0000950124-95-002390.txt : 19950810 0000950124-95-002390.hdr.sgml : 19950810 ACCESSION NUMBER: 0000950124-95-002390 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19950809 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN CAPITAL RESERVE FUND INC CENTRAL INDEX KEY: 0000005114 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 741794065 FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-59655 FILM NUMBER: 95559987 BUSINESS ADDRESS: STREET 1: 2800 POST OAK BLVD 46TH FL CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7139930500 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GENERAL RESERVE FUND INC DATE OF NAME CHANGE: 19830912 497 1 PROSPECTUS 1 DEAR VAN KAMPEN AMERICAN CAPITAL MONEY MARKET FUND SHAREHOLDER: Enclosed is information asking you for your vote on a reorganization (the "Reorganization") pursuant to an Agreement and Plan of Reorganization (the "Agreement") for the Van Kampen American Capital Money Market Fund (the "VK Fund"). The Reorganization calls for VK Fund shareholders to become shareholders of the Van Kampen American Capital Reserve Fund (the "AC Fund"), a mutual fund which pursues a substantially similar investment objective. The enclosed materials include a combined Proxy Statement/Prospectus containing information you need to make an informed decision. However, we thought it would also be helpful for you to have, at the start, answers to some of the important questions you might have about the proposed Reorganization. We hope you find these explanations useful as you review your materials before voting. For more detailed information about the Reorganization, please refer to the combined Proxy Statement/Prospectus. HOW WILL THE REORGANIZATION AFFECT ME? Assuming shareholders of the VK Fund approve the Reorganization, the assets and liabilities of the VK Fund will be combined with those of the AC Fund and you will become a shareholder of the AC Fund. You will receive shares of the AC Fund equal in value at the time of issuance to the shares of the VK Fund that you hold immediately prior to the Reorganization. Class A shareholders of the VK Fund will receive Class A Shares of the AC Fund and Class B shareholders of the VK Fund will receive Class B Shares of the AC Fund. WHY IS THE REORGANIZATION BEING RECOMMENDED? As we reported to you earlier, the parent company of Van Kampen American Capital Asset Management, Inc. ("AC Adviser"), the investment adviser to the AC Fund, was acquired in December 1994 by Van Kampen American Capital, Inc. ("VKAC"), and was subsequently merged into VKAC. VKAC, through its wholly owned subsidiaries, distributes and manages the Van Kampen American Capital funds. AC Adviser is an affiliate of Van Kampen American Capital Investment Advisory Corp. ("VK Adviser"), the investment adviser to the VK Fund. The primary purposes of the proposed Reorganization are to seek to achieve future economies of scale and eliminate certain costs associated with operating the VK Fund and the AC Fund separately. The Reorganization will result in combining the assets and liabilities of the VK Fund with the assets and liabilities of the AC Fund and consolidating their operations. The Reorganization is intended to provide various benefits to shareholders of the VK Fund who become shareholders of the AC Fund (as well as to existing and 2 future investors in the AC Fund). For example, higher net asset levels should enable the AC Fund to spread fixed and relatively fixed costs, such as accounting, legal and printing expenses, over a larger asset base, thereby potentially reducing per share expense levels. Higher net asset levels also may benefit portfolio management by permitting larger individual portfolio investments that may result in reduced transaction costs or more favorable pricing and by providing the opportunity for greater portfolio diversity. These benefits, in turn, should have a favorable effect on the relative performance of the AC Fund. The consummation of the Reorganization is subject to the satisfaction of a number of conditions (including approval by the VK Fund's shareholders), which are summarized below in "The Proposed Reorganization -- Terms of the Agreement" section of the accompanying combined Proxy Statement/Prospectus. These conditions are stated in the Agreement, which is attached as Exhibit A to the combined Proxy Statement/Prospectus. WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER TRANSACTIONAL FEE IN CONNECTION WITH THE REORGANIZATION? No. The full value of your shares of the VK Fund will be exchanged for shares of the corresponding class of the AC Fund without any sales load, commission or other transactional fee being imposed. As more fully discussed in the combined Proxy Statement/Prospectus, the holding period for shareholders acquiring Class B shares of the AC Fund in the Reorganization subject to a contingent deferred sales charge will be measured from the time the holder initially purchased such Class B shares from a Van Kampen American Capital open-end fund that were subsequently exchanged into Class B shares of the VK Fund. AC Adviser will bear the costs, whether or not the Reorganization is completed, associated with the Reorganization, such as printing and mailing costs and other expenses associated with the Special Meeting. HOW WILL THE FEES PAID BY THE AC FUND COMPARE TO THOSE PAYABLE BY THE VK FUND? It is anticipated that, on a per share basis, the total of the various fees and expenses incurred by the AC Fund will be less, upon completion of the Reorganization, than the total of such fees and expenses applicable to the VK Fund. The fees and expenses actually paid to date by the VK Fund have been less than the total of such fees and expenses applicable to the VK Fund as a result of voluntary fee waivers and expense reimbursements made by the VK Adviser. However, if the Reorganization is not consummated, VK Adviser does not currently intend to continue such voluntary fee waivers and expense reimbursements. 3 WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE AC FUND? WHAT HAPPENS TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED? If the Reorganization is approved, your interest in Class A or B shares of the VK Fund will automatically be converted into the same class of shares of the AC Fund and we will send you written confirmation that this change has taken place. You will receive the same class of shares of the AC Fund equal in value to your Class A or B shares of the VK Fund. No certificates for AC Fund shares will be issued in connection with the Reorganization, although such certificates will be available upon request. If you currently hold certificates representing your shares of the VK Fund, it is not necessary to surrender such certificates. WHO WILL ADVISE THE AC FUND AND PROVIDE OTHER SERVICES? AC Adviser provides advisory services to the AC Fund under an arrangement that is substantially similar to that currently in effect between the VK Fund and VK Adviser. The contractual advisory fees payable by the AC Fund are no higher than the contractual advisory fees applicable to the VK Fund. Van Kampen American Capital Distributors, Inc. serves as distributor of shares of both the AC Fund and the VK Fund. In addition, State Street Bank & Trust Company, 225 Franklin Street, P.O. Box 1713, Boston, Massachusetts 02105-1713 is the custodian of both the AC Fund and the VK Fund. ACCESS Investor Services, Inc., P.O. Box 418256, Kansas City, Missouri 64141-9256 serves as the transfer agent for both the AC Fund and the VK Fund. WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION? The Reorganization is intended to qualify as a "reorganization" within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). If the Reorganization so qualifies, in general, a shareholder of the VK Fund will recognize no gain or loss upon its receipt of solely the shares of the AC Fund in connection with the Reorganization. Additionally, the VK Fund would not recognize any gain or loss as a result of the transfer of all of its assets and liabilities solely in exchange for the shares of the AC Fund or as a result of its liquidation. The AC Fund expects that it will not recognize any gain or loss as a result of the Reorganization, that it will take a carryover basis in the assets acquired from the VK Fund and that its holding period of such assets will include the period during which the assets were held by the VK Fund. See "The Proposed Reorganization -- Federal Income Tax Consequences" in the combined Proxy Statement/ Prospectus. WHAT IF I REDEEM MY VK FUND SHARES BEFORE THE REORGANIZATION TAKES PLACE? If you choose to redeem your shares of the VK Fund before the Reorganization takes place, the redemption will be treated as a normal sale of shares and will be a 4 taxable transaction, unless your account is not subject to taxation, such as an individual retirement account or other tax-qualified retirement plan. We hope these answers help to clarify the Reorganization proposal for you. If you still have questions, do not hesitate to call us at 1-800-341-2911. Please give this matter your prompt attention. We need to receive your proxy before the shareholder meeting scheduled for September 15, 1995. If shareholders approve the Reorganization, it is expected to take effect on September 29, 1995. Thank you for your investment in the Van Kampen American Capital Money Market Fund. Very truly yours, Van Kampen American Capital Money Market Fund Dennis J. McDonnell President and Trustee 5 VAN KAMPEN AMERICAN CAPITAL MONEY MARKET FUND ONE PARKVIEW PLAZA OAKBROOK TERRACE, ILLINOIS 60181 (800) 341-2911 NOTICE OF SPECIAL MEETING SEPTEMBER 15, 1995 A Special Meeting of Shareholders of the Van Kampen American Capital Money Market Fund (the "VK Fund"), a series of the Van Kampen American Capital Money Market Trust, will be held at the Hyatt Regency Oak Brook, 1909 Spring Road, Oak Brook, Illinois 60521, on September 15, 1995 at 2:00 p.m. (the "Special Meeting") for the following purposes: (1) To approve a plan of reorganization pursuant to which the VK Fund would transfer all of its assets and liabilities to the Van Kampen American Capital Reserve Fund (the "AC Fund") in exchange for corresponding Class A and B shares of beneficial interest of the AC Fund, the VK Fund would distribute such Class A and B shares of the AC Fund to the holders of Class A and B shares of the VK Fund and the VK Fund would be dissolved. (2) To transact such other business as may properly come before the Special Meeting. The Special Meeting is scheduled to be held jointly with the special meetings of the respective shareholders of five other Van Kampen American Capital Funds because the shareholders of each of such funds are expected to consider and vote on similar matters. In the event that any shareholder of any Van Kampen American Capital Fund present at the special meetings objects to the holding of a joint meeting and moves for an adjournment of the meeting of such fund to a time immediately after the other special meetings so that such fund's special meeting may be held separately, the persons named as proxies will vote in favor of such adjournment. Shareholders of each Van Kampen American Capital Fund will vote separately on each of the proposals relating to their fund, and an unfavorable vote on a proposal by the shareholders of one fund will not affect the implementation of such a proposal by another fund if the proposal is approved by the shareholders of that fund. Shareholders of record as of the close of business on August 1, 1995 are entitled to vote at the Special Meeting or any adjournment thereof. For the Board of Trustees, Ronald A. Nyberg Secretary August 7, 1995 ------------------------ PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE ENCLOSED PROXY. ------------------------ 6 VAN KAMPEN AMERICAN CAPITAL MONEY MARKET FUND PROXY STATEMENT/PROSPECTUS RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF VAN KAMPEN AMERICAN CAPITAL MONEY MARKET FUND BY AND IN EXCHANGE FOR SHARES OF VAN KAMPEN AMERICAN CAPITAL RESERVE FUND This Proxy Statement/Prospectus is being furnished to shareholders of the Van Kampen American Capital Money Market Fund ( the "VK Fund"), a series of the Van Kampen American Capital Money Market Trust, a Delaware business trust (the "VKAC Money Market Trust"), and relates to the Special Meeting of Shareholders of the VK Fund (the "Special Meeting") called for the purpose of approving the proposed reorganization of the VK Fund (the "Reorganization") which would result in shareholders of the VK Fund in effect exchanging their VK Fund for shares of the Van Kampen American Capital Reserve Fund, a Delaware business trust (the "AC Fund"). The Reorganization would be accomplished as follows: (1) the AC Fund would acquire all of the then existing assets and liabilities of the VK Fund in exchange for Class A and B shares of beneficial interest of the AC Fund (the "Shares"); (2) the VK Fund would distribute the Shares to the VK Fund's shareholders holding the same respective class of shares; and (3) the VK Fund would dissolve and all outstanding shares of the VK Fund would be cancelled. The AC Fund is an open-end, diversified management investment company which is authorized to issue an unlimited number of shares of beneficial interest, par value $.01 per share, for each series authorized by its Board of Trustees. The investment objective of the AC Fund is to seek protection of capital and high current income through investments in U.S. dollar denominated money market securities, which is substantially similar to the investment objective of the VK Fund. (See "Summary -- Comparisons of the VK Fund and the AC Fund -- Investment Objectives and Policies" below.) There can be no assurance that the AC Fund will achieve its investment objective. The address, principal executive office and telephone number of the VK Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000 or (800) 341-2911. The address, principal executive office and telephone number of the AC Fund is 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666. The enclosed proxy and this Proxy Statement/Prospectus are first being sent to VK Fund shareholders on or about August 7, 1995. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT/ PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ 7 This Proxy Statement/Prospectus contains information shareholders of the VK Fund should know before voting on the Reorganization and constitutes an offering of Class A and B Shares of the AC Fund only. Please read it carefully and retain it for future reference. A Statement of Additional Information dated August 4, 1995, relating to this Proxy Statement/Prospectus (the "Reorganization SAI") has been filed with the Securities and Exchange Commission (the "SEC") and is incorporated herein by reference. A Prospectus and Statement of Additional Information containing additional information about the AC Fund, each dated August 1, 1995, have been filed with the SEC and are incorporated herein by reference. A copy of the AC Fund Prospectus accompanies this Proxy Statement/Prospectus. A Prospectus and Statement of Additional Information containing additional information about the VK Fund, each dated August 1, 1995, have been filed with the SEC and are incorporated herein by reference. Copies of any of the foregoing may be obtained without charge by calling or writing to the VK Fund at the telephone number or address shown above. If you wish to request the Reorganization SAI, please ask for the "Reorganization SAI." No person has been authorized to give any information or make any representation not contained in this Proxy Statement/Prospectus and, if so given or made, such information or representation must not be relied upon as having been authorized. This Proxy Statement/Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation. ------------------------ The AC Fund is subject to the information requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended (the "Act"), and in accordance therewith files reports and other information with the SEC. Such reports, other information and proxy statements filed by the AC Fund can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Office at 500 West Madison Street, Chicago, Illinois. Copies of such material can also be obtained from the SEC's Public Reference Branch, Office of Consumer Affairs and Information Services, Washington, D.C. 20549, at prescribed rates. The date of this Proxy Statement/Prospectus is August 4, 1995. 8 TABLE OF CONTENTS
PAGE ---- APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION.................................................... 4 A. SUMMARY...................................................... 4 The Reorganization........................................... 4 Comparisons of the AC Fund and the VK Fund................... 5 Investment Objectives and Policies......................... 7 Advisory and Other Fees.................................... 8 Distribution, Purchase, Redemption and Exchange of Shares.... 9 Federal Income Tax Consequences.............................. 16 Reasons for the Proposed Reorganization...................... 16 B. RISK FACTORS................................................. 19 Nature of Investment......................................... 19 C. INFORMATION ABOUT THE FUNDS.................................. 19 D. THE PROPOSED REORGANIZATION.................................. 20 Terms of the Agreement....................................... 20 Description of Securities to be Issued....................... 21 Shares of Beneficial Interest.............................. 21 Voting Rights of Shareholders.............................. 22 Continuation of Shareholder Accounts and Plans; Share Certificates................................................. 22 Federal Income Tax Consequences.............................. 23 Capitalization............................................... 25 Comparative Performance Information.......................... 25 Ratification of Investment Objective, Policies and Restrictions of the AC Fund.................................. 26 Legal Matters.............................................. 26 Expenses..................................................... 26 F. RECOMMENDATION OF THE VK BOARD............................... 27 OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING........................................................... 27 OTHER INFORMATION................................................... 27 A. SHAREHOLDINGS OF THE VK FUND AND THE AC FUND................. 27 B. SHAREHOLDER PROPOSALS........................................ 28 VOTING INFORMATION AND REQUIREMENTS................................. 28 EXHIBIT A........................................................... A-1 EXHIBIT B........................................................... A-2
3 9 APPROVAL OR DISAPPROVAL OF THE PROPOSED REORGANIZATION A. SUMMARY The following is a summary of, and is qualified by reference to, the more complete information contained in this Proxy Statement/Prospectus, including the Agreement and Plan of Reorganization by and between the AC Fund and the VKAC Money Market Trust attached hereto as Exhibit A (the "Agreement"), the prospectus of the VK Fund dated August 1, 1995 (the "VK Fund Prospectus") incorporated herein by reference and the prospectus of the AC Fund dated August 1, 1995 (the "AC Fund Prospectus") incorporated herein by reference and accompanying this Proxy Statement/Prospectus. This Proxy Statement/Prospectus constitutes an offering of Class A and B Shares of the AC Fund only. THE REORGANIZATION On May 11, 1995, the Board of Trustees of the VKAC Money Market Trust (the "VK Board") approved the Agreement. The Agreement provides that the VK Fund will transfer all of its assets and liabilities to the AC Fund in exchange for Class A and B Shares of the AC Fund. At the Closing (as defined herein), the AC Fund will issue Shares of the AC Fund to the VK Fund, which AC Fund Shares will have an aggregate net asset value equal in amount to the net asset value of the VK Fund net assets as of the Closing. The Agreement provides that the VK Fund will dissolve following the Closing pursuant to a plan of liquidation and dissolution to be adopted by the VK Board following the Closing and as part of such dissolution, will distribute to each shareholder of the VK Fund Shares of the respective class of the AC Fund equal in value to their existing shares in the VK Fund. All members of the VK Board who were not affiliated with the VK Adviser were elected as trustees of the AC Fund on July 21, 1995. The VK Board has unanimously determined that the Reorganization is in the best interests of the shareholders of each class of shares of the VK Fund and that such shareholders will not be diluted as a result of the Reorganization. Similarly, the Board of Trustees of the AC Fund (the "AC Board") has unanimously determined that the Reorganization is in the best interest of the AC Fund and that the interests of the shareholders of the AC Fund will not be diluted as a result of the Reorganization. Management of the respective funds believes that the proposed Reorganization of the VK Fund into the AC Fund should allow the AC Fund to achieve future economies of scale and to eliminate certain costs of operating the VK Fund and the AC Fund separately. Van Kampen American Capital Asset Management, Inc. ("AC Adviser") has agreed to pay all expenses of the Reorganization incurred by the AC Fund and the 4 10 VK Fund. Accordingly, the VK Fund and its shareholders will not bear any expenses of the Reorganization. The VK Board is asking shareholders of the VK Fund to approve the Reorganization at the Special Meeting to be held on September 15, 1995. If shareholders of the VK Fund approve the Reorganization, it is expected that the Closing will be on September 29, 1995, but it may be at a different time, as described herein. THE VK BOARD RECOMMENDS THAT YOU VOTE FOR THE REORGANIZATION. APPROVAL OF THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION AND REQUIREMENTS." COMPARISONS OF THE AC FUND AND THE VK FUND The principal changes which would result from the Reorganization are listed below: (1) The holders of Class A and B shares of the VK Fund would become holders of the same class of Shares, respectively, AC Fund. The VK Fund and the AC Fund have substantially similar investment objectives and follow similar investment strategies. (2) The AC Fund is managed by AC Adviser, an affiliate of the VK Fund's adviser, Van Kampen American Capital Investment Advisory Corp. ("VK Adviser"). The advisory fee for the AC Fund is a monthly fee computed on average daily net assets at an annual rate of 0.500% on the first $150 million of net assets; 0.450% on the next $100 million of net assets; 0.400% on the next $100 million of net assets; and 0.350% on net assets over $350 million. The advisory fee for the VK Fund is a monthly fee computed on average daily net assets at an annual rate of 0.500% on the first $250 million of net assets; 0.475% on the next $250 million of net assets; 0.425% on the next $250 million of net assets and 0.275% on net assets over $750 million. As of May 31, 1995, the AC Fund's net assets were approximately $324.5 million. As of May 31, 1995, the VK Fund's net assets were approximately $28.6 million. (3) The VK Fund offers two classes of shares. The AC Fund offers three classes of shares. The VK Fund offers Class A shares at the net asset value per share without a sales charge. In addition, the VK Fund offers Class B shares which are not subject to a sales charge when purchased, but which generally are subject to a contingent deferred sales charge (3.00% if redeemed within the first year after purchase and reduced thereafter to zero seven years after purchase). Class B shares of the VK Fund may be acquired only by exchange of Class B shares from other Van Kampen American Capital open-end funds and are offered for temporary investment purposes between investments in such other funds. None of the three classes of AC Fund 5 11 shares is subject to a sales charge when purchased. However, Class B and C shares generally are subject to a contingent deferred sales charge (4.00% if redeemed within the first year after purchase and reduced thereafter to zero six years after purchase in the case of the Class B shares and 1.00% if redeemed within the first year after purchase and reduced to zero thereafter in the case of the Class C shares). Class B Shares acquired in the Reorganization will remain subject to the contingent deferred sales charge applicable to Class B shares of the VK Fund. Class B shares of the VK Fund convert automatically to Class A shares of the VK Fund seven years after purchase. Class B shares of the AC Fund convert to Class A shares of the AC Fund six years after purchase. Class B Shares acquired in the Reorganization will remain subject to the conversion schedule applicable to Class B shares of the VK Fund. (4) The VK Fund and the AC Fund have adopted plans (each, a "Plan") for distribution-related expenses pursuant to Rule 12b-1 under the Act and expenses for providing ongoing shareholder services. The VK Fund Plan with respect to Class A shares provides that the VK Fund may spend an aggregate amount up to 0.25% per year of the average daily net assets attributable to Class A shares in connection with the ongoing provision of services to holders of such shares by Van Kampen American Capital Distributors, Inc. ("VKAC Distributors"), the distributor of the VK Fund shares and by financial intermediaries in connection with the maintenance of such shareholders' accounts. The VK Fund Plan with respect to Class B shares provides that VK Fund can charge up to 0.75% of the average daily net assets attributable to Class B shares for reimbursement of certain distribution-related expenses and can charge up to 0.25% of average daily net assets attributable to Class B shares for the provision of ongoing services to shareholders. The AC Fund Plan with respect to Class A shares allows for a service fee payment of up to 0.15% per annum of its average daily net assets attributable to Class A shares to be paid to VKAC Distributors, the distributor of the AC Fund shares, for shareholder servicing-related expenses. The AC Fund Plan with respect to Class B and Class C shares allows for a distribution fee to VKAC Distributors at an annual rate of up to 0.75% and a service fee at an annual rate up to 0.15% of the AC Fund's aggregate daily net assets attributable to the Class B and C Shares to reimburse VKAC Distributors for service fees paid by it to certain financial institutions (which may include banks), securities dealers and other industry professionals and for its distribution costs. Certain other comparisons between the VK Fund and the AC Fund are discussed below. 6 12 INVESTMENT OBJECTIVES AND POLICIES The AC Fund and the VK Fund have substantially similar investment objectives and also share similar investment practices, but there are also certain differences in their investment policies, practices and restrictions. The investment objective of the AC Fund is to seek protection of capital and high current income through investments in U.S. dollar denominated money market securities. The investment objective of the VK Fund is to provide high current income consistent with the preservation of capital and liquidity through investments in a broad range of money market instruments that will mature within 12 months of the date of purchase. Both funds invest principally in a diversified portfolio of United States agency and government obligations, commercial paper and repurchase agreements. As money market funds, both funds are required to comply with the credit quality, diversification and portfolio security maturity requirements of the Act applicable to money market funds. Both funds invest in obligations issued or guaranteed as to principal and interest by the U.S. Government, its agencies and instrumentalities. The AC Fund invests in bank obligations including certificates of deposit, time deposits and bankers' acceptances issued by domestic banks, foreign branches or subsidiaries of domestic banks and domestic or foreign branches of foreign banks which at the time of investment are rated in the two highest categories, A-1 or A-2 by Standard & Poor's Corporation ("S&P") or Prime-1 or Prime-2 by Moody's Investors Service, Inc. ("Moody's"). The VK Fund invests in similar types of bank obligations issued by domestic banks (or a foreign branch thereof) subject to regulation by the U.S. Government and rated at least A-2 by S&P or Prime-2 by Moody's but may also invest in unrated securities of comparable quality. Both the VK Fund and the AC Fund may invest in commercial paper rated at the time of investment at least A-2 by S&P or Prime-2 by Moody's. Currently, the AC Fund's policy is to limit investments in commercial paper to obligations rated A-1 or Prime-1, respectively, by S&P or Moody's. The VK Fund may not invest in Federal Housing Administration or Veterans' Administration pooled mortgages, or obligations of the Asian Development Bank, the Inter-American Development Bank or the International Bank for Reconstruction and Development (World Bank) or more than 10% of its assets in bank obligations payable in Euro Dollars. The VK Fund may not invest in bank time deposits maturing in more than 7 days or invest more than 10% of its assets in bank time deposits maturing between two business days and 7 calendar days. The AC Fund has no similar restrictions. For a complete description of the AC Fund's investment objectives and policies, see the respective sections in the AC Fund's Prospectus and Statement of Additional Information entitled "Investment Objectives and Policies". For a complete description of the VK Fund's investment objectives and policies, see the respective sections in the VK Fund's Prospectus and Statement of Additional Information entitled "Investment Objective and Policies". 7 13 The AC Fund is managed by AC Adviser while the VK Fund is managed by VK Adviser. AC Adviser and VK Adviser are wholly-owned subsidiaries of Van Kampen American Capital, Inc. ("VKAC") which has been developing investment strategies and products for individuals, businesses and institutions since 1974. AC Adviser and VK Adviser are the primary investment advisers to the Van Kampen American Capital funds. VKAC is a diversified asset management company with more than two million retail investor accounts, extensive capabilities for arranging institutional portfolios, and over $50 billion under management or supervision. VKAC'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. The business address of AC Adviser is 2800 Post Oak Boulevard, Houston, Texas 77056. AC Adviser and its investment advisory agreement with the AC Fund are more fully described in the AC Fund Prospectus and Statement of Additional Information. ADVISORY AND OTHER FEES The VK Fund pays the VK Adviser a monthly fee based on its average daily net asset value at the annual rates of 0.500% of the first $250 million; 0.475% of the next $250 million; 0.425% of the next $250 million and 0.275% over $750 million. However, such fee has historically been reduced as a result of voluntary fee waivers and expense reimbursements by the VK Adviser. The effective rate of advisory fees for the period ended December 31, 1994 was 0.03% of the average daily net assets of the VK Fund. In addition, the VK Fund bears most expenses associated with its operations and the issuance and repurchase or redemption of its securities, except for the compensation of trustees and officers affiliated with the VK Adviser, VKAC Distributors or VKAC. Total operating expenses for the VK Fund for the period ended December 31, 1994 were 1.03% and 1.80% of the average daily net assets attributable to the Class A and B Shares, respectively, after giving effect to voluntary expense reimbursement by VK Adviser. Absent such voluntary expense reimbursement, such total operating expenses for the period ending December 31, 1994 would have been 1.50% and 2.27% of the average daily net assets attributable to the Class A and B Shares, respectively. The fees and expenses actually paid to date by the VK Fund have been less than the total of such fees and expenses applicable to the VK Fund as a result of voluntary fee waivers and expense reimbursements made by VK Adviser. However, if the Reorganization is not consummated, VK Adviser does not currently intend to continue such voluntary fee waivers and expense reimbursements. The AC Fund pays the AC Adviser a monthly fee based on its average daily net asset value at the annual rates of 0.50% of the first $150 million; 0.45% on the next $100 million; 0.40% on the next $100 million and 0.35% on net assets over $350 million. The effective advisory fee for the fiscal year ended May 31, 1995, was 0.44% of the AC Fund's average daily net asset value. Similar to the VK Fund, the 8 14 AC Fund also bears most expenses associated with its operation and the issuance and repurchase or redemption of its securities, except for the compensation of trustees and officers affiliated with the AC Adviser and VKAC. The total operating expenses of the AC Fund for the fiscal year ended May 31, 1995 were 1.00%, 1.76% and 1.76%% of the average daily net assets attributable to its Class A, Class B and Class C shares, respectively. For a complete description of the AC Fund's advisory services, see the respective sections in the AC Fund's Prospectus and Statement of Additional Information entitled "Investment Advisory Services" and "Investment Advisory Agreement." For a complete description of the VK Fund's advisory services, see the respective sections in the VK Fund's Prospectus and Statement of Additional Information entitled "Investment Advisory Services" and "Investment Advisory and Other Services -- Investment Advisory Agreement." The AC Fund has adopted Plans for each of the Class A, B and C Shares hereinafter referred to as the "Class A Plan," "Class B Plan," and the "Class C Plan." Under the Class A Plan, the AC Fund pays a service fee to VKAC Distributors, at an annual rate of up to 0.15% 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 AC Fund pays a service fee to VKAC Distributors at an annual rate of up to 0.15% and a distribution fee at an annual rate of up to 0.75% of the Fund's aggregate average daily net assets attributable to the Class B shares and Class C shares, respectively, to reimburse VKAC Distributors for service fees paid by it to certain financial institutions (which may include banks), securities dealers and other industry professionals (collectively, "Service Organizations") and for distribution costs. VKAC Distributors uses the Class A Plan , Class B Plan and Class C Plan fees to compensate Service Organizations for personal services and/or maintenance of shareholder accounts. The expenses of the AC Fund attributable to such Class A Plan, Class B Plan and Class C Plan for the fiscal year ended May 31, 1995 were 0.14%, 0.90% and 0.90% of the average daily net assets attributable to the Class A, Class B and Class C shares, respectively. For a complete description of these arrangements, see the respective sections in the AC Fund's Prospectus and Statement of Additional Information entitled "Distribution Plans." The VK Fund has adopted a Plan with respect to each class of its shares. The expenses of the VK Fund for the period ended December 31, 1994 were 0.25% and 1.00% of the VK Fund's average daily net asset value attributable to the Class A and B shares, respectively. For a complete description of these arrangements, see the respective sections in the VK Fund's Prospectus and Statement of Additional Information entitled, "The Distribution and Service Plans." DISTRIBUTION, PURCHASE, REDEMPTION AND EXCHANGE OF SHARES Class A shares of the VK Fund and Class A shares of the AC Fund may be purchased at net asset value, without the imposition of a sales charge. Class B 9 15 shares of the VK Fund may be acquired only by exchange of Class B shares of other Van Kampen American Capital open-end funds and are subject to a contingent deferred sales charge (3.00% if redeemed within the first year after purchase and reduced thereafter to zero seven years after purchase). Class B shares of the AC Fund are not subject to a sales charge when purchased, but are subject to a contingent deferred sales charge (4.00% if redeemed within the first year after purchase and reduced thereafter to zero six years after purchase). Class B shares of the VK Fund acquired through use of the exchange privilege are subject to the contingent deferred sales charge applicable to such shares upon the investor's initial purchase of Class B shares from one of the other Van Kampen American Capital open-end funds. The Class B shares of the VK Fund will convert automatically to Class A shares of the VK Fund seven years after the end of the month in which the shareholder's initial order to purchase such Class B shares of one of the Van Kampen American Capital open-end funds was accepted. Class B shares of the AC Fund will convert automatically to Class A shares six years after the end of the calendar month in which the shareholder's order to purchase was accepted. Class B Shares of the AC Fund acquired in the Reorganization will remain subject to the contingent deferred sales charge and conversion schedule applicable to Class B shares of the VK Fund. Unlike the VK Fund, the AC Fund offers Class C shares. Class C shares may be purchased at net asset value and are subject to a contingent deferred sales charge of 1.00% on redemptions made within one year of purchase, which charge is reduced to zero thereafter. Class C shares 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. The minimum initial investment in Class A, B and C shares of the AC Fund and the Class A and B shares of the VK Fund is $500, although shares of the AC Fund acquired in connection with the Reorganization will not be subject to the minimum investment limitation. The minimum subsequent investment in Class A, B and C Shares of the AC Fund and Class A and B shares the VK Fund is $50. For a complete description of these arrangements with respect to the AC Fund, see the respective sections in the AC Fund's Prospectus and Statement of Additional Information entitled "Purchase of Shares" and "Purchase and Redemption of Shares." For a complete description of these arrangements with respect to the VK Fund, see the respective sections in the VK Fund's Prospectus and Statement of Additional Information entitled "Purchasing Shares of the Fund." Shares of either the VK Fund or the AC Fund may be purchased by check, by electronic transfer or by bank wire and offer exchange privileges among all other Van Kampen American Capital open-end mutual funds distributed by VKAC Distributors (except Van Kampen American Capital Government Target Fund). Shares of the AC Fund and the VK Fund properly presented for redemption may be redeemed or exchanged at the next determined net asset value per share (subject 10 16 to any applicable deferred sales charge). Shares of either the VK Fund or the AC Fund may be redeemed or exchanged by mail or by special redemption privileges (telephone exchange, telephone redemption by check or electronic transfer). If a shareholder of either fund attempts to redeem shares within a short time after they have been purchased by check, the respective fund may delay payment of the redemption proceeds until such fund can verify that payment for the purchase of the shares has been (or will be) received. No further purchases of the shares of the VK Fund may be made after the date on which the shareholders of the VK Fund approve the Reorganization, and the stock transfer books of the VK Fund will be permanently closed as of the date of Closing. Only redemption requests and transfer instructions received in proper form by the close of business on the day prior to the date of Closing will be fulfilled by the VK Fund. Redemption requests or transfer instructions received by the VK Fund after that date will be treated by the VK Fund as requests for the redemption or instructions for transfer of the shares of the AC Fund credited to the accounts of the shareholders of the VK Fund. Redemption requests or transfer instructions received by the VK Fund after the close of business on the day prior to the date of Closing will be forwarded to the AC Fund. For a complete description of these redemption arrangements with respect to the AC Fund, see the respective sections in the AC Fund's Prospectus and Statement of Additional Information entitled "Redemption of Shares" and "Purchase and Redemption of Shares." For a complete description of these redemption arrangements with respect to the VK Fund, see the respective sections in the VK Fund's Prospectus and Statement of Additional Information entitled "Redemption of Shares." 11 17 The differences in the distribution, purchase and redemption procedures and fee structure of the shares of the AC Fund and the shares of the VK Fund are highlighted in the table below. FEE COMPARISONS
VK AC CLASS A SHARES FUND* FUND** PRO FORMA --------------------------------------------------- ----- ------ --------- SHAREHOLDER TRANSACTION EXPENSES FOR CLASS A SHARES Maximum Sales Load Imposed on Purchase of a Share (as a percentage of Offering Price).............. None None None Maximum Deferred Sales Charge (as a percentage of the lower of the original purchase price or redemption proceeds)........... None None None ANNUAL FUND OPERATING EXPENSES FOR CLASS A SHARES (as a percentage of average net assets) Management Fees.................................... 0.50%(1) 0.44% 0.44% Rule 12b-1 Fees.................................... 0.25% 0.14% 0.14% Other Expenses..................................... 0.75% 0.42% 0.42% Total Fund Operating Expenses (before waivers and reimbursements).............. 1.50%(1) 1.00% 1.00% Expense Example of Total Operating Expenses Assuming Redemption at the End of the Period (before waivers and reimbursements)(4) One Year......................................... $ 15 $ 10 $ 10 Three Years...................................... $ 47 $ 32 $ 32 Five Years....................................... $ 82 $ 55 $ 55 Ten Years........................................ $ 179 $ 122 $ 122 Expense Example of Total Operating Expenses Assuming No Redemption at the End of the Period (before waivers and reimbursements)(4) One Year......................................... $ 15 $ 10 $ 10 Three Years...................................... $ 47 $ 32 $ 32 Five Years....................................... $ 82 $ 55 $ 55 Ten Years........................................ $ 179 $ 122 $ 122
12 18
VK AC CLASS A SHARES FUND* FUND** PRO FORMA --------------------------------------------------- ----- ------ --------- Total Fund Operating Expenses (after waivers and reimbursements)............... 1.03% 1.00% 1.00% Expense Example of Total Operating Expenses Assuming Redemption at the End of the Period (after waivers and reimbursements)(4) One Year......................................... $ 11 $ 10 $ 10 Three Years...................................... $ 33 $ 32 $ 32 Five Years....................................... $ 57 $ 55 $ 55 Ten Years........................................ $ 126 $ 122 $ 122 Expense Example of Total Operating Expenses Assuming No Redemption at the End of the Period (after waivers and reimbursements)(4) One Year......................................... $ 11 $ 10 $ 10 Three Years...................................... $ 33 $ 32 $ 32 Five Years....................................... $ 57 $ 55 $ 55 Ten Years........................................ $ 126 $ 122 $ 122 CLASS B SHARES SHAREHOLDER TRANSACTION EXPENSES FOR CLASS B SHARES Maximum Sales Load Imposed on Purchase of a Share (as a percentage of Offering Price).............. None None None Maximum Deferred Sales Charge (as a percentage of the lower of the original purchase price or redemption proceeds)............................. 3.00%(2) 4.00%(3) 4.00% ANNUAL FUND OPERATING EXPENSES FOR CLASS B SHARES (as a percentage of average net assets) Management Fees.................................... 0.50%(1) 0.44% 0.44% Rule 12b-1 Fees.................................... 1.00% 0.90% 0.90% Other Expenses..................................... 0.77% 0.42% 0.42% Total Fund Operating Expenses (before waivers and reimbursements).............. 2.27%(1) 1.76% 1.76% Expense Example of Total Operating Expenses Assuming Redemption at the End of the Period (before waivers and reimbursements)(4) One Year......................................... $ 53 $ 58 $ 58 Three Years...................................... $ 81 $ 85 $ 85 Five Years....................................... $ 122 $ 110 $ 110 Ten Years........................................ $ 232 $ 169 $ 169
13 19
VK AC CLASS B SHARES FUND* FUND** PRO FORMA --------------------------------------------------- ----- ------ --------- Expense Example of Total Operating Expenses Assuming No Redemption at the End of the Period (before waivers and reimbursements)(4) One Year......................................... $ 23 $ 18 $ 18 Three Years...................................... $ 71 $ 55 $ 55 Five Years....................................... $ 122 $ 95 $ 95 Ten Years........................................ $ 232 $ 169 $ 169 Total Fund Operating Expenses (after waiver and reimbursements)................ 1.80% 1.76% 1.76% Expense Example of Total Operating Expenses Assuming Redemption at the End of the Period (after waivers and reimbursements)(4) One Year......................................... $ 48 $ 58 $ 58 Three Years...................................... $ 67 $ 85 $ 85 Five Years....................................... $ 97 $ 110 $ 110 Ten Years........................................ $ 182 $ 169 $ 169 Expense Example of Total Operating Expenses Assuming No Redemption at the End of the Period (after waivers and reimbursements)(4) One Year......................................... $ 18 $ 18 $ 18 Three Years...................................... $ 57 $ 55 $ 55 Five Years....................................... $ 97 $ 95 $ 95 Ten Years........................................ $ 182 $ 169 $ 169 CLASS C SHARES SHAREHOLDER TRANSACTION EXPENSES FOR CLASS C SHARES Maximum Sales Load Imposed on Purchase of a Share (as a percentage of Offering Price).............. N/A None None Maximum Deferred Sales Charge (as a percentage of the lower of the original purchase price or redemption proceeds)........... N/A 1.00%(3) 1.00% ANNUAL FUND OPERATING EXPENSES FOR CLASS C SHARES (as a percentage of average net assets) Management Fees.................................... N/A 0.44% 0.44% Rule 12b-1 Fees.................................... N/A 0.90% 0.90% Other Expenses..................................... N/A 0.42% 0.42% Total Fund Operating Expenses...................... N/A 1.76% 1.76%
14 20
VK AC CLASS C SHARES FUND* FUND** PRO FORMA --------------------------------------------------- ----- ------ --------- Expense Example of Total Operating Expenses Assuming Redemption at the End of the Period(4) One Year......................................... N/A $ 28 $ 28 Three Years...................................... N/A $ 55 $ 55 Five Years....................................... N/A $ 95 $ 95 Ten Years........................................ N/A $ 207 $ 207 Expense Example of Total Operating Expenses Assuming No Redemption at the End of the Period(4) One Year......................................... N/A $ 18 $ 18 Three Years...................................... N/A $ 55 $ 55 Five Years....................................... N/A $ 95 $ 95 Ten Years........................................ N/A $ 207 $ 207
--------------- (1) Before voluntary expense waiver. After application of the expense waiver, Management Fees would be 0.03% for each class of shares, and Total Fund Operating Expenses would be 1.03% and 1.80% for Class A and B shares, respectively. (2) Class B shares of the VK Fund are subject to a contingent deferred sales charge equal to 3.00% of the lesser of the then current net asset value or the original purchase price on Class B shares redeemed during the first year after purchase, which charge is reduced each year thereafter to zero over a four year period as follows: Year 1 -- 3.00%; Year 2 -- 2.00%; Year 3 -- 1.00%; Year 4 -- 0.00%. (3) Class B shares of the AC Fund are subject to a contingent deferred sales charge equal to 4.00% of the lesser of the then current net asset value or the original purchase price on Class B shares redeemed during the first year after purchase, which charge is reduced each year thereafter to zero over a six year period as follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year 4 -- 2.50%; Year 5 -- 1.50%; Year 6 -- 0.00%. Class C shares of the AC Fund are subject to a contingent deferred sales charge equal to 1.00% of the lesser of the then current net asset value or the original purchase price on Class C shares redeemed during the first year after purchase, which charge is reduced to zero thereafter. (4) Expenses examples reflect what an investor would pay on a $1,000 investment, assuming a 5% annual return with either redemption or no redemption at the end of each time period as noted in the above table. The Pro Forma column reflects expenses estimated to be paid on new shares purchased from the combined fund subsequent to the Reorganization. For those shares issued in connection with the Reorganization, the following expenses would be incurred 15 21 based upon the purchase of the VK Fund immediately prior to the Reorganization and the Pro Forma expense ratio:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS -------- ----------- ---------- --------- With Redemption at End of Period Class A............................... $ 10 $32 $ 55 $ 122 Class B............................... $ 48 $65 $ 95 $ 178 Without Redemption at End of Period Class A............................... $ 10 $32 $ 55 $ 122 Class B............................... $ 18 $55 $ 95 $ 178
