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VAN KAMPEN AMERICAN CAPITAL
UTILITIES INCOME FUND
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Van Kampen American Capital Utilities Income Fund, formerly known as
American Capital Utilities Income Fund, Inc. (the "Fund"), is a mutual fund
seeking as its primary objective current income. Capital appreciation is a
secondary objective which is sought only when consistent with the primary
objective. The Fund seeks to achieve these investment objectives by investing in
a diversified portfolio of common stocks and income securities issued by
companies engaged in the utilities industry ("Utility Securities"). Companies
engaged in the utilities industry include those involved in the production,
generation, transmission, or distribution of electric energy, gas,
telecommunications services or the provision of other utility or utility related
goods or services. Under normal market conditions, at least 65% of the Fund's
total assets is invested in Utility Securities. The Fund may invest up to 35% of
its total assets in securities issued by foreign issuers, some or all of which
may also be Utility Securities. There is no assurance that the Fund will achieve
its investment objectives.
THE FUND'S CURRENT SHAREHOLDERS ARE CONSIDERING A PROPOSAL TO REORGANIZE THE
FUND INTO THE VAN KAMPEN MERRITT UTILITY FUND. SEE "PROPOSED REORGANIZATION."
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth 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
Boulevard, Houston, Texas 77056, and its telephone number is (800) 421-5666.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR 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, 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 1, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission ("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 Devise for
the Deaf, (800) 772-8889.
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VAN KAMPEN AMERICAN CAPITAL SM
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THIS PROSPECTUS IS DATED AUGUST 1, 1995
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Proposed Reorganization.......................................... 5
Shareholder Transaction Expenses................................. 7
Annual Fund Operating Expenses and Example....................... 8
Financial Highlights............................................. 10
The Fund......................................................... 11
Investment Objectives 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................................................. 50
Description of Shares of the Fund................................ 52
Additional Information........................................... 53
</TABLE>
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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.
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PROSPECTUS SUMMARY
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THE FUND. Van Kampen American Capital Utilities Income Fund (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's primary investment objective is to seek current
income. Capital appreciation is a secondary objective which is sought only when
consistent with the Fund's primary objective. There is, however, no assurance
that the Fund will be successful in achieving its objectives.
INVESTMENT POLICY AND RISKS. The Fund will seek to achieve its investment
objectives by investing in a diversified portfolio of common stocks and income
securities issued by companies engaged in the utilities industry. Companies
engaged in the utilities industry include those involved in the production,
transmission, or distribution of electric energy, gas, telecommunications
services or the provision of other utility or utility related goods or services.
Under normal market conditions, at least 65% of the Fund's total assets will be
invested in Utility Securities. Utility Securities may include securities issued
by foreign or domestic issuers and the Fund must concentrate over 25% of its
total assets in such securities. Under normal market conditions, the Fund may
invest up to 35% of its total assets in other than Utility Securities, including
common stocks and income securities of issuers not engaged in the utilities
industry, U.S. Government securities (securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities), cash and money market
instruments. The Fund's investments in income securities will be rated, at the
time of investment, at least BBB by Standard & Poor's Corporation ("S&P"), Baa
by Moody's Investors Service ("Moody's"), a comparable rating by any other
nationally recognized statistical rating organization or if unrated, considered
by the Fund's investment adviser to be of comparable quality.
Because of the Fund's policy of concentrating its investments in Utility
Securities, the Fund may be more susceptible than an investment company without
such a policy to any single economic, political or regulatory occurrence
affecting the public utilities industry. In addition, the Fund will be affected
by general changes in interest rates which will result in increases or decreases
in the market value of the debt securities (and, to a lesser degree, equity
securities) held by the Fund; the market value of such securities tends to have
an inverse relationship to the movement of interest rates. For additional
information regarding the risk connected with investment in Utility Securities,
see "Investment Objective and Policies -- Portfolio Securities."
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The Fund may invest up to 35% of its total assets in securities issued by
foreign issuers, some or all of which may also be Utility Securities.
Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers, including
fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions. See "Investment Objectives and
Policies -- Portfolio Securities -- Foreign Securities."
The Fund may sell (write) and purchase call and put options. The Fund may
purchase and sell futures contracts and options on such contracts since such
transactions are entered into for hedging purposes. The Fund may purchase or
sell debt securities on a forward commitment basis and may lend portfolio
securities. The use of options, futures contracts and options on futures
contracts may include additional risks. See "Using Options, Futures Contracts
and Options on Futures Contracts." The Fund's net asset value per share will
fluctuate depending on market conditions and other factors. See "Investment
Objectives and Policies."
INVESTMENT RESULTS. The investment results of the Fund are shown in the
"Financial Highlights" table.
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 years, declining each year
thereafter to zero percent after the fifth year. 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 B Shares" and "Distribution Plans." Class B
shares will convert automatically
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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. Dividends from net investment income are declared
daily and paid monthly; net capital gains, if any, are distributed at least
annually. All dividends and distributions are automatically reinvested in shares
of the Fund at net asset value per share (without sales charge) unless payment
in cash is requested. 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").
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
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PROPOSED REORGANIZATION
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On May 11, 1995, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization between the Fund and the Van Kampen Merritt Utility Fund,
a sub-trust of the Van Kampen Merritt Equity Trust (the "Van Kampen Fund"), a
fund advised by Van Kampen American Capital Investment Advisory Corp., providing
for the transfer of assets and liabilities of the Fund to the Van Kampen Fund in
exchange for shares of beneficial interest of the Van Kampen Fund at its net
asset value per share (the "Reorganization").
Van Kampen American Capital Investment Advisory Corp. and the Adviser are
wholly owned subsidiaries of Van Kampen American Capital, Inc., which is a
wholly owned subsidiary of VK/AC Holding, Inc.
The Reorganization is subject to approval by the holders of a majority of the
outstanding shares of the Fund. Further details of the proposed Reorganization
will
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be contained in the proxy statement/prospectus expected to be mailed to
shareholders in August, 1995.
The Van Kampen Fund had assets of $131.9 million on March 31, 1995. Its
objective is to seek to provide its shareholders with capital appreciation and
current income by investing in a diversified portfolio of common stocks and
income securities issued by companies engaged in the utilities industry. The
Fund and the Van Kampen Fund have similar investment objectives and follow
generally similar investment policies although the Van Kampen Fund invests a
greater percentage of its assets in securities issued by companies engaged in
the utilities industry.
The Fund will continue its normal operations prior to the Reorganization.
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SHAREHOLDER TRANSACTION EXPENSES
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES(6) SHARES(6) SHARES(6)
--------- ----------------- -------------
<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--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fee.................... None None None
</TABLE>
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(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.
7
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ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
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<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES(6) SHARES(6) SHARES(6)
--------- --------- ---------
<S> <C> <C> <C>
Management fees (after reimbursement)
(as a percentage of average daily net
assets)............................... .00%(7) .00% (7) .00%(7)
12b-1 Fees (as a percentage of average
daily net assets)(3).................. .18% 1.00% (5) 1.00%(5)
Other Expenses (after reimbursement) (as
a percentage of average daily net
assets)(4)............................ .88%(8) .82% (8) .79%(8)
Total Fund Operating Expenses (after
reimbursement) (as a percentage of
average daily net assets)............. 1.06% 1.82% (9) 1.79%(9)
</TABLE>
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(3) Up to .25% for Class A shares and one percent for Class B and C shares. See
"Distribution Plans."
(4) See "Investment Advisory Services." "Other expenses" is based on estimated
amounts for the current fiscal year on an annualized basis.
(5) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
(6) For the period November 23, 1993 through September 30, 1994 on an annualized
basis.
(7) After a voluntary expense reimbursement. In the absence of such a
reimbursement, management fees for all classes would be .65%.
(8) After voluntary expense reimbursement. In the absence of expense
reimbursement, other expenses would be 1.60% for Class A shares, 1.54% for
Class B shares and 1.51% for Class C shares, respectively.
(9) After a voluntary expense reimbursement. In the absence of expense
reimbursement, total fund operating expenses would be 2.43% for Class A
shares, 3.19% for Class B shares and 3.16% for Class C shares.
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<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 1.06% for
Class A shares, 1.82% for Class B shares
and 1.79% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $58 $80 $103 $171
Class B............................... $60 $90 $116 $175*
Class C............................... $29 $57 $ 99 $214
You 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 $103 $171
Class B............................... $18 $57 $ 99 $175*
Class C............................... $18 $57 $ 99 $214
</TABLE>
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* 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."
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FINANCIAL HIGHLIGHTS
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(Selected data for a share of beneficial interest outstanding throughout the
period indicated)
The following information for the period November 23, 1993 through September
30, 1994 has been audited by the Fund's independent accountants, Price
Waterhouse LLP, 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
----------------------------------- ----------------
NOVEMBER 23,
SIX MONTHS 1993(1) SIX MONTHS
ENDED THROUGH ENDED
MARCH 31, SEPTEMBER 30, MARCH 31,
1995 1994(4) 1995
---------------- -------------- ----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........................ $8.39 $9.44 $8.39
---------------- -------------- ----------------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................... .29 .53 .29
Expenses.................................................... (.06) (.09) (.10)
---------------- -------------- ----------------
Net investment income....................................... .23 .44 .19
Net realized and unrealized gains or losses on securities... .334 (1.10) .332
---------------- -------------- ----------------
Total from investment operations............................ .564 (.66) .522
---------------- -------------- ----------------
DISTRIBUTIONS FROM NET INVESTMENT INCOME.................... (.234) (.39) (.202)
---------------- -------------- ----------------
Net asset value, end of period.............................. $8.72 $8.39 $8.71
=============== ============= ===============
TOTAL RETURN(3)............................................. 6.70% (7.24%) 6.30%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........................ $8.7 $7.5 $14.3
Ratios to average net assets(2)
Expenses................................................... 1.42% 1.06% 2.28%
Expenses, without expense reduction........................ 2.31% 2.43% 3.17%
Net investment income...................................... 5.41% 5.48% 4.52%
Net investment income, without expense reduction........... 4.52% 4.11% 3.63%
Portfolio turnover rate..................................... 29% 72% 29%
<CAPTION>
CLASS C
-----------------------------------
NOVEMBER 23, NOVEMBER 23,
1993(1) SIX MONTHS 1993(1)
THROUGH ENDED THROUGH
SEPTEMBER 30, MARCH 31, SEPTEMBER 30,
1994(4) 1995 1994(4)
-------------- ---------------- --------------
<S> <C><C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........................ $9.44 $8.38 $9.44
-------------- ---------------- --------------
INCOME FROM INVESTMENT OPERATIONS
Investment income........................................... .52 .29 .53
Expenses.................................................... (.14) (.10) (.15)
-------------- ---------------- --------------
Net investment income....................................... .38 .19 .38
Net realized and unrealized gains or losses on securities... (1.096) .332 (1.106)
-------------- ---------------- --------------
Total from investment operations............................ (.716) .522 (.726)
-------------- ---------------- --------------
DISTRIBUTIONS FROM NET INVESTMENT INCOME.................... (.334) (.202) (.334)
-------------- ---------------- --------------
Net asset value, end of period.............................. $8.39 $8.70 $8.38
============= =============== =============
TOTAL RETURN(3)............................................. (7.72%) 6.30% (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)........................ $10.7 $2.3 $1.8
Ratios to average net assets(2)
Expenses................................................... 1.82% 2.27% 1.79%
Expenses, without expense reduction........................ 3.19% 3.16% 3.16%
Net investment income...................................... 4.66% 4.51% 4.65%
Net investment income, without expense reduction........... 3.29% 3.62% 3.28%
Portfolio turnover rate..................................... 72% 29% 72%
</TABLE>
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(1) Commencement of offering of sales.
(2) Annualized.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September 30,
1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
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THE FUND
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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 and has served as
investment adviser to the Fund since its inception.
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INVESTMENT OBJECTIVES AND POLICIES
------------------------------------------------------------------------------
The Fund's primary investment objective is to provide its shareholders with
current income. Capital appreciation is a secondary objective which is sought
only when consistent with the primary objective. The Fund will seek to achieve
its investment objectives by investing in a diversified portfolio of common
stock and income securities issued by companies engaged in the utilities
industry. Companies engaged in the utilities industry include those engaged in
the production, generation, transmission, or distribution of electric energy and
telecommunications services, the distribution of gas or the provision of other
utility or utility related goods or services. Utility Securities may be issued
by either foreign or domestic issuers. Under normal market conditions, at least
65% of the Fund's total assets will be invested in Utility Securities. As a
fundamental policy, which cannot be changed without shareholder approval, the
Fund must concentrate over 25% of its assets in Utility Securities. The Fund
will not purchase more than 5% of the outstanding voting securities of more than
one public utility company. Under normal market conditions, the Fund may invest
up to 35% of its total assets in other than Utility Securities, including common
stock and income securities of issuers not engaged in the utilities industry,
U.S. Government securities, cash and money market instruments. Income securities
include preferred stock and debt securities of various maturities. The Fund's
investments in income securities will be rated, at the time of investment, at
least BBB by S&P, Baa by Moody's, a comparable rating by any other nationally
recognized statistical rating organization or if unrated, determined by the
Adviser to be of comparable quality. Ratings at the time of purchase determine
which securities may be acquired, and a subsequent reduction in ratings does not
require the Fund to dispose of a security. Securities rated BBB by S&P or Baa by
Moody's are considered to be medium grade obligations which possess
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speculative characteristics so that changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of higher rated securities. The ratings
of the ratings agencies represent their opinions of the quality of the debt
securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. Consequently, income securities with the same
maturity, coupon and rating may have different yields while income securities of
the same maturity and coupon with different rates may have the same yield. The
Fund may invest up to 35% of its assets in securities issued by foreign issuers.
