may not
be readily marketable and will be considered illiquid for purposes of the Fund's
limitation on investments in illiquid securities. The Trustees of the Fund will
establish guidelines and standards for determining whether a particular
government-issued IO or PO backed by fixed-rate mortgages is liquid. Generally,
such a security may be deemed liquid if it can be disposed of promptly in the
ordinary course of business at a value reasonably close to that used in the
calculation of the net asset value per share. Stripped Mortgage Securities,
other than government-issued IO and PO securities backed by fixed-rate
mortgages, are presently considered by the staff of the SEC to be illiquid
securities and thus subject to the Fund's limitation on investment in illiquid
securities.
OTHER SECURITIES. The Fund may invest in high quality debt obligations of
supranational lending entities organized or supported by several national
governments. Such supranational entities in which the Fund may invest include
the following: International Bank for Reconstruction and Development (World
Bank), established to promote reconstruction and economic development in its
member nations; European Coal and Steel Community, a partnership of 12 European
countries created to establish a common market for coal and steel and to further
the economic development of its member countries; European Investment Bank,
established to finance investment projects that contribute to the balanced
development of the European Economic Community; European Bank for Reconstruction
& Development, whose objectives are to foster the transition toward open market
economies and to promote private and entrepreneurial initiative in countries of
central and eastern Europe; Inter-American Development Bank, established to
further the development of its Latin American member countries; African
Development Bank, established to contribute to the economic development and
social progress of its African member countries; Asian Development Bank,
established to promote economic growth and cooperation in Asia and the Far East.
The Fund may also invest in U.S. dollar denominated debt issues of foreign
governments, their agencies and instrumentalities, and other foreign issuers.
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The Adviser believes that in many instances such foreign debt securities may
provide higher yields than securities of domestic issuers which have similar
maturities. Such securities may be subject to foreign government taxes which
would reduce the effective yield. Such securities may be less liquid than the
securities of U.S. corporations, and are certainly less liquid than securities
issued by the U.S. Government or its agencies.
The above-described foreign investments involve certain risks, which should be
considered carefully by an investor in the Fund. These risks include political
or economic instability of the issuer or the country of issue, the difficulty of
predicting international trade patterns and the possibility of imposition of
exchange controls. Such securities may also be subject to greater fluctuations
in price than securities of U.S. corporations or of the U.S. Government. In
addition, there may be less publicly available information about a foreign
company than about a domestic company. Foreign companies generally are not
subject to uniform accounting, auditing and financial reporting standards
comparable to those applicable to domestic companies. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States, and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Finally, in the
event of a default on any such foreign debt obligations, it may be more
difficult for the Fund to obtain or to enforce a judgment against the issuers of
such securities. Such investments will be made only when the Adviser believes
that higher yields justify the attendant risks.
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INVESTMENT PRACTICES
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REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of a default by the other party. The Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds 15% of the value of its net assets. In the event of the bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and loss including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto, (b) possible lack of access to
income on the underlying security during this period, and (c) expenses of
enforcing its rights. See the Statement of Additional Information.
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<PAGE> 19
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
FORWARD COMMITMENTS. The Fund may purchase or sell debt securities on a
"when-issued" or "delayed delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future, frequently a month or more
after such transaction. The price is fixed on the date of the commitment, and
the seller continues to accrue interest on the securities covered by the Forward
Commitment until delivery and payment take place. At the time of settlement, the
market value of the securities may be more or less than the purchase or sale
price.
The Fund may either settle a Forward Commitment by taking delivery of the
securities or may either resell or repurchase a Forward Commitment on or before
the settlement date in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction, should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.
The Fund maintains a segregated account (which is marked to market daily) of
cash, U.S. Government securities or the security covered by the Forward
Commitment with the Fund's custodian in an aggregate amount equal to the amount
of its commitment as long as the obligation to purchase or sell continues.
LENDING OF SECURITIES. In order to generate additional income, the Fund may
lend its portfolio securities in an amount up to 33 1/3% of total assets to
broker-dealers, major banks or other recognized domestic institutional borrowers
of securities not affiliated with the Adviser. The borrower at all times during
the loan must maintain cash, cash equivalent or high-grade liquid debt
securities as collateral or provide to the Fund an irrevocable letter of credit
equal in value to at least 100% of the value of the securities loaned. During
the time portfolio securities are on loan, the borrower pays the Fund any
dividends or interest paid on such
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<PAGE> 20
securities, and the Fund may invest the cash collateral and earn additional
income, or it may receive an agreed-upon amount of interest income from the
borrower who has delivered equivalent collateral or a letter of credit. There
are risks of delay in recovery and in some cases even loss of rights in the
collateral should the borrower of the securities fail financially.
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and
may purchase or sell interest rate caps, floors and collars. The Fund expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio. The Fund may also enter into
these transactions to protect against any increase in the price of securities
the Fund anticipates purchasing at a later date. The Fund does not intend to use
these transactions as speculative investments and will not enter into interest
rate swaps or sell interest rate caps or floors where it does not own or have
the right to acquire the underlying securities or other instruments providing
the income stream the Fund may be obligated to pay. Interest rate swaps involve
the exchange by the Fund with another party of their respective commitments to
pay or receive interest, e.g., an exchange of floating rate payments for
fixed-rate payments. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually-based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a
contractually-based principal amount from the party selling the interest rate
floor. An interest rate collar combines the elements of purchasing a cap and
selling a floor. The collar protects against an interest rate rise above the
maximum amount but foregoes the benefit of an interest rate decline below the
minimum amount. Interest rate swaps, caps, floors and collars will be treated as
illiquid securities and will, therefore, be subject to the Fund's investment
restriction limiting investment in illiquid securities. See the Statement of
Additional Information for further discussion on such interest rate
transactions.
The net amount of the excess, if any, of the Fund's obligations over its
entitlements with respect to each interest rate swap will be accrued on a daily
basis and an amount of cash or high-quality liquid debt securities having an
aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Fund's custodian. If the Fund enters
into an interest rate swap on other than a net basis, the Fund would maintain a
segregated account in the full amount accrued on a daily basis of the Fund's
obligations with respect to the swap.
PORTFOLIO TURNOVER. The Fund may experience a high rate of portfolio turnover,
which may vary from year to year. The rate of portfolio turnover is not a
limiting factor when the Adviser deems it desirable to purchase or sell
securities or to engage in transactions in options, futures contracts and
related options. A 100%
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<PAGE> 21
turnover rate would occur, for example, if all the securities held by the Fund
were replaced in a period of one year. Higher portfolio turnover involves
correspondingly greater brokerage commissions and other transaction costs, which
are borne directly by the Fund, and may result in realization of short-term
capital gains if securities are held for one year or less which may be subject
to applicable income taxes. See "Distributions from the Fund." Although no
assurance can be given with respect to future portfolio turnover rates, it is
anticipated that the Fund's rate of portfolio turnover will not generally exceed
400%.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies
of the Fund permit the Fund to engage in options, futures contracts and related
options.
The Fund presently expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of a Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of options, futures
contracts and related options.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The
purchase and sale of options, futures contracts and related options involve
risks different from those involved with direct investments in securities. While
utilization of options, futures contracts and related options may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments, which
may increase the Fund's expenses and reduce its return. The Fund may sell or
purchase options in privately negotiated transactions ("OTC Options") as well as
listed options. OTC Options can be closed out only by agreement with the other
party to the transaction. Any OTC Options purchased by the Fund will be
considered an illiquid security. Any OTC Option written by the Fund will be with
a qualified dealer pursuant to an agreement under which the Fund may repurchase
the option at a formula price. Such options will be considered illiquid to the
extent that the formula price exceeds the intrinsic value of the option. The
Fund may not invest more than 15% of its net assets in illiquid securities and
repurchase agreements which have a maturity of longer than seven days.
EURODOLLAR INSTRUMENTS. The Fund may invest in Eurodollar instruments for
hedging purposes. Eurodollar instruments are essentially U.S. dollar-denominated
futures contracts or options thereon that are linked to the London Interbank
Offered Rate ("LIBOR"). Eurodollar futures contracts enable purchasers to obtain
a fixed-rate for the lending of funds and sellers to obtain a fixed-rate for
borrowings. The Fund intends to use Eurodollar futures contracts and options
thereon to hedge against changes in LIBOR to which many short-term borrowings
and floating rate
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<PAGE> 22
securities are linked. Eurodollar instruments are subject to the same
limitations and risks as other futures contracts and options thereon as
described above and in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund. The debt securities in which the Fund invests are traded in the
over-the-counter market. Such securities are generally traded on a net basis
with dealers acting as principal for their own accounts without a stated
commission, although the prices of the securities usually include a profit to
the dealers. It is the policy of the Fund to seek to obtain the best net results
taking into account such factors as price (including the applicable dealer
spread), the size, type and difficulty of the transaction involved, the firm's
general execution and operational facilities, the firm's risk in positioning the
securities involved, and the provision of supplemental investment research by
the firm. While the Fund seeks reasonably competitive dealer spreads, the Fund
will not necessarily be paying the lowest spread available. Brokerage
commissions are paid on transactions in listed options, futures contracts and
options thereon. The Adviser is authorized to place portfolio transactions with
broker-dealers participating in the distribution of shares of the Fund and other
Van Kampen American Capital funds if it reasonably believes that the quality of
the execution and any commissions are comparable to that available from other
qualified firms. The Adviser is authorized to pay higher commissions to
brokerage firms that provide it with investment and research information than to
firms which do not provide such service if the Adviser determines that such
commissions are reasonable in relation to the overall services provided. The
information received may be used by the Adviser in managing the assets of other
advisory accounts as well as in the management of the assets of the Fund.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:
1. Invest more than five percent of its assets in the securities of any one
issuer (except the U.S. Government, its agencies and instrumentalities) or
purchase more than ten percent of the outstanding voting securities of any
one issuer.
2. Purchase or sell commodities or commodity contracts except that the Fund
may enter into transactions in options, futures contracts or related
options including forward commitments.
3. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted loans
of its portfolio securities, or (iii) entering into repurchase agreements,
utilizing options,
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<PAGE> 23
futures contracts, options on futures contracts, forward commitments and other
investment strategies and instruments that would be considered "senior
securities" but for the maintenance by the Fund of a segregated account with its
custodian or some other form of "cover."
4. Borrow in excess of five percent of the market or other fair value of its
total assets; or pledge its assets to an extent greater than five percent
of the market or other fair value of its total assets. Any such borrowings
shall be from banks and shall be undertaken only as a temporary measure for
extraordinary or emergency purposes. Margin deposits or payments in
connection with the writing of options, or in connection with the purchase
or sale of futures contracts and related options, are not deemed to be a
pledge or other encumbrance.
5. Make any investment which would cause more than 25% of the market or other
fair value of its total assets to be invested in the securities of issuers,
all of which conduct their principal business activities in the same
industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
6. Write, purchase or sell puts, calls or combinations thereof, except that
the Fund may (i) write covered or fully collateralized call options, write
secured put options, and enter into closing or offsetting purchase
transactions with respect to such options, (ii) purchase and sell options
to the extent that the premiums paid for all such options owned at any time
do not exceed ten percent of its total assets and (iii) engage in
transactions in interest rate futures contracts and related options
provided that such transactions are entered into for bona fide hedging
purposes (or that the underlying commodity value of the Fund's long
positions do not exceed the sum of certain identified liquid investments as
specified in Commodity Futures Trading Commission ("CFTC") regulations),
provided further that the aggregate initial margin and premiums do not
exceed five percent of the fair market value of the Fund's total assets,
and provided further that the Fund may not purchase futures contracts or
related options if more than 30% of the Fund's total assets would be so
invested.
Additional investment restrictions are set forth in the Statement of
Additional Information.
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INVESTMENT ADVISORY SERVICES
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THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million
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<PAGE> 24
retail investor accounts, extensive capabilities for managing institutional
portfolios, and nearly $50 billion under management or supervision. Van Kampen
American Capital's more than 40 open-end and 38 closed-end funds and more than
2,700 unit investment trusts are professionally distributed by leading financial
advisers nationwide.
Van Kampen American Capital Distributors, Inc., the Distributor of the Fund
and the sponsor of the Funds mentioned above, is also a wholly owned subsidiary
of Van Kampen American Capital. Van Kampen American Capital is a wholly-owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel , Leon J. Hendrix,
Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of
Clayton, Dubilier & Rice, Inc. In addition, certain officers, directors and
employees of Van Kampen American Capital own, in the aggregate, not more than 7%
of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon
the exercise of options, approximately an additional 11% of the common stock of
VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own five percent or
more of the common stock of VK/AC Holding, Inc.
ADVISORY AGREEMENTS. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed on average daily net assets of the Fund at the annual rate of 0.60% of
the Fund's average daily net assets. Under the Advisory Agreement the Fund also
reimburses the Adviser for the costs of the Fund's accounting services, which
include maintaining its financial books and records and calculating its daily
net asset value. Operating expenses paid by the Fund include shareholder service
agency fees, service fees, distribution fees, custodial fees, legal and
accounting fees, the costs of reports and proxies to shareholders, trustees'
fees, and all other business expenses not specifically assumed by the Adviser.
Advisory (management) fee, and total operating expense, ratios are shown under
the caption "Annual Fund Operating Expenses and Example" herein.
From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees
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payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors/trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. Ted Mundy is primarily responsible for the day-to-day
management of the Fund's investment portfolio. Mr. Mundy is Vice President of
the Fund and has been primarily responsible for managing the Fund's investment
portfolio since June 30, 1994. From September, 1990 to June, 1994, Mr. Mundy was
a portfolio manager with AMR Investment Services, Inc. Prior to that he was a
trader with Howard, Weil, Labouisse and Friedrichs.
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ALTERNATIVE SALES ARRANGEMENTS
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The Alternative Sales Arrangements permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A Shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% at the time of purchase. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent sales charge of one percent may be imposed on certain redemptions
made within one year of the purchase. Class A shares are subject to an ongoing
service fee at an annual rate of up to 0.25% of the Fund's aggregate average
daily net assets attributable to the Class A shares. Certain purchases of Class
A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an ongoing distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares.
Class B shares enjoy the benefit of permitting all of the investor's dollars to
work from the time the investment is made. The ongoing distribution fee paid by
Class B shares will cause
25
<PAGE> 26
such shares to have a higher expense ratio and to pay lower dividends than those
related to Class A shares. See "Purchase of Shares -- Class B Shares." Class B
shares will automatically convert to Class A shares six years after the end of
the calendar month in which the shareholder's order to purchase was accepted.
See "Conversion Feature" below for discussion on applicability of the conversion
feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will automatically convert to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares, as the case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue
26
<PAGE> 27
Code, as amended (the "Code"), and (ii) the conversion of shares does not
constitute a taxable event under federal income tax law. The conversion of Class
B shares and Class C shares may be suspended if such an opinion is no longer
available. In that event, no further conversions of Class B shares or Class C
shares would occur, and shares might continue to be subject to the distribution
fee for an indefinite period which may extend beyond the period ending six years
or ten years, respectively, after the end of the calendar month in which the
shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share on Class A
shares. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares. In this regard, Class A shares may
be more beneficial to the investor who qualifies for reduced initial sales
charges or purchases at net asset value, as described herein under "Purchase of
Shares -- Class A Shares." For these reasons, the Distributor will reject any
order of $500,000 or more for Class B shares or any order of $1 million or more
for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to ongoing distribution fees and, for a five-year or one-year
period, respectively, being subject to a contingent deferred sales charge.
Ongoing distribution fees on Class B shares and Class C shares will be offset to
the extent of the additional funds originally invested and any return realized
on those funds. However, there can be no assurance as to the return, if any,
which will be realized on such additional funds. For investments held for ten
years or more, the relative value upon liquidation of the three classes tends to
favor Class A or Class B shares, rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In
27
<PAGE> 28
addition, the check writing privilege is only available for Class A shares (see
"Shareholder Services -- Shareholder Services Applicable to Class A Shareholders
Only -- Check Writing Privilege"). Class B shares may be appropriate for
investors who wish to avoid a front-end sales charge, put 100% of their
investment dollars to work immediately, and/or have a longer-term investment
horizon. Class C shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Distributions from the Fund." Shares of the Fund may be exchanged, subject to
certain limitations, for shares of the same class of other mutual funds advised
by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Trustees
of the Fund, pursuant to their fiduciary duties under the Investment Company Act
of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
------------------------------------------------------------------------------
PURCHASE OF SHARES
------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term
28
<PAGE> 29
"dealers" and "brokers" are sometimes referred to herein as "authorized
dealers." Class A shares are sold with an initial sales charge; Class B shares
and Class C shares are sold without an initial sales charge and are subject to a
contingent deferred sales charge upon certain redemptions. See "Alternative
Sales Arrangements" for a discussion of factors to consider in selecting which
class of shares to purchase. Contact the Investor Services Department at (800)
421-5666 for further information and appropriate forms.