* For the semi-annual period ended December 31, 1994 on an annualized basis. ** For the annual period ended May 31, 1995. FEDERAL INCOME TAX CONSEQUENCES The Reorganization is intended to qualify as a "reorganization" within the meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). If the Reorganization so qualifies, in general a shareholder of the VK Fund will recognize no gain or loss upon the receipt solely of the shares of the AC Fund pursuant to the Reorganization. Additionally, the VK Fund would not recognize any gain or loss as a result of the exchange of all of its assets for the shares of the AC Fund or as a result of its liquidation. The AC Fund expects that it will not recognize any gain or loss as a result of the Reorganization, that it will take a carryover basis in the assets acquired from the VK Fund and that its holding period of such assets will include the period during which the assets were held by the VK Fund. See "The Proposed Reorganization -- Federal Income Tax Consequences." The above information is only a summary of more complete information contained in this Proxy Statement/Prospectus and the related Statement of Additional Information. REASONS FOR THE PROPOSED REORGANIZATION On December 20, 1994, The Van Kampen Merritt Companies, Inc. acquired from The Travelers Inc. all of the outstanding capital stock of American Capital Management & Research, Inc., the parent company of the AC Adviser. Immediately after the acquisition, American Capital Management & Research, Inc. was merged into The Van Kampen Merritt Companies, Inc. and the combined entity was renamed Van Kampen American Capital, Inc. ("VKAC"). The VK Adviser and the AC Adviser currently are each wholly-owned subsidiaries of VKAC. On February 10, 1995, the VK Board and the AC Board held a joint meeting to discuss with management ("Management") of the VK Adviser and the AC Adviser the costs and potential benefits to shareholders of, among other things, (i) combining certain funds advised by the VK Adviser and the AC Adviser, 16 22 including the VK Fund and the AC Fund in order to seek to achieve certain economies of scale and efficiencies, (ii) permitting exchangeability of shares between funds advised by the VK Adviser and the AC Adviser, (iii) selecting a common transfer agent to facilitate exchangeability and enhance shareholder services, and (iv) consolidating the VK Board and the AC Board into a combined board of trustees (collectively, the "Consolidation"). The VK Board and the AC Board created a joint committee (the "Joint Committee") to consider the possible costs and benefits to shareholders associated with the proposed Consolidation, including the combination of the VK Fund and the AC Fund. The Joint Committee held meetings on February 20, 1995, March 27, 1995 and April 3, 1995 to consider issues relating to the Consolidation, review information requested from and provided by Management and review information requested from and provided by third-party analytical services. The VK Board and the AC Board held joint meetings on March 14, 1995 and April 6-7, 1995 to review the findings and recommendations of the Joint Committee. The VK Board unanimously approved each element of the Consolidation, including the combination of the VK Fund and the AC Fund, on April 7, 1995, subject to approval of the Consolidation by the AC Board. The AC Board met on May 11, 1995, and unanimously approved each element of the Consolidation, including the combination of the VK Fund and the AC Fund. Each of the VK Board and the AC Board also approved submitting the necessary proposals to the respective shareholders of the VK Fund and the AC Fund to effect the Consolidation. At separate shareholder meetings held on July 21, 1995, shareholders of the VK Fund and the AC Fund approved the reorganization of the VK Fund and the AC Fund into Delaware business trusts (or series thereof) and the combination of the VK Board and the AC Board. Shareholders of the VK Fund are now being asked to approve its consolidation with the AC Fund in order to (i) eliminate the duplication of services that currently exists as a result of the separate operations of the funds, (ii) seek to achieve economies of scale by combining the assets of the funds and (iii) potentially reduce transaction costs and obtain greater portfolio diversity. In connection with approving the combination of the VK Fund with the AC Fund, the VK Board considered the costs resulting from the separate operations of the AC Fund and the VK Fund in light of their substantially similar investment objectives, policies and restrictions. The VK Board also considered the potential expense savings, economies of scale, reduced per-share expenses and benefits to the portfolio management process that could result from combining the assets and operations of the AC Fund and the VK Fund. In this regard, the VK Board reviewed information provided by the AC Adviser, VK Adviser and VKAC Distributors relating to the anticipated cost savings to the shareholders of the AC Fund and the VK Fund as a result of the Reorganization. 17 23 In particular, the VK Board considered the probability that the elimination of duplicative operations and the increase in asset levels of the AC Fund after the Reorganization would result in the following potential benefits for investors, although there can, of course, be no assurances in this regard: (1) ELIMINATION OF SEPARATE OPERATIONS. Consolidating the VK Fund and the AC Fund should eliminate the duplication of services that currently exists as a result of their separate operations. For example, currently the VK Fund and the AC Fund are managed separately by different affiliated investment advisers. Consolidating the separate operations of the VK Fund with those of the AC Fund should promote more efficient operations on a more cost-effective basis. (2) ACHIEVEMENT OF REDUCED PER SHARE EXPENSES AND ECONOMIES OF SCALE. Combining the assets of the VK Fund with the assets of the AC Fund also should lead to reduced expenses, on a per share basis, by allowing fixed and relatively fixed costs, such as accounting, legal and printing expenses, to be spread over a larger asset base. An increase in the net asset levels of the AC Fund also could result in achieving future economies of scale, which should also reduce per share expenses. Any significant reductions in expenses on a per share basis should, in turn, have a favorable effect on the relative total return of the AC Fund. (3) BENEFITS TO THE PORTFOLIO MANAGEMENT PROCESS. Higher net asset levels also should enable the AC Fund to purchase larger individual portfolio investments that may result in reduced transaction costs and/or other more favorable pricing and provide the opportunity for greater portfolio diversity. In determining whether to recommend approval of the Reorganization to shareholders of the VK Fund, the VK Board considered a number of factors, including, but not limited to: (1) capabilities and resources of AC Adviser and other service providers to the AC Fund in the areas of marketing, investment and shareholder services; (2) expenses and advisory fees applicable to the VK Fund and the AC Fund before the Reorganization and the estimated expense ratios of the AC Fund after the Reorganization; (3) the comparative investment performance of the VK Fund and the AC Fund, as well as the performance of the AC Fund compared to its peers; (4) the terms and conditions of the Agreement and whether the Reorganization would result in dilution of the VK Fund shareholder interests; (5) the advantages of eliminating the competition and duplication of effort inherent in marketing two funds having similar investment objectives, in addition to the economies of scale realized through the combination of the two funds; (6) the compatibility of the funds' service features available to shareholders, including the retention of applicable holding periods and exchange privileges; (7) the costs estimated to be incurred by the respective funds as a result of the Reorganization; and (8) the anticipated tax consequences of the Reorganization. Based upon these 18 24 and other factors, the VK Board unanimously determined that the Reorganization is in the best interests of the shareholders of the VK Fund. B. RISK FACTORS NATURE OF INVESTMENT Each of the AC Fund and the VK Fund invest primarily in U.S. dollar denominated money market securities consisting of obligations of the U.S. Government and its agencies, bank obligations, commercial paper and repurchase agreements. Investment in either of the AC Fund or the VK Fund may not be appropriate for all investors. The investment objectives and policies of the AC Fund and the VK Fund, and the risks associated with an investment in either Fund, are substantially similar. For additional information see the respective sections of the AC Fund's Prospectus and Statement of Additional Information entitled "Investment Objectives and Policies" and "Investment Practices and Restrictions" and the respective sections of the VK Fund's Prospectus and Statement of Additional Information entitled "Investment Objectives and Policies" and "Investment Practices." C. INFORMATION ABOUT THE FUNDS AC Fund. Information about the AC Fund is included in its current Prospectus dated August 1, 1995, which accompanies this Proxy Statement/Prospectus. Additional information about the AC Fund is included in its Statement of Additional Information dated the same date as the AC Fund Prospectus. Copies of AC Fund Statement of Additional Information may be obtained without charge by calling (800) 421-5666. The AC Fund files proxy material, reports and other information with the SEC. These reports can be inspected and copied at the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates. VK Fund. Information about the VK Fund is included in its current Prospectus dated August 1, 1995. Additional information about the VK Fund is included in its current Statement of Additional Information dated the same date as the VK Fund Prospectus. Copies of the VK Fund Statement of Additional Information may be obtained without charge by calling (800) 341-2911. The VK Fund files proxy material, reports and other information with the SEC. These reports can be inspected and copied at the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can also be obtained from the Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549 at prescribed rates. 19 25 As Delaware business trusts, or series thereof, each of the AC Fund and the VK Fund are governed by their respective Agreements and Declarations of Trust (each, a "Declaration"), their respective Bylaws and applicable Delaware law. D. THE PROPOSED REORGANIZATION The material features of the Agreement are summarized below. This summary does not purport to be complete and is subject in all respects to the provisions of, and is qualified in its entirety by reference to, the Agreement, a copy of which is attached hereto as Exhibit A. The affirmative vote of a majority of the outstanding shares entitled to vote is required to approve the Reorganization at a meeting of shareholders at which a quorum is present. TERMS OF THE AGREEMENT Pursuant to the Agreement, the AC Fund will acquire all of the assets and the liabilities of the VK Fund on the Closing Date in exchange for Class A and B shares, respectively, of the AC Fund. Subject to VK Fund shareholder approval of the Reorganization, the closing (the "Closing") will occur within 15 business days after the later of the receipt of all necessary regulatory approvals and the final adjournment of the Special Meeting or such later date as soon as practicable thereafter as the AC Fund and the VK Fund may mutually agree. On the date of Closing, the VK Fund will transfer to the AC Fund all of the assets and liabilities of the VK Fund. The AC Fund will in turn transfer to the VK Fund a number of Class A and B Shares, respectively, of the AC Fund equal in value to the value of the net assets of the VK Fund transferred to the AC Fund as of the date of Closing as determined in accordance with the valuation method described in the AC Fund's then current prospectus. In order to minimize any potential for undesirable federal income and excise tax consequences in connection with the Reorganization, the VK Fund and the AC Fund may distribute on or before the Closing all or substantially all of their respective undistributed net investment income as of such date. The VK Fund expects to distribute the Class A and B Shares, respectively, of the AC Fund to the shareholders of the VK Fund promptly after the Closing and then dissolve pursuant to a plan of liquidation and dissolution adopted by the VK Board. The VK Fund and the AC Fund have made certain standard representations and warranties to each other regarding their capitalization, status and conduct of business. 20 26 Unless waived in accordance with the Agreement, the obligations of the parties to the Agreement are conditioned upon, among other things: 1. approval of the Reorganization by the VK Fund's shareholders; 2. the absence of any rule, regulation, order, injunction or proceeding preventing or seeking to prevent the consummation of the transactions contemplated by the Agreement; 3. the receipt of all necessary approvals, registrations and exemptions under federal and state laws; 4. the truth in all material respects as of the Closing of the representations and warranties of the parties and performance and compliance in all material respects with the parties' agreements, obligations and covenants required by the Agreement; 5. the effectiveness under applicable law of the registration statement of the AC Fund of which this Proxy Statement/Prospectus forms a part and the absence of any stop orders under the Securities Act pertaining thereto; and 6. receipt of opinions of counsel relating to, among other things, the tax free nature of the Reorganization. The Agreement may be terminated or amended by the mutual consent of the parties either before or after approval thereof by the shareholders of the VK Fund, provided that no such amendment after such approval shall be made if it would have a material adverse effect on the interests of VK Fund shareholders. The Agreement may also be terminated by the non-breaching party if there has been a material misrepresentation, material breach of any representation or warranty, material breach of contract or failure of any condition to Closing. The VK Board recommends that you vote to approve the Reorganization, as it believes the Reorganization is in the best interests of the VK Fund's shareholders and that the interests of the VK Fund's existing shareholders will not be diluted as a result of consummation of the proposed Reorganization. DESCRIPTION OF SECURITIES TO BE ISSUED SHARES OF BENEFICIAL INTEREST Beneficial interests in the AC Fund being offered hereby are represented by transferable Class A and B Shares, par value $.01 per share. The AC Fund's Declaration permits the trustees, as they deem necessary or desirable, to create one or more separate investment portfolios and to issue a separate series of shares for each portfolio and, subject to compliance with the Act, to further sub-divide the shares of a series into one or more class of shares for such portfolio. 21 27 VOTING RIGHTS OF SHAREHOLDERS Holders of shares of the AC Fund are entitled to one vote per share on matters as to which they are entitled to vote. The Declaration of the VKAC Money Market Trust and the Declaration of the AC Fund are substantially identical, except that the Declaration of the VKAC Money Market Trust permits the VK Board or shareholders to remove a trustee with or without cause by the act of two-thirds of such trustees or shareholders, respectively. The Declaration of the AC Fund permits (i) the AC Fund to remove a trustee with cause by the act of two-thirds of the trustees and (ii) shareholders holding a majority of the shares of each series outstanding to remove a trustee with or without cause. The Declaration of the AC Fund also requires the approval of 80% of the trustees in office or majority vote of the shares of each series then outstanding to amend these provisions. Each of the AC Fund and the VK Fund operate as a diversified, open-end management investment company registered with the SEC under the Act. Therefore, in addition to the specific voting rights described above, shareholders of the AC Fund, as well as shareholders of the VK Fund, are entitled, under current law, to vote with respect to certain other matters, including changes in fundamental investment policies and restrictions and the ratification of the selection of independent auditors. Moreover, under the Act, shareholders owning not less than 10% of the outstanding shares of the AC Fund or VK Fund may request that the respective board of trustees call a shareholders' meeting for the purpose of voting upon the removal of trustee(s). CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES If the Reorganization is approved, the AC Fund will establish an account for each VK Fund shareholder containing the appropriate number of shares of the AC Fund. The shareholder services and shareholder programs of the VK Fund and the AC Fund have already been substantially conformed as part of the Consolidation. Shareholders of the VK Fund who are accumulating VK Fund shares under the dividend reinvestment plan, or who are receiving payment under the systematic withdrawal plan with respect to VK Fund shares, will retain the same rights and privileges after the Reorganization in connection with the AC Fund Class A and B Shares, respectively, received in the Reorganization through substantially similar plans maintained by the AC Fund. Van Kampen American Capital Trust Company will continue to serve as custodian for the assets of VK Fund shareholders held in IRA accounts after the Reorganization. Such IRA investors will be sent appropriate documentation to confirm Van Kampen American Capital Trust Company's custodianship. It will not be necessary for shareholders of the VK Fund to whom certificates have been issued to surrender their certificates. Upon liquidation of the VK Fund, such certificates will become null and void. 22 28 FEDERAL INCOME TAX CONSEQUENCES The following is a general discussion of the material federal income tax consequences of the Reorganization to shareholders of the VK Fund and shareholders of the AC Fund. It is based upon the Code, legislative history, Treasury regulations, judicial authorities, published positions of the Internal Revenue Service (the "Service") and other relevant authorities, all as in effect on the date hereof and all of which are subject to change or different interpretations (possibly on a retroactive basis). This summary is limited to shareholders who hold their VK Fund shares as capital assets. No advance rulings have been or will be sought from the Service regarding any matter discussed in this Proxy Statement/Prospectus. Accordingly, no assurances can be given that the Service could not successfully challenge the intended federal income tax treatment described below. Shareholders should consult their own tax advisors to determine the specific federal income tax consequences of all transactions relating to the Reorganization, as well as the effects of state, local and foreign tax laws. The Reorganization is intended to qualify as a "reorganization" within the meaning of Section 368(a)(1) of the Code. It is a condition to closing that the VK Fund receive an opinion from Skadden, Arps, Slate, Meagher & Flom substantially to the effect that, for federal income tax purposes: 1. The acquisition by the AC Fund of the assets of the VK Fund in exchange solely for Class A and B Shares of the AC Fund and the assumption by the AC Fund of the liabilities of the VK Fund will qualify as a tax-free reorganization within the meaning of Section 368(a)(1) of the Code. 2. No gain or loss will be recognized by the VK Fund or the AC Fund upon the transfer to the AC Fund of the assets of the VK Fund in exchange solely for the Class A and B Shares of the AC Fund and the assumption by the AC Fund of the liabilities of the VK Fund. 3. The AC Fund's basis in the VK Fund assets received in the Reorganization will, in each instance, equal the basis in such assets in the hands of the AC Fund immediately prior to the transfer, and the AC Fund's holding period of such assets will, in each instance, include the period during which the assets were held by the VK Fund. 4. No gain or loss will be recognized by the shareholders of the VK Fund upon the exchange of their shares of the VK Fund solely for the Class A or B Shares, respectively, of the AC Fund. 5. The aggregate tax basis of the Class A and B Shares of the AC Fund received by the shareholders of the VK Fund will be the same as the aggregate tax basis of the shares of the VK Fund surrendered in exchange therefor. 23 29 6. The holding period of the Class A and B Shares of the AC Fund received by the shareholders of the VK Fund will include the holding period of the shares of the VK Fund surrendered in exchange therefor if such surrendered shares of the VK Fund are held as capital assets by such shareholder. In rendering its opinion, Skadden, Arps, Slate, Meagher & Flom may rely upon certain representations of the management of the VK Fund and the AC Fund and assume that the Reorganization will be consummated as described in the Agreement and that redemptions of shares of the VK Fund occurring prior to the Closing will consist solely of redemptions in the ordinary course of business. The AC Fund intends to be taxed under the rules applicable to regulated investment companies as defined in Section 851 of the Code, which are the same rules currently applicable to the VK Fund and its shareholders. 24 30 CAPITALIZATION The following table sets forth the capitalization of the VK Fund and the AC Fund as of May 31, 1995 and the pro forma combined capitalization of both as if the Reorganization had occurred on that date. These numbers may differ at the time of Closing. CAPITALIZATION TABLE AS OF MAY 31, 1995
VK FUND AC FUND PRO FORMA ----------- ------------ ------------ NET ASSETS Class A Shares............. $21,829,620 $319,680,102 $341,509,722 Class B Shares............. 6,712,140 4,189,960 10,902,100 Class C Shares............. N/A 588,477 588,477 ----------- ------------ ------------ Total...................... $28,541,760 $324,458,539 $353,000,299 ============ ============= ============= NET ASSET VALUE PER SHARE Class A Shares............. $1.00 $1.00 $1.00 Class B Shares............. 1.00 1.00 1.00 Class C Shares............. N/A 1.00 1.00 SHARES OUTSTANDING Class A Shares............. 21,899,865 319,694,843 341,594,708 Class B Shares............. 6,711,933 4,189,806 10,901,739 Class C Shares............. N/A 588,487 588,487 ----------- ------------ ------------ Total...................... 28,611,798 324,473,136 353,084,934 ============ ============= ============= SHARES AUTHORIZED Class A Shares............. Unlimited Unlimited Unlimited Class B Shares............. Unlimited Unlimited Unlimited Class C Shares............. N/A Unlimited Unlimited
COMPARATIVE PERFORMANCE INFORMATION The average annual total return for the VK Fund for the one-year, three-year, five-year and ten-year periods ended May 31, 1995 and for the period beginning April 22, 1983 (the date Class A Shares of the VK Fund were first offered for sale to the public) through May 31, 1995 in respect to the Class A Shares were 4.35%, 3.04%, 4.08%, 5.59% and 6.26%, respectively. The average annual total return for the VK Fund for the period beginning July 11, 1994 (the date Class B Shares of the VK Fund were first offered for sale to the public) through May 31, 1995 in respect to Class B Shares was 3.56%. The average annual total return for the AC Fund for the one-year, three-year, five-year and ten-year periods ended May 31, 1995 and for the period beginning July 12, 1974 (the date Class A Shares of the AC Fund were 25 31 first offered for sale to the public) through May 31, 1995 were 4.43%, 3.05%, 4.02%, 5.65% and 7.61%, respectively for Class A Shares. Class B and Class C shares of the AC Fund became available for purchase on May 1, 1995. The total return figures above assume reinvestment of all dividends and distributions and do not include payment of the CDSC. They are not necessarily indicative of future results. The performance of a fund is a result of conditions in the securities markets, portfolio management and operating expenses. Although information such as that shown above is useful in reviewing a fund's performance and in providing some basis for comparison with other investment alternatives, it should not be used for comparison with other investments using different reinvestment assumptions or time periods. RATIFICATION OF INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS OF THE AC FUND Approval of the Reorganization will constitute the ratification by VK Fund shareholders of the investment objectives, policies and restrictions, Distribution Plan and Advisory Agreement of the AC Fund. For a discussion of the investment objective, policies and restrictions of the AC Fund, see "Summary -- Comparisons of the AC Fund and the VK Fund" and the AC Fund Prospectus accompanying this Proxy Statement/Prospectus. Approval of the Reorganization will constitute approval of amendments to any of the fundamental investment restrictions of the VK Fund that might otherwise be interpreted as impeding the Reorganization, but solely for the purpose of and to the extent necessary for, consummation of the Reorganization. LEGAL MATTERS Certain legal matters concerning the issuance of Class A and B Shares of the AC Fund will be passed on by O'Melveny & Myers, 400 South Hope Street, Los Angeles, California 90071, counsel to the AC Fund. Lawrence J. Sheehan, a former partner of, and currently of counsel to said firm is a Trustee of the AC Fund. On July 21, 1995, Mr. Sheehan was elected as a Trustee of the VK Fund. Certain legal matters concerning the federal income tax consequences of the Reorganization will be passed upon by Skadden, Arps, Slate, Meagher & Flom, 333 West Wacker Drive, Chicago, Illinois 60606, counsel to the VKAC Money Market Trust and the VK Fund. Wayne W. Whalen, a partner of Skadden, Arps, Slate, Meagher & Flom, is a Trustee of the VKAC Money Market Trust. On July 21, 1995, Mr. Whalen was elected as a Trustee of the AC Fund. EXPENSES The expenses of the Reorganization, whether or not the Reorganization is completed, including expenses incurred by the VK Fund will be borne by AC 26 32 Adviser. Accordingly, the VK Fund and its shareholders will not bear any expenses of the Reorganization. The VK Board has determined that the arrangements regarding the payment of expenses and other charges relating to the Reorganization are fair and equitable. F. RECOMMENDATION OF BOARD OF TRUSTEES The VK Board has unanimously approved the Agreement and has determined that participation in the Reorganization is in the best interests of the shareholders of the VK Fund. THE VK BOARD RECOMMENDS VOTING FOR APPROVAL OF THE PROPOSED REORGANIZATION. OTHER MATTERS THAT MAY COME BEFORE THE SPECIAL MEETING It is not anticipated that any action will be asked of the shareholders of the VK Fund other than as indicated above, but if other matters are properly brought before the Special Meeting, it is intended that the persons named in the proxy will vote in accordance with their judgment. OTHER INFORMATION A. SHAREHOLDINGS OF THE VK FUND AND THE AC FUND At the close of business on July 21, 1995, there were 20,886,242 Class A shares and 6,536,023 Class B shares, respectively, of the VK Fund. As of July 17, 1995, the Trustees and officers as a group owned less than 1% of the VK Fund's shares. To the knowledge of the VK Fund, as of July 17, 1995, no person owned of record or beneficially 5% or more of the VK Fund's Class A shares or Class B shares. At the close of business on July 21, 1995, there were 376,916,361 Class A shares, 18,166,270 Class B shares and 2,456,328 Class C shares, respectively, of the AC Fund. As of July 14, 1995, no person was known by management to own beneficially or of record as much as 5% of the outstanding Class A shares of the AC Fund except as follows: 24.68% was owned by Van Kampen American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056. As of July 14, 1995, no person was known by management to own beneficially or of record as much as 5% of the outstanding Class B shares of the AC Fund except as follows: 17.31% was owned by Van Kampen American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056 and 8.59% was owned by National 27 33 Financial Services Corp., @ Southern Nat'l Investment Services, Inc., 200 S. College St., Suite 204, Charlotte, North Carolina 28202-2005. As of July 14, 1995, no person was known by management to own beneficially or of record as much as 5% of the outstanding Class C shares of the AC Fund except as follows: 7.40% was owned by Donaldson Lufkin Jenrette Securities Corp., Attn: Mutual Fund Department, P.O. Box 2052, Jersey City, New Jersey 07303-2052, 7.40% was owned by Van Kampen American Capital Trust Company, 2800 Post Oak Boulevard, Houston, Texas 77056, 5.16% was owned by National Financial Services Corp., @ Southern Nat'l Investment Services, Inc., 200 S. College St., Suite 204, Charoltte, North Carolina 28202-2005 and 9.21% was owned by Smith Barney Inc., 388 Greenwich Street, 11th Floor, New York, New York 10013-2375. Certain officers, directors and employees of VKAC own, in the aggregate, not more than 7% of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options, approximately an additional 11% of the common stock of VK/AC Holding, Inc. B. SHAREHOLDER PROPOSALS As a general matter, the VK Fund does not intend to hold future regular annual or special meetings of shareholders unless required by the Act. Any shareholder who wishes to submit proposals for consideration at a meeting of shareholders of the VK Fund should send such proposal to the VK Fund at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. To be considered for presentation at a shareholders' meeting, rules promulgated by the SEC require that, among other things, a shareholder's proposal must be received at the offices of the AC Fund a reasonable time before a solicitation is made. Timely submission of a proposal does not necessarily mean that such proposal will be so presented. VOTING INFORMATION AND REQUIREMENTS Each valid proxy given by a shareholder of the VK Fund will be voted by the persons named in the proxy in accordance with the designation on such proxy on the Reorganization proposal and as the persons named in the proxy may determine on such other business as may come before the Special Meeting on which shareholders are entitled to vote. If no designation is made, the proxy will be voted by the persons named in the proxy as recommended by the VK Board "FOR" approval of the Reorganization. Shareholders who execute proxies may revoke them at any time before they are voted by filing with the VK Fund a written notice of revocation, by delivering a duly executed proxy bearing a later date, or by attending the Special Meeting and voting in person. 28 34 The giving of a proxy will not affect your right to vote in person if you attend the Special Meeting and wish to do so. The presence in person or by proxy of the holders of a majority of the outstanding shares entitled to vote is required to constitute a quorum at the Special Meeting. APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES OF THE VK FUND ENTITLED TO VOTE AT THE SPECIAL MEETING AT WHICH A QUORUM IS CONSTITUTED. Shares not voted with respect to a proposal due to an abstention or broker non-vote will be deemed votes not cast with respect to such proposal, but such shares will be deemed present for quorum purposes. In the event that sufficient votes in favor of the Reorganization are not received by the scheduled time of the Special Meeting, the persons named in the proxy may propose and vote in favor of one or more adjournments of the Special Meeting to permit further solicitation of proxies. If sufficient shares were present to constitute a quorum, but insufficient votes had been cast in favor of the Reorganization to approve it, proxies would be voted in favor of adjournment only if the VK Board determined that adjournment and additional solicitation was reasonable and in the best interest of the shareholders of the VK Fund, taking into account the nature of the proposal, the percentage of the votes actually cast, the percentage of negative votes, the nature of any further solicitation that might be made and the information provided to shareholders about the reasons for additional solicitation. Any such adjournment will require the affirmative vote of the holders of a majority of the shares voted at the session of the Special Meeting to be adjourned. Proxies of shareholders of the VK Fund are solicited by the VK Board of the VK Fund. The cost of solicitation will be paid by AC Adviser. In order to obtain the necessary quorum at the Special Meeting, additional solicitation may be made by mail, personal interview, telephone, facsimile, telegraph or personal interview by representatives of the VK Fund, or VK Adviser or VKAC, or by dealers or their representatives, In addition, such solicitation servicing may also be provided by Applied Mailing Systems, a solicitation firm located in Boston, Massachusetts, at a cost estimated to be approximately $3,500 plus reasonable expenses. August 4, 1995 PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY. YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE. 29 35 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is made as of July 31, 1995, by and between the Van Kampen American Capital Reserve Fund, a Delaware business trust formed under the laws of the State of Delaware (the "AC Fund") and the Van Kampen American Capital Money Market Trust, a Delaware business trust created under the laws of the State of Delaware (the "VKM Trust") on behalf of its series, the Van Kampen American Capital Money Market Fund (the "VKM Fund"). W I T N E S S E T H: WHEREAS, on December 20, 1994, (the "AC Acquisition Date") The Van Kampen Merritt Companies, Inc. ("TVKMC") acquired all of the issued and outstanding shares of American Capital Management & Research, Inc. ("American Capital") and subsequently changed the combined entity's name to Van Kampen American Capital, Inc.; WHEREAS, American Capital and TVKMC, through their affiliated companies, sponsor and manage a number of registered investment companies; and WHEREAS, Van Kampen American Capital Distributors, Inc., successor by merger between Van Kampen Merritt Inc. and American Capital Marketing, Inc., acts as the sponsor and principal underwriter for both the AC Fund and the VKM Fund; WHEREAS, the VKM Trust was organized as a Massachusetts business trust, and subsequently reorganized as a Delaware business trust, pursuant to an Agreement and Declaration of Trust (the "Declaration of Trust") dated May 10, 1995, pursuant to which it is authorized to issue an unlimited number of shares of beneficial interest with par value of $0.01 per share, which at present have been divided into different series, each series constituting a separate and distinct series of the VKM Trust, including the VKM Fund; WHEREAS, Van Kampen American Capital Investment Advisory Corp. (formerly, Van Kampen Merritt Investment Advisory Corp.) ("Advisory Corp.") provides investment advisory and administrative services to the VKM Fund; WHEREAS, the AC Fund was organized as a Maryland corporation on March 28, 1974, and subsequently reorganized as a Delaware business trust, pursuant to an Agreement and Declaration of Trust subsequently amended and restated as of June 20, 1995 and is authorized to issue an unlimited number of shares of beneficial interest with par value of $0.01 per share; WHEREAS, Van Kampen American Capital Asset Management, Inc. (formerly, American Capital Asset Management, Inc.) ("VKAC Asset Management") provides investment advisory and administrative services to the AC Fund; WHEREAS, the Board of Trustees of each of the VKM Trust and the AC Fund have determined that entering into this Agreement for the AC Fund to acquire the assets and liabilities of the VKM Fund is in the best interests of the shareholders of each respective fund; and 1 36 WHEREAS, the parties intend that this transaction qualify as a reorganization within the meaning as described in Section 368(a) of the Internal Revenue Code of 1986, as amended, (the "Code"); NOW, THEREFORE, in consideration of the mutual promises contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. PLAN OF TRANSACTION. A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set forth in Sections 7 and 8 hereof, the VKM Trust will convey, transfer and deliver to the AC Fund at the closing, provided for in Section 2 hereof, all of the existing assets of the VKM Fund (including accrued interest to the Closing Date) consisting of nondefaulted, liquid, U.S. dollar denominated money market securities, due bills, cash and other marketable securities acceptable to the AC Fund as more fully set forth on Schedule 1 hereto, and as amended from time to time prior to the Closing Date (as defined below), free and clear of all liens, encumbrances and claims whatsoever (the assets so transferred collectively being referred to as the "Assets"). B. CONSIDERATION. In consideration thereof, the AC Fund agrees that on the Closing Date the AC Fund will (i) deliver to the VKM Trust, in exchange for such Assets, full and fractional Class A and Class B shares of the AC Fund having a net asset value per share calculated as provided in Section 3A hereof, in an amount equal to the aggregate dollar value of the Assets determined pursuant to Section 3A of this Agreement net of any liabilities of the VKM Fund described in Secion 3E hereof (the "Liabilities") (collectively, the "AC Fund Shares") and (ii) assume all of the VKM Fund's Liabilities. All AC Fund Shares delivered to the VKM Trust in exchange for such Assets shall be delivered at net asset value without sales load, commission or other transactional fee being imposed. 2. CLOSING OF THE TRANSACTION. CLOSING DATE. The closing shall occur within fifteen (15) business days after the later of receipt of all necessary regulatory approvals and the final adjournment of the meeting of shareholders of the VKM Fund at which this Agreement will be considered and approved or such later date as soon as practicable thereafter, as the parties may mutually agree (the "Closing Date"). On the Closing Date, the AC Fund shall deliver to the VKM Trust the AC Fund Shares in the amount determined pursuant to Section 1B hereof and the VKM Trust thereafter shall, in order to effect the distribution of such shares to the VKM Fund stockholders, instruct the AC Fund to register the pro rata interest in the AC Fund Shares (in full and fractional shares) of each of the holders of record of shares of the VKM Fund in accordance with their holdings of either Class A or Class B shares and shall provide as part of such instruction a complete and updated list of such holders (including addresses and taxpayer identification numbers), and the AC Fund agrees promptly to comply with said instruction. The AC Fund shall have no obligation to inquire as to the validity, propriety or correctness of such instruction, but shall assume that such instruction is valid, proper and correct. 3. PROCEDURE FOR REORGANIZATION. A. VALUATION. The value of the Assets and Liabilities of the VKM Fund to be transferred and assumed, respectively, by the AC Fund shall be computed as of the Closing Date, in the manner set forth in the most recent Prospectus and Statement of Additional Information of the AC Fund (collectively, the "AC Fund Prospectus"), copies of which have been delivered to the VKM Trust. B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street Bank and Trust Company, 225 Franklin Street, Post Office Box 1713, Boston, Massachusetts 02105-1713, as custodian for the AC Fund (the "Custodian") for the benefit of the AC Fund, duly endorsed in proper form for transfer in such condition as to constitute a good delivery thereof, free and clear of all liens, encumbrances and claims whatsoever, in accordance with the custom of brokers, and shall be accompanied by all necessary state stock transfer stamps, the cost of which shall be borne by the VKM Fund. 2 37 C. FAILURE TO DELIVER SECURITIES. If the VKM Trust is unable to make delivery pursuant to Section 3B hereof to the Custodian of any of the VKM Fund's securities for the reason that any of such securities purchased by the AC Fund have not yet been delivered to it by the VKM Fund's broker or brokers, then, in lieu of such delivery, the VKM Trust shall deliver to the Custodian, with respect to said securities, executed copies of an agreement of assignment and due bills executed on behalf of said broker or brokers, together with such other documents as may be required by the AC Fund or Custodian, including brokers' confirmation slips. D. SHAREHOLDER ACCOUNTS. The AC Fund, in order to assist the VKM Trust in the distribution of the AC Fund Shares to the VKM Fund shareholders after delivery of the AC Fund Shares to the VKM Trust, will establish pursuant to the request of the VKM Trust an open account with the AC Fund for each shareholder of the VKM Fund and, upon request by the VKM Trust, shall transfer to such account the exact number of full and fractional shares of the AC Fund then held by the VKM Trust specified in the instruction provided pursuant to Section 2 hereof. The AC Fund is not required to issue certificates representing AC Fund Shares unless requested to do so by a shareholder. Upon liquidation or dissolution of the VKM Fund, certificates representing shares of beneficial interest of the VKM Fund shall become null and void. E. LIABILITIES. The Liabilities shall include all of VKM Fund's liabilities, debts, obligations, and duties of whatever kind or nature, whether absolute, accrued, contingent, or otherwise, whether or not arising in the ordinary course of business, whether or not determinable at the Closing Date, and whether or not specifically referred to in this Agreement. F. EXPENSES. Whether or not the transactions contemplated herein are consummated VKAC Asset Management agrees to pay (i) for the reasonable outside expenses for the transactions contemplated herein; including, but not by way of limitation, the preparation of the AC Fund's Registration Statement on Form N-14 (the "Registration Statement") and the solicitation of VKM Fund shareholder proxies; (ii) VKM Trust's counsel's reasonable attorney's fees, which fees shall be payable pursuant to receipt of an itemized statement, and (iii) the cost of rendering the tax opinion, more fully referenced in Section 7F below. G. DISSOLUTION. As soon as practicable after the Closing Date but in no event later than one year after the Closing Date, the VKM Trust shall voluntarily dissolve and completely liquidate the VKM Fund, by taking, in accordance with the Delaware Business Trust Law and Federal securities laws, all steps as shall be necessary and proper to effect a complete liquidation and dissolution of the VKM Fund. Immediately after the Closing Date, the stock transfer books relating to the VKM Fund shall be closed and no transfer of shares shall thereafter be made on such books. 4. VKM TRUST'S REPRESENTATIONS AND WARRANTIES. The VKM Trust, on behalf of the VKM Fund, hereby represents and warrants to the AC Fund which representations and warranties are true and correct on the date hereof, and agrees with the AC Fund that: A. ORGANIZATION. The VKM Trust, a Delaware Business Trust duly formed and in good standing under the laws of the State of Delaware and is duly authorized to transact business in the State of Delaware. The VKM Fund is a separate series of the VKM Trust duly designated in accordance with the applicable provisions of the Declaration of Trust. The VKM Trust and the VKM Fund are qualified to do business in all jurisdictions in which they are required to be so qualified, except jurisdictions in which the failure to so qualify would not have a material adverse effect on either the VKM Trust or VKM Fund. The VKM Trust has all material federal, state and local authorizations necessary to own on behalf of the VKM Fund all of the properties and assets allocated to the VKM Fund and to carry on its business and the business of the VKM Fund as now being conducted, except authorizations which the failure to so obtain would not have a material adverse effect on the VKM Trust or the VKM Fund. 3 38 B. REGISTRATION. The VKM Trust is registered under the Investment Company Act of 1940, as amended (the "1940 Act") as an open-end, diversified management company and such registration has not been revoked or rescinded. The VKM Fund is duly designated as a series of the VKM Trust pursuant to the terms of the Declaration of Trust. VKM Trust is in compliance in all material respects with the 1940 Act and the rules and regulations thereunder with respect to its activities and those undertaken on behalf of the VKM Fund. All of the outstanding shares of beneficial interest of the VKM Fund have been duly authorized and are validly issued, fully paid and non-assessable and not subject to pre-emptive or dissenters' rights. C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities and the portfolio of investments and the related statements of operations and changes in net assets of the VKM Fund audited as of and for the year ended June 30, 1994, and, as soon as reasonably available, same for the year ended June 30, 1995, true and complete copies of which have been heretofore furnished to the AC Fund, fairly represent the financial condition and the results of operations of the VKM Fund as of and for their respective dates and periods in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved. D. FINANCIAL STATEMENTS. The VKM Trust shall furnish to the AC Fund (i) an unaudited statement of assets and liabilities and the portfolio of investments and the related statements of operations and changes in net assets of the VKM Fund for the period ended June 30, 1995; and (ii) within five (5) business days after the Closing Date an unaudited statement of assets and liabilities and the portfolio of investments and the related statements of operations and changes in net assets as of and for the interim period ending on the Closing Date; such financial statements will represent fairly the financial position and portfolio of investments and the results of the VKM Fund's operations as of, and for the period ending on, the dates of such statements in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved and the results of its operations and changes in financial position for the periods then ended; and such financial statements shall be certified by the Treasurer of the VKM Trust as complying with the requirements hereof. E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be, no contingent Liabilities of the VKM Fund not disclosed in the financial statements delivered pursuant to Sections 4C and 4D which would materially affect the VKM Fund's financial condition, and there are no legal, administrative, or other proceedings pending or, to its knowledge, threatened against the VKM Trust or the VKM Fund which would, if adversely determined, materially affect the VKM Fund's financial condition. All Liabilities were incurred by the VKM Fund in the ordinary course of its business. F. MATERIAL AGREEMENTS. The VKM Trust is in compliance as to the VKM Fund with all material agreements, rules, laws, statutes, regulations and administrative orders affecting the VKM Fund's operations or its assets; and except as referred to in the VKM Fund's Prospectus and Statement of Additional Information, there are no material agreements outstanding relating to the VKM Fund to which the VKM Trust is a party. G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no later than 30 calendar days after the Closing Date, KPMG Peat Marwick L.L.P., auditors for the VKM Trust, shall furnish the AC Fund with a statement of the earnings and profits of the VKM Fund within the meaning of the Code as of the Closing Date. H. RESTRICTED SECURITIES. None of the securities comprising the assets of the VKM Fund at the date hereof are, or on the Closing Date or any subsequent delivery date will be, "restricted securities" under the Securities Act of 1933, (the "Securities Act") or the rules and regulations of the Securities and Exchange Commission (the "SEC") thereunder, or will be securities for which market quotations are not readily available for purposes of Section 2(a)(41) under the 1940 Act. 4 39 I. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and other material tax returns and reports of the VKM Fund required by law to have been filed by such dates shall have been filed, and all Federal and other taxes shown thereon shall have been paid so far as due, or provision shall have been made for the payment thereof, and to the best of VKM Trust's knowledge no such return is currently under audit and no assessment has been asserted with respect to any such return. J. CORPORATE AUTHORITY. The VKM Trust has the necessary power under its Declaration of Trust to enter into this Agreement and to consummate the transactions contemplated herein. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by the VKM Trust's Board of Trustees, and except for obtaining approval of the holders of the shares of beneficial interest of the VKM Fund, no other corporate acts or proceedings by the VKM Trust or the VKM Fund are necessary to authorize this Agreement and the transactions contemplated herein. This Agreement has been duly executed and delivered by VKM Trust and constitutes a legal, valid and binding obligation of VKM Trust enforceable in accordance with its terms subject to bankruptcy laws and other equitable remedies. K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and performance of this Agreement by the VKM Trust does not and will not (i) result in a material violation of any provision of the Declaration of Trust of the VKM Trust or the Designation of Series of the VKM Fund, or any amendment thereto, (ii) result in a material violation of any statute, law, judgment, writ, decree, order, regulation or rule of any court or governmental authority applicable to VKM Trust, (iii) result in a material violation or breach of, or constitute a default under any material contract, indenture, mortgage, loan agreement, note, lease or other instrument or obligation to which the VKM Trust is subject, or (iv) result in the creation or imposition or any lien, charge or encumbrance upon any property or assets of the VKM Trust. Except as set forth in Schedule 2 to this Agreement, (i) no consent, approval, authorization, order or filing with or notice to any court or governmental authority or agency is required for the consummation by the VKM Trust of the transactions contemplated by this Agreement and (ii) no consent of or notice to any third party or entity is required for the consummation by the VKM Trust of the transactions contemplated by this Agreement. L. ABSENCE OF CHANGES. From the date of this Agreement through the Closing Date, there shall not have been: (1) any change in the business, results of operations, assets, or financial condition or the manner of conducting the business of the VKM Fund, other than changes in the ordinary course of its business, or any pending or threatened litigation, which has had or may have a material adverse effect on such business, results of operations, assets or financial condition; (2) issued any option to purchase or other right to acquire shares of the VKM Fund granted by the VKM Trust to any person other than subscriptions to purchase shares at net asset value in accordance with terms in the Prospectus for the VKM Fund; (3) any entering into, amendment or termination of any contract or agreement with respect to the VKM Fund by the VKM Trust, except as otherwise contemplated by this Agreement; (4) any indebtedness incurred, other than in the ordinary course of business, by the VKM Fund for borrowed money or any commitment to borrow money entered into by the VKM Fund or the VKM Trust on behalf of the VKM Fund; (5) any amendment of the Declaration of Trust of the VKM Trust or of the Designation of Series of the VKM Fund; or (6) any grant or imposition of any lien, claim, charge or encumbrance (other than encumbrances arising in the ordinary course of business with respect to covered options) upon any asset of the VKM Fund other than a lien for taxes not yet due and payable. 5 40 M. TITLE. On the Closing Date, the VKM Fund will have good and marketable title to the Assets, free and clear of all liens, mortgages, pledges, encumbrances, charges, claims and equities whatsoever, other than a lien for taxes not yet due and payable and full right, power and authority to sell, assign, transfer and deliver such Assets; upon delivery of such Assets, the AC Fund will receive good and marketable title to such Assets, free and clear of all liens, mortgages, pledges, encumbrances, charges, claims and equities other than a lien for taxes not yet due and payable. N. PROXY STATEMENT. The VKM Trust's Proxy Statement, at the time of delivery by the VKM Trust to its shareholders in connection with a special meeting of shareholders to approve this transaction, and the VKM Trust's Prospectus and Statement of Additional Information with respect to the VKM Fund on the forms incorporated by reference into such Proxy Statement and as of their respective dates (collectively, the "VKM Trust's Proxy Statement/Prospectus"), and at the time the Registration Statement becomes effective, the Registration Statement insofar as it relates to the VKM Trust and the VKM Fund and each of them at all times subsequent thereto and including the Closing Date, as amended or as supplemented if it shall have been amended or supplemented, conform and will conform, in all material respects, to the applicable requirements of the applicable Federal and state securities laws and the rules and regulations of the SEC thereunder, and do not and will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representations or warranties in this Section 4N apply to statements or omissions made in reliance upon and in conformity with written information concerning the AC Fund or their affiliates furnished to VKM Trust by the AC Fund. O. BROKERS. There are no brokers or finders fees payable by VKM Trust or VKM Fund in connection with the transactions provided for herein. P. TAX QUALIFICATION. The VKM Fund has qualified as a regulated investment company within the meaning of Section 851 of the Code for each of its taxable years; and has satisfied the distribution requirements imposed by Section 852 of the Code for each of its taxable years. Q. FAIR MARKET VALUE The fair market value on a going concern basis of the Assets will equal or exceed the Liabilities to be assumed by the AC Fund and those to which the Assets are subject. R. VKM TRUST'S LIABILITIES. Except as otherwise provided for herein, the VKM Trust shall use reasonable efforts, consistent with its ordinary operating procedures, to repay in full any indebtedness for borrowed money for the account of the VKM Fund and have discharged or reserved against all of the VKM Fund's known debts, liabilities and obligations including expenses, costs and charges whether absolute or contingent, accrued or unaccrued. 