The investment objectives and policies, the percentage limitations, and the
kinds of securities in which the Fund may invest are generally not fundamental
policies and may be changed by the Trustees, unless expressly governed by
certain limitations as described under "Investment Practices -- Investment
Restrictions" which can be changed only by action of the shareholders. If there
is a change in the objectives of the Fund, shareholders should consider whether
the Fund remains an appropriate investment in light of their then current
financial position and needs.
In evaluating particular issuers of Utility Securities, the Adviser will
consider a number of factors, including rates of return on capital, financial
condition and resources, historical growth rates, geographic location and
service area, management skills and such utilities industry factors as
regulatory environment, energy sources, the costs of alternative fuels and, in
the case of electric energy utilities, the extent and nature of their
involvement with nuclear power. The Adviser believes that Utility Securities
provide above-average dividend returns and below-average price/earnings ratios
which in the view of the Adviser are factors that not only provide current
income but also generally tend to moderate risk. The Adviser will buy and sell
securities for the Fund's portfolio with a view toward seeking capital
appreciation together with current income and will select securities which the
Adviser believes entail reasonable credit risk considered in relation to the
investment policies of the Fund. As a result, the Fund will not necessarily
invest in the highest yielding Utility Securities permitted by the investment
policies if the Adviser determines that market risks associated with such
investments would subject the Fund's portfolio to excessive risk. Other than for
tax purposes, frequency of portfolio turnover generally will not be a limiting
factor if the Fund considers it advantageous to purchase or sell securities. The
Fund may have annual portfolio turnover rates in excess of 100%. A high rate of
portfolio turnover involves correspondingly greater brokerage commission
expenses or dealer costs than a lower rate, which expenses and costs must be
borne by the Fund and its shareholders. See "Investment Practices -- Portfolio
Turnover."
The Fund may enter into repurchase agreements with domestic banks and
broker-dealers which involves certain risks or may lend portfolio securities on
a fully
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collateralized basis. See "Investment Practices -- Repurchase Agreements" and
"Investment Practices -- Lending of Securities." When deemed appropriate for
temporary defensive purposes, up to 100% of the Fund's assets may be invested in
U.S. Government securities and investment grade corporate debt securities.
The Fund may dispose of a security whenever, in the opinion of the Adviser,
factors indicate it is desirable to do so. Such factors include a change in
economic or market factors in general or with respect to a particular industry,
a change in the market trend of or other factors affecting an individual
security, changes in the relative market performance or appreciation
possibilities offered by individual securities and other circumstances bearing
on the desirability of a given investment.
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PORTFOLIO SECURITIES
------------------------------------------------------------------------------
GENERAL. Utility Securities are common stocks and income securities of
companies engaged in the utilities industry. Such companies may be either
foreign or domestic. Companies engaged in the utilities industry include a
variety of entities involved in (i) production, generation, transmission or
distribution of electric energy, (ii) the provision of natural gas, (iii) the
provision of telephone, mobile communication, satellite, microwave and other
telecommunications services or (iv) the provision of other utility or utility
related goods or services, including entities engaged in cogeneration, waste
disposal system provision, solid waste electric generation and independent power
producers.
The rate of return of issuers of Utility Securities generally are subject to
review and limitation by state public utilities commissions and tend to
fluctuate with marginal financing costs. Rate changes generally lag changes in
financing costs, and thus can favorably or unfavorably affect the earnings or
dividend payments on Utility Securities depending upon whether such rates and
costs are declining or rising.
Companies engaged in the public utilities industry historically have been
subject to a variety of risks depending, in part, on such factors as the type of
utility company involved and its geographic location. Such risks include
increases in fuel and other operating costs, high interest expenses for capital
construction programs, costs associated with compliance with environmental and
nuclear safety regulations, service interruption due to environmental,
operational or other mishaps, the effects of economic slowdowns, surplus
capacity, competition and changes in the overall regulatory climate. In
particular, regulatory changes with respect to nuclear and conventionally fueled
generating facilities could increase costs or impair the ability of utility
companies to operate such facilities, thus reducing utility companies' earnings
or resulting in losses. There can be no assurance that regulatory policies or
accounting standard changes will not negatively affect utility companies'
earnings or dividends. Companies engaged in the public utilities industry are
subject to
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<PAGE> 14
regulation by various authorities and may be affected by the imposition of
special tariffs and changes in tax laws. To the extent that rates are
established or reviewed by governmental authorities, companies engaged in the
public utilities industry are subject to the risk that such authority will not
authorize increased rates. In addition, because of the Fund's policy of
concentrating its investments in Utility Securities, the Fund may be more
susceptible than an investment company without such a policy to any single
economic, political or regulatory occurrence affecting the public utilities
industry. Under market conditions that are unfavorable to the utilities
industry, the Adviser may significantly reduce the Fund's investment in that
industry.
GAS AND TELECOMMUNICATIONS UTILITIES. Gas transmission companies, gas
distribution companies and telecommunications companies are undergoing
significant changes. Gas utilities have been adversely affected by declines in
the prices of alternative fuels, oversupply conditions and competition. However,
the better managed companies have utilized their cash flows to diversify into
non-regulated businesses that have helped to offset slow growth in the utility.
Telephone utilities are still experiencing the effects of increased competition
and rapidly developing technologies. Potential sources of competition and new
products are cable television systems, shared tenant services and other
noncarrier systems which are capable of bypassing traditional telephone services
providers' local plant, either completely or partially, through substitutions of
special access for switched access or through concentration of
telecommunications traffic on fewer of the traditional telephone services
providers' lines. Although there can be no assurance that increased competition
and other structural changes will not adversely affect the profitability of such
utilities, or that other negative factors will not develop in the future, in the
Adviser's opinion, competition and technological advances may over time result
in better-positioned utility companies with opportunities for enhanced
profitability.
ELECTRIC UTILITIES. Electric utility companies in general have been favorably
affected by lower fuel costs, the full or near completion of major construction
programs and lower financing costs. Some electric utilities have also taken
advantage of the right to sell power outside of their historical territories.
Certain electric utilities with uncompleted nuclear power facilities may have
problems completing and licensing such facilities, and there is increasing
public, regulatory and governmental concern with the cost and safety of nuclear
power facilities in general. At this time, there are certain institutional
impediments to the wide-scale deregulation of electric utilities including among
other things, limitations on the redistribution of power.
Electric utilities are also facing significant change as the industry moves
from a regulated monopoly to full competition. While this process will take
several years to complete, the companies today must enhance efficiency of
operation in order to survive. In some instances, this may require asset
writedowns of uneconomic plants
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<PAGE> 15
which could place a burden on those companies with weaker balance sheets. In the
opinion of the Adviser, those companies preparing today for competition in the
future will be strong survivors with opportunities for increased profitability
and dividend growth.
OTHER UTILITIES. Other issuers of Utility Securities are emerging as new
technologies develop and as old technologies are refined. Such issuers include
entities engaged in cogeneration, waste disposal system provision, solid waste
electric generation and independent power producers.
INCOME SECURITIES. The Fund may invest its assets in income securities, which
include preferred stocks and debt securities of various maturities. The Fund
will make these investments in securities which, at the time of investment, are
rated at least BBB by S&P, Baa by Moody's, a comparable rating by any other
nationally recognized statistical rating organization or if unrated, of
comparable quality as determined by the Adviser. For a description of such
ratings, see the Appendix included with the Statement of Additional Information.
While the Fund has no policy limiting the maturities of the debt securities in
which it may invest, the Adviser seeks to limit market risk by generally
maintaining a portfolio duration within a range of five to ten 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.
The Fund may invest in securities convertible into, or ultimately exchangeable
for, Utility Securities. Convertible securities rank senior to common stocks in
a corporation's capital structure. They are consequently of higher quality and
entail less risk than the corporation's common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed-income security.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. The values of income securities may change as interest
rate levels fluctuate. To the extent that the Fund invests in income securities,
the net asset value of the Fund can be expected to change as general levels of
interest rates fluctuate. When interest rates decline, the value of a portfolio
invested in income securities generally can be expected to rise. Conversely,
when interest rates rise, the value of a portfolio invested in income securities
generally can be expected to decline. Volatility may be greater during periods
of general economic uncertainty.
The foregoing policies with respect to credit quality of portfolio investments
will apply only at the time of purchase of a security, and the Fund will not be
required to dispose of a security in the event that S&P or Moody's (or any other
nationally recognized statistical rating organization) or, in the case of
unrated income securities, the Adviser, downgrades its assessment of the credit
characteristics of a
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<PAGE> 16
particular issuer. In determining whether the Fund will retain or sell such a
security, in addition to the factors described above, the Adviser may consider
such factors as the Adviser's assessment of the credit quality of the issuer of
such security, the price at which such security could be sold and the rating, if
any, assigned to such security by other nationally recognized statistical rating
organizations.
COMMON STOCK. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
after making required payments to holders of such entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so. In selecting common stocks for
investment, the Fund will focus both on the security's potential for
appreciation and on its dividend paying capacity.
FOREIGN SECURITIES. The Fund may invest up to 35% of its assets in securities
issued by foreign issuers of similar quality as the securities described above
as determined by the Adviser. Some of such securities may also be Utility
Securities. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments. Since the Fund may invest in
securities denominated or quoted in currencies other than the United States
dollar, changes in foreign currency exchange rates may affect the value of
investments in the portfolio and the accrued income and unrealized appreciation
or depreciation of investments. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Fund's
assets denominated in that currency and the Fund's yield on such assets.
The Fund may also purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. The Fund may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
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<PAGE> 17
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition,certain foreign
investments made by the Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Dividends,
Distributions and Taxes." Foreign financial markets, while growing in volume,
have, for the most part, substantially less volume than United States markets,
and securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable domestic companies. The foreign markets
also have different clearance and settlement procedures and in certain markets
there have been times when settlements have been unable to keep pace with the
volume of securities transactions making it difficult to conduct such
transactions. Delays in settlement could result in temporary periods when assets
of the Fund are not invested and no return is earned thereon. The inability of
the Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses
to the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities, including custodial costs and foreign brokerage commissions,
are generally higher than with transactions in United States securities. In
addition, the Fund will incur costs in connection with conversions between
various currencies. There is generally less government supervision and
regulation of exchanges, financial institutions and issuers in foreign countries
than there is in the United States.
The Adviser believes that many foreign issuers of Utility Securities have yet
to experience the growth that certain issuers of Utility Securities located in
the United States have experienced and that as such foreign issuers develop
their domestic markets, they may become attractive investments. In addition, the
Adviser believes that certain foreign governments may engage in programs of
privatization of issuers of Utility Securities and that the Utility Securities
issued by privatized companies may offer attractive investment opportunities
with the potential for long-term growth. However, it is not possible to predict
the terms of offerings by privatized companies or the effect of privatization in
the domestic securities market of such privatized companies. There can be no
assurance that securities of privatized companies will be offered to the public
or to foreign companies such as the Fund.
FOREIGN CURRENCY TRANSACTIONS. The value of the Fund's portfolio securities
that are traded in foreign markets may be affected by changes in currency
exchange
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<PAGE> 18
rates and exchange control regulations. In addition, the Fund will incur costs
in connection with conversions between various currencies. The Fund's foreign
currency exchange transactions generally will be conducted on a spot basis (that
is, cash basis) at the spot rate for purchasing or selling currency prevailing
in the foreign currency exchange market. The Fund purchases and sells foreign
currency on a spot basis in connection with the settlement of transactions in
securities traded in such foreign currency. The Fund does not purchase and sell
foreign currencies as an investment.
The Fund also may enter into contracts with banks or other foreign currency
brokers and dealers to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
The Fund may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Hedging against a change in
the value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the price of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions reduce
or preclude the opportunity for gain if the value of the hedged currency should
move in the direction opposite to the hedged position. The Fund will not
speculate in foreign currency forward or futures contracts or through the
purchase and sale of foreign currencies.
