<PAGE> 1
- August 2000 -
IMPORTANT NOTICE
TO VAN KAMPEN HIGH YIELD &
TOTAL RETURN
FUND SHAREHOLDERS
QUESTIONS
& ANSWERS
Although we recommend that you read the complete Prospectus/Proxy Statement, for
your convenience, we have provided a brief overview of the issues to be voted
on.
Q WHY IS A SHAREHOLDER MEETING BEING HELD?
A You are being asked to vote on a reorganization (the "Reorganization") of
Van Kampen High Yield & Total Return Fund (the "Target Fund") into Van
Kampen High Income Corporate Bond Fund (the "Acquiring Fund"), a fund that
pursues similar investment objectives.
Q WHY IS THE REORGANIZATION BEING RECOMMENDED?
A The purpose of the proposed Reorganization is to permit the shareholders to
(i) achieve certain economies of scale from the combined fund's larger net
asset size upon consummation of the reorganization and the potentially
lower operating expenses associated therewith, (ii) eliminate the
duplication of services and expenses that currently exists as a result of
the separate operations of the funds and (iii) obtain potentially greater
portfolio diversity and potentially lower portfolio transaction costs.
Q HOW WILL THE REORGANIZATION AFFECT ME?
A Assuming shareholders of the Target Fund approve the Reorganization, the
assets and liabilities of the Target Fund will be combined with those of
the Acquiring Fund, and you will become a shareholder of the Acquiring
Fund. You will receive shares of the Acquiring Fund equal in value (at the
time of issuance) to your shares of the Target Fund.
Q WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN
CONNECTION WITH THE REORGANIZATION?
A You will pay no sales loads or commissions in connection with the
Reorganization. If the Reorganization is completed, the costs associated
with the proposed Reorganization, including the costs associated with the
shareholder meeting, generally will be shared equally by Van Kampen
Investments, Inc.("Van Kampen Investments") and the combined fund. As more
fully discussed in the combined Prospectus/Proxy Statement, the holding
period with respect to the contingent deferred sales charge applicable to
Class B shares or Class C shares of the Target Fund acquired in
<PAGE> 2
the Reorganization will be measured from the earlier of the time (i) the
holder purchased such Class B shares or Class C shares from the Target Fund
or (ii) the holder purchased Class B shares or Class C shares of any other
Van Kampen fund and subsequently exchanged them for shares of the Target
Fund.
Q HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE ACQUIRING FUND COMPARE
TO THOSE PAYABLE BY THE TARGET FUND?
A The Acquiring Fund is advised by Van Kampen Asset Management, Inc.("Asset
Management"), a subsidiary of Van Kampen Investments. The Target Fund is
advised by Van Kampen Investment Advisory Corp.("Advisory Corp."), also a
subsidiary of Van Kampen Investments. The Target Fund is subadvised by
Morgan Stanley Dean Witter Investment Management Inc. (the "Subadviser"),
an indirect, wholly owned subsidiary of Morgan Stanley Dean Witter & Co.
Management of the funds anticipates that, as a result of the
Reorganization, shareholders of the Target Fund would be subject to lower
total operating expenses as a percentage of net assets.
Q WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE ACQUIRING FUND? WHAT
HAPPENS TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
A If the Reorganization is approved, your interest in shares of the Target
Fund automatically will be converted into shares of the Acquiring Fund, and
we will send you written confirmation that this change has taken place. You
will receive the same class of shares of the Acquiring Fund equal in value
to your class of shares of the Target Fund. Holders of Class A shares of
the Target Fund will receive Class A shares of the Acquiring Fund; holders
of Class B shares of the Target Fund will receive Class B shares of the
Acquiring Fund; and holders of Class C shares of the Target Fund will
receive Class C shares of the Acquiring Fund. No certificates for Acquiring
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 Target Fund, it is not
necessary to return such certificates; however, shareholders may want to
present such certificates to receive certificates of the Acquiring Fund (to
simplify proof of and to preserve the tax basis of separate lots of
shares).
Q WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A 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. If the Reorganization so qualifies, in general, a shareholder of
the Target Fund will recognize no gain or loss upon the receipt solely of
the shares of the Acquiring Fund in connection with the Reorganization.
Additionally, the Target 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 Acquiring Fund or as a result of its
liquidation.
<PAGE> 3
Q WHAT IF I REDEEM OR EXCHANGE MY SHARES OF THE TARGET FUND BEFORE THE
REORGANIZATION TAKES PLACE?
A If you choose to redeem or exchange your shares of the Target Fund before
the Reorganization takes place, the redemption or exchange will be treated
as a normal redemption or exchange of shares and generally will be a
taxable transaction.
Q WHERE DO I CALL FOR FURTHER INFORMATION?
A Please call Investor Services at 1-800-341-2911 (Telecommunications Device
for the Deaf users may call 1-800-772-8889) weekdays from 7:00 a.m.to 7:00
p.m. Central time.
<PAGE> 4
ABOUT THE PROXY CARD
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
Approval of Reorganization - mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the
card. When signing as attorney, trustee, executor, administrator, custodian,
guardian or corporate officer, please indicate your full title.
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PROXY
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
SPECIAL MEETING OF SHAREHOLDERS
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1. FOR [ ] AGAINST [ ] ABSTAIN [ ] The proposal to approve the Agreement
and Plan of Reorganization XXXXXXXX.
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XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
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<PAGE> 5
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
1 PARKVIEW PLAZA, PO BOX 5555
OAKBROOK TERRACE, ILLINOIS 60181-5555
(800) 421-5666
NOTICE OF SPECIAL MEETING
OCTOBER 11, 2000
A Special Meeting of shareholders of Van Kampen High Yield & Total Return Fund
will be held at the offices of Van Kampen Investments Inc., 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555, on October 11, 2000 at 3:00 p.m. (the
"Special Meeting"), for the following purposes:
(1) To approve an Agreement and Plan of Reorganization pursuant to which the
Van Kampen High Yield & Total Return Fund would (i) transfer all of its assets
to the Van Kampen High Income Corporate Bond Fund in exchange solely for Class
A, B and C shares of beneficial interest of the Van Kampen High Income
Corporate Bond Fund and the Van Kampen High Income Corporate Bond Fund's
assumption of the liabilities of the Van Kampen High Yield & Total Return
Fund, (ii) distribute such shares of the Van Kampen High Income Corporate Bond
Fund to the holders of shares of the Van Kampen High Yield & Total Return Fund
and (iii) be dissolved.
(2) To transact such other business as may properly come before the Special
Meeting.
Shareholders of record as of the close of business on August 4, 2000 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Directors,
A. Thomas Smith III
Vice President and Secretary
August 12, 2000
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 6
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
This Prospectus/Proxy Statement is being furnished to shareholders of Van
Kampen High Yield & Total Return Fund (the "Target Fund") and relates to the
special meeting of shareholders of the Target Fund to be held at the offices of
Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-
5555 on October 11, 2000 at 3:00 p.m. and at any and all adjournments thereof
(the "Special Meeting"). Shareholders of record as of the close of business on
August 4, 2000 are entitled to vote at the Special Meeting or any adjournment
thereof. The purpose of the Special Meeting is to approve or disapprove the
proposed reorganization of the Target Fund (the "Reorganization") into the Van
Kampen High Income Corporate Bond Fund (the "Acquiring Fund"). The
Reorganization would result in shareholders of the Target Fund in effect
exchanging their Class A, B and C Shares of the Target Fund for corresponding
Class A, B and C Shares of the Acquiring Fund. The purpose of the Reorganization
is to permit shareholders of the Target Fund to (i) achieve certain economies of
scale from the Acquiring Fund's larger net asset size and the potentially lower
operating expenses associated therewith, (ii) eliminate the duplication of
services and expenses that currently exists as a result of the separate
operations of the funds and (iii) obtain potentially greater portfolio diversity
and potentially lower portfolio transaction costs.
The Acquiring Fund is an open-end management investment company. The Target
Fund is a series of the Van Kampen Series Fund, Inc., an open-end management
investment company (the "Series Fund"). The primary investment objective of the
Acquiring Fund is to seek to maximize current income. Capital appreciation is a
secondary objective of the Acquiring Fund which is sought only when consistent
with the Acquiring Fund's primary investment objective. The investment objective
of the Target Fund is to seek to maximize total return. The investment objective
of the Target Fund is similar to the investment objectives of the Acquiring Fund
and the funds employ similar investment policies and practices in seeking to
achieve their respective investment objectives. There can be no assurance that
either fund will achieve its investment objectives. The address, principal
executive office and telephone number of the funds is 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555, (630) 684-6000 or (800) 421-5666.
The enclosed proxy and this Prospectus/Proxy Statement are first being sent to
Target Fund shareholders on or about August 24, 2000.
---------------------
Shares of the Acquiring Fund have not been approved or disapproved by the
Securities and Exchange Commission (SEC) or any state regulator, and neither the
SEC nor any state regulator has passed upon the accuracy or adequacy of this
Prospectus/Proxy Statement. Any representation to the contrary is a criminal
offense.
---------------------
<PAGE> 7
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the Target Fund should know before voting on the Reorganization
(in effect, investing in Class A, B or C Shares of the Acquiring Fund) and
constitutes an offering of Class A, B and C Shares of beneficial interest, par
value $0.01 per share, of the Acquiring Fund only. Please read it carefully and
retain it for future reference. A Statement of Additional Information dated
August 12, 2000, relating to this Prospectus/Proxy Statement (the
"Reorganization SAI") has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated herein by reference. A Prospectus (the
"Acquiring Fund Prospectus") and Statement of Additional Information containing
additional information about the Acquiring Fund, each dated December 29, 1999
(and as currently supplemented), have been filed with the SEC and are
incorporated herein by reference. A copy of the Acquiring Fund Prospectus
accompanies this Prospectus/Proxy Statement. A Prospectus (the "Target Fund
Prospectus"), dated October 28, 1999 (and as currently supplemented), and a
combined Statement of Additional Information containing additional information
about the Target Fund and other series of the Series Fund, dated April 3, 2000
(and as currently supplemented), have been filed with the SEC and are
incorporated herein by reference. Copies of the foregoing may be obtained
without charge by calling or writing the Acquiring Fund or the Target Fund at
the telephone number or address shown above. If you wish to request the
Reorganization SAI, please ask for the "Reorganization SAI." IN ADDITION, EACH
FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT AND,
IF APPLICABLE, SEMI-ANNUAL REPORT TO A SHAREHOLDER UPON REQUEST. ANY SUCH
REQUEST SHOULD BE DIRECTED TO VAN KAMPEN INVESTOR SERVICES INC. BY CALLING (800)
421-5666 OR BY WRITING THE RESPECTIVE FUND AT THE ADDRESS SHOWN ABOVE.
---------------------
No person has been authorized to give any information or make any
representation not contained in this Prospectus/Proxy Statement and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Prospectus/Proxy Statement 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 Acquiring Fund and the Series Fund, on behalf of the Target Fund, are
subject to the informational requirements of the Securities Exchange Act of
1934, as amended, and the Investment Company Act of 1940, as amended (the "1940
Act"), and in accordance therewith file reports and other information with the
SEC. Such reports, other information and proxy statements filed by the Acquiring
Fund and the Series Fund, on behalf of the Target Fund, can be reviewed and
copied at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Information on the operation of the SEC's Public Reference Room may
be obtained by calling the SEC at 1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating fee, by electronic request at the
SEC's e-mail address ([email protected]), or by writing the Public Reference
Section of the SEC, Washington, DC, 20549-0102 or on the EDGAR database on the
SEC's internet site (http://www.sec.gov).
The date of this Prospectus/Proxy Statement is August 12, 2000.
2
<PAGE> 8
TABLE OF CONTENTS
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<S> <C> <C>
THE PROPOSED REORGANIZATION......................................... 4
A. SUMMARY..................................................... 4
The Reorganization........................................ 4
Reasons for the Proposed Reorganization................... 5
Comparison of the Acquiring Fund and the Target Fund...... 7
B. RISK FACTORS................................................ 21
Similarity of Risks....................................... 21
Differences in Risks...................................... 22
C. THE PROPOSED REORGANIZATION................................. 23
Terms of the Agreement.................................... 23
Description of Securities to be Issued.................... 25
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 25
Federal Income Tax Consequences........................... 26
Expenses.................................................. 27
Ratification of Investment Objectives, Investment Policies
and Investment Restrictions, Distribution Plan and
Advisory Agreement of the Acquiring Fund................ 28
Legal Matters............................................. 28
D. RECOMMENDATION OF THE BOARD................................. 28
OTHER INFORMATION................................................... 29
A. SHAREHOLDERS OF THE ACQUIRING FUND AND THE TARGET FUND...... 29
B. SHAREHOLDER PROPOSALS....................................... 30
VOTING INFORMATION AND REQUIREMENTS................................. 31
EXHIBIT A: MANAGEMENT'S DISCUSSION OF ACQUIRING FUND AND TARGET FUND
PERFORMANCE....................................................... A-1
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3
<PAGE> 9
THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Directors of the Target Fund (the "Target Fund Board") believes the proposed
Reorganization (as defined herein) is in the best interests of shareholders of
the Target Fund. As a result of the Reorganization, shareholders of the Target
Fund would acquire an interest in the Acquiring Fund.
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with (i) the Acquiring Fund Prospectus incorporated herein by reference
and accompanying this Prospectus/Proxy Statement and (ii) the Series Fund
Prospectus incorporated herein by reference. This Prospectus/Proxy Statement
constitutes an offering of Class A, B and C Shares of the Acquiring Fund only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the
Target Fund in connection with the proposed combination of the Target Fund with
and into the Acquiring Fund pursuant to the terms and conditions of the
Agreement and Plan of Reorganization between the Series Fund, on behalf of the
Target Fund, and the Acquiring Fund (the "Agreement"). The Agreement provides
that the Target Fund would (i) transfer all of its assets to the Acquiring Fund
in exchange solely for Class A, B and C Shares of beneficial interest of the
Acquiring Fund and the Acquiring Fund's assumption of the liabilities of the
Target Fund, (ii) distribute to each shareholder of the Target Fund shares of
the respective class of shares of the Acquiring Fund equal in value to the
shareholder's existing shares of the Target Fund and (iii) dissolve pursuant to
a plan of liquidation and dissolution promptly following the Closing (as defined
herein) (collectively, the "Reorganization").
The Target Fund Board has determined that the Reorganization is in the best
interests of shareholders of each class of shares of the Target Fund and that
the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the Acquiring Fund (the
"Acquiring Fund Board") has determined that the Reorganization is in the best
interests of the Acquiring Fund and that the interests of each class of shares
of existing shareholders of the Acquiring Fund will not be diluted as a result
of the Reorganization.
The Target Fund Board is asking shareholders of the Target Fund to approve the
Reorganization at the Special Meeting to be held on October 11, 2000. If
shareholders of the Target Fund approve the Reorganization, it is expected that
the
4
<PAGE> 10
Closing will be after the close of business on or about October 13, 2000, but it
may be at a different time as described herein.
THE TARGET FUND 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 OF THE TARGET FUND. SEE "VOTING INFORMATION
AND REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
After several transactions in 1996 and 1997, Van Kampen Investments Inc. ("Van
Kampen") became an indirect wholly owned subsidiary of Morgan Stanley Dean
Witter & Co. ("Morgan Stanley"). Van Kampen through its subsidiaries acts as the
adviser, distributor and shareholder servicing agent of the Van Kampen-
sponsored family of retail funds. Van Kampen also assumed similar roles for
certain retail funds formerly sponsored by Morgan Stanley. The Acquiring Fund is
one of the Van Kampen-sponsored funds predating Van Kampen's affiliation with
Morgan Stanley and the Target Fund is one of the former Morgan Stanley-sponsored
funds predating Van Kampen's affiliation with Morgan Stanley. The Target Fund
Board believes that the proposed Reorganization is in the best interests of the
shareholders of the Target Fund because it would permit the shareholders of the
Target Fund to (i) achieve certain economies of scale from the Acquiring Fund's
larger net asset size and the potentially lower operating expenses associated
therewith, (ii) eliminate the duplication of services and expenses that
currently exists as a result of the separate operations of the funds and (iii)
obtain potentially greater portfolio diversity and potentially lower portfolio
transaction costs.
In determining whether to recommend approval of the Reorganization to
shareholders of the Target Fund, the Target Fund Board considered a number of
factors, including, but not limited to: (i) the capabilities and resources of
the funds' respective investment advisers, the Target Fund's investment
subadviser and the funds' other service providers in the areas of marketing,
investment and shareholder services; (ii) the expenses and advisory fees
applicable to the Target Fund and the Acquiring Fund before the Reorganization
and the estimated expense ratios of the Acquiring Fund after the Reorganization;
(iii) the comparative investment performance of the Target Fund and the
Acquiring Fund; (iv) the terms and conditions of the Agreement and whether the
Reorganization would result in dilution of Target Fund or Acquiring Fund
shareholder interests; (v) the advantages of eliminating duplication of effort
in marketing funds having similar investment objectives in addition to the
economies of scale potentially realized through the combination of the two
funds; (vi) the compatibility of the funds' investment objectives and investment
policies and practices; (vii) the compatibility of the funds' service features
available to shareholders, including the retention of applicable holding periods
and exchange privileges; (viii) the costs estimated to be
5
<PAGE> 11
incurred by the respective funds as a result of the Reorganization; (ix) the
future growth prospects of the Target Fund; and (x) the anticipated tax
consequences of the Reorganization.
In this regard, the Target Fund Board reviewed information provided by Van
Kampen Investment Advisory Corp. ("Advisory Corp."), the investment adviser of
the Target Fund, Van Kampen Asset Management Inc. ("Asset Management"), the
investment adviser of the Acquiring Fund, and Van Kampen, the parent corporation
of Advisory Corp. and Asset Management, relating to the anticipated impact to
the shareholders of the Target Fund and the Acquiring Fund as a result of the
Reorganization. The Target Fund Board considered the probability that the
elimination of duplicative operations and the increase in asset levels of the
combined fund after the Reorganization would result in the following potential
benefits for shareholders of the Target Fund, although there can, of course, be
no assurances in this regard:
(1) Achievement of Economies of Scale and Reduced Per Share Expenses.
Combining the assets of the Target Fund with the assets of the Acquiring
Fund should lead to reduced total operating expenses for shareholders of
the Target Fund, on a per share basis. The current net operating expenses
of the Acquiring Fund are less than the current net operating expenses of
the Target Fund, and the increased post-reorganization assets of the
Acquiring Fund may further reduce operating expenses of the Acquiring Fund
by allowing fixed and relatively fixed costs, such as accounting, legal
and printing expenses, to be spread over a larger asset base. The
contractual advisory fees payable by the Target Fund are greater than the
contractual advisory fees payable by the Acquiring Fund. The net advisory
fees paid by the Target Fund are currently less than those of the
Acquiring Fund but only because of voluntary fee waivers and expense
reimbursements from Advisory Corp. There can be no assurance that such
waivers or reimbursements will continue for the Target Fund if the
Reorganization is not completed.
(2) Elimination of Separate Operations. Consolidating the Target Fund and the
Acquiring Fund should eliminate the duplication of services and expenses
that currently exists as a result of the funds' separate operations.
Consolidating the separate operations of the Target Fund with those of the
Acquiring Fund should promote more efficient operations on a more cost-
effective basis.
(3) Benefits to the Portfolio Management Process. The larger net asset size
of the Acquiring Fund generally permits it to purchase larger individual
portfolio investments that may result in reduced transaction costs or more
favorable pricing and that may provide the opportunity for greater
portfolio diversity.
6
<PAGE> 12
Based upon these and other factors, the Target Fund Board unanimously determined
that the Reorganization is in the best interests of the shareholders of the
Target Fund.
COMPARISON OF THE ACQUIRING FUND AND THE TARGET FUND
GENERAL. The Acquiring Fund and the Target Fund (each a "Fund" or collectively
referred to herein as the "Funds") have similar investment objectives and
similar investment policies and practices. Although the Acquiring Fund places
more emphasis on maximizing current income and seeks capital appreciation as a
secondary objective while the Target Fund emphasizes total return (a combination
of current income and capital appreciation), both Funds seek to achieve their
respective investment objectives by investing primarily in a diversified
portfolio of high-yielding, high-risk bonds and other income securities,
including convertible securities and preferred stock.