5. THE AC FUND'S REPRESENTATIONS AND WARRANTIES. The AC Fund, hereby represents and warrants to the VKM Trust, which representations and warranties are true and correct on the date hereof and agrees with the VKM Trust that: A. ORGANIZATION. The AC Fund is a Delaware Business Trust duly formed and in good standing under the laws of the State of Delaware and is duly authorized to transact business in the State of Delaware. The AC Fund is qualified to do business as a foreign corporation in all jurisdictions in which it is required to be so qualified, except jurisdictions in which the failure to so qualify would not have a material adverse effect on the AC Fund. The AC Fund has all material federal, state and local authorization necessary to own all of its properties and assets and to carry on its business and the business thereof as now being conducted, except authorizations which the failure to so obtain would not have a material adverse effect on the AC Fund. B. REGISTRATION. The AC Fund is registered under the 1940 Act as an open-end, non-diversified management company and; such registration has not been revoked or rescinded. The AC Fund is in compliance in all material respects with the 1940 Act and the rules and regulations thereunder. All of the outstanding shares of the AC Fund have been duly authorized and are validly issued, fully paid and non-assessable and not subject to pre-emptive dissenters' rights. C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities and the portfolio of investments and the related statements of operations and changes in net assets of the AC Fund audited 6 41 as of and for the year ended May 31, 1995, true and complete copies of which have been heretofore furnished to the VKM Trust fairly represent the financial condition and the results of operations of the AC Fund as of and for their respective dates and periods in conformity with generally accepted accounting principles applied on a consistent basis during the periods involved. D. FINANCIAL STATEMENTS. The AC Fund shall furnish to the VKM Trust (i) an unaudited statement of assets and liabilities and the portfolio of investments and the related statements of operations and changes in net assets of the AC Fund for the period ended June 30, 1995, and (ii) within five (5) business days after the Closing Date, an unaudited statement of assets and liabilities and the portfolio of investments and the related statements of operations and changes in net assets as of and for the interim period ending on the Closing Date; such financial statements will represent fairly the financial position and portfolio of investments of the AC Fund and the results of its operations as of, and for the period ending on, the dates of such statements in conformity with generally accepted accounting principles applied on a consistent basis during the period involved and fairly present the financial position of the AC Fund as at the dates thereof and the results of its operations and changes in financial position for the periods then ended; and such financial statements shall be certified by the Treasurer of the AC Fund as complying with the requirements hereof. E. CONTINGENT LIABILITIES. There are no contingent liabilities of the AC Fund not disclosed in the financial statements delivered pursuant to Sections 5C and 5D which would materially affect the AC Fund's financial condition, and there are no legal, administrative, or other proceedings pending or, to its knowledge, threatened against the AC Fund which would, if adversely determined, materially affect the AC Fund's financial condition. F. MATERIAL AGREEMENTS. The AC Fund is in compliance with all material agreements, rules, laws, statutes, regulations and administrative orders affecting its operations or its assets; and except as referred to in the AC Funds Prospectus there are no material agreements outstanding to which the AC Fund is a party. G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal and other material tax returns and reports of the AC Fund required by laws to have been filed by such dates shall have been filed, and all Federal and other taxes shall have been paid so far as due, or provision shall have been made for the payment thereof, and to the best of the AC Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to any such return. H. CORPORATE AUTHORITY. The AC Fund has the necessary power to enter into this Agreement and to consummate the transactions contemplated herein. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by the AC Fund's Board of Trustees, no other corporate acts or proceedings by the AC Fund are necessary to authorize this Agreement and the transactions contemplated herein. This Agreement has been duly executed and delivered by the AC Fund and constitutes a valid and binding obligation of the AC Fund enforceable in accordance with its terms subject to bankruptcy laws and other equitable remedies. I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and performance of this Agreement by the AC Fund does not and will not (i) result in a material violation of any provision of the Declaration of Trust of the AC Fund, or any amendment thereto, (ii) result in a material violation of any statute, law, judgment, writ, decree, order, regulation or rule of any court or governmental authority applicable to the AC Fund or (iii) result in a violation or breach of, or constitute a default under, or result in the creation or imposition or any lien, charge or encumbrance upon any property or assets of the AC Fund pursuant to any material contract, indenture, mortgage, loan agreement, note, lease or other instrument or obligation to which the AC Fund is subject. Except as set forth in Schedule 3 to this Agreement, (i) no consent, approval, authorization, order of or filing with notice to any court or governmental authority or agency is required for the consummation by the AC Fund of the transactions contemplated by this Agreement and (ii) no consent of or notice to any third party or entity is required for the consummation by the AC Fund of the transactions contemplated by this Agreement. 7 42 J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other proceedings pending or, to its knowledge, threatened against the AC Fund which would materially affect its financial condition. K. SHARES OF THE AC FUND: REGISTRATION. The AC Fund Shares to be issued pursuant to Section 1 hereof will be duly registered under the Securities Act and all applicable state securities laws. L. SHARES OF THE AC FUND: AUTHORIZATION. The shares of the AC Fund to be issued pursuant to Section 1 hereof have been duly authorized and, when issued in accordance with this Agreement, will be validly issued and fully paid and non-assessable by the AC Fund and conform in all material respects to the description thereof contained in the AC Fund's Prospectus furnished to the VKM Trust. M. ABSENCE OF CHANGES. From the date hereof through the Closing Date, there shall not have been any change in the business, results of operations, assets or financial condition or the manner of conducting the business of the AC Fund, other than changes in the ordinary course of its business, which has had a material adverse effect on such business, results of operations, assets or financial condition. N. REGISTRATION STATEMENT. The Registration Statement and the Prospectus contained therein filed on Form N-14, the ("Registration Statement"), as of the effective date of the Registration Statement, and at all times subsequent thereto up to and including the Closing Date, as amended or as supplemented if they shall have been amended or supplemented, will conform, in all material respects, to the applicable requirements of the applicable Federal securities laws and the rules and regulations of the SEC thereunder, and will not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that no representations or warranties in this Section apply to statements or omissions made in reliance upon and in conformity with written information concerning the VKM Trust or the VKM Fund furnished to the AC Fund by the VKM Trust. O. TAX QUALIFICATION. The AC Fund has qualified as a regulated investment company within the meaning of Section 851 of the Code for each of its taxable years; and has satisfied the distribution requirements imposed by Section 852 of the Code for each of its taxable years. For purposes of this Section, any reference to the AC Fund shall include its predecessors, a Maryland corporation organized on March 28, 1974 and subsequently reorganized by merger with and into the Fund. 6. COVENANTS. During the period from the date of this Agreement and continuing until the Closing Date the VKM Trust and AC Fund each agrees that (except as expressly contemplated or permitted by this Agreement): A. OTHER ACTIONS. The VKM Fund shall operate only in the ordinary course of business consistent with prior practice. No party shall take any action that would, or reasonably would be expected to, result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect. B. GOVERNMENT FILINGS; CONSENTS. The VKM Trust and the AC Fund shall file all reports required to be filed by the VKM Trust and the AC Fund with the SEC between the date of this Agreement and the Closing Date and shall deliver to the other party copies of all such reports promptly after the same are filed. Except where prohibited by applicable statutes and regulations, each party shall promptly provide the other (or its counsel) with copies of all other filings made by such party with any state, local or federal government agency or entity in connection with this Agreement or the transactions contemplated hereby. Each of the VKM Trust and the AC Fund shall use all reasonable efforts to obtain all consents, approvals, and authorizations required in connection with the consummation of the transactions contemplated by this Agreement and to make all necessary filings with the Secretary of State of the State of Delaware. 8 43 C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROXY STATEMENT/PROSPECTUS. In connection with the Registration Statement and the VKM Fund's Proxy Statement/Prospectus, each party hereto will cooperate with the other and furnish to the other the information relating to the VKM Trust, VKM Fund or the AC Fund, as the case may be, required by the Securities Act or the Exchange Act and the rules and regulations thereunder, as the case may be, to be set forth in the Registration Statement or the Proxy Statement/Prospectus, as the case may be. The VKM Trust shall promptly prepare and file with the SEC the Proxy Statement/Prospectus and the AC Fund shall promptly prepare and file with the SEC the Registration Statement, in which the Proxy Statement/Prospectus will be included as a prospectus. In connection with the Registration Statement, insofar as it relates to the VKM Trust and its affiliated persons, the AC Fund shall only include such information as is approved by the VKM Trust for use in the Registration Statement. The AC Fund shall not amend or supplement any such information regarding the VKM Trust and such affiliates without the prior written consent of the VKM Trust which consent shall not be unreasonably withheld. The AC Fund shall promptly notify and provide the VKM Trust with copies of all amendments or supplements filed with respect to the Registration Statement. The AC Fund shall use all reasonable efforts to have the Registration Statement declared effective under the Securities Act as promptly as practicable after such filing. The AC Fund shall also take any action (other than qualifying to do business in any jurisdiction in which it is now not so qualified) required to be taken under any applicable state securities laws in connection with the issuance of the AC Fund's shares in the transactions contemplated by this Agreement, and the AC Fund shall furnish all information concerning the VKM Fund and the holders of the AC Fund's shares of beneficial interest as may be reasonably requested in connection with any such action. D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the VKM Trust shall make available to the AC Fund a copy of each report, schedule, registration statement and other document (the "Documents") filed or received by it during such period pursuant to the requirements of Federal or state securities laws or Federal or state banking laws (other than Documents which such party is not permitted to disclose under applicable law or which are not relevant to the VKM Fund). During the period prior to the Closing Date, the AC Fund shall make available to the VKM Fund each Document pertaining to the transactions contemplated hereby filed or received by it during such period pursuant to Federal or state securities laws or Federal or state banking laws (other than Documents which such party is not permitted to disclose under applicable law). E. SHAREHOLDERS MEETING. The VKM Trust shall call a meeting of the VKM Fund shareholders to be held as promptly as practicable for the purpose of voting upon the approval of this Agreement and the transactions contemplated herein, and shall furnish a copy of the Proxy Statement/Prospectus and form of proxy to each shareholder of the VKM Fund as of the record date for such meeting of shareholders. The VKM Trust's Board of Trustees shall recommend to the VKM Fund shareholders approval of this Agreement and the transactions contemplated herein, subject to fiduciary obligations under applicable law. F. COORDINATION OF PORTFOLIOS. The VKM Trust and AC Fund, covenant and agree to coordinate the respective portfolios of the VKM Fund and AC Fund from the date of the Agreement up to and including the Closing Date in order that at Closing, when the Assets are added to the AC Fund's portfolio, the resulting portfolio will meet the AC Fund's investment objective, policies and restrictions, as set forth in the AC Fund Prospectus, a copy of which has been delivered to VKM Trust. G. DISTRIBUTION OF THE SHARES. At Closing the VKM Trust covenants that it shall cause to be distributed the AC Fund Shares in the proper pro rata amount for the benefit of the VKM Fund's shareholders and such that neither the VKM Trust nor the VKM Fund shall continue to hold amounts of said shares so as to cause a violation of Section 12(d)(1) of the 1940 Act. VKM Trust covenants further that, pursuant to Section 3G, it shall liquidate and dissolve the VKM Fund as promptly as practicable after the Closing Date. The VKM Trust covenants to use all reasonable efforts to cooperate with the AC Fund and the AC Fund's transfer agent in the distribution of said shares. 9 44 H. BROKERS OR FINDERS. Except as disclosed in writing to the other party prior to the date hereof, each of the VKM Trust and the AC Fund represents that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, and each party shall hold the other harmless from and against any all claims, liabilities or obligations with respect to any such fees, commissions or expenses asserted by any person to be due or payable in connection with any of the transactions contemplated by this Agreement on the basis of any act or statement alleged to have been made by such first party or its affiliate. I. ADDITIONAL AGREEMENTS. In case at any time after the Closing Date any further action is necessary or desirable in order to carry out the purposes of this Agreement, the proper officers and trustees of each party to this Agreement shall take all such necessary action. J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this Agreement to the Closing Date, the VKM Trust and the AC Fund will consult with each other before issuing any press releases or otherwise making any public statements with respect to this Agreement or the transactions contemplated herein and shall not issue any press release or make any public statement prior to such consultation, except as may be required by law or the rules of any national securities exchange on which such party's securities are traded. K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the transaction will qualify as a reorganization within the meaning of Section 368(a) of the Code. Neither the VKM Trust, the VKM Fund nor the AC Fund shall take any action, or cause any action to be taken (including, without limitation, the filing of any tax return) that is inconsistent with such treatment or results in the failure of the transaction to qualify as a reorganization within meaning of Section 368(a) of the Code. At or prior to the Closing Date, the VKM Trust, the VKM Fund and the AC Fund will take such action, or cause such action to be taken, as is reasonably necessary to enable Skadden, Arps, Slate, Meagher & Flom, counsel to the VKM Trust and the VKM Fund, to render the tax opinion required herein. L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date, the VKM Fund shall declare and pay to its stockholders a dividend or other distribution in an amount large enough so that it will have distributed in an substantially all (and in any event not less than 98%) of its investment company taxable income (computed without regard to any deduction for dividends paid) and realized net capital gain, if any, for the current taxable year through the Closing Date. 7. CONDITIONS TO OBLIGATIONS OF THE VKM TRUST The obligations of the VKM Trust hereunder with respect to the consummation of the Reorganization are subject to the satisfaction, or written waiver by the VKM Trust, of the following conditions: A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated herein shall have been approved by the affirmative vote of the holders of a majority of the shares of beneficial interest of the VKM Fund present in person or by proxy at a meeting of said shareholders in which a quorum is constituted. B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations and warranties of the AC Fund contained herein shall be true in all material respects as of the Closing Date, and as of the Closing Date there shall have been no material adverse change in the financial condition, results of operations, business properties or assets of the AC Fund since May 31, 1995, and the VKM Trust shall have received a certificate of the President or Vice President of the AC Fund satisfactory in form and 10 45 substance to the VKM Trust so stating. The AC Fund shall have performed and complied in all material respects with all agreements, obligations and covenants required by this Agreement to be so performed or complied with by it on or prior to the Closing Date. C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have become effective and no stop orders under the Securities Act pertaining thereto shall have been issued. D. REGULATORY APPROVAL. All necessary approvals, registrations, and exemptions under federal and state securities laws shall have been obtained. E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition (an "Injunction") preventing the consummation of the transactions contemplated by this Agreement shall be in effect, nor shall any proceeding by any state, local or federal government agency or entity asking any of the foregoing be pending. There shall not have been any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the transactions contemplated by this Agreement, which makes the consummation of the transactions contemplated by this Agreement illegal or which has a material adverse affect on the business operations of the AC Fund. F. TAX OPINION. The VKM Trust and the VKM Fund shall have obtained an opinion from Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust and the VKM Fund, dated as of the Closing Date, addressed to the VKM Trust and the VKM Fund, that the consummation of the transactions set forth in this Agreement comply with the requirements of a reorganization as described in Section 368(a) of the Code substantially in the form attached as Annex A. G. OPINION OF COUNSEL. The VKM Trust shall have received the opinion of O'Melveny & Myers, counsel for AC Fund, dated as of the Closing Date, addressed to the VKM Trust and VKM Fund, substantially in the form and to the effect that: (i) the AC Fund is duly formed and existing as a trust under the laws of the State of Delaware; (ii) the AC Fund is registered as an open-end, diversified management company under the 1940 Act; (iii) this Agreement and the reorganization provided for herein and the execution of this Agreement have been duly authorized by all necessary trust action of the AC Fund and this Agreement has been duly executed and delivered by the AC Fund and (assuming the Agreement is a valid and binding obligation of the other parties thereto) is a valid and binding obligation of the AC Fund; (iv) neither the execution or delivery by the AC Fund of this Agreement nor the consummation by the AC Fund of the transactions contemplated thereby contravene the AC Fund's Declaration of Trust or, to their knowledge, violate any provision of any statute, or any published regulation or any judgment or order disclosed to them by the AC Fund as being applicable to the AC Fund; (v) to their knowledge based solely on the certificate of an appropriate officer of the AC Fund attached there is no pending, or threatened litigation involving the AC Fund except as disclosed therein (vi) the AC Fund's Shares being issued pursuant to this Agreement have been duly authorized and upon issuance thereof in accordance with this Agreement will be validly issued, fully paid and non-assessable; (vii) except as to financial statements and schedules and other financial and statistical data included or incorporated by reference therein and subject to usual and customary qualifications with respect to Rule 10b-5 type opinions as of the effective date of the Registration Statement filed pursuant to the Agreement, the portions thereof pertaining to the AC Fund comply as to form in all material respects with their requirements of the Securities Act, the Securities Exchange Act and the 1940 Act and the rules and regulations of the Commission thereunder and no facts have come to counsel's attention which cause them to believe that as of the effectiveness of the portions of the Registration Statement applicable to the AC Fund, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (viii) to their knowledge and subject to the qualifications set forth below, the execution and delivery by the AC Fund of the Agreement and the consummation of the transactions therein contemplated do not require, under 11 46 the laws of the State of Delaware, or the Federal laws of the United States, the consent, approval, authorization, registration, qualification or order of, or filing with, any court or governmental agency or body (except such as have been obtained under the Securities Act, the 1940 Act or the rules and regulations thereunder.) Counsel need express no opinion, however, as to any such consent, approval, authorization, registration, qualification, order or filing (a) which may be required as a result of the involvement of other parties to the Agreement in the transactions contemplated by the Agreement because of their legal or regulatory status or because of any other facts specifically pertaining to them; (b) the absence of which does not deprive the VKM Trust or VKM Fund of any material benefit under such agreements; or (c) which can be readily obtained without significant delay or expense to the VKM Trust or VKM Fund, without loss to the VKM Trust or VKM Fund of any material benefit under the Agreement and without any material adverse effect on them during the period such consent, approval authorization, registration, qualification or order was obtained. The foregoing opinion relates only to consents, approvals, authorizations, registrations, qualifications, orders or fillings under (a) laws which are specifically referred to in the opinion, (b) laws of the State of Delaware and the Federal laws of the United States of America which, in our experience, are normally applicable to transactions of the type provided for in the Agreement and (c) court orders and judgments disclosed to them by the AC Fund in connection with the opinion. Counsel's opinion as to the validity and binding nature of this Agreement may be limited to the present law of the State of Delaware. Counsel's other opinions may be limited to the present Federal law of the United States and the present general corporation and trust laws of the State of Delaware. H. OFFICER CERTIFICATES. The VKM Trust shall have received a certificate of an authorized officer of the AC Fund, dated as of the Closing Date, certifying that the representations and warranties set forth in Section 5 are true and correct on the Closing Date, together with certified copies of the resolutions adopted by the Board of Directors shall be furnished to the VKM Trust. 8. CONDITIONS TO OBLIGATIONS OF THE AC FUND The obligations of the AC Fund hereunder with respect to the consummation of the Reorganization are subject to the satisfaction, or written waiver by the AC Fund of the following conditions: A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated herein shall have been approved by the affirmative vote of the holders of a majority of the shares of beneficial interest of the VKM Fund present in person or by proxy at a meeting of said shareholders in which a quorum is constituted. B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations and warranties of the VKM Trust contained herein shall be true in all material respects as of the Closing Date, and as of the Closing Date there shall have been no material adverse change in the financial condition, results of operations, business, properties or assets of the VKM Fund since June 30, 1994 and the AC Fund shall have received a certificate of the President or Vice President of the VKM Trust satisfactory in form and substance to the AC Fund so stating. The VKM Trust and the VKM Fund shall have performed and complied in all material respects with all agreements, obligations and covenants required by this Agreement to be so performed or complied with by them on or prior to the Closing Date. C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have become effective and no stop orders under the Securities Act pertaining thereto shall have been issued. D. REGULATORY APPROVAL. All necessary approvals, registrations, and exemptions under federal and state securities laws shall have been obtained. E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the consummation of the transactions contemplated by this Agreement shall be in effect, nor shall any proceeding by any state, local or federal government agency or entity seeking any of the foregoing be pending. There shall not be 12 47 any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the transactions contemplated by this Agreement, which makes the consummation of the transactions contemplated by this Agreement illegal. F. TAX OPINION. The AC Fund shall have obtained an opinion from Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust and the VKM Fund, dated as of the Closing Date, addressed to the AC Fund, that the consummation of the transactions set forth in this Agreement comply with the requirements of a reorganization as described in Section 368(a) of the Code substantially in the form attached as Annex A. G. OPINION OF COUNSEL. The AC Fund shall have received the opinion of Skadden, Arps, Slate, Meagher & Flom, counsel for the VKM Trust, dated as of the Closing Date, addressed to the AC Fund substantially in the form of and to the effect that: (i) the VKM Trust is duly formed and in good standing as a business trust under the laws of the State of Delaware; (ii) the Board of Trustees of the VKM Trust has duly designated the VKM Fund as a series of the VKM Trust pursuant to the terms of the Declaration of Trust of the VKM Trust; (iii) the VKM Fund is registered as an open-end, diversified management company under the 1940 Act; (iv) this Agreement and the reorganization provided for herein and the execution of this Agreement have been duly authorized and approved by all requisite action of VKM Trust and this Agreement has been duly executed and delivered by the VKM Trust and (assuming the Agreement is a valid and binding obligation of the other parties thereto) is a valid and binding obligation of the VKM Trust; (v) neither the execution or delivery by the VKM Trust of this Agreement nor the consummation by the VKM Trust or VKM Fund of the transactions contemplated thereby contravene the VKM Trust's Declaration of Trust, or, to the best of their knowledge, violate any provision of any statute or any published regulation or any judgment or order disclosed to them by the VKM Trust as being applicable to the VKM Trust or the VKM Fund; (vi) to the best of their knowledge based solely on the certificate of an appropriate officer of the VKM Trust attached hereto, there is no pending or threatened litigation which would have the effect of prohibiting any material business practice or the acquisition of any material property or the conduct of any material business of the VKM Fund or might have a material adverse effect on the value of any assets of the VKM Fund; (vii) except as to financial statements and schedules and other financial and statistical data included or incorporated by reference therein and subject to usual and customary qualifications with respect to Rule 10b-5 type opinions, as of the effective date of the Registration Statement filed pursuant to the Agreement, the portions thereof pertaining to VKM Trust and the VKM Fund comply as to form in all material respects with the requirements of the Securities Act, the Securities Exchange Act and the 1940 Act and the rules and regulations of the Commission thereunder and no facts have come to counsel's attention which would cause them to believe that as of the effectiveness of the portions of the Registration Statement applicable to VKM Trust and VKM Fund, the Registration Statement contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and (viii) to the best of their knowledge and information and subject to the qualifications set forth below, the execution and delivery by the VKM Trust of the Agreement and the consummation of the transactions therein contemplated do not require, under the laws of the States of Delaware or Illinois or the federal laws of the United States, the consent, approval, authorization, registration, qualification or order of, or filing with, any court or governmental agency or body (except such as have been obtained). Counsel need express no opinion, however, as to any such consent, approval, authorization, registration, qualification, order or filing (a) which may be required as a result of the involvement of other parties to the Agreement in the transactions contemplated by the Agreement because of their legal or regulatory status or because of any other facts specifically pertaining to them; (b) the absence of which does not deprive the AC Fund of any material benefit under the Agreement; or (c) which can be readily obtained without significant delay or expense to the AC Fund, without loss to the AC Fund of any material benefit under the Agreement and without any material adverse effect on the AC Fund during the period such consent, approval, authorization, registration, qualification or order was obtained. The foregoing opinion relates only to consents, approvals, authorizations, registrations, qualifications, orders or filings under (a) laws which are specifically referred to in this opinion, (b) laws of the States of Delaware and Illinois and the Federal laws of the United States of America which, in counsel's experience, are normally applicable to transactions of the type provided for in the Agreement and (c) court orders and judgments disclosed to 13 48 them by the VKM Trust in connection with this opinion. In addition, although counsel need not specifically considered the possible applicability to the VKM Trust of any other laws, orders or judgments, nothing has come to their attention in connection with their representation of the VKM Trust and the VKM Fund in this transaction that has caused them to conclude that any other consent, approval, authorization, registration, qualification, order or filing is required. H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended, shall consist solely of nondefaulted, liquid U.S. dollar denominated money market securities, cash and other marketable securities which are in conformity with the AC Fund's investment objective, policy and restrictions as set forth in the AC Fund's prospectus and statement of additional information, copies of which have been delivered to the VKM Trust. I. SHAREHOLDER LIST. The VKM Trust shall have delivered to the AC Fund an updated list of all shareholders of the VKM Fund, as reported by VKM Trust's transfer agent, as of one (1) business day prior to the Closing Date with each shareholder's respective holdings in the VKM Fund, taxpayer identification numbers, Form W-9 and last known address. J. OFFICER CERTIFICATES. The AC Fund shall have received a certificate of an authorized officer of VKM Trust, dated as of the Closing Date, certifying that the representations and warranties set forth in Section 4 are true and correct on the Closing Date, together with certified copies of the resolutions adopted by the Board of Trustees and shareholders shall be furnished to the VKM Trust. 9. AMENDMENT, WAIVER AND TERMINATION. (A) The parties hereto may, by agreement in writing authorized by their respective Boards of Trustees, amend this Agreement at any time before or after approval thereof by the shareholders of the VKM Fund; provided, however, that after receipt of VKM Fund shareholder approval, no amendment shall be made by the parties hereto which substantially changes the terms of Sections 1, 2 and 3 hereof without obtaining VKM Fund's shareholder approval thereof or that affect any applications for exemptive relief from the SEC or any orders with respect thereto without obtaining the approval fo the staff of the SEC. (B) At any time prior to the Closing Date, either of the parties may by written instrument signed by it (i) waive any inaccuracies in the representations and warranties made to it contained herein and (ii) waive compliance with any of the covenants or conditions made for its benefit contained herein. No delay on the part of either party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege, or any single or partial exercise of any such right, power or privilege, preclude any further exercise thereof or the exercise of any other such right, power or privilege. (C) This Agreement may be terminated, and the transactions contemplated herein may be abandoned at any time prior to the Closing Date: (i) by the mutual consents of the Board of Trustees of the VKM Trust and the AC Fund; (ii) by the VKM Trust, if the AC Fund breaches in any material respect any of its representations, warranties, covenants or agreements contained in this Agreement; (iii) by the AC Fund, if the VKM Trust breaches in any material respect any of its representations, warranties, covenants or agreements contained in this Agreement; 14 49 (iv) by either the VKM Trust or the AC Fund, if the Closing has not occurred on or prior to September 30, 1995 (provided that the rights to terminate this Agreement pursuant to this subsection (C) (iv) shall not be available to any party whose failure to fulfill any of its obligations under this Agreement has been the cause of or resulted in the failure of the Closing to occur on or before such date); (v) by the AC Fund in the event that: (a) all the conditions precedent to the VKM Trust's obligation to close, as set forth in Section 7 of this Agreement, have been fully satisfied (or can be fully satisfied at the Closing); (b) the AC Fund gives the VKM Trust written assurance of its intent to close irrespective of the satisfaction or non-satisfaction of all conditions precedent to the AC Fund's obligation to close, as set forth in Section 8 of this Agreement; and (c) the VKM Trust then fails or refuses to close within the earlier of five (5) business days or September 30, 1995; or (vi) by the VKM Trust in the event that: (a) all the conditions precedent to the AC Fund's obligation to close, as set forth in Section 8 of this Agreement, have been fully satisfied (or can be fully satisfied at the Closing); (b) the VKM Trust gives the AC Fund written assurance of its intent to close irrespective of the satisfaction or non-satisfaction of all the conditions precedent to the VKM Trust's obligation to close, as set forth in Section 7 of this Agreement; and (c) the AC Fund then fails or refuses to close within the earlier of five (5) business days or September 30, 1995. 10. REMEDIES In the event of termination of this Agreement by either or both of the VKM Trust and AC Fund pursuant to Section 9(C), written notice thereof shall forthwith be given by the terminating party to the other party hereto, and this Agreement shall therefore terminate and become void and have no effect, and the transactions contemplated herein and thereby shall be abandoned, without further action by the parties hereto. 11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION. (A) SURVIVAL. The representations and warranties included or provided for herein, or in the Schedules or other instruments delivered or to be delivered pursuant hereto, shall survive the Closing Date for a three year period except that any representation or warranty with respect to taxes shall survive for the expiration of the statutory period of limitations for assessments of tax deficiencies as the same may be extended from time to time by the taxpayer. The covenants and agreements included or provided for herein shall survive and be continuing obligations in accordance with their terms. The period for which a representation, warranty, covenant or agreement survives shall be referred to hereinafter as the "Survival Period." Notwithstanding anything set forth in the immediately preceding sentence, the VKM Trust's and the AC Fund's right to seek indemnity pursuant to this Agreement shall survive for a period of ninety (90) days beyond the expiration of the Survival Period of the representation, warranty, covenant or agreement upon which indemnity is sought. In no event shall the VKM Trust or the AC Fund be obligated to indemnify the other if indemnity is not sought within ninety (90) days of the expiration of the applicable Survival Period. 15 50 (i) all debts, liabilities and obligations of the VKM Trust of any nature, whether accrued, absolute, contingent or otherwise, including liabilities or obligations relating to the Assets (whether or not disclosed to the AC Fund and whether or not known by the VKM Trust); and (ii) taxes of any kind in respect of the VKM Fund whether imposed on the VKM Fund or on any shareholder of the VKM Fund. (B) INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and hold the other and its officers, directors, agents and persons controlled by or controlling any of them (each an "Indemnified Party") harmless from and against any and all losses, damages, liabilities, claims, demands, judgments, settlements, deficiencies, taxes, assessments, charges, costs and expenses of any nature whatsoever (including reasonable attorneys' fees) including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by such Indemnified Party in connection with the defense or disposition of any claim, action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Indemnified Party may be or may have been involved as a party or otherwise or with which such Indemnified Party may be or may have been threatened, (collectively, the "Losses") arising out of or related to any claim of a breach of any representation, warranty or covenant made herein by the Indemnitor; provided, however, that no Indemnified Party shall be indemnified hereunder against any Losses arising directly from such Indemnified Party's (i) willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless disregard of the duties involved in the conduct of such Indemnified Party's position. (C) INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best efforts to minimize any liabilities, damages, deficiencies, claims, judgments, assessments, costs and expenses in respect of which indemnity may be sought hereunder. The Indemnified Party shall given written notice to Indemnitor within the earlier of ten (10) days of receipt of written notice to Indemnitor or thirty (30) days from discovery by Indemnified Party of any matters which may give rise to a claim for indemnification or reimbursement under this Agreement. The failure to give such notice shall not affect the right of Indemnified Party to indemnity hereunder unless such failure has materially and adversely affected the rights of the Indemnitor; provided that in any event such notice shall have been given prior to the expiration of the Survival Period. At any time after ten (10) days from the giving of such notice, Indemnified Party may, at its option, resist, settle or otherwise compromise, or pay such claim unless it shall have received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole cost and expense, to assume the defense of any such matter, in which case Indemnified Party shall have the right, at no cost or expense to Indemnitor, to participate in such defense. If Indemnitor does not assume the defense of such matter, and in any event until Indemnitor states in writing that it will assume the defense, Indemnitor shall pay all costs of Indemnified Party arising out of the defense until the defense is assumed; provided, however, that Indemnified Party shall consult with Indemnitor and obtain Indemnitor's consent to any payment or settlement of any such claim. Indemnitor shall keep Indemnified Party fully apprised at all times as to the status of the defense. If Indemnitor does not assume the defense, Indemnified Party shall keep Indemnitor apprised at all times as to the status of the defense. Following indemnification as provided for hereunder, Indemnitor shall be subrogated to all rights of Indemnified Party with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. 12. SURVIVAL The provisions set forth in Sections 10, 11 and 16 hereof shall survive the termination of this Agreement for any cause whatsoever. 13. NOTICES. All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and delivered personally or sent by registered mail or certified mail, postage prepaid. Notice to the VKM Trust shall be addressed to the VKM Trust c/o Van Kampen American Capital Investment Advisory Corp., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel or at such other address and to the attention of such other person as the VKM Trust may designate by written notice to the AC Fund. Notice to AC Fund shall be addressed to the AC Fund c/o Van Kampen American Capital Asset Management, Inc., 2800 Post Oak Boulevard, Houston, Texas 77056, Attention: General Counsel, with a copy to George M. Bartlett, O'Melveny & Myers, 400 South Hope Street, Los Angeles, 16 51 California 900710-2899, or at such other address as AC Fund may designate by written notice to the VKM Trust. Any notice shall be deemed to have been served or given as of the date such notice is delivered personally or mailed. 14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and assigns. This Agreement shall not be assigned by any party without the prior written consent of the other parties. 15. BOOKS AND RECORDS. The VKM Trust and the AC Fund agree that copies of the books and records of the VKM Fund relating to the Assets including, but not limited to all files, records, written materials; e.g., closing transcripts, surveillance files and credit reports shall be delivered by the VKM Trust to the AC Fund at the Closing Date. In addition to, and without limiting the foregoing, the VKM Trust and the AC Fund agree to take such action as may be necessary in order that the AC Fund shall have reasonable access to such other books and records as may be reasonably requested, all for three years after the Closing Date for the three tax years ending December 31, 1992, December 31, 1993 and December 31, 1994 namely, general ledger, journal entries, voucher registers; distribution journal; payroll register; monthly balance owing report; income tax returns; tax depreciation schedules; and investment tax credit basis schedules. 16. GENERAL. This Agreement supersedes all prior agreements between the parties (written or oral), is intended as a complete and exclusive statement of the terms of the Agreement between the parties and may not be amended, modified or changed or terminated orally. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been executed by the VKM Trust and the AC Fund and delivered to each of the parties hereto. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. This Agreement is for the sole benefit of the parties thereto, and nothing in this Agreement, expressed or implied, is intended to confer upon any other person any rights or remedies under or by reason of this Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without regard to principles of conflicts or choice of law. 17 52 17. LIMITATION OF LIABILITY. Copies of the Declarations of Trust of the VKM Trust and AC Fund are on file with the Secretary of State of the State of Delaware, and notice, is hereby given and the parties hereto acknowledge and agree that this instrument is executed on behalf of the Trustees of the VKM Trust and AC Fund, respectively, as Trustees and not individually and that the obligations of this instrument are not binding upon any of the Trustees or shareholders of the VKM Trust or the AC Fund individually but binding only upon the assets and property of this VKM Trust or AC Fund, as the case may be. IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be executed and delivered by their duly authorized officers as of the day and year first written above. VAN KAMPEN AMERICAN CAPITAL RESERVE FUND, a Delaware business trust By:_____________________________________ Title:__________________________________ Attest: _________________________ Title: _________________________ VAN KAMPEN AMERICAN CAPITAL MONEY MARKET TRUST, a Delaware business trust By:_____________________________________ Title:__________________________________ Attest: _________________________ Title: _________________________ 18 53 SCHEDULE 1 [LIST OF MARKETABLE SECURITIES] [AS AMENDED AT CLOSING] 54 SCHEDULE 2 [VKM TRUST CONSENTS] 55 SCHEDULE 3 [AC FUND CONSENTS] 56 ANNEX A [TAX FREE OPINION: SKADDEN, ARPS, SLATE, MEAGHER & FLOM] 57 -------------------------------------------------------------------------------- VAN KAMPEN AMERICAN CAPITAL RESERVE FUND -------------------------------------------------------------------------------- Van Kampen American Capital Reserve Fund, formerly known as American Capital Reserve Fund, Inc. (the "Fund"), is a mutual fund seeking protection of capital and high current income through investments in U.S. dollar denominated money market securities. INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE FUND SEEKS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO DO SO. The Fund's investment adviser is Van Kampen American Capital Asset Management, Inc. This Prospectus sets forth certain information that a prospective investor should know before investing in the Fund. Please read it carefully and retain it for future reference. The address of the Fund is 2800 Post Oak Blvd., Houston, Texas 77056, and its telephone number is (800)421-5666. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------------- SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. A Statement of Additional Information, dated August 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 Device For the Deaf, (800)772-8889. ------------------ VAN KAMPEN AMERICAN CAPITAL SM ------------------ THIS PROSPECTUS IS DATED AUGUST 1, 1995. 58 ------------------------------------------------------------------------------ TABLE OF CONTENTS ------------------------------------------------------------------------------
PAGE --- Prospectus Summary............................................... 3 Shareholder Transaction Expenses................................. 5 Annual Fund Operating Expenses and Example....................... 6 Financial Highlights............................................. 8 The Fund......................................................... 10 Investment Objective and Policies................................ 10 Investment Practices............................................. 13 Investment Advisory Services..................................... 13 Alternative Sales Arrangements................................... 15 Purchase of Shares............................................... 17 Shareholder Services............................................. 22 Redemption of Shares............................................. 26 Distribution Plans............................................... 30 Determination of Net Asset Value................................. 32 Distributions from the Fund...................................... 32 Tax Status....................................................... 33 Fund Performance................................................. 33 Description of Shares of the Fund................................ 34 Additional Information........................................... 35
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. 2 59 ------------------------------------------------------------------------------ PROSPECTUS SUMMARY ------------------------------------------------------------------------------ THE FUND. Van Kampen American Capital Reserve Fund (the "Fund) is a diversified, open-end management investment company organized as a Delaware business trust. MINIMUM PURCHASE. $500 minimum initial investment and $50 minimum for each subsequent investment (or less as described under "Purchase of Shares"). INVESTMENT OBJECTIVE. Protection of capital and high current income. There is, however, no assurance that the Fund will be successful in achieving its objective. INVESTMENT POLICY. The Fund seeks to maintain a constant net asset value of $1.00 per share by investing in a diversified portfolio of money market instruments. It seeks high current income from these short-term investments to the extent consistent with protection of capital. RISK FACTORS. Investments in the Fund are neither insured nor guaranteed by the U.S. Government. Although the Fund seeks to maintain a stable net asset value of $1.00 per share there is no assurance that the Fund will be able to do so. 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. Unless investors intend to exchange their Fund shares for Class B shares or Class C shares of other Van Kampen American Capital funds, they should purchase the Fund's Class A shares because there is no distribution fee. Even investors who do intend to exchange their Fund shares for Class B or Class C shares of other Van Kampen American Capital Funds may prefer to purchase Class A shares of the Fund and then redeem those shares and use the proceeds to purchase Class B or Class C shares of other Van Kampen American Capital funds. 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. The Fund pays an annual service fee of up to 0.15% 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 redemp- 3 60 tion proceeds during the first year, 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 .90% of its average daily net assets attributable to such class of shares. See "Purchase of Shares -- Class B Shares" and "Distribution Plans." Class B shares will convert automatically to Class A shares six years after the end of the calendar month in which the shareholder's order to purchase was accepted. See "Alternative Sales Arrangements -- Conversion Feature." Class C Shares. These shares are offered at net asset value per share and are subject to a contingent deferred sales charge of one percent on redemptions made within one year of purchase. See "Redemption of Shares." The Fund pays a combined annual distribution fee and service fee of up to .90% 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 and capital gains, if any, are declared and paid daily. 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. 4 61 ------------------------------------------------------------------------------ SHAREHOLDER TRANSACTION EXPENSES ------------------------------------------------------------------------------
CLASS A CLASS B CLASS C SHARES SHARES SHARES --------- ----------------- ------------- Maximum sales charge imposed on purchases (as a percentage of offering price)............... None 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 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
5 62 ------------------------------------------------------------------------------ ANNUAL FUND OPERATING EXPENSES AND EXAMPLE ------------------------------------------------------------------------------
CLASS A CLASS B CLASS C SHARES SHARES(4) SHARES(4) --------- --------- --------- Management fees (as a percentage of average daily net assets)............. .44% .44% .44% 12b-1 Fees (as a percentage of average daily net assets)(1).................. .14% .90%(3) .90%(3) Other Expenses (as a percentage of average daily net assets)(2).......... .42% .42% .42% Total Fund Operating Expenses (as a percentage of average daily net assets)............................... 1.00% 1.76% 1.76%
------------------------------------------------------------------------------ (1) Up to .15% for Class A shares and .90% for Class B and C shares. See "Distribution Plans." (2) See "Investment Advisory Services." (3) Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by NASD Rules. (4) Based on Class B and C shares being in effect for the entire fiscal year. 6 63
ONE THREE FIVE TEN EXAMPLE: YEAR YEARS YEARS YEARS ------ ------ ------ ------ You would pay the following expenses on a $1,000 investment, assuming (i) an operating expense ratio of 1.00% for Class A shares, 1.76% for Class B shares and 1.76% for Class C shares, (ii) a 5% annual return and (iii) redemption at the end of each time period: Class A............................... $10 $32 $ 55 $122 Class B............................... $59 $88 $113 $169* Class C............................... $28 $55 $ 95 $207 You would pay the following expenses on the same $1,000 investment assuming no redemption at the end of each time period: Class A............................... $10 $32 $ 55 $122 Class B............................... $18 $55 $ 95 $169* Class C............................... $18 $55 $ 95 $207
------------------------------------------------------------------------------ *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." 7 64 -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- (Selected data for a share of beneficial interest outstanding throughout each of the periods indicated) The following information for each of the five most recent fiscal years has been audited by Price Waterhouse LLP, independent accountants, whose report thereon was unqualified. This information should be read in conjunction with the related financial statements and notes thereto included in the Statement of Additional Information.