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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. It is the current policy of the
Fund not to invest at the time of purchase more than 25% of its total assets in
securities subject to repurchase agreements, nor more than 15% of its net assets
in securities subject to
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<PAGE> 19
repurchase agreements that do not mature within seven days and in any other
illiquid securities. In the event of the bankruptcy of the seller of a
repurchase agreement, the Fund could experience delays in liquidating the
underlying securities, and the Fund could incur a 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.
For the purpose of investing in repurchase agreements, the Adviser aggregates
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
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.
USING OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund
expects to utilize options, futures contracts and options on futures contracts
in several different ways, depending upon the status of the Fund's portfolio and
the Adviser's expectations concerning the securities markets. See the Statement
of Additional Information for a discussion of options, futures contracts and
options on futures contracts.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. The purchase and sale of options and futures contracts involve risks
different from those involved with direct investments in securities. While
utilization of options, futures contracts and similar instruments may be
advantageous to the Fund, if the Adviser is not successful in employing such
instruments in managing the Fund's investments, the Fund's performance will be
worse than if the Fund did not make such investments. In addition, the Fund
would pay commissions and other costs in connection with such investments, which
may increase the Fund's expenses and reduce its return. The Fund may write or
purchase options in privately negotiated transactions ("OTC Options") as well as
listed options. OTC Options can be closed out only by agreement with the other
party to the transaction. Any OTC Option purchased by the Fund is considered an
illiquid security. Any OTC Option written by the Fund is with a qualified dealer
pursuant to an agreement under which the Fund may repurchase the option at a
formula price. Such options are considered illiquid to the extent that the
formula price exceeds the intrinsic
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<PAGE> 20
value of the option. The Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value of the Fund's assets. In order to prevent
leverage in connection with the purchase of futures contracts or call options
thereon 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
contract or option (less any related margin deposits) will be maintained in a
segregated account with the Custodian. 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. A more complete discussion of the potential
risks involved in transactions involving options or futures contracts and
related options, is contained in the Statement of Additional Information.
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. This 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 of 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 equal 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 securities, and
the Fund may invest the cash collateral in short-term instruments and earn
additional income. There are risks of
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<PAGE> 21
delay in recovery and in some cases even loss of rights in the collateral should
the borrower of the securities fail financially.
RESTRICTED SECURITIES. The Fund may invest up to 15% of its net assets in
restricted securities and other illiquid assets (but see below for information
regarding state restrictions). As used herein, restricted securities are those
that have been sold in the United States without registration under the
Securities Act of 1933 and are thus subject to restrictions on resale. Excluded
from the limitation, however, are any restricted securities which are eligible
for resale pursuant to Rule 144A under the Securities Act of 1933 and which have
been determined to be liquid by the Trustees or by the Adviser pursuant to
Board-approved guidelines. The determination of liquidity is based on the volume
of reported trading in the institutional secondary market for each security. The
Trustees will carefully monitor the Fund's investment in 144A securities
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
These difficulties and delays could result in the Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the Fund
impossible. Since market quotations are not readily available for restricted
securities, such securities will be valued by a method that the Fund's Trustees
believes accurately reflects fair value.
Notwithstanding the foregoing, due to various state regulations, the Fund will
not invest more than 10% of its net assets in restricted securities; restricted
securities eligible for resale pursuant to Rule 144A are not included within
this limitation. In the event that the Fund's shares cease to be qualified under
the laws of such states or if such regulations are amended or otherwise cease to
be operative, the Fund would not be subject to this 10% restriction.
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, future contracts and related
options. A 100% 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 "Tax Status." 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%.
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<PAGE> 22
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuing basis. The Adviser is authorized to place portfolio transactions
with brokerage firms participating in the distribution of shares of the Fund and
other Van Kampen American Capital mutual funds if it reasonably believes that
the quality of the execution and the commission are comparable to that available
from other qualified brokerage firms. The Adviser is authorized to pay higher
commissions to brokerage firms that provide it with investment and research
information than to firms which do not provide such services if the Adviser
determines that such commissions are reasonable in relation to the overall
services provided. The information received may be used by the Adviser in
managing the assets of other advisory accounts as well as in the management of
the assets of the Fund.
INVESTMENT RESTRICTIONS. The Fund is subject to certain investment
restrictions which constitute fundamental policies. Fundamental policies cannot
be changed without the approval of holders of a majority of the Fund's
outstanding voting securities, as defined in the 1940 Act. See the Statement of
Additional Information for further information. These restrictions provide,
among other things that the Fund may not:
1. 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 forward contracts, futures contracts and foreign currency
futures and options thereon, are not deemed to be a pledge or other
encumbrance.
2. 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.
3. 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 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 enter into closing or
offsetting transactions with respect to such options, 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
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<PAGE> 23
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.
4. 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 loans are
secured by cash collateral that is at least equal to the market value. See
"Investment Practices" herein.
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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 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 seven percent
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
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<PAGE> 24
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 AGREEMENT. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed on average daily net assets of the Fund at the annual rate of 0.65% of
the Fund's average daily net assets. Under the Advisory Agreement, the Fund also
reimburses the Adviser for the cost of the Fund's accounting services, which
include maintaining its financial books and records and calculating its daily
net asset value. Operating expenses paid by the Fund include shareholder service
agency fees, 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 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 certain restrictions. Persons with access to certain sensitive
information are subject to preclearance and other procedures designed to prevent
conflicts of interest.
PORTFOLIO MANAGEMENT. Mary Jayne Maly is primarily responsible for the day-
to-day management of the Fund's investment portfolio. Ms. Maly has been
primarily responsible for managing the Fund's investment portfolio since May 20,
1994. Prior to that she was associate portfolio manager of the Fund. Ms. Maly is
Vice President of the Fund and has been a portfolio manager with the Adviser
since 1994. Ms. Maly was an associate portfolio manager with the Adviser from
1992 to 1994. Prior to that time, Ms. Maly was a senior equity analyst at Texas
Commerce Investment Management Company. Thomas Copper is associate portfolio
manager of the Fund. In that role he assists Ms. Maly in the day-to-day
management of the Fund's investment portfolio. He has served in that capacity
since the inception of
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the Fund. Mr. Copper is also Vice President of the Fund and has been an
associate portfolio manager of the Adviser since 1992. Prior to that time Mr.
Copper was a credit analyst with the Adviser.
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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% 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. 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 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" herein for discussion
on applicability of the conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A
25
<PAGE> 26
shares. See "Purchase of Shares -- Class C Shares." 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 "Conversion Feature"
below 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 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
26
<PAGE> 27
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 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
27
<PAGE> 28
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 "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. The Fund and the Distributor reserve the right to refuse
any order for the purchase of shares. Shares of the Fund may be sold in foreign
countries where permissible. The Fund also reserves the right to suspend the
sale of the Fund's shares in response to conditions in the securities markets or
for other reasons.
28
<PAGE> 29
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares may also be purchased by completing the application accompanying
this Prospectus and forwarding the application, through the 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. Such computation is made by using prices as of
the close of trading on the Exchange and (i) valuing securities listed or traded
on a national securities exchange at the last reported sale price, or if there
has been no sale that day, at the last reported bid price, (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, and (iii) valuing any securities for which market quotations are not
readily available, and any other assets at fair value as determined in good
faith by the Trustees of the Fund. Short-term investments 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 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
29
<PAGE> 30
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 higher
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 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
30
<PAGE> 31
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>
REALLOWED
TO DEALERS
AS % OF AS % OF (AS A % OF
SIZE OF NET AMOUNT OFFERING OFFERING
INVESTMENT INVESTED PRICE 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.
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. Dealers which are
reallowed all or substantially all of the sale charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to 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
31
<PAGE> 32
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 interpretation 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.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
Cumulative Purchase Discount. The size of investment shown in the 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
32
<PAGE> 33
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 purchase amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustments in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application form accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
Unit 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. 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
33
<PAGE> 34
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.
(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 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 which 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.
34
<PAGE> 35
(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 or broker-dealer charges an account
management fee ("wrap accounts"), provided the bank or broker-dealer has a
separate agreement with 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 sale 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 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.
35
<PAGE> 36
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 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
36
<PAGE> 37
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, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, 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 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
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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
investments 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 shareholder
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 the 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 per share (without sales
charge) on the record date. Unless the shareholder instructs ACCESS otherwise,
the reinvestment plan is automatic. This instruction may be made by telephone by
calling (800) 421-5666 ((800) 772-8889 for the hearing impaired) or in writing
to ACCESS. The investor may, on the initial application or prior to any
declaration,
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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 form accompanied by this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class
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 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 for sale
in the investor's state.
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EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund, other
than Van Kampen American Capital Government Target Fund ("Government Target"),
may be exchanged for shares of the same class of any other fund without sales
charge, provided that shares of certain 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 class of 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 requirement 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
for more information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying this Prospectus. Van
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<PAGE> 41
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
gain 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 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 Class B shares for a retirement
plan established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Class B and Class C shareholders who 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
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<PAGE> 42
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. Those
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 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 or
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 documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where Van Kampen American Capital Trust
Company serves as IRA custodian, special IRA,
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403(b)(7), or Keogh distribution forms must be obtained from and be forwarded to
Van Kampen American Capital Trust Company, P. O. Box 944, Houston, Texas
77001-0944. Contact the custodian for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed will be made by check
mailed within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until it confirms the purchase check has cleared, usually a
period of 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
previously set forth, 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 herein. To establish such privilege a
shareholder must complete the appropriate section of the application form
accompanying this Prospectus or call the Fund at (800) 421-5666 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares contact the telephone transaction line at (800)
421-5684. VKAC and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, neither VKAC nor the Fund
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. ACCESS will record any calls. 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
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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 form 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 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.
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<PAGE> 46
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
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
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 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 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 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
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<PAGE> 47
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 reimbursements 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 shares or Class C shares is
designed to permit an investor to purchase such shares without the assessment of
a front-end sales load and at the same time permit the Distributor to compensate
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 expenditures 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 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
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$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 period November 23, 1993 through June 30, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B Plan and
carried forward were approximately $405,000 or 4.4% of average daily net assets
of the class under the Class B Plan. The unreimbursed expenses incurred by the
Distributor under the Class C Plan and carried forward were approximately
$25,000 or 1.6% of average daily net assets of the class under the Class C Plan.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated and has no liability to pay 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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In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. 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 (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 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.
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.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund at least annually distributes to
shareholders the excess, if any, of its total profits on the sale of securities
during the year over its total losses on the sale of securities, including
capital losses carried
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forward from prior years in accordance with tax laws. As in the case of
dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value. See "Shareholder
Services -- Reinvestment Plan."
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TAX STATUS
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The Fund has qualified and intends to be taxed as a regulated investment
company under the Code. By qualifying as a regulated investment company, the
Fund is not subject to federal income taxes to the extent it distributes its net
investment income and net realized capital gains. Dividends from net investment
income and distributions from any net realized short-term capital gains are
taxable to shareholders as ordinary income. Long-term capital gains
distributions constitute long-term capital gains for federal income tax
purposes. All such dividends and distributions are taxable to the shareholder
whether or not reinvested in shares. However, shareholders not subject to tax on
their income will not be required to pay tax on amounts distributed to them.
Shareholders are notified annually of the federal tax status of dividends and
capital gains distributions.
To avoid being subject to a 31% federal backup withholding on dividends,
distributions and redemption payments, shareholders must furnish the Fund with a
certification of their correct taxpayer identification number.
Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution paid shortly after the purchase of shares
by an investor would represent, in substance, a return of capital to the
shareholder (to the extent it is paid on the shares so purchased) even though
subject to income taxes as discussed above.
Gains or losses on the Fund's transactions in listed options (except certain
equity options) on securities or indices, 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.
49
<PAGE> 50
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Under Code Section 988, foreign currency gains or losses from certain forward
contracts not traded in the interbank market generally are treated as ordinary
income or loss. Such Code Section 988 gains or losses will increase or decrease
the amount of the Fund's investment company taxable income available to be
distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if Code
Section 988 losses exceed other investment company taxable income during a
taxable year, the Fund would not be able to make any ordinary dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be recharacterized as a return of capital to
shareholders, thereby reducing each shareholder's basis in his or her Fund
shares.
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 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, five and ten-year periods or 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
50
<PAGE> 51
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.
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.
Total return is 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, the Dow Jones
Industrial Average Index, Standard & Poor's, NASDAQ, other appropriate indices
of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Investor'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
51
<PAGE> 52
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 incorporated in Maryland on August 31, 1993 and
reorganized on July 31, 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
share is equal as to earnings, assets and voting privileges, except as noted
above, and each class bears the expenses related to the distribution of its
shares. There are no conversion, preemptive or other subscription rights, except
with respect to the conversion of Class B shares and Class C shares into Class A
shares as described above. In the event of liquidation, each of the shares of
the Fund is entitled to its portion of all of the Fund's net assets after all
debt and expenses of the Fund have been paid. Since Class B shares and Class C
shares pay higher distribution expenses, the liquidation proceeds to Class B
shareholders and Class C shareholders are likely to be lower than to other
shareholders.