Under normal market conditions, the Acquiring Fund invests at least 80% of its
total assets in income securities rated at the time of purchase BBB or lower by
Standard & Poor's ("S&P"), rated Baa or lower by Moody's Investors Service, Inc.
("Moody's"), or unrated securities determined by the Acquiring Fund's investment
adviser to be of comparable quality. Under normal market conditions, the Target
Fund invests at least 80% of its total assets in income securities rated at the
time of purchase BB or lower by S&P, rated Ba or lower by Moody's, or unrated
securities determined by the Target Fund's investment adviser to be of
comparable quality. Thus, the Acquiring Fund has the flexibility to invest in a
slightly higher credit quality portfolio than the Target Fund under normal
market conditions. The Acquiring Fund may invest up to 35% of its total assets
in securities of foreign issuers while the Target Fund may invest up to 20% of
its total assets in securities of foreign issuers. While each Fund may only
invest up to 15% of its respective net assets in illiquid securities, including
certain restricted securities, the Acquiring Fund may invest an unlimited amount
in securities offered and sold to qualified institutional buyers under Rule 144A
of the Securities Act of 1933, as amended ("144A Securities"), determined to be
liquid while the Target Fund is limited to no more than 20% of its total assets
in 144A Securities. In recent years, the high-yield, high-risk bond markets (in
which the Funds invest) have experienced significant growth in the number and
amount of 144A Securities issuances; thus management of the Funds believes the
added flexibility allowed to the Acquiring Fund in investing in 144A Securities
benefits shareholders and may assist in achieving the Acquiring Fund's
investment objectives. The primary differences between the Funds are as follows:
(i) the Acquiring Fund places more emphasis on achieving current income with a
secondary objective of capital appreciation while the Target Fund emphasizes
total return; (ii) the Acquiring Fund has more flexibility to invest in a
slightly higher credit quality portfolio than the Target Fund under normal
market conditions, (iii) the Acquiring Fund may invest more of its total assets
in foreign securities than the Target Fund and (iv) the Acquiring Fund has more
7
<PAGE> 13
flexibility in investing in 144A Securities than the Target Fund. See further
information comparing the Funds below and under the heading "Risk Factors".
INVESTMENT OBJECTIVES AND POLICIES. The primary investment objective of the
Acquiring Fund is to seek to maximize current income. Capital appreciation is a
secondary objective of the Acquiring Fund which is sought only when consistent
with the primary investment objective. The Acquiring Fund seeks to achieve its
investment objectives by investing primarily in a diversified portfolio of
high-yielding, high-risk bonds and other income securities, such as convertible
securities and preferred stock. The investment objective of the Target Fund is
seeking to maximize total return by investing primarily in a diversified
portfolio of high-yielding, high-risk income securities that offer a yield above
that generally available on debt securities in the four highest ratings
categories of the recognized rating services. The primary difference between the
Funds' investment objectives is that the objectives of the Acquiring Fund place
more emphasis on current income than does the Target Fund.
Under normal market conditions, the Acquiring Fund invests at least 80% of its
total assets in a portfolio of income securities rated, at the time of
investment, BBB or lower by S&P, Baa or lower by Moody's, or unrated securities
determined by the Acquiring Fund's investment adviser to be of comparable
quality. Under normal market conditions, the Target Fund invests at least 80% of
its total assets in a portfolio of income securities rated, at the time of
investment, BB or lower by S&P or Ba or lower by Moody's, or unrated securities
determined by the Target Fund's investment adviser to be of comparable quality.
Bonds rated BB or lower by S&P or Ba or lower by Moody's are commonly referred
to as "junk bonds" and involve greater risks as compared to investments in
higher-grade securities. The policies of the Acquiring Fund state that the
Acquiring Fund will not purchase any securities which will cause more than 20%
of its total assets to be invested in securities rated below B by both S&P and
Moody's, common stocks or other equity securities and income securities on which
interest or dividends are not currently being paid (including securities in
default, zero-coupon securities or pay-in-kind securities), while the policies
of the Target Fund state that the Target Fund will not purchase any securities
that will cause more than 10% of its total assets to be invested in securities
with the lowest-grade rating assigned by the rating agencies. For a description
of S&P's and Moody's ratings, see the Acquiring Fund Prospectus.
Each of the Funds has the ability to invest in securities issued by foreign
corporations or governments. Up to 35% of the Acquiring Fund's total assets and
up to 20% of the Target Fund's total assets may be so invested. The Target Fund
also may not invest more than 5% of its total assets in foreign governmental
issuers of any one country.
Under normal market conditions, the Acquiring Fund invests at least 65% of the
Fund's total assets in corporate bonds with maturities of more than one year.
8
<PAGE> 14
Although neither Fund has a policy limiting the maturities of its investments,
the Acquiring Fund's investment adviser generally seeks to moderate market risk
by normally maintaining a portfolio duration of two to six years. The prices of
income securities tend to fall as interest rates rise. This "market risk" is
usually greater among income securities with longer maturities or longer
durations. In addition to traditional bonds, each of the Funds may invest in
other income securities including convertible debt securities, preferred stock,
zero coupon, pay-in-kind, and zero-fixed coupon securities. In addition, the
policies of the Acquiring Fund and the Target Fund state that neither of the
Funds will purchase securities which will cause more than 10% of its respective
total assets to be invested in equity securities (excluding preferred stock)
such as common stocks, warrants and options on equity securities.
Each of the Funds may invest a limited portion of its net assets in illiquid
and certain restricted securities. The Acquiring Fund may invest up to 15% of
its net assets in illiquid securities and certain restricted securities. The
Acquiring Fund may invest an unlimited amount in 144A Securities that are
determined to be liquid. The Target Fund may invest up to 15% of its net assets
in illiquid securities and certain restricted securities. Notwithstanding the
foregoing, the Target Fund may not invest more than 10% of its total assets in
securities subject to legal or contractual restrictions on resale except that
the Target Fund may invest up to 20% of its total assets in 144A Securities.
Each of the Funds may engage in portfolio management strategies and techniques
involving options, futures contracts, options on futures contracts,
currency-related transactions involving options, futures and forward contracts
and interest rate swaps and other interest rate-related transactions. Each of
the Funds allows for a limited amount of borrowing; the Acquiring Fund limit is
5% of such Fund's total assets for temporary borrowing to facilitate payment of
redemption requests whereas the Target Fund limit is 10% of such Fund's total
assets for emergency or extraordinary purposes (and the Target Fund may not
purchase additional securities when borrowings exceed 5% of such Fund's total
assets). Each Fund allows for lending of its portfolio securities; the Acquiring
Fund may lend its portfolio securities up to 10% of its total assets whereas the
Target Fund may lend its portfolio securities up to 33 1/3% of its total assets.
INVESTMENT ADVISER AND SUB-ADVISER. The Acquiring Fund is advised by Asset
Management, which is a wholly owned subsidiary of Van Kampen. The Target Fund is
advised and administered by Advisory Corp., which also is a wholly owned
subsidiary of Van Kampen. Van Kampen is a diversified asset management company
with more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $100 billion under management
or supervision as of June 30, 2000. Van Kampen's more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen is an indirect
wholly owned subsidiary of Morgan Stanley. The principal offices of Asset
Management
9
<PAGE> 15
and Advisory Corp. are located at 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555.
Morgan Stanley Dean Witter Investment Management Inc. (the "Subadviser") is
the Subadviser of the Target Fund. The Subadviser also is a wholly owned
subsidiary of Morgan Stanley, and is an affiliate of Asset Management and
Advisory Corp. The Subadviser conducts a worldwide portfolio management business
and provides a broad range of portfolio management services to customers in the
United States and abroad. At June 30, 2000, the Subadviser, together with its
affiliated institutional asset management companies, managed assets of
approximately $89.3 billion, including assets under fiduciary advice. The
Subadviser's principal office is located at 1221 Avenue of the Americas, New
York, New York 10020. On December 1, 1998, Morgan Stanley Asset Management, Inc.
changed its name to Morgan Stanley Dean Witter Investment Management Inc. but
continues to do business in certain instances using the name Morgan Stanley
Asset Management.
The Acquiring Fund is managed by portfolio managers headed by Robert J.
Hickey, a Vice President of Asset Management. Mr. Hickey joined Advisory Corp.
in 1988 and became Assistant Vice President of Advisory Corp. in January 1993.
Mr. Hickey has been a Vice President of Asset Management and Advisory Corp.
since June 1995. Mr. Hickey has managed the Acquiring Fund's portfolio since
June 1999. Peter Ehret, a Vice President of Asset Management, has assisted in
the Acquiring Fund's portfolio management since June 1999. Mr. Ehret has been
working for Advisory Corp. since July 1992, and he became an Assistant Vice
President of Advisory Corp. in 1994 and Asset Management in January 1999. Mr.
Ehret became a Vice President of Asset Management and Advisory Corp. in February
1999.
The Target Fund is managed by co-managers Robert Angevine, Stephen F. Esser
and Gordon W. Loery. Mr. Angevine is a Principal of Morgan Stanley and the
Subadviser and is the portfolio manager for high yield investments. Prior to
joining the Subadviser in October 1988, he spent over eight years at Prudential
Insurance where he was responsible for one of the largest open-end high yield
mutual funds in the country. Prior to 1980, his other experience included
international treasury operations at a major pharmaceutical company and
commercial banking. Mr. Angevine has been co-manager of the Target Fund since it
commenced investment operations. Mr. Esser joined the Subadviser in 1996 and has
been a portfolio manager with Miller Anderson & Sherrerd, LLP (an affiliate of
Asset Management and Advisory Corp.) since 1988. Mr. Esser was previously with
Kidder Peabody and Co., Incorporated from 1985 to 1988 where he served as
Assistant Vice President of the Fixed Income Group. Mr. Esser has been co-
manager of the Target Fund since April 1996. Mr. Loery, currently a Principal of
the Subadviser, joined the Subadviser as a Fixed Income Analyst in 1990.
10
<PAGE> 16
Previously, he worked in Fixed Income at Alex Brown and Mabon Neugent and
managed commodity pools for a private firm. Mr. Loery has been co-manager of the
Target Fund since April 1999.
ADVISORY AND OTHER FEES. The contractual advisory fees of the Acquiring Fund
are lower than the contractual advisory fees of the Target Fund. Each of the
Funds is obligated to pay its respective adviser a monthly fee based on its
average daily net asset value.
The Acquiring Fund's contractual advisory fee is as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
------------------------ ---------------
<S> <C>
First $150 million.................................... 0.625 of 1.00%
Next $150 million..................................... 0.550 of 1.00%
Over $300 million..................................... 0.500 of 1.00%
</TABLE>
Applying this fee schedule, the Acquiring Fund paid Asset Management an
advisory fee at the effective rate of 0.53% of the Acquiring Fund's average net
assets for the Acquiring Fund's fiscal year ended August 31, 1999.
The Target Fund's contractual advisory fee is as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
------------------------ ---------------
<S> <C>
First $500 million.................................... 0.750 of 1.00%
Next $500 million..................................... 0.700 of 1.00%
Over $1 billion....................................... 0.650 of 1.00%
</TABLE>
During the Target Fund's fiscal year ended June 30, 2000, the contractual
advisory fees were 0.750% of the Target Fund's net assets but the Target Fund
paid Advisory Corp. at an effective rate of 0.150% due to a voluntary fee waiver
by Advisory Corp. Under an administration agreement between the Target Fund and
Advisory Corp., the Target Fund also pays a monthly administration fee of 0.25%
applied to the average daily net assets of the Target Fund.
Each of Asset Management and Advisory Corp. retains the right from time to
time to charge all or a portion of its management fee or to reimburse the
respective Fund for all or a portion of its other expenses. For a complete
description of the Acquiring Fund's advisory services, see the section of the
Acquiring Fund Prospectus entitled "Investment Advisory Services" and the
section of the Acquiring Fund Statement of Additional Information entitled
"Investment Advisory Agreement". For a complete description of the Target Fund's
advisory services, see the section of the Target Fund Prospectus entitled
"Investment Advisory Services" and the section of the Acquiring Fund Statement
of Additional Information entitled "Investment Advisory Agreements". Subadvisory
fees are paid to the Subadviser by Advisory Corp.
11
<PAGE> 17
The total operating expenses of the Acquiring Fund for the fiscal year ended
August 31, 1999 (on an annualized basis) were 1.03% of the average daily net
assets for Class A Shares and 1.79% of the average daily net assets for Class B
and C Shares. No fee waivers or expense reimbursements were in effect with
respect to the Acquiring Fund during such period.
The total operating expenses (before fee waiver) of the Target Fund for the
fiscal year ended June 30, 2000 were 1.85% of average daily net assets for Class
A Shares and 2.60% of average daily net assets for Class B and C Shares. The
total operating expenses (net of fee waiver) of the Target Fund were 1.25% of
average daily net assets for Class A Shares and 2.00% of the average daily net
assets for Class B and C Shares, for that same period.
The net operating expenses of the Target Fund are currently greater than those
of the Acquiring Fund and the disparity is even greater without the Target Fund
receiving voluntary fee waivers from Advisory Corp. There can be no assurance
that such waivers will continue for the Target Fund if the Reorganization is not
completed. Management periodically reviews voluntary fee waivers and expense
reimbursements for funds it advises and there can be no assurance such waivers/
reimbursements will continue.
Both the Acquiring Fund and the Target Fund have adopted substantially similar
distribution plans (the "Distribution Plans") pursuant to Rule 12b-1 under the
1940 Act and have adopted substantially similar service agreements or plans (the
"Service Plans"). Both the Acquiring Fund and the Target Fund can pay up to
0.25% of their respective average daily net assets attributable to Class A
Shares for distribution-related expenses and for the provision of ongoing
services to shareholders. Both the Acquiring Fund and the Target Fund can pay up
to 0.75% of their respective average daily net assets attributable to Class B
and C Shares for reimbursement of certain distribution-related expenses. In
addition, both the Acquiring Fund and the Target Fund can pay up to 0.25% of the
respective average daily net assets attributable to Class B and C Shares for the
provision of ongoing services to shareholders. The distributor of both the
Acquiring Fund's shares and the Target Fund's shares is Van Kampen Funds Inc.
(the "Distributor"), a subsidiary of Van Kampen. For a complete description of
these arrangements with respect to the Acquiring Fund, see the section of the
Acquiring Fund Prospectus entitled "Purchase of Shares" and the section of the
Acquiring Fund Statement of Additional Information entitled "Distribution and
Service". For a complete description of these arrangements with respect to the
Target Fund, see the section of the Target Fund Prospectus entitled "Purchase of
Shares" and the section of the Target Fund Statement of Additional Information
entitled "Distribution and Service".
12
<PAGE> 18
FEE AND EXPENSE COMPARISON TABLE
EXPENSES. The table below sets forth the fees and expenses that investors may
pay to buy and hold shares of the Funds including (i) the annual fees and
expenses paid by the Acquiring Fund for the fiscal year ended August 31, 1999
(ii) the fees and expenses paid by the Target Fund for the fiscal year ended
June 30, 2000 and (iii) pro forma fees and expenses for the combined fund.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
ACQUIRING TARGET ACQUIRING FUND ACQUIRING TARGET ACQUIRING FUND
FUND FUND PRO FORMA FUND FUND PRO FORMA
--------- ------ -------------- --------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
(fees paid directly from your
investments)
Maximum sales charge (load) imposed
on purchase (as a percentage of
offering price)................... 4.75%(1) 4.75%(1) 4.75%(1) None None None
Maximum deferred sales charge (as a
percentage of the lower of the
original purchase price or
redemption proceeds).............. None(2) None(2) None(2) 4.00%(3) 4.00%(3) 4.00%(3)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from
fund assets)
Management fees(5)................. 0.53 0.75(5) 0.53 0.53 0.75(5) 0.53
Distribution and/or service (12b-1)
fees(6)........................... 0.23 0.25 0.23 1.00(7) 1.00(7) 1.00(7)
Other expenses(5).................. 0.27 0.85(5) 0.23 0.26 0.85(5) 0.23
----- ----- ----- ----- ----- -----
Total fund operating expenses(5)... 1.03 1.85(5) 0.99 1.79 2.60(5) 1.76
----- ----- ----- ----- ----- -----
<CAPTION>
CLASS C SHARES
-----------------------------------
ACQUIRING TARGET ACQUIRING FUND
FUND FUND PRO FORMA
--------- ------ --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
(fees paid directly from your
investments)
Maximum sales charge (load) imposed
on purchase (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).............. 1.00%(4) 1.00%(4) 1.00%(4)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from
fund assets)
Management fees(5)................. 0.53 0.75(5) 0.53
Distribution and/or service (12b-1)
fees(6)........................... 1.00(7) 1.00(7) 1.00(7)
Other expenses(5).................. 0.26 0.85(5) 0.23
----- ----- -----
Total fund operating expenses(5)... 1.79 2.60(5) 1.76
----- ----- -----
</TABLE>
Notes to Expense Comparison Table
(1) Reduced on purchases of $100,000 and over. Class A Shares of the Acquiring
Fund received pursuant to the Reorganization will not be subject to a sales
charge upon purchase.
(2) Investments of $1,000,000 or more are not subject to any sales charge at the
time of purchase but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of purchase.
(3) Class B Shares of each 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 or
second year after purchase, which charge is reduced to zero after a five
year period as follows: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%;
Year 4 -- 2.50%; Year 5 -- 1.50%; and Year 6 -- 0.00%.
(4) Class C Shares of each 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.
(5) The Target Fund's investment adviser is currently waiving or reimbursing a
portion of the Target Fund's Management fees and Other expenses such that
the actual Total annual fund operating expenses were 1.25% for Class A
Shares, 2.00% for Class B Shares and 2.00% for Class C Shares for the fiscal
year ended June 30, 2000. The fee waivers or expense reimbursements can be
terminated at any time.
(6) Class A Shares are subject to a combined annual distribution and service fee
of up to 0.25% of the average daily net assets attributable to such class of
shares. Class B Shares and Class C Shares are each subject to a combined
annual distribution and service fee of up to 1.00% of the average daily net
assets attributable to such class of shares.
(7) Because Distribution and/or service (12b-1) fees are paid out of a Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
13
<PAGE> 19
EXAMPLE. The following examples are intended to help you compare the costs of
investing in the Acquiring Fund, both before and pro forma after the
Reorganization, with the costs of investing in the Target Fund. The examples
assume that you invest $10,000 in each Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The examples also
assume that your investments each have a 5% return each year and that each
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual returns and costs may be
higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------- -----------------------------------
ACQUIRING TARGET ACQUIRING FUND ACQUIRING TARGET ACQUIRING FUND
FUND FUND PRO FORMA FUND FUND PRO FORMA
--------- ------ -------------- --------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Expense example of total operating
expenses assuming redemption at
the end of the period
One year.......................... 575 654 571 582 663 579
Three years....................... 787 1,029 775 863 1,108 854
Five years........................ 1,017 1,428 996 1,120 1,530 1,104
Ten years......................... 1,675 2,541 1,630 1,905* 2,752* 1,870*
Expense example of total operating
expenses assuming no redemption at
the end of the period
One year.......................... 575 654 571 182 263 179
Three years....................... 787 1,029 775 563 808 554
Five years........................ 1,017 1,428 996 970 1,380 954
Ten years......................... 1,675 2,541 1,630 1,905* 2,752* 1,870*
<CAPTION>
CLASS C SHARES
-----------------------------------
ACQUIRING TARGET ACQUIRING FUND
FUND FUND PRO FORMA
--------- ------ --------------
<S> <C> <C> <C>
Expense example of total operating
expenses assuming redemption at
the end of the period
One year.......................... 282 363 279
Three years....................... 563 808 554
Five years........................ 970 1,380 954
Ten years......................... 2,105 2,934 2,073
Expense example of total operating
expenses assuming no redemption at
the end of the period
One year.......................... 182 263 179
Three years....................... 563 808 554
Five years........................ 970 1,380 954
Ten years......................... 2,105 2,934 2,073
</TABLE>
* Based on conversion to Class A Shares after eight years.