CLASS A ------------------------------------------------------------------------------------ YEAR ENDED MAY 31 ------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 1990 1989 ---------- ---------- ---------- ---------- ---------- ---------- ------------ PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ---------- ---------- ---------- ---------- ---------- ---------- ------------ INCOME FROM INVESTMENT OPERATIONS Investment income............................ .0535 .0329 .0353 .052 .0758 .0893 .0891 Expenses..................................... (.0101) (.0100) (.0109) (.0105) (.0094) (.0092) (.0076) ---------- ---------- ---------- ---------- ---------- ---------- ------------ Net investment income........................ .0434 .0229 .0244 .0415 .0664 .0801 .0815 Net realized and unrealized gain on securities.................................. -- -- -- -- -- -- .000007 ---------- ---------- ---------- ---------- ---------- ---------- ------------ Total from investment operations............. .0434 .0229 .0244 .0415 .0664 .0801 .081507 ---------- ---------- ---------- ---------- ---------- ---------- ------------ LESS DISTRIBUTIONS Dividends from net investment income......... (.0434) (.0229) (.0244) (.0415) (.0664) (.0801) (.0815) Distributions from net realized gain on securities.................................. -- -- -- -- -- -- (.000007) ---------- ---------- ---------- ---------- ---------- ---------- ------------ Total dividends and distributions............ (.0434) (.0229) (.0244) (.0415) (.0664) (.0801) (.081507) ---------- ---------- ---------- ---------- ---------- ---------- ------------ Net asset value, end of period............... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ========== ========== ========== ========== ========== ========== ============ TOTAL RETURN(2).............................. 4.43% 2.32% 2.44% 4.20% 6.80% 8.33% 8.49% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (millions)......... $319.7 $463.8 $279.3 $329.2 $402.3 $426.1 $474.2 Ratios to average net assets (annualized) Expenses.................................... 1.00% 1.03% 1.09% 1.05% .94% .91% .76% Net investment income....................... 4.28% 2.36% 2.44% 4.19% 6.68% 7.99% 8.19% CLASS A ------------------------------------- YEAR ENDED MAY 31 ------------------------------------- 1988 1987 1986 ------------ ------------ --------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period......... $1.00 $1.00 $1.00 ------------ ------------ --------- INCOME FROM INVESTMENT OPERATIONS Investment income............................ .0729 .0647 .0802 Expenses..................................... (.0078) (.0092) (.0093) ------------ ------------ --------- Net investment income........................ .0651 .0555 .0709 Net realized and unrealized gain on securities.................................. .000015 .000102 .0002 ------------ ------------ --------- Total from investment operations............. .065115 .055602 .0711 ------------ ------------ --------- LESS DISTRIBUTIONS Dividends from net investment income......... (.0651) (.0556) (.0709) Distributions from net realized gain on securities.................................. (.000015) (.000002) (.0002) ------------ ------------ --------- Total dividends and distributions............ (.065115) (.055602) (.0711) ------------ ------------ --------- Net asset value, end of period............... $1.00 $1.00 $1.00 ============ ============ ========= TOTAL RETURN(2).............................. 6.71% 5.71% 7.37% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (millions)......... $500.7 $377.8 $227.9 Ratios to average net assets (annualized) Expenses.................................... .78% .92% .93% Net investment income....................... 6.56% 5.60% 7.16%
(Table continued on following page) 8 65 -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -- (CONTINUED) --------------------------------------------------------------------------------
CLASS B CLASS C --------------- --------------- APRIL 18, APRIL 18, 1995(1) THROUGH 1995(1) THROUGH MAY 31, MAY 31, 1995 1995 --------------- --------------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period...................................................... $1.00 $1.00 -------- -------- INCOME FROM INVESTMENT OPERATIONS Investment income......................................................................... .0073 .0076 Expenses.................................................................................. (.0026) (.0027) -------- -------- Net investment income..................................................................... .0047 .0049 Net realized and unrealized gain on securities............................................ -- -- -------- -------- Total from investment operations.......................................................... .0047 .0049 -------- -------- LESS DISTRIBUTIONS Dividends from net investment income...................................................... (.0047) (.0049) Distributions from net realized gains on securities....................................... -- -- -------- -------- Total dividends and distributions......................................................... (.0047) (.0049) -------- -------- Net asset value, end of period............................................................ $1.00 $1.00 ======== ======== TOTAL RETURN(2)........................................................................... .47% .49% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (millions)...................................................... $4.2 $0.6 Ratios to average net assets (annualized) Expenses................................................................................. 1.76%(3) 1.76(3) Net investment income.................................................................... 3.52%(3) 3.52(3)
--------------- (1) Commencement of operations. (2) Total return has not been annualized and does not consider the effect of sales charges. (3) Ratios based on the class of shares being in effect for the entire fiscal year. 9 66 ------------------------------------------------------------------------------ THE FUND ------------------------------------------------------------------------------ The Fund is an open-end, diversified management investment company. This type of company is commonly known as a mutual fund. A mutual fund provides, for those who have similar investment goals, a practical and convenient way to invest in a diversified portfolio of securities by combining their resources in an effort to achieve such goals. Fourteen Trustees have the responsibility for overseeing the affairs of the Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines the investment of the Fund's assets, provides administrative services and manages the Fund's business and affairs. The Adviser together with its predecessors, has been in the investment advisory business since 1926. ------------------------------------------------------------------------------ INVESTMENT OBJECTIVE AND POLICIES ------------------------------------------------------------------------------ The Fund seeks protection of capital and high current income through investments in U.S. dollar denominated money market securities. These securities may include obligations of the U.S. Government and its agencies, bank obligations, commercial paper and repurchase agreements secured by such obligations. Such securities are described below. The Fund seeks to maintain a constant net asset value of $1.00 per share by investing in a diversified portfolio of money market instruments with remaining maturities of 13 months or less with a dollar-weighted average maturity of 90 days or less as defined in the rules of the SEC. It seeks high current income from these short-term investments to the extent consistent with protection of capital. Of course, there can be no guarantee that the Fund will achieve its objective or be able at all times to maintain its net asset value per share at $1.00. In addition, the daily dividend rate paid by the Fund may be expected to fluctuate. The Fund uses the amortized cost method for valuing portfolio securities purchased at a discount. See "Determination of Net Asset Value." OBLIGATIONS OF THE U.S. GOVERNMENT AND ITS AGENCIES. The Fund may invest in obligations issued or guaranteed as to principal and interest by the U.S. Government, its agencies and instrumentalities which are supported by any of the following: (a) the full faith and credit of the U.S. Government, (b) the right of the issuer to borrow an amount limited to a specific line of credit from the U.S. Government, (c) discretionary authority of the U.S. Government agency or instrumentality, or (d) the credit of the instrumentality. Such agencies or instrumentalities include, but are not limited to, the Federal National Mortgage Association, the Government National Mortgage Association, Federal Land Banks, and the Farmer's Home Administration. 10 67 BANK OBLIGATIONS. The Fund may invest in certificates of deposit, time deposits and bankers' acceptances issued by domestic banks, foreign branches or subsidiaries of domestic banks, and domestic or foreign branches of foreign banks which at the time of investment are rated in the two highest categories by Standard & Poor's Corporation ("S&P") (A-1 and A-2) or by Moody's Investors Service ("Moody's") (Prime-1 and Prime-2). The ratings of Moody's and S&P represent their opinions of the quality of the bank obligations they undertake to rate. It should be emphasized, however, that ratings are general and are not absolute standards of quality. The Fund's current policy is to limit investments in bank obligations to obligations rated A-1 or Prime-1. Certificates of deposit are certificates representing the obligation of a bank to repay funds deposited with it for a specified period of time. Time deposits are non-negotiable deposits maintained in a bank for a specified period of time (in no event longer than seven days) at a stated interest rate. Time deposits which may be held by the Fund will not benefit from insurance from the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. The purchase of obligations of foreign banks may subject the Fund to additional investment risks that are different in some respect from those incurred in investing in obligations of domestic banks. Foreign banks and foreign branches or subsidiaries of domestic banks are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations and accounting, audit and financial record keeping requirements. In addition, less information may be publicly available about a foreign bank or about a foreign branch of a domestic bank. Because evidences of ownership of obligations of foreign branches or subsidiaries of foreign banks usually are held outside the United States, the Fund will be subject to additional risks which include possible adverse political and economic developments, possible seizure or nationalization of foreign deposits and possible adopting of governmental restrictions which might adversely affect the payment of principal and interest on the foreign obligations or might restrict the payment of principal and interest to investors located outside the country of the issuer, whether from currency blockage or otherwise. Income earned or received by the Fund from sources within foreign countries may be reduced by withholding and other taxes imposed by such countries. COMMERCIAL PAPER. The Fund may invest in short-term obligations of companies which at the time of investment are (a) rated in the two highest categories by S&P (A-1 and A-2) or by Moody's (Prime-1 and Prime-2), or (b) if not rated, issued by 11 68 a company which at the date of investment has any outstanding long-term debt securities rated at least A by S&P or by Moody's. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in order to finance their current operations. (See Appendix in the Statement of Additional Information for an explanation of these ratings.) The Fund's current policy is to limit investments in commercial paper to obligations rated A-1 or Prime-1. REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with domestic banks (or a foreign branch or subsidiary thereof) which have a short-term debt rating of high quality (in one of the two highest categories) by either Moody's or S&P and with primary government securities dealers reporting to the Federal Reserve Bank of New York. 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. No repurchase agreement may exceed one year, and the Fund may not invest in repurchase agreements maturing in more than seven days if such investment, together with any other illiquid securities held by the Fund, exceeds 10% of the value of the net assets. In the event of a bankruptcy or other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying securities and loss including: (a) possible decline in the value of the underlying security during the period while the Fund seeks to enforce its rights thereto, (b) possible lack of access to income on the underlying security during this period, and (c) expenses of enforcing its rights. For the purpose of investing in repurchase agreements, the Adviser may aggregate the cash that substantially all of the funds advised or subadvised by the Adviser would otherwise invest separately into a joint account. The cash in the joint account is then invested and the funds that contributed to the joint account share pro rata in the net revenue generated. The Adviser believes that the joint account produces greater efficiencies and economies of scale that may contribute to reduced transaction costs, higher returns, higher quality investments and greater diversity of investments for the Fund that would be available to the Fund investing separately. The manner in which the joint account is managed is subject to conditions set forth in the SEC order obtained by the Fund authorizing this practice, which conditions are designed to ensure the fair administration of the joint account and to protect the amounts in that account. 12 69 ------------------------------------------------------------------------------ INVESTMENT PRACTICES ------------------------------------------------------------------------------ BROKERAGE PRACTICES. The Adviser is responsible for the placement of orders for the purchase and sale of portfolio securities for the Fund. Most transactions made by the Fund are principal transactions at net prices which incur little or no brokerage costs. Dealers 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 firms. No commissions were paid by the Fund during the past three fiscal years. INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions which, like the investment objective, may not be changed without the approval of a majority (as defined in the Investment Company Act of 1940 ("1940 Act") vote of the Fund's shareholders. The Fund may not borrow money, except from banks for temporary or emergency purposes, such as to accommodate heavy redemption requests, and then in amounts not exceeding 10% of the value of the Fund's total net assets. The Fund may not mortgage, pledge, or hypothecate any assets except in connection with any such borrowing and in amounts not exceeding the lesser of the dollar amount borrowed or five percent of the value of the Fund's assets at the time of such borrowing. The Fund may not lend money, except through the purchase or holding of the types of debt securities in which the Fund may invest. Other investment restrictions are described in the Statement of Additional Information. Except to the extent governed by such restrictions, the investment policies described under "Investment Objective and Policies" can be changed by the Trustees. ------------------------------------------------------------------------------ INVESTMENT ADVISORY SERVICES ------------------------------------------------------------------------------ THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a diversified asset management company with more than two million retail investor accounts, extensive capabilities for managing institutional portfolios, and 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 its sponsor of the funds mentioned above, is also a wholly-owned subsidiary of 13 70 Van Kampen American Capital. Van Kampen American Capital is a wholly owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial majority of its common stock, by The Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York based private investment firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers, directors and employees of Van Kampen American Capital own, in the aggregate, not more than 7% of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options, approximately an additional 11% of the common stock of VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such options, no officer or trustee of the Fund owns 5% or more of the common stock of VKAC 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 0.50% of the first $150 million of net assets; 0.45% on the next $100 million of net assets; 0.40% on the next $100 million of net assets; and 0.35% on net assets over $350 million. 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) fees 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 14 71 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 preclearance and other procedures designed to prevent conflicts of interest. ------------------------------------------------------------------------------ ALTERNATIVE SALES ARRANGEMENTS ------------------------------------------------------------------------------ The Alternative Sales Arrangements permits an investor to choose the method of purchasing shares that is most beneficial given the amount of the purchase and the length of time the investor expects to hold the shares. CLASS A SHARES. Class A shares are sold at net asset value. Class A shares are subject to an ongoing service fee at an annual rate of up to 0.15% of the Fund's aggregate average daily net assets attributable to the Class A shares. 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 0.15% 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. 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" below for discussion on applicability of 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 0.15% 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. The ongoing distribution fee paid by Class C shares will cause such shares to have a higher expense ratio and to pay lower dividends than those related to Class A shares. See "Purchase of Shares -- Class C Shares." Class C shares will 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 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 15 72 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 or a private letter ruling from the Internal Revenue Service 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 an opinion or ruling is no longer available at the time such conversion is to occur that such conversion does not constitute a taxable event. 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. Class B and Class C shares of the Fund are made available primarily to allow investors to directly purchase Class B and Class C shares and later exchange such shares directly into Class B and Class C shares of the other Participating Funds listed in "Shareholder Services -- Exchange Privilege." Investors purchasing shares of the Fund without regard to the availability of exchanges should purchase Class A shares because there is no distribution fee and, therefore, Class A shares will have a higher yield than Class B and Class C shares. Investors who wish to have the ability to exchange their shares for Class B or Class C shares of other Participating Funds (as defined herein) should consider purchasing the class they ultimately intend to hold in that Participating Fund. Such investors should also consider purchasing Class A shares of the Fund and then 16 73 redeeming those shares when they wish to invest in Class B shares or Class C shares of other Participating Funds. Since Class A shares are not subject to an ongoing distribution fee, purchasing Class A shares and then redeeming them to purchase Class B or Class C shares of another Participating Fund is likely to result in a higher return to the investor than purchasing Class B or Class C shares of the Fund and then exchanging them for Class B or Class C shares of another Participating Fund. GENERAL. The distribution expenses incurred by the Distributor in connection with the sale of Class B and Class C shares will be reimbursed 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. Distribution expenses by the Distributor in connection with the sale of Class A shares are not reimbursed by the Fund. 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 B and Class C shares. Sales personnel are not entitled to receive compensation for selling Class A shares. 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 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 at net asset value, without sales charge; Class B and Class C shares are sold at net asset value, without sales charge, and are subject to a 17 74 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. Shares of the Fund may be purchased on any business day through the shareholder service agent, ACCESS Investor Services, Inc., a wholly-owned subsidiary of Van Kampen American Capital ("ACCESS"). When purchasing shares of this Fund, investors must specify whether the purchase is Class A, Class B or Class C. All orders and drafts become effective when the wire or check payment is converted into federal funds. A check order or draft is normally converted into federal funds on the second business day following receipt of payment by ACCESS. These payments should be sent to ACCESS, P.O. Box 419319, Kansas City, Missouri 64141-6319. When payment is by wire transfer of federal funds, such order becomes effective upon receipt provided that prior notice has been given as described below; other bank wire payments are normally converted into federal funds on the day following receipt. Initial investments must be at least $500 and subsequent investments must be at least $50. 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. Each class of shares represents an interest in the same portfolio of investments of the Fund, has the same rights and is identical in all respects, except that (i) Class B and Class C shares bear the expenses of the deferred sales arrangement and any expenses (including the distribution fee and incremental transfer agency costs) resulting from such sales arrangement, (ii) generally, each class has exclusive voting rights with respect to approvals of the Rule 12b-1 distribution plan pursuant to which its distribution fee and/or service fee is paid which relate to a specific class, and (iii) Class B and Class C shares are subject to a conversion feature. Each class has different exchange privileges and certain different shareholder service options available. See "Distribution Plans" and "Shareholder Services -- Exchange Privilege." The net income attributable to Class B and Class C shares and the dividends payable on Class B and Class C shares will be reduced by the amount of the distribution fee and incremental expenses associated with such distribution fees. Sales personnel of broker-dealers distributing the Fund's shares and other persons entitled to receive compensation for selling such shares may receive differing compensation for selling Class A, Class B or Class C shares. INITIAL INVESTMENT BY BANK WIRE. To open an account by wire an investor should telephone ACCESS at (800) 421-6714 (Alaska and Hawaii residents 18 75 should call collect at (816) 283-3979), and provide the account registration, the address, tax identification number, the amount being wired and the name of the wiring bank. ACCESS furnishes the investor with an account number. The investor's bank should wire the specified amount along with the account number and registration to State Street Bank and Trust Company ("State Street Bank"), 225 Franklin Street, Boston, Massachusetts 02102, attention ACCESS/VKAC Reserve Account No. 9900-446-7. The investor should then immediately mail a properly completed application form accompanied by this Prospectus to ACCESS. To receive immediate credit to an account, the investor must call ACCESS, at the telephone number listed above, by 11:00 a.m. Kansas City time with the intent to wire funds and State Street Bank must then receive such funds by 4:00 p.m. Boston time. INITIAL INVESTMENT BY MAIL. To open an account by mail an investor should send a check payable to Van Kampen American Capital Reserve Fund along with a completed application form to ACCESS. SUBSEQUENT INVESTMENTS BY BANK WIRE. The investor's bank should wire the specified amount along with the account number and registration to State Street Bank. To receive immediate credit to an account, the investor must call ACCESS at (800) 421-6714 (Alaska and Hawaii residents should call collect at (816) 283-3979), by 11:00 a.m. Kansas City time with the intent to wire funds and State Street Bank must then receive such funds by 4:00 p.m. Boston time. SUBSEQUENT INVESTMENTS BY MAIL. Subsequent investments in the amount of $50 or more may be sent to ACCESS, indicating the account registration and account number. CLASS A SHARES Class A shares are offered at net asset value without sales charge. The Fund will permit unitholders of unit investment trusts to reinvest distributions from such trusts in Class A shares of the Fund, any Participating Fund, the Van Kampen American Capital Money Market Fund ("VK Money Market") and the Van Kampen American Capital Tax Free Money Market Fund ("VK Tax Free") with no minimum or subsequent investment requirement. In order to qualify for this privilege, the administrator of such a unit investment trust must have an agreement with the Distributor pursuant to which the administrator will (1) submit a single bulk order and make payment with a single remittance for all investments in the Fund during each distribution period by all investors who choose to invest in the Fund through the program and (2) provide ACCESS with appropriate backup data for each participating investor in a computerized format fully compatible with ACCESS's processing system. In addition, the Fund also requires that all dividends and other distributions by the Fund be reinvested in additional shares without any 19 76 systematic withdrawal program. There will be no minimum for reinvestments from unit investment trusts. The Fund will send account activity statements to investors on a quarterly basis only, even if an investors' investment period is more frequent. 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 Fund reserves the right to modify or terminate this program at any time. CLASS B SHARES Class B shares are offered at 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 Distributor will reject any order of $500,000 or more for Class B shares. 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.
-------------------------------------------------------------------------------- CONTINGENT DEFERRED SALES CHARGE AS A PERCENTAGE OF DOLLAR AMOUNT YEAR SINCE PURCHASE SUBJECT TO CHARGE -------------------------------------------------------------------------------- First...................................................... 4% Second..................................................... 4% Third...................................................... 3% Fourth..................................................... 2.5% Fifth...................................................... 1.5% Sixth...................................................... None --------------------------------------------------------------------------------
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. 20 77 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 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 lower 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 Distributor will reject any order of $1 million or more for Class C shares. 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 may be 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 proceeds in shares of the same class of the Fund within 120 days after redemption. 21 78 See the Statement of Additional Information for further discussion of waiver provisions. ------------------------------------------------------------------------------ SHAREHOLDER SERVICES ------------------------------------------------------------------------------ The Fund offers a number of shareholder services designed to facilitate the investment in its shares at little or no extra cost to the investor. Below is a description of such services. SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES INVESTMENT ACCOUNT. Each shareholder has an investment account under which shares are held by ACCESS. Except as described below, after each share transaction in an account, the shareholder receives a statement showing the activity in the account. Each shareholder who has an account in certain of the Participating Funds may receive statements quarterly from ACCESS showing any reinvestment of dividends and capital gains distributions and any other activity in the account since the preceding statement. Such shareholders also will receive separate confirmations for each purchase or sale transaction other than reinvestment of dividends and capital gains distributions and systematic purchases or redemptions. Additions to an investment account may be made at any time by purchasing shares through authorized investment dealers or by mailing a check directly to ACCESS. SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates. However, upon written or telephone request to the Fund, a share certificate will be issued, representing shares (with the exception of fractional shares) of the Fund. A shareholder will be required to surrender such certificates upon redemption thereof. In addition, if such certificates are lost the shareholder must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a Surety Bond in a form acceptable to ACCESS. On the date the letter is received ACCESS will calculate no more than 2.00% of the net asset value of the issued shares, and bill the party to whom the certificate was mailed. AUTOMATIC INVESTMENT PLAN. Investors desiring a monthly investment are given the option to utilize an automatic investment plan whereby the Distributor is empowered to draft the shareholder's account monthly (minimum $50) with the proceeds of the draft to be invested in Fund shares. 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 22 79 American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and Keogh plans. Details regarding fees, as well as full plan administration for profit sharing, pension and 401(k) plans, are available from the Distributor. AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use ACH to have redemption proceeds deposited electronically into their bank accounts. Redemptions transferred to a bank account via the ACH plan are available to be credited to the account on the second business day following normal payment. In order to utilize this option, the shareholder's bank must be a member of Automated Clearing House. In addition, the shareholder must fill out the appropriate section of the account application. The shareholder must also include a voided check or deposit slip from the bank account into which redemptions are to be deposited together with the completed application. Once ACCESS has received the application and the voided check or deposit slip, such shareholder's designated bank account, following any redemption, will be credited with the proceeds of such redemption. Once enrolled in the ACH plan, a shareholder may terminate participation at any time by writing ACCESS. DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by completing the appropriate section of the application accompanied by this Prospectus or by calling (800) 421-5666, (800) 772-8889 for the hearing impaired), elect to have all dividends and other distributions paid on a Class A, Class B or Class C account in the Fund invested into a pre-existing Class A, Class B or Class C account in any of the Participating Funds, VK Money Market or VK Tax Free. Both accounts must be of the same class. 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. EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same class of other open-end investment companies distributed by the Distributor other than The Govett Funds, Inc. (the "Participating Funds"), upon payment of the excess, if any, of the sales charge rate applicable to the shares being acquired over the sales charge rate, if any, previously paid. Shares of any Participating Fund and the Fund may be exchanged for shares of any other Participating Fund if shares of that Participating Fund are available for sale; however, shares of a Participating Fund may not be available to potential investors who are not already shareholders of the Participating Fund. Shares of the Participating Funds may be exchanged without sales charge for shares of the same class of the Fund provided that shares of certain Van Kampen American Capital fixed-income funds may not be exchanged within 30 days of acquisition without Adviser approval. Shares of Van Kampen American Capital Government Target Fund may be exchanged for Class A shares of the Fund 23 80 without sales charge. Class B and Class C shareholders of the Fund have the ability to exchange their shares ("original shares") for the same class of shares of any other Van Kampen American Capital fund that offers such shares ("new shares") in an amount equal to the aggregate net asset value of the original shares, without the payment of any contingent deferred sales charge otherwise due upon redemption of the original shares. Such shares remain subject to the contingent deferred sales charge imposed by the fund initially purchased by the shareholder upon their redemption from the Van Kampen American Capital complex of Funds. Class A shareholders who acquired their shares in exchange for Class B or Class C shares of a Participating Fund may exchange their Class A shares for the same class of shares of a Participating Fund (also, "new shares") as the class of shares they disposed of in acquiring their current shares (also, "original shares") without incurring a contingent deferred sales charge. 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. 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. 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 designated otherwise in the application form accompanied by this Prospectus. Van Kampen American Capital and its subsidiaries, including ACCESS (collectively, "VKAC"), and the Fund employ procedures considered by them to be reasonable to confirm that instructions communicated by telephone are genuine. Such procedures include requiring certain personal identification information prior to acting upon telephone instructions, tape recording telephone communications, and providing written confirmation of instructions communicated by telephone. If reasonable procedures are employed, neither VKAC nor the Fund will be liable for following telephone instructions which it reasonably believes to be genuine. VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent instructions if reasonable procedures are not followed. Exchanges are effected at the net asset value next calculated after the request is received in good order with adjustment for any additional sales charge. See "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 24 81 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. SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account total $10,000 or more at the next determined net asset value 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, semiannual, or annual checks in any amount, not less than $50. A Class B or Class C shareholder or a Class A shareholder who acquired his or her shares in the Fund in exchange for Class B or Class C shares of another Van Kampen American Capital mutual fund may redeem up to 12% annually of the shareholder's initial account balance without incurring a contingent deferred sales charge. Initial account balance means the amount of the shareholder's investment in the Fund at the time the election to participate in the plan is made. For more detail regarding waiver of contingent deferred sales charges, please refer to the prospectus of the original fund. 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. SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY CHECK WRITING PRIVILEGE. A shareholder holding Class A shares of the Fund (a) for which certificates have not been issued, (b) which are in a non-escrow status and (c) which were not acquired in exchange for Class B or Class C shares of another Van Kampen American Capital mutual fund 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 application to ACCESS. Once the form is properly completed, signed and returned to ACCESS, a supply of checks drawn on State Street Bank will be sent to the shareholder. 25 82 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. 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 Class A shares held in the shareholder's 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. A "stop payment" system is not available on these checks. Retirement Plans and accounts that are subject to backup withholding are not eligible for the privilege. See the Statement of Additional Information for further information regarding the establishment of the privilege. ------------------------------------------------------------------------------ REDEMPTION OF SHARES ------------------------------------------------------------------------------ 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 dealer. Orders received from dealers must be at least $500 unless transmitted via the FUNDSERV network. As described herein under "Purchase of Shares," redemptions of Class B or Class C shares are subject to a contingent deferred sales charge. The contingent deferred sales charge incurred upon redemption is paid to the Distributor in reimbursement for distribution-related expenses. 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, and the names must be exactly the same as the names which were signed when the shares were purchased. If the proceeds of the redemption exceed $50,000, 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 savings and loan association; a member firm of a national securities exchange, registered securities association or clearing agency; or federal savings bank. 26 83 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 does 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 custodian, special IRA, 403(b)(7), or Keogh distribution forms must be obtained from and must be forwarded to Van Kampen American Capital Trust Company, P.O. Box 944, Houston, Texas 77001-0944. Contact the custodian for information. In all cases, the redemption price is the net asset value per share next determined after the request for redemption is received in proper form by ACCESS. Payment for shares redeemed is 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 the purchase check has cleared, usually a period of up to 15 days. Such delay can be avoided if such payment of shares is made by bank wire. Any taxable gain or loss will be recognized by the shareholder upon redemption of shares. The Fund may redeem any shareholder account with a net asset value on the date of the notice of redemption less than the minimum investment as specified by the Trustees. At least 60 days advance written notice of any such involuntary redemption is required and the shareholder is given an opportunity to purchase the required value of additional shares at the next determined net asset value without sales charge. Any applicable contingent deferred sales charge will be deducted from the proceeds of this redemption. Any involuntary redemption may only occur if the shareholder account is less than the minimum initial investment due to shareholder redemptions. TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set forth above, the Fund permits redemption of shares by telephone and for redemption proceeds to be sent to the address of record of the account or to the bank account of record as described below. To establish such privilege a shareholder must complete the appropriate section of the application form accompanied by this Prospectus or call the Fund at (800) 421-5666 to request that a copy of the 27 84 Telephone Redemption Authorization form be sent to them for completion. To redeem shares contact the telephone transaction line at (800) 421-5684. VKAC and the Fund employ procedures considered by them to be reasonable to confirm that instructions communicated by telephone are genuine. Such procedures include requiring certain personal identification information prior to acting upon telephone instructions, tape recording telephone communications, and providing written confirmation of instructions communicated by telephone. If reasonable procedures are employed, neither VKAC nor the Fund will be liable for following telephone instructions which it reasonably believes to be genuine. VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent instructions if reasonable procedures are not followed. Telephone redemptions may not be available if the shareholder cannot reach ACCESS by telephone, whether because all telephone lines are busy or for any other reason; in such case, a shareholder would have to use the Fund's regular redemption procedure described above. 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 to be paid by check and amounts of at least $1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by wire. The proceeds must be payable to the shareholder(s) of record and sent to the address of record for the account or wired directly to their predesignated bank account. This privilege is not available if the address of record has been changed within 30 days prior to a telephone redemption request. Proceeds from redemptions are expected to be wired on the next business day following the date of redemption. This service is also not available with respect to shares held in an individual retirement account (IRA) for which Van Kampen American Capital Trust Company acts as custodian. To establish such privilege a shareholder must complete the appropriate section of the application form accompanied by this Prospectus or call the Fund at 1-800 421-5666. The Fund reserves the right at any time to terminate, limit or otherwise modify this redemption privilege. EXPEDITED REDEMPTIONS. Shareholders of the Fund who have completed the appropriate section of the application may request expedited redemption payment of shares having a value of $1,000 or more, by calling (800) 421-5671 (Alaska and Hawaii residents should call collect at (816) 283-3114). Redemption proceeds in the form of federal funds will be wired to the bank designated in the application. Expedited redemption requests received in good order prior to 10:00 a.m. Kansas City time are processed on the date of receipt. Redemption requests received by ACCESS after such hour are priced at the net asset value next determined and the proceeds are wired on the next banking day following receipt of such request. 28 85 ACCESS reserves the right to deduct the wiring costs from the proceeds of the redemption. A shareholder may change the bank account previously designated at any time by written notice to ACCESS with the signature of the shareholder guaranteed. The Fund reserves the right at any time to terminate, limit or otherwise modify this expedited 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. 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 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. 29 86 ------------------------------------------------------------------------------ DISTRIBUTION PLANS ------------------------------------------------------------------------------ Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company to directly or indirectly pay expenses associated with the distribution of its shares ("distribution expenses") and servicing of 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 0.15% of the Fund's aggregate average daily net assets attributable to the Class A shares. Under the Class B Plan and the Class C Plan, the Fund pays a service fee to the Distributor at an annual rate of up to 0.15% and a distribution fee at an annual rate of up to 0.75% of the Fund's aggregate average daily net assets attributable to the Class B shares or Class C shares to reimburse the Distributor for service fees paid by it to certain financial institutions (which may include banks), securities dealers and other industry professionals (collectively, "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 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 30 87 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. 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 $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 April 18, 1995 through May 31, 1995, the unreimbursed expenses incurred by the Distributor under the Class B Plan and carried forward were approximately $9,000 or .41% of average daily net assets of the class under the Class B Plan. For the same time period, the unreimbursed expenses incurred by the Distributor under the Class C Plan and carried forward were approximately $3,000 or .97% 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 to pay and has no liability to the Distributor for any expenses not previously reimbursed by the Fund or recovered through contingent deferred sales charges. Banks are currently prohibited under the Glass-Steagall Act from providing certain underwriting or distribution services. If banking firms were prohibited from acting in any capacity or providing any of the described services, the Distributor would consider what action, if any, would be appropriate. The Distributor does not believe that termination of a relationship with a bank would result in any material 31 88 adverse consequences to the Fund. In light of the Glass-Steagall Act, the Distributor engages banks as Service Organizations only to perform administrative and shareholder servicing functions. 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. ------------------------------------------------------------------------------ DETERMINATION OF NET ASSET VALUE ------------------------------------------------------------------------------ Purchases of shares are priced at the next determined net asset value after a purchase order becomes effective which is upon receipt by the Fund of federal funds. Net asset value per share for each class 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 adding the total market value of all portfolio securities owned by the Fund, cash and other assets, including accrued interest and dividends attributable to such class. All liabilities attributable to such class, including accrued expenses, are subtracted. The resulting amount is divided by the total number of shares of the class outstanding to arrive at the net asset value of each share of the class. The Fund's assets are valued on the basis of amortized cost, which involves valuing a portfolio security at its cost and, thereafter, assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the security. While this method provides for certainty in valuation it may result in periods in which value as determined by amortized cost is higher or lower than the price the Fund would receive if it sold the security. ------------------------------------------------------------------------------ DISTRIBUTIONS FROM THE FUND ------------------------------------------------------------------------------ The Fund's net income is declared as a dividend on a daily basis. Dividends are paid to shareholders of record immediately prior to the determination of net asset value for that day. Since shares are issued and redeemed at the time net asset value is determined, dividends commence on the day following the date shares are issued and are paid for the day shares are redeemed. All dividends are automatically invested in additional full and fractional shares of the Fund at net asset value. Shareholders may elect to receive monthly payment of dividends in cash by written instruction to ACCESS. Shares purchased by daily reinvestments are liquidated at the net asset value on the last business day of the month and the proceeds of such redemption mailed to the shareholder electing cash payment. A redeeming shareholder receives all dividends accrued through the date of redemption. 32 89 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 incremental transfer agency fees applicable to such classes of shares. The Fund's net income for dividend purposes is calculated daily and consists of interest accrued or discount earned, plus or minus any net realized gains or losses on portfolio securities, less any amortization of premium and the expenses of the Fund. ------------------------------------------------------------------------------ TAX STATUS ------------------------------------------------------------------------------ The Fund has qualified and intends to continue to qualify as a regulated investment company under Subchapter M of the Code. By qualifying as a regulated investment company, the Fund is not subject to federal income taxes to the extent it distributes 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. However, shareholders not subject to tax on their income will not be required to pay tax on amounts distributed to them. Information as to the federal tax status of dividends and distributions is provided by the Fund to shareholders annually if such amounts are $10.00 or more. To avoid being subject to a 31% federal back-up withholding tax on dividends, distributions and redemption payments, a shareholder must furnish the Fund with a certification of their correct taxpayer identification number. 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 advertises its "yield" and "effective yield." Both yield figures are based on historical earnings and are not intended to indicate future performance. The "yield" of the Fund refers to the income generated by an investment in the Fund over a seven-day period (which period will be stated in the advertisement). This income is then "annualized." That is, the amount of income generated by the investment during that week is assumed to be generated each week over a 52-week period and is shown as a percentage of the investment. The 33 90 "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment. The current and effective yields for the seven-day period ending May 31, 1995, and a description of the method by which the yield was calculated is contained in the Statement of Additional Information. Since yield fluctuates, yield data cannot necessarily be used to compare an investment in the Fund's shares with bank deposits, savings accounts and similar investment alternatives which often provide an agreed or guaranteed fixed yield for a stated period of time. Shareholders should remember that yield is generally a function of the kind and quality of the instrument held in a portfolio, portfolio maturity, operating expenses and market conditions. Yield is calculated separately for Class A, Class B and Class C shares. Because of the differences in distribution fees, the yields for each of the classes will differ with Class B and Class C shares having a lower yield than Class A 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., Donoghue's Money Market Report or similar independent services which monitor the performance of mutual funds, with other appropriate indexes 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, U.S. News & World Report, USA Today and The Wall Street Journal. 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. ------------------------------------------------------------------------------ DESCRIPTION OF SHARES OF THE FUND ------------------------------------------------------------------------------ The Fund was originally incorporated in Maryland on March 28, 1974 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 34 91 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." 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. 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. 35 92 VAN KAMPEN AMERICAN CAPITAL RESERVE 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 EXISTING SHAREHOLDERS-- ACCESS INVESTOR SERVICES, INC. FOR INFORMATION ON YOUR P.O. Box 418256 EXISTING ACCOUNT PLEASE CALL Kansas City, MO 64141-9256 THE FUND'S TOLL-FREE NUMBER--(800) 421-5666 Custodian PROSPECTIVE INVESTORS--CALL STATE STREET BANK AND YOUR BROKER OR (800) 421-5666 TRUST COMPANY 225 West Franklin Street, P.O. Box 1713 DEALERS--FOR DEALER Boston, MA 02105-1713 INFORMATION, SELLING Attn: Van Kampen American Capital Funds AGREEMENTS, WIRE ORDERS, OR REDEMPTIONS CALL THE DISTRIBUTOR'S TOLL-FREE Legal Counsel NUMBER--(800) 421-5666 O'MELVENY & MYERS FOR SHAREHOLDER AND DEALER 400 South Hope Street INQUIRIES THROUGH Los Angeles, CA 90071 TELECOMMUNICATIONS DEVICE FOR THE DEAF (TDD) Independent Accountants DIAL (800) 772-8889 PRICE WATERHOUSE LLP FOR TELEPHONE TRANSACTIONS 1201 Louisiana, Suite 2900 DIAL (800) 421-5684 Houston, TX 77002
93 RESERVE 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 ----------------------------------------------------------------------------- 94 VAN KAMPEN AMERICAN CAPITAL MONEY MARKET FUND STATEMENT OF ADDITIONAL INFORMATION RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF VAN KAMPEN AMERICAN CAPITAL MONEY MARKET FUND BY AND IN EXCHANGE FOR SHARES OF VAN KAMPEN AMERICAN CAPITAL RESERVE FUND ------------------------ Statement of Additional Information Dated August 4, 1995 ------------------------ This Statement of Additional Information provides information about the Van Kampen American Capital Reserve Fund (the "AC Fund"), an open-end management investment company, in addition to information contained in the Proxy Statement/Prospectus of the AC Fund, dated August 1, 1995, which also serves as the Proxy Statement of the Van Kampen American Capital Money Market Fund, a series of the Van Kampen American Capital Money Market Trust (the "VKAC Trust") in connection with the issuance of shares of the AC Fund to shareholders of the VK Fund. This Statement of Additional Information is not a prospectus. It should be read in conjunction with the Proxy Statement/Prospectus, into which it has been incorporated by reference and which may be obtained by contacting the VK Fund located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181, (708) 684-6000 or (800) 341-2911 or the AC Fund located at 2800 Post Oak Boulevard, Houston, Texas 77056, (800) 421-5666. TABLE OF CONTENTS
PAGE ---- Proposed Reorganization of the VK Fund................................................ 2 Additional Information About the AC Fund.............................................. 2 Additional Information About the VK Fund.............................................. 2 Financial Statements.................................................................. 2 Pro Forma Financial Statements........................................................ 2
The AC Fund will provide, without charge, upon the written or oral request of any person to whom this Statement of Additional Information is delivered, a copy of any and all documents that have been incorporated by reference in the registration statement of which this Statement of Additional Information is a part. 1 95 PROPOSED REORGANIZATION OF THE VK FUND The shareholders of the VK Fund are being asked to approve an acquisition of all the assets and liabilities of the VK Fund in exchange for shares of the AC Fund (the "Reorganization"). For detailed information about the Reorganization, shareholders should refer to the Proxy Statement/ Prospectus. ADDITIONAL INFORMATION ABOUT THE AC FUND Incorporated herein by reference to the Statement of Additional Information of the AC Fund, dated August 1, 1995, attached as Appendix A to this Statement of Additional Information. ADDITIONAL INFORMATION ABOUT THE VK FUND Incorporated herein by reference to the Statement of Additional Information of the VK Fund, dated August 1, 1995, attached as Appendix B to this Statement of Additional Information. FINANCIAL STATEMENTS Incorporated herein by reference in their respective entireties are (i) the audited financial statements of the AC Fund for fiscal year ended May 31, 1995, attached as Appendix C to this Statement of Additional Information, (ii) the audited financial statements of the VK Fund for fiscal year ended June 30, 1994, attached as Appendix D to this Statement of Additional Information and (iii) the unaudited semi-annual financial statements of the VK Fund for the six months ended December 31, 1994, attached as Appendix E to this Statement of Additional Information. The unaudited semi-annual financial statements of the AC Fund and the VK Fund, respectively, reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature. PRO FORMA FINANCIAL STATEMENTS In connection with the Reorganization, the AC Fund will acquire all of the assets and liabilities of the VK Fund in exchange for a number of shares of the AC Fund equal to the value of the net assets of the VK Fund being acquired. Based on the respective net assets of the AC Fund and the VK Fund as of May 19, 1995, the net asset value of the VK Fund does not exceed ten (10%) percent of the AC Fund's net assets. Accordingly, pro forma financial statements are not included herein. 2 96 APPENDIX A STATEMENT OF ADDITIONAL INFORMATION VAN KAMPEN AMERICAN CAPITAL RESERVE 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
PAGE ---- GENERAL INFORMATION........................................................... 2 INVESTMENT POLICIES........................................................... 3 INVESTMENT RESTRICTIONS....................................................... 3 REPURCHASE AGREEMENTS......................................................... 5 LOANS OF PORTFOLIO SECURITIES................................................. 5 TRUSTEES AND EXECUTIVE OFFICERS............................................... 5 INVESTMENT ADVISORY AGREEMENT................................................. 9 DISTRIBUTOR................................................................... 10 DISTRIBUTION PLANS............................................................ 10 TRANSFER AGENT................................................................ 12 PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 12 DETERMINATION OF NET ASSET VALUE.............................................. 12 PURCHASE OF SHARES............................................................ 13 EXCHANGE PRIVILEGE............................................................ 15 REDEMPTION OF SHARES.......................................................... 16 CHECK WRITING PRIVILEGE....................................................... 16 DIVIDENDS AND TAXES........................................................... 16 YIELD INFORMATION............................................................. 17 OTHER INFORMATION............................................................. 18 FINANCIAL STATEMENTS.......................................................... 18 APPENDIX...................................................................... 19
97 GENERAL INFORMATION Van Kampen American Capital Reserve Fund (the "Fund") was originally incorporated in Maryland on March 28, 1974, and reorganized 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"), ACCESS Investor Services, Inc. ("ACCESS") and Advantage Capital Corporation, a retail broker-dealer affiliate of the Distributor, 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 6% of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options, approximately an additional 10% of the common stock of VK/AC Holding, Inc. 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 86 analysts devoted to various specializations. As of July 14, 1995, no one person was known to own beneficially or hold of record five percent or more of the outstanding shares of any class of the Fund, except for those listed below:
NAME AND ADDRESS NATURE OF NUMBER OF OF HOLDER OWNERSHIP CLASS SHARES HELD PERCENT -------------------------------------------- ---------------- ------ ------------ -------- Donaldson Lufkin Jenrette Securities Corp. of record C 121,347 7.40% Attn: Mutual Fund Department P.O. Box 2052 Jersey City, NJ 07303-2052 Van Kampen American Capital of record A 85,603,757 24.68% Trust Company of record B 1,743,034 17.31% 2800 Post Oak Blvd. of record C 121,413 7.40% Houston, TX 77056 National Financial Services Corp. of record B 865,147 8.59% @Southern Nat'l Investment Services, Inc. of record C 84,684 5.16% 200 S. College St. Suite 204 Charlotte, NC 28202-2005 Smith Barney, Inc. of record C 151,079 9.21% 388 Greenwich Street 11th Floor New York, NY 10013-2375
2 98 INVESTMENT POLICIES The Fund seeks to maintain a net asset value of $1.00 per share for purchases and redemptions. To do so, the Fund uses the amortized cost method of valuing the Fund's securities pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"), certain requirements of which are summarized below. In accordance with Rule 2a-7, the Fund is required to maintain a dollar-weighted average portfolio maturity of 90 days or less, purchase only instruments having remaining maturities of 13 months or less and invest only in U.S. dollar denominated securities determined in accordance with procedures established by the Trustees to present minimal credit risks and which are rated in one of the two highest rating categories for debt obligations by at least two nationally recognized statistical rating organizations (or one rating organization if the instrument was rated by only one such organization) or, if unrated, are of comparable quality as determined in accordance with procedures established by the Trustees. The nationally recognized statistical rating organizations currently rating instruments of the type the Fund may purchase are Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S & P"), Fitch Investors Services, Inc., Duff and Phelps, Inc. and IBCA Limited and IBCA Inc. See Appendix hereto. In addition, the Fund will not invest more than five percent of its total assets in the securities (including the securities collateralizing a repurchase agreement) of, or subject to puts issued by, a single issuer, except that (i) the Fund may invest more than five percent of its total assets in a single issuer for a period of up to three business days in certain limited circumstances, (ii) the Fund may invest in obligations issued or guaranteed by the U.S. Government without any such limitation, and (iii) the limitation with respect to puts does not apply to unconditional puts if no more than ten percent of the Fund's total assets is invested in securities issued or guaranteed by the issuer of the unconditional put. Investments in rated securities not rated in the highest category by at least two rating organizations (or one rating organization if the instrument was rated by only one such organization), and unrated securities not determined by the Trustees to be comparable to those rated in the highest category, will be limited to five percent of the Fund's total assets, with the investment in any one such issuer being limited to no more than the greater of one percent of the Fund's total assets or $1,000,000. As to each security, these percentages are measured at the time the Fund purchases the security. There can be no assurance that the Fund will be able to maintain a stable net asset value of $1.00 per share. INVESTMENT RESTRICTIONS The Fund has adopted the following restrictions which may be less restrictive than the investment policies stated in the Prospectus and may not be changed without approval by the holders of a majority of its outstanding shares. Such majority is defined by the 1940 Act 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 of the Fund are present or represented by proxy; or (ii) more than 50% of the Fund's outstanding voting securities. In addition to the fundamental investment limitations set forth in the Fund's Prospectus, the Fund may not: 1. Purchase any security which matures more than two years from the date of purchase. As set forth under "Investment Objective and Policies" in the Prospectus, the Fund's operating policy is not to purchase any security having a remaining maturity of more than 13 months; 2. Purchase any security other than (a) obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities; (b) bank time deposits, certificates of deposit and bankers' acceptances which are obligations of a domestic bank (or a foreign branch or subsidiary thereof), or of a foreign bank, rated at the time of investment A-1 and A-2 by Moody's or Prime-1 and Prime-2 by S & P; (c) instruments secured by a bank obligation described in item 2(b); (d) commercial paper if rated A by S & P's or Prime by Moody's, or if not rated, issued by a company having an outstanding debt issue rated at least A by S & P's or Moody's (see Appendix for an explanation of these ratings); and (e) repurchase agreements collateralized by the debt securities described above; 3. Issue any senior security, although the Fund may borrow as set forth under item 14 below; 3 99 4. Purchase or sell real estate; although the Fund may purchase securities issued by companies, including real estate investment trusts, which invest in real estate or interest therein; 5. Purchase securities on margin, make short sales of securities or maintain a short position; 6. Purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs; 7. Acquire voting securities of any issuer or any securities of other investment companies; 8. Make investments for the purpose of exercising control or management; 9. Lend its portfolio securities in excess of 10% of its total assets, both taken at market value provided that any loans shall be in accordance with the guidelines established for such loans by the Trustees of the Fund as described under "Loans of Portfolio Securities," including the maintenance of collateral from the borrower equal at all times to the current market value of the securities loaned; 10. Invest in securities, except repurchase agreements, for which there are legal or contractual restrictions on resale; 11. Underwrite securities of other issuers except that the Fund may sell an investment position even though it may be deemed an underwriter as that term is defined under the Securities Act of 1933; 12. Invest in warrants, or write, purchase or sell puts, calls, straddles, spreads or combinations thereof; 13. Purchase or retain securities of any issuer if those officers and directors of the Fund or its investment adviser who own beneficially more than one-half of one percent of the securities of such issuer, together own more than five percent of the securities of such issuer; 14. Borrow money, except from banks for temporary or emergency purposes and then in amounts not exceeding ten percent of the value of the Fund's total net assets; or mortgage, pledge, or hypothecate any assets except in connection with any such borrowing and in amounts not exceeding the lesser of the dollar amount borrowed or five percent of the value of the Fund's assets at the time of such borrowing (the Fund will not borrow for leveraging or investment but only to meet redemption requests which might otherwise require undue dispositions of portfolio securities); 15. Lend money, except through the purchase or holding of the types of debt securities in which the Fund may invest; 16. With respect to 75% of its assets, purchase securities if the purchase would cause the Fund, at that time, to have more than five percent of the value of its total assets invested in the securities of any one issuer (except obligations of the U.S. government, its agencies or instrumentalities and repurchase agreements fully collateralized thereby); 17. Invest in the securities of any issuer, if immediately thereafter, the Fund would own more than ten percent of the total value of all outstanding securities of such issuer; 18. Invest more than five percent of its assets in companies having a record together with predecessors, of less than three years continuous operation; and 19. Invest more than 25% of the value of its total assets in securities of issuers in any particular industry (except obligations of the U.S. Government and of domestic branches of U.S. banks). The Fund has committed to one state that so long as its shares are registered for sale in that state it will apply the restriction contained in No. 17 above to any class of the outstanding securities of any issuer. Consistent with its investment objectives, the Fund may make additional commitments more restrictive than its fundamental policies. Should the Fund determine in the future that a commitment is no longer in the best interests of the Fund and its shareholders, it will revoke the commitment by withdrawing its shares from sale in the state to which the commitment was made. 4 100 REPURCHASE AGREEMENTS Repurchase agreements are collateralized by the underlying debt securities and may be considered to be loans under the 1940 Act. The Fund makes 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 must be of a type in which the Fund may invest (normally securities of the U.S. Government, or its agencies and instrumentalities), except that the underlying securities may have maturity dates exceeding one year. LOANS OF PORTFOLIO SECURITIES The Fund may lend portfolio securities to 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. The Fund does not presently intend to lend its portfolio securities in excess of five percent of its total assets. Any loans would be made for short-term purposes and would be 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. TRUSTEES AND EXECUTIVE OFFICERS The Fund's Trustees and executive officers and their principal occupations for the past five years are listed below. TRUSTEES
PRINCIPAL OCCUPATIONS OR NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS ----------------------------------- --------------------------------------------------------- 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: 62 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
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PRINCIPAL OCCUPATIONS OR NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS ----------------------------------- --------------------------------------------------------- Roger Hilsman...................... Professor of Government and International Affairs 251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the Lyme, CT 06371 Van Kampen American Capital Funds. Age: 75 R. Craig Kennedy................... President and Director, German Marshall Fund of the 1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive Age: 43 Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. A Trustee of each of the Van Kampen American Capital Funds. Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company 415 North Adams in insurance related businesses. Formerly Vice Chairman Hinsdale, IL 60521 and Director of Continental Illinois National Bank and Age: 75 Trust Company of Chicago and Continental Illinois Corporation. A Trustee of each of the Van Kampen American Capital Funds and Chairman of each Van Kampen American Capital Fund advised by Van Kampen American Capital Investment Advisory Corp. Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a 423 Country Club Drive financial planning company and registered investment Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage Age: 59 Services Inc., a member of the National Association of Securities Dealers, Inc. ("NASD") and Securities Investors Protection Corp. A Trustee of each of the Van Kampen American Capital Funds. 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.