Initial investments must be at least $500 and subsequent investments must be
at least $25. Both minimums may be waived by the Distributor for plans involving
periodic investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares to the public in response to conditions in the securities
markets or for other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application accompanied by this
Prospectus and forwarding the application, through the designated dealer, to the
shareholder service agent, ACCESS Investor Services, Inc., a wholly-owned
subsidiary of Van Kampen American Capital ("ACCESS"). When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A, Class B or
Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class less all liabilities
(including accrued expenses) attributable to such class, by the total number of
shares of the class outstanding.
U.S. Government securities and Agency obligations are valued at the last
reported bid price. Listed options are valued at the last reported sale price on
the exchange on which such option is traded, or, if no sales are reported, at
the mean between the last reported bid and asked prices. Options for which
market quotations are not readily available are valued at a fair value under a
method approved by the Trustees.
Short-term investments with a maturity of 60 days or less when purchased are
valued at cost plus interest earned (amortized cost), which approximates market
value. Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days to
29
<PAGE> 30
maturity becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized cost using the value of the investment on
the 61st day. See the notes to financial statements in the Statement of
Additional Information.
Generally, the net asset values per share of the Class A, Class B, and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value (plus applicable Class A sales charges) after an
order is received by a dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. Orders
received by dealers after the close of the Exchange are priced based on the next
close provided they are received by the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of dealers to transmit
orders received by them to the Distributor so they will be received prior to
such time. Orders of less than $500 are mailed by the dealer and processed at
the offering price next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
generally, each class has exclusive voting rights with respect to approvals of
the Rule 12b-1 distribution plan pursuant to which its distribution fee and/or
service fee is paid which relate to a specific class, and (iii) Class B and
Class C shares are subject to a conversion feature. Each class has different
exchange privileges and certain different shareholder service options available.
See "Distribution Plans" and "Shareholder Services -- Exchange Privilege." The
net income attributable to Class B and Class C shares and the dividends payable
on Class B and Class C shares will be reduced by the amount of the distribution
fee and incremental expenses associated with such distribution fees. Sales
personnel of broker-dealers distributing the Fund's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any
30
<PAGE> 31
broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in sales programs sponsored by the Distributor, an amount not
exceeding the total applicable sales charges on the sales generated by the
broker, dealer or financial intermediaries at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediaries
for certain services or activities which are primarily intended to result in
sales of shares of the Fund. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. These programs will not change the price
an investor will pay for shares or the amount that a Fund will receive from such
sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
SIZE OF AS % OF NET AS % OF REALLOWED TO DEALERS
INVESTMENT AMOUNT INVESTED OFFERING PRICE (AS A % OFFERING PRICE)
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000........... 4.99% 4.75% 4.25%
$100,000 but less than
$250,000.................... 3.90% 3.75% 3.25%
$250,000 but less than
$500,000.................... 2.83% 2.75% 2.25%
$500,000 but less than
$1,000,000.................. 2.04% 2.00% 1.75%
$1,000,000 and over.......... * * *
--------------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of certain redemptions
within one year of the purchase. The contingent deferred sales charge incurred
upon redemption is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for purchases of $1 million or more as follows:
one percent on sales to $2 million, plus 0.80% on the next million, plus 0.20%
on the next $2 million and 0.08% on the excess over $5 million.
31
<PAGE> 32
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described herein. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children and any corporation, partnership or sole
proprietorship which is 100% owned, either alone or in combination, by any of
the foregoing; a trustee or other fiduciary purchasing for a single fiduciary
account, or a "company" as defined in Section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("VK Money Market"), Van Kampen American Capital Tax Free
Money Fund ("VK Tax Free"), Van Kampen American Capital Reserve Fund ("Reserve")
and The Govett Funds, Inc.
32
<PAGE> 33
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the
indicated Fund, or in any combination of shares of such Funds and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
Cumulative Purchase Discount. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the Participating Funds over a 13-month period based on the total
amount of intended purchases plus the value of all shares of the Participating
Funds previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charges applicable to the purchases made and the charges previously paid. The
initial purchase must be for an amount equal to at least five percent of the
minimum total purchased amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustments in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application accompanied by this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
Unit Fund Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A shares
of the Fund, other Participating Funds, VK Money Market, VK Tax Free or Reserve
with no minimum initial or subsequent investment requirement, and with a lower
sales charge if the administrator of an investor's unit investment trust program
meets certain uniform criteria relating to cost savings by the Fund and the
Distributor.
33
<PAGE> 34
The total sales charge for all investments made from unit trust distributions
will be one percent of the offering price (1.01% of net asset value). Of this
amount, the Distributor will pay to the broker, dealer or financial
intermediary, if any, through which such participation in the qualifying program
was initiated 0.50% of the offering price as a dealer concession or agency
commission. Persons desiring more information with respect to this program,
including the applicable terms and conditions thereof, should contact their
securities broker or dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above,
or an affiliate of such subadviser; and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
34
<PAGE> 35
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or in any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts,"
during the 13-month period commencing with the first investment pursuant
hereto equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve-month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to one percent for such purchases.
(6) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in
Participating Funds, VK Money Market, VK Tax Free or Reserve. For such
investments the Fund imposes a contingent deferred sales charge of one
percent in the event of redemptions within one year of the purchase other
than redemptions required to make payments to participants under the terms
of the plan. The contingent deferred sales charge incurred upon certain
redemptions is paid to the Distributor in reimbursement for distribution-
related expenses. A commission will be paid to dealers who initiate and
are responsible for such purchases as follows: one percent on sales to $5
million, plus 0.50% on the next $5 million, plus 0.25% on the excess over
$10 million.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may
35
<PAGE> 36
charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchases
of shares, all payments during a month are aggregated and deemed to have been
made on the last day of the month.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
OF DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
--------------------------------------------------------------------------------
<S> <C>
First....................................................... 4%
Second...................................................... 4%
Third....................................................... 3%
Fourth...................................................... 2.5%
Fifth....................................................... 1.5%
Sixth....................................................... None
------------------------------------------------------------------------------
</TABLE>
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, second, of shares held for over five years or shares acquired pursuant
to reinvestment of dividends or distributions and third, of shares held longest
during the five-year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares
36
<PAGE> 37
upon dividend reinvestment. If at such time the investor makes his or her first
redemption of 50 shares (proceeds of $600), ten shares will not be subject to
charge because of dividend reinvestment. With respect to the remaining 40
shares, the charge is applied only to the original cost of $10 per share and not
to the increase in net asset value of $2 per share. Therefore, $400 of the $600
redemption proceeds is subject to a deferred sales charge at a rate of four
percent (the applicable rate in the second year after purchase).
A commission or transaction fee of four percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. The charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first, of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge and second, of shares held for more than one year or shares acquired
pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.75% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited
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to 12% annually of the initial value of the account, and (iv) effected pursuant
to the right of the Fund to liquidate a shareholder's account as described
herein under "Redemption of Shares." The contingent deferred sales charge is
also waived on redemptions of Class C shares as it relates to the reinvestment
of redemption proceeds in shares of the same class of the Fund within 120 days
after redemption. See the Statement of Additional Information for further
discussion of waiver provisions.
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SHAREHOLDER SERVICES
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The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Except as described herein, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in certain of the
Participating Funds or Reserve may receive statements quarterly from ACCESS
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate no more than two percent of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value, without sales charge, on
the
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record date. Unless the shareholder instructs otherwise, the reinvestment plan
is automatic. This instruction may be made by telephone by calling (800)
421-5666 ((800) 772-8889 for the hearing impaired). The investor may, on the
initial application or prior to any declaration instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized investment dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP, and pension and profit sharing plans; 401(k) plans; or
Section 403(b)(7) plans in the case of employees of public school systems and
certain non-profit organizations. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application accompanied by this
Prospectus, or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class
A, Class B or Class C account in the Fund invested into a pre-existing Class A,
Class B or Class C account in any of the Participating Funds, VK Money Market,
VK Tax Free or Reserve.
If a qualified, pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund
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<PAGE> 40
into which distributions would be invested. Distributions are invested into the
selected fund at its net asset value as of the payable date of the distribution
only if shares of such selected fund have been registered in the investor's
state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of shares of any other Fund
without sales charge, provided that shares of certain other Van Kampen American
Capital fixed-income funds may not be exchanged within 30 days of acquisition
without Adviser approval. Shares of Government Target may be exchanged for Class
A shares of the Fund without sales charge. Class A shares of VK Money Market, VK
Tax Free or Reserve that were not acquired in exchange for Class B or Class C
shares of a Participating Fund may be exchanged for Class A shares of the Fund
upon payment of the excess, if any, of the sales charge rate applicable to the
shares being acquired over the sales charge rate previously paid. Shares of VK
Money Market, VK Tax Free or Reserve acquired through an exchange of Class B or
Class C shares may be exchanged only for the same class of shares of a
Participating Fund without incurring a contingent deferred sales charge. Shares
of any Participating Fund, VK Money Market, VK Tax Free or Reserve may be
exchanged for shares of any other Participating Fund if shares of that
Participating Fund are available for sale; however, during periods of suspension
of sales, shares of a Participating Fund may be available for sale only to
existing shareholders of a Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other Van
Kampen American Capital fund that offers such shares ("new shares") in an amount
equal to the aggregate net asset value of the original shares, without the
payment of any contingent deferred sales charge otherwise due upon redemption of
the original shares. For purposes of computing the contingent deferred sales
charge payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B or
Class C shareholders would remain subject to the contingent deferred sales
charge imposed by the original fund upon their redemption from the Van Kampen
American Capital complex of funds. The contingent deferred sales charge is based
on the holding period requirements of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the exchanged shares, but is carried over and included in the
tax basis of the shares acquired. See the Statement of Additional Information.
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<PAGE> 41
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application accompanied by this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Exchanges are effected
at the net asset value per share next calculated after the request is received
in good order with adjustment for any additional sales charge. See both
"Purchase of Shares" and "Redemption of Shares." If the exchanging shareholder
does not have an account in the fund whose shares are being acquired, a new
account will be established with the same registration, dividend and capital
gains options (except dividend diversification) and dealer of record as the
account from which shares are exchanged, unless otherwise specified by the
shareholder. In order to establish a systematic withdrawal plan for the new
account or reinvest dividends from the new account into another fund, however,
an exchanging shareholder must file a specific written request. The Fund
reserves the right to reject any order to acquire its shares through exchange.
In addition, the Fund may modify, restrict or terminate the exchange privilege
at any time on 60 days' notice to its shareholders of any termination or
material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25. Such a systematic withdrawal plan
may also be maintained by an investor purchasing shares for a retirement plan
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
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<PAGE> 42
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
appoint ACCESS as agent by completing the Authorization For Redemption By Check
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the shareholder to the order of any person in any
amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A shares. Any
gain or loss realized on the sale of shares is a taxable event. See "Redemption
of Shares."
Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or
State Street Bank. Retirement Plans and accounts that are subject to backup
withholding are not
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eligible for the privilege. A "stop payment" system is not available on these
checks. See the Statement of Additional Information for further information
regarding the establishment of the privilege.
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REDEMPTION OF SHARES
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REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a dealer provided such order
is transmitted to the Distributor prior to the Distributor's close of business
on such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. A contingent
deferred sales charge of one percent may be imposed on certain redemptions of
Class A shares made within one year of purchase for investments of $1 million or
more and for certain qualified 401(k) retirement plans. The contingent deferred
sales charge incurred upon redemption is paid to the Distributor in
reimbursement for distribution-related expenses. See "Purchase of Shares." A
custodian of a retirement plan account may charge fees based on the custodian's
fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal
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<PAGE> 44
documentation appointing the authorized signer and certified within the prior
30 days must accompany the redemption request. IRA redemption requests should be
sent to the IRA custodian to be forwarded to ACCESS. Where Van Kampen American
Capital Trust Company serves as custodian, special IRA, 403(b)(7), or Keogh
distribution forms must be obtained from and be forwarded to Van Kampen American
Capital Trust Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the
custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any taxable gain or loss will be recognized by the
shareholder upon redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum investment as specified by the
Trustees. At least 60 days advance written notice of any such involuntary
redemption is required and the shareholder is given an opportunity to purchase
the required value of additional shares at the next determined net asset value
without sales charge. Any applicable contingent deferred sales charge will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application accompanied
by this Prospectus or call the Fund at (800) 421-5666 to request that a copy of
the Telephone Redemption Authorization form be sent to them for completion. To
redeem shares contact the telephone transaction line at (800) 421-5684. VKAC and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, neither VKAC nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. VKAC and the
Fund may
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<PAGE> 45
be liable for any losses due to unauthorized or fraudulent instructions if
reasonable procedures are not followed. Telephone redemptions may not be
available if the shareholder cannot reach ACCESS by telephone, whether because
all telephone lines are busy or for any other reason; in such case, a
shareholder would have to use the Fund's regular redemption procedure previously
described. Requests received by ACCESS prior to 4:00 p.m., New York time, on a
regular business day will be processed at the net asset value per share
determined that day. These privileges are available for all accounts other than
retirement accounts. The telephone redemption privilege is not available for
shares represented by certificates. If an account has multiple owners, ACCESS
may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual retirement account (IRA) for which Van Kampen American Capital
Fund Company acts as custodian. To establish such privilege a shareholder must
complete the appropriate section of the application accompanied by this
Prospectus or call the Fund at (800) 421-5666. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B and Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B and Class C shares.
In cases of disability, the contingent deferred sales charge on Class B and
Class C shares will be waived where the disabled person is either an individual
shareholder or owns the shares as a joint tenant with right of survivorship or
is the beneficial owner of a custodial or fiduciary account, and where the
redemption is made within one year of the initial determination of disability.
This waiver of the contingent
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<PAGE> 46
deferred sales charge on Class B and Class C shares applies to a total or
partial redemption, but only to redemptions of shares held at the time of the
initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information. Reinstatement at net asset value is also offered to
participants in those eligible retirement plans held or administered by Van
Kampen American Capital Trust Company for repayment of principal (and interest)
on their borrowings on such plans.
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DISTRIBUTION PLANS
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Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Trustees of the Fund, and the
sole shareholder of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan", the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
limit the annual distribution charges that a mutual fund may impose on a class
of shares. The NASD Rules also limit the aggregate amount which the Fund may pay
for such distribution costs. Under the Class A Plan, the Fund pays a service fee
to the Distributor at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Under the Class B
Plan and the Class C Plan, the Fund pays a service fee to the Distributor at an
annual rate of up to 0.25% and a distribution fee at an annual rate of up to
0.75% of the Fund's aggregate average daily net assets attributable to the Class
B shares or Class C shares to reimburse the Distributor for service fees paid by
it to Service Organizations and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder
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<PAGE> 47
accounts. Under the Class B Plan, the Distributor receives additional payments
from the Fund in the form of a distribution fee at the annual rate of up to
0.75% of the net assets of the Class B shares as reimbursement for (i) upfront
commissions and transaction fees of up to four percent of the purchase price of
Class B shares purchased by the clients of broker-dealers and other Service
Organizations, and (ii) other distribution expenses as described in the
Statement of Additional Information. Under the Class C Plan, the Distributor
receives additional payments from the Fund in the form of a distribution fee at
the annual rate of up to 0.75% of the net assets of the Class C shares as
reimbursement for (i) upfront commissions and transaction fees of up to 0.75% of
the purchase price of Class C shares purchased by the clients of broker-dealers
and other Service Organizations and ongoing commissions and transaction fees of
up to 0.75% of the average daily net assets of the Fund's Class C shares, and
(ii) other distribution expenses as described in the Statement of Additional
Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
Plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plans. In their review of the Distribution
Plans, the Trustees are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-end
sales load and at the same time permit the Distributor to compensate Service
Organizations with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect to the Class A
shares of the Fund in that in both cases such charges provide for the financing
of the distribution of the Fund's shares.