14
<PAGE> 20
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
Acquiring Fund and the Target Fund offer three classes of shares. The Class A
Shares of each Fund are subject to an initial sales charge of up to 4.75%. The
initial sales charge applicable to Class A Shares of the Acquiring Fund will be
waived for Class A Shares acquired in the Reorganization. Any subsequent
purchases of Class A Shares of the Acquiring Fund after the Reorganization will
be subject to an initial sales charge of up to 4.75%, excluding Class A Shares
purchased through the dividend reinvestment plan. Purchases of Class A Shares of
each Fund in amounts of $1,000,000 or more are not subject to an initial sales
charge, but a contingent deferred sales charge of 1.00% may be imposed on
certain redemptions made within the first year after purchase.
The Class B Shares of each Fund do not incur a sales charge when they are
purchased, but generally are subject to a contingent deferred sales charge of
4.00%, if redeemed within the first or second year after purchase, which charge
is reduced to zero after a five year period. The deferred sales charge schedules
for the Funds are identical.
The Class C Shares of each Fund do not incur a sales charge when purchased,
but generally are subject to a contingent deferred sales charge of 1.00% if
redeemed within the first year after purchase.
No contingent deferred sales charge will be imposed on Class B Shares or Class
C Shares of the Target Fund in connection with the Reorganization. The holding
period and conversion schedule for Class B Shares or Class C Shares of the
Acquiring Fund received in connection with the Reorganization will be measured
from the earlier time (i) the holder purchased such shares from the Target Fund
or (ii) the holder purchased such shares from any other fund advised by Advisory
Corp. or Asset Management and distributed by the Distributor and subsequently
exchanged them for shares of the Target Fund.
Shares of each Fund may be purchased by check, by electronic transfer, by bank
wire and by exchange from certain other funds advised by Advisory Corp. or Asset
Management and distributed by the Distributor. For a complete description
regarding purchase of shares and exchange of shares of the Acquiring Fund, see
the sections of the Acquiring Fund Prospectus entitled "Purchase of Shares" and
"Shareholder Services--Exchange Privilege." For a complete description regarding
purchase of shares and exchange of shares of the Target Fund, see the sections
of the Target Fund Prospectus entitled "Purchase of Shares" and "Shareholder
Services--Exchange Privilege".
Shares of each Fund properly presented for redemption may be redeemed or
exchanged at the next determined net asset value per share (subject to any
applicable deferred sales charge). Shares of each 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
15
<PAGE> 21
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, usually a period of up to 15 days.
No further purchases of the shares of the Target Fund may be made after the
date on which the shareholders of the Target Fund approve the Reorganization,
and the stock transfer books of the Target 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 Target Fund. Redemption requests or transfer
instructions received by the Target Fund after that date will be treated by the
Target Fund as requests for the redemption or instructions for transfer of the
shares of the Acquiring Fund credited to the accounts of the shareholders of the
Target Fund. Redemption requests or transfer instructions received by the Target
Fund after the close of business on the day prior to the date of Closing will be
forwarded to the Acquiring Fund. For a complete description of the redemption
arrangements for the Acquiring Fund, see the section of the Acquiring Fund
Prospectus entitled "Redemption of Shares," and, for the Target Fund, see the
section of the Target Fund Prospectus entitled "Redemption of Shares."
16
<PAGE> 22
CAPITALIZATION. The following table sets forth the capitalization of the
Acquiring Fund and the Target Fund as of June 30, 2000, and the pro forma
capitalization of the combined fund as if the Reorganization had occurred on
that date. These numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
ACQUIRING FUND
ACQUIRING FUND TARGET FUND PRO FORMA(1)(2)
-------------- ----------- ---------------
<S> <C> <C> <C>
NET ASSETS (IN THOUSANDS)
Class A Shares............... 476,238 7,090 483,256
Class B Shares............... 271,278 20,103 291,337
Class C Shares............... 58,174 5,480 63,645
--------- ----------- ---------
Total................. 805,690 32,673 838,238
========= =========== =========
NET ASSET VALUE PER SHARE
Class A Shares............... 5.30 10.87 5.29
Class B Shares............... 5.31 10.84 5.30
Class C Shares............... 5.28 10.85 5.27
SHARES OUTSTANDING (IN THOUSANDS)
Class A Shares............... 89,896 652 91,233
Class B Shares............... 51,116 1,854 54,901
Class C Shares............... 11,026 505 12,064
--------- ----------- ---------
Total................. 152,038 3,011 158,198
========= =========== =========
SHARES AUTHORIZED
Class A Shares............... Unlimited 375,000,000 Unlimited
Class B Shares............... Unlimited 375,000,000 Unlimited
Class C Shares............... Unlimited 375,000,000 Unlimited
</TABLE>
---------------
(1) The pro forma net assets and net asset value per share reflect the payment
of the reorganization expenses of approximately $125,000 by the Acquiring
Fund (allocated among the classes of approximately $72,000, $44,000 and
$9,000 for Class A, Class B and Class C Shares, respectively).
(2) The pro forma shares outstanding reflect the issuance by the Acquiring Fund
of approximately 1,337,000 Class A Shares, 3,785,000 Class B Shares and
1,038,000 Class C Shares reflecting the exchange of the assets and
liabilities of the Target Fund for newly issued shares of the Acquiring Fund
at the pro forma net asset value per share.
PERFORMANCE INFORMATION. The average annual total returns for the Acquiring
Fund for the one-year, five-year, and ten-year periods ended June 30, 2000 were
-2.99%, 6.42% and 9.30%, respectively, with respect to its Class A Shares; for
the one-year and five-year periods ended June 30, 2000 and for the period
beginning July 2, 1992 (the date Class B Shares of the Acquiring Fund were first
offered for sale to the public) through June 30, 2000 were -2.62%, 6.41% and
7.36%, respectively, with respect to its Class B Shares; and for the one-year
and five-year periods ended June 30, 2000 and for the period beginning July 6,
1993 (the date
17
<PAGE> 23
Class C Shares of the Acquiring Fund were first offered to the public) through
June 30, 2000 were 0.13%, 6.61% and 6.13%, respectively, with respect to its
Class C Shares.
The average annual total returns for the Target Fund for the one-year period
ended June 30, 2000, and for the period beginning May 1, 1996 (the date Class A
Shares of the Target Fund were first offered for sale to the public) through
June 30, 2000 were -3.61% and 6.27% with respect to its Class A Shares; for the
one-year period ended June 30, 2000 and for the period beginning May 1, 1996
(the date Class B Shares of the Target Fund were first offered for sale to the
public) through June 30, 2000 were -3.38% and 6.44% with respect to its Class B
Shares; and for the one-year period ended June 30, 2000 and for the period
beginning May 1, 1996 (the date Class C Shares of the Target Fund were first
offered for sale to the public) through June 30, 2000 were -0.50% and 6.73% with
respect to its Class C shares.
The foregoing total returns include the effect of the maximum sales charge
applicable to sales of shares of both the Acquiring Fund and the Target Fund.
The foregoing total returns also assume reinvestment of all dividends and
distributions.
The Acquiring Fund paid income distributions totaling $0.6009 per Class A
Share for the 12 month period ended June 30, 2000. The Target Fund paid income
distributions totaling $0.9460 per Class A Share for the 12 month period ended
June 30, 2000. During such period, the Target Fund had fee waivers and expense
reimbursements in place and in the absence of such waivers and reimbursements,
the Target Fund's income available for distribution would have been reduced.
The total returns, yields and distribution rates are not necessarily
indicative of future results. The performance of an investment company is the
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. In the
absence of fee waivers and expense reimbursements for the Target Fund, the total
returns, yields and distribution rates for the Target Fund would have been
reduced.
For additional performance information, including comparative data to a
broad-based market index, see the sections of the Acquiring Fund Prospectus
entitled "Risk/Return Summary -- Annual Performance" and "-- Comparative
Performance" and for the Target Fund, see the sections of the Target Fund
Prospectus entitled "Risk/Return Summary -- Annual Performance" and "--
Comparative Performance". Management's discussion of the Acquiring Fund's and
Target Fund's performance as of the end of each Fund's last fiscal year are
attached hereto as Exhibit A.
OTHER SERVICE PROVIDERS. The transfer agent for each Fund is Van Kampen
Investor Services Inc., a wholly owned subsidiary of Van Kampen. The Target Fund
18
<PAGE> 24
obtains certain administrative services from Advisory Corp. and through
subadministration arrangements with The Chase Manhattan Bank ("Chase"). The
Acquiring Fund and Target Fund obtain certain accounting services from Advisory
Corp. The Target Fund obtains certain legal services from Van Kampen. The
custodian for the Target Fund is Chase. The custodian for the Acquiring Fund is
State Street Bank and Trust Company. The financial statements of each Fund
contained in such Fund's annual report to shareholders for its most recently
completed fiscal year, have been audited by PricewaterhouseCoopers LLP.
PricewaterhouseCoopers LLP ("PWC") ceased being the independent accountants of
both Funds effective May 18, 2000. The cessation of the client-auditor
relationship between the Funds and PWC was based solely on a possible future
business relationship by PWC with an affiliate of the Funds investment advisers.
The Acquiring Fund Board has engaged Ernst & Young LLP, located at 233 South
Wacker Drive, Chicago, Illinois 60606, to be the Acquiring Fund's independent
accountants, effective May 18, 2000, and the Target Fund Board has engaged
Deloitte & Touche LLP, Two Prudential Plaza, 180 North Stetson, Chicago, IL
60601 to be the Target Fund's independent accountants, effective May 18, 2000.
The change in independent accountants was approved by the Funds' audit
committees and the Funds' Boards of Trustees/Directors, including
Trustees/Directors who are not "interested persons" of the Funds (as defined in
the 1940 Act).
GOVERNING LAW. The Target Fund is a series of the Van Kampen Series Fund, Inc.
("Series Fund"), an open-end management investment company organized as a
Maryland corporation. The Acquiring Fund is an open-end management investment
company organized as a Delaware business trust. While Maryland corporate law
contains many provisions specifically applicable to management investment
companies and Delaware business trust law is specifically drafted to accommodate
some of the unique corporate governance needs of management investment
companies, certain statutory differences do exist and the Funds' organization
documents contain certain differences summarized below. Each Fund is subject to
federal securities laws, including the 1940 Act and the rules and regulations
promulgated by SEC thereunder, and applicable state securities laws.
Consistent with Delaware law, the Acquiring Fund has authorized the issuance
of an unlimited number of shares. Consistent with Maryland law, the Series Fund
has authorized a specific number of shares available for the Target Fund,
however, the Series Fund organizational documents provide directors with the
authority to increase or decrease the authorized number of shares, from time to
time, as they consider necessary. Both the Acquiring Fund and the Series Fund
allow the trustees/directors to create one or more separate investment
portfolios and to establish a separate series of shares for each portfolio and
to further subdivide the shares of a series into one or more classes.
In general, the rights associated with common shares of beneficial interest of
the Acquiring Fund are similar to the rights associated with shares of common
stock of
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<PAGE> 25
the Target Fund. An area of potential difference is that, although shareholders
of a Delaware business trust generally are not personally liable for obligations
of the trust under Delaware law (the Delaware business trust law provides that
shareholders of a Delaware business trust should be entitled to the same
limitation of liability as shareholders of private, for profit corporations),
similar statutory or other authority limiting business trust shareholder
liability does not apply in many other states, and a shareholder subject to
proceedings in courts in other states, which may not apply Delaware law, may be
subject to liability. To guard against this risk, the Acquiring Fund
organizational documents (i) contain an express disclaimer of shareholder
liability for acts or obligations of the trust and require notice of such
disclaimer in each agreement, obligation or instrument entered into by the trust
and (ii) provide for shareholder indemnification out of the series or fund
property if any shareholder is held personally liable for the obligations of the
trust. Management of the Acquiring Fund believes the risk of liability to an
Acquiring Fund shareholder beyond his or her investment is remote.
Shareholders of a Maryland corporation currently have no personal liability
for the corporation's acts or obligations, except that a shareholder may be
liable to the extent that: (1) the dividends a shareholder receives exceed the
amount which properly could have been paid under Maryland law, (2) the
consideration paid to a shareholder by the Maryland corporation for stock was
paid in violation of Maryland law or (3) a shareholder otherwise receives any
distribution, payment or release which exceeds the amount which a shareholder
could properly receive under Maryland law.
Neither Fund is required to hold annual meetings of its shareholders and
neither Fund anticipates doing so. Both Funds do have certain mechanics whereby
shareholders can call a special meeting of the respective Fund. Shareholders
generally have the right to approve investment advisory agreements, elect
trustees/directors, change fundamental investment policies, ratify the selection
of independent accountants and vote on other matters required by law or deemed
desirable by trustees/directors.
The business of each Fund is governed by the same persons comprising the Board
of Trustees of the Acquiring Fund and the Board of Directors of the Target Fund.
The responsibilities, powers and fiduciary duties of trustees under Delaware law
are substantially the same as those for directors under Maryland law. For the
Acquiring Fund and the Target Fund, trustee/director vacancies may be filled by
approval of a majority of the trustees/directors then in office subject to
provisions of the 1940 Act. Trustees/Directors terms are until the later of the
election of such person's successor or resignation or removal. Each of the Funds
has substantially the same mandatory retirement age provisions for
trustees/directors. Trustees of the Acquiring Fund may be removed with or
without cause by vote of a majority of the shares then outstanding or by vote of
two-third's of the number of trustees prior to such
20
<PAGE> 26
removal. Directors of the Target Fund may be removed with or without cause by
vote of a majority of the shares present or in person at a meeting.
The foregoing is only a summary of certain differences between the Acquiring
Fund under Delaware law and the Target Fund under Maryland law. It is not
intended to be a complete list of differences and shareholders should refer to
the provisions of each Fund's applicable organizational documents for a more
thorough comparison. Such documents are filed as part of each Fund's
registration statements with the SEC and shareholders may obtain copies of such
documents as described on page 2 of this Prospectus/Proxy Statement.
B. RISK FACTORS
SIMILARITY OF RISKS
The investment objectives and investment policies and practices of the Funds
are similar. Although the Acquiring Fund places more emphasis on current income
and seeks capital appreciation as a secondary objective while the Target Fund
emphasizes total return (a combination of current income and capital
appreciation), both Funds seek to achieve their investment objectives by
investing primarily in a diversified portfolio of high-yielding, high-risk bonds
and other income securities including convertible securities and preferred
stock. In addition, both Funds may invest a portion of their assets in
securities of foreign issuers, and both Funds may use certain derivative
instruments for various portfolio management purposes. To the extent that the
investment objectives and investment policies and practices of the Acquiring
Fund and the Target Fund are similar, the risks associated with an investment in
the Funds are similar.
With their portfolios of medium- or lower-grade securities, both Funds will be
subject to greater risks than Funds owning higher-grade securities, including
greater credit risk, greater market risk and volatility, greater liquidity
concerns and potentially greater manager risk. Lower-grade securities are
commonly referred to as "junk bonds". Credit risk refers to an issuer's ability
to make timely payments of interest and principal. Because the Funds invest
primarily in medium- or lower-grade securities, the Funds are subject to a
higher level of credit risk than funds that buy only investment-grade
securities. The credit quality of "noninvestment-grade" securities is considered
speculative by recognized rating agencies with respect to the issuer's
continuing ability to pay interest and principal. Lower-grade securities may
have less liquidity and a higher incidence of default than higher-grade
securities. The Funds may incur higher expenditures to protect their interests
in such securities. The credit risks and market prices of lower-grade securities
generally are more sensitive to negative issuer developments, such as reduced
revenues or increased expenditures, or adverse economic conditions, such as a
recession, than are higher-grade securities. Market risk is the possibility that
the market values of securities owned by the Funds will decline. The prices of
income securities tend to
21
<PAGE> 27
fall as interest rates rise, and such declines tend to be greater among income
securities with longer maturities. Lower-grade securities, especially those with
longer maturities or those that do not make regular interest payments, may be
more volatile and may decline more in response to negative issuer or general
economic news than higher-grade securities. Market risk is often greater among
certain types of income securities, such as zero-coupon bonds or pay-in-kind
securities. As interest rates change, these securities often fluctuate more in
price than traditional income securities and may subject the Funds to greater
market risk than a fund that does not own these types of securities. The income
investors receive from the Funds is based primarily on interest rates, which can
vary widely over the short- and long-term. If interest rates drop, the income
from the Funds may drop as well. The Funds' investments in income securities are
subject to call risk (i.e., the possibility that if interest rates fall issuers
will prepay or "call" their bonds before their maturity dates, which would most
likely result in the Funds reinvesting the proceeds in bonds bearing the new,
lower interest rate).
The Funds' investments in foreign securities may be subject to risks not
usually associated with owning securities of U.S. issuers. These risks can
include fluctuations in foreign currencies, foreign currency exchange controls,
political and economic instability, differences in financial reporting,
differences in securities regulation and trading, and foreign taxation issues.
The Funds' investments in derivative investments involve risks different from
direct investment in underlying securities. These risks include imperfect
correlation between the value of the instruments and the underlying assets;
risks of default by the other party to certain transactions; risks that the
transactions may result in losses that partially or completely offset gains in
portfolio positions; risks that the transactions may not be liquid; and manager
risk.
Each of the Acquiring Fund and the Target Fund also engages in certain common
investment practices such as the ability to engage in repurchase agreements, to
invest up to a certain percentage of its assets in illiquid and certain
restricted securities and to lend portfolio securities up to a certain
percentage of its respective assets.
Investment in either of the Acquiring Fund or the Target Fund may not be
appropriate for all investors. Neither Fund is 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
Funds. An investment in either Fund is intended to be a long-term investment and
should not be used as a trading vehicle.
DIFFERENCES IN RISKS
The Acquiring Fund and the Target Fund engage in some dissimilar investment
practices. To the extent that the investment practices of the Funds differ, the
risks associated with an investment in the Acquiring Fund are different from the
risks
22
<PAGE> 28
associated with an investment in the Target Fund. An investment in the Acquiring
Fund may not be appropriate for all Target Fund shareholders. For a complete
description of the risks of an investment in the Acquiring Fund, see the
sections in the Acquiring Fund Prospectus entitled "Risk/Return Summary" and
"Investment Objectives, Policies, and Risks." For a complete description of the
risks of an investment in the Target Fund, see the sections in the Target Fund
Prospectus entitled "Risk/Return Summary" and "Investment Objectives, Policies
and Risks.
While both Funds invest in medium- or lower-grade income securities, the
actual portfolios of each Fund will differ and the overall credit quality and
credit risk of each portfolio will differ from time to time. Similarly, the
maturities and durations of the actual portfolios of each Fund will differ and
the overall market risk of each portfolio will differ from time to time. While
neither Fund has a policy limiting the maturities of its investments, the
Acquiring Fund's investment adviser seeks to moderate market risk by normally
maintaining a portfolio duration of two to six years. The policies of the
Acquiring Fund generally allow it to invest more of its assets in securities
rated BBB by S&P or Baa by Moody's than the Target Fund under normal market
conditions, and therefore the Acquiring Fund has the flexibility to invest in a
slightly higher credit quality portfolio than the Target Fund. Notwithstanding
the foregoing the actual credit quality of the Acquiring Fund may be higher or
lower from time to time than the credit quality of the Target Fund.
The Acquiring Fund may invest a higher percentage of its assets in foreign
securities (35%, as opposed to 20% for the Target Fund). While this allows the
Acquiring Fund more flexibility in its investments, it also may subject the
Acquiring Fund to a higher level of risk associated with investing in the
securities of foreign issuers.
C. 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 attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the Acquiring Fund or the Target Fund at (800) 421-5666 and
asking for the "Reorganization SAI".
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the Acquiring Fund would acquire all of the assets
and the liabilities of the Target Fund portfolio of the Series Fund on the date
of the Closing in consideration for Class A, B and C Shares of the Acquiring
Fund.
Subject to the Target Fund's shareholders approving 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
23
<PAGE> 29
Special Meeting or such later date as soon as practicable thereafter as the
Acquiring Fund and the Target Fund may mutually agree.