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PRINCIPAL OCCUPATIONS OR NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS ----------------------------------- --------------------------------------------------------- Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean Stevens Institute of Graduate School and Chairman, Department of Mechanical of Technology Engineering, Stevens Institute of Technology. Director of Castle Point Station Dynalysis of Princeton, a firm engaged in engineering Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American Age: 70 Capital Funds and Chairman of the Van Kampen American Capital Funds advised by the Adviser. Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher 333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van Age: 55 Kampen American Capital Funds. He also is a Trustee of the Van Kampen Merritt Series Trust and closed-end investment companies advised by an affiliate of the Adviser. 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.
--------------- * Such Trustees are "interested persons" (within the meaning of Section 2(a)(19) of the 1940 Act). Mr. Powell is an interested person of the Adviser and the Fund by reason of his position with the Adviser. Mr. Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by reason of their firms having acted as legal counsel to the Adviser or an affiliate thereof. The Fund's officers other than Messrs. McDonnell and Nyberg are located at 2800 Post Oak Blvd., Houston, Texas 77056. Messrs. McDonnell and Nyberg are located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. OFFICERS
POSITIONS AND PRINCIPAL OCCUPATIONS DURING NAME AND AGE OFFICES WITH FUND PAST 5 YEARS ------------------------- -------------------------- ------------------------------------------- Nori L. Gabert........... Vice President and Vice President, Associate General Counsel Age: 41 Secretary and Corporate Secretary of the Adviser. Tanya M. Loden........... Vice President and Vice President and Controller of most of Age: 35 Controller the investment companies advised by the Adviser, formerly Tax Manager/Assistant Controller. Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a Age: 53 Director of the Adviser. Director of VK/AC Holding, Inc. and Van Kampen American Capital. Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the Age: 48 Treasurer investment companies advised by the Adviser.
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POSITIONS AND PRINCIPAL OCCUPATIONS DURING NAME AND AGE OFFICES WITH FUND PAST 5 YEARS ------------------------- -------------------------- ------------------------------------------- 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. David R. Troth........... Vice President Senior Vice President of the Advisor Age: 61 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.
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 the last fiscal year. During the fiscal year ended May 31, 1995, the Trustees who were not affiliated with the Adviser or its parent received as a group $19,263 in trustees' fees from the Fund in addition to certain out-of-pocket expenses. Such Trustees also received compensation for serving as directors or trustees of other investment companies advised by the Adviser. For legal services rendered during the last fiscal year, the Fund paid legal fees of $20,066 to the law firm of O'Melveny & Myers, of which Mr. Sheehan is Of Counsel. The firm also serves as legal counsel to other Van Kampen American Capital Funds. Additional information regarding compensation paid by the Fund and the related mutual funds for which the Trustees serve 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.
TOTAL PENSION OR COMPENSATION AGGREGATE RETIREMENT FROM REGISTRANT COMPENSATION BENEFITS ACCRUED AND FUND FROM AS PART OF FUND COMPLEX PAID TO NAME OF PERSON REGISTRANT EXPENSES DIRECTORS(1)(5) ------------------------------------------------- --------------- ---------------- --------------- J. Miles Branagan................................ $ 2,355 -0- $64,000 Dr. Richard E. Caruso(3)......................... 2,360(2) -0- 64,000 Dr. Roger Hilsman................................ 2,425 -0- 66,000 David Rees(3).................................... 2,355 -0- 64,000 Lawrence J. Sheehan.............................. 2,465 -0- 67,000 Dr. Fernando Sisto(3)............................ 3,020 -0- 82,000 William S. Woodside(4)........................... 1,145 -0- 18,000
--------------- (1) Represents 29 investment company portfolios in the fund complex. 8 104 (2) Mr. Caruso deferred his $2,280 of his compensation from the Fund for the most recent fiscal year. (3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The cumulative deferred compensation paid by the Fund is as follows: Caruso, $6,668; Rees, $31,491; Sisto, $5,810. (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, $970 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 Advisor 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 $1,010 and a meeting fee of $29 per Board meeting plus expenses. No additional fees are paid for committee meetings or to the chairman of the board. In order to alleviate an additional expense that might be caused by the new compensation arrangement, the trustees have approved a reduction in the compensation per trustee and have agreed to an aggregate annual compensation cap with respect to the combined fund complex of $84,000 per trustee until December 31, 1996, based upon the net assets and the number of Van Kampen American Capital funds as of July 21, 1995 (except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an affiliate of the Adviser, would receive an additional $119,000 for serving as a trustee of such funds). In addition, the Adviser has agreed to reimburse the Fund through December 31, 1996 for any increase in the aggregate trustees' compensation paid by the Fund over their 1994 fiscal year aggregate compensation. INVESTMENT ADVISORY AGREEMENT The Fund and the Adviser are parties to an investment advisory agreement (the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the Adviser to manage the investment of its assets 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. 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. During the fiscal years ended May 31, 1993, 1994 and 1995, the Adviser received $1,426,894, $1,494,701 and $1,896,937, respectively in advisory fees from the Fund. For such periods the Fund paid $90,648, $106,905 and $100,666, respectively, for accounting services. A portion of these amounts was paid to the Adviser or its parent in reimbursement of personnel, facilities and equipment costs attributable to the provision of accounting services to the Fund. The services provided by the Adviser are at cost. The Fund also pays transfer agency fees, custodian fees, legal and auditing fees, the costs of reports to shareholders and all other ordinary expenses not specifically assumed by the Adviser. Under the Advisory Agreement, the Fund pays to the Adviser as compensation for the services rendered, facilities furnished, and expenses paid by it a fee payable monthly computed on average daily net assets of the Fund at the annual rate of: 0.50% on the first $150 million net assets; 0.45% on the next $100 million of net assets; 0.40% on the next $100 million of net assets; and 0.35% on the net assets over $350 million. 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 day during a given calendar month. Such fee is payable for each calendar month as soon as practicable after the end of that month. 9 105 The fees payable to the adviser by the Fund shall be reduced by any commissions, tender solicitation and other fees, brokerage or similar payments received by the Adviser, or any other direct or indirect majority owned subsidiary of VK/AC Holding, Inc. in connection with the purchase and sale of portfolio investments of the Fund, less any direct expenses incurred by such subsidiary of VK/AC Holding, Inc. in connection with obtaining such commissions, fees, brokerage or similar payments. The Adviser agrees to use its best efforts to recapture tender solicitation fees and exchange offer fees for the Fund's benefit and to advise the Trustees of the Fund of any other commissions, fees, brokerage or similar payments which may be possible for the Adviser or any other direct or indirect majority owned subsidiary of VK/AC Holding, Inc., to receive in connection with the Fund's portfolio transactions or other arrangements which may benefit the Fund. The Advisory Agreement also provides that, in the event the ordinary business expenses of the Fund for any fiscal year exceed one percent of the Fund's average net assets, 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 do not include (1) interest and taxes; (2) brokerage commissions; (3) certain litigation and indemnification expenses as described in the Advisory Agreement and (4) payments made by the Fund pursuant to the Distribution Plans. The Advisory Agreement also provides that the Adviser shall not be liable to the Fund for any actions or omissions if it acted in good faith without negligence or misconduct. The Advisory Agreement has an initial term of two years and may be continued from year to year if specifically approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a majority of the Fund's outstanding voting securities and (b) by the affirmative vote of a majority of the Trustees who are not parties to the agreement or interested persons of any such party by votes cast in person at a meeting called for such purpose. The Advisory Agreement provides that it shall terminate automatically if assigned and that it may be terminated without penalty by either party on 60 days' written notice. DISTRIBUTOR The Distributor, acts as the principal underwriter of the Fund's shares pursuant to a written agreement (the "Underwriting Agreement"). The Distributor is owned by the Adviser's parent company. 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 Underwriting Agreement is renewable from year to year if approved (a) (i) by the Fund's Trustees or (ii) by a vote of a majority of the Fund's outstanding voting securities and (b) by the affirmative vote of a majority of Directors 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. 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 Fund pays all expenses attributable to the registrations of its shares under federal and state laws, including registration and filing fees, the cost of preparation of the prospectuses, related legal and auditing expenses, and the cost of printing prospectuses for current shareholders. DISTRIBUTION PLANS The Fund adopted a Class A distribution plan, a Class B distribution plan and a Class C distribution plan (the "Class A Plan", "Class B Plan" or "Class C Plan", respectively) to permit the Fund directly or indirectly to pay expenses associated with servicing shareholders and in the case of the Class B Plan and Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan and the Class C Plan are sometimes referred to herein collectively as "Plans" and individually as a "Plan"). The Trustees have authorized payments by the Fund under the Plan 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 10 106 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, in an amount up to 0.15% of the aggregate average daily net assets attributable to Class A shares, 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 0.15% of the net assets of the shares of the respective class to reimburse the Distributor for payments for personal service and/or the maintenance of shareholder accounts. With respect to the Class B Plan, authorized payments by the Fund also include payments at an annual rate of up to 0.75% of the net assets of the Class B shares to reimburse the Distributor for (1) commissions and transaction fees of up to four percent of the purchase price of Class B shares purchased by the clients of broker-dealers and other Service Organizations, (2) out-of-pocket expenses of printing and distributing prospectuses and annual and semi-annual shareholder reports to other than existing shareholders, (3) out-of-pocket and overhead expenses for preparing, printing and distributing advertising material and sales literature, (4) expenses for promotional incentives to broker-dealers and financial and industry professionals, (5) advertising and promotion expenses, including conducting and organizing sales seminars, marketing support salaries and bonuses, and travel-related expenses, and (6) interest expense 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 also include payments at an annual rate of up to 0.75% of the net assets of the Class C shares to reimburse the Distributor for (1) upfront commissions and transaction fees of up to 0.75% of the purchase price of Class C shares purchased by the clients of broker-dealers and other Service Organizations and ongoing commissions and transaction fees paid to broker-dealers and other Service Organizations in an amount up to 0.75% of the average daily net assets of the Fund's Class C shares, (2) out-of-pocket expenses of printing and distributing prospectuses and annual and semi-annual shareholder reports to other than existing shareholders, (3) out-of-pocket and overhead expenses for preparing, printing and distributing advertising material and sales literature, (4) expenses for promotional incentives to broker-dealers and financial and industry professionals, (5) advertising and promotion expenses, including 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 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 forms of servicing agreements and selling group agreements were approved by the Trustees, including a majority of the Trustees who are not affiliated persons (as defined in the 1940 Act) of the Fund and who have no direct or indirect financial interest in the operation of any of the Plans or in any agreements related to each Plan ("Independent Trustees"). In approving each Plan in accordance with the requirements of Rule 12b-1, the 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, each Plan 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 securities of the Fund. Any change in any of the Plans that would materially increase 11 107 the distribution expenses borne by the Fund requires shareholder approval; 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 amendments. So long as each Plan is in effect, the selection or nomination of the Independent Trustees is committed to the discretion of the Independent Trustees. During the fiscal year ended May 31, 1995, the Fund's aggregate expenses under the Class A Plan were $611,646 or .14%, respectively of the Fund's 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 period April 18, 1995 (the commencement of the offering of Class B shares) through May 31, 1995, the Fund's aggregate expenses under the Class B Plan were $3,845 or .17% (not annualized) of the Class B shares' average net assets. Such expenses were paid to reimburse the Distributor for the following payments: $3,268 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 $577 for fees paid to Service Organizations for servicing Class B shareholders and administering the Class B Plan. For the period April 18, 1995 (the commencement of the offering of Class C shares) through May 31, 1995, the Fund's aggregate expenses under the Class C Plan were $526 or .17% (not annualized) of the Class C shares' average net assets. Such expenses were paid to reimburse the Distributor for the following payments: $447 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 $79 for fees paid to Service Organizations for servicing Class B shareholders and administering the Class C Plan. TRANSFER AGENT During the fiscal years ending May 31, 1993, 1994 and 1995, ACCESS, shareholder service agent and dividend disbursing agent for the Fund, received fees aggregating $986,681, $898,801 and $1,266,690 respectively, for these services. These services are provided at cost plus a profit. PORTFOLIO TRANSACTIONS AND BROKERAGE The Adviser is responsible for decisions to buy and sell securities for the Fund and for the placement of its portfolio business and the negotiation of the commissions, if any, on such transactions. As most transactions made by the Fund are principal transactions at net prices, the Fund incurs little or no brokerage cost. During the past three years the Fund paid no commissions to brokers on the purchase or sale of portfolio securities. Portfolio securities are normally purchased directly from the issuer or from an underwriter or market maker for the securities. Purchases from underwriters of portfolio securities include a commission or concession paid by the issuer to the underwriter and purchases from dealers serving as market makers include the spread between the bid and asked price. The Adviser places portfolio transactions in a manner deemed fair and reasonable to the Fund and not according to any formula. The primary consideration in all portfolio transactions is prompt execution of orders in an effective manner at a favorable price. The Adviser places portfolio transactions for other advisory accounts including other investment companies, and 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, 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. DETERMINATION OF NET ASSET VALUE Purchases of shares will be priced at the net asset value next determined after a purchase order becomes effective which is upon receipt by the Fund of federal funds. The 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. The Exchange is currently closed on weekends and on the 12 108 following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset value is computed by dividing the value of the Fund's securities plus all cash and other assets (including accrued interest) less all liabilities (including accrued expenses) by the number of shares outstanding. The valuation of the Fund's portfolio securities is based upon their amortized cost, which does not take into account unrealized capital gains or losses. Amortized cost valuation involves initially valuing an instrument at its cost and thereafter, assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. While this method provides certainty in valuation, it may result in periods during which value, as determined by amortized cost, is higher or lower than the price that the Fund would receive if it sold the instrument. The Fund's use of the amortized cost method of valuing its portfolio securities is permitted by a rule adopted by the Securities and Exchange Commission ("SEC"). Under this rule, the Fund must maintain a dollar-weighted average portfolio maturity of 90 days or less, purchase only instruments having remaining maturities of thirteen months or less and invest only in securities determined by the Adviser to be of eligible quality with minimal credit risks. The Fund's Trustees has established procedures reasonably designed, taking into account current market conditions and the Fund's investment objective, to stabilize the net asset value per share for purposes of sales and redemptions at $1.00. These procedures include review by the Trustees, at such intervals as it deems appropriate, to determine the extent, if any, to which the net asset value per share calculated by using available market quotations deviates from $1.00 per share based on amortized cost. In the event such deviation should exceed four tenths of one percent, the Trustees is required to promptly consider what action, if any, should be initiated. If the Trustees believes that the extent of any deviation from a $1.00 amortized cost price per share may result in material dilution or other unfair results to new or existing shareholders, it will take such steps as it considers appropriate to eliminate or reduce these consequences to the extent reasonably practicable. Such steps may include selling portfolio securities prior to maturity; shortening the average maturity of the portfolio; withholding or reducing dividends; or utilizing a net asset value per share determined by using available market quotations. The assets belonging to the Class A shares, the Class B shares and the Class C shares will be invested together in a single portfolio. The net asset value of each class will be determined separately by subtracting the expenses and liabilities allocated to that class from the assets belonging to that class pursuant to an order issued by the SEC. PURCHASE OF SHARES Shares of the Fund are sold in a continuous offering and may be purchased on any business day through ACCESS. All orders become effective when the wire or check payment is converted into federal funds. A check order will normally be converted into federal funds on the second business day following receipt of payment by ACCESS. When payment is by wire transfer of federal funds, such order becomes effective upon receipt provided that prior notice has been given as described below; other bank wire payments will normally be converted into federal funds on the day following receipt. After each initial and subsequent investment, the shareholder receives a statement of the number of shares owned. Certificates for shares purchased will not normally be issued but shares will be held on deposit by ACCESS. However, the shareholder may request a certificate by writing ACCESS for shares at any time. It is preferred that such request for a certificate be for at least 1,000 shares in order to minimize shareholder service agent costs. ALTERNATIVE SALES ARRANGEMENTS The Fund issues three classes of shares: Class A shares are sold at net asset value without a sales charge; Class B shares and Class C shares are sold at net asset value and are subject to a contingent deferred sales charge. The three classes of shares each represent interests in the same portfolio of investments of the Fund, 13 109 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. WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B AND C") The CDSC -- Class B and C may be waived on redemptions of Class B and Class C shares in the circumstances described below: (a) Redemption Upon Disability or Death The Fund will waive the CDSC -- Class B and C on redemptions following the death or disability of a Class B and Class C shareholder. An individual will be considered disabled for this purpose if he or she meets the definition thereof in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in pertinent part defines a person as disabled if such person "is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration." While the Fund does not specifically adopt the balance of the Code's definition which pertains to furnishing the Secretary of Treasury with such proof as he or she may require, the Distributor will require satisfactory proof of death or disability before it determines to waive the CDSC -- Class B and C. In cases of disability or death, the CDSC -- Class B and C will be waived where the decedent or disabled person is either an individual shareholder or owns the shares as a joint tenant with right of survivorship or is the beneficial owner of a custodial or fiduciary account, and where the redemption is made within one year of the death or initial determination of disability. This waiver of the CDSC -- Class B and C applies to a total or partial redemption, but only to redemptions of shares held at the time of the death or initial determination of disability. (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 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. (d) Involuntary Redemptions of Shares in Accounts that Do Not Have the Required Minimum Balance 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 14 110 specified by the shareholder upon his or her election to participate in the Plan. The CDSC -- Class B and C will be waived on redemptions made under the Plan. The amount of the shareholder's investment in a Fund at the time the election to participate in the Plan is made with respect to the Fund is hereinafter referred to as the "initial account balance." The amount to be systematically redeemed from such Fund without the imposition of a CDSC -- Class B and C may not exceed a maximum of 12% annually of the shareholder's initial account balance. The Fund reserves the right to change the terms and conditions of the Plan and the ability to offer the Plan. (e) 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. Any involuntary redemption may only occur if the shareholder account is less than the amount specified in the Prospectus due to shareholder redemptions. The Fund will waive the CDSC -- Class B and Class C upon such involuntary redemption. (f) 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, 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 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. (g) 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 "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. 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 above. 15 111 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. REDEMPTION OF SHARES Redemptions are not made on days during which the 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 Exchange is closed for other than customary weekends or holidays; (b) trading on the Exchange is restricted; (c) an emergency exists as a result of which disposal by the Fund of securities owned by it is not reasonably practicable or it is not reasonably practicable for the Fund to fairly determine the value of its net assets; or (d) the SEC, by order, so permits. CHECK WRITING PRIVILEGE To establish the check writing privilege, 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 signators 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 AND TAXES The Fund's net income is declared as dividends on a daily basis. Dividends are paid to shareholders of record immediately prior to the determination of net asset value for that day. Since shares are issued and redeemed at the time net asset value is determined, dividends commence on the day following the date shares are issued and are received for the day shares are redeemed. 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. All dividends are automatically invested in additional full and fractional shares of the Fund at net asset value. Shareholders may elect to receive monthly payment of dividends in cash by written instruction to ACCESS. Shares purchased by daily reinvestments are liquidated at the net asset value on the last business day of the month and the proceeds of such redemption less any applicable CDSC mailed to the shareholder electing cash payment. A redeeming shareholder receives all dividends accrued through the date of redemption. The Fund's net income for dividend purposes is calculated daily and consists of interest accrued or discount earned, plus or minus any net realized gains or losses on portfolio securities, less any amortization of premium and the expenses of the Fund. Should the Fund incur or anticipate any unusual expense, or loss or depreciation which would adversely affect its net asset value per share or income for a particular period, the Trustees would at that time consider whether to adhere to the present dividend policy described above or to revise it in the light of the then prevailing circumstances. For example, if the Fund's net asset value per share was reduced below $1.00, the Board may suspend further dividend payments until net asset value returned to $1.00. Thus, such expenses or losses or depreciation may result in an investor receiving no dividends for the period during which he held his shares and in his receiving upon redemption a price per share lower than that which he paid. By meeting certain diversification of assets and other requirements of the Internal Revenue Code (the "Code"), the Fund intends to continue to qualify as a regulated investment company and thereby be relieved 16 112 from payment of federal income taxes on that portion of its net investment income and net realized capital gains which is distributed to shareholders. Dividends from net investment income and distributions from any net realized short-term capital gains are taxable to shareholders as ordinary income. Dividends do not qualify for the dividends received deduction for corporations. All dividends and any distributions are taxable to the shareholder whether or not reinvested in shares. Information as to the federal tax status of dividends and distributions is provided by the Fund to shareholders annually if such amounts are $10.00 or more. 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 does not distribute to its shareholders during any calendar year at least 98% of its ordinary taxable (net investment) income for the twelve months ended December 31, plus 98% of its capital gain net income for the twelve months ended October 31 of such year. The Fund intends to distribute sufficient amounts to avoid liability for the excise tax. If shares of the Fund are sold or exchanged within 90 days of acquisition, and shares of the same or a related mutual fund are acquired, to the extent the sales charge is reduced or waived on the subsequent acquisition, the sales charge may not be used to determine the basis in the disposed shares for purposes of determining gain or loss. To the extent the sales charge is not allowed in determining gain or loss on the initial shares, it is capitalized in the basis of the subsequent shares. 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. Dividends to shareholders who are non-resident aliens may be subject to a United States withholding tax at a rate up to 30% under existing provisions of the Code applicable to foreign individuals and entities unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law. Non-resident shareholders are urged to consult their own tax 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 any 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. YIELD INFORMATION The annualized current yield for Class A shares for the seven day period ending May 31, 1995 was 4.53%. Its compound effective yield for the same period was 4.63%. For Class B shares the annualized yield and compound effective yield for the seven day period was 3.61% and 3.68%, respectively. For Class C shares the annualized yield and compound effective yield for the seven day period was 3.59% and 3.65%, respectively. 17 113 The yield of the Fund is its net income expressed in annualized terms. The SEC requires by rule that a yield quotation set forth in an advertisement for a "money market" fund be computed by a standardized method based on a historical seven calendar day period. The standardized yield is computed by determining the net change (exclusive of realized gains and losses and unrealized appreciation and depreciation) in the value of an hypothetical pre-existing account having a balance of one share at the beginning of the period, dividing the net change in account value by the value of the account at the beginning of the base period to obtain the base period return, and multiplying the base period return by (365/7). The determination of net change in account value reflects the value of additional shares purchased with dividends from the original share, dividends declared on both the original share and such additional shares, and all fees that are charged to all shareholder accounts, in proportion to the length of the base period and the Fund's average account size. The Fund may also calculate its annualized yield by compounding the unannualized base period return (calculated as described above) by adding 1 to the base period return, raising the sum to a power equal to 365 divided by 7, and subtracting one. The yield quoted at any time represents the amount being earned on a current basis for the indicated period and is a function of the types of instruments in the Fund's portfolio, their quality and length of maturity, and the Fund's operating expenses. At May 31, 1995, 20% of the Fund's portfolio was invested in obligations of U.S. Government Agencies', 50% was invested in commercial paper of which 100% was rated A-1 or Prime-1, 5% was invested in U.S. Treasury obligations and the remaining 30% was invested in repurchase agreements. See "Investment Policies -- Commercial Paper," and the Appendix hereto. The length of maturity for the portfolio is the average dollar weighted maturity of the portfolio. This means that the portfolio has an average maturity of a stated number of days for all of its issues. The calculation is weighted by the relative value of the investment. At May 31, 1995 the average dollar weighted maturity of the portfolio was 25 days. The yield fluctuates daily as the income earned on the investments of the Fund fluctuates. Accordingly, there is no assurance that the yield quoted on any given occasion will remain in effect for any period of time. It should also be emphasized that the Fund is an open-end investment company and that there is no guarantee that the net asset value will remain constant. A shareholder's investment in the Fund is not insured. Investors comparing results of the Fund with investment results and yields from other sources such as banks or savings and loan associations should understand this distinction. The yield quotation may be of limited use for comparative purposes because it does not reflect charges imposed at the Account level which, if included, would decrease the yield. Other funds of the money market type as well as banks and savings and loan associations may calculate their yield on a different basis, and the yield quoted by the Fund could vary upwards or downwards if another method of calculation or base period were used. Yield is calculated separately for Class A, Class B and Class C shares. Because of the differences in distribution fees, the yield for each of the classes will differ. OTHER INFORMATION CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including proceeds from the sale of shares of the Fund and of securities in the Fund's investment portfolio, are held by State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, as Custodian. SHAREHOLDER REPORTS -- 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 Report to Shareholders including the related report of Independent Accountants on such financial statements are included in the Statement of Additional Information. 18 114 APPENDIX Description of the highest commercial paper, bond and other short-term and long-term rating categories assigned by Standard & Poor's Corporation ("S&P"), Moody's Investors Service ("Moody's"), Fitch Investors Service, Inc. ("Fitch"), Duff and Phelps, Inc. ("Duff") and IBCA Limited and IBCA Inc. ("IBCA"). COMMERCIAL PAPER AND SHORT-TERM RATINGS The designation A-1 by S&P indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) designation. Capacity for timely payment on issues with an A-2 designation is strong. However, the relative degree of safety is not as high as for issues designated A-1. The rating Prime-1 (P-1) is the highest commercial paper rating assigned by Moody's. Issuers of P-1 paper must have a superior capacity for repayment of short-term promissory obligations and ordinarily well established industries, high rates of return of funds employed, conservative well established industries, high rates of return of funds employed, conservative capitalization structures with moderate reliance on debt and ample asset protection, broad margins in earnings coverage of fixed financial charges and high internal cash generation, and well established access to a range of financial markets and assured sources of alternate liquidity. Issues rated Prime-2 (P-2) have a strong capacity for repayment of short-term promissory obligations. This ordinarily will be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. The rating Fitch-1 (Highest Grade) is the highest commercial paper rating assigned by Fitch. Paper rated Fitch-1 is regarded as having the strongest degree of assurance for timely payment. The rating Fitch-2 (Very Good Grade) is the second highest commercial paper rating assigned by Fitch which reflects an assurance of timely payment only slightly less in degree than the strongest issues. The rating Duff-1 is the highest commercial paper rating assigned by Duff, Paper rated Duff-1 is regarded as having very high certainty of timely payment with excellent liquidity factors which are supported by ample asset protection. Risk factors are minor. Paper rated Duff-2 is regarded as having good certainty of timely payment, good access to capital markets and sound liquidity factors and company fundamentals. Risk factors small. The designation A1 by IBCA indicates that the obligation is supported by a very strong capacity for timely repayment. Those obligations rated A1+ are supported by the highest capacity for timely repayment. The designation A2 by IBCA indicates that the obligation is supported by a strong capacity for timely repayment, although such capacity may be susceptible to adverse changes in business, economic, or financial conditions. BOND AND LONG-TERM RATINGS Bonds rated AAA are considered by S&P to be the highest grade obligations and possess an extremely strong capacity to pay principal and interest. Bonds rated AA by S&P are judged by S&P to have a very strong capacity to pay principal and interest and, in the majority of instances, differ only in small degrees from issues rated AAA. Bonds which are rated Aaa by Moody's are judged to be of the best quality. Bonds are rated Aa by Moody's are judged by Moody's 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 Aaa bonds because margins of protection may not be as large or fluctuations of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger. Moody's applies numerical modifiers 1, 2 and 3 in the Aa rating category. The modifier 1 indicates a ranking for the security in 19 115 the higher end of this rating category, the modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a ranking in the lower end of the rating category. Bonds rated AAA by Fitch are judged by Fitch to be strictly high grade, broadly marketable, suitable for investment by trustees and fiduciary institutions and liable to but slight market fluctuation other than through changes in the money rate. The prime feature of an AAA bond is a showing of earnings several times or many times interest requirements, with such stability of applicable earnings that safety is beyond reasonable question whatever changes occur in conditions. Bonds rated AA by Fitch are judged by Fitch to be of safety virtually beyond question and are readily salable, whose merits are not unlike those of the AAA class, but whose margin of safety is less strikingly broad. The issue may be the obligation of a small company, strongly secured but influenced as to rating by the lesser financial power of the enterprise and more local type of market. Bonds rated Duff-1 are judged by Duff to be of the highest credit quality with negligible risk factors; only slightly more than U.S. Treasury debt. Bonds rated Duff-2, 3 and 4 are judged by Duff to be of high credit quality with strong protection factors. Risk is modest but may vary slightly from time to time because of economic conditions. Obligations rated AAA by IBCA have the lowest expectation of investment risk. Capacity for timely repayment of principal and interest is substantial, such that adverse changes in business, economic or financial conditions are unlikely to increase investment risk significantly. Obligations rated AA have a very low expectation of investment risk. Capacity for timely repayment of principal and interest is substantial. Adverse changes in business, economic or financial conditions may increase investment risk albeit not very significantly. IBCA also assigns a rating to certain international and U.S. banks. An IBCA bank rating represents IBCA's current assessment of the strength of the bank and whether such bank would receive support should it experience difficulties. In its assessment of a bank, IBCA uses a dual rating system comprised of Legal Rating and Individual Ratings. In addition, IBCA assigns banks Long- and Short-Term Ratings as used in the corporate ratings discussed above. Legal Ratings, which range in gradation from 1 through 5, address the question of whether the bank would receive support by central banks or shareholders if it experienced difficulties, and such ratings are considered by IBCA to be a prime factor in its assessment of credit risk. Individual Ratings, which range in gradations from A through E, represent IBCA's assessment of a bank's economic merits and address the question of how the bank would be viewed if it were entirely independent and could not rely on support from state authorities or its owners. 20 116 -------------------------------------------------------------------------------- PORTFOLIO OF INVESTMENTS May 31, 1995 --------------------------------------------------------------------------------
Par Amount (000) Description Coupon Maturity Market Value -------------------------------------------------------------------------------------------------- COMMERCIAL PAPER 60.7% $16,000 Associates Corp. of North America.............. 6.230% 07/12/95 $ 15,886,133 15,000 Chevron Oil Finance Co......................... 5.930% 06/26/95 14,936,083 10,000 Du Pont (E.I.) de Nemours...................... 6.060% 06/27/95 9,955,150 18,000 General Electric Capital Corp.................. 6.190% 07/24/95 17,837,190 19,000 General Electric Co............................ 6.230% 09/05/95 18,689,250 6,300 Lilly (Eli) & Co............................... 6.000% 06/30/95 6,268,815 10,000 MetLife Funding, Inc........................... 5.960% 06/22/95 9,963,761 10,000 MetLife Funding, Inc........................... 6.000% 07/11/95 9,932,350 18,000 Pitney Bowes Credit Corp....................... 6.100% 06/12/95 17,963,880 9,000 Pitney Bowes, Inc.............................. 5.960% 06/14/95 8,979,210 8,000 Prudential Funding Corp........................ 6.230% 07/24/95 7,927,160 9,000 Prudential Funding Corp........................ 6.230% 07/27/95 8,913,503 18,000 Raytheon Co.................................... 5.970% 06/09/95 17,973,180 5,000 State Bank of New South Wales.................. 6.250% 08/29/95 4,923,750 10,000 State Bank of New South Wales.................. 6.260% 09/06/95 9,833,944 17,000 Toronto Dominion Holdings...................... 5.990% 07/10/95 16,887,989 ------------ TOTAL COMMERCIAL PAPER (Cost $196,871,348)............................. 196,871,348 ------------ REPURCHASE AGREEMENTS* 37.2% SBC Capital Markets, Inc., dated 5/31/95, repurchase 65,000 proceeds $65,011,104.......................... 6.150% 06/01/95 65,000,000 State Street Bank & Trust Co., dated 5/31/95, 55,905 repurchase proceeds $55,914,512............... 6.125% 06/01/95 55,905,000 ------------ TOTAL REPURCHASE AGREEMENTS (Cost $120,905,000)....................... 120,905,000 ------------ UNITED STATES GOVERNMENT OBLIGATIONS 24.6% 30,000 Federal Home Loan Banks........................ 6.100% 06/01/95 29,994,917 25,000 Federal National Mortgage Association.......... 5.900% 06/02/95 24,991,819 25,000 Federal National Mortgage Association.......... 5.940% 08/09/95 24,715,625 ------------ TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $79,702,361)........................ 79,702,361 ------------ TOTAL INVESTMENTS (Cost $397,478,709) 122.5%...................................... 397,478,709 OTHER ASSETS AND LIABILITIES, NET (22.5%)......................................... (73,020,170) ------------ NET ASSETS 100%................................................................... $324,458,539 ============