Actual distribution expenses paid by the Distributor with respect to Class B
or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward and may
be reimbursed
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by the Fund or its shareholders from payments received through contingent
deferred sales charges in future years and from payments under the Class B Plan
and Class C Plan so long as such Plans are in effect. For example, if in a
fiscal year the Distributor incurred distribution expenses under the Class B
Plan of $1 million, of which $500,000 was recovered in the form of contingent
deferred sales charges paid by investors and $400,000 was reimbursed in the form
of payments made by the Fund to the Distributor under the Class B Plan, the
balance of $100,000 would be subject to recovery in future fiscal years from
such sources. For the plan year ended June 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B Plan and carried forward were
approximately $11.9 million or 5.1% of the Class B shares' average daily net
assets. For the plan year ended June 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class C Plan and carried forward were
approximately $840,000 or 2.0% of the Class C shares' average daily net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
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DISTRIBUTIONS FROM THE FUND
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DIVIDENDS AND DISTRIBUTIONS. Income dividends are paid each business day, and
distributed monthly. The daily dividend is a fixed amount determined for each
class at least monthly. Shares become entitled to dividends on the day ACCESS
receives payment for the shares, and remain entitled to dividends through the
day before the day such shares are priced for redemption purposes, which is the
day a valid redemption request with respect to such shares is received by
ACCESS. Therefore, if a dealer delays forwarding to ACCESS payment for shares
which an investor has made to the dealer, this will in effect cost the investor
money because it will delay the date upon which he becomes entitled to
dividends.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the distribution fees and
higher incremental transfer agency fees applicable to such classes of shares.
Shares (other than shares acquired through an exchange) become entitled to
dividends on the day ACCESS receives payment for the shares, and remain entitled
to dividends through the day such shares are priced for redemption. With respect
to shares acquired through an exchange, such shares become entitled to dividends
on the day after ACCESS receives payment for the shares, and remains entitled to
dividends through the day such shares are purchased for payment on redemption.
Therefore, if a dealer delays forwarding to ACCESS payment for shares which an
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<PAGE> 49
investor has made to the dealer, this will in effect cost the investor money
because it will delay the date upon which he or she becomes entitled to
dividends.
Any taxable net realized short-term or long-term capital gains will be
distributed to shareholders at least annually.
Unless the shareholder instructs otherwise, dividends and capital gains
distributions are automatically applied to purchase additional shares of the
Fund at the next determined net asset value. See "Shareholder
Services -- Reinvestment Plan." In computing interest income the Fund does not
amortize premiums paid on the purchase of debt securities. Thus in the case of
mortgage-related and other U.S. Government securities purchased at a premium,
interest income is greater than it would be if the premiums were amortized.
Dividends and distributions paid by the Fund have the effect of reducing the
net asset value per share on the record date by the amount of the dividend or
distribution. Therefore, a dividend or distribution paid shortly after a
purchase of shares by an investor would represent, in substance, a return of
capital to the shareholder (to the extent it is paid on the shares so
purchased), even though it would be subject to income taxes, as discussed below.
------------------------------------------------------------------------------
TAX STATUS
------------------------------------------------------------------------------
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code. By qualifying as a regulated investment company, the
Fund is not subject to federal income taxes to the extent it distributes
substantially all of its net investment income and net realized capital gains to
shareholders. However, shareholders normally are subject to federal income
taxes, and any applicable state or local income taxes, on the dividends and
distributions received from the Fund.
There are differences between federal income tax regulations and the generally
accepted accounting principles followed by the Fund. For example, year-end
marking to market on certain options and futures contracts generally are
recognized as realized gains or losses for tax purposes but not for accounting
purposes and certain adjustments are made for tax purposes for repayments on
mortgage-related securities. Since dividends and distributions may, from time to
time, be paid by the Fund based on earnings recognized for accounting purposes,
a portion of such dividends and distributions may constitute a return of capital
for federal income tax purposes. If the amount of distributions paid by the Fund
for any fiscal year exceeds its investment company taxable income plus net
realized capital gains for the year, the excess is treated as a return of
capital. Shareholders are not subject to current federal income tax on the part
which is treated as a return of capital, but their basis in Fund shares would be
reduced by that amount. This reduction of basis would
49
<PAGE> 50
operate to increase capital gain (or decrease capital loss) upon subsequent sale
or redemption of shares.
Current federal tax law requires that a holder (such as the Fund) of a
stripped security accrue a portion of the discount at which the security was
purchased as income each year even though the Fund receives no interest payment
in cash on the security during the year. As an investment company, the Fund must
pay out substantially all of its net investment income each year. Accordingly,
the Fund may be required to pay out as an income distribution each year an
amount which is greater than the total amount of cash interest the Fund actually
received. Such distributions will be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary. If a distribution of cash
necessitates the liquidation of portfolio securities, the Adviser will select
which securities to sell. The Fund may realize a gain or loss from such sales.
In the event the Fund realizes net capital gains from such transactions, its
shareholders may receive a larger capital gain distribution, if any, than they
would in the absence of such transactions.
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions. Long-term capital gains distributions constitute
long-term capital gains for federal income tax purposes. However, shareholders
not subject to tax on their income will not be required to pay tax on amounts
distributed to them.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Gains or losses on the Fund's transactions in listed options on securities,
futures and options on futures generally are treated as 60% long-term and 40%
short-term, and positions held by the Fund at the end of its fiscal year
generally are required to be marked to market, with the result that unrealized
gains and losses are treated as realized. Gains and losses realized by the Fund
from writing over-the-counter options constitute short-term capital gains or
losses unless the option is exercised, in which case the character of the gain
or loss is determined by the holding period of the underlying security. The Code
contains certain "straddle" rules which require deferral of losses incurred in
certain transactions involving hedged positions to the extent the Fund has
unrealized gains in offsetting positions and generally terminate the holding
period of the subject position. Additional information is set forth in the
Statement of Additional Information.
The foregoing is a brief summary of some of the federal income tax
considerations affecting the Fund and its investors who are U.S. residents or
U.S. corporations. Investors should consult their tax advisers for more detailed
tax advice including state and local tax considerations. Foreign investors
should consult their own counsel for further information as to the U.S. and
their country of residence or
50
<PAGE> 51
citizenship tax consequences of receipt of dividends and distributions from the
Fund.
------------------------------------------------------------------------------
FUND PERFORMANCE
------------------------------------------------------------------------------
From time to time the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five years and for the life of the Fund. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
In addition to total return information, the Fund may also advertise its
current "yield". Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes.
51
<PAGE> 52
Thus the yield computed for a period may be greater or less than the Fund's then
current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
To increase the Fund's yield the Adviser may, from time to time, absorb a
certain amount of the future ordinary business expenses. The Adviser may stop
absorbing these expenses at any time without prior notice.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%; Class B and Class C total return figures include any applicable
contingent deferred sales charge. Because of the differences in sales charges
and distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. It differs from yield, which is a measure of the income
actually earned by the Fund's investments, and from total return, which is a
measure of the income actually earned by, plus the effect of any realized and
unrealized appreciation or depreciation of, such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Fund's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Fund. Distribution rates will be
computed separately for each class of the Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Inves-
52
<PAGE> 53
tor's Business Daily, Kiplinger's Personal Finance Magazine, Money, Mutual Fund
Forecaster, Stanger's Investment Advisor, USA Today, U.S. News & World Report
and The Wall Street Journal. Such comparative performance information will be
stated in the same terms in which the comparative data or indices are stated.
Such advertisements and sales material may also include a yield quotation as of
a current period. In each case, such total return and yield information, if any
will be calculated pursuant to rules established by the SEC and will be computed
separately for each Class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce Fund
performance. The Fund will include performance data for Class A, Class B and
Class C shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.
------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
------------------------------------------------------------------------------
The Fund was originally organized on June 24, 1992, under the laws of the
Commonwealth of Massachusetts as a business entity commonly known as a
"Massachusetts business trust" and reorganized on August 5, 1995, under the laws
of the state of Delaware as a business entity commonly known as a "Delaware
business trust." It is authorized to issue an unlimited number of Class A, Class
B and Class C shares of beneficial interest of $0.01 par value. Other classes of
shares may be established from time to time in accordance with provisions of the
Fund's Declaration of Trust. Shares issued by the Fund are fully paid,
non-assessable and have no preemptive or conversion rights.
The Fund currently offers three classes, designated Class A shares, Class B
shares and Class C shares. Each class of shares represents an interest in the
same assets of the Fund and generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. See "Distribution Plans."
The Fund is permitted to issue an unlimited number of classes. Each class of
shares is equal as to earnings, assets and voting privileges, except as noted
above, and each class bears the expenses related to the distribution of its
shares. There are no conversion, preemptive or other subscription rights, except
with respect to the
53
<PAGE> 54
conversion of Class B shares and Class C shares into Class A shares as described
above. In the event of liquidation, each of the shares of the Fund is entitled
to its portion of all of the Fund's net assets after all debt and expenses of
the Fund have been paid. Since Class B shares and Class C shares pay higher
distribution expenses, the liquidation proceeds to Class B shareholders and
Class C shareholders are likely to be lower than to other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
------------------------------------------------------------------------------
ADDITIONAL INFORMATION
------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
An investment in the Fund may not be appropriate for all investors.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund.
An investment in the Fund is intended to be a long-term investment, and should
not be used as a trading vehicle.
54
<PAGE> 55
VAN KAMPEN AMERICAN CAPITAL
U.S. GOVERNMENT TRUST FOR INCOME
------------------
2800 Post Oak Blvd.
Houston, TX 77056
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
Houston, TX 77056
EXISTING SHAREHOLDERS-- Distributor
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL VAN KAMPEN AMERICAN CAPITAL
THE FUND'S TOLL-FREE DISTRIBUTORS, INC.
NUMBER--(800) 421-5666 One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666 ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
DEALERS--FOR DEALER Custodian
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS, STATE STREET BANK AND
OR REDEMPTIONS CALL THE TRUST COMPANY
DISTRIBUTOR'S TOLL-FREE 225 Franklin Street, P.O. Box 1713
NUMBER--(800) 421-5666 Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds
Legal Counsel
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH O'MELVENY & MYERS
TELECOMMUNICATIONS 400 South Hope Street
DEVICE FOR THE DEAF (TDD) Los Angeles, CA 90071
DIAL (800) 772-8889
Independent Accountants
PRICE WATERHOUSE LLP
FOR AUTOMATED TELEPHONE 1201 Louisiana, Suite 2900
SERVICES DIAL (800) 847-2424 Houston, TX 77002
<PAGE> 56
U.S. GOVERNMENT TRUST FOR INCOME
------------------------------------------------------------------------------
P R O S P E C T U S
AUGUST 7, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 57
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL
U.S. GOVERNMENT TRUST FOR INCOME
AUGUST 7, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 7,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
INVESTMENT OBJECTIVE AND POLICIES............................................. 3
INVESTMENT RESTRICTIONS....................................................... 12
TRUSTEES AND EXECUTIVE OFFICERS............................................... 14
INVESTMENT ADVISORY AGREEMENT................................................. 18
DISTRIBUTOR................................................................... 19
DISTRIBUTION PLANS............................................................ 19
TRANSFER AGENT................................................................ 21
PORTFOLIO TURNOVER............................................................ 21
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 21
DETERMINATION OF NET ASSET VALUE.............................................. 23
PURCHASE AND REDEMPTION OF SHARES............................................. 23
EXCHANGE PRIVILEGE............................................................ 27
CHECK WRITING PRIVILEGE....................................................... 27
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES.................................... 27
FUND PERFORMANCE.............................................................. 30
OTHER INFORMATION............................................................. 31
FINANCIAL STATEMENTS.......................................................... 31
</TABLE>
1
<PAGE> 58
GENERAL INFORMATION
Van Kampen American Capital U.S. Government Trust for Income (the "Fund")
was originally organized as a trust under the laws of Massachusetts on June 24,
1992 and reorganized under the laws of Delaware on August 5, 1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than 7% of the common stock of VK/AC
Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC's roots in money
management extend back to 1926. Today, we manage or supervise more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations.
As of July 14, 1995, no person was known by management to own beneficially
or of record as much as five percent of the outstanding shares of any portfolio
except the following:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER JULY 14, 1995 SHARES OWNERSHIP
------------------------------------------ ---------------------- -------- ---------
<S> <C> <C> <C>
Van Kampen American Capital 1,735,158.877 shares A 20.06%
Trust Company owned of record
2800 Post Oak Blvd. 1,842,887.237 shares B 7.90%
Houston, TX 77056 owned of record
Merrill Lynch Pierce Fenner & Smith 1,710,540 shares B 6.95%
4800 Deer Lake Drive East, owned of record
3rd Floor 567,820 shares C 16.06%
Jacksonville, FL 32246-6484 owned of record
Smith Barney, Inc. 725,285 shares A 8.39%
388 Greenwich Street, 11th Floor owned of record
New York, NY 10013-2375 2,737,023 shares B 11.13%
owned of record
853,966 shares C 24.15%
owned of record
National Financial Services Corp. 3,647,485 shares B 14.83%
200 S. College St., Suite 204 owned of record
Charlotte, NC 28202-2005
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain employee
benefit plans and independent retirement accounts.
2
<PAGE> 59
INVESTMENT OBJECTIVE AND POLICIES
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
One type of mortgage-related security in which the Fund invests is that
which is issued or guaranteed by an agency or instrumentality of the U.S.
Government, though not necessarily by the U.S. Government itself. One such type
of mortgage-related security is a Government National Mortgage Association
("GNMA") Certificate. GNMA Certificates are backed as to principal and interest
by the full faith and credit of the U.S. Government. Another type is a Federal
National Mortgage Association ("FNMA") Certificate. Principal and interest
payments of FNMA Certificates are guaranteed only by FNMA itself, not by the
full faith and credit of the U.S. Government. A third type of mortgage-related
security in which the Fund may invest is a Federal Home Loan Mortgage
Association ("FHLMC") Participation Certificate. This type of security is backed
by FHMLC as to payment of principal and interest but, like a FNMA security, it
is not backed by the full faith and credit of the U.S. Government.
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 Fund purchases are of the modified
pass-through type. Modified pass-through Certificates entitle the holder to
receive all interest and principal payments owned 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 Fund 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 ("FHA") or the Farmers
Home Administration or guaranteed by the Veterans Administration ("VA"). 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.
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 FHA 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 twelve 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
3
<PAGE> 60
of mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06 of one percent of the outstanding principal for providing its
guarantee, and the GNMA Certificate issuer is paid an annual servicing fee of
0.44 of one percent 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 twelve-year life. Compared on this
basis, GNMA Certificates have historically yielded roughly 1/4 of one percent
more than high grade corporate bonds and 1/2 of one percent 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
twelve-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.
FNMA SECURITIES
The Federal National Mortgage Association ("FNMA") was established in 1938
to create a secondary market in mortgages insured by the FHA. FNMA issues
guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a pro rata share of all principal and interest payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and principal on
FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit
of the United States.
FHLMC SECURITIES
The Federal Home Loan Mortgage Corporation ("FHLMC") was created in 1970 to
promote development of a nationwide secondary market in conventional residential
mortgages. The FHLMC issues two types of mortgage pass-through securities
("FHLMC Certificates"): mortgage participation certificates ("PCs") and
guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in
that each PC represents a pro rata share of all interest and principal payments
made and owed on the underlying pool. The FHMLC guarantees timely monthly
payment of interest on PCs and the ultimate payment of principal. GMCs also
represent a pro rata interest in a pool of mortgages. However, these instruments
pay interest semi-annually and return principal once a year in guaranteed
minimum payments. The expected average life of these securities is approximately
ten years. The FHLMC guarantee is not backed by the full faith and credit of the
United States.
4
<PAGE> 61
COLLATERALIZED MORTGAGE OBLIGATIONS
Collateralized mortgage obligations are debt obligations issued generally
by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgages which are secured by mortgage-related
securities, including GNMA Certificates, FHLMC Certificates and FNMA
Certificates, together with certain funds and other collateral. Scheduled
distributions on the mortgage-related securities pledged to secure the
collateralized mortgage obligations, together with certain funds and other
collateral and reinvestment income thereon at an assumed reinvestment rate, will
be sufficient to make timely payments of interest on the obligations and to
retire the obligations not later than their stated maturity. Since the rate of
payment of principal of any collateralized mortgage obligation will depend on
the rate of payment (including prepayments) of the principal of the mortgage
loans underlying the mortgage-related securities; the actual maturity of the
obligation could occur significantly earlier than its stated maturity.