On the date of Closing, the Target Fund will transfer to the Acquiring Fund
all of the assets and liabilities of the Target Fund. The Acquiring Fund will in
turn transfer to the Target Fund a number of its Class A, B and C Shares equal
in value to the value of the net assets of the Target Fund transferred to the
Acquiring Fund as of the date of Closing, as determined in accordance with the
valuation method described in the Acquiring 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 Acquiring Fund and the
Target Fund may distribute on or before the Closing all or substantially all of
their respective undistributed net investment income (including net capital
gains) as of such date.
The Target Fund expects to distribute the Class A, B and C Shares of the
Acquiring Fund to the shareholders of the Target Fund promptly after the Closing
and then dissolve pursuant to a plan of dissolution adopted by the Board. The
Target Fund will be deregistered as an investment company under the 1940 Act.
The Acquiring Fund and the Target Fund have made certain standard
representations and warranties to each other regarding their capitalization,
status and conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the Target 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 Acquiring Fund of which this Prospectus/Proxy Statement forms a part
and the absence of any stop orders under the Securities Act of 1933, as
amended, pertaining thereto; and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
24
<PAGE> 30
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
Target Fund, provided that no such amendment after such approval shall be made
if it would have a material adverse affect on the interests of Target Fund
shareholders. The Agreement also may 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 Target Fund Board recommends that you vote to approve the Reorganization,
as it believes the Reorganization is in the best interests of the Target Fund's
shareholders and that the interests of the Target 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 Acquiring Fund
being offered hereby are represented by transferable Class A, B and C Shares,
par value $0.01 per share.
VOTING RIGHTS OF SHAREHOLDERS. Holders of shares of the Acquiring Fund are
entitled to one vote per share on matters as to which they are entitled to vote.
The Acquiring Fund is an open-end management investment company registered
with the SEC under the 1940 Act. Therefore, in addition to the specific voting
rights described above, shareholders of the Acquiring Fund are entitled, under
the 1940 Act, to vote with respect to certain other matters, including changes
in fundamental investment policies and restrictions, the approval of advisory
contracts, distribution contracts and certain distribution-related plans, and
the ratification of the selection of independent accountants.
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the Acquiring Fund will establish an
account for each Target Fund shareholder containing the appropriate number of
shares of the Acquiring Fund. The shareholder services and shareholder programs
of the Acquiring Fund and the Target Fund are substantially identical.
Shareholders of the Target Fund who are accumulating Target Fund shares under
the dividend reinvestment plan, or who are receiving payment under the
systematic withdrawal plan with respect to Target Fund shares, will retain the
same rights and privileges after the Reorganization in connection with the
Acquiring Fund Class A, B or C Shares received in the Reorganization through
substantially identical plans maintained by the Acquiring Fund. Van Kampen Trust
Company will continue to serve as custodian for the assets of Target Fund
shareholders held in IRA accounts after the Reorganization. Such IRA investors
will be sent appropriate documentation to confirm Van Kampen Trust Company's
custodianship.
25
<PAGE> 31
It will not be necessary for shareholders of the Target Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the Target Fund, such certificates will become null and void. However, Target
Fund shareholders holding such certificates may want to present such
certificates to receive certificates of the Acquiring Fund (to simplify
substantiation of and to preserve the tax basis of separate lots of shares).
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations,
court decisions, published positions of the Internal Revenue Service ("IRS") and
other applicable authorities, all as in effect on the date hereof and all of
which are subject to change or differing interpretations (possibly with
retroactive effect). The discussion is limited to U.S. persons who hold shares
of the Target Fund as capital assets for federal income tax purposes. This
summary does not address all of the federal income tax consequences that may be
relevant to a particular shareholder or to shareholders who may be subject to
special treatment under federal income tax laws (such as non-U.S. persons, banks
and other financial institutions, insurance companies, tax-exempt organizations,
dealers in stocks, securities or other financial instruments and holders who
acquired shares of the Target Fund as compensation). No advance ruling has been
or will be sought from the IRS regarding any matter relating to the
Reorganization. Thus, no assurance can be given that the IRS would not assert a
position contrary to any of the tax aspects described below. Shareholders should
consult their own tax advisers as to the federal income tax consequences of the
Reorganization, as well as the effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion from Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Target Fund ("Skadden Arps"), dated as of the
Closing date, regarding the characterization of the Reorganization as a
"reorganization" within the meaning of Section 368(a) of the Code. As such a
reorganization, the federal income tax consequences of the Reorganization can be
summarized as follows:
- No gain or loss will be recognized by the Target Fund or the Acquiring
Fund upon the transfer to the Acquiring Fund of the assets of the Target
Fund in exchange solely for the Class A, B or C Shares of the Acquiring
Fund and the assumption by the Acquiring Fund of the liabilities of the
Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund
who exchanges all of his, her or its shares of the Target Fund solely for
the Class A, B or C Shares of the Acquiring Fund pursuant to the
Reorganization.
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<PAGE> 32
- The aggregate tax basis of the Class A, B or C Shares of the Acquiring
Fund received by a shareholder of the Target Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of the shares
of the Target Fund surrendered in exchange therefor.
- The holding period of the Class A, B or C Shares of the Acquiring Fund
received by a shareholder of the Target Fund pursuant to the
Reorganization will include the holding period of the shares of the
Target Fund surrendered in exchange therefor.
- The Acquiring Fund's tax basis in the Target Fund's assets received by
the Acquiring Fund pursuant to the Reorganization will, in each instance,
equal the tax basis of such assets in the hands of the Target Fund
immediately prior to the Reorganization, and the Acquiring Fund's holding
period of such assets will, in each instance, include the period during
which the assets were held by the Target Fund.
The opinion of Skadden Arps will be based on federal income tax law in effect
on the Closing date. In rendering its opinion, Skadden Arps will also rely upon
certain representations of the management of the Acquiring Fund and the Target
Fund and assume, among other things, that the Reorganization will be consummated
in accordance with the operative documents. An opinion of counsel is not binding
on the IRS or any court.
The Acquiring Fund intends to continue 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 Target Fund and its shareholders.
EXPENSES
The expenses of the Reorganization generally will be shared by the Acquiring
Fund and Van Kampen (or its subsidiaries) in the event the Reorganization is
completed. Management believes that shareholders of the Target Fund and the
Acquiring Fund will benefit from the Reorganization due to anticipated decreases
in operating expenses of each Fund and the Fund's investment advisers,
collectively, will benefit from increased advisory fees and operational
efficiencies of the combined Fund. See the "Expense Comparison Table" above.
Management of the Target Fund and the Acquiring Fund estimates total
Reorganization costs of approximately $130,000. In addition, as part of the
Reorganization, the Target Fund will write-off the remaining unamortized
organizational expenses of approximately $12,000, which will be reimbursed by
Advisory Corp., in its capacity as the investment adviser of the Target Fund. In
the event the Reorganization is not completed, Van Kampen (or its subsidiaries)
will bear the costs associated with the Reorganization. The Acquiring Fund Board
and the Target Fund Board have
27
<PAGE> 33
reviewed and approved the foregoing arrangements with respect to expenses and
other charges relating to the Reorganization.
As noted above, shareholders of the Target Fund may redeem their shares or
exchange their shares for shares of certain other funds distributed by the
Distributor at any time prior to the closing of the Reorganization. See
"Distribution, Purchase, Valuation, Redemption and Exchange of Shares" above.
Redemptions and exchanges of shares generally are taxable transactions, unless
your account is not subject to taxation, such as an individual retirement
account or other tax-qualified retirement plan. Shareholders should consult with
their own tax advisers regarding potential transactions.
RATIFICATION OF INVESTMENT OBJECTIVES, INVESTMENT POLICIES AND INVESTMENT
RESTRICTIONS, DISTRIBUTION PLAN AND ADVISORY AGREEMENT OF THE ACQUIRING FUND
Approval of the Reorganization will constitute the ratification by the Target
Fund shareholders of the investment objectives, investment policies and
investment restrictions, distribution plan and advisory agreement of the
Acquiring Fund. Approval of the Reorganization will constitute approval of
amendments to any of the fundamental investment restrictions of the Target 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 federal income tax consequences of the
Reorganization and issuance of Class A, B and C Shares of the Acquiring Fund
will be passed on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois
60606, which serves as counsel to the Acquiring Fund and the Target Fund. Wayne
W. Whalen, a partner of Skadden Arps, is a Trustee of the Acquiring Fund and a
Director of the Target Fund.
D. RECOMMENDATION OF THE BOARD
The Target Fund Board has unanimously approved the Agreement and has
determined that participation in the Reorganization is in the best interests of
shareholders of each class of shares of the Target Fund. THE TARGET FUND BOARD
RECOMMENDS VOTING "FOR" THE PROPOSED REORGANIZATION.
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<PAGE> 34
OTHER INFORMATION
A. SHAREHOLDERS OF THE ACQUIRING FUND AND THE
TARGET FUND
At the close of business on August 4, 2000, there were 88,527,192 Class A
Shares, 51,309,754 Class B Shares and 11,137,576 Class C Shares of the Acquiring
Fund. As of such date, the trustees and officers of the Acquiring Fund as a
group own less than 1% of the shares of the Acquiring Fund. As of such date, no
person was known by the Acquiring Fund to own beneficially or of record as much
as 5% of the Class A, B or C Shares except as follows:
<TABLE>
<CAPTION>
NUMBER CLASS PERCENTAGE
SHAREHOLDER AND ADDRESS OF SHARES OF SHARES OF CLASS
----------------------- --------- --------- ----------
<S> <C> <C> <C>
Edward D. Jones & Co. 6,139,108 A 6.94%
201 Progress Parkway
Maryland Heights, MO 63043-3009
MLFP&S for the sole benefit of 3,006,611 B 5.86%
its customers
4800 Deer Lake Drive E 2(nd) Floor
Jacksonville, FL 32246-6484
MLFP&S for the sole benefit of 1,031,399 C 9.26%
its customers
4800 Deer Lake Drive E 2(nd) Floor
Jacksonville, FL 32246-6484
Edward D. Jones & Co. 913,574 C 8.20%
201 Progress Parkway
Maryland Heights, MO 63043-3009
</TABLE>
At the close of business on August 4, 2000, the record date with respect to
the Special Meeting, there were 644,124 Class A Shares, 1,842,347 Class B Shares
and 486,501 Class C Shares of the Target Fund. As of such date, the directors
and officers of the Target Fund as a group own less than 1% of the outstanding
shares of the Target Fund. As of such date, no person was known by the Target
Fund to own
29
<PAGE> 35
beneficially or of record as much as 5% of the Class A, B or C Shares of the
Target Fund except as follows:
<TABLE>
<CAPTION>
NUMBER CLASS PERCENTAGE
SHAREHOLDER AND ADDRESS OF SHARES OF SHARES OF CLASS
----------------------- --------- --------- ----------
<S> <C> <C> <C>
Edward D. Jones & Co. 131,616 A 20.43%
201 Progress Parkway
Maryland Heights, MO 63043-3009
Charles Schwab & Co. for the
exclusive 52,105 A 8.10%
benefit of its customers
101 Montgomery Street
San Francisco, CA 94104-4122
MLFP&S for the sole benefit of its 40,232 A 6.25%
customers
4800 Deer Lake Drive E 2(nd) Floor
Jacksonville, FL 32246-6484
LPL Financial Services 38,935 A 6.05%
A/C 2977-0269
9785 Towne Centre Drive
San Diego, CA 92121-1968
Edward D. Jones & Co. 34,404 C 7.07%
201 Progress Parkway
Maryland Heights, MO 63043-3009
</TABLE>
B. SHAREHOLDER PROPOSALS
As a general matter, the Acquiring Fund does not intend to hold future regular
annual or special meetings of its shareholders unless required by the 1940 Act.
In the event the Reorganization is not consummated, the Target Fund does not
intend to hold future regular annual or special meetings of its shareholders
unless required by the 1940 Act. Any shareholder who wishes to submit proposals
for consideration at a meeting of shareholders of the Acquiring Fund or the
Target Fund should send such proposal to the respective Fund at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555. 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 Fund a reasonable time before a solicitation is made. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.
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<PAGE> 36
VOTING INFORMATION AND REQUIREMENTS
Holders of shares of the Target Fund are entitled to one vote per share on
matters as to which they are entitled to vote. The Target Fund does not utilize
cumulative voting.
Each valid proxy given by a shareholder of the Target Fund will be voted by
the persons named in the proxy in accordance with the instructions marked
thereon 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 Board "FOR" approval of the
Reorganization. Abstentions and broken non-votes (i.e., where a nominee, such as
a broker, holding shares for beneficial owners votes on certain matters pursuant
to discretionary authority or instructions from beneficial owners but with
respect to one or more proposals does not receive instructions from beneficial
owners or does not exercise discretionary authority) have the effect of a vote
"AGAINST" the Reorganization proposal because the required vote is a majority of
the outstanding shares. One-third of the outstanding shares entitled to vote on
a proposal must be present in person or by proxy to have a quorum to conduct
business at the Special Meeting. Abstentions and broker non-votes will be deemed
present for quorum purposes.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Target 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. 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.
It is not anticipated that any action will be asked of the shareholders of the
Target 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.
APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF THE TARGET FUND.
In the event that sufficient votes in favor of a proposal 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 a proposal
to approve it, proxies would be voted in favor of adjournment only if the Board
determined that adjournment and additional solicitation was reasonable and in
the best interest of the shareholders of the Target 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
31
<PAGE> 37
to shareholders about the reasons for additional solicitation. Any such
adjournment will require the affirmative vote of the holders of a majority of
the outstanding shares voted at the session of the Special Meeting to be
adjourned.
Proxies of shareholders of the Target Fund are solicited by the Target Fund
Board. In order to obtain the necessary quorum at the Special Meeting,
additional solicitation may be made by mail, telephone, telegraph or personal
interview by representatives of Advisory Corp., Asset Management, Van Kampen, or
by dealers or their representatives. In addition, such solicitation servicing
may also be provided by PFPC Inc., a solicitation firm located in Boston,
Massachusetts, at a cost estimated to be approximately $3,000, plus reasonable
expenses.
August 12, 2000
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
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<PAGE> 38
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
ACQUIRING FUND AND TARGET FUND
PERFORMANCE
A-1
<PAGE> 39
Management's Discussion of the Van Kampen High Income Corporate Bond Fund's
Performance as of the Annual Report for August 31, 1999.
LETTER TO SHAREHOLDERS
September 20, 1999
Dear Shareholder,
With the volatility that we've experienced recently in many financial
markets, some investors have sold securities because of uncertainty about where
the markets were going, only to be left rethinking whether they made the right
decision. We've witnessed this kind of market activity numerous times over the
past several years, sparked by concerns such as the impact of the Asian economic
crisis, high stock valuations, or, most recently, the stability of many
high-flying technology companies. While these fears eventually subsided,
investors who may have sold during this period were unable to reap the benefits
of the subsequent rally. That's partly because most of the recent big gains
happened in relatively short periods of time. This kind of volatility--and the
danger of making short-term decisions--highlights the importance of investing
for the long term, in accordance with your individual financial objectives.
Although the worst of the Asian crisis appears to be behind us, new concerns
are always emerging. In the coming months, we'll likely hear more about how the
year 2000 computer problem may affect the markets or that we're overdue for a
correction. While the markets could undoubtedly suffer as a result of these or
any number of other events, we encourage you to focus on your long-term
investment goals. Although nothing is certain, history has shown us that over
time, the markets tend to recover--and most investors want to be positioned to
take advantage of any recovery.
If you have concerns about market volatility or questions about how your
portfolio is structured to respond to these events, we encourage you to contact
your financial advisor. Your advisor can talk with you about sustaining a
long-term investment plan through a variety of market conditions. We hope that
Van Kampen Funds will play an important role as you and your advisor build a
portfolio designed to help you weather what the markets have in store.
Sincerely,
[SIG]
Richard F. Powers III
Chairman
Van Kampen Asset Management Inc.
[SIG]
Dennis J. McDonnell
President
Van Kampen Asset Management Inc.
A-2
<PAGE> 40
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
Americans continued their spending spree over the past 12 months, keeping
the economy growing at a healthy pace. Although the economic environment
remained positive, we experienced a slowdown over the last several months from
the rapid growth early in the reporting period. The nation's gross domestic
product (GDP) peaked at 6.0 percent in the fourth quarter of 1998, then fell to
more sustainable levels in the first and second quarters of 1999.
EMPLOYMENT SITUATION
The strong job market helped encourage continued economic growth by making
consumers confident enough to spend at a brisk pace. During the reporting
period, the unemployment rate reached its lowest level in almost 30 years, and
wages and the number of jobs created continued to climb. However, some
economists expressed concerns about the job market in recent months, with wages
still increasing but productivity remaining stagnant. This has pushed the cost
of labor higher, as evidenced by the Employment Cost Index, which jumped sharply
in the second quarter of 1999.
INFLATION AND INTEREST RATES
In addition to strong growth levels, inflation remained tame throughout most
of the reporting period, although a sharp increase in oil prices contributed to
a spike in April's consumer price index (CPI) report. The Federal Reserve
remained active in guarding against inflation and tempering the economy during
this environment. The Fed lowered interest rates 0.25 percent three times in the
fall of 1998 in response to economic pressures, but, during the summer of 1999,
reversed two of those decreases to keep the economy from overheating.
INTEREST RATES AND INFLATION
August 31, 1997, through August 31, 1999
[LINE GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Aug 1997 5.5000 2.2000
6.2500 2.2000
5.7500 2.1000
Nov 1997 5.6875 1.8000
6.5000 1.7000
5.5625 1.6000
Feb 1998 5.6250 1.4000
6.1250 1.4000
5.6250 1.4000
May 1998 5.6875 1.7000
6.0000 1.7000
5.5625 1.7000
Aug 1998 5.9375 1.6000
5.7500 1.5000
5.2500 1.5000
Nov 1998 4.8750 1.5000
4.0000 1.6000
4.8125 1.7000
Feb 1999 4.8750 1.6000
5.1250 1.7000
4.9375 2.3000
May 1999 4.5000 2.1000
4.0000 2.0000
4.7500 2.1000
Aug 1999 5.4375 2.3000
</TABLE>
Interest rates are represented by the closing midline federal funds rate
on the last day of each month. Inflation is indicated by the annual
percent change of the Consumer Price Index for all urban consumers at
the end of each month.
A-3
<PAGE> 41
PERFORMANCE RESULTS FOR THE PERIOD ENDED AUGUST 31, 1999
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV(1).... 4.41% 3.57% 3.42%
One-year total return(2)................. (0.51%) (0.18%) 2.48%
Five-year average annual total
return(2)................................ 7.55% 7.50% 7.74%
Ten-year average annual total
return(2)................................ 7.57% N/A N/A
Life-of-Fund average annual total
return(2)................................ 8.78% 8.16% 6.70%
Commencement date........................ 10/02/78 07/02/92 07/06/93
DISTRIBUTION RATE AND YIELD
Distribution rate(3)..................... 10.31% 9.97% 10.02%
SEC Yield(4)............................. 10.54% 10.25% 10.32%
</TABLE>
N/A = Not Applicable
(1)Assumes reinvestment of all distributions for the period and does not include
payment of the maximum sales charge (4.75% for A shares) or contingent deferred
sales charge for early withdrawal (4% for B shares and 1% for C shares).
(2)Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
(3)Distribution rate represents the monthly annualized distributions of the Fund
at the end of the period and not the earnings of the Fund.
(4)SEC Yield is a standardized calculation prescribed by the Securities and
Exchange Commission for determining the amount of net income a portfolio should
theoretically generate for the 30-day period ending August 31, 1999.
See the Comparative Performance section of the current prospectus. Past
performance does not guarantee future results. Investment return and net asset
value will fluctuate with market conditions. Fund shares, when redeemed, may be
worth more or less than their original cost.
Investing in high yield, lower-rated securities involves certain risks, which
may include the potential for greater sensitivity to general economic downturns
and greater market price volatility.
Foreign investments may magnify volatility due to changes in foreign exchange
rates, the political and economic uncertainties in foreign countries, and the
potential lack of liquidity, government supervision, and regulation.
Market forecasts provided in this report may not necessarily come to pass.