52
<PAGE> 53
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.
53
<PAGE> 54
VAN KAMPEN AMERICAN CAPITAL
UTILITIES INCOME FUND
2800 Post Oak Boulevard
Houston, TX 77056
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Boulevard
Houston, TX 77056
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Custodian
EXISTING SHAREHOLDERS-- STATE STREET BANK AND
FOR INFORMATION ON YOUR EXISTING TRUST COMPANY
ACCOUNT PLEASE CALL THE FUND'S 225 West Franklin Street
TOLL-FREE NUMBER--(800) 421-5666 P.O. Box 1713
Boston, MA 02105-1713
PROSPECTIVE INVESTORS--CALL YOUR Attn: Van Kampen American Capital
BROKER OR (800) 421-5666 Funds
DEALERS--FOR DEALER INFORMATION, Legal Counsel
SELLING AGREEMENTS, WIRE ORDERS, OR
REDEMPTIONS CALL THE DISTRIBUTOR'S O'MELVENY & MYERS
TOLL-FREE NUMBER--(800) 421-5666 400 South Hope Street
Los Angeles, CA 90071
FOR SHAREHOLDER AND DEALER INQUIRIES
THROUGH TELECOMMUNICATIONS DEVICE Independent Accountants
FOR THE DEAF (TDD)
DIAL (800) 772-8889 PRICE WATERHOUSE LLP
1201 Louisiana
FOR TELEPHONE TRANSACTIONS Suite 2900
DIAL (800) 421-5684 Houston, TX 77002
<PAGE> 55
UTILITIES INCOME FUND
------------------------------------------------------------------------------
P R O S P E C T U S
AUGUST 1, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
-----------------------------------------------------------------------------
<PAGE> 56
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL UTILITIES INCOME FUND
AUGUST 1, 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 1,
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 POLICIES AND TECHNIQUES.................................................... 3
DEPOSITARY RECEIPTS................................................................... 4
REPURCHASE AGREEMENTS................................................................. 4
FORWARD COMMITMENTS................................................................... 4
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS........................... 4
LOANS OF PORTFOLIO SECURITIES......................................................... 11
INVESTMENT RESTRICTIONS............................................................... 11
TRUSTEES AND EXECUTIVE OFFICERS....................................................... 13
INVESTMENT ADVISORY AGREEMENT......................................................... 17
DISTRIBUTOR........................................................................... 18
DISTRIBUTION PLANS.................................................................... 19
TRANSFER AGENT........................................................................ 20
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................................. 20
DETERMINATION OF NET ASSET VALUE...................................................... 22
PURCHASE AND REDEMPTION OF SHARES..................................................... 22
EXCHANGE PRIVILEGE.................................................................... 26
CHECK WRITING PRIVILEGE............................................................... 27
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES............................................ 27
FUND PERFORMANCE...................................................................... 29
OTHER INFORMATION..................................................................... 29
FINANCIAL STATEMENTS.................................................................. 30
APPENDIX -- DESCRIPTION OF BOND RATINGS............................................... 31
</TABLE>
<PAGE> 57
GENERAL INFORMATION
Van Kampen American Capital Utilities Income Fund (the "Fund") was
originally incorporated in Maryland on August 31, 1993 and reorganized as a
trust under the laws of Delaware July 31, 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 seven percent 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, VKAC manages or supervises more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with more than 86 analysts devoted to various specializations.
VKAC equity fund philosophy is to normally remain fully invested and
diversified across many industries to achieve consistent long-term returns.
VKAC uses a four-step investment process designed to attempt to produce
consistently good short-term results, which should help lead to superior
long-term performance.
Fully Invested: Money invested in a VKAC stock fund will normally be fully
invested in the market to attempt to maximize the potential for long-term
returns. The importance of being fully invested can be illustrated by the
following comparison. By missing fewer than four percent of the months during
the past 68 years, the value of one dollar invested in 1926 was $11.57 at the
end of 1994, compared to $810.54 for one dollar that was invested for the entire
period (Source: Micropal, Inc.). During the most recent five-year period
(1990-1994), the average annual total return for stocks, as measured by the
Standard and Poor's 500 Stock Index, a broad-based, unmanaged index, was 8.87
percent. However, the average annual return for the S&P 500 for the same period
excluding the 20 best days for stock market performance, was just 0.67 percent.
Of course, past performance is no guarantee of future results.
Widely Varied: A widely varied portfolio usually reduces risk and increases
relative stability. Since VKAC's goal is consistency, a widely varied portfolio
across industries is emphasized. VKAC stock funds are varied both in terms of
the number of industries and the number of stocks within each industry in which
they invest. Generally, the stock funds invest in 12 broad economic sectors, and
in many individual stocks within each sector.
Clearly Defined: The basic characteristics of VKAC funds are determined by
a pre-defined profile which remains constant over time.
Blended Investment Style: Market conditions are constantly changing, which
means the stocks that perform well should be expected to change. A rigid
investment style might cause an investor to suffer when certain types of stocks
lose favor with the market. The two most common investment styles are growth,
which
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<PAGE> 58
emphasizes companies that are projected to experience rapid growth in earnings,
and value, which focuses on companies whose stock is selling for less than the
company's net worth. At VKAC, our style is blended between growth and value of a
fund-specific basis. The results of our approval are constantly evaluated and
compared to other similar funds. Although past performance is no guarantee of
future results, VKAC remains committed to our belief that this approach should
help maximize potential for long-term returns.
As of July 6, 1995, no person was known by management to own beneficially
or of record as much as five percent of the outstanding shares of any class
except the following:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OWNERSHIP AT CLASS PERCENTAGE
OF HOLDER JULY 6 OF SHARES OWNERSHIP
---------------------------------------- -------------------- --------- ----------
<S> <C> <C> <C>
Van Kampen American Capital 217,192 shares of Class A 21.05%
Asset Management Inc. beneficial ownership
2800 Post Oak Boulevard
Houston, Texas 77056
Van Kampen American Capital 283,755 shares held Class A 25.69%
Trust Company of record
2800 Post Oak Boulevard 375,528 shares held Class B 21.72%
Houston, Texas 77056 of record
12,508 shares held Class C 4.20%
of record
Donaldson Lufkin Jenrette 264,329 shares held Class B 15.29%
1 Pershing Plaza 5th floor of record
Jersey City, New Jersey 07399-0002 45,733 shares held Class C 15.36%
of record
National Financial Services Corp. 102,286 shares held Class B 5.92%
Church Street Station of record
P.O. Box 3730
New York, New York 10008-3730
Paine Webber, Inc. 154,892 shares held Class B 8.96%
Genises Jungco-Lincoln Harbor of record
1000 Harbor Blvd., 6th Floor
Weehawken, New Jersey 07087-6727
Smith Barney Inc. 62,944 shares held Class A 6.10%
388 Greenwich Street -- 22nd Floor of record
New York, New York 10013-2375 115,990 shares held Class B 6.71%
of record
147,700 shares held Class C 49.60%
of record
</TABLE>
The outstanding shares of the Fund were held of record by Van Kampen
American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056,
acting as custodian for certain employee benefit plans and retirement accounts.
INVESTMENT POLICIES AND TECHNIQUES
The Fund's primary investment objective is to seek current income. Capital
appreciation is a secondary objective which is sought only when consistent with
the primary objective. The Fund will seek to achieve its investment objectives
by investing in a diversified portfolio of common stocks and income securities
issued by companies engaged in the utilities industry. The following disclosures
supplement disclosures set forth in the Prospectus. Readers must refer also to
the Prospectus for a complete presentation.
3
<PAGE> 59
DEPOSITARY RECEIPTS
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with broker-dealers or
domestic banks (or a foreign branch or subsidiary thereof). 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 ("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 is
required to maintain the value of the underlying securities marked to market
daily at not less than the repurchase price. The underlying securities (normally
securities of the U.S. Government, or its agencies and instrumentalities), may
have maturity dates exceeding one year. The Fund does not bear the risk of a
decline in value of the underlying security unless the seller defaults under its
repurchase obligation. See 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, cash equivalents, liquid high
grade debt securities or U.S. Government 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 by the
securities subject to the Forward Commitment, 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, cash equivalents, liquid high grade debt securities or U.S.
Government 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 security which is
being hedged by the Forward Commitment sale. See Prospectus for further
information.
OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may engage in transactions in options, futures contracts and
options on futures contracts. Set forth below is certain additional information
regarding options, futures contracts and options on futures contracts. See
Prospectus for further information.
4
<PAGE> 60
WRITING CALL AND PUT OPTIONS
Purpose. The principal reason for writing options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. The Fund's current return can be expected to
fluctuate because premiums earned from an option writing program and dividend or
interest income yields on portfolio securities vary as economic and market
conditions change. Writing options on portfolio securities also is likely to
result in a higher portfolio turnover.
Writing Options. The purchaser of a call option pays a premium to the
writer (i.e., the seller) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund writes call
options either on a covered basis or for cross-hedging purposes. A call option
is covered if at all times during the option period the Fund owns or has the
right to acquire securities of the type that it would be obligated to deliver if
any outstanding option were exercised. An option is for cross-hedging purposes
if it is not covered by the security subject to the option, 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 maintains 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 writer (i.e., the
seller) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would write put options only
on a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its Custodian cash, cash
equivalents or U.S. Government securities in an amount of not less than the
exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could write options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as writer of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a writer, but would provide an asset of
equal value to its obligation under the option written. If the Fund is not able
to enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has written, it will be required to maintain the
securities subject to the call or the collateral underlying the put until a
closing purchase transaction can be entered into (or the option is exercised or
expires), even though it might not be advantageous to do so.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Writing Options. By writing a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by writing a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
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. In
addition, the Fund may purchase call options for capital appreciation. Since the
premium paid for a call option is typically a small fraction of the price of the
underlying security, a given
5
<PAGE> 61
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. In addition, the Fund may purchase put
options for capital appreciation in anticipation of a price decline in the
underlying security and a corresponding increase in the value of the put option.
The purchase of put options for capital appreciation involves the same
significant risk of loss as described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
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, which are
considered illiquid.
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 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.
6
<PAGE> 62
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash upon exercise of the option. Receipt of this
cash amount will depend upon the closing level of the stock index upon which the
option is based being greater than (in the case of a call) or less than (in the
case of a put) the exercise price of the option. The amount of cash received
will be the difference between the closing price of the index and the exercise
price of the option, multiplied by a specified dollar multiple. The writer of
the option is obligated, in return for the premium received, to make delivery of
this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
FOREIGN CURRENCY OPTIONS
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than five percent of the Fund's net assets at
any given time. Options on foreign currencies operate similarly to options on
securities, and are traded primarily in the over-the-counter market, although
options on foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Fund from time to
time and over-the-counter options may also be purchased, but only when the
Adviser believes that a liquid secondary market exists for such options,
although there can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investment generally. See "Investment Practices -- Using Options, Futures
Contracts and Related Options" in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
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<PAGE> 63
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC") under which the Fund is exempt from registration as
a "commodity pool."
Types of Contracts. 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, LIBOR.
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the
Chicago Mercantile Exchange and United States commodity exchanges may develop
futures and futures options on other indices of foreign securities. Futures and
options on United States devised index of foreign stocks are also being
developed.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to a percentage (which will normally range between
two and ten 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, are made on a daily
basis as the price of the underlying securities or index fluctuates, making the
long and short positions in the futures contract more or less valuable, a
process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market
8
<PAGE> 64
or market sector decline that may adversely affect the market value of the
Fund's securities ("defensive hedge"). To the extent that the Fund's portfolio
of securities changes in value in correlation with the underlying security or
index, the sale of futures contracts substantially reduces the risk to the Fund
of a market decline and, by so doing, provides an alternative to the liquidation
of securities positions in the Fund with attendant transaction costs. Ordinarily
commissions on futures transactions are lower than transaction costs incurred in
the purchase and sale of securities.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased and/or
incur a loss of all or part of its margin deposits with the broker. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for this 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 the securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not be
correlated with movements in the securities or index underlying the futures
contract due to certain market distortions. First, all participants in the
futures market are subject to margin depository and maintenance requirements.
Rather than meet additional margin depositary requirements, investors may close
futures contracts through offsetting transactions, which could distort the
normal relationship between the futures market and the securities or index
underlying the futures contract. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities markets. Therefore, increased participation by
speculators in the futures markets may cause temporary price distortions. Due to
the possibility of price distortion in the futures markets and because of the
imperfect correlation between movements in futures contracts and movements in
the securities underlying them, a correct forecast of general market trends by
the Adviser may still not result in a successful hedging transaction 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.