*Collateralized by U.S. Government obligations in a pooled cash account See Notes to Financial Statements F-1 117 -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES May 31, 1995 -------------------------------------------------------------------------------- ASSETS Investments, at amortized cost.............................................. $397,478,709 Cash........................................................................ 127,602 Receivable for Fund shares sold............................................. 786,579 Other assets................................................................ 43,829 ------------ Total Assets............................................................. 398,436,719 ------------ LIABILITIES Payable for Fund shares redeemed............................................ 73,417,480 Due to shareholder service agent............................................ 162,280 Due to Adviser.............................................................. 138,975 Due to Distributor.......................................................... 87,995 Dividends payable........................................................... 62,989 Deferred Directors' compensation............................................ 60,138 Accrued expenses............................................................ 48,323 ------------ Total Liabilities........................................................ 73,978,180 ------------ NET ASSETS, equivalent to $1.00 per share for Class A, B and C shares....... $324,458,539 ============ NET ASSETS WERE COMPRISED OF: Capital stock at par; 319,694,843 Class A, 4,189,806 Class B and 588,487 Class C shares outstanding................................................. $ 3,244,731 Capital surplus............................................................. 321,161,934 Undistributed net investment income......................................... 51,874 ------------ NET ASSETS at May 31, 1995.................................................. $324,458,539 ============
See Notes to Financial Statements F-2 118 -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS Year Ended May 31, 1995 -------------------------------------------------------------------------------- INVESTMENT INCOME Interest..................................................................... $22,971,502 ----------- EXPENSES Management fees.............................................................. 1,896,937 Shareholder service agent's fees and expenses................................ 1,495,213 Accounting services.......................................................... 100,666 Service fees--Class A........................................................ 611,646 Distribution and service fees--Class B....................................... 3,845 Distribution and service fees--Class C....................................... 526 Directors' fees and expenses................................................. 22,739 Audit fees................................................................... 21,525 Legal fees................................................................... 20,066 Reports to shareholders...................................................... 58,845 Registration and filing fees................................................. 111,820 Miscellaneous................................................................ 13,559 ----------- Total expenses............................................................ 4,357,387 ----------- NET INVESTMENT INCOME........................................................ 18,614,115 ----------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $18,614,115 ===========
See Notes to Financial Statements F-3 119 -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
Year Ended May 31 ----------------------------------- 1995 1994 ------------------------------------------------------------------------------------------------ NET ASSETS, beginning of period.......................... $ 463,827,313 $ 279,344,078 --------------- --------------- Operations Increase from net investment income...................... 18,614,115 7,722,464 --------------- --------------- Distributions to shareholders from net investment income Class A............................................... (18,623,009) (7,713,417) Class B............................................... (15,317) -- Class C............................................... (2,167) -- --------------- --------------- (18,640,493) (7,713,417) --------------- --------------- Capital transactions Proceeds from shares sold Class A............................................... 3,148,142,161 2,733,962,738 Class B............................................... 21,754,203 -- Class C............................................... 3,049,049 -- --------------- --------------- 3,172,945,413 2,733,962,738 --------------- --------------- Proceeds from shares issued for distributions reinvested Class A............................................... 18,623,009 7,713,418 Class B............................................... 15,317 -- Class C............................................... 2,167 -- --------------- --------------- 18,640,493 7,713,418 --------------- --------------- Cost of shares redeemed Class A............................................... (3,310,885,859) (2,557,201,968) Class B............................................... (17,579,714) -- Class C............................................... (2,462,729) -- --------------- --------------- (3,330,928,302) (2,557,201,968) --------------- --------------- Increase (decrease) in net assets resulting from capital transactions................................ (139,342,396) 184,474,188 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS........................ (139,368,774) 184,483,235 --------------- --------------- NET ASSETS, end of period................................ $ 324,458,539 $ 463,827,313 =============== ===============
See Notes to Financial Statements F-4 120 -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS Selected data for a share of capital stock outstanding throughout each of the periods indicated. --------------------------------------------------------------------------------
Class A -------------------------------------------------- Year Ended May 31 -------------------------------------------------- 1995 1994 1993 1992 1991 ------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------ ------ ------ ------ ------ Income from operations Investment income............................... .0535 .0329 .0353 .052 .0758 Expenses........................................ (.0101) (.0100) (.0109) (.0105) (.0094) ------ ------ ------ ------ ------ Net investment income............................ .0434 .0229 .0244 .0415 .0664 ------ ------ ------ ------ ------ Distributions from net investment income......... (.0434) (.0229) (.0244) (.0415) (.0664) ------ ------ ------ ------ ------ Net asset value, end of period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ====== ====== ====== ====== ====== TOTAL RETURN..................................... 4.43% 2.32% 2.44% 4.20% 6.80% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (millions)............. $319.7 $463.8 $279.3 $329.2 $402.3 Average net assets (millions).................... $434.4 $326.8 $306.7 $377.5 $482.6 Ratios to average net assets Expenses........................................ 1.00% 1.03% 1.09% 1.05% .94% Net investment income........................... 4.28% 2.36% 2.44% 4.19% 6.68%
See Notes to Financial Statements F-5 121 -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share of capital stock outstanding throughout each of the periods indicated. --------------------------------------------------------------------------------
Class B Class C ---------------- ---------------- April 18, April 18, 1995(1) 1995(1) through through May 31, 1995 May 31, 1995 --------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period..................... $ 1.00 $ 1.00 ------ ------ Income from investment operations Investment income....................................... .0073 .0076 Expenses................................................ (.0026) (.0027) ------ ------ Net investment income.................................... .0047 .0049 ------ ------ Distributions from net investment income................. (.0047) (.0049) ------ ------ Net asset value, end of period........................... $ 1.00 $ 1.00 ====== ====== TOTAL RETURN(2).......................................... .47% .49% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (millions)..................... $ 4.2 $ 0.6 Average net assets (millions)............................ $ 2.3 $ 0.3 Ratios to average net assets (annualized)(3. Expenses................................................ 1.76% 1.76% Net investment income................................... 3.52% 3.52%
(1) Commencement of operations (2) Total return has not been annualized and does not consider the effect of sales charges. (3) Ratios based on the class of shares being in effect for the entire fiscal year. See Notes to Financial Statements F-6 122 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1--SIGNIFICANT ACCOUNTING POLICIES American Capital Reserve Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified open-end management investment company. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. INVESTMENT VALUATIONS-Investments are valued at amortized cost, which approximates market value. The cost of investments for federal income tax purposes is substantially the same as for financial reporting purposes. B. REPURCHASE AGREEMENTS-A repurchase agreement is a short-term investment in which the Fund acquires ownership of a debt security and the seller agrees to repurchase the security at a future time and specified price. The Fund may invest independently in repurchase agreements, or transfer uninvested cash balances into a pooled cash account along with other investment companies advised by Van Kampen American Capital Asset Management, Inc. (the "Adviser"), the daily aggregate of which is invested in repurchase agreements. Repurchase agreements are collateralized by the underlying debt security. The Fund will make payment for such securities only upon physical delivery or evidence of book entry transfer to the account of the custodian bank. The seller is required to maintain the value of the underlying security at not less than the repurchase proceeds due the Fund. C. FEDERAL INCOME TAXES-No provision for federal income taxes is required because the Fund has elected to be taxed as a "regulated investment company" under the Internal Revenue Code and intends to maintain this qualification by annually distributing all of its taxable net investment income and taxable net realized gains to its shareholders. Additionally, approximately $18,000 of financial statement losses are deferred for federal income tax purposes to the 1996 fiscal year. D. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the basis of amortized cost. Interest income is accrued daily. E. DIVIDENDS-The Fund records daily dividends from net investment income. These dividends are automatically reinvested in additional shares of the Fund at net asset value. Shares purchased by daily reinvestments are liquidated at net asset value on the last business day of the month and the proceeds of such redemptions paid to the shareholders electing to receive dividends in cash. The Fund distributes tax basis earnings in accordance with the minimum F-7 123 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- distribution requirements of the Internal Revenue Code, which may differ from generally accepted accounting principles. Such distributions may result in dividends in excess of financial statement net investment income. F. DEBT DISCOUNT AND PREMIUM-For financial and tax reporting purposes, all discounts and premiums are amortized over the life of the security. NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Adviser serves as investment manager of the Fund. Management fees are calculated monthly, based on the average daily net assets of the Fund at an annual rate of .50% of the first $150 million; .45% of the next $100 million; .40% of the next $100 million; and .35% of the amount in excess of $350 million. Accounting services include the salaries and overhead expenses of the Fund's Treasurer and the personnel operating under his direction. Charges are allocated among investment companies advised by the Adviser. During the period, these charges included $12,498 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. ACCESS Investors Services, Inc., an affiliate of the Adviser, serves as the Fund's shareholder service agent. These services are provided at cost plus a profit. During the period, such fees aggregated $1,266,690. Under the Distribution Plans, each class of shares pays up to .15% per annum of its average daily net assets to reimburse the Distributor for expenses and service fees incurred. Class B and Class C shares pay an additional fee of up to .75% per annum of their average daily net assets to reimburse Van Kampen American Capital Distributors, Inc. (the "Distributor") for its distribution expenses. Actual distribution expenses incurred by the Distributor for Class B and Class C shares may exceed the amounts reimbursed to the Distributor by the Fund. At the end of the period, the unreimbursed expenses incurred by the Distributor under the Class B and Class C plans aggregated approximately $9,000 and $3,000, 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 and the shareholder service agent. F-8 124 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- NOTE 3--DIRECTOR COMPENSATION Fund directors who are not affiliated with the Adviser are compensated by the Fund at the annual rate of $1,440 plus a fee of $35 per day for Board and Committee meetings attended. The Chairman receives additional fees from the Fund at the annual rate of $540. During the period, such fees aggregated $19,263. 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 by the Plan elects to be credited with an earnings component on amounts deferred equal to the income earned by the Fund on its short-term investments or equal to the total return of the Fund. NOTE 4--CAPITAL The Fund offers three classes of shares at their respective net asset values per share. Class B and Class C shares are subject to a sales charge imposed at the time of redemption on a contingent deferred basis. All classes of shares have the same rights, except that Class B and Class C shares bear the cost of distribution fees and certain other class specific expenses. Realized and unrealized gains or losses, investment income and expenses (other than class specific expenses) are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Class B and Class C shares automatically convert to Class A shares six years and ten years after purchase, respectively, subject to certain conditions. The offering of Class B and Class C shares commenced April 18, 1995, at which time all previously outstanding shares became Class A shares. F-9 125 -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (CONTINUED) -------------------------------------------------------------------------------- The Fund has 1 billion of Class A shares, and 500 million each of Class B and Class C shares of $.01 par value capital stock authorized. Transactions in shares of capital stock were as follows:
Year Ended May 31 --------------------------------- 1995 1994 ------------------------------------------------------------------------------------------------ Shares sold Class A................................................. 3,148,142,161 2,733,962,738 Class B................................................. 21,754,203 -- Class C 3,049,049 -- ------------- -------------- 3,172,945,413 2,733,962,738 ============= ============== Shares issued for distributions reinvested Class A................................................. 18,623,009 7,713,418 Class B................................................. 15,317 -- Class C................................................. 2,167 -- ------------- -------------- 18,640,493 7,713,418 ============= ============== Shares redeemed Class A................................................. (3,310,885,862) (2,557,202,100) Class B................................................. (17,579,714) -- Class C................................................. (2,462,729) -- ------------- -------------- (3,330,928,305) (2,557,202,100) ------------- -------------- Increase (decrease) in shares outstanding.................. (139,342,399) 184,474,056 ============= ==============
F-10 126 -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF AMERICAN CAPITAL RESERVE 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 Reserve Fund, Inc. at May 31, 1995, and the results of its operations, the changes in its net assets and the financial highlights for each of the fiscal periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (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 audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 audits, which included confirmation of securities at May 31, 1995 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Houston, Texas June 30, 1995 F-11 127 APPENDIX B STATEMENT OF ADDITIONAL INFORMATION VAN KAMPEN AMERICAN CAPITAL MONEY MARKET FUND Van Kampen American Capital Money Market Fund, formerly known as Van Kampen Merritt Money Market Fund (the "Fund"), is a money market mutual fund whose investment objective is to provide a high level of current income, liquidity and safety of principal through investment in a diversified portfolio of money market securities. There can be no assurance that the Fund will achieve its objective. The Fund is a separate series of Van Kampen American Capital Money Market Trust, a Delaware business trust (the "Trust"). The Fund is a mutual fund whose portfolio is advised by Van Kampen American Capital Investment Advisory Corp. (the "Adviser"). This Statement of Additional Information is not a prospectus but should be read in conjunction with the Prospectus for the Fund dated August 1, 1995 (the "Prospectus"). This Statement of Additional Information does not include all information that a prospective investor should consider before purchasing shares of the Fund, and investors should obtain and read the Prospectus prior to purchasing shares. A copy of the Prospectus may be obtained without charge by calling the Fund at (800) 421-5666. This Statement of Additional Information incorporates by reference the entire Prospectus. The Prospectus and this Statement of Additional Information omit certain information contained in the registration statement filed with the Securities and Exchange Commission (the "Commission"), Washington, D.C. This omitted information may be obtained from the Commission upon payment of the fee prescribed or inspected at the Commission's office at no charge. TABLE OF CONTENTS The Fund and the Trust............................................................ 2 Investment Policies and Restrictions.............................................. 2 Officers and Trustees............................................................. 5 Legal Counsel..................................................................... 11 Investment Advisory and Other Services............................................ 11 Portfolio Transactions............................................................ 13 The Distributor................................................................... 14 Yield Information................................................................. 15 Dividends......................................................................... 16 Unaudited Financial Statements.................................................... 17 Notes to Unaudited Financial Statements........................................... 25 Independent Auditors' Report...................................................... 28 Audited Financial Statements...................................................... 29 Notes to Audited Financial Statements............................................. 35 Appendix.......................................................................... 38
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED AUGUST 1, 1995. 128 THE FUND AND THE TRUST The Fund is an open-end diversified management investment company. The Fund is a series of Van Kampen American Capital Money Market Trust (the "Trust"). At present, the Fund is the only series of the Trust although other series may be organized and offered in the future. The Trust and each of its series, including the Fund, will be treated as separate corporations for Federal income tax purposes. The Trust is an unincorporated business trust established under the laws of the state of Delaware by an Agreement and Declaration of Trust dated as of May 10, 1995, (the "Declaration of Trust"). The Declaration of Trust permits the Trustees to create one or more separate investment portfolios and issue a series of shares for each portfolio. The Trustees can further sub-divide each series of shares into one or more classes of shares for each portfolio. Each share represents an equal proportionate interest in the assets of the series with each other share in such series and no interest in any other series. No series is subject to the liabilities of any other series. The Declaration of Trust provides that shareholders are not liable for any liabilities of the Trust or any of its series, requires inclusion of a clause to that effect in every agreement entered into by the Trust or any of its series and indemnifies shareholders against any such liability. Each Class A Share and Class B Share represents an equal proportionate interest in the assets of the respective class of the series, with each other share of the respective class, and no interest in any other series. No series is subject to the liabilities of any other series. The Declaration of Trust provides that shareholders are not liable for any liabilities of the Trust or any of its series, requires inclusion of a clause to that effect in every agreement entered into by the Trust or any of its series and indemnifies shareholders against any such liability. Shares of the Trust entitle their holders to one vote per share. However, separate votes are taken by each series on matters affecting an individual series or, with respect to a class of shares, on the respective class' distribution plan. For example, a change in investment policy for a series would be voted upon by shareholders of only the series involved. Shares do not have cumulative voting rights, preemptive rights or any conversion or exchange rights. The Trust does not contemplate holding regular meetings of shareholders to elect Trustees or otherwise. However, the holders of 10% or more of the outstanding shares may by written request require a meeting to consider the removal of Trustees by a vote of a majority of the shares present and voting at such meeting. The Trustees may amend the Declaration of Trust if authorized by a vote of the Trustees and a favorable vote of the holders of more than 50% of the outstanding shares entitled to vote (or such higher vote as may be required by the Investment Company Act of 1940 (the "Investment Company Act") or other applicable law). Statements contained in this Statement of Additional Information as to the contents of any contract or other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which this Statement of Additional Information forms as part, each such statement being qualified in all respects by such reference. INVESTMENT POLICIES AND RESTRICTIONS The investment objective of the Fund is to provide high current income, liquidity and safety of principal through investment in a diversified portfolio of money market securities. The Fund will invest 2 129 only in the securities listed below. These securities must be denominated in U.S. dollars and must either (i) mature or have been called for redemption within one year of the date purchased or (ii) be subject to repurchase agreements maturing within one year. There can be no assurance that the Fund will achieve its objective. The foregoing is a fundamental policy and cannot be changed without approval of the shareholders of the Fund. 1. U.S. Government Securities. The Fund may invest in obligations issued or guaranteed by the U.S. Government or its agencies or instrumentalities. 2. Bank Obligations. The Fund may invest in time deposits of federal and state banks whose accounts are insured by a government agency; certificates of deposit, bankers' acceptances and other bank obligations if they are obligations of a domestic bank (or foreign branch thereof) subject to regulation by the U.S. Government. 3. Commercial Paper Obligations. The Fund may invest in commercial paper, including variable amount master demand notes, rated at least A-3 by Standard & Poor's Ratings Group ("S&P") or Prime-3 by Moody's Investors Service, Inc. ("MIS") or, if not rated, issued by a corporation in whose debt obligations the Fund may invest (see 4 below) see Appendix A to this Statement of Additional Information for a description of the factors considered by S&P and MIS. 4. Corporate Debt Obligations. The Fund may invest in corporate debt obligations (for example, bonds and debentures) if they are rated at least AA by S&P or Aa by MIS see Appendix A to this Statement of Additional Information for bond ratings. Fundamental investment restrictions limiting the investments of the Fund provide that the Money Fund may not: 1. Purchase any securities (other than obligations issued or guaranteed by the United States Government or by its agencies or instrumentalities) if, as a result, more than 5% of the Fund's total assets (taken at current value) would then be invested in securities of a single issuer or if, as a result, the Fund would hold more than 10% of the outstanding voting securities of an issuer. (There is no limit on the amount of the Fund's assets which may be invested in any single issue of U.S. Government Securities.) 2. Borrow money, except from banks for temporary or emergency purposes and then not in amounts in excess of 10% of its net assets at the time of borrowing. It can mortgage or pledge its assets only in connection with such borrowing and in amounts not in excess of 10% of the value of its net assets at the time of such borrowing. Interest on borrowing would reduce the Fund's income. The Fund will not purchase any securities while it has any outstanding borrowings and will not engage in reverse repurchase transactions. 3. Buy any securities "on margin" or sell any securities "short." 4. Make investments for the purpose of exercising control or management. 5. Write, purchase or sell puts, calls or combinations thereof, or purchase or sell interest rate futures contracts or related options. 6. Purchase any security which is restricted as to disposition under federal securities laws or by contract or which are not readily marketable, or enter into a repurchase agreement maturing in more than seven days with respect to any security if, as a result, more than 10% of the Fund's total assets would be invested in such securities. 3 130 7. Invest in securities of other investment companies, except as part of a merger, consolidation or other acquisition. 8. Invest in interests in oil, gas or other mineral exploration or development programs. 9. Purchase or retain securities of any company if, to the knowledge of the Fund, its officers and directors and the officers and directors of the Fund's investment advisor who individually own more than 1/2 of 1% of the securities of such company together own beneficially more than 5% of such securities. 10. Make loans, except that the Fund can purchase and hold those publicly distributed debt securities which it is permitted to buy, lend its portfolio securities, and enter into repurchase agreements. 11. Act as an underwriter of securities, except to the extent the Fund may be deemed to be an underwriter in connection with the sale of securities held in its portfolio. 12. Purchase or sell real estate, commodities or commodity contracts, except that the Fund may purchase marketable debt securities issued by companies which invest in interests in real estate. 13. Purchase or retain securities of issuers having a record, together with predecessors, of less than three years continuous operations if at the time of purchase more than 5% of the Fund's total assets would be invested in such securities. 14. Invest more than 25% of its assets in a single industry, except that such limitation shall not apply to U.S. Government Securities or domestic bank obligations (excluding foreign branches thereof). 15. Invest in FHA or VA pooled mortgages, or obligations of the Asian Development Bank, the Inter-American Development Bank or the International Bank for Reconstruction and Development (World Bank) or in foreign securities or more than 10% of its assets in bank obligations payable in Eurodollars; also, the Fund may not purchase or sell forward foreign currency exchange contracts, invest in bank time deposits maturing in more than seven days, or invest more than 10% of its assets in bank time deposits maturing between two business days and seven calendar days. The Fund may not change any of these investment restrictions without the approval of the lesser of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's shares present at a meeting at which the holders of more than 50% of such outstanding shares are present in person or by proxy. As long as the percentage restrictions described above are satisfied at the time of the investment or borrowing, the Fund will be considered to have abided by those restrictions even if, at a later time, a change in values or net assets causes an increase or decrease in percentage. From time to time, the Fund may adopt more stringent investment restrictions in order to satisfy rules and regulations promulgated by the Commission or to be able to offer its shares to residents in particular states. In order to offer its shares to residents in particular states, the Fund presently will not invest in warrants. 4 131 OFFICERS AND TRUSTEES The tables below list the trustees and officers of the Trust (of which the Fund is a separate series) and their principal occupations for the last five years and their affiliations, if any, with Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company, Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding, Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes each of the open-end investment companies advised by the VK Adviser (excluding the Van Kampen Merritt Series Trust) and each of the open-end investment companies advised by the AC Adviser. TRUSTEES
PRINCIPAL OCCUPATIONS OR NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS ----------------------------------- ---------------------------------------------------- J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and 2300 205th Street President of MDT Corporation, a company which Torrance, CA 90501 develops manufactures, markets and services medical Age: 63 and scientific equipment. Trustee of each of the Van Kampen American Capital Funds. Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Two Randor Station, Suite 314 Integra Life Sciences Corporation, a firm King of Prussia Road specializing in life sciences. Trustee of Radnor, PA 19087 Susquehanna University and First Vice President, The Age: 52 Baum School of Art; Founder and Director of Uncom- mon 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. Trustee of each of the Van Kampen American Capital Funds. Philip P. Gaughan.................. Prior to February, 1989, Managing Director and 9615 Torresdale Avenue Manager of Municipal Bond Department, W. H. Philadelphia, PA 19114 Newbold's Sons & Co. Trustee of each of the Van Age: 66 Kampen American Capital Funds. Roger Hilsman...................... Professor of Government and International Affairs 251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of Lyme, CT 06371 the Van Kampen American Capital Funds. Age: 75
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PRINCIPAL OCCUPATIONS OR NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS ----------------------------------- ---------------------------------------------------- R. Craig Kennedy................... President and Director, German Marshall Fund of the 1341 E. 50th Street United States. Formerly, advisor to the Dennis Chicago, IL 60615 Trading Group Inc. Prior to 1992, President and Age: 43 Chief Executive Officer, Director and member of the Investment Committee of the Joyce Foundation, a private foundation. Trustee of each of the Van Kampen American Capital Funds. Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of One Parkview Plaza the VK Adviser, the AC Adviser and Van Kampen Oakbrook Terrace, IL 60181 American Capital Management, Inc. Director of VK/AC Age: 53 Holding, Inc, Van Kampen American Capital, and McCarthy, Crisanti & Maffei, Inc. Chairman and a Director of MCM Asia Pacific Company, Ltd. President, Chief Executive Officer and Trustee of each of the funds advised by the VK Adviser. Prior to December, 1991, Senior Vice President of Van Kampen Merritt Inc. Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a 415 North Adams company in insurance related businesses. Formerly Hinsdale, IL 60521 Vice Chairman and Director of Continental Illinois Age: 75 National Bank and Trust Company of Chicago and Continental Illinois Corporation. Trustee of each of the Van Kampen American Capital Funds and Chairman of the Board of each of the open-end funds (except the Van Kampen Merritt Series Trust) advised by the VK Adviser. Jack E. Nelson..................... President of Nelson Investment Planning Services, 423 Country Club Drive Inc., a financial planning company and registered Winter Park, FL 32789 investment adviser. President of Nelson Investment Age: 59 Brokerage Services Inc., a member of the National Association of Securities Dealers, Inc. (NASD) and Securities Investors Protection Corp. (SIPC). Trustee of each of the Van Kampen American Capital Funds.
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PRINCIPAL OCCUPATIONS OR NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS ----------------------------------- ---------------------------------------------------- Don G. Powell*..................... President, Chief Executive Officer and a Director of 2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital. Houston, TX 77056 Chairman, Chief Executive Officer and a Director of Age: 55 the Distributor, the VK Adviser, the AC Adviser and Van Kampen American Capital Management, Inc. Director, President and Chief Executive Officer of Van Kampen American Capital Advisers, Inc. and Van Kampen American Capital Exchange Corp. Director and Executive Vice President of Advantage Capital Corporation, ACCESS Investor Services, Inc., Van Kampen American Capital Services, Inc. and Van Kampen American Capital Trust Company. Director of McCarthy, Crisanti & Maffei, Inc. President and Director, Trustee or Managing General Partner of each of the funds advised by the AC Adviser and Trustee of each of the funds advised by the VK Ad- viser. He is also Chairman of the Board of the Van Kampen Merritt Series Trust and closed-end investment companies advised by the VK Adviser. David Rees......................... Contributing Columnist and, prior to 1995, Senior 1601 Country Club Drive Editor of Los Angeles Business Journal. A director Glendale, CA 91208 of Source Capital, Inc., a closed-end investment Age: 71 company unaffiliated with Van Kampen American Capital, a director and the second vice president of International Institute of Los Angeles. Trustee of each of the Van Kampen American Capital Funds. Jerome L. Robinson................. President of Robinson Technical Products 115 River Road Corporation, a manufacturer and processor of welding Edgewater, NJ 07020 alloys, supplies and equipment. Director of Age: 72 Pacesetter Software, a software programming company specializing in white collar productivity. Director of Panasia Bank. Trustee of each of the Van Kampen American Capital Funds. Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1999 Avenue of the Stars 1994) of the law firm of O'Melveny & Myers, legal Suite 700 counsel to the funds advised by the AC Adviser. Los Angeles, CA 90067 Director, FPA Capital Fund, Inc.; FPA New Income Age: 63 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital, Inc.; and TCW Convertible Security Fund, Inc. Trustee of each of the Van Kampen American Capital Funds. Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Stevens Institute Dean of Graduate School and Chairman, Department of of Technology Mechanical Engineering, Stevens Institute of Castle Point Station Technology. Director of Dynalysis of Princeton, a Hoboken, NJ 07030 firm engaged in engineering research. Trustee of Age: 70 each of the Van Kampen American Capital Funds and Chairman of the Board of each of the open-end funds advised by the AC Adviser.
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PRINCIPAL OCCUPATIONS OR NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS ----------------------------------- ---------------------------------------------------- Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, 333 West Wacker Drive Meagher & Flom, legal counsel to funds advised by Chicago, IL 60606 the VK Adviser. Trustee of each of the Van Kampen Age: 55 American Capital Funds. He also is a Trustee of the Van Kampen Merritt Series Trust and closed-end investment companies advised by the VK Adviser. William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a 712 Fifth Avenue caterer of airline food. Formerly, Director of 40th Floor Primerica Corporation (currently known as The New York, NY 10019 Traveler's Inc.). Formerly, Director of James River Age: 73 Corporation, a producer of paper products. Trustee, and former President of Whitney Museum of American Art. Formerly, Chairman of Institute for Educational Leadership, Inc., Board of Visitors, Graduate School of The City University of New York, Academy of Political Science. Trustee of Committee for Economic Development. Director of Public Education Fund Network, Fund for New York City Public Education. Trustee of Barnard College. Member of Dean's Council, Harvard School of Public Health. Member of Mental Health Task Force, Carter Center. Trustee of each of the Van Kampen American Capital Funds.
OFFICERS
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS --------------------- -------------------------- ---------------------------------------- Peter W. Hegel....... Vice President Executive Vice President and Portfolio Age: 39 Manager of the Adviser. Executive Vice President of the AC Adviser. Vice President of each of the Van Kampen American Capital Funds and closed- end funds advised by the VK Adviser. Ronald A. Nyberg..... Vice President and Executive Vice President, General Age: 41 Secretary Counsel and Secretary of Van Kampen American Capital. Executive Vice President and a Director of the VK Adviser and the Distributor. Executive Vice President of the AC Adviser. Vice President and Secretary of each of the Van Kampen American Capital Funds and closed-end funds advised by the VK Adviser. Director of ICI Mutual Insurance Co., a provider of insurance to members of the Investment Company Institute. Prior to March 1990, Secretary of Van Kampen Merritt Inc., the VK Adviser and McCarthy, Crisanti & Maffei, Inc.
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POSITIONS AND OTHER PRINCIPAL OCCUPATIONS NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS --------------------- -------------------------- ---------------------------------------- Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Age: 39 and Chief Financial Vice President, Treasurer and Chief Officer Financial Officer of each of the Van Kampen American Capital Funds and closed-end funds advised by the VK Adviser. Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Age: 30 Van Kampen American Capital. Assistant Secretary of each of the Van Kampen American Capital Funds and closed-end funds advised by the VK Adviser. Prior to May 1992, attorney for Cantwell & Cantwell, a Chicago law firm. Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Age: 38 Counsel and Assistant Secretary of Van Kampen American Capital. Senior Vice President, Deputy General Counsel and Secretary of the VK Adviser and the Distributor. Assistant Secretary of each of the Van Kampen American Capital Funds and closed-end funds advised by the VK Adviser. Weston B. Assistant Secretary Vice President, Associate General Wetherell.......... Counsel and Assistant Secretary of Van Age: 39 Kampen American Capital, the VK Adviser and the Distributor. Assistant Secretary of McCarthy, Crisanti & Maffei, Inc. Assistant Secretary of each of the Van Kampen American Capital Funds and closed-end funds advised by the VK Adviser. John L. Sullivan..... Controller First Vice President of the VK Adviser. Age: 39 Controller of each of the Van Kampen American Capital Funds and closed-end funds advised by the VK Adviser. Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Age: 30 Adviser. Assistant Treasurer of each of the Van Kampen American Capital Funds and closed-end funds advised by the VK Adviser.