Collateralized mortgage obligations may be subject to redemption under certain
circumstances. The rate of interest borne by collateralized mortgage obligations
may be either fixed or floating. In addition, certain collateralized mortgage
obligations do not bear interest and are sold at a substantial discount (i.e., a
price less than the principal amount). Purchases of collateralized mortgage
obligations at a substantial discount involves a risk that the anticipated yield
on the purchase may not be realized if the underlying mortgage loans prepay at a
slower than anticipated rate, since the yield depends significantly on the rate
of prepayment of the underlying mortgages. Conversely, purchases of
collateralized mortgage obligations at a premium involve additional risk of loss
of principal in the event of unanticipated prepayments of the mortgage loans
underlying the mortgage-related securities since the premium may not have been
fully amortized at the time the obligation is repaid. The market value of
collateralized mortgage obligations purchased at a substantial premium of
discount is extremely volatile and the effects of prepayments on the underlying
mortgage loans may increase such volatility.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure collateralized mortgage obligations may be
guaranteed by GNMA, FHLMC or FNMA, the collateralized mortgage obligations
represent obligations solely of their issuers and are not insured or guaranteed
by GNMA, FHLMC, FNMA or any other governmental agency or instrumentality, or by
any other person or entity. The issuers of collateralized mortgage obligations
typically have no significant assets other than those pledged as collateral for
the obligations.
LENDING OF SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to broker-dealers and other financial institutions provided
that such loans are callable at any time by the Fund, and are at all times
secured by cash collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest on the loaned securities, while at
the same time earning interest on the collateral which will be invested in
short-term obligations. The Fund pays lending fees and custodial fees in
connection with loans of its securities. There is no assurance as to the extent
to which securities loans can be effected.
A loan may be terminated by the borrower on one business day's notice, or
by the Fund at any time. If the borrower fails to maintain the requisite amount
of collateral, the loan automatically terminates, and the Fund could use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases even loss of rights in
the collateral should the borrower of the securities fail financially. However,
these loans of portfolio securities will only be made to firms deemed by the
Fund's management to be creditworthy and when the consideration which can be
earned from such loans is believed to justify the attendant risks. The Fund
would not lend any portfolio securities to brokers affiliated with the Adviser.
On termination of the loan, the borrower is required to return the securities to
the Fund; any gain or loss in the market price during the loan would inure to
the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, whole or in part
as may be appropriate, to permit the exercise of such
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rights if the matters involved would have a material effect on the Fund's
investment in the securities which are the subject of the loan.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of a custodian or bank acting as agent. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities marked to market daily at not less than the repurchase
price. The underlying securities (securities of the U.S. Government, or its
agencies and instrumentalities), may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying security
unless the seller defaults under its repurchase obligation. See "Investment
Practices -- Repurchase Agreements" in the Prospectus for further information.
FORWARD COMMITMENTS
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash, U.S. Government securities or
other high quality liquid debt securities (which may have maturities which are
longer than the term of the Forward Commitment) with the Fund's custodian in an
aggregate amount equal to the amount of its commitment as long as the obligation
to purchase continues. Since the market value of both the securities subject to
the Forward Commitment and the securities held in the segregated account may
fluctuate, the use of Forward Commitments may magnify the impact of interest
rate changes on the Fund's net asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities subject to the Forward Commitment. A Forward
Commitment sale is for cross-hedging purposes if it is not covered, but is
designed to provide a hedge against a decline in value of a security which the
Fund owns or has the right to acquire. In either circumstance, the Fund
maintains in a segregated account (which is marked to market daily) either the
security covered by the Forward Commitment or cash, U.S. Government securities
or other high quality liquid debt securities (which may have maturities which
are longer than the term of the Forward Commitment) with the Fund's custodian in
an aggregate amount equal to the amount of its commitment as long as the
obligation to sell continues. By entering into a Forward Commitment sale
transaction, the Fund forgoes or reduces the potential for both gain and loss in
the holding which is being hedged by the Forward Commitment sale.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, and will usually enter into
interest rate swaps on a net basis, i.e., the two payment streams are netted
out, with the Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of the Fund's
obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or high-quality liquid debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by the Fund's custodian. If
the Fund enters into an interest rate swap on other than a net basis, the Fund
would maintain a segregated account in the full amount accrued on a daily basis
of the Fund's obligations with respect to the swap. Interest rate transactions
do not constitute senior securities under the 1940 Act when the Fund segregates
assets to cover the obligations under the transactions. The Fund will enter into
interest rate swap, cap or floor transactions only with counterparties approved
by the Trustees. The Adviser will monitor the creditworthiness of counterparties
to its interest rate swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, the Fund
will
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have contractual remedies pursuant to the agreements related to the transaction.
To the extent the Fund sells (i.e., writes) caps, floors and collars, it will
maintain in a segregated account cash or high-quality liquid debt securities
having an aggregate net asset value at least equal to the full amount, accrued
on a daily basis, of the Fund's net obligations with respect to the caps, floors
or collars. The use of interest rate swaps is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the Adviser is incorrect in
its forecasts of the market values, interest rates and other applicable factors,
the investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not used. The use of
interest rate swaps, caps, collars and floors may also have the effect of
shifting the recognition of income between current and future periods.
These transactions do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
CALL AND PUT OPTIONS
Call and put options on various U.S. Treasury notes and U.S. Treasury bonds
are listed and traded on Exchanges, and are written in over-the-counter
transactions. Call and put options on mortgage-related securities are currently
written or purchased only in over-the-counter transactions.
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater return than would be realized on the underlying
securities alone.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
seller at a specified price during a certain period. The Fund sells call options
either on a covered basis, or for cross-hedging purposes. A call option is
covered if the Fund owns or has the right to acquire the underlying securities
subject to the call options at all times during the option period. Thus, the
Fund may sell options on forward commitments or on mortgage-related or other
U.S. Government securities. An option is for cross-hedging purposes if it is not
covered, but is designed to provide a hedge against a security which the Fund
owns or has the right to acquire. In such circumstances, the Fund collateralized
the option by maintaining in a segregated account with the Fund's Custodian,
cash or U.S. Government securities in an amount not less than the market value
of the underlying security, marked to market daily, while the option is
outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would sell put options only on
a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or high grade debt securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a seller of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously sold by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as a seller of an option only
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if a liquid secondary market exists for options of that series, but there is no
assurance that such a market will exist, particularly in the case of
over-the-counter options, since they can be closed out only with the other party
to the transaction. Alternatively, the Fund could purchase an offsetting option,
which would not close out its position as a seller, but would provide an asset
of equal value to its obligation under the option sold. If the Fund is not able
to enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the option until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
Risks of Writing Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option a Fund might become obligated to
purchase the underlying security at an exercise price that exceeds the then
current market prices.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. Since
the premium paid for a call option is typically a small fraction of the price of
the underlying security, a given amount of funds will purchase call options
covering a much larger quantity of such security than could be purchased
directly. By purchasing call options, the Fund could benefit from any
significant increase in the price of the underlying security to a greater extent
than had it invested the same amount in the security directly. However, because
of the very high volatility of option premiums, the Fund would bear a
significant risk of losing the entire premium if the price of the underlying
security did not rise sufficiently, or if it did not do so before the option
expired.
Conversely, put options could be purchased to protect (i.e., hedge) against
anticipated declines in the market value of either specific portfolio securities
or of the Fund's assets generally. The Fund will not purchase call or put
options on securities if as a result, more than ten percent of its net assets
would be invested in premiums on such options.
The Fund may purchase either listed or over-the-counter options.
RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the Exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, writers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a writer of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Fund will purchase additional mortgage-related securities from the same pool (if
obtainable) or replacement mortgage-related securities in
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the cash market in order to maintain its cover. A mortgage-related security held
by the Fund to cover an option position in any but the nearest expiration month
may cease to represent cover for the option in the event of a decline in the
coupon rate at which new pools are originated under the FHA/VA loan ceiling in
effect at any given time. If this should occur, the Fund will no longer be
covered, and the Fund will either enter into a closing purchase transaction or
replace such mortgage-related security with a mortgage-related security which
represents cover. When the Fund closes its position or replaces such
mortgage-related security, it may realize an unanticipated loss and incur
transaction costs.
INTEREST RATE FUTURES CONTRACTS
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool."
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds, U.S. Treasury notes, U.S. Treasury bills and GNMA Certificates)
at a specified future time and at a specified price. Interest rate futures
contracts also include cash settlement contracts based upon a specified interest
rate such as the London interbank offering rate for dollar deposits or LIBOR.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund will be required to deposit with its Custodian in
an account in the brokers' name an amount of cash, cash equivalents or liquid
high grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, will be made on a daily basis as the price of the underlying
securities fluctuates, making the long and short positions in the futures
contract more or less valuable, a process known as marking to market.
For example, when the Fund has purchased a futures contract and the price
of the underlying security has risen, that position will have increased in
value, and the Fund will receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the value of the underlying security has declined, the
position would be less valuable, and the Fund would be required to make a
variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract would serve
as a temporary substitute for the purchase of individual securities, which may
be purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security, the sale of futures contracts would
substantially reduce the risk to the Fund of a market decline and, by so doing,
provide an alternative to the liquidation of securities positions in the Fund.
Ordinarily commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of mortgage-related and U.S. Government
securities.
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In the event of the bankruptcy of a broker through which the Fund engages
in transactions in listed options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
would be entered into by the Fund only with brokers or financial institutions
deemed creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contracts. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depository requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities underlying the
futures contract. Second, from the point of view of speculators, the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities markets. Therefore, increased participation by speculators in the
futures markets may cause temporary price distortions. Due to the possibility of
price distortion in the futures markets and because of the imperfect correlation
between movements in futures contracts and movements in the securities
underlying them, a correct forecast of general market trends by the Adviser may
still not result in a successful hedging transaction judged over a very short
time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
CFTC regulations require, among other things, (i) that futures and related
options be used solely for bona fide hedging purposes (or meet certain
conditions as specified in CFTC regulations) and (ii) that the
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Fund not enter into futures and related options for which the aggregate initial
margin and premiums exceed five percent of the fair market value of the Fund's
assets. In order to minimize leverage in connection with the purchase of futures
contracts by the Fund, an amount of cash, cash equivalents or liquid high grade
debt securities equal to the market value of the obligation under the futures
contracts (less any related margin deposits) will be maintained in a segregated
account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as, it could sell a futures contract. The purchase of call
options on futures contracts would be intended to serve the same purpose as the
actual purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security, when the use of an
option on a future would result in a loss to the Fund when the use of a future
would not.
ADDITIONAL RISKS RELATING TO OPTIONS AND FUTURES TRANSACTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting along or in concert with others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described in the Prospectus,
there is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus provide
an offset to losses on the futures contract.
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INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which may not be changed
without the approval of the holders of a majority of its outstanding shares.
Such majority is defined as the lesser of (i) 67% or more of the voting
securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more
than 50% of the outstanding voting securities. The percentage limitations
contained in the restrictions and policies set forth herein apply at the time of
purchase of securities. These restrictions provide that the Fund shall not:
1. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making and
collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts, forward commitments and other investment strategies and
instruments that would be considered "senior securities" but for the
maintenance by the Fund of a segregated account with its custodian or
some other form of "cover".
2. Borrow in excess of five percent of the market or other fair value of
its total assets; or pledge its assets to an extent greater than five
percent of the market or other fair value of its total assets. Any such
borrowings shall be from banks and shall be undertaken only as a
temporary measure for extraordinary or emergency purposes. Margin
deposits or payments in connection with the writing of options, or in
connection with the purchase or sale of futures contracts and related
options, are not deemed to be a pledge or other encumbrance.
3. Make any investment in real estate except that the Fund may purchase or
sell securities which are secured by real estate.
4. Make any investment which would cause more than 25% of the market or
other fair value of its total assets to be invested in the securities of
issuers all of which conduct their principal business activities in the
same industry. This restriction does not apply to obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
5. Invest more than five percent of its assets in the securities of any
one issuer (except the U.S. Government, its agencies and
instrumentalities) or purchase more than ten percent of the outstanding
voting securities of any one issuer.
6. Purchase or sell commodities or commodity contracts except that the
Fund may enter into transactions in options, futures contracts or
related options including forward commitments.
7. Underwrite securities of other companies, except insofar as the Fund
might be deemed to be an underwriter for purposes of the Securities Act
of 1933 (the "1933 Act") in the resale of any securities owned by the
Fund.
8. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or offsetting
purchase transactions with respect to such options, (b) purchase and
sell options to the extent that the premiums paid for all such options
owned at any time do not exceed ten percent of its total assets and (c)
engage in transactions in interest rate futures contracts and related
options provided that such transactions are entered into for bona fide
hedging purposes (or that the underlying commodity value of the Fund's
long positions do not exceed the sum of certain identified liquid
investments as specified in CFTC regulations), provided further that the
aggregate initial margin and premiums do not exceed five percent of the
fair market value of the Fund's total assets, and provided further that
the Fund may not purchase futures contracts or related options if more
than 30% of the Fund's total assets would be so invested.
9. Make loans of money or securities, except (a) by investment in
repurchase agreements in accordance with applicable requirements set
forth in the Fund's Prospectus or (b) by lending its portfolio
securities in amounts not to exceed 33 1/3% of the Fund's total assets,
provided that such
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loans are secured by cash collateral that is at least equal to the
market value. See "Repurchase Agreements" and "Lending of Securities"
herein and "Investment Practices" in the Prospectus.
The Fund has adopted additional investment restrictions, which may be
changed by the Trustees without a vote of shareholders, as follows:
1. Make short sales of securities, unless at the time of the sale the Fund
owns an equal amount of such securities. Notwithstanding the foregoing,
the Fund may make short sales by entering into forward commitments for
hedging or cross-hedging purposes and engage in transactions in options,
futures contracts and related options.
2. Purchase securities on margin, except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. Transactions in forward commitments, options,
interest rate futures contracts and options on such contracts, including
deposits or payments by the Fund of initial or maintenance margin in
connection with any such transaction, are not considered to be purchases
of securities on margin.
3. Invest in securities of any company if any officer or director of the
Fund or of the Adviser owns more than one-half of one percent of the
outstanding securities of such company, and such officers and directors
own in the aggregate more than five percent of the outstanding
securities of such issuer.
4. Invest in interests in oil, gas, or other mineral exploration or
development programs.
5. Invest in securities of other investment companies except as part of a
merger, consolidation or other acquisition.
6. Purchase an illiquid security if, as a result of such purchase, more
than 15% of the Fund's net assets would be invested in such securities.
Illiquid securities include securities subject to legal or contractual
restrictions on resale, which include repurchase agreements which have a
maturity of longer than seven days.
7. Invest in warrants or rights except where acquired in units or attached
to other securities. This restriction does not apply to options, futures
contracts or related options.
8. Purchase securities of unseasoned issuers, including their predecessors
or sponsors, which have been in operation for less than three years, and
equity securities of issuers which are not readily marketable if by
reason thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets.
The Fund has made an undertaking to certain states that the Fund shall not
purchase securities of issuers which the Fund is restricted from selling to the
public without registration under the 1933 Act, as amended, if by any reason
thereof the value of its aggregate investment in such classes of securities will
exceed 10% of its total assets.
13
<PAGE> 70
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and Executive Officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital funds.
Age: 63
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Art. Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital funds and Chairman of each Van Kampen American
Capital fund advised by Van Kampen American Capital
Investment Advisory Corp.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital funds.
</TABLE>
14
<PAGE> 71
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital, a Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
funds.
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 71 Capital funds and Chairman of the Van Kampen American
Capital funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital funds. A Trustee of each of the Van
Age: 55 Kampen American Capital funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
</TABLE>
15
<PAGE> 72
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital funds.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
The Fund's Officers other than Messrs. McDonnell and Nyberg are located at
2800 Post Oak Blvd., Houston, TX 77056. Messrs. McDonnell and Nyberg are located
at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 41 Secretary and Corporate Secretary of the Adviser.
Tanya M. Loden........... Vice President and Vice President and Controller of most of
Age: 35 Controller the investment companies advised by the
Adviser, formerly Tax Manager/Assistant
Controller.
Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser. Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.
Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 49 Treasurer investment companies advised by the
Adviser.
Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 42 and Secretary of Van Kampen American
Capital. Executive Vice President and a
Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.
Robert C. Peck, Jr....... Vice President Senior Vice President and Director of the
Age: 48 Adviser.
Ted Mundy................ Vice President Portfolio Manager of the Adviser, formerly,
Age: 35 Portfolio Manager, AMR Investment Services,
Inc. and Trader, Howard, Weil, Labouisse
and Friedrichs.
</TABLE>
16
<PAGE> 73
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.
Paul R. Wolkenberg....... Vice President Senior Vice President of the Adviser.
Age: 50 President, Chief Operating Officer and
Director of Van Kampen American Capital
Services, Inc. Executive Vice President,
Chief Operating Officer and Director of Van
Kampen American Capital Trust Company.
Executive Vice President and Director of
ACCESS.