A-4
<PAGE> 42
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment performance at regular intervals. A
comparison of your Fund's performance to an applicable benchmark can:
- Illustrate the market environment in which your Fund is being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate how your Fund's management team has responded to
opportunities and challenges
The following graph compares your Fund's performance to that of the Credit
Suisse First Boston High Yield Index and the Lipper High Yield Bond Fund Index
over time.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen High Income Corporate Bond Fund vs. the Credit Suisse First
Boston High Yield Index and the Lipper High Yield Bond Fund Index (August
31, 1989 through August 31, 1999)
[INVESTMENT PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
VAN KAMPEN HIGH INCOME CREDIT SUISSE FIRST BOSTON LIPPER HIGH YIELD BOND FUND
CORPORATE BOND FUND HIGH YIELD INDEX INDEX
---------------------- -------------------------- ---------------------------
<S> <C> <C> <C>
Aug 1989 9522.00 10000.00 10000.00
9145.00 9773.00 9817.00
8570.00 9527.70 9484.00
8478.00 9546.75 9416.00
8410.00 9503.79 9314.00
8040.00 9169.26 9035.00
7779.00 8999.63 8799.00
7898.00 9258.82 8900.00
7980.00 9297.70 8907.00
8129.00 9491.10 9110.00
8292.00 9790.07 9300.00
8485.00 10106.30 9500.00
Aug 1990 8010.00 9639.37 9084.00
7486.00 8904.85 8591.00
7055.00 8680.45 8225.00
7087.00 8854.93 8250.00
7083.00 8897.43 8279.00
7179.00 9141.22 8398.00
7692.00 9929.20 9071.00
8017.00 10544.80 9579.00
8223.00 10982.40 9981.00
8385.00 11037.30 10044.00
8659.00 11326.50 10286.00
8936.00 11709.30 10626.00
Aug 1991 9248.00 11922.50 10834.00
9418.00 12193.10 11033.00
9787.00 12596.70 11424.00
9911.00 12697.50 11521.00
10007.00 12790.10 11608.00
10459.00 13310.70 12121.00
10643.00 13634.20 12432.00
10914.00 13837.30 12659.00
11014.00 13849.80 12749.00
11202.00 14038.10 12933.00
11287.00 14177.10 13068.00
11479.00 14395.40 13289.00
Aug 1992 11636.00 14594.10 13452.00
11704.00 14688.90 13585.00
11406.00 14536.20 13349.00
11550.00 14754.20 13565.00
11751.00 14920.90 13740.00
12062.00 15328.30 14135.00
12222.00 15631.80 14402.00
12519.00 15961.60 14694.00
12643.00 16052.60 14805.00
12886.00 16287.00 15041.00
13210.00 16581.80 15399.00
13317.00 16754.20 15544.00
Aug 1993 13405.00 16896.60 15652.00
13372.00 16992.90 15686.00
13625.00 17303.90 16073.00
13777.00 17521.90 16204.00
13998.00 17742.70 16466.00
14322.00 18058.50 16861.00
14309.00 18085.60 16852.00
13918.00 17553.90 16291.00
13675.00 17318.70 16055.00
13692.00 17417.40 16101.00
13796.00 17300.70 16074.00
13724.00 17382.00 16042.00
Aug 1994 13718.00 17507.20 16057.00
13645.00 17577.80 16069.00
13617.00 17589.50 16069.00
13498.00 17385.50 15821.00
13492.00 17569.70 15861.00
13648.00 17754.20 16003.00
14016.00 18191.00 16485.00
14127.00 18396.50 16635.00
14453.00 18804.90 17053.00
14782.00 19335.20 17440.00
14800.00 19462.80 17511.00
15036.00 19764.50 17871.00
Aug 1995 15156.00 19819.90 17910.00
15375.00 20047.80 18116.00
15522.00 20270.30 18251.00
15620.00 20365.60 18343.00
15844.00 20624.20 18618.00
16198.00 21016.10 18982.00
16350.00 21127.50 19174.00
16347.00 21070.40 19093.00
16553.00 21184.20 19248.00
16708.00 21355.80 19397.00
16785.00 21402.80 19409.00
16889.00 21595.40 19498.00
Aug 1996 17075.00 21830.80 19813.00
17478.00 22206.30 20329.00
17588.00 22392.80 20426.00
17808.00 22742.20 20778.00
18008.00 23185.60 21034.00
18204.00 23354.90 21242.00
18487.00 23794.00 21599.00
18259.00 23527.50 21131.00
18374.00 23736.80 21311.00
18808.00 24214.00 21875.00
19099.00 24543.30 22250.00
19481.00 25063.60 22843.00
Aug 1997 19540.00 25198.90 22896.00
19988.00 25697.90 23450.00
19777.00 25695.30 23358.00
20050.00 25877.70 23528.00
20212.00 26113.20 23805.00
20644.00 26557.20 24267.00
20892.00 26764.30 24496.00
21206.00 26898.10 24851.00
21395.00 27099.90 24929.00
21459.00 27181.20 24901.00
21395.00 27238.20 24945.00
21588.00 27428.90 25115.00
Aug 1998 19865.00 25566.50 23201.00
19640.00 25563.90 23062.00
19214.00 25055.20 22539.00
20419.00 26325.50 23862.00
20305.00 26265.00 23788.00
20548.00 26209.80 24218.00
20483.00 26154.80 24121.00
20869.00 26392.80 24546.00
21292.00 26976.00 25181.00
20873.00 26684.70 24703.00
20807.00 26698.00 24703.00
20918.00 26711.40 24714.00
Aug 1999 20742.00 26473.70 24463.00
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
A-5
<PAGE> 43
PORTFOLIO MANAGEMENT REVIEW
HIGH INCOME CORPORATE BOND FUND ANNUAL REPORT
We recently spoke with the management team of the Van Kampen High Income
Corporate Bond Fund about the key events and economic forces that shaped the
markets during the Fund's fiscal year. The team includes Robert J. Hickey,
portfolio manager, Peter E. Ehret, portfolio comanager, and Peter W. Hegel,
chief investment officer for fixed-income investments. Mr. Hickey assumed
management responsibilities for the Fund on June 1, 1999. The following excerpts
reflect their views on the Fund's performance during the 12-month reporting
period ended August 31, 1999.
Q HOW WOULD YOU CHARACTERIZE THE MARKET CONDITIONS IN WHICH THE FUND
OPERATED DURING THE PAST 12 MONTHS?
A The last quarter of 1998 was marked by a series of interest-rate cuts by
the Federal Reserve Board, implemented to restore order to a volatile
market. This intervention paved the way for recovery in the first quarter
of 1999, as investors gained confidence in the strength of the economy and
inflation remained modest. Consequently, yield spreads narrowed between
Treasuries and other types of bonds (such as corporate, high-yield, and
mortgage-backed securities).
However, the good news for the fixed-income market was quelled in the second
quarter, as investors became distracted by expectations of rising inflation and
warnings of additional action from the Fed. This development prompted yield
spreads to widen once again, although not to the record-high levels seen last
fall. The market breathed a sigh of relief at the end of the second quarter, as
the Fed announced a 0.25 percent rate hike while reassuring fixed-income
investors that additional action seemed unnecessary at that time.
By the beginning of August, however, rumblings of another rate hike were
once again triggered by indications of a further increase in inflation and a
strengthening economy. At the end of the month, the Fed boosted rates a second
time to 5.25 percent. Bond prices grew erratic at the possibility of a third
increase by the end of the year, and dropped for the final four days of the
reporting period.
Q WHAT WAS THE EFFECT OF THIS ACTIVITY ON THE HIGH-YIELD MARKET?
A Initially, the high-yield market participated in the cautious recovery of
the fixed-income market from last fall's lows. However, investor concerns
about the direction of interest rates and the level of high-yield defaults
lingered through the reporting period. Although the default rate crept higher
during the period, we believe it represented a reversion to historical norms
from the unusually low default levels of the past few years. We believe the
attractive yields of high-yield bonds compensate investors for their increased
credit and default risk.
Thanks to the positive economic environment and relatively low interest
rates, high-yield issuance bounced back from last fall's depressed levels,
giving us a greater range of
A-6
<PAGE> 44
bonds to consider for investment. We anticipate that this trend will gain energy
in September, with a record-high level of issuance expected as issuers scramble
to bring new bonds to the market before year 2000.
Q HOW DID YOU MANAGE THE FUND IN LIGHT OF THESE CONDITIONS?
A We continued to implement our investment strategy of fundamental credit
analysis--which, given the volatility experienced in the market during
this period of time, proved to be successful. In support of this strategy,
we maintained the Fund's credit quality profile with a focus on B-rated bonds,
which provided a yield advantage over higher-quality investments. We also
maintained a low cash position in the portfolio despite the flow of assets in
and out of the Fund during the reporting period. From its August-end level, the
Fund's duration was elevated just slightly to 4.58 years, reflecting the longer
average maturities and coupons of the issues held in the portfolio during the
period. Each of these actions contributed to the Fund's return.
Among the Fund's sector allocation, our investments in the
telecommunications sector benefited the portfolio, thanks to that sector's high
profile and selective new issuance. We also returned our attention to cyclical
issues, adding defensive investments like forest products to the portfolio.
However, the Fund's return was hurt by its holdings in the health-care and
energy sectors--two of the weakest industries of 1999. The Fund's position in
textiles also undermined the Fund's return, as this sector came under extreme
pressure during the summer months.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund posted a total return of 4.41 percent (Class A shares at net
asset value) for the 12-month period ended August 31, 1999. By comparison,
the Credit Suisse First Boston High Yield Index returned 3.55 percent for
the same period. The Credit Suisse First Boston High Yield Index is a
broad-based, unmanaged index that reflects the general performance of a wide
range of selected bonds within the public high-yield debt market. Of course,
past performance is no guarantee of comparable future results. Please refer to
the chart and footnotes on page A-4 for additional Fund performance results.
Q WHAT IS YOUR OUTLOOK FOR THE MARKET OVER THE COMING MONTHS?
A Generally, the picture for the high-yield bond market has improved from
six months ago, and certainly from 12 months ago. The story for the
remainder of the year will hinge on the market's preparation for year
2000, and how the market reacts to issuers rushing to bring new bonds to the
market as investors catch up from a relatively sluggish summer. We'll continue
to monitor the level of supply for opportunities to alter the structure of the
portfolio.
A-7
<PAGE> 45
As we manage the Fund going forward, our focus on fundamental, in-depth
research and assessment of high-yield bonds will remain unchanged. We will look
beyond the sector and credit rating of a bond to identify those issuers that we
believe will remain financially sound and perform well in a range of market
conditions. We'll also search for value in out-of-favor areas of the market in
our quest for opportunities to diversify the portfolio and contribute to the
Fund's performance.
<TABLE>
<S> <C> <C>
[SIG.] [SIG.] [SIG.]
Robert J. Hickey Peter E. Ehret Peter W. Hegel
Portfolio Manager Portfolio Comanager Chief Investment
Officer
Fixed Income
Investments
</TABLE>
A-8
<PAGE> 46
Management's Discussion of the Van Kampen High Yield & Total Return Fund's
Performance as of the Annual Report for June 30, 1999.
LETTER TO SHAREHOLDERS
July 20, 1999
Dear Shareholder,
With the volatility that we've experienced recently in many financial
markets, some investors have sold securities because of uncertainty about where
the markets were going, only to be left rethinking whether they made the right
decision. We've witnessed this kind of market activity numerous times over the
past several years, sparked by concerns such as the impact of the Asian economic
crisis, high stock valuations, or, most recently, the stability of many
high-flying technology companies. While these fears eventually subsided,
investors who may have sold during this period were unable to reap the benefits
of the subsequent rally. That's partly because most of the recent big gains
happened in relatively short periods of time. This kind of volatility--and the
danger of making short-term decisions--highlights the importance of investing
for the long term, in accordance with your individual financial objectives.
Although the worst of the Asian crisis appears to be behind us, new concerns
are always emerging. In the coming months, we'll likely hear more about how the
year 2000 computer problem may affect the markets or that we're overdue for a
correction. While the markets could undoubtedly suffer as a result of these or
any number of other events, we encourage you to focus on your long-term
investment goals. Although nothing is certain, history has shown us that over
time, the markets tend to recover--and most investors want to be positioned to
take advantage of any recovery.
If you have concerns about market volatility or questions about how your
portfolio is structured to respond to these events, we encourage you to contact
your financial advisor. Your advisor can talk with you about sustaining a
long-term investment plan through a variety of market conditions. We hope that
Van Kampen Funds will play an important role as you and your advisor build a
portfolio designed to help you weather what the markets have in store.
Sincerely,
[SIG]
Richard F. Powers, III
Chairman
Van Kampen Investment Advisory Corp.
[SIG]
Dennis J. McDonnell
President
Van Kampen Investment Advisory Corp.
A-9
<PAGE> 47
ECONOMIC SNAPSHOT
The strength of the domestic economy continued to defy expectations in the
first half of 1999, although it finally began to show signs of slowing down.
Strong growth, healthy employment, and low inflation all contributed to the
favorable economic environment.
STRONG ECONOMIC GROWTH
The nation's gross domestic product rose at an impressive rate of 4.3
percent during the first quarter of 1999, but fell to 2.3 percent in the second
quarter. The first-quarter expansion was fueled by an increase in consumer
spending, which dropped to more moderate levels later in the reporting period.
POSITIVE EMPLOYMENT ENVIRONMENT
In May, the unemployment rate dropped to 4.2 percent--its lowest level in
more than 30 years. Throughout the reporting period, unemployment remained low,
the number of jobs grew, and wages rose. The labor market remained especially
tight in the service industry and most urban areas.
LOW INFLATION
Inflation remained low throughout most of the reporting period, although a
sharp increase in oil prices contributed to a spike in April's consumer price
index report (CPI). Following this up-tick, the Federal Reserve raised interest
rates 0.25 percent on June 30. Although the Fed had expressed a bias toward a
series of rate increases, May's tame CPI report prompted it to drop this bias
when announcing the June rate increase.
ECONOMIC OUTLOOK
Our outlook for the economy suggests that the moderate slowdown may
continue, bringing the economy back to historically normal growth levels.
Healthy job growth, which has been supporting the consumer confidence and
spending levels, showed signs of faltering toward the end of the reporting
period. However, a renewed optimism for corporate earnings, low unemployment,
and a vibrant housing market should provide some balance against a slower job
growth rate.
INTEREST RATES AND INFLATION
June 30, 1997 through June 30, 1999
[LINE GRAPH]
<TABLE>
<CAPTION>
INTEREST RATES INFLATION
-------------- ---------
<S> <C> <C>
Jun 97 6.5 2.3
6 2.2
5.5 2.2
Sep 97 6.25 2.2
5.75 2.1
5.6875 1.8
Dec 97 6.5 1.7
5.5625 1.6
5.625 1.4
Mar 98 6.125 1.4
5.625 1.4
5.6875 1.7
Jun 98 6 1.7
5.5625 1.7
5.9375 1.6
Sep 98 5.75 1.5
5.25 1.5
4.875 1.5
Dec 98 4 1.6
4.8125 1.7
4.875 1.6
Mar 99 5.125 1.7
4.9375 2.3
4.5 2.1
Jun 99 4 2
</TABLE>
Interest rates are represented by the closing midline federal funds rate
on the last day of each month. Inflation is indicated by the annual
percentage change of the Consumer Price Index for all urban consumers at
the end of each month.
A-10
<PAGE> 48
INVESTMENT OVERVIEW
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
COMPOSITION OF NET ASSETS (AT JUNE 30, 1999)
[PIE CHART]
TELECOMMUNICATIONS (31.5%)
OTHER (27.2%)
HEALTH CARE SUPPLIES & SERVICES (7.3%)
GAMING & LODGING (6.9%)
RETAIL -- GENERAL (4.8%)
BROADCAST -- RADIO & TELEVISION (4.5%)
CABLE TELEVISION (3.9%)
ENERGY (3.3%)
CHEMICALS (3.2%)
MULTI-INDUSTRY (3.1%)
ENVIRONMENTAL CONTROLS (2.2%)
SHORT-TERM INVESTMENT (2.1%)
TOP FIVE ISSUERS
<TABLE>
<CAPTION>
PERCENT OF
ISSUER INDUSTRY NET ASSETS
<S> <C> <C>
Columbia/HCA Healthcare Health Care Supplies & Services 4.3%
Nextel Communications, Inc. Telecommunications 4.0%
DR Securitized Lease Trust Retail--General 2.2%
RSL Communications plc Telecommunications 2.2%
Station Casinos, Inc. Gaming & Lodging 1.9%
</TABLE>
A-11
<PAGE> 49
TOP FIVE SECTORS
<TABLE>
<CAPTION>
VALUE PERCENT OF
SECTOR (000) NET ASSETS
<S> <C> <C>
Telecommunications $12,187 31.5%
Health Care Supplies & Services 2,819 7.3%
Gaming & Lodging 2,680 6.9%
Retail--General 1,866 4.8%
Broadcast--Radio & Television 1,772 4.5%
</TABLE>
<TABLE>
<CAPTION>
YIELD INFORMATION AS OF JUNE 30, 1999
30-DAY CURRENT
YIELD+
<S> <C>
Class A....................................... 8.52%
Class B....................................... 8.18%
Class C....................................... 8.18%
</TABLE>
+ The current 30-day yield reflects the net investment income generated by the
Fund over the specified 30-day period expressed as an annual percentage.
Expenses accrued for the 30-day period include any fees charged to all
shareholders. Yields will fluctuate as market conditions change and are not
necessarily indicative of future performance.
<TABLE>
<CAPTION>
TOTAL RETURNS**
------------------------------------------------------------
AVERAGE ANNUAL COMMENCEMENT
ONE YEAR SINCE INCEPTION DATE
-------------------- -------------------- ------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE*** CHARGE* CHARGE***
<S> <C> <C> <C> <C> <C>
Class A Shares....... -2.93% 1.90% 7.93% 9.60% 5/1/96
Class B Shares....... -2.41% 1.28% 8.16% 8.80% 5/1/96
Class C Shares....... 0.35% 1.28% 8.80% 8.80% 5/1/96
CS First Boston High
Yield Index........ N/A -0.85% N/A 7.97% N/A
</TABLE>
The CS First Boston High Yield Index is an unmanaged index of high yield
corporate bonds.
* The returns above are calculated using the applicable sales charge for Class A
shares and the applicable deferred sales charge for Class B and Class C shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
*** Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for Class A shares) or
contingent deferred sales charge for early withdrawal (4% for Class B shares and
1% for Class C shares).
A-12
<PAGE> 50
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
In accordance with SEC regulations, Fund performance since inception as
shown below assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; all recurring fees (including
management fees) were deducted; and all dividends and distributions were
reinvested. The graph presents the performance of Class A shares. The
performance of Class B and Class C shares will vary based upon the sales charge
and fees assessed to each Class.
[LINE GRAPH]
<TABLE>
<CAPTION>
VAN KAMPEN HIGH YIELD & TOTAL
RETURN FUND CLASS A CS FIRST BOSTON HIGH YIELD INDEX
----------------------------- --------------------------------
<S> <C> <C>
5/1/96 9500 10000
6/30/96 9553 10501
6/30/97 11284 12040
6/30/98 12493 13362
6/30/99 12730 13248
</TABLE>
Past performance is not predictive of future performance.
The performance results provided in this overview are for informational purposes
only and should not be construed as a guarantee of the Fund's future
performance. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
A-13
<PAGE> 51
INVESTMENT OVERVIEW
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
We recently spoke with the management team of the Van Kampen High Yield & Total
Return Fund about the key events and economic forces that shaped the markets
during the past 12 months. The team is led by Robert Angevine, portfolio
manager, and includes Thomas L. Bennett and Stephen F. Esser. The following
excerpts reflect their views on the Fund's performance during the 12-month
period ended June 30, 1999.
Q HOW WOULD YOU CHARACTERIZE THE MARKET CONDITIONS IN WHICH THE FUND
OPERATED DURING THE PAST 12 MONTHS?
A The second half of 1998 was marked by volatility, as the fixed-income
market was unsettled by global economic weakness and a subsequent flight
to quality. A series of fourth-quarter interest-rate cuts by the Federal
Reserve Board restored order and paved the way for recovery in the first quarter
of 1999, as investors gained confidence in the strength of the economy and
modest inflation. Consequently, yield spreads narrowed between treasuries and
other fixed-income products (such as corporate, high-yield, and government
securities).