--------------- * Such Trustees are "interested persons" (within the meaning of Section 2(a)(19) of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr. Sheehan is an interested person of the VK Adviser and the Fund by reason of his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an interested person of the Fund by reason of his firm acting as legal counsel for the Fund. 9 136 Messrs. Powell and McDonnell own, or have the opportunity to purchase, an equity interest in VK/ AC Holding, Inc., the parent company of Van Kampen American Capital, and have entered into employment contracts (for a term of five years) with Van Kampen American Capital. The Fund will pay trustees who are not affiliated persons of the VK Adviser, the Distributor or Van Kampen American Capital an annual retainer of $2,500 per year and $125 per regular quarterly meeting of the Fund, plus expenses. No additional fees are proposed at the present time to be paid for special meetings, committee meetings or to the chairman of the board. The trustees have approved an aggregate annual compensation cap from the combined fund complex of $84,000 per trustee (excluding any retirement benefits) until December 31, 1996, based upon the current net assets and the current number of Van Kampen American Capital funds (except that Mr. Whalen, who is also a trustee of the closed-end funds advised by the VK Adviser would receive additional compensation for serving as a trustee of such funds). In addition, the VK Adviser has agreed to reimburse the Fund through December 31, 1996, for any increase in the aggregate trustees' compensation over the aggregate compensation paid by the Fund in its 1994 fiscal year. COMPENSATION TABLE(1)
TOTAL PENSION OR COMPENSATION RETIREMENT FROM REGISTRANT AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID TO NAME FROM REGISTRANT(2) FUND EXPENSES(3) RETIREMENT(4) TRUSTEE(5) -------------------------- -------------------- ------------------ ---------------- --------------- R. Craig Kennedy.......... $3,783 $0 $2,500 $62,362 Philip G. Gaughan......... 3,783 0 2,500 63,250 Donald C. Miller.......... 3,783 0 2,500 62,178 Jack A. Nelson............ 3,783 0 2,500 62,362 Jerome L. Robinson........ 3,786 0 2,500 58,475 Wayne W. Whalen........... 891 0 2,500 49,875
--------------- (1) Messrs. McDonnell and Powell, trustees of the Registrant, are affiliated persons of the VK Adviser and are not eligible for compensation or retirement benefits from the Trust. Messrs. Branagan, Caruso, Hilsman, Rees, Sheehan, Sisto and Woodside were elected as trustees of the Trust at a shareholders meeting held July 21, 1995 and thus received no compensation or retirement benefits from the Registrant during its 1994 fiscal year. (2) The Registrant is Van Kampen American Capital Money Market Trust (the "Trust") which currently is comprised of 1 operating series. The amounts shown in this column are accumulated from the Aggregate Compensation of the Registrant's year ended December 31, 1994. Beginning in October 1994 each Trustee, except Messrs. Gaughan and Whalen, began deferring his entire aggregate compensation. The total combined amount of deferred compensation (including interest) accrued with respect to each trustee from the Fund Complex (as defined herein) as of December 31, 1994 is as follows: Mr. Kennedy $14,737; Mr. Miller $14,553; Mr. Nelson $14,737 and Mr. Robinson $13,725. (3) The Registrant's last completed fiscal year for which audited financial statements are available ended on June 30, 1994. The Retirement Plan commenced as of August 1, 1994 for the Fund. 10 137 (4) This is the estimated annual benefits payable per year for the 10-year period commencing in the year of such Trustee's retirement by a Fund assuming: the Trustee has 10 or more years of service on the Board of the Fund and retires at or after attaining the age of 60. Trustees retiring prior to the age of 60 or with fewer than 10 years of service for the Fund may receive reduced retirement benefits from such Fund. (5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds advised by the VK Adviser which had the same members on each funds' Board of Trustees. The amounts shown in this column are accumulated from the Aggregate Compensation of each of these 20 mutual funds in the Fund Complex during the calendar year ended December 31, 1994. The VK Adviser also serves as investment adviser for other investment companies; however, with the exception of Messrs. Powell, McDonnell and Whalen, such investment companies do not have the same trustees as the Fund Complex. Combining the Fund Complex with other investment companies advised by the VK Adviser, Mr. Whalen received Total Compensation of $161,850. As of July 17, 1995, the Trustees and officers as a group owned less than 1% of the Fund's shares. To the knowledge of the Fund, as of July 17, 1995, no person owned of record or beneficially 5% or more of the Fund's Class A Shares or Class B Shares. LEGAL COUNSEL Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago, Illinois. INVESTMENT ADVISORY AND OTHER SERVICES Van Kampen American Capital Investment Advisory Corp. (the "Adviser") is the Fund's investment adviser. The Adviser was incorporated as a Delaware corporation in 1982 (and through December 31, 1987 transacted business under the name of American Portfolio Advisory Service Inc.). The Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc., which in turn is a wholly-owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a substantial majority of its common stock by The Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a New York based private investment firm. The General Partner of C&D L.P. is Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton, Dubilier & Rice, Inc. In addition, certain officers, directors and employees of Van Kampen American Capital, Inc. own, in the aggregate, not more than 7% of the common stock of VK/AC Holding, Inc. and have the right to acquire upon the exercise of options, approximately an additional 11% of the common stock of VK/AC Holding, Inc. Presently, and after giving effect to the exercise of such options, no officer or trustee owns or would own 5% or more of VK/AC Holding, Inc. The investment advisory agreement between the Adviser and the Fund provides that the Adviser will supply investment research and portfolio management, including the selection of securities for the Fund 11 138 to purchase, hold or sell and the selection of brokers through whom the Fund's portfolio transactions are executed. The Adviser also administers the business affairs of the Fund, furnishes offices, necessary facilities and equipment, provides administrative services, and permits its officers and employees to serve without compensation as trustees and officers of the Trust if duly elected to such positions. The Adviser's activities are subject to the review and supervision of the Trustees, to whom the Adviser renders periodic reports of the Fund's investment activities. The investment advisory agreement with the Fund will remain in effect from year to year if specifically approved by the Trustees of the Fund or the shareholders, as the case may be, and by the disinterested Trustees in compliance with the requirements of the Investment Company Act. The agreement may be terminated without penalty upon 60 days written notice by either party and will automatically terminate in the event of assignment. The Adviser has undertaken to reimburse the Fund for annual expenses which exceed the most stringent limit prescribed by any State in which the Fund's shares are offered for sale. Currently, the most stringent limit in any State would require such reimbursement to the extent that aggregate operating expenses of the Fund (excluding interest, taxes and other expenses which may be excludable under applicable state law) exceed in any fiscal year 2 1/2% of the average annual net assets of the Fund up to $30 million. 2% of the average annual net assets of the Fund of the next $70 million, and 1 1/2% of the remaining average annual net assets of the Fund. In addition to making any required reimbursements, the Adviser may in its discretion, but is not obligated to, waive all or any portion of its fee or assume all or any portion of the expenses of the Fund. OTHER AGREEMENTS SUPPORT SERVICES AGREEMENT. Under a support services agreement with the Distributor and Van Kampen American Capital which terminated concurrent with the Fund's change in transfer agent, the Fund received support services for shareholders, including the handling of all written and telephonic communications, including any other distribution related communications. Payment by the Fund for such services is made on a cost basis for the employment of the personnel and the equipment necessary to render the support services. The Fund, and the other mutual funds distributed by the Distributor and advised by the Adviser, share such costs proportionately among themselves based upon their respective net asset values. ACCOUNTING SERVICES AGREEMENT. The Fund has also entered into an accounting services agreement pursuant to which the Adviser provides accounting services supplementary to those provided by the Custodian. Such services are expected to enable the Fund to more closely monitor and maintain its accounts and records. The Fund shares together with the other mutual funds distributed by the Distributor and advised by the Adviser in the cost of employment of persons to provide such services, with 25% of such costs shared proportionately based on the number of outstanding classes of securities per fund and with the remaining 75% of such cost being paid by the Fund and such other funds based proportionally on their respective net assets. LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American Capital funds advised by the VK Adviser and distributed by the Distributor have entered into Legal Services Agreements pursuant to which Van Kampen American Capital provides legal services, including without limitation: accurate maintenance of the funds' minute books and records, preparation and oversight of the funds' regulatory reports, and other information provided to shareholders, as well as 12 139 responding to day-to-day legal issues on behalf of the funds. Payment by the Fund for such services is made on a cost basis for the employment of personnel as well as the overhead and the equipment necessary to render such services. Other funds distributed by the Distributor also receive legal services from Van Kampen American Capital. Of the total costs for legal services provided to funds distributed by the Distributor, one half of such costs are allocated equally to each fund and the remaining one half of such costs are allocated to specific funds based on specific funds based on monthly time records. CUSTODIAN AND INDEPENDENT AUDITORS State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713, Boston, MA 02105-1713, is the custodian of the Fund and has custody of all securities and cash of the Fund. The custodian, among other things, attends to the collection of principal and income, and payment for and collection of proceeds of securities bought and sold by the Fund. The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago, Illinois. The selection of independent auditors will be subject to ratification by the shareholders of the Fund at any annual meeting of shareholders. PORTFOLIO TRANSACTIONS The Adviser is responsible for decisions to buy and sell securities for the Fund and broker-dealer selection. The primary consideration in effecting a securities transaction will be execution at the most favorable securities price. A substantial majority of the Fund's portfolio transactions may be transacted with primary market makers acting as principal on a net basis, with no brokerage commissions being paid by the Fund. Such principal transactions may, however, result in a profit to the market makers. In certain instances the Adviser may make purchases of underwritten issues at prices which include underwriting fees. In selecting a broker-dealer to execute each particular transaction, the Adviser will take the following into consideration: the best securities price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Fund on a continuing basis. Accordingly, the price to the Fund in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Trustees of the Trust may determine, the Adviser may cause the Fund to pay a broker-dealer that provides brokerage and research services an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker-dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Fund. The Adviser may also allocate the orders placed by it on behalf of the Fund to such broker-dealers who provide research or statistical material, or other services to the Fund or the Adviser. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser will report on said allocations regularly to the Trustees, indicating the brokers to whom such allocations have been made and the basis therefor. 13 140 While the Adviser will be primarily responsible for the placement of the Fund's business, the policies and practices in this regard must be consistent with the foregoing and will at all times be subject to review by the Trustees of the Trust. THE DISTRIBUTOR The Distributor offers one of the industry's broadest lines of investments -- encompassing mutual funds, closed-end funds and unit investment trusts -- and is currently the nation's 5th largest broker-sold mutual fund group according to Strategic Insight. Van Kampen American Capital's roots in money management extend back to 1926. Today, Van Kampen American Capital manages or supervises more than $50 billion in mutual funds, closed-end funds and unit investment trusts -- assets which have been entrusted to Van Kampen American Capital in more than 2 million investor accounts. Van Kampen American Capital has one of the largest research teams (outside of the rating agencies) in the country, with 86 analysts devoted to various specializations. Shares of the Fund are offered on a continuous basis through the Distributor, One Parkview Plaza, Oakbrook Terrace, Illinois 60181. The Distributor is a wholly-owned subsidiary of Van Kampen American Capital, which is a subsidiary of VK/AC Holding, Inc., a Delaware corporation that is controlled through an 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. In addition, certain officers, directors and employees of Van Kampen American Capital and its subsidiaries own, in the aggregate not more than 7% of the common stock of VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options, approximately an additional 11% of the common stock of VK/AC Holding, Inc. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.") is the general partner of C&D L.P. Pursuant to a distribution agreement, Van Kampen American Capital will purchase shares of the Fund for resale to the public, either directly or through securities dealers and brokers, and is obligated to purchase only those shares for which it has received purchase orders. A discussion of how to purchase and redeem the Fund's shares and how the Fund's shares are priced is contained in the Prospectus. The Fund has adopted a distribution plan (the "Distribution Plan") with respect to each class of its shares pursuant to Rule 12b-1 under the Investment Company Act. The Fund also has adopted a service plan (the "Service Plan") with respect to each class of its shares. The Distribution Plan and the Service Plan sometimes are referred to herein as the "Plans." The Plans provide that the Fund may spend a portion of the Fund's average daily net assets attributable to each class of its shares in connection with the distribution of the shares and in connection with the provision of ongoing services to shareholders. The Plans are being implemented through an agreement (the "Distribution and Service Agreement") with the Distributor of each class of the Fund's shares, sub-agreements between the Distributor and members of the NASD who are acting as securities dealers and NASD members or eligible non-members who are acting as brokers or agents and similar agreements between the Fund and banks who are acting as brokers (collectively, "Selling Agreements") that may provide for their customers or clients certain services or assistance, which may include, but not be limited to, processing purchase and redemption transactions, establishing and maintaining shareholder accounts regarding the Fund, and such other services as may be agreed to from time to time and as may be permitted by applicable statute, rule or regulation. Brokers, dealers and banks that have entered into sub-agreements with the Distributor and sell shares of the Fund are referred to herein as "financial intermediaries." 14 141 Under the Distribution and Service Agreement and the Selling Agreements, financial intermediaries that sold shares prior to July 1, 1987, or prior to the beginning of the calendar quarter in which the Selling Agreement between the Fund and such financial intermediary was approved by the Money Fund's Board of Trustees (an "Implementation Date") are not eligible to receive compensation pursuant to such Distribution and Service Agreement and/or Selling Agreement. To the extent that there remain outstanding shares of the Fund that were purchased prior to all Implementation Dates, the percentage of the total average daily net asset value that may be utilized pursuant to the Distribution and Service Agreement will be less than the maximum percentage amount permissible under the Distribution and Service Agreement. The Distributor must submit quarterly reports to the Board of Trustees of the Trust, of which the Fund is a series, setting forth separately by class all amounts paid under the Plans and the purposes for which such expenditures were made, together with such other information as from time to time is reasonably requested by the Trustees. The Plans provide that they will continue in full force and effect from year to year so long as such continuance is specifically approved by a vote of the Trustees, and also by a vote of the disinterested Trustees, cast in person at a meeting called for the purpose of voting on the Plans. Each of the Plans may not be amended to increase materially the amount to be spent for the services described therein with respect to a class of shares without approval by a vote of a majority of the outstanding voting shares of such class and all material amendments to either of the Plans must be approved by the Trustees and also by the disinterested Trustees. Each of the Plans may be terminated with respect to a class of shares at any time by a vote of a majority of the disinterested Trustees or by a vote of a majority of the outstanding voting shares of such class. YIELD INFORMATION There are two methods by which the Fund's yield for a specified period of time is calculated. Normally a seven day period will be used in determining yields in published or mailed advertisements. The first method, which results in an amount referred to as the "current yield," assumes an account containing exactly one share at the beginning of the period. (The net asset value of this share will be $1.00 except under extraordinary circumstances.) The net change in the value of the account during the period is then determined by subtracting this beginning value from the value of the account at the end of the period; however, capital changes and unrealized appreciation or depreciation of the Fund's portfolio are excluded from this calculation. This net change in the account value is then divided by the value of the account at the beginning of the period (i.e., normally $1.00 as discussed above) and the resulting figure (referred to as the "base period return") is then annualized by multiplying it by 365 and dividing by the seven days of the period; the result is the "current yield," usually expressed to the nearest one- hundredth of one percent. The second method results in an amount referred to as the "compounded effective yield." This represents an annualization of the current yield with dividends reinvested daily. This compounded effective yield, calculated again for a seven day period, would be computed by compounding the unannualized base period return by adding one to the base period return, raising the sum to a power equal to 365 divided by seven and subtracting one from the result. In addition to using the yields in advertisements or information furnished to present or prospective stockholders, the Fund also may quote rankings, yields or returns as published by recognized statistical 15 142 services or publishers, such as Lipper Analytical Services, Inc., Weisenberger Investment Companies, Donoghues Money Fund Report, or others. Yield information may be useful to investors in reviewing the performance of the Fund. However, a number of factors should be taken into account before using yield information as a basis for comparison with alternative investments. An investment in the Fund is not insured and its yields are not guaranteed. They normally will fluctuate on a daily basis. Accordingly they cannot be compared to yields on those savings accounts or other investment alternatives which provide a guaranteed fixed yield for a stated period of time and which may be insured by a government agency. The yields for any given past period are not an indication or representation by the Trust of future yields or rates of return on the Fund's shares. For the fiscal year ended June 30, 1994 the Adviser waived a portion of its fee, and the Adviser may in its discretion elect to discontinue waiving all or any portion of its fee. In the event that the Adviser elects to discontinue waiving its fee, the Fund's yield will be less than it otherwise would have been. In comparing the yields of one money market fund to another, consideration should be given to each fund's investment policy, portfolio quality, portfolio maturity, type of instruments held and operating expenses. DIVIDENDS On each day, including a Saturday, Sunday or other holiday, a dividend of all of the Fund's net income since the last declaration is declared. The Fund's net income for dividend purposes consists of all interest income accrued on the Fund's portfolio, less the Fund's expenses. Under the procedures which the Trust's Board of Trustees have adopted relating to amortized cost valuation, the calculation of the Fund's daily dividends for each respective class of shares will change from that indicated above in certain circumstances. If on any date the deviation between the net asset value for a class of shares determined on an amortized cost basis and that determined using market quotations is 0.5% or more, the amount of such deviation will be added to or subtracted from the daily dividend for such class of shares to the extent necessary to reduce such deviation to within 0.5%. 16 143 VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS December 31, 1994 (Unaudited) --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) SECURITY DESCRIPTION DATE PURCHASE COST ----------------------------------------------------------------------------------------------- AGENCY 9.1% $ 869 Small Business Administration................... 1/03/95 5.750% $ 868,761 1,000 Federal Farm Credit Bank........................ 1/05/95 5.300 999,411 1,000 Federal Home Loan Mortgage Corp.(b)............. 1/05/95 5.900 999,344 1,000 Federal Home Loan Bank.......................... 1/10/95 5.780 998,555 ----------- TOTAL AGENCY.......................................................... 3,866,071 ----------- BANKERS ACCEPTANCES 13.0% 1,000 Bank of New York................................ 1/06/95 5.480 999,239 1,000 Nationsbank Corp. .............................. 1/06/95 5.880 999,183 1,000 Sanwa Bank...................................... 1/19/95 5.870 997,065 1,500 National Bank of Detroit........................ 1/23/95 5.870 1,500,000 1,000 Northern Trust Co. ............................. 2/17/95 5.980 992,193 ----------- TOTAL BANKERS ACCEPTANCES............................................. 5,487,680 ----------- CERTIFICATES OF DEPOSIT 4.7% 1,000 Dresdner Bank................................... 1/26/95 5.530 999,947 1,000 Societe Generale Bank Yankee.................... 2/03/95 6.150 1,000,000 ----------- TOTAL CERTIFICATES OF DEPOSIT......................................... 1,999,947 ----------- COMMERCIAL PAPER 52.0% 1,000 AT & T Capital Corp. ........................... 1/03/95 5.850 999,645 1,500 J. P. Morgan & Co. Inc. ........................ 1/03/95 6.000 1,499,500 1,500 Exxon Asset Management.......................... 1/04/95 5.600 1,499,300 1,500 Southern California Edison Co. ................. 1/05/95 5.930 1,499,012 1,000 Credit Suisse First Boston Inc. ................ 1/09/95 5.030 998,883 1,500 Rabobank USA Financial Corp. ................... 1/09/95 5.910 1,498,030 1,500 IBM Credit Corp. ............................... 1/10/95 6.000 1,497,750 1,000 State Street Boston Corp. ...................... 1/12/95 5.138 1,000,000 1,500 Ford Motor Credit Co. .......................... 1/17/95 5.950 1,496,033 1,000 Merrill Lynch & Co. Inc. ....................... 1/19/95 5.100 1,000,000 1,000 Commercial Credit Corp. ........................ 1/23/95 5.450 1,000,000 1,000 American General Finance Corp. ................. 1/25/95 5.750 1,000,000 1,500 Associates Corp. ............................... 1/27/95 6.120 1,493,370 1,000 CIT Group Holdings Inc. ........................ 1/27/95 5.750 1,000,000 1,500 American Express Credit Corp. .................. 1/30/95 5.850 1,492,931 1,500 Norwest Financial Inc. ......................... 2/07/95 6.050 1,490,673 1,500 John Deere Capital Corp. ....................... 2/09/95 6.000 1,490,250 ----------- TOTAL COMMERCIAL PAPER................................................ 21,955,377 -----------
See Notes to Financial Statements. 17 144 VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS -- (CONTINUED) December 31, 1994 (Unaudited) --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) SECURITY DESCRIPTION DATE PURCHASE COST ----------------------------------------------------------------------------------------------- VARIABLE RATE DEMAND OBLIGATIONS 13.0% $1,500 Virginia St Housing Development Authority....... 1/03/95 6.000% $ 1,500,000 1,400 Catholic Healthcare West (Gtd: Toronto Dominion Bank)........................................... 1/04/95 7.000 1,400,000 500 Florida Housing Finance Agency (L.O.C. Credit Suisse)......................................... 1/04/95 6.100 500,000 900 Health Insurance Plan Greater New York (L.O.C. Morgan Gty)..................................... 1/04/95 6.450 900,000 500 Illinois Student Assistance Commission (L.O.C. Sumitomo Bank).................................. 1/04/95 6.170 500,000 700 Mississippi Business Finance Corp. ............. 1/04/95 6.400 700,000 ----------- TOTAL VARIABLE RATE DEMAND OBLIGATIONS................................ 5,500,000 ----------- REPURCHASE AGREEMENT 7.2% UBS Securities, U.S. T-Note, $3,165,000 par, 3.875% coupon, due 10/31/95, dated 12/30/94, to be sold on 01/03/95 at $3,041,942........ 3,040,000 ----------- TOTAL INVESTMENTS (a) 99.0%........................................... 41,849,075 Other Assets in Excess of Liabilities 1.0%............................ 408,518 ----------- NET ASSETS 100.0%..................................................... $42,257,593 ==========
(a) At December 31, 1994, cost is identical for both book and federal income tax purposes. (b) This is a Mortgage Backed Security (MBS) which is a pass-through instrument created by pooling mortgages and selling participations in the principal and interest payments received from borrowers. This security is guaranteed by Federal Home Loan Mortgage Corporation (FHLMC), a federally sponsored agency. See Notes to Financial Statements. 18 145 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES December 31, 1994 (Unaudited) ASSETS: Investments, at Amortized Cost which Approximates Market (Note 1)......... $41,849,075 Cash...................................................................... 180,760 RECEIVABLES: Fund Shares Sold.......................................................... 544,455 Interest.................................................................. 118,772 Other..................................................................... 4,883 ----------- Total Assets.............................................................. 42,695,945 ----------- LIABILITIES: PAYABLES: Fund Shares Repurchased................................................... 346,906 Income Distributions...................................................... 24,412 Investment Advisory Fee (Note 2).......................................... 1,791 Accrued Expenses.......................................................... 55,243 ----------- Total Liabilities......................................................... 438,352 ----------- NET ASSETS................................................................ $42,257,593 =========== NET ASSETS CONSIST OF: Paid in Surplus: Class A Shares............................................................ $32,412,705 Class B Shares............................................................ 9,918,443 Accumulated Net Realized Loss on Investments.............................. (73,555) ----------- NET ASSETS................................................................ $42,257,593 =========== MAXIMUM OFFERING PRICE PER SHARE: Class A Shares: Net Asset Value per share (Based on net assets of $32,339,762 and 32,412,706 shares of beneficial interest issued and outstanding)........ $ 1.00 =========== Class B Shares: Net Asset Value per share (Based on net assets of $9,917,831 and 9,918,443 shares of beneficial interest issued and outstanding)................... $ 1.00 ===========
See Notes to Financial Statements. 19 146 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF OPERATIONS For the Six Months Ended December 31, 1994 (Unaudited) INVESTMENT INCOME: Interest................................................................... $ 842,639 Amortization of Premium.................................................... (10,988) ----------- Total Income............................................................... 831,651 ----------- EXPENSES: Investment Advisory Fee (Note 2)........................................... 83,571 Shareholder Services....................................................... 60,277 Distribution (12b-1) and Service Fees (Allocated to Classes A and B of $35,230 and $21,742, respectively)(Note 4)............................... 56,972 Printing................................................................... 18,400 Audit...................................................................... 15,088 Custody.................................................................... 14,107 Trustees Fees and Expenses (Note 2)........................................ 11,040 Legal (Note 2)............................................................. 6,440 Other...................................................................... 1,844 ----------- Total Expenses............................................................. 267,739 Less Fees Deferred......................................................... 79,108 ----------- Net Expenses............................................................... 188,631 ----------- NET INVESTMENT INCOME...................................................... $ 643,020 =========== REALIZED GAIN/LOSS ON INVESTMENTS: Proceeds from Sales........................................................ $ 1,531,038 Cost of Securities Sold.................................................... (1,550,018) ----------- NET REALIZED LOSS ON INVESTMENTS........................................... $ (18,980) =========== NET INCREASE IN NET ASSETS FROM OPERATIONS................................. $ 624,040 ===========
See Notes to Financial Statements. 20 147 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF CHANGES IN NET ASSETS For the Six Months Ended December 31, 1994 and the Year Ended June 30, 1994 (Unaudited)
----------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1994 JUNE 30, 1994 ----------------------------------------------------------------------------------------------- FROM INVESTMENT ACTIVITIES: OPERATIONS: Net Investment Income................................... $ 643,020 $ 499,064 Net Realized Loss on Investments........................ (18,980) (26,427) ----------------- ------------- Change in Net Assets from Operations.................... 624,040 472,637 ----------------- ------------- DISTRIBUTIONS FROM NET INVESTMENT INCOME: Class A Shares.......................................... (568,757) (499,064) Class B Shares.......................................... (74,263) -0- ----------------- ------------- Total Distributions.................................. (643,020) (499,064) ----------------- ------------- Net Change in Net Assets from Investment Activities..... (18,980) (26,427) ----------------- ------------- FROM CAPITAL TRANSACTIONS (NOTE 3): PROCEEDS FROM SHARES SOLD: Class A Shares.......................................... 40,881,989 79,908,069 Class B Shares.......................................... 15,887,574 -0- ----------------- ------------- 56,769,563 79,908,069 ----------------- ------------- NET ASSET VALUE OF SHARES ISSUED THROUGH DIVIDEND REINVESTMENT: Class A Shares.......................................... 479,626 445,332 Class B Shares.......................................... 50,549 -0- ----------------- ------------- 530,175 445,332 ----------------- ------------- COST OF SHARES REPURCHASED: Class A Shares.......................................... (36,550,200) (74,519,684) Class B Shares.......................................... (6,019,680) -0- ----------------- ------------- (42,569,880) (74,519,684) ----------------- ------------- Net Change in Net Assets from Capital Transactions........ 14,729,858 5,833,717 ----------------- ------------- Total Increase in Net Assets......................... 14,710,878 5,807,290 NET ASSETS: Beginning of the Period................................. 27,546,715 21,739,425 ----------------- ------------- End of the Period....................................... $ 42,257,593 $ 27,546,715 ============= ===========
See Notes to Financial Statements. 21 148 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for one share of the Fund outstanding throughout the periods indicated. (Unaudited) --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JUNE 30, DEC. 31, -------------------------------- CLASS A SHARES 1994 1994 1993 1992 1991 -------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period............. $ 1.00 $1.00 $1.00 $1.00 $1.00 ---------- ----- ----- ----- ----- Net Investment Income.......................... .019 .025 .023 .041 .065 Less Distributions from Net Investment Income...................................... .019 .025 .023 .041 .065 ---------- ----- ----- ----- ----- Net Asset Value, End of Period................... $ 1.00 $1.00 $1.00 $1.00 $1.00 ---------- ----- ----- ----- ----- TOTAL RETURN (Non-Annualized)*................... 1.96% 2.50% 2.31% 4.21% 6.72% Net Assets at End of Period (In millions)........ $ 32.3 $27.5 $21.7 $24.9 $35.0 Ratio of Expenses to Average Net Assets*......... 1.03% 1.13% 1.16% 1.14% .99% Ratio of Net Investment Income to Average Net Assets*........................................ 3.91% 2.44% 2.31% 4.21% 6.57%
------------------------- * If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets.......... 1.50% 1.54% 1.31% 1.55% 1.39% Ratio of Net Investment Income to Average Net Assets......................................... 3.44% 2.03% 2.16% 3.80% 6.17%
See Notes to Financial Statements. 22 149 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS -- (CONTINUED) The following schedule presents financial highlights for one share of the Fund outstanding throughout the periods indicated. (Unaudited) --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, CLASS A SHARES 1990 1989 1988 1987 1986 ------------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period................ $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- Net Investment Income............................. .078 .078 .066 .056 .068 Less Distributions from Net Investment Income..... .078 .078 .066 .056 .068 ----- ----- ----- ----- ----- Net Asset Value, End of Period...................... $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- TOTAL RETURN (Non-Annualized)*...................... 8.11% 8.07% 6.60% 5.94% 6.96% Net Assets at End of Period (in millions)........... $45.0 $44.1 $51.5 $17.1 $ 6.3 Ratio of Expenses to Average Net Assets*............ .90% .98% .78% .58% .88% Ratio of Net Investment Income to Average Net Assets*........................................... 7.81% 7.79% 6.56% 5.65% 6.78%
------------------------- * If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets............. 1.31% 1.31% 1.22% 1.48% 1.85% Ratio of Net Investment Income to Average Net Assets............................................ 7.40% 7.46% 6.13% 4.74% 5.81%
See Notes to Financial Statements. 23 150 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS -- (CONTINUED) The following schedule presents financial highlights for one share of the Fund outstanding throughout the period indicated. (Unaudited)
------------------------------------------------------------------------------------------ JULY 11, 1994 (COMMENCEMENT OF DISTRIBUTION) TO DECEMBER 31, CLASS B SHARES 1994 ------------------------------------------------------------------------------------------ Net Asset Value, Beginning of Period................................... $ 1.00 ------ Net Investment Income................................................ .015 Less Distributions from Net Investment Income........................ .015 ------ Net Asset Value, End of Period......................................... $ 1.00 ============== TOTAL RETURN (Non-Annualized)*......................................... 1.49% Net Assets at End of Period (in millions).............................. $ 9.9 Ratio of Expenses to Average Net Assets*............................... 1.80% Ratio of Net Investment Income to Average Net Assets*.................. 3.41%
--------------- * If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as follows: Ratio of expenses to average net assets................................ 2.28% Ratio of net investment income to average net assets................... 2.93%
See Notes to Financial Statements. 24 151 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS December 31, 1994 (Unaudited) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Van Kampen Merritt Money Market Fund (the "Fund") is a separate series of Van Kampen Merritt Money Market Trust (the "Trust"). The Fund is an open-end diversified management investment company registered under the Investment Company Act of 1940, as amended. The distribution of the Fund's second class of shares, Class B shares, commenced on July 11, 1994. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. Security Valuation Investments are valued at amortized cost, which approximates market. Under this valuation method, a portfolio instrument is valued at cost and any discount or premium is amortized on a straight-line basis to the maturity of the instrument. B. Security Transactions Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. Interest income is recorded on an accrual basis. C. Federal Income Taxes It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset such losses against any future realized capital gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward for tax purposes of $39,559. Of this amount, $26,110, $2,038 and $11,411 will expire on June 30, 1998, 1999 and 2000, respectively. Net realized gains or losses differ for financial statement and tax reporting purposes primarily because of the deferral of post October 31 losses which are not recognized for tax purposes until the first day of the following fiscal year. D. Distribution of Income and Gains The Fund declares dividends from net investment income daily and automatically reinvests such dividends daily. Net realized gains, if any, are distributed annually. Shareholders can elect to receive the cash equivalent of their daily dividends at each month end. 25 152 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1994 (Unaudited) NOTE 2 -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American Capital Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE NET ASSETS % PER ANNUM --------------------------------------------------- ------------ First $250 million................................. .500 of 1% Next $250 million.................................. .475 of 1% Next $250 million.................................. .425 of 1% Over $750 million.................................. .275 of 1%
Certain legal expenses were paid to Skadden, Arps, Slate, Meagher & Flom, counsel to the Fund, of which a trustee of the Fund is an affiliated person. For the six months ended December 31, 1994, the Fund recognized expenses of approximately $9,700 representing Van Kampen American Capital Distributors, Inc.'s or its affiliates' ("VKAC") cost of providing accounting, legal and certain shareholder services to the Fund. Certain officers and trustees of the Fund are also officers and directors of VKAC. The Fund does not compensate its officers or trustees who are officers of VKAC. The Fund has implemented deferred compensation and retirement plans for its Trustees. Under the deferred compensation plan, Trustees may elect to defer all or a portion of their compensation to a later date. The retirement plan covers those Trustees who are not officers of VKAC. At December 31, 1994, VKAC owned 611,383 and 100 shares of Classes A and B, respectively. 26 153 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1994 (Unaudited) NOTE 3 -- CAPITAL TRANSACTIONS The Fund has outstanding two classes of common shares, Classes A and B. There are an unlimited number of shares of each class without par value authorized. At June 30, 1994, paid in surplus for Class A shares aggregated $27,601,290. Transactions in shares were as follows:
YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, 1994 1994 ----------------- ----------- SALES: Class A.................................................... 40,881,989 79,908,069 Class B.................................................... 15,887,574 -0- ----------------- ----------- Total Sales................................................ 56,769,563 79,908,069 ============= ========== DIVIDEND REINVESTMENT: Class A.................................................... 479,626 445,332 Class B.................................................... 50,549 -0- ----------------- ----------- Total Dividend Reinvestment................................ 530,175 445,332 ============= ========== REPURCHASES: Class A.................................................... (36,550,200) (74,519,684) Class B.................................................... (6,019,680) -0- ----------------- ----------- Total Repurchases.......................................... (42,569,880) (74,519,684) ============= ==========
NOTE 4 -- DISTRIBUTION AND SERVICE PLANS The Fund and its shareholders have adopted a distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 and a Service Plan (the "Service Plan," collectively the "Plans"). The Plans govern payments for the distribution of the Fund's shares, ongoing shareholder services and maintenance of shareholder accounts. Annual fees under the Plans of up to .25% of Class A shares and 1.00% of Class B shares are accrued daily. Included in these fees for the six months ended December 31, 1994, are payments to VKAC of approximately $16,300. 27 154 VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS June 30, 1994 --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) DESCRIPTION DATE PURCHASE COST ---------------------------------------------------------------------------------------------- AGENCY 9.7% $ 877 Small Business Administration................... 07/01/94 5.250% $ 876,598 800 Student Loan Marketing Association.............. 07/06/94 4.325 800,000 1,000 Federal Home Loan Bank.......................... 08/22/94 4.270 993,832 ----------- TOTAL AGENCY......................................................... 2,670,430 ----------- COMMERCIAL PAPER 25.4% 1,000 American General Finance Corp................... 07/15/94 4.245 1,000,000 1,000 Ford Motor Credit Co............................ 07/15/94 4.245 1,000,000 1,000 John Deere Capital Corp......................... 07/15/94 4.245 1,000,000 1,000 Associates Corp................................. 07/20/94 4.290 1,000,000 1,000 State Street Bank & Trust....................... 07/20/94 4.311 1,000,000 1,000 American Express Credit Corp.................... 08/01/94 4.367 1,000,000 1,000 General Electric Capital Corp................... 08/01/94 4.387 1,000,000 ----------- TOTAL COMMERCIAL PAPER............................................... 7,000,000 ----------- MEDIUM TERM NOTES 14.8% 500 CIT Group Hldgs Inc............................. 07/01/94 4.600 500,027 1,000 Purdue University Indiana Rev................... 07/01/94 4.000 1,000,000 1,000 Kent County, MI Gen Oblig Limited Tax Notes..... 11/01/94 4.547 1,009,598 750 San Diego, CA Taxable Anticipation Notes........ 12/14/94 4.000 750,493 800 Cuyahoga County, OH Taxable Anticipation Notes........................................... 12/30/94 4.170 800,845 ----------- TOTAL MEDIUM TERM NOTES.............................................. 4,060,963 ----------- VARIABLE RATE DEMAND OBLIGATIONS 15.6% 500 AT & T Capital Corp............................. 07/01/94 4.750 500,000 700 Catholic Healthcare West (Gtd: Toronto Dominion Bank)........................................... 07/06/94 4.600 700,000 500 Florida Housing Finance Agency (L.O.C. Credit Suisse)......................................... 07/06/94 4.460 500,000 700 Health Insurance Plan Greater New York (L.O.C. Morgan Gty)..................................... 07/06/94 4.500 700,000 500 Illinois Student Assistance Commission (L.O.C. Sumitomo Bank).................................. 07/06/94 4.820 500,000 700 Mississippi Business Finance Corp............... 07/06/94 4.400 700,000 700 Virginia St Housing Development Authority....... 07/06/94 4.500 700,000 ----------- TOTAL VARIABLE RATE DEMAND OBLIGATIONS............................... 4,300,000 -----------
28 155 VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS -- (CONTINUED) June 30, 1994 --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) DESCRIPTION DATE PURCHASE COST ---------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 16.1% 4,440 UBS Securities, U.S. T-Note, $4,190,000 par, 9.500% coupon, due 11/15/95, dated 06/30/94, to be sold on 07/01/94 at $4,440,518............... 07/01/94 4.200 4,440,000 ----------- TOTAL INVESTMENTS (A) 81.6%.......................................... 22,471,393 OTHER ASSETS IN EXCESS OF LIABILITIES 18.4%.......................... 5,075,322 ----------- NET ASSETS 100.0%.................................................... $27,546,715 ===========
(a) At June 30, 1994, cost is identical for both book and federal income tax purposes. See Notes to Financial Statements 29 156 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES June 30, 1994 ASSETS: Investments, at Amortized Cost which Approximates Market (Note 1)......... $22,471,393 Cash...................................................................... 36,251 RECEIVABLES: Fund Shares Sold.......................................................... 5,002,968 Interest.................................................................. 119,753 Other..................................................................... 5,070 ----------- Total Assets.............................................................. 27,635,435 ----------- LIABILITIES: PAYABLES: Fund Shares Repurchased................................................... 33,514 Income Distributions...................................................... 4,018 Investment Advisory Fee (Note 2).......................................... 3,400 Accrued Expenses.......................................................... 47,788 ----------- Total Liabilities......................................................... 88,720 ----------- NET ASSETS................................................................ $27,546,715 =========== NET ASSETS CONSIST OF: Paid in Surplus........................................................... $27,601,290 Accumulated Net Realized Loss on Investments.............................. (54,575) ----------- NET ASSETS (equivalent to $1.00 per share on 27,601,290 shares outstanding)............................................................ $27,546,715 ===========
See Notes to Financial Statements 30 157 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF OPERATIONS For the Year Ended June 30, 1994 INVESTMENT INCOME: Interest................................................................... $ 727,456 Amortization of Discount (Premium) -- Net.................................. 3,996 ----------- Total Income............................................................... 731,452 ----------- EXPENSES: Investment Advisory Fee (Note 2)........................................... 97,029 Shareholder Services....................................................... 58,932 Distribution (12b-1) and Service Fees (Note 4)............................. 49,893 Printing................................................................... 31,130 Audit...................................................................... 28,430 Trustees Fees and Expenses (Note 2)........................................ 18,855 Custody.................................................................... 17,760 Legal (Note 2)............................................................. 10,950 Other...................................................................... 3,170 ----------- Total Expenses............................................................. 316,149 Less Fees Waived........................................................... 83,761 ----------- Net Expenses............................................................... 232,388 ----------- Net Investment Income...................................................... $ 499,064 =========== REALIZED GAIN/LOSS ON INVESTMENTS: Proceeds from Sales........................................................ $ 8,035,919 Cost of Securities Sold.................................................... (8,062,346) ----------- NET REALIZED LOSS ON INVESTMENTS (including $85,500 reimbursement by the Adviser for realized losses incurred on variable rate instruments)....... $ (26,427) =========== Net Increase in Net Assets from Operations................................. $ 472,637 ===========
See Notes to Financial Statements 31 158 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF CHANGES IN NET ASSETS For the Years Ended June 30, 1994 and 1993
--------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED JUNE 30, 1994 JUNE 30, 1993 --------------------------------------------------------------------------------------------- FROM INVESTMENT ACTIVITIES: OPERATIONS: Net Investment Income..................................... $ 499,064 $ 541,128 Net Realized Gain/Loss on Investments..................... (26,427) 695 ------------- ------------- Change in Net Assets from Operations...................... 472,637 541,823 Distributions from Net Investment Income.................. (499,064) (541,128) ------------- ------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES......... (26,427) 695 ------------- ------------- FROM CAPITAL TRANSACTIONS (NOTE 3): Proceeds from Shares Sold................................. 79,908,069 86,871,367 Net Asset Value of Shares Issued Through Dividend Reinvestment........................................... 445,332 500,012 Cost of Shares Repurchased................................ (74,519,684) (90,537,141) ------------- ------------- NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS.......... 5,833,717 (3,165,762) ------------- ------------- TOTAL INCREASE/DECREASE IN NET ASSETS....................... 5,807,290 (3,165,067) NET ASSETS: Beginning of the Period................................... 21,739,425 24,904,492 ------------- ------------- End of the Period......................................... $ 27,546,715 $ 21,739,425 ============= =============
See Notes to Financial Statements 32 159 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS The following schedule presents selected per share data and related ratios for one share of the Fund outstanding throughout the periods indicated. --------------------------------------------------------------------------------
YEAR ENDED JUNE 30 -------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 ------------------------------------------------------------------------ Net Asset Value, Beginning of Period......................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net Investment Income............ .025 .023 .041 .065 .078 .078 .066 .056 .068 .092 Less Distribution from Net Investment Income.............. .025 .023 .041 .065 .078 .078 .066 .056 .068 .092 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total Return*.................... 2.50% 2.31% 4.21% 6.72% 8.11% 8.07% 6.60% 5.94% 6.96% 9.60% Net Assets at End of Period (in millions)...................... $27.5 $21.7 $24.9 $35.0 $45.0 $44.1 $51.5 $17.1 $ 6.3 $ 1.5 Ratio of Expenses to Average Net Assets*........................ 1.13% 1.16% 1.14% .99% .90% .98% .78% .58% .88% 1.01% Ratio of Net Investment Income to Average Net Assets*............ 2.44% 2.31% 4.21% 6.57% 7.81% 7.79% 6.56% 5.65% 6.78% 8.39% * If certain expenses had not been assumed by the investment adviser, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets......................... 1.54% 1.31% 1.55% 1.39% 1.31% 1.31% 1.22% 1.48% 1.85% 1.94% Ratio of Net Investment Income to Average Net Assets............. 2.03% 2.16% 3.80% 6.17% 7.40% 7.46% 6.13% 4.74% 5.81% 7.46%
See Notes to Financial Statements 33 160 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS June 30, 1994 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Merritt Money Market Fund (the "Fund") is a separate series of Van Kampen Merritt Money Market Trust (the "Trust"). The Fund is an open-end diversified management investment company registered under the Investment Company Act of 1940, as amended. The distribution of the Fund's second class of shares, Class B shares, commenced on July 11, 1994. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. Security Valuation Investments are valued at amortized cost, which approximates market. Under this valuation method, a portfolio instrument is valued at cost and any discount or premium is amortized on a straight-line basis to the maturity of the instrument. B. Security Transactions Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. Interest income is recorded on an accrual basis. C. Federal Income Taxes It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset such losses against any future realized capital gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward for tax purposes of $39,559. Of this amount, $26,110, $2,038 and $11,411 will expire on June 30, 1998, 1999 and 2000, respectively. Net realized gains or losses differ for financial statement and tax reporting purposes primarily because of the deferral of post October 31 losses which are not recognized for tax purposes until the first day of the following fiscal year. D. Distribution of Income and Gains The Fund declares dividends from net investment income daily and automatically reinvests such dividends daily. Net realized gains, if any, are distributed annually. Shareholders can elect to receive the cash equivalent of their daily dividends at each month end. 34 161 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 1994 2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Merritt Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE NET ASSETS % PER ANNUM --------------------------------------------------- ----------- First $250 million................................. .500 of 1% Next $250 million.................................. .475 of 1% Next $250 million.................................. .425 of 1% Over $750 million.................................. .275 of 1%
Certain legal expenses were paid to Skadden, Arps, Slate, Meagher & Flom, counsel to the Fund, of which a trustee of the Fund is an affiliated person. For the year ended June 30, 1994, the Fund recognized expenses of approximately $20,250 representing Van Kampen Merritt Inc.'s ("Van Kampen Merritt") or the Adviser's cost of providing accounting, legal and certain shareholder services to the Fund. Certain officers and trustees of the Fund are also officers and directors of the Adviser and Van Kampen Merritt. The Fund does not compensate its officers or trustees who are officers of the Adviser or Van Kampen Merritt. At June 30, 1994, Van Kampen Merritt owned 743,833 shares of the Fund. 3. CAPITAL TRANSACTIONS The Fund is authorized to issue an unlimited number of shares of beneficial interest without par value. At June 30, 1994, and 1993, paid in surplus aggregated $27,601,290 and $21,767,573, respectively. Transactions in shares were as follows:
YEAR ENDED YEAR ENDED JUNE 30, 1994 JUNE 30, 1993 ------------- ------------- Beginning Shares............................................... 21,767,573 24,933,335 ------------- ------------- Shares Sold.................................................... 79,908,069 86,871,367 Shares Issued Through Dividend Reinvestment.................... 445,332 500,012 Shares Repurchased............................................. (74,519,684) (90,537,141) ------------- ------------- Net Change in Shares Outstanding............................... 5,833,717 (3,165,762) ------------- ------------- Ending Shares.................................................. 27,601,290 21,767,573 ============= =============
35 162 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 1994 4. DISTRIBUTION AND SERVICE PLANS The Fund and its shareholders have adopted a distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 and a Service Plan (the "Service Plan," collectively the "Plans"). The Plans govern payments for the distribution of the Fund's shares, ongoing shareholder services and maintenance of shareholder accounts. Annual fees under the Plans of up to .25% of the Fund's average net assets are accrued daily. 36 163 VAN KAMPEN MERRITT MONEY MARKET FUND INDEPENDENT AUDITOR'S REPORT The Board of Trustees and Shareholders of Van Kampen Merritt Money Market Fund: We have audited the accompanying statement of assets and liabilities of Van Kampen Merritt Money Market Fund (the "Fund"), including the portfolio of investments, as of June 30, 1994, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of June 30, 1994, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Van Kampen Merritt Money Market Fund as of June 30, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois August 4, 1994 37 164 APPENDIX STANDARD & POORS RATINGS DEBT RATINGS A Standard & Poor's corporate or municipal debt rating is a current assessment of the creditworthiness of an obligor with respect to a specific obligation. This assessment may take into consideration obligors such as guarantors, insurers, or lessees. The debt rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform any audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of, such information, or based on other circumstances. The ratings are based in varying degrees, on the following considerations: 1. Likelihood of default -- capacity and willingness of the obligor as to the timely payment of interest and repayment of principal in accordance with the terms of the obligation; 2. Nature of and provisions of the obligation; 3. Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights. INVESTMENT GRADE 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 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. 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 categories. c The letter "c" indicates that the holder's option to tender the security for purchase may be canceled under certain prestated conditions enumerated in the tender option documents. L The letter "L" indicates that the rating pertains to the principal amount of those bonds to the extent that the underlying deposit collateral is federally insured and interest in adequately collateralized. In the case of certificates of deposit, the letter "L" indicates that the deposit, combined with other deposits being held in the same right and capacity, will be honored for principal and accrued per-default interest up to the federal insurance limits within 30 days
38 165 after closing of the insured institution or, in the event that the deposit is assumed by a successor insured institution, upon maturity. p The letter "p" indicates that the rating is provisional. A provisional rating assumes the successful completion of the project being financed by the debt being rated and indicates that payment of debt service requirements is largely or entirely dependent upon the successful and timely completion of the project. This rating, however, while addressing credit quality subsequent to completion of the project, makes no comment on the likelihood of, or the risk of default upon failure of, such completion. The investor should exercise his own judgment with respect to such likelihood and risk. * Continuance of the rating is contingent upon S&P's receipt of an executed copy of the escrow agreement or closing documentation confirming investments and cash flows.
COMMERCIAL PAPER RATINGS Standard & Poor's commercial paper rating is a current assessment of the likelihood of timely payment of debt considered short-term in the relevant market. Ratings are graded into several categories, ranging from "A-1" for the highest quality obligations to "D" for the lowest. These categories are as follows: A-1 This highest category indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted with a plus (+) sign designation. A-2 Capacity for timely payment on issues with this designation is satisfactory. However, the relative degree of safety is not as high as for issues designated "A-1". A commercial paper rating is not a recommendation to purchase, sell or hold a security inasmuch as it does not comment as to market price or suitability for a particular investor. The ratings are based on current information furnished to S&P by the issuer or obtained by S&P from other sources it considers reliable. S&P does not perform an audit in connection with any rating and may, on occasion, rely on unaudited financial information. The ratings may be changed, suspended, or withdrawn as a result of changes in, or unavailability of , such information, or based on other circumstances.
39 166 MOODY'S RATINGS DEBT RATINGS 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 risk appear somewhat larger than the 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 some time in the future. Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating classification of Aa and A. The modifier 1 indicates that the company ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking and the modifier 3 indicates that the company ranks in the lower end of its generic rating category.
COMMERCIAL PAPER RATINGS Moody's Commercial Paper ratings are opinions of the ability of issues to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody's employs the following designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Issuers rated Prime-1 (or related supporting institutions) have a superior capacity for repayment of short-term promissory obligations. Prime-1 repayment capacity will normally be evidenced by the following characteristics: - Leading market positions in well established industries. - High rates of return on funds employed. - Conservative capitalization structures with moderate reliance on debt and ample asset protection. - Broad margins in earnings coverage of fixed financial charges and high internal cash generation. - Well established access to a range of financial markets and assured sources of alternative liquidity. Issuers rated Prime-2 (or related supporting institutions) have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternative liquidity is maintained. 40 167 APPENDIX C AMERICAN CAPITAL RESERVE FUND PORTFOLIO OF INVESTMENTS May 31, 1995 --------------------------------------------------------------------------------
PAR AMOUNT MARKET (000) DESCRIPTION COUPON MATURITY VALUE --------------------------------------------------------------------------------------------------- COMMERCIAL PAPER 60.7% $16,000 Associates Corp. of North America................... 6.230% 07/12/95 $ 15,886,133 15,000 Chevron Oil Finance Co. ............................ 5.930% 06/26/95 14,936,083 10,000 Du Pont (E.I.) de Nemours........................... 6.060% 06/27/95 9,955,150 18,000 General Electric Capital Corp. ..................... 6.190% 07/24/95 17,837,190 19,000 General Electric Co. ............................... 6.230% 09/05/95 18,689,250 6,300 Lilly (Eli) & Co. .................................. 6.000% 06/30/95 6,268,815 10,000 MetLife Funding, Inc. .............................. 5.960% 06/22/95 9,963,761 10,000 MetLife Funding, Inc. .............................. 6.000% 07/11/95 9,932,350 18,000 Pitney Bowes Credit Corp. .......................... 6.100% 06/12/95 17,963,880 9,000 Pitney Bowes, Inc. ................................. 5.960% 06/14/95 8,979,210 8,000 Prudential Funding Corp. ........................... 6.230% 07/24/95 7,927,160 9,000 Prudential Funding Corp. ........................... 6.230% 07/27/95 8,913,503 18,000 Raytheon Co. ....................................... 5.970% 06/09/95 17,973,180 5,000 State Bank of New South Wales....................... 6.250% 08/29/95 4,923,750 10,000 State Bank of New South Wales....................... 6.260% 09/06/95 9,833,944 17,000 Toronto Dominion Holdings........................... 5.990% 07/10/95 16,887,989 ------------ TOTAL COMMERCIAL PAPER (Cost $196,871,348).......... 196,871,348 ------------ REPURCHASE AGREEMENTS* 37.2% 65,000 SBC Capital Markets, Inc., dated 5/31/95, repurchase proceeds $65,011,104................................ 6.150% 06/01/95 65,000,000 55,905 State Street Bank & Trust Co., dated 5/31/95, repurchase proceeds $55,914,512..................... 6.125% 06/01/95 55,905,000 ------------ TOTAL REPURCHASE AGREEMENTS (Cost $120,905,000)..... 120,905,000 ------------ UNITED STATES GOVERNMENT OBLIGATIONS 24.6% 30,000 Federal Home Loan Banks............................. 6.100% 06/01/95 29,994,917 25,000 Federal National Mortgage Association............... 5.900% 06/02/95 24,991,819 25,000 Federal National Mortgage Association............... 5.940% 08/09/95 24,715,625 ------------ TOTAL UNITED STATES GOVERNMENT OBLIGATIONS (Cost $79,702,361).................................. 79,702,361 ------------ TOTAL INVESTMENTS (Cost $397,478,709) 122.5%....... 397,478,709 Other assets and liabilities, net (22.5%).......... (73,020,170) ------------ NET ASSETS 100%.................................... $324,458,539 ============
* Collateralized by U.S. Government obligations in a pooled cash account See Notes to Financial Statements. C-1 168 AMERICAN CAPITAL RESERVE FUND STATEMENT OF ASSETS AND LIABILITIES May 31, 1995 ASSETS Investments, at amortized cost................................................. $397,478,709 Cash........................................................................... 127,602 Receivable for Fund shares sold................................................ 786,579 Other assets................................................................... 43,829 ------------ Total Assets................................................................... 398,436,719 ------------ LIABILITIES Payable for Fund shares redeemed............................................... 73,417,480 Due to shareholder service agent............................................... 162,280 Due to Adviser................................................................. 138,975 Due to Distributor............................................................. 87,995 Dividends payable.............................................................. 62,989 Deferred Directors' compensation............................................... 60,138 Accrued expenses............................................................... 48,323 ------------ Total Liabilities.............................................................. 73,978,180 ------------ NET ASSETS, equivalent to $1.00 per share for Class A, B and C shares.......... $324,458,539 ============ NET ASSETS WERE COMPRISED OF: Capital stock at par; 319,694,843 Class A, 4,189,806 Class B and 588,487 Class C shares outstanding............................................. $ 3,244,731 Capital surplus................................................................ 321,161,934 Undistributed net investment income............................................ 51,874 ------------ NET ASSETS at May 31, 1995..................................................... $324,458,539 ============
See Notes to Financial Statements. C-2 169 AMERICAN CAPITAL RESERVE FUND STATEMENT OF OPERATIONS Year Ended May 31, 1995 INVESTMENT INCOME Interest........................................................................ $22,971,502 ----------- EXPENSES Management fees................................................................. 1,896,937 Shareholder service agent's fees and expenses................................... 1,495,213 Accounting services............................................................. 100,666 Service fees --Class A.......................................................... 611,646 Distribution and service fees -- Class B........................................ 3,845 Distribution and service fees -- Class C........................................ 526 Directors' fees and expenses.................................................... 22,739 Audit fees...................................................................... 21,525 Legal fees...................................................................... 20,066 Reports to shareholders......................................................... 58,845 Registration and filing fees.................................................... 111,820 Miscellaneous................................................................... 13,559 ----------- Total expenses.................................................................. 4,357,387 ----------- Net investment income........................................................... 18,614,115 ----------- Increase in Net Assets Resulting from Operations................................ $18,614,115 ===========
See Notes to Financial Statements. C-3 170 AMERICAN CAPITAL RESERVE FUND STATEMENT OF CHANGES IN NET ASSETS
------------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, --------------------------------- 1995 1994 ------------------------------------------------------------------------------------------------ NET ASSETS, beginning of period.............................. $ 463,827,313 $ 279,344,078 --------------- --------------- OPERATIONS Increase from net investment income........................ 18,614,115 7,722,464 --------------- --------------- DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME Class A.................................................... (18,623,009) (7,713,417) Class B.................................................... (15,317) -- Class C.................................................... (2,167) -- --------------- --------------- (18,640,493) (7,713,417) --------------- --------------- CAPITAL TRANSACTIONS Proceeds from shares sold Class A.................................................... 3,148,142,161 2,733,962,738 Class B.................................................... 21,754,203 -- Class C.................................................... 3,049,049 -- --------------- --------------- 3,172,945,413 2,733,962,738 --------------- --------------- Proceeds from shares issued for distributions reinvested Class A.................................................... 18,623,009 7,713,418 Class B.................................................... 15,317 -- Class C.................................................... 2,167 -- --------------- --------------- 18,640,493 7,713,418 --------------- --------------- Cost of shares redeemed Class A.................................................... (3,310,885,859) (2,557,201,968) Class B.................................................... (17,579,714) -- Class C.................................................... (2,462,729) -- --------------- --------------- (3,330,928,302) (2,557,201,968) --------------- --------------- Increase (decrease) in net assets resulting from capital transactions............................................ (139,342,396) 184,474,188 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS............................ (139,368,774) 184,483,235 --------------- --------------- NET ASSETS, end of period.................................... $ 324,458,539 $ 463,827,313 =============== ===============
See Notes to Financial Statements. C-4 171 AMERICAN CAPITAL RESERVE FUND FINANCIAL HIGHLIGHTS Selected data for a share of capital stock outstanding throughout each of the periods indicated.