</TABLE>
The Trustees and Officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Fund during
its last fiscal year. During the fiscal year ended September 30, 1994, the
Trustees who were not affiliated with the Adviser or its parent received as a
group $12,823 in trustees' fees from the Fund in addition to certain
out-of-pocket expenses. Such trustees also receive compensation for serving as
trustees or directors of other investment companies advised by the Adviser as
identified in the notes to the foregoing table. For legal services rendered
during the fiscal year ended September 30, 1994, the Fund paid legal fees of
$9,188 to the law firm of O'Melveny & Myers of which Mr. Sheehan is Of Counsel.
The firm also serves as legal counsel to other Van Kampen American Capital
funds.
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve is set forth below. The
compensation shown for the Fund is for the most recent fiscal year and the total
compensation shown for the Fund and other related mutual Funds is for the year
ended December 31, 1994. Mr. Powell is not compensated for his service as
Trustee, because of his affiliation with the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM
ACCRUED REGISTRANT
AS AND
AGGREGATE PART FUND
COMPENSATION OF COMPLEX
FROM FUND PAID TO
NAME OF PERSON REGISTRANT EXPENSES TRUSTEES(1)(5)
-------------- ---------- ---------- --------------
<S> <C> <C> <C>
J. Miles Branagan.................... $2,100 -0- $64,000
Dr. Richard E. Caruso(3)............. $2,130(2) -0- $64,000
Dr. Roger Hilsman.................... $2,175 -0- $66,000
David Rees........................... $2,100 -0- $64,000
Lawrence J. Sheehan.................. $2,205 -0- $67,000
Dr. Fernando Sisto(3)................ $2,725(2) -0- $82,000
William S. Woodside(4)............... $ -0- -0- $18,000
</TABLE>
---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $2,070 and $1,440 for Messrs.
Caruso and Sisto, respectively.
(3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation accrued by the Fund as of December 31, 1994
is as follows: Caruso, $2,592; Sisto, $2,032.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Registrant's adviser. As a result, with respect to the second and fourth
columns, $1,700 and $36,000, respectively, was paid by the Adviser directly.
(5) Includes the following amounts for which the various Funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in footnote 4 above).
17
<PAGE> 74
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $1,002 and a
meeting fee of $29 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate an
additional expense that might be caused by the new compensation arrangement, the
trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for serving as a
trustee of such funds). In addition, the Adviser has agreed to reimburse the
Fund through December 31, 1996 for any increase in the aggregate trustees'
compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of its assets, including the placing of orders
for the purchase and sale of portfolio securities. The Adviser obtains and
evaluates economic, statistical, and financial information to formulate and
implement the Fund's investment programs.
The Adviser also furnishes the services of the Fund's President and such
other executive and clerical personnel as are necessary to prepare the various
reports and statements and conduct the Fund's day-to-day operations. The Fund,
however, bears the cost of its accounting services, which include maintaining
its financial books and records and calculating its net asset value. The costs
of such accounting services include the salaries and overhead expenses of the
Fund's Treasurer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts will be paid to the Adviser or its parent in
reimbursement of personnel, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost. The Fund also pays shareholder service agency fees,
distribution fees, service fees, custodian fees, legal and auditing fees, the
costs of reports to shareholders, and all other ordinary business expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any actions or omissions if it
acted without bad faith, negligence or reckless disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed at the annual rate of 0.60% of average daily net assets
of the Fund.
The Fund's average net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of VK/AC
Holding, Inc. in connection with the purchase and sale of portfolio investments
of the Fund, less any direct expenses incurred by such subsidiary of VK/AC
Holding, Inc. in connection with obtaining such commissions, fees, brokerage or
similar payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Fund's benefit and to advise
the Trustees of the Fund of any other commissions, fees, brokerage or similar
payments which may be possible for the Adviser or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc. to receive in connection with
the Fund's portfolio transactions or other arrangements which may benefit the
Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year should exceed the most
restrictive expense limitation applicable in the states where the Fund's shares
are qualified for sale, the Adviser's monthly compensation will be reduced by
the amount of such excess and that, if the amount of such excess exceeds the
Adviser's monthly compensation, the Adviser will pay the Fund an amount
sufficient to make up the deficiency, subject to readjustment during the Fund's
fiscal year. Ordinary business expenses include the investment advisory fee and
other operating costs paid by the Fund
18
<PAGE> 75
except (1) interest and taxes, (2) brokerage commissions, (3) certain litigation
and indemnification expenses as described in the Advisory Agreement and (4)
payments made by the Fund pursuant to the Distribution Plans. See
"Distributor -- Distribution Plans." The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any actions or omissions if it
acted in good faith without negligence or misconduct.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement has an initial term of two years and thereafter may
be continued from year to year if specifically approved at least annually (a)(i)
by the Fund's Trustees or (ii) by vote of a majority of the Fund's outstanding
voting securities and (b) by the affirmative vote of a majority of the Trustees
who are not parties to the agreement or interested persons of any such party by
votes cast in person at a meeting called for such purpose. The Advisory
Agreement provides that it shall terminate automatically if assigned and that it
may be terminated without penalty by either party on 60 days' written notice.
During the fiscal years ended September 30, 1993 and 1994, the Adviser
received $878,332 and $2,302,231, respectively, in advisory fees from the Fund.
For such periods, the Fund paid $64,216 and $91,803, respectively, for
accounting services. A substantial portion of these amounts was paid to the
Adviser in reimbursement of personnel, facilities and equipment costs
attributable to the provision of accounting services to the Fund.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's
outstanding voting securities and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Underwriting Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
Advantage Capital Corporation is an affiliated dealer of the Distributor.
During the fiscal years ended September 30, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $1,900,503 and
$536,272, respectively. Of such totals, the amount retained by the Distributor
was $171,990 and $81,152, respectively. The remainder was reallowed to dealers.
Of such dealer reallowances, $328,330 and $64,575, respectively, was received by
Advantage Capital Corporation, an affiliated dealer of the Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" or "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of
19
<PAGE> 76
Fund shares held in shareholder accounts for which such Service Organizations
are responsible. With respect to the Class A Plan, the Distributor intends to
make payments thereunder only to compensate Service Organizations for personal
service and/or the maintenance of shareholder accounts. With respect to the
Class B and Class C Plans, authorized payments by the Fund include payments at
an annual rate of up to 0.25% of the net assets of the shares of the respective
class to reimburse the Distributor for payments for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B Plan,
authorized payments by the Fund also include payments at an annual rate of up to
0.75% of the net assets of the Class B shares to reimburse the Distributor for
(1) commissions and transaction fees of up to four percent of the purchase price
of Class B shares purchased by the clients of broker-dealers and other Service
Organizations, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, (5) advertising and promotion expenses, including conducting and
organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses, and (6) interest expense at the three-month LIBOR rate
plus 1 1/2% compounded quarterly on the unreimbursed distribution expenses. With
respect to the Class C Plan, authorized payments by the Fund also include
payments at an annual rate of up to 0.75% of the net assets of the Class C
shares to reimburse the Distributor for (1) upfront commissions and transaction
fees of up to 0.75% of the purchase price of Class C shares purchased by the
clients of broker-dealers and other Service Organizations and ongoing
commissions and transaction fees paid to broker-dealers and other Service
Organizations in an amount up to 0.75% of the average daily net assets of the
Fund's Class C shares, (2) out-of-pocket expenses of printing and distributing
prospectuses and annual and semi-annual shareholder reports to other than
existing shareholders, (3) out-of-pocket and overhead expenses for preparing,
printing and distributing advertising material and sales literature, (4)
expenses for promotional incentives to broker-dealers and financial and industry
professionals, (5) advertising and promotion expenses, including conducting and
organizing sales seminars, marketing support salaries and bonuses, and
travel-related expenses, and (6) interest expense at the three-month LIBOR rate
plus 1 1/2% compounded quarterly on the unreimbursed distribution expenses. Such
reimbursements are subject to the maximum sales charge limits specified by the
NASD for asset-based charges.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. In addition,
state securities laws on this issue may differ from the interpretations of
federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the form of
servicing agreements and selling group agreements were approved by the Trustees,
including a majority of the Trustees who are not affiliated persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Trustees"). In approving each Plan in accordance with
the requirements of Rule 12b-1, the directors determined that there is a
reasonable likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Fund's Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect so long as such
continuance is specifically approved at least annually by the Trustees,
including a majority of Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting securities of the
Fund. Any change in any of the Plans that would materially increase the
distribution or service expenses borne by the Fund requires shareholder
approval, voting separately by class; otherwise, it may be amended by a majority
of the Trustees, including a majority of the Independent Trustees, by vote cast
in person at a meeting called for the purpose of voting upon such amendment. So
long as
20
<PAGE> 77
the Plans are in effect, the selection or nomination of the Independent Trustees
is committed to the discretion of the Independent Trustees.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $211,959 or 0.25% of the Class A shares' average net
assets. Such expenses were paid to reimburse the Distributor for payments made
to Service Organizations for servicing Fund shareholders and for administering
the Class A Plan. For the fiscal year ended September 30, 1994, the Fund's
aggregate expenses under the Class B Plan were $2,522,178 or 1.00% of the Class
B shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $1,891,634 for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class B shares of the Fund and $630,544 for fees paid to
Service Organizations for servicing Class B shareholders and for administering
the Class B Plan. For the fiscal year ended September 30, 1994, the Fund's
aggregate expenses under the Class C Plan were $448,146 or 1.00% of the Class C
shares' average net assets. Such expenses were paid to reimburse the Distributor
for the following payments: $336,110 for commissions and transaction fees paid
to broker-dealers and other Service Organizations in respect of sales of Class C
shares of the Fund and $112,036 for fees paid to Service Organizations for
servicing Class C shareholders and for administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended September 30, 1994, ACCESS, shareholder
service agent and dividend disbursing agent for the Fund received fees
aggregating $262,040. These services are provided at cost plus a profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The turnover rate may vary greatly from year to
year as well as within a year. The turnover rate will fluctuate over time
depending upon the Adviser's investment strategy and the higher volatility of
the market for government securities.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions, if any, paid on such transactions. It is the policy of the Adviser
to seek the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described below)
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Fund and of the other Van Kampen
American Capital mutual funds as a factor in the selection of firms to execute
portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
21
<PAGE> 78
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the investment advisory agreement, the Fund's
Trustees have authorized the Adviser to cause the Fund to incur brokerage
commissions in an amount higher than the lowest available rate in return for
research services provided to the Adviser. The Adviser is of the opinion that
the continued receipt of supplemental investment research services from dealers
is essential to its provision of high quality portfolio management services to
the Fund. The Adviser undertakes that such higher commissions will not be paid
by the Fund unless (a) the Adviser determines in good faith that the amount is
reasonable in relation to the services in terms of the particular transaction or
in terms of the Adviser's overall responsibilities with respect to the accounts
as to which it exercises investment discretion, (b) such payment is made in
compliance with the provisions of Section 28(e) and other applicable state and
federal laws, and (c) in the opinion of the Adviser, the total commissions paid
by the Fund are reasonable in relation to the expected benefits to the Fund over
the long term. The investment advisory fee paid by the Fund under the investment
advisory agreement is not reduced as a result of the Adviser's receipt of
research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts (including the Fund)
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons (as defined in the 1940 Act) of the Adviser.
During the fiscal year ended September 30, 1994, the Fund paid $5,502 in
brokerage commissions.
Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
The Travelers Inc. Such affiliated persons included Smith Barney and Robinson
Humphrey. Effective December 20, 1994, Smith Barney and Robinson Humphrey ceased
to be affiliates of the Adviser. The negotiated commission paid to an affiliated
broker on any transaction would be comparable to that payable to a
non-affiliated broker in a similar transaction. The Fund paid the following
commission to these brokers during the periods shown:
<TABLE>
<CAPTION>
SMITH BARNEY ROBINSON HUMPHREY
------------ -----------------
<S> <C> <C>
Commissions Paid:
Fiscal 1993 -0- -0-
Fiscal 1994 $2,750 --
Fiscal 1994 Percentages:
Commissions with affiliate to total commissions 50% --
Value of brokerage transactions with affiliate to total
transactions 50% --
</TABLE>
22
<PAGE> 79
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time) on each
business day on which the Exchange is open. The Exchange is currently closed on
weekends and on the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The types of mortgage-related securities in which the Fund invests, as well
as U.S. Government securities, are traded in the over-the-counter market and are
valued at the last available bid price. Such valuations are based on quotations
of one or more dealers that make markets in the securities as obtained from such
dealers or from a pricing service. Options, futures contracts and options
thereon, which are traded on exchanges, are valued at their last sale or
settlement price as of the close of such exchanges or if no sales are reported,
at the mean between the last reported bid and asked prices. Securities with a
remaining maturity of 60 days or less are valued on an amortized cost basis,
which approximates market value.
Securities (as well as over-the-counter options) and assets for which
market quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Trustees of the Fund.
Such valuations and procedures are reviewed periodically by the Trustees.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements,
distribution fees, and any expenses (including higher transfer agency costs)
resulting from such sales arrangements, and have exclusive voting rights with
respect to the Rule 12b-1 distribution plan pursuant to which the distribution
fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the 1933 Act.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
investments are made at the public offering price of Fund shares next computed
following receipt of payment
23
<PAGE> 80
by ACCESS. Confirmations of the opening of an account and of all subsequent
transactions in the account are forwarded by ACCESS to the investor's dealer of
record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus under "Sales Charge Table" apply to purchases of Class A shares
of the Fund where the aggregate investment is $100,000 or more. For purposes of
determining eligibility for volume discounts, spouses and their minor children
are treated as a single purchaser, as is a director or other fiduciary
purchasing for a single fiduciary account. An aggregate investment includes all
shares of the Fund and all shares of certain other participating Van Kampen
American Capital mutual funds described in the Prospectus (the "Participating
Funds"), which have been previously purchased and are still owned, plus the
shares being purchased. The current offering price is used to determine the
value of all such shares. If, for example, an investor has previously purchased
and still holds shares of the Fund and shares of other Participating Funds
having a current offering price of $40,000, and that person purchases $65,000 of
additional Class A shares of the Fund, the charge applicable to the $65,000
purchase would be 3.75% of the offering price. The same reduction is applicable
to purchases under a Letter of Intent as described in the next paragraph. THE
DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED FOR A PURCHASE
WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF PREVIOUS PURCHASES.
SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN ORDER IS PLACED BY
MAIL. The reduced sales charge will not be applied if such notification is not
furnished at the time of the order. The reduced sales charge will also not be
applied should a review of the records of the Distributor or ACCESS fail to
confirm the investor's representations concerning his holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount", made pursuant to the Letter of Intent and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the investor in shares of the Fund, the amount of excess sales
charges, if any, paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
is closed, including those holidays listed under "Determination of Net Asset
Value." The right of redemption may be suspended and the payment therefor may be
postponed for more than seven days during any period when (a) the New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York Stock Exchange is restricted; (c) an emergency exists as a result
of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund to fairly determine
the value of its net assets; or (d) the SEC, by order, so permits.
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<PAGE> 81
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC-Class A") of one percent is imposed in the event of certain
redemptions within one year of the purchase. If a CDSC-Class A is imposed upon
redemption, the amount of the CDSC-Class A will be equal to the lesser of one
percent of the net asset value of the shares at the time of purchase, or one
percent of the net asset value of the shares at the time of redemption.
The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one-year period prior to the redemption. The CDSC-Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., retirement plans qualified under Section 401(a) of the Code and deferred
compensation plans under Section 457 of the Code) required to obtain funds to
pay distributions to beneficiaries pursuant to the terms of the plans. Such
payments include, but are not limited to, death, disability, retirement, or
separation from service. No CDSC-Class A will be imposed on exchanges between
funds. For purposes of the CDSC-Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC-Class A rather than a front-end load sales charge. In determining whether a
CDSC-Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent will apply to the net
asset value privilege. Also, in order to establish an amount of $1,000,000 or
more, a Qualified Purchaser may aggregate shares of Van Kampen American Capital
Reserve Fund, Van Kampen American Capital Money Market Fund and Van Kampen
American Capital Tax Free Money Fund with shares of certain other participating
funds described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Purchase of Shares," redemption of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC-CLASS B
AND C")
The CDSC-Class B and C may be waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of disability or death, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
25
<PAGE> 82
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge may be waived upon the tax-free rollover or transfer of assets
to another Retirement Plan invested in one or more of Van Kampen American
Capital funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts That Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC-Class B and C upon
such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C shares of the Fund, provided that the reinvestment is effected
within 120 days after such redemption and the shareholder has not previously
exercised this reinvestment privilege with respect to Class C shares of the
Fund. Shares acquired in this manner will be deemed to have the original cost
and purchase date of the redeemed shares for purposes of applying the CDSC-Class
C to subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
26
<PAGE> 83
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form and return both documents to ACCESS before checks will be
issued. All signatures on the authorization card must be guaranteed if any of
the signatures are persons not referenced in the account registration or if more
than 30 days have elapsed since ACCESS established the account on its records.