However, this good news for fixed-income products was quelled in the second
quarter of 1999 by a slight increase in inflation and warnings of interference
from the Fed. This prompted yield spreads to widen once again, although not to
the record-high levels seen last fall. The market breathed a sigh of relief at
the end of the reporting period, as the Fed approved a 0.25 percent hike while
reassuring fixed-income investors that additional action seemed unnecessary.
Q HOW DID HIGH-YIELD BONDS REACT TO THESE CONDITIONS?
A The high-yield market continued to make progress from last fall's lows,
when growing concerns about the global economy sparked a flight to quality
that created one of the most difficult periods on record for high-yield
bonds. In the first six months of 1999, high-yield bonds initially performed
well, as they were supported by positive fund flows and merger and investment
activity in the dominant telecommunications and cable industries. Activity in
these industries has generally been favorable for the overall credit quality of
high-yield issuers--even those securities not directly involved in a
transaction--because these deals provided a basis from which to value the equity
of issuers. By May, however, liquidity concerns, technical conditions, and
rising rates contributed to lower prices.
Q HOW DID THE FUND PERFORM DURING THE PERIOD? SPECIFICALLY, WHAT FACTORS
CONTRIBUTED TO ITS RETURN?
A The Fund's 12-month return of 1.90 percent (Class A shares at net asset
value without sales charge) outperformed the -0.85 percent return of the
unmanaged
A-14
<PAGE> 52
CS First Boston High Yield Index. The Fund's exposure to non-U.S. issues and the
telecommunications and cable sectors had the largest positive impact on the
portfolio's results. Because the telecommunications sector has been a driving
force for the high-yield market for the past few years, we continued to focus on
this industry, selecting those issuers that we view as having fundamental
strength.
We also found attractive yields and good value in the Fund's modest yet
important allocation to non-U.S. holdings. Country allocation continued to be
broad as we focused on diversifying this portion of the portfolio. Canada,
Germany, and Mexico remained among our largest non-U.S. holdings.
Holdings in the health-care, retail, and gaming sectors also supported the
Fund's performance. However, our underweight positions in the strong-performing
cyclical sectors, such as commodities, detracted from the Fund's return.
Q WHAT IS YOUR OUTLOOK FOR THE COMING MONTHS?
A We expect economic growth to moderate and inflation to remain close to
current levels, which should provide an excellent environment for
high-yield bonds. Backed by a favorable credit environment, we continue to
believe that high-yield bonds offer attractive value on a risk-adjusted expected
return basis. As a result, our outlook is positive, and we will continue to
pursue opportunities to support the Fund's objective of providing high current
income and total return.
<TABLE>
<S> <C> <C>
Robert Angevine Thomas L. Bennett Stephen F. Esser
Portfolio Manager Portfolio Manager Portfolio Manager
</TABLE>
A-15
<PAGE> 53
[VAN KAMPEN FUNDS LOGO]
HYTR
<PAGE> 54
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
1 PARKVIEW PLAZA, PO BOX 5555
OAKBROOK TERRACE, ILLINOIS 60181-5555
(800) 421-5666
---------------------
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
DATED AUGUST 12, 2000
---------------------
This Statement of Additional Information provides information about the Van
Kampen High Income Corporate Bond (the "Acquiring Fund"), an open-end management
investment company, in addition to information contained in the Prospectus/Proxy
Statement of the Acquiring Fund, dated August 12, 2000, which also serves as the
proxy statement of the Van Kampen High Yield & Total Return Fund (the "Target
Fund"), a series of the Van Kampen Series Fund, Inc., an open-end management
investment company (the "Series Fund"), in connection with the issuance of Class
A, B and C Shares of the Acquiring Fund to shareholders of the Target Fund. This
Statement of Additional Information is not a prospectus. It should be read in
conjunction with the Prospectus/Proxy Statement (dated August 12, 2000) into
which it has been incorporated by reference and which may be obtained by
contacting the Acquiring Fund located at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555 (telephone no. (630) 684-6000 or (800) 421-5666).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization..................................... 2
Additional Information About the Acquiring Fund............. 2
Additional Information About the Target Fund................ 2
Financial Statements........................................ 2
</TABLE>
The Acquiring 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
<PAGE> 55
PROPOSED REORGANIZATION
The shareholders of the Target Fund are being asked to approve an
acquisition of all the assets of the Target Fund solely in exchange for Class A,
B and C Shares of the Acquiring Fund and the Target Fund's assumption of the
liabilities of the Target Fund (the "Reorganization") pursuant to an Agreement
and Plan of Reorganization by and between the Acquiring Fund and the Series
Fund, on behalf of the Target Fund (the "Agreement"). A copy of the form of the
Agreement is attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Acquiring Fund, dated December 29, 1999, as
supplemented, attached as Appendix B to this Statement of Additional
Information.
ADDITIONAL INFORMATION ABOUT THE TARGET FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Series Fund, dated April 3, 2000, attached as
Appendix C to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the Acquiring Fund for the fiscal year ended
August 31, 1999 which are included in Appendix B hereto, (ii) the unaudited
financial statements of the Acquiring Fund for six months ended February 29,
2000 as included in Appendix D hereto (iii) the audited financial statements of
the Target Fund for the fiscal year ended June 30, 1999 which are included in
Appendix C hereto, and (iv) the unaudited financial statements of the Target
Fund for the six months ended December 31, 1999 as included in Appendix E
hereto.
2
<PAGE> 56
APPENDIX A
FORM OF
AGREEMENT AND PLAN OR REORGANIZATION
<PAGE> 57
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as
of ________________, by and between Van Kampen High Income Corporate Bond Fund
(the "Acquiring Fund"), a registered investment company, SEC File No. 811-2851,
and Van Kampen Series Fund, Inc. (the "Series Fund"), a registered investment
company, SEC File No. 811-7140, on behalf of its series, Van Kampen High Yield &
Total Return Fund (the "Target Fund").
WITNESSETH:
WHEREAS, the Board of Trustees of the Acquiring Fund (the "Acquiring Fund
Board") and the Board of Directors of the Target Fund (the "Target Fund Board")
have determined that entering into this Agreement for the Acquiring Fund to
acquire the assets and liabilities of the Target Fund is in the best interests
of the shareholders of each respective fund; and
WHEREAS, the parties intend that this transaction qualify as a reorganization
within the meaning of 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 Target Fund will convey, transfer and
deliver to the Acquiring Fund at the Closing, provided for in Section 2 hereof,
all of the existing assets of the Target Fund (including accrued interest to the
Closing Date) to the Acquiring 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 Acquiring Fund agrees
that on the Closing Date the Acquiring Fund will (i) deliver to the Target Fund,
full and fractional Class A, Class B and Class C Shares of beneficial interest,
par value $0.01 per share, of the Acquiring Fund having aggregate net asset
values in an amount equal to the aggre-
<PAGE> 58
gate dollar value of the Assets net of any liabilities of the Target Fund
described in Section 3E hereof (the "Liabilities") determined pursuant to
Section 3A of this Agreement (collectively, the "Acquiring Fund Shares") and
(ii) assume all of the Target Fund's Liabilities. The calculation of full and
fractional Class A, Class B and Class C Shares of the Acquiring Fund to be
exchanged shall be carried out to no less than two (2) decimal places. All
Acquiring Fund Shares delivered to the Target Fund 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 Target 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 Acquiring Fund shall deliver to the Target Fund the
Acquiring Fund Shares in the amount determined pursuant to Section 1B hereof and
the Target Fund thereafter shall, in order to effect the distribution of such
shares to the Target Fund shareholders, instruct the Acquiring Fund to register
the pro rata interest in the Acquiring Fund Shares (in full and fractional
shares) of each of the holders of record of shares of the Target Fund in
accordance with their holdings of Class A, Class B or Class C 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 Acquiring
Fund agrees promptly to comply with said instruction. The Acquiring 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 Target
Fund to be transferred and assumed, respectively, by the Acquiring 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 Acquiring Fund
(collectively, the "Acquiring Fund Prospectus"), copies of which have been
delivered to the Target Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State
Street Bank and Trust Company or other custodian as designated by the Acquiring
2
<PAGE> 59
Fund (collectively the "Custodian") for the benefit of the Acquiring 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 Van Kampen Investments Inc. ("Van Kampen") or a subsidiary or affiliate
thereof.
C. FAILURE TO DELIVER SECURITIES. If the Target Fund is unable to make
delivery pursuant to Section 3B hereof to the Custodian of any of the Target
Fund's securities for the reason that any of such securities purchased by the
Acquiring Fund have not yet been delivered to it by the Target Fund's broker or
brokers, then, in lieu of such delivery, the Target Fund 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 Acquiring Fund or
Custodian, including brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The Acquiring Fund, in order to assist the
Target Fund in the distribution of the Acquiring Fund Shares to the Target Fund
shareholders after delivery of the Acquiring Fund Shares to the Target Fund,
will establish pursuant to the request of the Target Fund an open account with
the Acquiring Fund for each shareholder of the Target Fund and, upon request by
the Target Fund, shall transfer to such accounts, the exact number of full and
fractional Class A, Class B and Class C Shares of the Acquiring Fund then held
by the Target Fund specified in the instruction provided pursuant to Section 2
hereof. The Acquiring Fund is not required to issue certificates representing
Acquiring Fund Shares unless requested to do so by a shareholder. Upon
liquidation or dissolution of the Target Fund, certificates representing shares
of beneficial interest of the Target Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of Target 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. In the event that the transactions contemplated herein are
consummated, the Target Fund 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 Acquiring Fund's Registration Statement on
Form N-14 (the
3
<PAGE> 60
"Registration Statement") and the solicitation of the Target Fund shareholder
proxies; (ii) the Target Fund counsel's reasonable attorney's fees; and (iii)
the cost of rendering the tax opinion, more fully referenced in Section 7F
below. In the event that the transactions contemplated herein are not
consummated for any reason, then all reasonable outside expenses incurred to the
date of termination of this Agreement shall be borne by Van Kampen.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no
event later than one year after the Closing Date, the Target Fund shall
voluntarily dissolve and completely liquidate by taking, in accordance with
Maryland Law and Federal securities laws, all steps as shall be necessary and
proper to effect a complete liquidation and dissolution of the Target Fund.
Immediately after the Closing Date, the share transfer books relating to the
Target Fund shall be closed and no transfer of shares shall thereafter be made
on such books.
4. TARGET FUND'S REPRESENTATIONS AND WARRANTIES.
The Target Fund hereby represents and warrants to the Acquiring Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Acquiring Fund that:
A. ORGANIZATION. The Target Fund is duly formed and in good standing
under the laws of the state of its organization and is duly authorized to
transact business in the state of its organization. The Target Fund is 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 the Target Fund. The Target Fund has all
material federal, state and local authorizations necessary to own all of the
properties and assets and to carry on its business as now being conducted,
except authorizations which the failure to so obtain would not have a material
adverse effect on the Target Fund.
B. REGISTRATION. The Target Fund is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as an open-end, management
investment company and such registration has not been revoked or rescinded. The
Target Fund is in compliance in all material respects with the 1940 Act and the
rules and regulations thereunder with respect to its activities. All of the
outstanding shares of common stock of the Target Fund have been duly authorized
and are validly issued, fully paid and nonassessable and not subject to
pre-emptive or dissenters' rights.
4
<PAGE> 61
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 Target Fund audited as of and for
the year ended June 30, 2000, true and complete copies of which have been
heretofore furnished to the Acquiring Fund, fairly represent the financial
condition and the results of operations of the Target 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 Target Fund shall furnish to the Acquiring
Fund 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 Target 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 period then
ended; and such financial statements shall be certified by the Treasurer of the
Target Fund as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will
be, no contingent Liabilities of the Target Fund not disclosed in the financial
statements delivered pursuant to Sections 4C and 4D which would materially
affect the Target Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the Target Fund which would, if adversely determined, materially affect
the Target Fund's financial condition. All Liabilities were incurred by the
Target Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The Target 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
Target Fund's Prospectus, there are no material agreements outstanding relating
to the Target Fund to which the Target Fund 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, the Target Fund shall
furnish the Acquiring Fund with a statement of the earnings and profits of the
Target Fund within the meaning of the Code as of the Closing Date.
5
<PAGE> 62
H. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the Target 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 the Target Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to any such return.
I. CORPORATE AUTHORITY. The Target 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 Target Fund Board, and except for obtaining approval of the holders of
the shares of the Target Fund, no other corporate acts or proceedings by the
Target Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
Target Fund and constitutes the legal, valid and binding obligation of the
Target Fund enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar law affecting creditors' rights generally,
or by general principals of equity (regardless of whether enforcement is sought
in a proceeding at equity or law).
J. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Target Fund does not and will not (i)
violate any provision of the Target Fund's organizational documents, (ii)
violate any statute, law, judgment, writ, decree, order, regulation or rule of
any court or governmental authority applicable to the Target Fund, (iii) result
in a 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 Target Fund is subject, or (iv) result in the
creation or imposition or any lien, charge or encumbrance upon any property or
assets of the Target Fund. 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 Target 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 Target Fund of the transactions contemplated by this
Agreement.
K. ABSENCE OF CHANGES. From the date of this Agreement through the
Closing Date, there shall not have been:
6
<PAGE> 63
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the Target 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 Target Fund granted by the Target Fund to any person other than
subscriptions to purchase shares at net asset value in accordance with terms in
the Prospectus for the Target Fund;
(3) any entering into, amendment or termination of any contract or
agreement by the Target Fund, except as otherwise contemplated by this
Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the Target Fund for borrowed money or any commitment to borrow
money entered into by the Target Fund;
(5) any amendment of the Target Fund's organizational documents; 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 Target Fund other than a lien for
taxes not yet due and payable.
L. TITLE. On the Closing Date, the Target 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
Acquiring 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.
M. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein 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 it shall have been amended or
supplemented, conform and will conform as it relates to the Target Fund, in all
material respects, to the applicable requirements of the applicable Federal and
state
7
<PAGE> 64
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 4M
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the Acquiring Fund furnished to the Target Fund
by the Acquiring Fund.
N. TAX QUALIFICATION. The Target 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.
O. 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 Acquiring
Fund and those to which the Assets are subject.
P. Target FUND LIABILITIES. Except as otherwise provided for herein,
the Target Fund shall use reasonable efforts, consistent with its ordinary
operating procedures, to repay in full any indebtedness for borrowed money and
have discharged or reserved against all of the Target Fund's known debts,
liabilities and obligations including expenses, costs and charges whether
absolute or contingent, accrued or unaccrued.
5. THE ACQUIRING FUND'S REPRESENTATIONS AND WARRANTIES.
The Acquiring Fund hereby represents and warrants to the Target Fund,
which representations and warranties are true and correct on the date hereof,
and agrees with the Target Fund that:
A. ORGANIZATION. The Acquiring Fund is duly formed and in good standing
under the laws of the state of its organization and is duly authorized to
transact business in the state of its organization. The Acquiring Fund is
qualified to do business 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 Acquiring Fund. The Acquiring Fund has all
material federal, state and local authorizations necessary to own all of the
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 Acquiring Fund.
8
<PAGE> 65
B. REGISTRATION. The Acquiring Fund is registered under the 1940 Act as
an open-end, management investment company and such registration has not been
revoked or rescinded. The Acquiring Fund is in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder. All of the
outstanding shares of beneficial interest, par value $0.01 per share, of the
Acquiring 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 Acquiring Fund audited as of and for
the year ended December 31, 1999, true and complete copies of which have been
heretofore furnished to the Target Fund, fairly represent the financial
condition and the results of operations of the Acquiring 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 Acquiring Fund shall furnish to the Target
Fund 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 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 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 Acquiring
Fund as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
Acquiring Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the Acquiring Fund's financial
condition, and there are no legal, administrative, or other proceedings pending
or, to its knowledge, threatened against the Acquiring Fund which would, if
adversely determined, materially affect the Acquiring Fund's financial
condition.
F. MATERIAL AGREEMENTS. The Acquiring 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
Acquiring Fund
9
<PAGE> 66
Prospectus and Statement of Additional Information there are no material
agreements outstanding to which the Acquiring 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 Acquiring Fund required by law
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 Acquiring 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 Acquiring 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 Acquiring Fund Board, no other corporate acts or proceedings by the
Acquiring Fund are necessary to authorize this Agreement and the transactions
contemplated herein. This Agreement has been duly executed and delivered by the
Acquiring Fund and constitutes a valid and binding obligation of the Acquiring
Fund enforceable in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Acquiring Fund does not and will not (i)
result in a material violation of any provision of the Acquiring Fund's
organizational documents, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Acquiring Fund or (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 Acquiring
Fund is subject, or (iv) result in the creation or imposition or any lien,
charge or encumbrance upon any property or assets of the Acquiring Fund. Except
as set forth in Schedule 3 to this Agreement, (i) no consent, approval,
authorization, order or filing with notice to any court or governmental
authority or agency is required for the consummation by the Acquiring 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 Acquiring
Fund of the transactions contemplated by this Agreement.
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J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Acquiring Fund
which would materially affect its financial condition.
K. SHARES OF THE ACQUIRING FUND: REGISTRATION. The Acquiring 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 ACQUIRING FUND: AUTHORIZATION. The shares of
beneficial interest of the Acquiring 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
Acquiring Fund and conform in all material respects to the description thereof
contained in the Acquiring Fund's Prospectus furnished to the Target Fund.
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
Acquiring 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/Proxy Statement contained therein 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, conforms and will conform, as it relates to the Acquiring Fund,
in all material respects, to the applicable requirements of the applicable
Federal 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 5N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the Target Fund furnished to the Acquiring Fund
by the Target Fund.
O. TAX QUALIFICATION. The Acquiring 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.
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6. COVENANTS.
During the period from the date of this Agreement and continuing until
the Closing Date the Target Fund and Acquiring Fund each agrees that (except as
expressly contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Target Fund and Acquiring 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 Target Fund and Acquiring Fund
shall file all reports required to be filed by the Target Fund and Acquiring
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 Target Fund and the Acquiring 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 appropriate Secretary
of State.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other and
furnish to the other the information relating to the Target Fund or Acquiring
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 Prospectus/Proxy Statement, as the case may be.
The Target Fund shall promptly prepare for filing with the SEC the
Prospectus/Proxy Statement and the Acquiring Fund shall promptly prepare and
file with the SEC the Registration Statement, in which the Prospectus/Proxy
Statement will be included as a prospectus. In connection with the Registration
Statement, insofar as it relates to the Target Fund and its affiliated persons,
the Acquiring Fund shall only include such information as is approved by the
Target Fund for use in the Registration Statement. The Acquiring Fund shall not
amend or supplement any such information regarding the Target Fund and such
affiliates without the prior written consent of the Target
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Fund which consent shall not unreasonably withheld or delayed. The Acquiring
Fund shall promptly notify and provide the Target Fund with copies of all
amendments or supplements filed with respect to the Registration Statement. The
Acquiring 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 Acquiring 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 Acquiring Fund's shares of beneficial
interest in the transactions contemplated by this Agreement, and the Target Fund
shall furnish all information concerning the Target Fund and the holders of the
Target 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 Target Fund shall make available to the Acquiring 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).
During the period prior to the Closing Date, the Acquiring Fund shall make
available to the Target 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 Target Fund shall call a meeting of the
Target 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 Prospectus/Proxy Statement and form of
proxy to each shareholder of the Target Fund as of the record date for such
meeting of shareholders. The Board shall recommend to the Target Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Target Fund and Acquiring Fund
covenant and agree to coordinate the respective portfolios of the Target Fund
and Acquiring 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
Acquiring Fund's portfolio, the resulting portfolio will meet the Acquiring
Fund's investment
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objective, policies and restrictions, as set forth in the Acquiring Fund's
Prospectus, a copy of which has been delivered to the Target Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the Target Fund covenants
that it shall cause to be distributed the Acquiring Fund Shares in the proper
pro rata amount for the benefit of Target Fund's shareholders and such that the
Target Fund shall not continue to hold amounts of said shares so as to cause a
violation of Section 12(d)(1) of the 1940 Act. The Target Fund covenants further
that, pursuant to Section 3G, it shall liquidate and dissolve as promptly as
practicable after the Closing Date. The Target Fund covenants to use all
reasonable efforts to cooperate with the Acquiring Fund and the Acquiring
Fund's transfer agent in the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other
party prior to the date hereof, each of the Target Fund and the Acquiring 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 and 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.