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<PAGE> 65
Successful use of futures is also subject to the Adviser's ability
correctly to 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 other
conditions specified in CFTC regulations) and (ii) that the Fund not enter into
futures and related options for which the aggregate initial margin and premiums
exceed five percent of the fair market value of the Fund's assets. In order to
prevent leverage in connection with the purchase of futures contracts by the
Fund, an amount of cash, cash equivalents or liquid high grade debt securities
equal to the market value of the obligation under the futures contracts (less
any related margin deposits) will be maintained in a segregated account with the
Custodian.
Additional Risks to Options and Futures Transactions. Each of the United
States exchanges has established limitations governing the maximum number of
call or put options on the same underlying security or futures contract (whether
or not covered) which may be written by a single investor, whether acting alone
or in concert with others (regardless of whether such options are written on the
same or different Exchanges or are held or written on one or more accounts or
through one or more brokers). Option positions of all investment companies
advised by the Adviser are combined for purposes of these limits. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. These position limits may
restrict the number of listed options which the Fund may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
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, 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.
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 is 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 purposes as, the sale of a futures contract; at the same time, it
could write put options at a lower strike price (a "put bear spread") to offset
part of the cost of the strategy to the Fund. The purchase of call options on
futures contracts is 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
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<PAGE> 66
market for such options exists. Compared to the use of futures, the purchase of
options on futures involves less potential risk to the Fund because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However there may be circumstances, such as when there is no movement in the
level of the index, 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.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities to unaffiliated brokers, dealers and
financial institutions provided that cash equal to 100% of the market value of
the securities loaned is deposited by the borrower with the Fund and is
maintained each business day. While such securities are on loan, the borrower is
required to pay the Fund any income accruing thereon. Furthermore, the Fund may
invest the cash collateral in portfolio securities thereby increasing the return
to the Fund as well as increasing the market risk to the Fund.
Loans would be made for short-term purposes and subject to termination by
the Fund in the normal settlement time, currently five business days after
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
Fund and its shareholders, but any gain can be realized only if the borrower
does not default. The Fund may pay reasonable finders', administrative and
custodial fees in connection with a loan.
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 and foreign currency
futures and options thereon, forward 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 forward contracts, futures
contracts and foreign currency futures and options thereon, 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 and securities issued
by real estate investment trusts and corporation engaged primarily in
real estate.
4. 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.
5. Purchase or sell commodities or commodity contracts except that the
Fund may enter into transactions in options, futures contracts and
foreign currency futures or options thereon and forward contracts.
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<PAGE> 67
6. 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 in the resale of any securities owned by the Fund.
7. 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 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 enter into closing or offsetting transactions with
respect to such options, 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.
8. 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 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. These restrictions
provide that the Fund shall not:
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 engage in transactions in options, forward contacts,
futures contracts, foreign currency futures and options thereon.
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 contracts, options,
futures contracts, foreign currency futures 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 options on futures contracts.
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<PAGE> 68
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 five percent of its total assets.
The Fund may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and limitations as the Fund.
The Fund has made an undertaking with one state to provide written
notification to shareholders of any change in its investment objective at least
30 days prior to implementing such change and will waive any fee or charge which
may result if the shareholder decides to redeem his or her account as a result
of such change in the investment objectives. The Fund has also undertaken to
invest no more than 10% of its total assets in securities of real estate
investment trusts.
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.
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. Co-Chairman of the Board and a trustee of
each of the Van Kampen American Capital Funds.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
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.
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. Co-Chairman of the Board and a Trustee of each
Age: 70 of the Van Kampen American Capital Funds.
</TABLE>
14
<PAGE> 70
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
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.
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.
OFFICERS
The Fund's officers, other than Messrs. McDonnell and Nyberg, are located
at 2800 Post Oak Blvd., Houston, Texas 77056. Messrs. McDonnell and Nyberg are
located at One Parkview Plaza, Oakbrook Terrace, IL 61181.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Thomas Copper............ Vice President Associate Portfolio Manager of the Adviser;
Age: 36 formerly, Credit Analyst of the Adviser.
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.
Mary Jayne Maly.......... Vice President Portfolio Manager of the Adviser; formerly,
Age: 39 Senior Equity Analyst, Texas Commerce
Investment Management Company.
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: 48 Treasurer investment companies advised by the
Adviser.
</TABLE>
15
<PAGE> 71
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 41 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.
Alan T. Sachtleben....... Vice President Executive Vice President and Director of
Age: 53 the Adviser, Executive Vice President of
VK/AC Holding, Inc. and Van Kampen American
Capital.
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 $1,575 in trustees' fees from the Fund in addition to certain
out-of-pocket expenses. Such Trustees also received compensation for serving as
trustees of other investment companies advised by the Adviser. For legal
services rendered during the fiscal year, the Fund paid legal fees of $2,975 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.
16
<PAGE> 72
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as trustees 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 calendar 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
RETIREMENT TOTAL
AGGREGATE BENEFITS COMPENSATION
COMPENSATION ACCRUAL FROM THE FUND
FROM THE AS PART OF FUND COMPLEX PAID TO
NAME OF PERSON FUND EXPENSES TRUSTEES(1)(5)
------------------------------------------------- ------------ --------------- ---------------
<S> <C> <C> <C>
J. Miles Branagan................................ $295 0 $64,000
Dr. Richard E. Caruso(3)......................... 310(2) 0 64,000
Dr. Roger Hilsman................................ 280 0 66,000
David Rees....................................... 295 0 64,000
Lawrence J. Sheehan.............................. 295 0 67,000
Dr. Fernando Sisto(3)............................ 370(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 $280 for Dr. Caruso and $265 for
Dr. Sisto.
(3) Messrs. Caruso and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Fund is as follows: $280 for
Dr. Caruso and $265 for Dr. Sisto.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, with respect to the second and fourth columns, $235
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).
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $640 and a
meeting fee of $18 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 and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objectives. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports, and notices and proxy solicitation materials. In addition,
the Adviser furnishes at no cost to the Fund the services of a President of the
Fund, one or more Vice Presidents as needed, and a Secretary.
17
<PAGE> 73
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment companies advised or subadvised by the Adviser. A
portion of these amounts were paid to the Adviser or its parent in reimbursement
of personnel, office space, facilities and equipment costs attributable to the
provision of accounting services to the Fund. The services provided by the
Adviser are at cost. The Fund also pays shareholder service agency fees,
distribution fees, service fees, custodian fees, legal and auditing fees, the
costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the company for any actions or omissions if
it acted without willful misfeasance, 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 on average daily net assets of the Fund at annual rate
of 0.65% of the average daily net assets of the Fund.
The average net asset value for purposes of computing the advisory fee is
determined by taking the average of all of the determinations of net asset value
for each business day during a given calendar month. Such fee is payable for
each calendar month as soon as practicable after the end of that month. The
Adviser agrees to use its best efforts to recapture tender solicitation fees and
exchange offer fees for the Fund's benefit, and to advise the Trustees of the
Fund of any other commissions, fees, brokerage or similar payments which may be
possible under applicable laws for the Adviser or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc. to receive in connection with
the Fund's portfolio transactions or other arrangements which may benefit the
Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitations applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the Distribution Plans.
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 may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on not more than 60 days' nor less than 30 days' written notice.
During the fiscal year ended September 30, 1994, the Adviser received $-0-
in advisory fees from the Fund. For such period, the Fund paid $17,596 for
accounting services.
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
18
<PAGE> 74
renewable from year to year if approved (a) by the Fund's Trustees or by a vote
of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of Trustees who are not parties to the
Underwriting Agreement or interested persons of any party, by votes cast in
person at a meeting called for such purpose. The Underwriting Agreement provides
that it will terminate if assigned, and that it may be terminated without
penalty by either party on 60 days' written notice. During the fiscal year ended
September 30, 1994, total underwriting commissions on the sale of shares of the
Fund were $118,639. Of such total, the amount retained by the Distributor was
$18,378. The remainder was reallowed to dealers. Of such dealer reallowances,
$30,810 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" and "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 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 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 include payments at an annual rate of up to 0.75% of the net assets of
the Class B shares to reimburse the Distributor for (1) commissions and
transaction fees of up to 4% 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 thereon computed at the three-month LIBOR rate plus one
and one-half percent compounded quarterly on the unreimbursed distribution
expenses. With respect to the Class C Plan, authorized payments by the Fund
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 semiannual 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 thereon computed
at the three-month LIBOR rate plus one and one-half percent compounded quarterly
on the unreimbursed distribution expenses. Such reimbursements are subject to
the maximum sales charge limits specified by the NASD for asset-based charges.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the
19
<PAGE> 75
described services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a bank would result in any material adverse consequences to the Fund. In
addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and the form of
servicing agreement was 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 either
Plan or in any agreements related to the Plan ("Independent Trustees"). In
approving each Plan in accordance with the requirements of Rule 12b-1, the
Trustees determined that there is a reasonable likelihood that each Plan will
benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, the Plans will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of the Fund.
Any change in any of the Plans that would materially increase the distribution
or service expenses borne by the Fund requires shareholder approval voting
separately by class; otherwise, it may be amended by a majority of the Trustees,
including a majority of the Independent Trustees, by vote cast in person at a
meeting called for the purpose of voting upon such amendment. So long as the
Plans are in effect, the selection or nomination of the Independent Trustees is
committed to the discretion of the Independent Trustees.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $7,768 or .15%, (not annualized) respectively, 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
$50,180 or .83% (not annualized) of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$45,162 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
$5,018 for fees paid to Service Organizations for servicing Class B shareholders
and administering the Class B Plan. For the fiscal year ended September 30,
1994, the Fund's aggregate expenses under the Class C Plan were $7,517 or .83%
(not annualized) of the Class C shares' average net assets. Such expenses were
paid to reimburse the Distributor for the following payments: $6,765 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 $752 for
fees paid to Service Organizations for servicing Class C shareholders and
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 $6,315 for these services. These services are provided at cost plus
a profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions 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
20
<PAGE> 76
on securities exchanges, the Adviser seeks the best security price at the most
favorable commission rate. In selecting broker-dealers and in negotiating
commissions, the Adviser considers the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. When more
than one firm is believed to meet these criteria, preference may be given to
firms which also provide research services to the Fund or the Adviser.
Consistent with the Rules of Fair Practice of the NASD and subject to seeking
best execution and such other policies as the Trustees may determine, the
Adviser may consider sales of shares of the Fund and of the other Van Kampen
American Capital mutual funds as a factor in the selection of firms to execute
portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the investment advisory agreement, the Fund's
Trustees has 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.
Brokerage commissions paid by the Fund on portfolio transactions for the
fiscal year ended September 30, 1994 totalled $39,197. During the year ended
September 30, 1994, the Fund paid $28,916 in brokerage
21
<PAGE> 77
commissions on transactions totalling $12,656,588 to brokers selected primarily
on the basis of research services provided to the Adviser.
Prior to December 20, 1994, the Fund placed brokerage transactions with
brokers that were considered affiliated persons of the Adviser's former parent,
Travelers. 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:
Commissions Paid:
<TABLE>
<CAPTION>
ROBINSON
SMITH BARNEY HUMPHREY
------------ --------
<S> <C> <C>
Fiscal 1994 $3,150 $2,058
Fiscal 1994 Percentages:
Commissions with affiliate to total commissions 8.04% 5.25%
Value of brokerage transactions with affiliate to total
transactions 7.74% 3.24%
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time) on each
business day on which the Exchange is open. The 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.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets including Japanese markets on days which are not
business days in New York. The Fund's net asset value is not calculated and the
Fund does not effect sales, redemptions and repurchases of its shares on days
which are not business days in New York. There may be significant variations in
the net asset value of Fund shares on account of changes in prices of stocks
traded in foreign stock markets on days when net asset value is not calculated
and on which shareholders cannot redeem.
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 pursuant to an order issued by the
Securities and Exchange Commission.
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 offers 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
22
<PAGE> 78
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 Securities Act of 1933.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in this 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 the
shareholder service agent. 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 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 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 trustee 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 Class A
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
representations concerning the investor's 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
the value of all shares of such Participating Funds previously purchased 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
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<PAGE> 79
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 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 Securities and Exchange Commission, by
order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For certain full service participant directed profit sharing and money
purchase plans and qualified 401(k) retirement plans and for investments in the
amount of $1,000,000 or more of Class A shares of the Fund ("Qualified
Purchaser"), the front-end sales charge will be waived and a contingent deferred
sales charge ("CDSC -- Class A") of 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 a specified percentage 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 Tax Free Money Fund and Van Kampen
American Capital Money Market Fund with shares of other participating funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemptions of Shares," redemption of
Class B and Class C shares is subject to a contingent deferred sales charge.
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<PAGE> 80
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE
The CDSC -- Class B and C is 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 Code, which in pertinent part defines a person as
disabled if such person "is unable to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment which can
be expected to result in death or to be of long-continued and indefinite
duration." While the Fund does not specifically adopt the balance of the Code's
definition which pertains to furnishing the Secretary of Treasury with such
proof as he or she may require, the Distributor will require satisfactory proof
of death or disability before it determines to waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of Van Kampen American
Capital funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held onto the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC -- Class B and C is applicable in the event that such acquired shares
are redeemed following the transfer or rollover. The charge also will be waived
on any redemption which results from the return of an excess contribution
pursuant to Section 408(d)(4) or (5) of the Code, the return of excess deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or
disability of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In
addition, the charge will be waived on any minimum distribution required to be
distributed in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("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.