Moreover, if the shareholder is a corporation, partnership, trust, fiduciary,
executor or administrator, the appropriate documents appointing authorized
signers (corporate resolutions, partnerships or trust agreements) must accompany
the authorization card. The documents must be certified in original form, and
the certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund declares dividends each business day on Class A shares, Class B
shares and Class C shares and distributes monthly substantially all of its net
investment income to shareholders of Class A, Class B and Class C shares. The
daily dividends are a fixed amount determined for each class at least monthly.
The per share
27
<PAGE> 84
dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares as a result of the distribution fees and higher
transfer agency fees applicable to the Class B and Class C shares. The total of
the Class A, Class B and Class C dividend is expected not to exceed the net
investment income of the Fund for the month. Net investment income for dividend
purposes consists of interest earned less expenses of the Fund accrued for that
dividend period. Any taxable net realized short-term or long-term capital gains
will be distributed to shareholders at least annually. Dividends and
distributions are automatically reinvested in shares of the Fund at the next
determined net asset value without sales charge except that any shareholder may
elect in writing to receive any such dividends or distributions, or both, in
cash. Dividends and distributions are taxable to shareholders as discussed below
whether they are reinvested in shares of the Fund or received in cash.
As described below under "Tax Treatment of Options and Futures
Transactions," 60% of any gain or loss realized by the Fund from transactions in
listed options, futures and options on futures generally constitutes long-term
capital gains or losses and the balance constitutes short-term capital gains or
losses.
Dividends and distributions declared to shareholders of record after
September 30th of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even if paid in the
following January.
TAX STATUS OF THE FUND
Through payment of all or substantially all of its taxable net investment
income and net realized capital gains to shareholders and by meeting certain
diversification of assets and other requirements of the Code, the Fund expects
to qualify as a regulated investment company, under Subchapter M of the Code.
This enables the Fund to be relieved from payment of income taxes on that
portion of its taxable net investment income and net realized capital gains
distributed to shareholders.
If for any taxable year the Fund does not qualify for the special tax
treatment afforded regulated investment companies, all of its taxable income,
including any net realized capital gains, would be subject to tax at regular
corporate rates (without any deduction for distributions to shareholders).
Dividends paid by the Fund from its net investment income, and
distributions of the Fund's net realized short-term capital gains, are taxable
to shareholders as ordinary income. Any distributions designated as being made
from the Fund's net realized long-term capital gains are taxable to shareholders
as long-term capital gains, regardless of the length of the period that a
shareholder has held his shares. Not later than 60 days after the end of each
fiscal year, the Fund will send to its shareholders a written notice required by
the Code designating the amount of any distributions made during such year which
are long-term capital gains distributions. Such notice may be included in the
annual report to shareholders. A dividend or capital gains distribution received
after the purchase of the Fund's shares reduces the net asset value of the
shares by the amount of the dividend or distribution and will be subject to
income taxes. A loss on the sale of shares held for less than six months
attributable to a long-term capital gains distribution is treated as a long-term
capital loss for federal income tax purposes.
If for any fiscal year of the Fund, the amount of distributions paid or
deemed paid for such year exceeds its net investment income plus net realized
capital gains for such year, the amount of such excess is expected to be treated
as a return of capital. In such case, distributions paid would be treated in
part as a distribution of taxable income and in part as a return of capital.
Shareholders would incur no current federal income tax on the portion of such
distributions which are treated as a return of capital, but each shareholder's
basis in the Fund's shares would be reduced by that amount. This reduction of
basis would operate to increase the shareholder's capital gain (or decrease its
capital loss) upon redemption of Fund shares.
One of the requirements for qualification as a regulated investment company
is that less than 30% of the Fund's gross income be derived from gains from the
sale or other disposition of securities held for less than three months.
Accordingly, the Fund may be restricted in utilizing certain option and futures
trading strategies, including the extent to which it may write options on
securities which have been held less than three months, write options which
expire in less than three months, effect closing purchase transactions with
28
<PAGE> 85
respect to options which have been written less than three months prior to such
transactions and effect closing transactions in futures contracts which have
been open for less than three months. Another requirement for qualification is
that at least 90% of the Fund's gross income in each fiscal year be derived from
dividends, interest and gains from the sale or other disposition of securities.
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary income for the
twelve-months ended December 31, plus 98% of its capital gain net income for the
twelve-months ended October 31 of such calendar year. The Fund intends to
distribute sufficient amounts to avoid liability for the excise tax.
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized on
the basis of the subsequent shares.
Since none of the Fund's net investment income arises from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction for corporations.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
laws. Non-resident shareholders are urged to consult their own tax advisers
concerning the applicability of the United States withholding tax.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and these Treasury
Regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income, or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TAX TREATMENT OF OPTIONS AND FUTURES TRANSACTIONS
The Code includes special rules applicable to listed options, futures
contracts and options on futures contracts which the Fund may write, purchase or
sell. Such options and contracts are classified as Section 1256 contracts under
the Code. The character of gain or loss resulting from the sale, disposition,
closing out, expiration or other termination of Section 1256 contracts is
generally treated as long-term capital gain or loss to the extent of 60% thereof
and short-term capital gain or loss to the extent of 40% thereof ("60/40 gain or
loss"). Such contracts, when held by the Fund at the end of a fiscal year,
generally are required to be treated as sold at market value on the last day of
such fiscal year for federal income tax purposes ("marked-to-market").
Over-the-counter options are not classified as Section 1256 contracts and are
not subject to the marked-to-market rule or to 60/40 gain or loss treatment. Any
gains or losses recognized by the Fund from transaction in over-the-counter
options generally constitute short-term capital gains or losses. If over-the-
29
<PAGE> 86
counter call options written, or over-the-counter put options purchased, by the
Fund are exercised, the gain or loss realized on the sale of the underlying
securities may be either short-term or long-term, depending on the holding
period of the securities. In determining the amount of gain or loss, the sales
proceeds are reduced by the premium paid for over-the-counter puts or increased
by the premium received for over-the-counter calls.
A substantial portion of the Fund's transactions in options, futures
contracts and options on futures contracts, particularly its hedging
transactions, may constitute "straddles" which are defined in the Code as
offsetting positions with respect to personal property. A straddle in which at
least one, but not all, of the positions are Section 1256 contracts is a "mixed
straddle" under the Code if certain identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position is sold and a new offsetting position is acquired within a
prescribed period and (iii) "short sale" rules which may terminate the holding
period of securities owned by the Fund when offsetting positions are established
and which may convert certain losses from short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. No determination has been reached to make any of
these elections.
FUND PERFORMANCE
The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for the one-year and the
two-year-and-six-months periods ended March 31, 1995 was -1.06% and 1.48%,
respectively. The average annual total return (computed in the manner described
in the Prospectus) for Class B shares of the Fund for the one-year and the
two-year-and-six-months periods ended March 31, 1995 was -0.78% and 1.62%,
respectively. The average annual total return (computed in the manner described
in the Prospectus) for Class C shares of the Fund for the one-year and the
one-year-and-eleven-months periods (the initial offering of Class C shares)
ended March 31, 1995 was 2.10% and 0.81%, respectively. These results are based
on historical earnings and asset value fluctuations and are not intended to
indicate future performance. Such information should be considered in light of
the Fund's investment objective and policies as well as the risks incurred in
the Fund's investment practices.
The Fund's annualized current yield for Class A shares, Class B shares and
Class C shares of the Fund for the 30-day period ending September 30, 1994, was
4.60%, 4.05% and 4.05%, respectively. The yield for Class A shares, Class B
shares and Class C shares is not fixed and will fluctuate in response to
prevailing interest rates and the market value of portfolio securities, and as a
function of the type of securities owned by the Fund, portfolio maturity and the
Fund's expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time VKAC will announce the results of its monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
Intentions and the Van Kampen American Capital Mutual Fund Index -- which polls
measure how Americans plan to use their money.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors, and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
The Funds may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic
30
<PAGE> 87
investment plan to investments made in a rising market; (3) illustrate
allocations among different types of mutual funds for investors at different
stages of their lives; and (4) in reports or other communications to
shareholders or in advertising material, illustrate the benefits of compounding
at various assumed rates of return. Such illustrations may be in the form of
charts or graphs and will not be based on historical returns experienced by the
Funds.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 1201 Louisiana, Houston, Texas
77002, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual and Semi-Annual Reports to Shareholders, including the related Report of
Independent Accountants on the September 30, 1994 financial statements, are
included in the Statement of Additional Information.
The following information is not included in the Annual or Semi-Annual
Reports. This example assumes a purchase of Class A shares of the Fund
aggregating less than $100,000 subject to the schedule of sales charges set
forth in the Prospectus at a price based upon the net asset value of Class A
shares of the Fund.
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1995 1994
--------- -------------
<S> <C> <C>
Net Asset Value per Class A Share $8.21 $8.17
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $0.41 $0.41
--------- ------
Class A Per Share Offering Price to the Public $8.62 $8.58
</TABLE>
31
<PAGE> 88
Investment Portfolio
September 30, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
United States Treasury Obligations 90.8%
United States Treasury Notes
$ 13,000,000 8.50%, 5/15/95 . . . . . . . . . . . . . . . . . . . . . . . $ 13,217,360
*200,000,000 9.25%, 1/15/96 . . . . . . . . . . . . . . . . . . . . . . . 207,282,000
*85,000,000 11.25%, 5/15/95 . . . . . . . . . . . . . . . . . . . . . . . 87,802,450
--------------
TOTAL UNITED STATES TREASURY OBLIGATIONS
(Cost $326,795,077) . . . . . . . . . . . . . . . . . . . . . 308,301,810
--------------
Collateralized Mortgage Obligations 8.6%
5,301,787 Capstead Security Corp., Series 93-2C, 9.7556%, 8/25/23 . . . . 5,339,907
Prudential Home Mortgage Securities
5,326,519 Series 93-23 A7, 10.00%, 6/25/08 . . . . . . . . . . . . . . 5,631,143
8,098,394 Series 93-30 A7, 10.00%, 8/25/23 . . . . . . . . . . . . . . 8,293,241
10,000,000 Salomon Brothers Mortgage Securities, Series 93-5 A3,
7.374%, 10/25/23 . . . . . . . . . . . . . . . . . . . . . . 9,720,000
--------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost $30,982,455) . . . . . . . . . . . . . . . . . . . . . 28,984,291
--------------
Short-Term Investments 0.1%
415,000 Federal National Mortgage Association, Discount Notes, 4.65%,
10/7/94 (Cost $414,625) . . . . . . . . . . . . . . . . . . . 414,625
--------------
TOTAL INVESTMENTS (Cost $358,192,157) 99.5% . . . . . . . . . . 337,700,726
Other assets and liabilities, net 0.5% . . . . . . . . . . . . . 1,781,769
--------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . $ 339,482,495
==============
</TABLE>
*Securities with a market value of approximately $247.2 million were placed as
collateral for forward commitments (Note 1B).
See Notes to Financial Statements.
F-1
<PAGE> 89
Statement of Assets and Liabilities
September 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $358,192,157) . . . . . . . . . . . $ 337,700,726
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,018
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . 33,614,063
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 8,080,524
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . 498,901
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,098
---------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379,911,330
---------------
LIABILITIES
Payable for investments purchased . . . . . . . . . . . . . . . . . . . 34,071,094
Unrealized depreciation of forward commitments . . . . . . . . . . . . 2,557,302
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . 1,875,345
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,202,308
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . 368,432
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,334
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,020
---------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 40,428,835
---------------
Net Assets, equivalent to $8.17 per share for Class A, Class B
and Class C shares . . . . . . . . . . . . . . . . . . . . . . . . . . $ 339,482,495
===============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 9,214,660 Class A,
27,750,108 Class B and 4,591,915 Class C shares outstanding . . . . . $ 415,567
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390,806,999
Accumulated net realized loss on securities . . . . . . . . . . . . . . (29,298,096)
Net unrealized depreciation of securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,491,431)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . (2,557,302)
Undistributed net investment income . . . . . . . . . . . . . . . . . . 606,758
---------------
NET ASSETS at September 30, 1994 . . . . . . . . . . . . . . . . . . . $ 339,482,495
===============
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 90
Statement of Operations
Year Ended September 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,282,980
--------------
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,302,231
Service fees - Class A. . . . . . . . . . . . . . . . . . . . . . . . . . 211,959
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . 2,522,178
Distribution and service fees - Class C . . . . . . . . . . . . . . . . . 448,146
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . 461,629
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . 172,025
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,803
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,745
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 31,195
Trustees' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . 14,762
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,571
Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,893
Organization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,424
--------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,332,561
--------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 27,950,419
--------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,091,590)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . (12,940,781)
Futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . (206,004)
Net unrealized depreciation of securities during the year
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,594,931)
Forward commitments . . . . . . . . . . . . . . . . . . . . . . . . . . (4,272,027)
--------------
Net realized and unrealized loss on securities . . . . . . . . . . . . (46,105,333)
--------------
Decrease in net assets resulting from operations . . . . . . . . . . . $ (18,154,914)
==============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 91
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
October 6, 1992*
Year Ended through
September 30, September 30,
1994 1993
------------- -------------
<S> <C> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . $ 373,038,429 $ 100,000
------------- -------------
OPERATIONS
Net investment income . . . . . . . . . . . . . . . . . 27,950,419 13,270,049
Net realized gain (loss) on securities . . . . . . . . (27,238,375) 1,013,779
Net unrealized depreciation of securities during
the period . . . . . . . . . . . . . . . . . . . . . . (18,866,958) (4,181,775)
------------- -------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . (18,154,914) 10,102,053
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
FROM NET INVESTMENT INCOME
Class A . . . . . . . . . . . . . . . . . . . . . . . . (6,697,256) (4,242,691)
Class B . . . . . . . . . . . . . . . . . . . . . . . . (17,450,058) (7,978,856)
Class C . . . . . . . . . . . . . . . . . . . . . . . . (3,082,877) (633,176)
------------- -------------
(27,230,191) (12,854,723)
------------- -------------
IN EXCESS OF BOOK-BASIS NET REALIZED GAIN ON
SECURITIES (NOTE 1E)
Class A . . . . . . . . . . . . . . . . . . . . . . . . (813,341) --
Class B . . . . . . . . . . . . . . . . . . . . . . . . (2,362,620) --
Class C . . . . . . . . . . . . . . . . . . . . . . . . (426,336) --
------------- -------------
(3,602,297) --
------------- -------------
Total dividends and distributions to shareholders . . . (30,832,488) (12,854,723)
------------- -------------
FUND SHARE TRANSACTIONS
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . 27,679,417 104,113,083
Class B . . . . . . . . . . . . . . . . . . . . . . . . 82,370,435 251,472,838
Class C . . . . . . . . . . . . . . . . . . . . . . . . 27,429,633 39,024,065
------------- -------------
137,479,485 394,609,986
------------- -------------
Proceeds from shares issued for dividends and
distributions reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . 3,247,416 1,874,967
Class B . . . . . . . . . . . . . . . . . . . . . . . . 8,823,558 3,576,008
Class C . . . . . . . . . . . . . . . . . . . . . . . . 2,028,264 376,095
------------- -------------
14,099,238 5,827,070
------------- -------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . (37,008,105) (12,845,722)
Class B . . . . . . . . . . . . . . . . . . . . . . . . (75,285,723) (10,487,177)
Class C . . . . . . . . . . . . . . . . . . . . . . . . (23,853,427) (1,413,058)
------------- -------------
(136,147,255) (24,745,957)
------------- -------------
Increase in net assets resulting from Fund share
transactions . . . . . . . . . . . . . . . . . . . . . 15,431,468 375,691,099
------------- -------------
INCREASE (DECREASE) IN NET ASSETS . . . . . . . . . . . . (33,555,934) 372,938,429
------------- -------------
NET ASSETS, end of period . . . . . . . . . . . . . . . . $ 339,482,495 $ 373,038,429
============= =============
</TABLE>
*Commencement of operations.
See Notes to Financial Statements.
F-4
<PAGE> 92
Notes to Financial Statements
Note 1-Significant Accounting Policies
American Capital U.S. Government Trust for Income (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified
open-end management investment company. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
A. Investment Valuations
All debt securities are valued at the last reported bid price.
Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the
direction of the Board of Trustees of the Fund.
Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market
value. Short-term investments with a maturity of more than 60 days when
purchased are valued based on market quotations until the remaining days
to maturity becomes less than 61 days. From such time, until maturity,
the investments are valued at amortized cost.
B. Forward Commitments
The Fund trades certain securities under the terms of forward
commitments, whereby the settlement for payment and delivery occurs at a
specified future date. Forward commitments are privately negotiated
transactions between the Fund and dealers. The Fund is exposed to a
risk of loss due to nonperformance by the dealers. Upon executing a
forward commitment and during the period of obligation, the Fund
maintains collateral of cash or securities in a segregated account with
its custodian in an amount sufficient to relieve the obligation. If
the intent of the Fund is to accept delivery of a security traded under
a forward purchase commitment, the commitment is recorded as a
long-term purchase. For forward purchase commitments entered into for
temporary investment strategies for which security settlement is not
intended by the Fund, and for all forward sale commitments, changes in
the value of the commitment are recognized by marking the commitment
to market on a daily basis. During the period of commitment, as a
result of then current market conditions, the Fund may either resell or
repurchase the forward commitment and enter into a new forward
commitment, the effect of which is to extend the settlement date. In
addition, the Fund may occasionally close such forward commitments
prior to delivery. Gains and losses are realized upon the closing or
cash settlement of these commitments.
C. Federal Income Taxes
No provision for federal income taxes is required because the Fund
has elected to be taxed as a "regulated investment company" under
the Internal Revenue Code and intends to maintain this qualification
by annually distributing all of its taxable net investment income and
taxable net realized capital gains on investments to its shareholders.
It is anticipated that no distributions of capital gains will be made
until tax basis capital loss carryforwards, if any, expire or are offset
by net realized capital gains.
D. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date.
Realized gains and losses on investments are determined on the basis
of identified cost. Interest income is accrued daily.
F-5
<PAGE> 93
E. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the
record date. The Fund distributes tax basis earnings in accordance
with the minimum distribution requirements of the Internal Revenue Code
which may differ from generally accepted accounting principles. Such
dividends or distributions may exceed financial statement earnings.
Effective October 1, 1993, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies, which states that permanent book and tax differences relating
to shareholder distributions are to be reclassified to capital
surplus. Net investment income, net realized loss and net assets were
not affected by this change.
F. Debt Discount and Premium
The Fund accounts for discounts and premiums on the same basis as is used
for federal income tax reporting. Accordingly, original issue discounts
on debt securities purchased are amortized over the life of a security.
Premiums on debt securities are not amortized. Market discounts are
recognized at the time of sale as realized gains for book purposes and
ordinary income for tax purposes.
G. Organization Costs
Organization expenses of approximately $15,000 were deferred and are
being amortized over a five year period ending September, 1997.
Note 2--Management Fees and Other Transactions with Affiliates
American Capital Asset Management, Inc. (the "Adviser") serves as investment
manager of the Fund. Management fees are paid monthly, based on the average
daily net assets of the Fund at an annual rate of .60%. From time to
time, the Adviser may voluntarily elect to reimburse a portion of the Fund's
expenses. Such reimbursement may be discontinued at any time without prior
notice.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the
Adviser. For the year ended September 30, 1994, these charges included
$10,616 as the Fund's share of the employee costs attributable to the Fund's
accounting officers. A portion of the accounting services expense was paid
to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund. The
services provided by the Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit. For the year ended September 30, 1994, the
fees for these services aggregated approximately $269,000.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both
affiliates of the Adviser, received $81,152 and $64,575, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.
Under the Distribution Plans, each class of shares pays up to .25% per annum
of its average net assets to reimburse the Distributor for expenses and
service fees incurred. Class B shares and Class C shares pay an additional
distribution fee of up to .75% per annum of their average net assets to
reimburse the Distributor for its distribution expenses. Actual distribution
expenses incurred by the Distributor for Class B shares and Class C
shares may exceed the amounts reimbursed to the Distributor by the Fund.
F-6
<PAGE> 94
At September 30, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B and Class C plans aggregated approximately
$11.5 million and $794,000, respectively, and may be carried forward and
reimbursed through either the collection of the contingent deferred sales
charges from share redemptions or, subject to the annual renewal of the plans,
future Fund reimbursements of distribution fees.
Legal fees of $9,188 were for services rendered by O'Melveny & Myers,
counsel for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a
trustee of the Fund.
Certain officers and trustees of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
Note 3--Investment Activity
During the year, the cost of purchases and proceeds from sales of
investments, excluding short-term investments and forward purchase
commitments, were $458,667,149 and $432,131,413, respectively.
For federal income tax purposes, the identified cost of investments owned at
September 30, 1994 was the same for federal income tax and financial
reporting purposes. Gross unrealized depreciation of investments
aggregated $20,491,431. Approximately $29 million of financial statement
losses are deferred for tax purposes to the following fiscal year.
At September 30, 1994, the Fund held the following forward purchase
commitments:
<TABLE>
<CAPTION>
Market Value
Principal at September 30, Unrealized
Amount Security 1994 Depreciation
---------- ------------------------------------- --------------- ------------
<S> <C> <C> <C>
Federal National Mortgage Association
$ 48,000,000 8.00%, settlement 12/94 $ 46,520,160 $ 669,840
Government National Mortgage Association
45,000,000 8.00%, settlement 12/94 43,411,050 688,950
30,000,000 8.50%, settlement 10/94 29,962,500 371,484
20,000,000 8.50%, settlement 12/94 19,862,600 243,650
51,000,000 9.00%, settlement 10/94 52,290,810 497,315
50,000,000 9.50%, settlement 10/94 52,515,500 86,063
------------- -----------
$ 244,562,620 $ 2,557,302
============= ===========
</TABLE>
Note 4--Trustee Compensation
Trustees who are not affiliated with the Adviser are compensated by the Fund
at the annual rate of $1,320 plus a fee of $30 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $490. During the year, such fees aggregated $12,823.
The trustees may participate in a voluntary Deferred Compensation Plan
(the "Plan"). The Plan is not funded, and obligations under the Plan will
be paid solely out of the Fund's general accounts. The Fund will not
reserve or set aside funds for the payment of its obligations under the Plan by
any form of trust or escrow. At September 30, 1994, the liability for the
Plan aggregated $5,548. Each director covered by the Plan elects to be
credited with an earnings component on amounts deferred equal to the income
earned by the Fund on its short-term investments or equal to the total return
of the Fund.
F-7
<PAGE> 95
Note 5--Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of
purchase (the Class A shares) or at the time of redemption on a contingent
deferred basis (the Class B shares and Class C shares). All classes of
shares have the same rights, except that Class B shares and Class C shares
bear the cost of distribution fees and certain other class specific
expenses. Realized and unrealized gains or losses, investment income and
expenses (other than class specific expenses) are allocated daily to each
class of shares based upon the relative proportion of net assets of
each class. Class B shares and Class C shares automatically convert to
Class A shares six years and ten years after purchase, respectively,
subject to certain conditions.
The Fund has an unlimited number of shares of $.01 par value beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
Year October 6, 1992*
Ended through
September 30, September 30,
1994 1993
------------- -----------------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . 3,145,165 11,163,886
Class B . . . . . . . . . . . . . . . . . . . . 9,201,638 26,974,443
Class C . . . . . . . . . . . . . . . . . . . . 3,059,847 4,191,790
----------- -----------
15,406,650 42,330,119
----------- -----------
Shares issued for dividends and distributions
reinvested
Class A . . . . . . . . . . . . . . . . . . . . 373,042 200,644
Class B . . . . . . . . . . . . . . . . . . . . 1,013,538 384,411
Class C . . . . . . . . . . . . . . . . . . . . 233,058 40,569
----------- -----------
1,619,638 625,624
----------- -----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . (4,290,195) (1,383,184)
Class B . . . . . . . . . . . . . . . . . . . . (8,702,305) (1,126,919)
Class C . . . . . . . . . . . . . . . . . . . . (2,781,050) (152,299)
----------- -----------
(15,773,550) (2,662,402)
----------- -----------
Increase in shares outstanding . . . . . . . . 1,252,738 40,293,341
=========== ===========
</TABLE>
*Commencement of operations.
F-8
<PAGE> 96
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated.
<TABLE>
<CAPTION>
Class A Class B
--------------------------------------- --------------------------------------
October 6, 1992(1) October 6, 1992(1)
Year Ended through Year Ended through
September 30, September 30, September 30, September 30,
1994 1993(4) 1994 1993(4)
----------------- ------------------ -------------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . $9.26 $9.43(1) $9.26 $9.43(1)
--------- --------- --------- ---------
Income from investment operations
Investment income . . . . . . . . . . . . . .76 .91 .76 .86
Expenses . . . . . . . . . . . . . . . . . (.09) (.11) (.15) (.17)
Expense reimbursement(5) . . . . . . . . . -- .01 -- .01
--------- --------- --------- ---------
Net investment income . . . . . . . . . . . .67 .81 .61 .70
Net realized and unrealized
losses on securities . . . . . . . . . . . (1.0085) (.1795) (1.0205) (.1475)
--------- --------- --------- ---------
Total from investment operations . . . . . (.3385) .6305 (.4105) .5525
--------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income . . . (.674) (.8005) (.602) (.7225)
Distributions in excess of book-basis
net realized gains on securities . . . . . (.0775) -- (.0775) --
--------- --------- --------- ---------
Total distributions . . . . . . . . . . . (.7515) (.8005) (.6795) (.7225)
--------- --------- --------- ---------
Net asset value, end of period . . . . . . $8.17 $9.26 $8.17 $9.26
========= ========= ========= =========
TOTAL RETURN(3) . . . . . . . . . . . . . . (3.82%) 8.07%(2) (4.61%) 7.24%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . $75.3 $92.4 $226.7 $242.8
Average net assets (millions) . . . . . . . $86.5 $50.9 $252.4 $108.6
Ratios to average net assets(5)
Expenses . . . . . . . . . . . . . . . . . 1.07% 1.07%(6) 1.82% 1.81%(6)
Expenses, without expense reimbursement . 1.07% 1.15%(6) 1.82% 1.89%(6)
Net investment income . . . . . . . . . . 7.89% 8.71%(6) 7.11% 7.70%(6)
Net investment income, without expense
reimbursement . . . . . . . . . . . . . . 7.89% 8.64%(6) 7.11% 7.62%(6)
Portfolio turnover rate . . . . . . . . . . 122% 281% 122% 281%
<CAPTION>
C Class
---------------------------------------
April 12, 1993(1)
Year Ended through
September 30, September 30,
1994 1993(4)
----------------- ------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . . . $9.25 $9.41(1)
--------- ---------
Income from investment operations
Investment income . . . . . . . . . . . . . .79 .41
Expenses . . . . . . . . . . . . . . . . . (.16) (.083)
Expense reimbursement(5) . . . . . . . . . -- .003
--------- ---------
Net investment income . . . . . . . . . . . .63 .33
Net realized and unrealized
losses on securities . . . . . . . . . . . (1.0305) (.1561)
--------- ---------
Total from investment operations . . . . . (.4005) .1739
--------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income . . . (.602) (.3339)
Distributions in excess of book-basis
net realized gains on securities . . . . . (.0775) --
--------- ---------
Total distributions . . . . . . . . . . . (.6795) (.3339)
--------- ---------
Net asset value, end of period . . . . . . $8.17 $9.25
========= =========
TOTAL RETURN(3) . . . . . . . . . . . . . . (4.51%) 2.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . $37.5 $37.8
Average net assets (millions) . . . . . . . $44.8 $19.2
Ratios to average net assets(5)
Expenses . . . . . . . . . . . . . . . . . 1.82% 1.76%(6)
Expenses, without expense reimbursement . 1.82% 1.83%(6)
Net investment income . . . . . . . . . . 7.08% 7.26%(6)
Net investment income, without expense
reimbursement . . . . . . . . . . . . . . 7.08% 7.18%(6)
Portfolio turnover rate . . . . . . . . . . 122% 281%
</TABLE>
(1) Commencement of operations.
(2) Total return from November 2, 1992 (date the Fund's investment
strategy was implemented) through September 30, 1993.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
(5) See Note 2.
(6) Annualized.
See Notes to Financial Statements.
F-9
<PAGE> 97
Report of Independent Accountants
To the Shareholders and Trustees of
American Capital U.S. Government Trust for Income
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital U.S. Government
Trust for Income at September 30, 1994, and the results of its operations,
the changes in its net assets and the selected per share data and ratios
for each of the fiscal periods presented, in conformity with generally
accepted accounting principles. These financial statements and selected per
share data and ratios (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at September 30, 1994 by correspondence
with the custodian and brokers, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
November 14, 1994
F-10
<PAGE> 98
PORTFOLIO OF INVESTMENTS
March 31, 1995 (Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Par
Amount
(000) Description Coupon Maturity Market Value
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UNITED STATES TREASURY
OBLIGATIONS 70.0%
$25,000 United States Treasury
Notes....................... 5.875% 02/15/04 $ 22,777,250
31,000 United States Treasury
Notes....................... 8.500% 08/15/95 31,261,640
18,000 United States Treasury
Notes....................... 8.875% 02/15/99 19,102,500
*95,500 United States Treasury
Notes....................... 11.250% 05/15/95 96,037,665
*45,000 United States Treasury
Notes....................... 11.500% 11/15/95 46,406,250
------------
Total United States Treasury
Obligations
(Cost $219,096,797)......... 215,585,305
------------
UNITED STATES AGENCY AND
GOVERNMENT OBLIGATIONS 14.6%
*45,270 Government National Mortgage
Association, Pools
(Cost $44,364,572)......... 8.000% 10/19 to 12/24 44,831,305
------------
COLLATERALIZED MORTGAGE
OBLIGATIONS 9.3%
5,051 Capstead Security Corp.,
Series 93-2C................ 9.757% 08/25/23 5,157,866
Prudential Home Mortgage
Securities
5,327 Series 93-23 A7............. 10.000% 06/25/08 5,569,568
7,939 Series 93-30 A7............. 10.000% 08/25/23 8,397,796
10,000 Salomon Brothers Mortgage
Securities, Series 93-5 A3.. 7.374% 10/25/23 9,509,400
------------
Total Collateralized
Mortgage Obligations
(Cost $30,540,251).......... 28,634,630
------------
REPURCHASE AGREEMENT 3.1%
9,735 Salomon Brothers, Inc.,
dated 3/31/95
(Collateralized by U.S.
Government obligations in a
pooled cash account)
repurchase proceeds
$9,740,086 (Cost
$9,735,000)................ 6.270% 04/03/95 9,735,000
------------
TOTAL INVESTMENTS (Cost $303,736,620) 97.0%............................... 298,786,240
Other assets and liabilities, net 3.0%.................................... 9,082,423
------------
NET ASSETS 100%........................................................... $307,868,663
============
</TABLE>
*Securities with a market value of approximately $154.2 million were placed as
collateral for a forward commitments (Note 1B).
See Notes to Financial Statements.