L. ADDITIONAL AGREEMENT. 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 Target Fund and the Acquiring 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 Acquiring Fund nor the Target Fund shall take
any action, or
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<PAGE> 71
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 Acquiring Fund and the
Target Fund will take such action, or cause such action to be taken, as is
reasonably necessary to enable Skadden, Arps, Slate, Meagher & Flom (Illinois),
counsel to the Target Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing
Date, the Target Fund shall declare and pay to its stockholders a dividend or
other distribution in an amount large enough so that it will have distributed
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 TARGET FUND.
The obligations of the Target Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Target 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 outstanding shares of beneficial interest the
Target Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the Acquiring 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 Acquiring Fund, and
the Target Fund shall have received a certificate of the President or Vice
President of the Acquiring Fund satisfactory in form and substance to the Target
Fund so stating. The Acquiring 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.
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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 effect on business
operations of the Acquiring Fund.
F. TAX OPINION. The Target Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Target Fund,
dated as of the Closing Date, addressed to the Target 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.
G. OPINION OF COUNSEL. The Target Fund shall have received the opinion
of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Acquiring
Fund, dated as of the Closing Date, addressed to the Target Fund substantially
in the form and to the effect that: (i) the Acquiring Fund existing in good
standing under the laws of its State of organization; (ii) the Acquiring Fund is
registered as an open-end, management investment company under the 1940 Act;
(iii) 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 Acquiring Fund and this Agreement has been duly executed and
delivered by the Acquiring Fund and (assuming the Agreement is a valid and
binding obligation of the other parties thereto) is a valid and binding
obligation of the Acquiring Fund; (iv) neither the execution or delivery by the
Acquiring Fund of this Agreement nor the consummation by the Acquiring Fund of
the transactions contemplated thereby contravene the Acquiring Fund's
organizational documents, or, to the knowledge of such counsel, violate any
provision of any statute or any published regulation or any judgment or order
disclosed to counsel by the Acquiring Fund as being applicable to the Acquiring
Fund; (v) to their knowledge based solely on the certificate of an appropriate
officer of the Acquiring Fund attached thereto, there is no pending or
threatened litigation except as described therein; (vi) the Acquiring Fund's
Shares
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have been duly authorized and upon issuance thereof in accordance with this
Agreement will be validly issued, fully paid and nonassessable; (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 Acquiring 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 SEC 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
Acquiring 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 Acquiring Fund of the Agreement and the
consummation of the transactions therein contemplated do not require, under the
laws of the State of organization or any state in which the Acquiring Fund is
qualified to do business 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 Target Fund of any material
benefit under the Agreement; or (c) which can be readily obtained without
significant delay or expense to the Target Fund, without loss to the Target Fund
of any material benefit under the Agreement and without any material adverse
effect on the Target 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 State of organization or any state in which
the Acquiring Fund is qualified to do business and the federal laws of the
United States 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 counsel by the Acquiring Fund in connection with the
opinion. In addition, although counsel need not have specifically considered the
possible applicability to the Acquiring Fund of any other laws, orders or
judgments,
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<PAGE> 74
nothing has come to their attention in connection with their representation of
the Acquiring Fund in this transaction that has caused them to conclude that any
other consent, approval, authorization, registration, qualification, order or
filing is required.
H. OFFICER CERTIFICATES. The Target Fund shall have received a
certificate of an authorized officer of the Acquiring 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 Acquiring Fund Board shall be furnished
to the Target Fund.
8. CONDITIONS TO OBLIGATIONS OF ACQUIRING FUND.
The obligations of the Acquiring Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Acquiring 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 outstanding shares of common stock of the Target
Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the Target 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 Target Fund, and
the Acquiring Fund shall have received a certificate of an authorized officer of
the Target Fund satisfactory in form and substance to the Acquiring Fund so
stating. The Target 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.
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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 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 Acquiring Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Target Fund,
dated as of the Closing Date, addressed to the Acquiring 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.
G. OPINION OF COUNSEL. The Acquiring Fund shall have received the
opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the
Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund,
substantially in the form and to the effect that: (i) the Target Fund is duly
formed and existing under the laws of its state of organization; (ii) the Target
Fund is registered as a closed-end, management investment 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 requisite action of
the Target Fund and this Agreement has been duly executed and delivered by the
Target Fund and (assuming the Agreement is a valid and binding obligation of the
other parties thereto) is a valid and binding obligation of the Target Fund;
(iv) neither the execution or delivery by the Target Fund of this Agreement nor
the consummation by the Target Fund of the transactions contemplated thereby
contravene the Target Fund's organizational documents or, to its knowledge,
violate any provision of any statute, or any published regulation or any
judgment or order disclosed to them by the Target Fund as being applicable to
the Target Fund; (v) to its knowledge based solely on the certificate of an
appropriate officer of the Target Fund attached thereto, there is no pending, or
threatened litigation involving the Target Fund except as disclosed therein;
(vi) 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 Target 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
SEC 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
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Registration Statement applicable to the Target 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 (vii) to their knowledge and subject to the
qualifications set forth below, the execution and delivery by the Trust on
behalf of the Target Fund of the Agreement and the consummation of the
transactions therein contemplated do not require, under the laws of the State of
organization or any state in which the Target Fund is qualified to do business,
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 Acquiring Fund of any material benefit
under such agreements; or (c) which can be readily obtained without significant
delay or expense to the Acquiring Fund, without loss to the Acquiring 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
filings under (a) laws which are specifically referred to in the opinion, (b)
laws of the State of organization or any State in which the Target Fund is
qualified to do business and the federal laws of the United States 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 Target
Fund in connection with the opinion. In addition, although counsel need not have
specifically considered the possible applicability to the Target Fund of any
other laws, orders or judgments, nothing has come to their attention in
connection with their representation of the Target 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 securities which are in conformity with the Acquiring
Fund's investment objectives, policies and restrictions as set forth in the
Acquiring Fund's Prospectus, a copy of which has been delivered to the Target
Fund.
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I. SHAREHOLDER LIST. The Target Fund shall have delivered to the
Acquiring Fund an updated list of all shareholders of the Target Fund, as
reported by the Target Fund's transfer agent, as of one (1) business day prior
to the Closing Date with each shareholder's respective holdings in the Target
Fund, taxpayer identification numbers, Form W9 and last known address.
J. OFFICER CERTIFICATES. The Acquiring Fund shall have received a
certificate of an authorized officer of the Target Fund, 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 Target Fund Board and shareholders.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by the
respective Boards, amend this Agreement at any time before or after approval
thereof by the shareholders of the Target Fund; provided, however, that after
receipt of Target 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 Target Fund's shareholder approval thereof.
(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 respective Boards of the Target Fund
and the Acquiring Fund;
(ii) by the Target Fund, if the Acquiring Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;
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(iii) by the Acquiring Fund, if the Target Fund breaches in any
material respect any of its representations, warranties, covenants or agreements
contained in this Agreement;
(iv) by either the Target Fund or Acquiring Fund, if the Closing has
not occurred on or prior to June 30, 2001 (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 Acquiring Fund in the event that: (a) all the conditions
precedent to the Target Fund'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 Acquiring Fund gives the Target Fund written assurance of its
intent to close irrespective of the satisfaction or nonsatisfaction of all
conditions precedent to the Acquiring Fund's obligation to close, as set forth
in Section 8 of this Agreement; and (c) the Target Fund then fails or refuses to
close within the earlier of five (5) business days or June 30, 2001; or
(vi) by the Target Fund in the event that: (a) all the conditions
precedent to the Acquiring 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 Target Fund gives the Acquiring Fund written assurance of its
intent to close irrespective of the satisfaction or nonsatisfaction of all the
conditions precedent to the Target Fund's obligation to close, as set forth in
Section 7 of this Agreement; and (c) the Acquiring Fund then fails or refuses to
close within the earlier of five (5) business days or June 30, 2001.
10. REMEDIES.
In the event of termination of this Agreement by either or both of the
Target Fund and Acquiring 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
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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 Acquiring Fund's and the Target
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 Acquiring Fund or the Target Fund be obligated to
indemnify the other if indemnity is not sought within ninety (90) days of the
expiration of the applicable Survival Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and
hold the other and its officers, trustees, 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 give written notice to Indemnitor within
23
<PAGE> 80
the earlier of ten (10) days of receipt of written notice to Indemnified Party
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 prior written
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 Target Fund shall be addressed to
the Target Fund c/o Van Kampen Investment Advisory Corp., 1 Parkview Plaza, P.O.
Box 5555, Oakbrook Terrace, Illinois 60181-5555, Attention: General Counsel, or
at such other address as the Target Fund may designate by written notice to the
Acquiring Fund. Notice to the Acquiring Fund shall be addressed to the Acquiring
Fund c/o Van Kampen Asset Management Inc., 1 Parkview Plaza, P.O. Box 5555,
Oakbrook
24
<PAGE> 81
Terrace, Illinois 60181, Attention: General Counsel, or at such other address
and to the attention of such other person as the Acquiring Fund may designate by
written notice to the Target Fund. 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 party
hereto.
15. BOOKS AND RECORDS.
The Target Fund and the Acquiring Fund agree that copies of the books
and records of the Target 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 Target Fund to
the Acquiring Fund at the Closing Date. In addition to, and without limiting the
foregoing, the Target Fund and the Acquiring Fund agree to take such action as
may be necessary in order that the Acquiring Fund shall have reasonable access
to such other books and records as may be reasonably requested, all for three
complete fiscal and tax years after the Closing Date; 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
Target Fund and Acquiring 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 Illinois
without regard to principles of conflicts or choice of law.
25
<PAGE> 82
17. LIMITATION OF LIABILITY.
Consistent with the Acquiring Fund's Declaration of Trust, notice is hereby
given and the parties hereto acknowledge and agree that this instrument is
executed by the Trustees of the Acquiring Fund on behalf of the Acquiring Fund
as Trustees and not individually and that the obligations of this instrument are
not binding upon any of the Trustees or shareholders of the Acquiring Fund
individually but binding only upon the assets and property of the Target Fund or
the Acquiring 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 HIGH INCOME CORPORATE BOND FUND
---------------------------------
Richard Powers, III
President
Attest:
------------------------------
Weston Wetherell
Assistant Secretary
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
---------------------------------
Richard Powers, III
President
26
<PAGE> 83
Attest:
------------------------------
Weston Wetherell
Assistant Secretary
27
<PAGE> 84
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN
HIGH INCOME CORPORATE BOND FUND
DATED DECEMBER 29, 1999, AS SUPPLEMENTED ON MAY 25, 2000
<PAGE> 85
VAN KAMPEN CORPORATE BOND FUND
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
SUPPLEMENT DATED MAY 25, 2000 TO THE
STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER 29, 1999,
SUPERCEDING ALL PRIOR SUPPLEMENTS
The Statement of Additional Information is hereby supplemented as follows:
(1) The section entitled "TRUSTEES AND OFFICERS" is hereby amended by
deleting all information pertaining to Paul G. Yovovich, effective April 14,
2000.
(2) The section entitled "TRUSTEES AND OFFICERS--OFFICERS" is hereby
amended by deleting all information pertaining to Curtis W. Morell and Tanya M.
Loden, effective January 31, 2000, Dennis J. McDonnell, effective March 31,
2000, Edward C. Wood, III and Stephen L. Boyd, effective April 17, 2000, and
Peter W. Hegel, effective May 31, 2000, and by adding the following:
<TABLE>
<S> <C>
Stephen L. Boyd.............................. Executive Vice President and Chief Investment
Date of Birth: 11/16/40 Officer of Van Kampen Investments, and
Executive Vice President and President and Chief Operating Officer of the
Chief Investment Officer Advisers. Executive Vice President and Chief
Investment Officer of each of the funds in
the Fund Complex and certain other investment
companies advised by the Advisers or their
affiliates. Prior to April 2000, Vice
President and Chief Investment Officer of the
Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with
AIM Capital Management, Inc. Prior to
February 1998, Senior Vice President and
Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp,
and Van Kampen American Capital Management
Inc.
John H. Zimmermann, III...................... Senior Vice President and Director of Van
Date of Birth: 11/25/57 Kampen Investments, President and Director of
Vice President the Distributor and President of Van Kampen
Insurance Agency of Illinois Inc. Vice
President of each of the funds in the Fund
Complex. From November 1992 to December 1997,
Senior Vice President of the Distributor.
</TABLE>
(3) The footnote to the "CLASS A SHARES SALES CHARGE TABLE" at the end of
the second paragraph in the section entitled "DISTRIBUTION AND SERVICE" is
hereby deleted in its entirety and replaced with the following:
* No sales charge is payable at the time of purchase on investments of
$1 million or more, although the Fund may impose a contingent deferred
sales charge of 1.00% on certain redemptions made within one year of
purchase. A commission or transaction fee will be paid by the Distributor
at the time of purchase directly out of the Distributor's assets (and not
out of the Fund's assets) to authorized dealers who initiate and are
responsible for purchases of $1 million or more computed on a percentage of
the dollar value of such shares sold as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million and 0.50% on the excess over $3
million. For single purchases of $20 million or more by an individual
retail investor the Distributor will pay, at the time of purchase and
directly out of the Distributor's assets (and not out of the Fund's
assets), a commission or transaction fee of 1.00% to authorized dealers who
<PAGE> 86
initiate and are responsible for such purchases. The commission or
transaction fee of 1.00% will be computed on a percentage of the dollar
value of such shares sold.
(4) The information in the section entitled "OTHER INFORMATION--INDEPENDENT
ACCOUNTANTS" is hereby deleted in its entirety and replaced with the following:
Independent accountants for the Fund perform an annual audit of the Fund's
financial statements. The Fund's Board of Trustees has engaged Ernst & Young
LLP, located at 233 South Wacker Drive, Chicago, Illinois 60606, to be the
Fund's independent accountants, effective May 18, 2000. PricewaterhouseCoopers
LLP, located at 200 East Randolph Drive, Chicago, Illinois 60601 ("PWC"), ceased
being the Fund's independent accountants effective May 18, 2000. The cessation
of the client-auditor relationship between the Fund and PWC was based solely on
a possible future business relationship by PWC with an affiliate of the Fund's
investment adviser. The change in independent accountants was approved by the
Fund's audit committee and the Fund's Board of Trustees, including Trustees who
are not "interested persons" of the Fund (as defined in the 1940 Act).
RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 87
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN
HIGH INCOME CORPORATE BOND FUND
Van Kampen High Income Corporate Bond Fund (the "Fund") is a mutual fund
with a primary investment objective of seeking to maximize current income.
Capital appreciation is a secondary objective which is sought only when
consistent with the Fund's primary investment objective. The Fund's investment
adviser seeks to achieve the Fund's investment objectives by investing primarily
in a portfolio of high-yielding, high-risk bonds and other income securities,
such as convertible securities and preferred stock.
The Fund is organized as a diversified series of the Van Kampen High Income
Corporate Bond Fund, an open-end management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-4833
for the hearing impaired).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B-2
Investment Objectives, Policies and Risks................... B-3
Options, Futures Contracts and Related Options.............. B-8
Investment Restrictions..................................... B-12
Trustees and Officers....................................... B-14
Investment Advisory Agreement............................... B-21
Other Agreements............................................ B-22
Distribution and Service.................................... B-22
Transfer Agent.............................................. B-25
Portfolio Transactions and Brokerage Allocation............. B-25
Shareholder Services........................................ B-27
Redemption of Shares........................................ B-29
Contingent Deferred Sales Charge-Class A.................... B-29
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-30
Taxation.................................................... B-31
Fund Performance............................................ B-34
Other Information........................................... B-37
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-19
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED DECEMBER 29, 1999.
<PAGE> 88
GENERAL INFORMATION
The Fund was originally incorporated in Texas on July 11, 1978 organized
under the name American Capital High Yield Investments, Inc. The Fund was
reincorporated by merger into a Maryland corporation on July 2, 1992, under the
name American Capital High Income Corporate Bond Fund, Inc. As of August 5,
1995, the Fund was reorganized as a series of the Trust, under the name Van
Kampen American Capital High Income Corporate Bond Fund. The Trust is a business
trust organized under the laws of the State of Delaware. On July 14, 1998, the
Fund and the Trust adopted their present names.
Van Kampen Asset Management Inc. (the "Adviser" or "Asset Management"), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co.("Morgan Stanley Dean Witter"). The principal
office of the Fund, the Adviser, the Distributor and Van Kampen Investments is
located at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555.
Morgan Stanley Dean Witter and various of its directly or indirectly owned
subsidiaries, including Morgan Stanley Dean Witter Investment Management Inc.,
an investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and securities lending.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. 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.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund 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. 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 and separate votes are taken by each
class of a series on matters affecting an individual class of such series. For
example, a change in investment policy for a series would be voted upon by
shareholders of only the series involved and a change in the distribution fee
for a class of a series would be voted upon by shareholders of only the class of
such series involved. Except as otherwise described in the Prospectus or herein,
shares do not have cumulative voting rights, preemptive rights or any
conversion, subscription 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 then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
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 debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less than to holders of
Class A Shares.
B-2
<PAGE> 89
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the 1940 Act or other applicable law) and except that the Trustees cannot amend
the Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
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 a part, each such statement being
qualified in all respects by such reference.
As of December 1, 1999, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF
OWNERSHIP AT
NAME AND ADDRESS DECEMBER 1, CLASS PERCENTAGE
OF HOLDER 1999 OF SHARES OWNERSHIP
---------------- ------------- --------- ----------
<S> <C> <C> <C>
Van Kampen Trust Company................................. 18,956,528 A 20.73%
2800 Post Oak Blvd. 5,954,840 B 10.79%
Houston, TX 77056 871,637 C 7.44%
Edward Jones & Co. ...................................... 5,481,581 A 5.99%
Attn Mutual Fund 933,693 C 7.97%
Shareholder Accounting
201 Progress Pkwy
Maryland Hts, MO 63043-3009
Merrill Lynch Pierce Fenner & Smith Inc. ................ 3,329,328 B 6.03%
For the Sole Benefit of its Customers
Attn: Fund Administration 971J4
4800 Deer Lake Dr. East
2nd Floor
Jacksonville, FL 32246-6484
MLPF&S For the Sole Benefit of Its Customers............. 1,229,471 C 10.50%
Attn Fund Administration 97BY5
9800 Dear Lake Dr. E 2nd Fl
Jacksonville, FL 32246-6484
</TABLE>
---------------
Van Kampen Trust Company acts as custodian for certain employee benefit plans
and individual retirement accounts.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following disclosures supplement disclosures set forth under the same
caption in the Prospectus and do not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in the Prospectus for a complete presentation of the matters disclosed
below.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock or other equity security of the same or a different issuer or into
cash within a particular period of time at a specified price or formula. A
convertible security generally entitles the holder to receive interest paid or
accrued on debt securities or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
B-3
<PAGE> 90
conversion, convertible securities generally have characteristics similar to
both debt and equity securities. The value of convertible securities tends to
decline as interest rates rise and, because of the conversion feature, tends to
vary with fluctuations in the market value of the underlying equity securities.
Convertible securities ordinarily provide a stream of income with generally
higher yields than those of common stock of the same or similar issuers.
Convertible securities generally rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Convertible securities generally do not participate directly in any
dividend increases or decreases of the underlying equity securities although the
market prices of convertible securities may be affected by any such dividend
changes or other changes in the underlying equity securities.
Equity-linked securities are instruments whose value is based upon the
value of one or more underlying equity securities, a reference rate or an index.
Equity-linked securities come in many forms and may include features, among
others, such as the following: (i) may be issued by the issuer of the underlying
equity security or by a company other than the one to which the instrument is
linked (usually an investment bank), (ii) may convert into equity securities,
such as common stock, within a stated period from the issue date or may be
redeemed for cash or some combination of cash and the linked security at a value
based upon the value of the underlying equity security within a stated period
from the issue date, (iii) may have various conversion features prior to
maturity at the option of the holder or the issuer or both, (iv) may limit the
appreciation value with caps or collars of the value of the underlying equity
security and (v) may have fixed, variable or no interest payments during the
life of the security which reflect the actual or a structured return relative to
the underlying dividends of the linked equity security. Investments in
equity-linked securities may subject the Fund to additional risks not ordinarily
associated with investments in other equity securities. Because equity-linked
securities are sometimes issued by a third party other than the issuer of the
linked security, the Fund is subject to risks if the underlying stock
underperforms and if the issuer defaults on the payment of the dividend or the
common stock at maturity. In addition, the trading market for particular
equity-linked securities may be less liquid, making it difficult for the Fund to
dispose of a particular security when necessary and reduced liquidity in the
secondary market for any such securities may make it more difficult to obtain
market quotations for valuing the Fund's portfolio.