(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.
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<PAGE> 81
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.
(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.
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.
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<PAGE> 82
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
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 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
Fund intends similarly to distribute to shareholders any taxable net realized
capital gains. Taxable net realized capital gains are the excess, if any, of the
Fund's total profits on the sale of securities during the year over its total
losses on the sale of securities, including capital losses carried forward from
prior years in accordance with the tax laws. Such capital gains, if any, are
distributed at least once a year. All income dividends and capital gains
distributions are reinvested in shares of the Fund at net asset value without
sales charge on the record date, except that any shareholder may otherwise
instruct the shareholder service agent in writing and receive cash. Shareholders
are informed as to the sources of distributions at the time of payment.
The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders and meet certain diversification and other requirements. By
qualifying as a regulated investment company, the Fund is not subject to federal
income taxes to the extent it distributes its taxable net investment income and
taxable net realized capital gains. If for any taxable year the Fund does not
qualify for the special tax treatment afforded regulated investment companies,
all of its taxable income, including any net realized capital gains, would be
subject to tax at regular corporate rates (without any deduction for
distributions to shareholders).
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders during any calendar year at least 98% of its
ordinary net investment income for the twelve months ended December 31, plus 98%
of its capital gains 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.
Dividends from net investment income and distributions from any short-term
capital gains are taxable to shareholders as ordinary income. A portion of
dividends taxable as ordinary income qualify for the 70% dividends received
deduction for corporations. To qualify for the dividends received deduction, a
corporate shareholder must hold the shares on which the dividend is paid for
more than 45 days.
Dividends and distributions declared payable to shareholders of record
after September 30 of any year and paid before February 1 of the following year
are considered taxable income to shareholders on the record date even though
paid in the next year.
Distributions from long-term capital gains are taxable to shareholders as
long-term capital gains, regardless of how long the shareholder has held Fund
shares. Such dividends and distributions from short-term capital gains are not
eligible for the dividends received deduction referred to above. Any loss on the
sale of Fund shares held for less than six months is treated as a long-term
capital loss to the extent of any long-term capital gain distribution paid on
such shares, subject to any exception that may be provided by IRS regulations
27
<PAGE> 83
for losses incurred under certain systematic withdrawal plans. All dividends and
distributions are taxable to the shareholder whether or not reinvested in
shares. Shareholders are notified annually by the Fund as to the federal tax
status of dividends and distributions paid by the Fund.
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 in
the basis of the subsequent shares.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
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 (excluding
equity options as defined in the Code), 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 terminations 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 mark-to-market
rule or to 60/40 gain or loss treatment. Any gains or losses recognized by the
Fund from transactions in over-the-counter options generally constitute
short-term capital gains or losses. If over-the-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.
Certain 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.
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<PAGE> 84
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 overall total return (computed in the manner described in the
Prospectus) for Class A shares of the Fund for the one year and 16 month
periods, ended March 31, 1995 was -0.44% and -4.34%, respectively. The Fund's
overall total return (computed in the manner described in the Prospectus) for
Class B shares for the time periods was -0.14% and -4.24%, respectively. The
Fund's overall total return (computed in the manner described in the Prospectus)
for Class C shares for the one year and 16 month periods ended March 31, 1995
was 2.72% and -1.52%, respectively. These results are based on historical
earnings and net 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.
Total return is computed separately for Class A, Class B and Class C
shares.
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.
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
IntentionsSM and the Van Kampen American Capital Mutual Fund IndexSM -- which
polls measure how Americans plan to use their money.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return. Such illustrations may be in the
form of charts or graphs and will not be based on historical returns experienced
by the Fund.
From time to time, the Fund may also illustrate allocations among different
types of mutual funds for investors at different stages of their lives.
OTHER INFORMATION
CUSTODY OF ASSETS -- State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 serves as Custodian for the Company. The custodian
has entered into agreements with foreign sub-custodians which are approved by
the Trustees pursuant to Rule 17f-5 under the 1940 Act. The Custodian and
sub-custodians generally domestically, and frequently abroad, do not actually
hold certificates for the securities in their custody, but instead have book
records with domestic and foreign securities depositories, which in turn have
book records with the transfer agents of the issuers of the securities.
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<PAGE> 85
SHAREHOLDER REPORTS -- Semiannual 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 annual audits 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 Report to Shareholders including the related report of
Independent Accountants on such financial statements are included in the
Statement of Additional Information.
The following information is not included in the Annual Report. 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>
SEPTEMBER 30, MARCH 31,
1994 1995
------------- ---------
<S> <C> <C>
Net Asset Value per Class A Share................. $8.39 $8.72
Class A Per Share Sales Charge -- 4.75% of
offering price (4.99% of net asset value per
share).......................................... $ .42 $ .43
Class A Per Share Offering Price to the Public.... $8.81 $9.15
</TABLE>
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<PAGE> 86
APPENDIX -- DESCRIPTION OF BOND RATINGS
MOODY'S INVESTORS SERVICE
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. such bonds lack outstanding investment characteristics and in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Nonrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption, or for other reasons.
31
<PAGE> 87
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S CORPORATION
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is
being paid. D: Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS
Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.
32
<PAGE> 88
INVESTMENT PORTFOLIO
SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Corporate Obligations 47.3%
CONSUMER SERVICES 2.7%
$600,000 Tele-Communications, Inc., 7.25%, 8/1/05 . . . . . . . . . . . . . . $ 530,520
-------------
ENERGY 12.5%
500,000 Colorado Interstate Gas Co., 10.00%, 6/15/05 . . . . . . . . . . . . 550,400
95,000 Enron Corp., 6.75%, 7/1/05 . . . . . . . . . . . . . . . . . . . . . 84,407
400,000 ENSERCH Corp., 6.375%, 2/1/04 . . . . . . . . . . . . . . . . . . . 347,608
330,000 Laclede Gas Co., 8.50%, 11/15/04 . . . . . . . . . . . . . . . . . . 336,897
75,000 Occidental Petroleum, 10.125%, 9/15/09 . . . . . . . . . . . . . . . 80,906
500,000 Panhandle Eastern Corp., 7.875%, 8/15/04 . . . . . . . . . . . . . . 485,175
400,000 Southern Union Co., 7.60%, 2/1/24 . . . . . . . . . . . . . . . . . 339,552
100,000 Texas Eastern Transmission Corp., 8.00%, 7/15/02 . . . . . . . . . . 99,750
Union Oil of California
100,000 6.375%, 2/1/04 . . . . . . . . . . . . . . . . . . . . . . . . . . 87,130
85,000 8.75%, 8/15/01 . . . . . . . . . . . . . . . . . . . . . . . . . . 88,120
-------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,499,945
-------------
TECHNOLOGY 2.3%
485,000 Motorola, Inc., 7.60%, 1/1/07 . . . . . . . . . . . . . . . . . . . 464,872
-------------
UTILITIES 29.8%
380,000 Alabama Power Co., 6.375%, 8/1/99 . . . . . . . . . . . . . . . . . 361,167
600,000 American Telephone & Telegraph Corp., 7.50%, 6/1/06 . . . . . . . . 573,540
100,000 Baltimore Gas & Electric Co., 7.50%, 1/15/07 . . . . . . . . . . . . 94,560
200,000 Cincinnati Gas & Electric Co., 6.45%, 2/15/04 . . . . . . . . . . . 176,940
100,000 Duke Power Co., 7.00%, 6/1/00 . . . . . . . . . . . . . . . . . . . 96,650
355,000 GTE Corp., 9.375%, 12/1/00 . . . . . . . . . . . . . . . . . . . . . 379,388
Hydro Quebec
200,000 7.375%, 2/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . 187,980
500,000 8.05%, 7/7/24 . . . . . . . . . . . . . . . . . . . . . . . . . . 488,580
500,000 Idaho Power Co., 8.00%, 3/15/04 . . . . . . . . . . . . . . . . . . 495,100
300,000 Iowa Electric Light & Power, 8.625%, 5/15/01 . . . . . . . . . . . . 310,350
390,000 MCI Communications Corp., 7.50%, 8/20/04 . . . . . . . . . . . . . . 373,230
80,000 Northwestern Bell Telephone Co., 9.50%, 5/1/00 . . . . . . . . . . . 86,264
450,000 Pacific Telephone & Telegraph Co., 6.00%, 11/1/02 . . . . . . . . . 391,635
200,000 San Diego Gas & Electric Co., 7.625%, 6/15/02 . . . . . . . . . . . 195,060
250,000 Texas Utilities Electric Co., 6.25%, 10/1/04 . . . . . . . . . . . . 214,357
500,000 Union Electric Co., 7.375%, 12/15/04 . . . . . . . . . . . . . . . . 476,400
617,000 United Telecommunications, Inc., 9.75%, 4/1/00 . . . . . . . . . . . 660,251
Virginia Electric & Power Co.
200,000 6.00%, 8/1/01 . . . . . . . . . . . . . . . . . . . . . . . . . . 180,800
200,000 8.875%, 6/1/99 . . . . . . . . . . . . . . . . . . . . . . . . . . 208,780
-------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 5,951,032
-------------
TOTAL CORPORATE OBLIGATIONS (COST $10,050,317) . . . . . . . . . . 9,446,369
-------------
</TABLE>
F-1
<PAGE> 89
INVESTMENT PORTFOLIO, CONTINUED
<TABLE>
<CAPTION>
Number of Market
Shares Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock 44.1%
ENERGY 4.0%
13,500 Nicor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 327,375
22,100 Pacific Enterprises . . . . . . . . . . . . . . . . . . . . . . . . 469,625
-------------
TOTAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . 797,000
-------------
FINANCE 2.3%
7,500 Equity Residential Properties Trust . . . . . . . . . . . . . . . . 238,125
6,100 Weingarten Realty Investors . . . . . . . . . . . . . . . . . . . . 218,075
-------------
TOTAL FINANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 456,200
-------------
UTILITIES 37.8%
14,600 Ameritech Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 587,650
20,500 Baltimore Gas & Electric Co. . . . . . . . . . . . . . . . . . . . . 471,500
9,600 Bellsouth Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 535,200
13,100 CMS Energy Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . 284,925
25,800 DPL, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,100
12,600 Duke Power Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . 491,400
16,600 FPL Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . 539,500
14,100 NYNEX Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542,850
14,200 Pacific Telesis Group . . . . . . . . . . . . . . . . . . . . . . . 436,650
28,500 Pacificorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,938
17,100 Peco Energy Co. . . . . . . . . . . . . . . . . . . . . . . . . . . 433,913
15,500 Public Service Company of Colorado . . . . . . . . . . . . . . . . . 418,500
16,800 Public Service Enterprise Group . . . . . . . . . . . . . . . . . . 441,000
10,600 SCANA Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470,375
24,100 Southern Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448,863
16,900 Western Resources, Inc. . . . . . . . . . . . . . . . . . . . . . . 479,538
-------------
TOTAL UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 7,565,902
-------------
TOTAL COMMON STOCK (COST $9,199,579) . . . . . . . . . . . . . . . 8,819,102
-------------
Convertible Preferred Stock 2.3%
10,000 Transco Energy Co., $3.50 (Cost $461,250) . . . . . . . . . . . . . 450,000
-------------
Principal
Amount Short-Term Investments 3.8%
---------
$560,000 Prudential Funding Corp., 4.70%, 10/3/94 . . . . . . . . . . . . . . 559,781
200,000 United States Treasury Note, 7.75%, 2/15/95 . . . . . . . . . . . . 201,594
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $762,031) . . . . . . . . . . . 761,375
-------------
TOTAL INVESTMENTS (COST $20,473,177) 97.5% . . . . . . . . . . . . . 19,476,846
Other assets and liabilities, net 2.5% . . . . . . . . . . . . . . . 505,787
-------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,982,633
=============
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE> 90
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
September 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $20,473,177) . . . . . . . . . . . . . $ 19,476,846
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,078
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . . 339,923
Interest and dividends receivable . . . . . . . . . . . . . . . . . . . . 269,006
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,053
------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,117,906
------------
LIABILITIES
Payable for Fund shares purchased . . . . . . . . . . . . . . . . . . . . 55,342
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,442
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,372
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,117
------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 135,273
------------
Net Assets, equivalent to $8.39 per share for Class A and
Class B shares and $8.38 per share for Class C shares . . . . . . . . . $ 19,982,633
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 892,244 Class A, 1,279,763
Class B and 209,939 Class C shares outstanding . . . . . . . . . . . . $ 23,819
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,250,210
Accumulated net realized loss on securities . . . . . . . . . . . . . . . (326,263)
Unrealized depreciation of securities . . . . . . . . . . . . . . . . . . (996,331)
Undistributed net investment income . . . . . . . . . . . . . . . . . . . 31,198
------------
NET ASSETS at September 30, 1994 . . . . . . . . . . . . . . . . . . . . $ 19,982,633
============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE> 91
STATEMENT OF OPERATIONS
November 23, 1993* through September 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 400,095
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,632
-------------
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 670,727
-------------
EXPENSES
Management fees (net of expense reimbursement of $65,379) . . . . . . . . . . . . . . -
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,855
Service fees - Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,768
Distribution and service fees - Class B . . . . . . . . . . . . . . . . . . . . . . . 50,180
Distribution and service fees - Class C . . . . . . . . . . . . . . . . . . . . . . . 7,517
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,596
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,292
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . . . . . . . 14,846
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,975
Director's fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,633
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,663
Expense reimbursement in excess of management fees . . . . . . . . . . . . . . . . . (76,410)
-------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,915
-------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516,812
-------------
NET REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . (326,081)
Net unrealized depreciation of securities . . . . . . . . . . . . . . . . . . . . . . (996,331)
-------------
Net realized and unrealized loss on securities . . . . . . . . . . . . . . . . . (1,322,412)
-------------
Decrease in net assets resulting from operations . . . . . . . . . . . . . . . . $ (805,600)
=============
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-4
<PAGE> 92
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
November 23, 1993* through September 30, 1994
<TABLE>
<S> <C>
NET ASSETS, beginning of period . . . . . . . . . . . . . . . . . . . . $ 101,000
-----------
Operations
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . 516,812
Net realized loss on securities . . . . . . . . . . . . . . . . . . . (326,081)
Net unrealized depreciation of securities . . . . . . . . . . . . . . . (996,331)
-----------
Decrease in net assets resulting from operations . . . . . . . . . . (805,600)
-----------
Dividends to shareholders from net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225,591)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (226,800)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,691)
-----------
(486,082)
-----------
Funds share transactions
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,870,409
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,813,610
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,166,085
-----------
24,850,104
-----------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,220
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,883
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,750
-----------
422,853
-----------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,139,284)
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,610,501)
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (349,857)
-----------
(4,099,642)
-----------
Increase in net assets resulting from Fund share transactions . . . 21,173,315
-----------
Increase in Net Assets . . . . . . . . . . . . . . . . . . . . . . . . 19,881,633
-----------
NET ASSETS, end of period . . . . . . . . . . . . . . . . . . . . . . . . $19,982,633
===========
</TABLE>
*Commencement of operations
See Notes to Financial Statements.