F-11
<PAGE> 99
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $303,736,620)................. $298,786,240
Receivable for investments sold.................................. 78,892,418
Interest receivable.............................................. 7,171,752
Unrealized appreciation of forward commitments................... 3,065,238
Receivable for Fund shares sold.................................. 163,334
Other assets..................................................... 9,222
------------
Total Assets................................................... 388,088,204
------------
LIABILITIES
Payable for investments purchased................................ 76,951,114
Payable for Fund shares redeemed................................. 1,351,978
Dividends payable................................................ 1,233,955
Due to Distributor............................................... 330,175
Due to Adviser................................................... 155,127
Due to shareholder service agent................................. 46,153
Deferred trustee compensation.................................... 7,109
Accrued expenses................................................. 143,930
------------
Total Liabilities.............................................. 80,219,541
------------
NET ASSETS, equivalent to $8.21 per share for Class A, Class
B and Class C shares........................................... $307,868,663
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 8,722,927 Class A,
25,031,076 Class B and 3,761,772 Class C shares outstanding.... $ 375,158
Capital surplus.................................................. 358,248,955
Accumulated net realized loss on securities...................... (49,425,657)
Net unrealized appreciation (depreciation) of securities
Investments.................................................... (4,950,380)
Forward commitments............................................ 3,065,238
Undistributed net investment income.............................. 555,349
------------
NET ASSETS at March 31, 1995..................................... $307,868,663
============
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE> 100
STATEMENT OF OPERATIONS
Six Months Ended March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest......................................................... $ 14,321,327
------------
EXPENSES
Management fees.................................................. 951,722
Service fees--Class A............................................ 87,738
Distribution and service fees--Class B........................... 1,059,602
Distribution and service fees--Class C........................... 165,803
Shareholder service agent's fees and expenses.................... 241,143
Registration and filing fees..................................... 78,929
Accounting services.............................................. 43,960
Audit fees....................................................... 22,600
Reports to shareholders.......................................... 15,600
Trustees' fees and expenses...................................... 8,999
Legal fees....................................................... 3,093
Custodian fees................................................... 2,790
Organization expenses............................................ 1,500
Miscellaneous.................................................... 7,863
------------
Total expenses................................................. 2,691,342
------------
NET INVESTMENT INCOME............................................ 11,629,985
============
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities
Investments.................................................... (9,405,703)
Forward commitments............................................ (10,505,156)
Futures contracts.............................................. (20,146)
Net unrealized appreciation of securities during the period
Investments.................................................... 15,541,051
Forward commitments............................................ 5,622,540
------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES................... 1,232,586
============
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................. $ 12,862,571
============
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE> 101
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Six Months Ended Year Ended
March 31, 1995 September 30, 1994
---------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period............. $339,482,495 $373,038,429
------------ ------------
Operations
Net investment income..................... 11,629,985 27,950,419
Net realized loss on securities........... (19,931,005) (27,238,375)
Net unrealized appreciation (depreciation)
of securities during the period......... 21,163,591 (18,866,958)
------------ ------------
Increase (decrease) in net assets
resulting from operations............... 12,862,571 (18,154,914)
------------ ------------
Distributions to shareholders from
Net investment income
Class A................................. (2,875,981) (6,697,256)
Class B................................. (7,613,223) (17,450,058)
Class C................................. (1,192,190) (3,082,877)
------------ ------------
(11,681,394) (27,230,191)
------------ ------------
Excess of book-basis net realized gain
on securities (Note 1F)
Class A................................. (44,467) (813,341)
Class B................................. (131,320) (2,362,620)
Class C................................. (20,769) (426,336)
------------ ------------
(196,556) (3,602,297)
------------ ------------
Total distributions to shareholders....... (11,877,950) (30,832,488)
------------ ------------
Capital transactions
Proceeds from shares sold
Class A................................. 4,867,776 27,679,417
Class B................................. 5,697,778 82,370,435
Class C................................. 2,740,284 27,429,633
------------ ------------
13,305,838 137,479,485
------------ ------------
Proceeds from shares issued for
distributions reinvested
Class A................................. 1,176,752 3,247,416
Class B................................. 3,136,414 8,823,558
Class C................................. 623,975 2,028,264
------------ ------------
4,937,141 14,099,238
------------ ------------
Cost of shares redeemed
Class A................................. (10,006,234) (37,008,105)
Class B................................. (30,775,873) (75,285,723)
Class C................................. (10,059,325) (23,853,427)
------------ ------------
(50,841,432) (136,147,255)
------------ ------------
Increase (decrease) in net assets
resulting from capital transactions....... (32,598,453) 15,431,468
------------ ------------
DECREASE IN NET ASSETS...................... (31,613,832) (33,555,934)
------------ ------------
NET ASSETS, end of period................... $307,868,663 $339,482,495
============ ============
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE> 102
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Class A
-------------------------------------------------------
Six Months October 6, 1992(1)
Ended Year Ended through
March 31, September 30, September 30,
1995 1994 1993(4)
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period.......................... $ 8.17 $ 9.26 $ 9.43
------ ------- ------
Income from investment operations
Investment income............... .37 .76 .91
Expenses........................ (.05) (.09) (.11)
Expense reimbursement(5)........ -- -- .01
------ ------- ------
Net investment income............. .32 .67 .81
Net realized and unrealized
gains or losses on securities... .0475 (1.0085) (.1795)
------ ------- ------
Total from investment operations.. .3675 (.3385) .6305
------ ------- ------
Less distributions from
Net investment income........... (.3225) (.674) (.8005)
Excess of book-basis net
realized gains on securities.. (.005) (.0775) --
------ ------- ------
Total distributions............... (.3275) (.7515) (.8005)
------ ------- ------
Net asset value, end of period.... $ 8.21 $ 8.17 $ 9.26
====== ======= ======
TOTAL RETURN(3)................... 4.62% (3.82%) 8.07%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period
(millions)...................... $ 71.6 $ 75.3 $ 92.4
Average net assets (millions)..... $ 72.2 $ 86.5 $ 50.9
Ratios to average net assets
(annualized)(5)
Expenses........................ 1.11% 1.07% 1.07%
Expenses, without expense
reimbursement................. 1.11% 1.07% 1.15%
Net investment income........... 7.93% 7.89% 8.71%
Net investment income, without
expense reimbursement......... 7.93% 7.89% 8.64%
Portfolio turnover rate........... 107% 122% 281%
</TABLE>
(1) Commencement of operations.
(2) Total return from November 2, 1992 (date the Fund's investment strategy was
implemented) through September 30, 1993.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
(5) See Note 2.
See Notes to Financial Statements.
F-15
<PAGE> 103
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------
Six Months October 6, 1992(1)
Ended Year Ended through
March 31, September 30, September 30,
1995 1994 1993(4)
-----------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................ $ 8.17 $ 9.26 $ 9.43
------ ------- ------
Income from investment operations
Investment income................. .37 .76 .86
Expenses.......................... (.08) (.15) (.17)
Expense reimbursement(5).......... -- -- .01
------ ------- ------
Net investment income............... .29 .61 .70
Net realized and unrealized
gains or losses on
securities........................ .0455 (1.0205) (.1475)
------ ------- ------
Total from investment operations.... .3355 (.4105) .5525
------ ------- ------
Less distributions from
Net investment income............. (.2905) (.602) (.7225)
Excess of book-basis net
realized gains on securities.... (.005) (.0775) --
------ ------- ------
Total distributions................. (.2955) (.6795) (.7225)
------ ------- ------
Net asset value, end of period...... $ 8.21 $ 8.17 $ 9.26
====== ======= ======
TOTAL RETURN(3)..................... 4.21% (4.61%) 7.24%(2)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the period
(millions)........................ $205.4 $ 226.7 $242.8
Average net assets (millions)....... $211.9 $ 252.4 $108.6
Ratios to average net assets
(annualized)(5)
Expenses.......................... 1.87% 1.82% 1.81%
Expenses, without expense
reimbursement................... 1.87% 1.82% 1.89%
Net investment income............. 7.18% 7.11% 7.70%
Net investment income, without
expense reimbursement........... 7.18% 7.11% 7.62%
Portfolio turnover rate............. 107% 122% 281%
</TABLE>
(1) Commencement of operations.
(2) Total return from November 2, 1992 (date the Fund's investment strategy was
implemented) through September 30, 1993.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
(5) See Note 2.
See Notes to Financial Statements.
F-16
<PAGE> 104
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------------------------------------------
Six Months April 12, 1993(1)
Ended Year Ended through
March 31, September 30, September 30,
1995 1994 1993(3)
----------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.... $ 8.17 $ 9.25 $ 9.41
------ ------- ------
Income from investment operations
Investment income..................... .37 .79 .41
Expenses.............................. (.08) (.16) (.083)
Expense reimbursement(4).............. -- -- .003
------ ------- ------
Net investment income................... .29 .63 .33
Net realized and unrealized gains
or losses on securities............... .0455 (1.0305) (.1561)
------ ------- ------
Total from investment operations........ .3355 (.4005) .1739
------ ------- ------
Less distributions from
Net investment income................. (.2905) (.602) (.3339)
Excess of book-basis net realized
gains on securities................. (.005) (.0775) --
------ ------- ------
Total distributions..................... (.2955) (.6795) (.3339)
------ ------- ------
Net asset value, end of period.......... $ 8.21 $ 8.17 $ 9.25
====== ======= ======
TOTAL RETURN(2)......................... 4.21% (4.51%) 2.10%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).... $ 30.9 $ 37.5 $ 37.8
Average net assets (millions)........... $ 33.2 $ 44.8 $ 19.2
Ratios to average net assets
(annualized)(4)
Expenses.............................. 1.88% 1.82% 1.76%
Expenses, without expense
reimbursement....................... 1.88% 1.82% 1.83%
Net investment income................. 7.19% 7.08% 7.26%
Net investment income, without
expense reimbursement............... 7.19% 7.08% 7.18%
Portfolio turnover rate................. 107% 122% 281%
</TABLE>
(1) Commencement of operations.
(2) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(3) Based on average month-end shares outstanding.
(4) See Note 2.
See Notes to Financial Statements.
F-17
<PAGE> 105
NOTES TO FINANCIAL STATEMENTS
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
American Capital U.S. Government Trust for Income (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant ac-
counting policies consistently followed by the Fund in the preparation of its
financial statements.
A. INVESTMENT VALUATIONS-All debt securities are valued at the last reported
bid price. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the direction of
the Board of Trustees of the Fund.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
costs.
B. FUTURE CONTRACTS AND FORWARD COMMITMENTS-Transactions in futures contracts
and forward commitments are utilized in strategies to manage the market risk of
the Fund's investments. The purchase of a futures contract or forward commit-
ment increases the impact on net asset value of changes in the market price of
investments. Forward commitments have a risk of loss due to nonperformance of
counterparties. There is also a risk that the market movement of such instru-
ments may not be in the direction forecasted. Note 3--Investment activity con-
tains additional information.
Futures Contracts--Upon entering into futures contracts, the Fund maintains,
in a segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is held as
collateral in an account in the name of the broker, the Fund's agent in acquir-
ing the futures position. During the period the futures contract is open,
changes in the value of the contract ("variation margin") are recognized by
marking the contract to market on a daily basis. As unrealized gains or losses
are incurred, variation margin payments are received from or made to the bro-
ker. Upon the closing or cash settlement of a contract, gains or losses are re-
alized. The cost of securities acquired through delivery under a contract is
adjusted by the unrealized gain or loss on the contract.
Forward Commitments--The Fund trades certain securities under the terms of
forward commitments, whereby the settlement for payment and delivery occurs at
a specified future date. Forward commitments are privately negotiated transac-
tions between the Fund and dealers. Upon executing a forward commitment and
during the period of obligation, the Fund maintains collateral of cash or secu-
rities in a segregated account with its custodian in an amount sufficient to
relieve the obligation. If the intent of the Fund is to accept delivery of a
F-18
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
-------------------------------------------------------------------------------
security traded under a forward purchase commitment, the commitment is re-
corded as a long-term purchase. For forward purchase commitments and for for-
ward sale commitments which security settlement is not intended by the Fund,
changes in the value of the commitment are recognized by marking the commit-
ment to market on a daily basis. During the commitment, the Fund may either
resell or repurchase the forward commitment and enter into a new forward com-
mitment, the effect of which is to extend the settlement date. In addition,
the Fund may occasionally close such forward commitments prior to delivery.
Gains and losses are realized upon the ultimate closing or cash settlement of
forward commitments.
C. REPURCHASE AGREEMENTS-A repurchase agreement is a short-term investment in
which the Fund acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund may in-
vest independently in repurchase agreements, or transfer uninvested cash bal-
ances into a pooled cash account along with other investment companies advised
or subadvised by Van Kampen American Capital Asset Management, Inc. (the "Ad-
viser"), the daily aggregate of which is invested in repurchase agreements.
Repurchase agreements are collateralized by the underlying debt security. The
Fund will make payment for such securities only upon physical delivery or evi-
dence of book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not less than
the repurchase proceeds due the Fund.
D. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains on investments to its shareholders. It is anticipated
that no distributions of capital gains will be made until tax basis capital
loss carryforwards, if any, expire or are offset by net realized capital
gains. Approximately $29 million of financial statement losses are deferred
for tax purposes to the 1995 fiscal year.
E. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Interest income is
accrued daily.
F. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
F-19
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
-------------------------------------------------------------------------------
G. DEBT DISCOUNT AND PREMIUM-For financial reporting purposes, discounts or
premiums are accounted for on the same basis as is used for federal income tax
reporting. Accordingly, original issue discounts on debt securities purchased
are amortized over the life of a security. Premiums on debt securities are not
amortized. Market discounts are recognized at the time of sale as realized
gains for book purposes and ordinary income for tax purposes.
H. ORGANIZATION COSTS-Organization expenses of approximately $15,000 were de-
ferred and are being amortized over a five year period ending September, 1997.
NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Adviser serves as investment manager of the Fund. Management fees are paid
monthly, based on the average daily net assets of the Fund at an annual rate
of .60%. From time to time, the Adviser may voluntarily elect to reimburse a
portion of the Fund's expenses. Such reimbursement may be discontinued at any
time without prior notice.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised or sub-advised by the Adviser. For
the period ended March 31, 1995, these charges included $5,157 as the Fund's
share of the employee costs attributable to the Fund's accounting officers. A
portion of the accounting services expense was paid to the Adviser in reim-
bursement of personnel, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the Ad-
viser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period ended March 31, 1995, the fees for these services ag-
gregated $198,184.
The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"),
both affiliates of the Adviser, received $12,937 and $8,128, respectively, as
their portion of the commissions charged on sales of Fund shares during the
period.
Under the Distribution Plans, each class of shares pays up to .25% per annum
of its average net assets to reimburse the Distributor for expenses and serv-
ice fees incurred. Class B shares and Class C shares pay an additional distri-
bution fee of up to .75% per annum of their average net assets to reimburse
the Distributor for its distribution expenses. Actual distribution expenses
incurred by the Distributor for Class B shares and Class C shares may exceed
the amounts reimbursed to the Distributor by the Fund. At March 31, 1995, the
unreimbursed expenses incurred by the Distributor under the Class B and Class
C plans aggregated approximately $10.1 million and $681,000, respectively, and
may be carried forward and reimbursed through either the collection of the
contingent deferred sales charges from share redemptions
F-20
<PAGE> 108
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
or, subject to the annual renewal of the plans, future Fund reimbursements of
distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a trustee of the Fund.
Certain officers and trustees of the Fund are officers and trustees of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments and forward purchase commitments, were
$310,039,492 and $398,774,274, respectively.
For federal income tax purposes, the identified cost of investments owned at
March 31, 1995 was the same for federal income tax and financial reporting pur-
poses. Gross unrealized depreciation of investments aggregated $5,835,840 and
gross unrealized appreciation aggregated $885,460.
At March 31, 1995, the Fund held the following forward purchase commitments:
<TABLE>
<CAPTION>
PAR UNREALIZED
AMOUNT MARKET VALUE AT APPRECIATION
(000) SECURITY MARCH 31, 1995 (DEPRECIATION)
------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Federal National Mtg Assoc.
$20,000 7.50%, settlement 4/95 $ 19,318,800 $ 360,988
40,000 8.00%, settlement 4/95 39,550,000 1,469,375
Government National Mtg Assoc.
25,000 7.50%, settlement 4/95 24,117,250 539,125
50,000 8.50%, settlement 5/95 50,547,000 915,750
Federal Home Loan Mtg Corp.
22,000 7.00%, settlement 5/95 20,680,000 (220,000)
------------ ----------
$154,213,050 $3,065,238
============ ==========
</TABLE>
NOTE 4--TRUSTEE COMPENSATION
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $1,200 plus a fee of $30 per day for Board and Committee
meetings attended. The Chairman receives additional fees from the Fund at the
annual rate of $450. During the period, such fees aggregated $7,346.
The trustees may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each trustee covered by the Plan elects to be credited
F-21
<PAGE> 109
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
-------------------------------------------------------------------------------
with an earnings component on amounts deferred equal to the income earned by
the Fund on its short-term investments or equal to the total return of the
Fund.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred ba-
sis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
The Fund has an unlimited number of shares of $.01 par value beneficial in-
terest authorized. Transactions in shares of beneficial interest were as fol-
lows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1995 1994
---------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................ 599,147 3,145,165
Class B............................................ 702,215 9,201,638
Class C............................................ 338,103 3,059,847
---------- -----------
1,639,465 15,406,650
========== ===========
Shares issued for distributions reinvested
Class A............................................ 145,203 373,042
Class B............................................ 387,028 1,013,538
Class C............................................ 77,025 233,058
---------- -----------
609,256 1,619,638
========== ===========
Shares redeemed
Class A............................................ (1,236,083) (4,290,195)
Class B............................................ (3,808,275) (8,702,305)
Class C............................................ (1,245,271) (2,781,050)
---------- -----------
(6,289,629) (15,773,550)
---------- -----------
Increase (decrease) in shares outstanding............ (4,040,908) 1,252,738
========== ===========
</TABLE>
F-22