-------------------------------------------------------------------------------------------------- CLASS A YEAR ENDED MAY 31, ----------------------------------------------- 1995 1994 1993 1992 1991 -------------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ------- ------- ------- ------- ------- INCOME FROM OPERATIONS Investment income................................ .0535 .0329 .0353 .052 .0758 Expenses......................................... (.0101) (.0100) (.0109) (.0105) (.0094) ------- ------- ------- ------- ------- Net investment income............................ .0434 .0229 .0244 .0415 .0664 ------- ------- ------- ------- ------- DISTRIBUTIONS FROM NET INVESTMENT INCOME......... (.0434) (.0229) (.0244) (.0415) (.0664) ------- ------- ------- ------- ------- Net asset value, end of period................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 ======= ======= ======= ======= ======= TOTAL RETURN..................................... 4.43% 2.32% 2.44% 4.20% 6.80% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (millions)............. $ 319.7 $ 463.8 $ 279.3 $ 329.2 $ 402.3 Average net assets (millions).................... $ 434.4 $ 326.8 $ 306.7 $ 377.5 $ 482.6 Ratios to average net assets Expenses....................................... 1.00% 1.03% 1.09% 1.05% .94% Net investment income.......................... 4.28% 2.36% 2.44% 4.19% 6.68%
See Notes to Financial Statements. C-5 172 AMERICAN CAPITAL RESERVE FUND FINANCIAL HIGHLIGHTS (CONTINUED) Selected data for a share of capital stock outstanding throughout each of the periods indicated.
------------------------------------------------------------------------------------------------------ CLASS B CLASS C ----------------- ----------------- APRIL 18, 1995(1) APRIL 18, 1995(1) THROUGH THROUGH MAY 31, 1995 MAY 31, 1995 ------------------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE Net asset value, beginning of period........................... $ 1.00 $ 1.00 ------- ------- INCOME FROM INVESTMENT OPERATIONS Investment income.............................................. .0073 .0076 Expenses....................................................... (.0026) (.0027) ------- ------- Net investment income.......................................... .0047 .0049 ------- ------- DISTRIBUTIONS FROM NET INVESTMENT INCOME....................... (.0047) (.0049) ------- ------- Net asset value, end of period................................. $ 1.00 $ 1.00 ======= ======= TOTAL RETURN(2)................................................ .47% .49% RATIOS/SUPPLEMENTAL DATA Net assets, end of period (millions)........................... $ 4.2 $ 0.6 Average net assets (millions).................................. $ 2.3 $ 0.3 Ratios to average net assets (annualized)(3) Expenses..................................................... 1.76% 1.76% Net investment income........................................ 3.52% 3.52%
--------------- (1) Commencement of operations. (2) Total return has not been annualized and does not consider the effect of sales charges. (3) Ratios based on the class of shares being in effect for the entire fiscal year. See Notes to Financial Statements. C-6 173 AMERICAN CAPITAL RESERVE FUND NOTES TO FINANCIAL STATEMENTS NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES American Capital Reserve Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified open-end management investment company. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. Investment Valuations Investments are valued at amortized cost, which approximates market value. The cost of investments for federal income tax purposes is substantially the same as for financial reporting purposes. B. Repurchase Agreements A repurchase agreement is a short-term investment in which the Fund acquires ownership of a debt security and the seller agrees to repurchase the security at a future time and specified price. The Fund may invest independently in repurchase agreements, or transfer uninvested cash balances into a pooled cash account along with other investment companies advised by Van Kampen American Capital Asset Management, Inc. (the "Adviser"), the daily aggregate of which is invested in repurchase agreements. Repurchase agreements are collateralized by the underlying debt security. The Fund will make payment for such securities only upon physical delivery or evidence of book entry transfer to the account of the custodian bank. The seller is required to maintain the value of the underlying security at not less than the repurchase proceeds due the Fund. C. Federal Income Taxes No provision for federal income taxes is required because the Fund has elected to be taxed as a "regulated investment company" under the Internal Revenue Code and intends to maintain this qualification by annually distributing all of its taxable net investment income and taxable net realized gains to its shareholders. Additionally, approximately $18,000 of financial statement losses are deferred for federal income tax purposes to the 1996 fiscal year. D. Investment Transactions and Related Investment Income Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the basis of amortized cost. Interest income is accrued daily. E. Dividends The Fund records daily dividends from net investment income. These dividends are automatically reinvested in additional shares of the Fund at net asset value. Shares purchased by daily reinvestments are liquidated at net asset value on the last business day of the month and the proceeds of such redemptions paid to the shareholders electing to receive dividends in cash. 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 distributions may result in dividends in excess of financial statement net investment income. C-7 174 AMERICAN CAPITAL RESERVE FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) F. Debt Discount and Premium For financial and tax reporting purposes, all discounts and premiums are amortized over the life of the security. NOTE 2 -- MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Adviser serves as investment manager of the Fund. Management fees are calculated monthly, based on the average daily net assets of the Fund at an annual rate of .50% of the first $150 million; .45% of the next $100 million; .40% of the next $100 million; and .35% of the amount in excess of $350 million. Accounting services include the salaries and overhead expenses of the Fund's Treasurer and the personnel operating under his direction. Charges are allocated among investment companies advised by the Adviser. During the period, these charges included $12,498 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. ACCESS Investors Services, Inc., an affiliate of the Adviser, serves as the Fund's shareholder service agent. These services are provided at cost plus a profit. During the period, such fees aggregated $1,266,690. Under the Distribution Plans, each class of shares pays up to .15% per annum of its average daily net assets to reimburse the Distributor for expenses and service fees incurred. Class B and Class C shares pay an additional fee of up to .75% per annum of their average daily net assets to reimburse Van Kampen American Capital Distributors, Inc. (the "Distributor") for its distribution expenses. Actual distribution expenses incurred by the Distributor for Class B and Class C shares may exceed the amounts reimbursed to the Distributor by the Fund. At the end of the period, the unreimbursed expenses incurred by the Distributor under the Class B and Class C plans aggregated approximately $9,000 and $3,000, 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 and the shareholder service agent. NOTE 3 -- DIRECTOR COMPENSATION Fund directors who are not affiliated with the Adviser are compensated by the Fund at the annual rate of $1,440 plus a fee of $35 per day for Board and Committee meetings attended. The Chairman receives additional fees from the Fund at the annual rate of $540. During the period, such fees aggregated $19,263. C-8 175 AMERICAN CAPITAL RESERVE FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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 by the Plan elects to be credited with an earnings component on amounts deferred equal to the income earned by the Fund on its short-term investments or equal to the total return of the Fund. NOTE 4 -- CAPITAL The Fund offers three classes of shares at their respective net asset values per share. Class B and Class C shares are subject to a sales charge imposed at the time of redemption on a contingent deferred basis. All classes of shares have the same rights, except that Class B and Class C shares bear the cost of distribution fees and certain other class specific expenses. Realized and unrealized gains or losses, investment income and expenses (other than class specific expenses) are allocated daily to each class of shares based upon the relative proportion of net assets of each class. Class B and Class C shares automatically convert to Class A shares six years and ten years after purchase, respectively, subject to certain conditions. The offering of Class B and Class C shares commenced April 18, 1995, at which time all previously outstanding shares became Class A shares. The Fund has 1 billion of Class A shares, and 500 million each of Class B and Class C shares of $.01 par value capital stock authorized. Transactions in shares of capital stock were as follows:
------------------------------------------------------------------------------------------------ YEAR ENDED MAY 31, ------------------------------- 1995 1994 ------------------------------------------------------------------------------------------------ Shares sold Class A...................................................... 3,148,142,161 2,733,962,738 Class B...................................................... 21,754,203 -- Class C...................................................... 3,049,049 -- ------------- ------------- 3,172,945,413 2,733,962,738 ============= ============= Shares issued for distributions reinvested Class A...................................................... 18,623,009 7,713,418 Class B...................................................... 15,317 -- Class C...................................................... 2,167 -- ------------- ------------- 18,640,493 7,713,418 ============= ============= Shares redeemed Class A...................................................... (3,310,885,862) (2,557,202,100) Class B...................................................... (17,579,714) -- Class C...................................................... (2,462,729) -- ------------- ------------- (3,330,928,305) (2,557,202,100) ------------- ------------- Increase (decrease) in shares outstanding.................... (139,342,399) 184,474,056 ============= =============
C-9 176 AMERICAN CAPITAL RESERVE FUND REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of American Capital Reserve 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 Reserve Fund, Inc. at May 31, 1995, and the results of its operations, the changes in its net assets and the financial highlights for each of the fiscal periods presented, in conformity with generally accepted accounting principles. These financial statements and financial highlights (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 audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 audits, which included confirmation of securities at May 31, 1995 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Houston, Texas June 30, 1995 C-10 177 APPENDIX D VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS June 30, 1994 --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) DESCRIPTION DATE PURCHASE COST --------------------------------------------------------------------------------------------------- AGENCY 9.7% $ 877 Small Business Administration........................ 07/01/94 5.250% $ 876,598 800 Student Loan Marketing Association................... 07/06/94 4.325 800,000 1,000 Federal Home Loan Bank............................... 08/22/94 4.270 993,832 ----------- TOTAL AGENCY.............................................................. 2,670,430 ----------- COMMERCIAL PAPER 25.4% 1,000 American General Finance Corp........................ 07/15/94 4.245 1,000,000 1,000 Ford Motor Credit Co................................. 07/15/94 4.245 1,000,000 1,000 John Deere Capital Corp.............................. 07/15/94 4.245 1,000,000 1,000 Associates Corp...................................... 07/20/94 4.290 1,000,000 1,000 State Street Bank & Trust............................ 07/20/94 4.311 1,000,000 1,000 American Express Credit Corp......................... 08/01/94 4.367 1,000,000 1,000 General Electric Capital Corp........................ 08/01/94 4.387 1,000,000 ----------- TOTAL COMMERCIAL PAPER.................................................... 7,000,000 ----------- MEDIUM TERM NOTES 14.8% 500 CIT Group Hldgs Inc.................................. 07/01/94 4.600 500,027 1,000 Purdue University Indiana Rev........................ 07/01/94 4.000 1,000,000 1,000 Kent County, MI Gen Oblig Limited Tax Notes.......... 11/01/94 4.547 1,009,598 750 San Diego, CA Taxable Anticipation Notes............. 12/14/94 4.000 750,493 800 Cuyahoga County, OH Taxable Anticipation Notes....... 12/30/94 4.170 800,845 ----------- TOTAL MEDIUM TERM NOTES................................................... 4,060,963 ----------- VARIABLE RATE DEMAND OBLIGATIONS 15.6% 500 AT & T Capital Corp.................................. 07/01/94 4.750 500,000 700 Catholic Healthcare West (Gtd: Toronto Dominion Bank)................................................ 07/06/94 4.600 700,000 500 Florida Housing Finance Agency (L.O.C. Credit Suisse).............................................. 07/06/94 4.460 500,000 700 Health Insurance Plan Greater New York (L.O.C. Morgan Gty)................................................. 07/06/94 4.500 700,000 500 Illinois Student Assistance Commission (L.O.C. Sumitomo Bank)....................................... 07/06/94 4.820 500,000 700 Mississippi Business Finance Corp.................... 07/06/94 4.400 700,000 700 Virginia St Housing Development Authority............ 07/06/94 4.500 700,000 ----------- TOTAL VARIABLE RATE DEMAND OBLIGATIONS.................................... 4,300,000 -----------
D-1 178 VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS -- (CONTINUED) June 30, 1994 --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) DESCRIPTION DATE PURCHASE COST --------------------------------------------------------------------------------------------------- REPURCHASE AGREEMENT 16.1% 4,440 UBS Securities, U.S. T-Note, $4,190,000 par, 9.500% coupon, due 11/15/95, dated 06/30/94, to be sold on 07/01/94 at $4,440,518............................... 07/01/94 4.200 4,440,000 ----------- TOTAL INVESTMENTS (A) 81.6%............................................... 22,471,393 OTHER ASSETS IN EXCESS OF LIABILITIES 18.4%............................... 5,075,322 ----------- NET ASSETS 100.0%......................................................... $27,546,715 ===========
(a) At June 30, 1994, cost is identical for both book and federal income tax purposes. See Notes to Financial Statements D-2 179 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES June 30, 1994 ASSETS: Investments, at Amortized Cost which Approximates Market (Note 1).............. $22,471,393 Cash........................................................................... 36,251 RECEIVABLES: Fund Shares Sold............................................................... 5,002,968 Interest....................................................................... 119,753 Other.......................................................................... 5,070 ----------- Total Assets................................................................... 27,635,435 ----------- LIABILITIES: PAYABLES: Fund Shares Repurchased........................................................ 33,514 Income Distributions........................................................... 4,018 Investment Advisory Fee (Note 2)............................................... 3,400 Accrued Expenses............................................................... 47,788 ----------- Total Liabilities.............................................................. 88,720 ----------- NET ASSETS..................................................................... $27,546,715 =========== NET ASSETS CONSIST OF: Paid in Surplus................................................................ $27,601,290 Accumulated Net Realized Loss on Investments................................... (54,575) ----------- NET ASSETS (equivalent to $1.00 per share on 27,601,290 shares outstanding).... $27,546,715 ===========
See Notes to Financial Statements D-3 180 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF OPERATIONS For the Year Ended June 30, 1994 INVESTMENT INCOME: Interest........................................................................ $ 727,456 Amortization of Discount (Premium) -- Net....................................... 3,996 ----------- Total Income.................................................................... 731,452 ----------- EXPENSES: Investment Advisory Fee (Note 2)................................................ 97,029 Shareholder Services............................................................ 58,932 Distribution (12b-1) and Service Fees (Note 4).................................. 49,893 Printing........................................................................ 31,130 Audit........................................................................... 28,430 Trustees Fees and Expenses (Note 2)............................................. 18,855 Custody......................................................................... 17,760 Legal (Note 2).................................................................. 10,950 Other........................................................................... 3,170 ----------- Total Expenses.................................................................. 316,149 Less Fees Waived................................................................ 83,761 ----------- Net Expenses.................................................................... 232,388 ----------- Net Investment Income........................................................... $ 499,064 =========== REALIZED GAIN/LOSS ON INVESTMENTS: Proceeds from Sales............................................................. $ 8,035,919 Cost of Securities Sold......................................................... (8,062,346) ----------- NET REALIZED LOSS ON INVESTMENTS (including $85,500 reimbursement by the Adviser for realized losses incurred on variable rate instruments).................... $ (26,427) =========== Net Increase in Net Assets from Operations...................................... $ 472,637 ===========
See Notes to Financial Statements D-4 181 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF CHANGES IN NET ASSETS For the Years Ended June 30, 1994 and 1993
-------------------------------------------------------------------------------------------------- YEAR ENDED YEAR ENDED JUNE 30, 1994 JUNE 30, 1993 -------------------------------------------------------------------------------------------------- FROM INVESTMENT ACTIVITIES: OPERATIONS: Net Investment Income.......................................... $ 499,064 $ 541,128 Net Realized Gain/Loss on Investments.......................... (26,427) 695 ------------- ------------- Change in Net Assets from Operations........................... 472,637 541,823 Distributions from Net Investment Income....................... (499,064) (541,128) ------------- ------------- NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.............. (26,427) 695 ------------- ------------- FROM CAPITAL TRANSACTIONS (NOTE 3): Proceeds from Shares Sold...................................... 79,908,069 86,871,367 Net Asset Value of Shares Issued Through Dividend Reinvestment................................................ 445,332 500,012 Cost of Shares Repurchased..................................... (74,519,684) (90,537,141) ------------- ------------- NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............... 5,833,717 (3,165,762) ------------- ------------- TOTAL INCREASE/DECREASE IN NET ASSETS............................ 5,807,290 (3,165,067) NET ASSETS: Beginning of the Period........................................ 21,739,425 24,904,492 ------------- ------------- End of the Period.............................................. $ 27,546,715 $ 21,739,425 ============= =============
See Notes to Financial Statements D-5 182 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS The following schedule presents selected per share data and related ratios for one share of the Fund outstanding throughout the periods indicated. --------------------------------------------------------------------------------
YEAR ENDED JUNE 30 -------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 ------------------------------------------------------------------------ Net Asset Value, Beginning of Period... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net Investment Income.................. .025 .023 .041 .065 .078 .078 .066 .056 .068 .092 Less Distribution from Net Investment Income............................... .025 .023 .041 .065 .078 .078 .066 .056 .068 .092 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net Asset Value, End of Period......... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total Return*.......................... 2.50% 2.31% 4.21% 6.72% 8.11% 8.07% 6.60% 5.94% 6.96% 9.60% Net Assets at End of Period (in millions)............................ $27.5 $21.7 $24.9 $35.0 $45.0 $44.1 $51.5 $17.1 $ 6.3 $ 1.5 Ratio of Expenses to Average Net Assets*.............................. 1.13% 1.16% 1.14% .99% .90% .98% .78% .58% .88% 1.01% Ratio of Net Investment Income to Average Net Assets*.................. 2.44% 2.31% 4.21% 6.57% 7.81% 7.79% 6.56% 5.65% 6.78% 8.39% * If certain expenses had not been assumed by the investment adviser, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets............................... 1.54% 1.31% 1.55% 1.39% 1.31% 1.31% 1.22% 1.48% 1.85% 1.94% Ratio of Net Investment Income to Average Net Assets................... 2.03% 2.16% 3.80% 6.17% 7.40% 7.46% 6.13% 4.74% 5.81% 7.46%
See Notes to Financial Statements D-6 183 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS June 30, 1994 1. SIGNIFICANT ACCOUNTING POLICIES Van Kampen Merritt Money Market Fund (the "Fund") is a separate series of Van Kampen Merritt Money Market Trust (the "Trust"). The Fund is an open-end diversified management investment company registered under the Investment Company Act of 1940, as amended. The distribution of the Fund's second class of shares, Class B shares, commenced on July 11, 1994. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. Security Valuation Investments are valued at amortized cost, which approximates market. Under this valuation method, a portfolio instrument is valued at cost and any discount or premium is amortized on a straight-line basis to the maturity of the instrument. B. Security Transactions Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. Interest income is recorded on an accrual basis. C. Federal Income Taxes It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset such losses against any future realized capital gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward for tax purposes of $39,559. Of this amount, $26,110, $2,038 and $11,411 will expire on June 30, 1998, 1999 and 2000, respectively. Net realized gains or losses differ for financial statement and tax reporting purposes primarily because of the deferral of post October 31 losses which are not recognized for tax purposes until the first day of the following fiscal year. D. Distribution of Income and Gains The Fund declares dividends from net investment income daily and automatically reinvests such dividends daily. Net realized gains, if any, are distributed annually. Shareholders can elect to receive the cash equivalent of their daily dividends at each month end. D-7 184 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 1994 2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen Merritt Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE NET ASSETS % PER ANNUM -------------------------------------------------------- ----------- First $250 million...................................... .500 of 1% Next $250 million....................................... .475 of 1% Next $250 million....................................... .425 of 1% Over $750 million....................................... .275 of 1%
Certain legal expenses were paid to Skadden, Arps, Slate, Meagher & Flom, counsel to the Fund, of which a trustee of the Fund is an affiliated person. For the year ended June 30, 1994, the Fund recognized expenses of approximately $20,250 representing Van Kampen Merritt Inc.'s ("Van Kampen Merritt") or the Adviser's cost of providing accounting, legal and certain shareholder services to the Fund. Certain officers and trustees of the Fund are also officers and directors of the Adviser and Van Kampen Merritt. The Fund does not compensate its officers or trustees who are officers of the Adviser or Van Kampen Merritt. At June 30, 1994, Van Kampen Merritt owned 743,833 shares of the Fund. 3. CAPITAL TRANSACTIONS The Fund is authorized to issue an unlimited number of shares of beneficial interest without par value. At June 30, 1994, and 1993, paid in surplus aggregated $27,601,290 and $21,767,573, respectively. Transactions in shares were as follows:
YEAR ENDED YEAR ENDED JUNE 30, 1994 JUNE 30, 1993 ------------- ------------- Beginning Shares.................................................... 21,767,573 24,933,335 ------------- ------------- Shares Sold......................................................... 79,908,069 86,871,367 Shares Issued Through Dividend Reinvestment......................... 445,332 500,012 Shares Repurchased.................................................. (74,519,684) (90,537,141) ------------- ------------- Net Change in Shares Outstanding.................................... 5,833,717 (3,165,762) ------------- ------------- Ending Shares....................................................... 27,601,290 21,767,573 ============= =============
D-8 185 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 1994 4. DISTRIBUTION AND SERVICE PLANS The Fund and its shareholders have adopted a distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 and a Service Plan (the "Service Plan," collectively the "Plans"). The Plans govern payments for the distribution of the Fund's shares, ongoing shareholder services and maintenance of shareholder accounts. Annual fees under the Plans of up to .25% of the Fund's average net assets are accrued daily. D-9 186 VAN KAMPEN MERRITT MONEY MARKET FUND INDEPENDENT AUDITOR'S REPORT The Board of Trustees and Shareholders of Van Kampen Merritt Money Market Fund: We have audited the accompanying statement of assets and liabilities of Van Kampen Merritt Money Market Fund (the "Fund"), including the portfolio of investments, as of June 30, 1994, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of June 30, 1994, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Van Kampen Merritt Money Market Fund as of June 30, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Chicago, Illinois August 4, 1994 D-10 187 APPENDIX E VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS December 31, 1994 (Unaudited) --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) SECURITY DESCRIPTION DATE PURCHASE COST ---------------------------------------------------------------------------------------------------- AGENCY 9.1% $ 869 Small Business Administration........................ 1/03/95 5.750% $ 868,761 1,000 Federal Farm Credit Bank............................. 1/05/95 5.300 999,411 1,000 Federal Home Loan Mortgage Corp.(b).................. 1/05/95 5.900 999,344 1,000 Federal Home Loan Bank............................... 1/10/95 5.780 998,555 ----------- TOTAL AGENCY............................................................... 3,866,071 ----------- BANKERS ACCEPTANCES 13.0% 1,000 Bank of New York..................................... 1/06/95 5.480 999,239 1,000 Nationsbank Corp. ................................... 1/06/95 5.880 999,183 1,000 Sanwa Bank........................................... 1/19/95 5.870 997,065 1,500 National Bank of Detroit............................. 1/23/95 5.870 1,500,000 1,000 Northern Trust Co. .................................. 2/17/95 5.980 992,193 ----------- TOTAL BANKERS ACCEPTANCES.................................................. 5,487,680 ----------- CERTIFICATES OF DEPOSIT 4.7% 1,000 Dresdner Bank........................................ 1/26/95 5.530 999,947 1,000 Societe Generale Bank Yankee......................... 2/03/95 6.150 1,000,000 ----------- TOTAL CERTIFICATES OF DEPOSIT.............................................. 1,999,947 ----------- COMMERCIAL PAPER 52.0% 1,000 AT & T Capital Corp. ................................ 1/03/95 5.850 999,645 1,500 J. P. Morgan & Co. Inc. ............................. 1/03/95 6.000 1,499,500 1,500 Exxon Asset Management............................... 1/04/95 5.600 1,499,300 1,500 Southern California Edison Co. ...................... 1/05/95 5.930 1,499,012 1,000 Credit Suisse First Boston Inc. ..................... 1/09/95 5.030 998,883 1,500 Rabobank USA Financial Corp. ........................ 1/09/95 5.910 1,498,030 1,500 IBM Credit Corp. .................................... 1/10/95 6.000 1,497,750 1,000 State Street Boston Corp. ........................... 1/12/95 5.138 1,000,000 1,500 Ford Motor Credit Co. ............................... 1/17/95 5.950 1,496,033 1,000 Merrill Lynch & Co. Inc. ............................ 1/19/95 5.100 1,000,000 1,000 Commercial Credit Corp. ............................. 1/23/95 5.450 1,000,000 1,000 American General Finance Corp. ...................... 1/25/95 5.750 1,000,000 1,500 Associates Corp. .................................... 1/27/95 6.120 1,493,370 1,000 CIT Group Holdings Inc. ............................. 1/27/95 5.750 1,000,000 1,500 American Express Credit Corp. ....................... 1/30/95 5.850 1,492,931 1,500 Norwest Financial Inc. .............................. 2/07/95 6.050 1,490,673 1,500 John Deere Capital Corp. ............................ 2/09/95 6.000 1,490,250 ----------- TOTAL COMMERCIAL PAPER..................................................... 21,955,377 -----------
See Notes to Financial Statements. E-1 188 VAN KAMPEN MERRITT MONEY MARKET FUND PORTFOLIO OF INVESTMENTS -- (CONTINUED) December 31, 1994 (Unaudited) --------------------------------------------------------------------------------
DISCOUNT PAR YIELD ON AMOUNT MATURITY DATE OF AMORTIZED (000) SECURITY DESCRIPTION DATE PURCHASE COST ---------------------------------------------------------------------------------------------------- VARIABLE RATE DEMAND OBLIGATIONS 13.0% $1,500 Virginia St Housing Development Authority............ 1/03/95 6.000% $ 1,500,000 1,400 Catholic Healthcare West (Gtd: Toronto Dominion Bank)................................................ 1/04/95 7.000 1,400,000 500 Florida Housing Finance Agency (L.O.C. Credit Suisse).............................................. 1/04/95 6.100 500,000 900 Health Insurance Plan Greater New York (L.O.C. Morgan Gty)................................................. 1/04/95 6.450 900,000 500 Illinois Student Assistance Commission (L.O.C. Sumitomo Bank)....................................... 1/04/95 6.170 500,000 700 Mississippi Business Finance Corp. .................. 1/04/95 6.400 700,000 ----------- TOTAL VARIABLE RATE DEMAND OBLIGATIONS..................................... 5,500,000 ----------- REPURCHASE AGREEMENT 7.2% UBS Securities, U.S. T-Note, $3,165,000 par, 3.875% coupon, due 10/31/95, dated 12/30/94, to be sold on 01/03/95 at $3,041,942....................... 3,040,000 ----------- TOTAL INVESTMENTS (a) 99.0%................................................ 41,849,075 Other Assets in Excess of Liabilities 1.0%................................. 408,518 ----------- NET ASSETS 100.0%.......................................................... $42,257,593 ===========
(a) At December 31, 1994, cost is identical for both book and federal income tax purposes. (b) This is a Mortgage Backed Security (MBS) which is a pass-through instrument created by pooling mortgages and selling participations in the principal and interest payments received from borrowers. This security is guaranteed by Federal Home Loan Mortgage Corporation (FHLMC), a federally sponsored agency. See Notes to Financial Statements. E-2 189 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF ASSETS AND LIABILITIES December 31, 1994 (Unaudited) ASSETS Investments, at Amortized Cost which Approximates Market (Note 1).............. $41,849,075 Cash........................................................................... 180,760 RECEIVABLES: Fund Shares Sold............................................................... 544,455 Interest....................................................................... 116,772 Other.......................................................................... 4,883 ----------- Total Assets................................................................... 42,695,945 ----------- LIABILITIES: PAYABLES: Fund Shares Repurchased........................................................ 346,906 Income Distributions........................................................... 24,412 Investment Advisory Fee (Note 2)............................................... 1,791 Accrued Expenses............................................................... 65,243 ----------- Total Liabilities.............................................................. 438,352 ----------- NET ASSETS..................................................................... $42,257,593 =========== NET ASSETS CONSIST OF: PAID IN SURPLUS: Class A Shares................................................................. $32,412,705 Class B Shares................................................................. 9,918,443 Accumulated Net Realized Loss on Investments................................... (73,555) ----------- NET ASSETS..................................................................... $42,257,593 =========== MAXIMUM OFFERING PRICE PER SHARE: CLASS A SHARES: Net Asset Value Per Share (Based on Net Assets of $32,339,762 and 32,412,705 Shares of Beneficial Interest Issued and Outstanding)........................ $1.00 CLASS B SHARES: ===== Net Asset Value Per Share (Based on Net Assets of $9,917,831 and 9,918,443 Shares of Beneficial Interest Issued and Outstanding)........................ $1.00 =====
See Notes to Financial Statements. E-3 190 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF OPERATIONS For the Six Months Ended December 31, 1994 (Unaudited) INVESTMENT INCOME: Interest........................................................................ $ 842,639 Amortization of Premium......................................................... (10,988) ----------- Total Income.................................................................... 831,651 ----------- EXPENSES: Investment Advisory Fee (Note 2)................................................ 83,571 Shareholder Services............................................................ 60,277 Distribution (12b-1) and Service Fees (allocated to Classes A and B of $35,230 and $21,742, respectively) (Note 4)........................................... 56,972 Printing........................................................................ 18,400 Audit........................................................................... 15,088 Custody......................................................................... 14,107 Trustees Fees and Expenses (Note 2)............................................. 11,040 Legal (Note 2).................................................................. 6,440 Other........................................................................... 1,844 ----------- Total Expenses.................................................................. 267,739 Less Fees Deferred.............................................................. 79,108 ----------- Net Expenses.................................................................... 188,631 ----------- Net Investment Income........................................................... $ 643,020 =========== REALIZED GAIN/LOSS ON INVESTMENTS: Proceeds from Sales............................................................. $ 1,531,038 Cost of Securities Sold......................................................... (1,550,018) ----------- Net Realized Loss on Investments................................................ $ (18,980) =========== Net Increase in Net Assets from Operations...................................... $ 624,040 ===========
See Notes to Financial Statements. E-4 191 VAN KAMPEN MERRITT MONEY MARKET FUND STATEMENT OF CHANGES IN NET ASSETS For the Six Months Ended December 31, 1994 and the Year Ended June 30, 1994 (Unaudited)
---------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1994 JUNE 30, 1994 ---------------------------------------------------------------------------------------------------- FROM INVESTMENT ACTIVITIES: OPERATIONS: Net Investment Income........................................ $ 643,020 $ 499,064 Net Realized Loss on Investments............................. (18,980) (26,427) ------------- ------------- Change in Net Assets from Operations......................... 624,040 472,637 ------------- ------------- DISTRIBUTIONS FROM NET INVESTMENT INCOME: Class A Shares............................................... (568,757) (499,064) Class B Shares............................................... (74,263) -0- ------------- ------------- Total Distributions....................................... (643,020) (499,064) ------------- ------------- Net Change in Net Assets from Investment Activities.......... (18,980) (26,427) ------------- ------------- FROM CAPITAL TRANSACTIONS (NOTE 3): PROCEEDS FROM SHARES SOLD: Class A Shares............................................... 40,881,989 79,908,069 Class B Shares............................................... 15,887,574 -0- ------------- ------------- 56,769,563 79,908,069 ------------- ------------- NET ASSET VALUE OF SHARES ISSUED THROUGH DIVIDEND REINVESTMENT: Class A Shares............................................... 479,626 445,332 Class B Shares............................................... 50,549 -0- ------------- ------------- 530,175 445,332 ------------- ------------- COST OF SHARES REPURCHASED: Class A Shares............................................... (36,550,200) (74,519,684) Class B Shares............................................... (6,019,680) -0- ------------- ------------- (42,569,880) (74,519,684) ------------- ------------- Net Change in Net Assets from Capital Transactions............. 14,729,858 5,833,717 ------------- ------------- Total Increase in Net Assets.............................. 14,710,878 5,807,290 NET ASSETS: Beginning of the Period...................................... 27,546,715 21,739,425 ------------- ------------- End of the Period............................................ $ 42,257,593 $ 27,546,715 ============= =============
See Notes to Financial Statements. E-5 192 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS The following schedule presents financial highlights for one share of the Fund outstanding throughout the periods indicated. (Unaudited) --------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JUNE 30, DEC. 31, -------------------------------- CLASS A SHARES 1994 1994 1993 1992 1991 ------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period.................. $ 1.00 $1.00 $1.00 $1.00 $1.00 ------ ----- ----- ----- ----- Net Investment Income............................... .019 .025 .023 .041 .065 Less Distributions from Net Investment Income....... .019 .025 .023 .041 .065 ------ ----- ----- ----- ----- Net Asset Value, End of Period........................ $ 1.00 $1.00 $1.00 $1.00 $1.00 ------ ----- ----- ----- ----- TOTAL RETURN (Non-Annualized)*........................ 1.96% 2.50% 2.31% 4.21% 6.72% Net Assets at End of Period (In millions)............. $ 32.3 $27.5 $21.7 24.9 $35.0 Ratio of Expenses to Average Net Assets*.............. 1.03% 1.13% 1.16% 1.14% .99% Ratio of Net Investment Income to Average Net Assets*............................................. 3.91% 2.44% 2.31% 4.21% 6.57%
------------------------- * If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets............... 1.50% 1.54% 1.31% 1.55% 1.39% Ratio of Net Investment Income to Average Net Assets.............................................. 3.44% 2.03% 2.16% 3.80% 6.17%
See Notes to Financial Statements. E-6 193 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS -- (CONTINUED) The following schedule presents financial highlights for one share of the Fund outstanding throughout the periods indicated. (Unaudited) --------------------------------------------------------------------------------
YEAR ENDED JUNE 30, CLASS A SHARES 1990 1989 1988 1987 1986 ----------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period..................... $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- Net Investment Income.................................. .078 .078 .066 .056 .068 Less Distributions from Net Investment Income.......... .078 .078 .066 .056 .068 ----- ----- ----- ----- ----- Net Asset Value, End of Period........................... $1.00 $1.00 $1.00 $1.00 $1.00 ----- ----- ----- ----- ----- TOTAL RETURN (Non-Annualized)*........................... 8.11% 8.07% 6.60% 5.94% 6.96% Net Assets at End of Period (in millions)................ $45.0 $44.1 $51.5 $17.1 $ 6.3 Ratio of Expenses to Average Net Assets*................. .90% .98% .78% .58% .88% Ratio of Net Investment Income to Average Net Assets*.... 7.81% 7.79% 6.56% 5.65% 6.78%
------------------------- * If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as follows: Ratio of Expenses to Average Net Assets.................. 1.31% 1.31% 1.22% 1.48% 1.85% Ratio of Net Investment Income to Average Net Assets..... 7.40% 7.46% 6.13% 4.74% 5.81%
See Notes to Financial Statements. E-7 194 VAN KAMPEN MERRITT MONEY MARKET FUND FINANCIAL HIGHLIGHTS -- (CONTINUED) The following schedule presents financial highlights for one share of the Fund outstanding throughout the period indicated. (Unaudited)
----------------------------------------------------------------------------------------------- JULY 11, 1994 (COMMENCEMENT OF DISTRIBUTION) TO DECEMBER 31, CLASS B SHARES 1994 ----------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period........................................ $ 1.00 ------ Net Investment Income..................................................... .015 Less Distributions from Net Investment Income............................. .015 ------ Net Asset Value, End of Period.............................................. $ 1.00 ====== TOTAL RETURN (Non-Annualized)*.............................................. 1.49% Net Assets at End of Period (in millions)................................... $ 9.9 Ratio of Expenses to Average Net Assets*.................................... 1.80% Ratio of Net Investment Income to Average Net Assets*....................... 3.41%
--------------- * If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as follows: Ratio of expenses to average net assets..................................... 2.28% Ratio of net investment income to average net assets........................ 2.93%
See Notes to Financial Statements. E-8 195 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS December 31, 1994 (Unaudited) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Van Kampen Merritt Money Market Fund (the "Fund") is a separate series of Van Kampen Merritt Money Market Trust (the "Trust"). The Fund is an open-end diversified management investment company registered under the Investment Company Act of 1940, as amended. The distribution of the Fund's second class of shares, Class B shares, commenced on July 11, 1994. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A. Security Valuation Investments are valued at amortized cost, which approximates market. Under this valuation method, a portfolio instrument is valued at cost and any discount or premium is amortized on a straight-line basis to the maturity of the instrument. B. Security Transactions Security transactions are recorded on a trade date basis. Realized gains and losses are determined on an identified cost basis. Interest income is recorded on an accrual basis. C. Federal Income Taxes It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes is required. The Fund intends to utilize provisions of the federal income tax laws which allow it to carry a realized capital loss forward for eight years following the year of the loss and offset such losses against any future realized capital gains. At June 30, 1994, the Fund had an accumulated capital loss carryforward for tax purposes of $39,559. Of this amount, $26,110, $2,038 and $11,411 will expire on June 30, 1998, 1999 and 2000, respectively. Net realized gains or losses differ for financial statement and tax reporting purposes primarily because of the deferral of post October 31 losses which are not recognized for tax purposes until the first day of the following fiscal year. D. Distribution of Income and Gains The Fund declares dividends from net investment income daily and automatically reinvests such dividends daily. Net realized gains, if any, are distributed annually. Shareholders can elect to receive the cash equivalent of their daily dividends at each month end. E-9 196 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1994 (Unaudited) NOTE 2 -- INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American Capital Investment Advisory Corp. (the "Adviser") will provide investment advice and facilities to the Fund for an annual fee payable monthly as follows:
AVERAGE NET ASSETS % PER ANNUM ------------------ ------------ First $250 million...................................... .500 of 1% Next $250 million....................................... .475 of 1% Next $250 million....................................... .425 of 1% Over $750 million....................................... .275 of 1%
Certain legal expenses were paid to Skadden, Arps, Slate, Meagher & Flom, counsel to the Fund, of which a trustee of the Fund is an affiliated person. For the six months ended December 31, 1994, the Fund recognized expenses of approximately $9,700 representing Van Kampen American Capital Distributors, Inc.'s or its affiliates' ("VKAC") cost of providing accounting, legal and certain shareholder services to the Fund. Certain officers and trustees of the Fund are also officers and directors of VKAC. The Fund does not compensate its officers or trustees who are officers of VKAC. The Fund has implemented deferred compensation and retirement plans for its Trustees. Under the deferred compensation plan, Trustees may elect to defer all or a portion of their compensation to a later date. The retirement plan covers those Trustees who are not officers of VKAC. At December 31, 1994, VKAC owned 611,383 and 100 shares of Classes A and B, respectively. E-10 197 VAN KAMPEN MERRITT MONEY MARKET FUND NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1994 (Unaudited) NOTE 3 -- CAPITAL TRANSACTIONS The Fund has outstanding two classes of common shares, Classes A and B. There are an unlimited number of shares of each class without par value authorized. At June 30, 1994, paid in surplus for Class A shares aggregated $27,601,290. Transactions in shares were as follows:
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1994 JUNE 30, 1994 ----------------- ------------- SALES: Class A......................................................... 40,881,989 79,908,069 Class B......................................................... 15,887,574 -0- ------------- ----------- Total Sales..................................................... 56,769,563 79,908,069 ============= =========== DIVIDEND REINVESTMENT: Class A......................................................... 479,626 445,332 Class B......................................................... 50,549 -0- ------------- ----------- Total Dividend Reinvestment..................................... 530,175 445,332 ============= =========== REPURCHASES: Class A......................................................... (36,550,200) (74,519,684) Class B......................................................... (6,019,680) -0- ------------- ----------- Total Repurchases............................................... (42,569,880) (74,519,684) ============= ===========
NOTE 4 -- DISTRIBUTION AND SERVICE PLANS The Fund and its shareholders have adopted a distribution plan (the "Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 and a Service Plan (the "Service Plan," collectively the "Plans"). The Plans govern payments for the distribution of the Fund's shares, ongoing shareholder services and maintenance of shareholder accounts. Annual fees under the Plans of up to .25% of Class A shares and 1.00% of Class B shares are accrued daily. Included in these fees for the six months ended December 31, 1994, are payments to VKAC of approximately $16,300. E-11