F-5
<PAGE> 93
Notes to Financial Statements
Note 1-Organization
American Capital Utilities Income Fund, Inc. (the "Fund") was organized as an
open-end, diversified management investment company in Maryland on August 31,
1993. The Fund's investment manager, American Capital Asset Management, Inc.
(the "Adviser") contributed the initial capital of $101,000 on November 8, 1993
and an additional $1,899,000 on November 30, 1993. The Fund began offering
shares on November 23, 1993.
Note 2-Significant Accounting Policies
The Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified 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
Securities listed or traded on a national securities exchange are valued at
the last sale price. Unlisted securities and listed securities for which
the last sale price is not available are valued at the last reported bid
price. Short-term investments with a maturity of 60 days or less when
purchased are valued at amortized cost, which approximates market value.
Short-term 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. Federal Income Taxes
No provision for federal income taxes is required because the Fund intends
to elect 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 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.
C. 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.
Dividend income is recorded on the ex-dividend date. Interest income is
accrued daily.
D. 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.
E. Debt Discount or Premium
The Fund accounts for discounts and premiums on the same basis as is
followed for federal income tax reporting. Accordingly, originally issue
discounts on debt securities purchased are amortized over the life of the
security. Premiums on debt securities are not amortized. Market discounts
are accounted for at the time of sale as realized gains for book purposes
and ordinary income for tax purposes.
F. Organization Costs
Organization expenses of approximately $15,000 were deferred and are being
amortized over a five year period ending November, 1998.
F-6
<PAGE> 94
Note 3-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
.65%. From time to time, the Adviser may voluntarily elect to reimburse the
Fund a portion of the Fund's expenses. Such reimbursement may be discontinued
at any time without prior notice. For the period ended September 30, 1994, such
reimbursement amounted to $141,789.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his discretion. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the period ended September 30, 1994, these charges included $1,621 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 period ended September 30, 1994, such
fees aggregated $6,315.
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 $18,378 and $30,810, respectively, as their
portion of the commission charged on sales of Fund shares during the period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its average
daily net assets to the Distributor for expenses and service fees incurred.
Class B shares and Class C shares pay an additional 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 September 30, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B plan and Class C plan aggregated approximately
$462,250 and $29,000, 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 were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
Note 4-Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $770 plus a fee of $15 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at an annual rate of $290. During the period, such fees aggregated $1,575.
The directors 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
$500. Each director covered under the Plan elects to be credited with an
earnings component on amounts deferred equal to the income earned by the Fund
on its short-term investments or equal to the total return of the Fund.
Note 5-Investment Activity
During the period, the cost of purchases and proceeds from sales of
investments, excluding short-term investments, were $28,382,015 and $8,140,116,
respectively.
For federal income tax purposes, the identified cost of investments owned at
September 30, 1994 was $20,475,892. Gross unrealized appreciation of
investments aggregated $80,850 and gross unrealized depreciation of investments
aggregated $1,079,896. Approximately $323,500 in financial statement losses are
deferred for tax purposes until the following fiscal year.
F-7
<PAGE> 95
Note 6-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 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock during the period
were as follows:
<TABLE>
<S> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . 1,116,081
Class B . . . . . . . . . . . . . . . . . . . . . . 1,446,604
Class C . . . . . . . . . . . . . . . . . . . . . . 248,296
-----------
2,810,981
-----------
Shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . 24,273
Class B . . . . . . . . . . . . . . . . . . . . . . 21,860
Class C . . . . . . . . . . . . . . . . . . . . . . 2,888
-----------
49,021
-----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . (248,110)
Class B . . . . . . . . . . . . . . . . . . . . . . (188,701)
Class C . . . . . . . . . . . . . . . . . . . . . . (41,245)
-----------
(478,056)
-----------
Increase in shares outstanding . . . . . . . . . 2,381,946
===========
</TABLE>
F-8
<PAGE> 96
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout the period
indicated.
<TABLE>
<CAPTION>
November 23, 1993(1) through
September 30, 1994
-----------------------------
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period . . . . . . . . . . $ 9.44 $ 9.44 $ 9.44
------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . . . . . . . . . .53 .52 .53
Expenses . . . . . . . . . . . . . . . . . . . . . . . . (.09) (.14) (.15)
------ ------ ------
Net investment income . . . . . . . . . . . . . . . . . . .44 .38 .38
Net realized and unrealized losses on securities . . . . (1.10) (1.09) (1.106)
------ ------ ------
Total from investment operations . . . . . . . . . . . . (.66) (.71) (.726)
DIVIDENDS FROM NET INVESTMENT INCOME . . . . . . . . . . (.39) (.34) (.334)
------ ------ ------
Net asset value, end of period . . . . . . . . . . . . . $ 8.39 $ 8.39 $ 8.38
====== ====== ======
TOTAL RETURN(3) . . . . . . . . . . . . . . . . . . . . . (7.24%) (7.72%) (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . . . . . . . . . $ 7.5 $ 10.7 $ 1.8
Average net assets (millions) . . . . . . . . . . . . . $ 5.2 $ 6.0 $ 0.9
Ratios to average net assets(2)
Expenses . . . . . . . . . . . . . . . . . . . . . . . 1.06% 1.82% 1.79%
Expenses, without expense reimbursement . . . . . . . . 2.43% 3.19% 3.16%
Net investment income . . . . . . . . . . . . . . . . . 5.48% 4.66% 4.65%
Net investment income, without expense reimbursement . 4.11% 3.29% 3.28%
Portfolio turnover rate . . . . . . . . . . . . . . . . . 72% 72% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Per share information based on average month-end shares outstanding.
See Notes to Financial Statements.
F-9
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
American Capital Utilities Income Fund, Inc.
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 Utilities Income
Fund, Inc. 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 the
period from November 23, 1993 (commencement of operations) through September
30, 1994, 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 Fund's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit 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 misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included confirmation
of securities at September 30, 1994 by correspondence with the custodian and
brokers, provides 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/
Number of Shares
(000) Description Coupon Maturity Market Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE OBLIGATIONS 40.0%
CONSUMER SERVICES 2.1%
$600 Tele-Communications, Inc....................... 7.750% 08/01/05 $ 541,800
----------------
ENERGY 13.7%
500 Colorado Interstate Gas Co..................... 10.000% 06/15/05 559,250
595 Enron Corp..................................... 6.750% 07/01/05 543,949
400 ENSEARCH Corp.................................. 6.375% 02/01/04 356,360
330 Laclede Gas Co................................. 8.500% 11/15/04 346,731
75 Occidental Petroleum Corp...................... 10.125% 09/15/09 85,087
500 Panhandle Eastern Corp......................... 7.875% 08/15/04 497,180
400 Southern Union Co.............................. 7.600% 02/01/24 354,800
400 Southwest Gas Co............................... 9.750% 06/15/02 433,320
100 Texas Eastern Transmission Corp................ 8.000% 07/15/02 101,080
100 Union Oil of California........................ 6.375% 02/01/04 89,820
85 Union Oil of California........................ 8.750% 08/15/01 89,190
----------------
TOTAL ENERGY............................... 3,456,767
----------------
TECHNOLOGY 1.9%
485 Motorola, Inc.................................. 7.600% 01/01/07 479,714
----------------
UTILITIES 22.3%
600 A T & T Corp................................... 7.500% 06/01/06 591,480
100 Baltimore Gas & Electric Co.................... 7.500% 01/15/07 97,400
200 Cincinnati Gas & Electric Co................... 6.450% 02/15/04 183,060
500 Florida Power & Light Co....................... 6.875% 04/01/04 471,050
355 GTE Corp....................................... 9.375% 12/01/00 381,803
500 Idaho Power Co................................. 8.000% 03/15/04 508,250
700 Iowa Electric Light & Power Co................. 8.625% 05/15/01 734,440
635 MCI Communications Corp........................ 7.500% 08/20/04 625,285
80 Northwestern Bell Telephone Co................. 9.500% 05/01/00 86,640
200 San Diego Gas & Electric Co.................... 7.625% 06/15/02 199,460
250 Texas Utilities Electric Co.................... 6.250% 10/01/04 223,590
500 Union Electric Co.............................. 7.375% 12/15/04 490,300
617 United Telecommunications, Inc................. 9.750% 04/01/00 665,928
200 Virginia Electric & Power Co................... 6.000% 08/01/01 184,120
200 Virginia Electric & Power Co................... 8.875% 06/01/99 209,800
----------------
TOTAL UTILITIES............................ 5,652,606
----------------
TOTAL CORPORATE OBLIGATIONS (Cost $10,455,626). 10,130,887
----------------
COMMON STOCK 56.8%
ENERGY 4.7%
25 Pacific Enterprises.............................................. 618,750
25 Panhandle Eastern Corp........................................... 575,000
----------------
TOTAL ENERGY................................................. 1,193,750
----------------
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 99
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Amount/
Number of Shares
(000) Description Market Value
-------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES 52.1%
14 Ameritech Corp............................ $ 577,500
26 Baltimore Gas & Electric Co............... 614,250
10 Bellsouth Corp............................ 595,000
25 CMS Energy Corp........................... 584,375
29 DPL, Inc.................................. 605,375
25 Eastern Utilities Association............. 596,875
20 FPL Group, Inc............................ 727,500
22 General Public Utilities Corp............. 640,750
12 GTE Corp.................................. 399,000
7 National Power ADR........................ 75,250
19 NIPSCO Industries, Inc.................... 591,375
16 NYNEX Corp................................ 634,000
19 Pacific Telesis Group..................... 574,750
30 Pacificorp................................ 581,250
24 Peco Energy Co............................ 603,000
27 Pinnacle West Capital Corp................ 563,625
5.2 Powergen Power & Light ADR................ 63,050
19 Public Service Co. of Colorado............ 584,250
22 Public Service Enterprise Group........... 602,250
29 Southern Co............................... 590,875
18 Texas Utilities Electric Co............... 571,500
24 Unicom Corp............................... 570,000
15 U. S. West, Inc........................... 600,000
20 Western Resources, Inc.................... 625,000
----------------
TOTAL UTILITIES........................... 13,170,800
----------------
TOTAL COMMON STOCK (Cost $13,991,594)..... 14,364,550
----------------
REPURCHASE AGREEMENT 2.1%
$ 535 Salomon Brothers, Inc, dated 3/31/95,
6.27% due 4/3/95 (collateralized by
U. S. Government obligations in a pooled
cash account) repurchase
proceeds $535,279 (Cost $535,000)......... 535,000
----------------
TOTAL INVESTMENTS (Cost $24,982,220) 98.9% ................. 25,030,437
OTHER ASSETS AND LIABILITIES, NET 1.1%...................... 267,674
----------------
NET ASSETS 100%............................................. $ 25,298,111
----------------
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 100
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
ASSETS
<TABLE>
<S> <C>
Investment, at market value (Cost $24,982,220)............... $ 25,030,437
Cash......................................................... 2,984
Interest and dividends receivable............................ 318,764
Receivable for Fund shares sold.............................. 70,581
Other assets................................................. 35,396
----------------
Total Assets................................................ 25,458,162
----------------
LIABILITIES
Due to Distributor........................................... 21,862
Due to shareholder service agent............................. 29,242
Deferred Directors' compensation............................. 1,374
Dividends payable............................................ 18,270
Payable for Fund shares redeemed............................. 17,281
Accrued expenses and other payables.......................... 72,022
----------------
Total Liabilities........................................... 160,051
----------------
NET ASSETS, equivalent to $8.72 per share for Class A, $8.71
per share Class B and $8.70 per share for Class C shares.... $ 25,298,111
----------------
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 995,792 Class A, 1,638,873 Class B and
269,483 Class C shares outstanding.......................... $ 29,041
Capital surplus.............................................. 25,669,373
Accumulated net realized loss on securities.................. (456,783)
Net unrealized appreciation of securities.................... 48,217
Undistributed net investment income.......................... 8,263
----------------
NET ASSETS at March 31, 1995................................. $ 25,298,111
----------------
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 101
STATEMENT OF OPERATIONS
Six Months Ended March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest..................................................... $ 445,920
Dividends.................................................... 314,116
----------------
Investment income........................................... 760,036
----------------
EXPENSES:
Management fees.............................................. 72,767
Registration and filing fees................................. 62,865
Service fees--Class A........................................ 5,980
Distribution and service fees--Class B....................... 61,001
Distribution and service fees--Class C....................... 10,143
Accounting services.......................................... 26,816
Shareholder service agent's fees and expenses................ 44,609
Audit fees................................................... 14,400
Reports to shareholders...................................... 9,919
Director's fees and expenses................................. 5,510
Legal fees................................................... 3,199
Miscellaneous................................................ 1,772
Expense reimbursement........................................ (99,662)
----------------
Total expenses.............................................. 219,319
----------------
NET INVESTMENT INCOME...................................... 540,717
----------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities.............................. (130,520)
Net unrealized appreciation of securities during the period.. 1,044,548
----------------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES............. 914,028
----------------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... $ 1,454,745
----------------
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 102
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 23, 1993*
Six Months Ended through
March 31, 1995 September 30, 1994
--------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period.......... $19,982,633 $ 101,000
----------- -----------
Operations
Net investment income................... 540,717 516,812
Net realized loss on securities......... (130,520) (326,081)
Net unrealized appreciation (deprecia-
tion) of securities during the period.. 1,044,548 (996,331)
----------- -----------
Increase (decrease) in net assets
resulting from operations............ 1,454,745 (805,600)
----------- -----------
Distributions to shareholders from net
investment income
Class A................................ (225,289) (225,591)
Class B................................ (290,220) (226,800)
Class C................................ (48,143) (33,691)
----------- -----------
(563,652) (486,082)
----------- -----------
Capital transactions
Proceeds from shares sold
Class A................................ 2,321,151 9,870,409
Class B................................ 4,053,715 12,813,610
Class C................................ 576,648 2,166,085
----------- -----------
6,951,514 24,850,104
----------- -----------
Proceeds from shares issued for distri-
butions reinvested
Class A................................ 204,839 210,220
Class B................................ 238,579 187,883
Class C................................ 32,346 24,750
----------- -----------
475,764 422,853
----------- -----------
Cost of shares redeemed
Class A................................ (1,660,741) (2,139,284)
Class B................................ (1,237,109) (1,610,501)
Class C................................ (105,043) (349,857)
----------- -----------
(3,002,893) (4,099,642)
----------- -----------
Increase in net assets resulting from
capital transactions..................... 4,424,385 21,173,315
----------- -----------
INCREASE IN NET ASSETS................... 5,315,478 19,881,633
----------- -----------
NET ASSETS, end of period................ $25,298,111 $19,982,633
----------- -----------
</TABLE>
*Commencement of operations
See Notes to Financial Statements
F-15
<PAGE> 103
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------
November 23,
Six Months 1993(1)
Ended through
March 31, September 30,
1995 1994(4)
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C>
Net asset value, beginning of period............... $ 8.39 $ 9.44
------ ------
Income from investment operations
Investment income................................. .29 .53
Expenses.......................................... (.06) (.09)
------ ------
Net investment income.............................. .23 .44
Net realized and unrealized gains or losses on
securities........................................ .334 (1.10)
------ ------
Total from investment operations................... .564 (.66)
------ ------
Distributions from net investment income........... (.234) (.39)
------ ------
Net asset value, end of period..................... $ 8.72 $ 8.39
------ ------
TOTAL RETURN (3)................................... 6.70% (7.24%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............... $8.7 $7.5
Average net assets (millions)...................... $8.2 $5.2
Ratios to average net assets (2)
Expenses.......................................... 1.42% 1.06%
Expenses, without expense reimbursement........... 2.31% 2.43%
Net investment income............................. 5.41% 5.48%
Net investment income, without expense
reimbursement.................................... 4.52% 4.11%
Portfolio turnover rate............................ 29% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-16
<PAGE> 104
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------
November 23,
Six Months 1993(1)
Ended through
March 31, September 30,
1995 1994(4)
-------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
<S> <C> <C>
Net asset value, beginning of period............... $ 8.39 $ 9.44
------ -------
Income from investment operations
Investment income................................. .29 .52
Expenses.......................................... (.10) (.14)
------ -------
Net investment income.............................. .19 .38
Net realized and unrealized gains or losses on
securities........................................ .332 (1.096)
------ -------
Total from investment operations................... .522 (.716)
------ -------
Distributions from net investment income........... (.202) (.334)
------ -------
Net asset value, end of period..................... $ 8.71 $ 8.39
------ -------
TOTAL RETURN (3)................................... 6.30% (7.72%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............... $14.3 $10.7
Average net assets (millions)...................... $12.2 $6.0
Ratios to average net assets (2)
Expenses.......................................... 2.28% 1.82%
Expenses, without expense reimbursement........... 3.17% 3.19%
Net investment income............................. 4.52% 4.66%
Net investment income, without expense
reimbursement.................................... 3.63% 3.29%
Portfolio turnover rate............................ 29% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-17
<PAGE> 105
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------
November 23,
Six Months 1993(1)
Ended through
March 31, September 30,
1995 1994(4)
-------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............... $ 8.38 $ 9.44
------ -------
Income from investment operations
Investment income................................. .29 .53
Expenses.......................................... (.10) (.15)
------ -------
Net investment income.............................. .19 .38
Net realized and unrealized gains or losses on
securities........................................ .332 (1.106)
------ -------
Total from investment operations................... .522 (.726)
------ -------
Distributions from net investment income........... (.202) (.334)
------ -------
Net asset value, end of period..................... $ 8.70 $ 8.38
------ -------
TOTAL RETURN (3)................................... 6.30% (7.82%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions)............... $2.3 $1.8
Average net assets (millions)...................... $2.0 $0.9
Ratios to average net assets (2)
Expenses.......................................... 2.27% 1.79%
Expenses, without expense reimbursement........... 3.16% 3.16%
Net investment income............................. 4.51% 4.65%
Net investment income, without expense
reimbursement.................................... 3.62% 3.28%
Portfolio turnover rate............................ 29% 72%
</TABLE>
(1) Commencement of operations.
(2) Annualized; see Note 3.
(3) Total return not annualized. Total return calculated from December 1, 1993
(date the Fund began meeting its investment objective) through September
30, 1994. Total return does not consider the effect of sales charges.
(4) Based on average month-end shares outstanding.
See Notes to Financial Statements
F-18
<PAGE> 106
NOTES TO FINANCIAL STATEMENTS
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
NOTE 1--ORGANIZATION
American Capital Utilities Income Fund, Inc. (the "Fund") was organized as an
open-end, diversified management investment company in Maryland on August 31,
1993. The Fund's investment manager, Van Kampen American Capital Asset Manage-
ment, Inc. (the "Adviser") contributed the initial capital of $101,000 on No-
vember 8, 1993 and an additional $1,899,000 on November 30, 1993. The Fund
began offering shares on November 23, 1993.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
The Fund is registered under the Investment Company Act of 1940, as amended, as
an open-end, diversified management investment company. The following is a sum-
mary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
A. INVESTMENT VALUATIONS-Securities listed or traded on a national securities
exchange are valued at the last sale price. Unlisted securities and listed se-
curities for which the last sale price is not available are valued at the last
reported bid price.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations, until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
B. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund intends to elect 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 to its shareholders. It is anticipated that no distribu-
tions of capital gains will be made until tax-basis capital loss carryforwards,
if any, expire or are offset by net realized capital gains.
Approximately $323,500 in financial statement losses are deferred for tax
purposes until the 1995 fiscal year.
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on invest-
ments are determined on the basis of identified cost. Dividend income is
recorded on the ex-dividend date. Interest income is accrued daily.
F-19
<PAGE> 107
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
D. 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.
E. DEBT DISCOUNT OR PREMIUM-The Fund accounts for original issue discounts and
premiums on the same basis as is followed for federal income tax reporting. Ac-
cordingly, originally issue discounts on long-term debt securities purchased
are amortized over the life of the security. Premiums on debt securities are
not amortized. Market discounts are accounted for at the time of sale as real-
ized gains for book purposes and ordinary income for tax purposes.
F. ORGANIZATION COSTS-Organization expenses of approximately $15,000 were de-
ferred and are being amortized over a five year period ending November, 1998.
NOTE 3--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
.65%. From time to time, the Adviser may voluntarily elect to reimburse the
Fund a portion of the Fund's expenses. Such reimbursement may be discontinued
at any time without prior notice. For the period ended March 31, 1995, such re-
imbursement amounted to $99,662.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his discretion. Charges are allo-
cated among investment companies advised or sub-advised by the Adviser. For the
period ended March 31, 1995, these charges included $3,130 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 ac-
counting services to the Fund. The services provided by the Adviser are at
cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as the
Fund's shareholder service agent. These services are provided at cost plus a
profit. For the period ended March 31, 1995, such fees aggregated $30,900.
The Fund has been advised that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corp. (the "Retail Dealer"), both af-
filiates of the Adviser, received $3,383 and $10,323, respectively, as their
portion of the commission charged on sales of Fund shares during the period.
F-20
<PAGE> 108
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
Under the Distribution Plans, the Fund pays up to .25% per annum of its aver-
age daily net assets to the Distributor for expenses and service fees incurred.
Class B shares and Class C shares pay an additional 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 Dis-
tributor under the Class B plan and Class C plan aggregated approximately
$529,000 and $31,000, 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 were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
NOTE 4--DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $730 plus a fee of $20 per day for Board and Commit-
tee meetings attended. The Chairman receives additional fees from the Fund at
an annual rate of $270. During the period, such fees aggregated $2,849.
The directors 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 director covered under the Plan elects to be credited
with an earnings component on amounts deferred equal to the income earned by
the Fund on its short-term investments or equal to the total return of the
Fund.
NOTE 5--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $11,020,452 and $6,356,147, re-
spectively.
The cost of investments owned at March 31, 1995 was the same for federal in-
come tax and financial reporting purposes. Gross unrealized appreciation of in-
vestments aggregated $649,418 and gross unrealized depreciation of investments
aggregated $601,201.
NOTE 6--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
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<PAGE> 109
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
March 31, 1995 (Unaudited)
--------------------------------------------------------------------------------
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 200 million of each class of shares of $.01 par value capital
stock authorized. Transactions in shares of capital stock during the period
were as follows:
<TABLE>
<CAPTION>
NOVEMBER 23, 1993*
SIX MONTHS ENDED THROUGH
MARCH 31, 1995 SEPTEMBER 30, 1994
-------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A................................... 273,477 1,116,081
Class B................................... 476,363 1,446,604
Class C................................... 68,131 248,296
-------- ---------
817,971 2,810,981
-------- ---------
Shares issued for distributions reinvested
Class A................................... 24,018 24,273
Class B................................... 27,959 21,860
Class C................................... 3,791 2,888
-------- ---------
55,768 49,021
-------- ---------
Shares redeemed
Class A................................... (193,947) (248,110)
Class B................................... (145,212) (188,701)
Class C................................... (12,378) (41,245)
-------- ---------
(351,537) (478,056)
-------- ---------
Increase in shares outstanding............. 522,202 2,381,946
-------- ---------
</TABLE>
*Commencement of operations
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