PREFERRED STOCKS
Preferred stock generally has a preference as to dividends and upon
liquidation over an issuer's common stock but ranks junior to other income
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on income securities, preferred stock dividends
are payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may provide that, in the event the issuer
fails to make a specified number of dividend payments, the holders of the
preferred stock will have the right to elect a specified number of directors to
the issuer's board. Preferred stock also may be subject to optional or mandatory
redemption provisions.
DURATION
Duration is a measure of the expected life of an income security that was
developed as an alternative to the concept of "term to maturity." Duration
incorporates an income security's yield, coupon interest payments, final
maturity and call features into one measure. Traditionally an income security's
"term to maturity" has been used as a proxy for the sensitivity of the
security's price to changes in interest rates. However, "term to maturity"
measures only the time an income security provides its final payment taking no
account of the pattern of the security's payments of interest or principal prior
to maturity. Duration is a measure of the expected life of an income security on
a present value basis expressed in years. It measures the length of the time
interval between the present and the time when the interest and principal
payments are scheduled (or in the case of a callable bond, expected to be
received), weighing them by the present value of the cash to be received at each
future point in time. For any debt security with interest payments occurring
B-4
<PAGE> 91
prior to the payment of principal, duration is always less than maturity, and
for zero-coupon issues, duration and term to maturity are equal. In general, the
lower the coupon rate of interest or the longer the maturity, or the lower the
yield-to-maturity of an income security, the longer its duration; conversely,
the higher the coupon rate of interest, the shorter the maturity or the higher
the yield-to-maturity of an income security, the shorter its duration. There are
some situations where even the standard duration calculation does not properly
reflect the interest rate exposure of a security. For example, floating and
variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by the duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
SECURITIES OF FOREIGN ISSUERS
The Fund may purchase foreign securities in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
representing underlying shares of foreign companies. These securities are not
necessarily denominated in the same currency as the underlying securities but
generally are denominated in the currency of the market in which they are
traded. ADRs are receipts typically issued by an American bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid by the ADR holders. In addition, less information is
available in the United States about an unsponsored ADR than about a sponsored
ADR and financial information about a company may not be as reliable for an
unsponsored ADR as it is for a sponsored ADR. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements. EDRs are receipts issued in
Europe by banks or depositories which evidence a similar ownership arrangement.
BRADY BONDS
Brady Bonds are created through the exchange of existing commercial bank
loans to foreign entities for new obligations in connection with debt
restructuring under a plan introduced by former U.S. Secretary of the Treasury
Nicholas F. Brady (the "Brady Plan"). Brady Bonds may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. The Fund may purchase Brady Bonds either in the primary or
secondary markets. The price and yield of Brady Bonds purchased in the secondary
market will reflect the market conditions at the time of purchase, regardless of
the stated face amount and the stated interest rate. With respect to Brady Bonds
with no or limited collateralization, the Fund will rely for payment of interest
and principal primarily on the willingness and ability of the issuing government
to make payment in accordance with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts
B-5
<PAGE> 92
constitute the "residual risk"). In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the U.S. Treasury zero coupon obligations held as
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held to the scheduled maturity of the defaulted Brady Bonds by the
collateral agent, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of the Brady Bonds
and, among other factors, the history of defaults with respect to commercial
bank loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds should be viewed as speculative.
LENDING OF SECURITIES
Consistent with applicable legal and regulatory requirements, the Fund may
lend its portfolio securities, in an amount up to 10% of the Fund's total
assets, to broker-dealers, banks and other recognized institutional borrowers of
securities provided that such loans are at all times secured by cash collateral
that is at least equal to the market value, determined daily, of the loaned
securities and are callable at any time by the Fund. The advantage of such loans
is that the Fund continues to receive the interest or dividends on the loaned
securities, while at the same time earning interest on the collateral which is
invested in short-term obligations. The Fund may pay reasonable finders,
administrative and custodial fees in connection with loans of its securities.
There is no assurance as to the extent to which securities loans can be
effected.
If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates, and the Fund could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over collateral. As with any extensions of credit, there are risks of delay
in recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's Adviser to be
creditworthy and when the consideration which can be earned from such loans is
believed to justify the attendant risks. On termination of the loan, the
borrower is required to return the securities to the Fund; any gain or loss in
the market price during the loan would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements with broker-dealers, banks and
other financial institutions in order to earn a return on temporarily available
cash. A repurchase agreement is a short-term investment in which the purchaser
(i.e., the Fund) acquires ownership of a security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the holding period. Repurchase agreements involve certain risks
in the event of default by the other party. The Fund may enter into repurchase
agreements with banks or broker-dealers deemed to be creditworthy by the Adviser
under guidelines approved by the Trustees. The Fund will not invest in
repurchase agreements maturing in more than seven days if any such investment,
together with any other illiquid securities held by the Fund, would exceed the
Fund's limitation on illiquid securities described below. The Fund does not bear
the risk of a decline in value of the underlying security unless the seller
defaults under its repurchase obligation. In the event of the bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and losses 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 certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that
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contributed to the joint account share pro rata in the net revenue generated.
The Adviser believes that the joint account produces efficiencies and economies
of scale that may contribute to reduced transaction costs, higher returns,
higher quality investments and greater diversity of investments for the Fund
than would be available to the Fund investing separately. The manner in which
the joint account is managed is subject to conditions set forth in an exemptive
order from the SEC permitting this practice, which conditions are designed to
ensure the fair administration of the joint account and to protect the amounts
in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. The Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year. The
turnover rate may vary greatly from year to year as well as within a year. The
Fund's portfolio turnover rate is the lesser of the value of the securities
purchased or securities sold divided by the average value of the securities held
in the Fund's portfolio excluding all securities whose maturities at acquisition
were one year or less. A high portfolio turnover rate (100% or more) increases
the Fund's transaction costs, including brokerage commissions, and may result in
the realization of more short-term capital gains than if the Fund had a lower
portfolio turnover rate. The turnover rate will not be a limiting factor,
however, if the Adviser deems portfolio changes appropriate.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities which are not readily marketable, repurchase
agreements which have a maturity of longer than seven days and generally
includes securities that are restricted from sale to the public without
registration under the Securities Act of 1933, as amended (the "1933 Act").
However, the Fund shall not invest in such securities in excess of 10% of its
net assets without prior approval of the Fund's Board of Trustees. The sale of
such securities often requires more time and results in higher brokerage charges
or dealer discounts and other selling expenses than does the sale of liquid
securities trading on national securities exchanges or in the over-the-counter
markets. Restricted securities are often purchased at a discount from the market
price of unrestricted securities of the same issuer reflecting the fact that
such securities may not be readily marketable without some time delay.
Investments in securities for which market quotations are not readily available
are valued at fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Fund's Trustees. Ordinarily, the Fund
would invest in restricted securities only when it receives the issuer's
commitment to register the securities without expense to the Fund. However,
registration and underwriting expenses (which typically may range from 7% to 15%
of the gross proceeds of the securities sold) may be paid by the Fund.
Restricted securities which can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act ("144A Securities") and are determined
to be liquid under guidelines adopted by and subject to the supervision of the
Fund's Board of Trustees are not subject to the limitation on illiquid
securities. Such 144A Securities are subject to monitoring and may become
illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act, as amended from time to
time.
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OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may, but is not required to, use various investment strategies as
described below to earn income, facilitate portfolio management, and mitigate
risks. Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option selling program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Selling options on portfolio securities is likely to result in a higher
portfolio turnover rate.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
seller at a specified price during a certain period. The Fund would write call
options only on a covered basis or for cross-hedging purposes. A call option is
covered if, at all times during the option period, the Fund would own or have
the right to acquire securities of the type that it would be obligated to
deliver if any outstanding option were exercised. An option is for cross-hedging
purposes if it is not covered by the security subject to the option, but is
designed to provide a hedge against another security which the Fund owns or has
the right to acquire. In such circumstances, the Fund collateralizes the option
by maintaining in a segregated account with the Fund's custodian cash or liquid
securities in an amount not less than the market value of the underlying
security, marked to market daily, while the option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would sell put options only on
a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its custodian cash or liquid
securities in an amount of not less than the exercise price of the option, or
would hold a put on the same underlying security at an equal or greater exercise
price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously sold by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is lesser (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as a seller of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a seller, but would provide an asset of
equal value to its obligation under the option sold. If the Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the option until a
closing purchase transaction can be entered into (or the option is exercised or
expires) even though it might not be advantageous to do so.
Risks of Writing Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
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PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect against anticipated
increases in the prices of securities it wishes to acquire. Alternatively, call
options could be purchased for capital appreciation. Since the premium paid for
a call option is typically a small fraction of the price of the underlying
security, a given amount of funds will purchase call options covering a much
larger quantity of such security than could be purchased directly. By purchasing
call options, the Fund could benefit from any significant increase in the price
of the underlying security to a greater extent than had it invested the same
amount in the security directly. However, because of the very high volatility of
option premiums, the Fund would bear a significant risk of losing the entire
premium if the price of the underlying security did not rise sufficiently, or if
it did not do so before the option expired.
Put options may be purchased to protect against anticipated declines in the
market value of either specific portfolio securities or of the Fund's assets
generally. Alternatively, put options may be purchased for capital appreciation
in anticipation of a price decline in the underlying security and a
corresponding increase in the value of the put option. The purchase of put
options for capital appreciation involves the same significant risk of loss as
described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
OVER THE COUNTER OPTIONS
The Fund is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC Options are purchased from or sold to securities dealers,
financial institutions of other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. The Fund will sell only OTC Options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require to the Counterparty to sell the option back to
the Fund at a formula price within seven days. The staff of the SEC currently
takes the position that, in general, OTC Options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities covering
OTC Options sold by the Fund, are illiquid securities subject to the Fund's
limitation on illiquid securities.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund would be exempt from
registration as a "commodity pool."
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) to take or make delivery of cash based upon the changes
in value of a basket or index of securities at a specified future time and at a
specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its custodian in an
account in the broker's name an amount of cash or liquid securities equal to a
percentage (which will normally range between 2% and 10%) of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment
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equal to that increase in value. Conversely, where the Fund purchases a futures
contract and the value of the underlying security or index declines, the
position is less valuable, and the Fund is required to make a variation margin
payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is otherwise
fully invested ("anticipatory hedge"). Such purchase of a futures contract would
serve as a temporary substitute for the purchase of individual securities, which
may be purchased in an orderly fashion once the market has stabilized. As
individual securities are purchased, an equivalent amount of futures contracts
could be terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
would substantially reduce the risk to the Fund of a market decline and, by so
doing, provides an alternative to the liquidation of securities positions in the
Fund. Ordinarily transaction costs associated with futures transactions are
lower than transaction costs that would be incurred in the purchase and sale of
the underlying securities.
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities or index; the risk of market
distortion; the illiquidity risk; and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contracts. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any
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particular contract or at any particular time. In the event of such illiquidity,
it might not be possible to close a futures position and, in the event of
adverse price movement, the Fund would continue to be required to make daily
payments of variation margin. Since the securities being hedged would not be
sold until the related futures contract is sold, an increase, if any, in the
price of the securities may to some extent offset losses on the related futures
contract. In such event, the Fund would lose the benefit of the appreciation in
value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.
The Fund will not enter into futures contracts or options transactions
(except for closing transactions) other than for bona fide hedging purposes if,
immediately thereafter, the sum of its initial margin and premiums on open
futures contracts and options exceed 5% of the fair market value of the Fund's
assets; however, in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. In order to prevent leverage in connection with the purchase of
futures contracts by the Fund, an amount of cash or liquid securities equal to
the market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purposes as the sale of a futures contract; at the same time, it
could write put options at a lower strike price (a "put bear spread") to offset
part of the cost of the strategy to the Fund. The purchase of call options on
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contracts.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less
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potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However, there may be
circumstances, such as when there is no movement in the price of the underlying
security or index, when the use of an option on a future would result in a loss
to the Fund when the use of a future would not.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures or related options, the Fund could
experience delays and/or losses in liquidating open positions purchased or incur
a loss of all or part of its margin deposits with the broker. Transactions are
entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting securities which is defined by the 1940 Act as the
lesser of (i) 67% or more of the voting securities present at the 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. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. With respect to the limitations on illiquid securities and
borrowings, the percentage limitations apply at the time of purchase and on an
ongoing basis. These restrictions provide that the Fund shall not:
1. Borrow money, except that the Fund may borrow for temporary purposes in
amounts not exceeding 5% of the market or other fair value (taken at
the lower of cost or current value) of its total assets (not including
the amount borrowed). Secured temporary borrowings may take the form of
reverse repurchase agreements, pursuant to which the Fund would sell
portfolio securities for cash and simultaneously agree to repurchase
such securities at a specified date for the same amount of cash plus an
interest component. Pledge its assets or assign or otherwise encumber
them in excess of 3.25% of its net assets (taken at market value at the
time of pledging) and then only to secure borrowings effected within
the limitations set forth in the preceding sentence. Notwithstanding
the foregoing, the Fund may engage in transactions in options, futures
contracts and related options and make margin deposits and payments in
connection therewith.
2. Engage in the underwriting of securities except insofar as the Fund may
be deemed an underwriter under the 1933 Act in disposing of a portfolio
security.
3. Make short sales of securities, but it may engage in transactions in
options, futures contracts, and related options.
4. Purchase securities on margin, except for such short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities, and it may engage in transactions in options, futures
contracts and related options and make margin deposits and payments in
connection therewith.
5. Purchase or sell real estate, although it may purchase securities of
issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing
interests in real estate.
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6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may enter into transactions in futures contracts and
related options.
7. Make loans of money or securities, except (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objectives and policies; (b) by investment in repurchase agreements or
(c) by lending its portfolio securities, subject to limitations
described elsewhere in this Statement of Additional Information.
8. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest
in the securities of companies which invest in or sponsor such
programs.
9. Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act.
10. Invest for the purpose of exercising control or management of another
company, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
11. Invest in securities of any company if, to the knowledge of the Fund,
any officer or director of the Fund or of the Adviser owns more than
1/2 of 1% of the outstanding securities of such company, and such
officers and directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such company.
12. Invest more than 5% of the market or other fair value of its assets in
warrants, or more than 2% of such value in warrants which are not
listed on the New York or American Stock Exchanges. Warrants attached
to other securities are not subject to these limitations.
13. Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements which have
a maturity of longer than seven days.
14. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except the U.S. government) or
purchase more than 10% of the outstanding voting securities of any one
issuer, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
15. 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).
16. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover".
B-13
<PAGE> 100
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Trustee/Director of each of the funds
1632 Morning Mountain Road in the Fund Complex. Co-founder, and prior to August
Raleigh, NC 27614 1996, Chairman, Chief Executive Officer and President,
Date of Birth: 07/14/32 MDT Corporation (now known as Getinge/Castle, Inc., a
subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
Barrington Place, Building 4 Trustee/ Director of each of the funds in the Fund
18 E. Dundee Road, Suite 101 Complex. Prior to January 1999, Chairman and Chief
Barrington, IL 60010 Executive Officer of The Allstate Corporation
Date of Birth: 09/16/38 ("Allstate") and Allstate Insurance Company. Prior to
January 1995, President and Chief Executive Officer of
Allstate. Prior to August 1994, various management
positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Trustee/Director of each of the funds in the
233 South Wacker Drive Fund Complex. Prior to 1997, Partner, Ray & Berndtson,
Suite 7000 Inc., an executive recruiting and management consulting
Chicago, IL 60606 firm. Formerly, Executive Vice President of ABN AMRO,
Date of Birth: 06/03/48 N.A., a Dutch bank holding company. Prior to 1992,
Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board,
Vice Chair of the Board of The YMCA of Metropolitan
Chicago and a member of the Women's Board of the
University of Chicago. Prior to 1996, Trustee of The
International House Board.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States, an independent U.S. foundation created to
Washington, D.C. 20016 deepen understanding, promote collaboration and stimulate
Date of Birth: 02/29/52 exchanges of practical experience between Americans and
Europeans. Trustee/ Director of each of the funds in the
Fund Complex. Formerly, advisor to the Dennis Trading
Group Inc., a managed futures and option company that
invests money for individuals and institutions. Prior to
1992, President and Chief Executive Officer, Director and
Member of the Investment Committee of the Joyce
Foundation, a private foundation.
</TABLE>
B-14
<PAGE> 101
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset Management
Two World Trade Center of Morgan Stanley Dean Witter since December 1998.
66th Floor President and Director since April 1997 and Chief
New York, NY 10048 Executive Officer since June 1998 of Morgan Stanley Dean
Date of Birth: 08/13/53 Witter Advisors Inc. and Morgan Stanley Dean Witter
Services Company Inc. Chairman, Chief Executive Officer
and Director of Morgan Stanley Dean Witter Distributors
Inc. since June 1998. Chairman and Chief Executive
Officer since June 1998, and Director since January 1998,
of Morgan Stanley Dean Witter Trust FSB. Director of
various Morgan Stanley Dean Witter subsidiaries.
President of the Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series since May 1999. Trustee
of each of the funds in the Fund Complex, and Vice
President of other investment companies advised by the
Advisers and their affiliates. Previously Chief Strategic
Officer of Morgan Stanley Dean Witter Advisors Inc. and
Morgan Stanley Dean Witter Services Company Inc. and
Executive Vice President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice President of
the Morgan Stanley Dean Witter Funds and Discover
Brokerage Index Series May 1997-April 1999, and Executive
Vice President of Dean Witter, Discover & Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning Services,
423 Country Club Drive Inc., a financial planning company and registered
Winter Park, FL 32789 investment adviser in the State of Florida. President and
Date of Birth: 02/13/36 owner, Nelson Ivest Brokerage Services Inc., a member of
the National Association of Securities Dealers, Inc. and
Securities Investors Protection Corp. Trustee/ Director
of each of the funds in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief
P.O. Box 5555 Executive Officer of the Advisers, the Distributor, Van
Oakbrook Terrace, IL 60181-5555 Kampen Advisors Inc. and Van Kampen Management Inc.
Date of Birth: 02/02/46 Director and officer of certain other subsidiaries of Van
Kampen Investments. Trustee and President of each of the
funds in the Fund Complex. Trustee, President and
Chairman of the Board of other investment companies
advised by the Advisers and their affiliates, and Chief
Executive Officer of Van Kampen Exchange Fund. Prior to
May 1998, Executive Vice President and Director of
Marketing at Morgan Stanley Dean Witter and Director of
Dean Witter Discover & Co. and Dean Witter Realty. Prior
to 1996, Director of Dean Witter Reynolds Inc.
</TABLE>
B-15
<PAGE> 102
<TABLE>
<CAPTION>
Principal Occupations or
Name, Address and Age Employment in Past 5 Years
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since
One ServiceMaster Way 1994) of The ServiceMaster Company, a business and
Downers Grove, IL 60515 consumer services company. Director of Illinois Tool
Date of Birth: 07/08/44 Works, Inc., a manufacturing company and the Urban
Shopping Centers Inc., a retail mall management company.
Trustee, University of Notre Dame. Trustee/Director of
each of the funds in the Fund Complex. Prior to 1998,
Director of Stone Smurfit Container Corp., a paper
manufacturing company. From May 1996 through February
1997 he was President, Chief Executive Officer and Chief
Operating Officer of Waste Management, Inc., an
environmental services company, and from November 1984
through May 1996 he was President and Chief Operating
Officer of Waste Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a George M.
155 Hickory Lane Bond Chaired Professor with Stevens Institute of
Closter, NJ 07624 Technology, and prior to 1995, Dean of the Graduate
Date of Birth: 08/02/24 School, Stevens Institute of Technology. Director,
Dynalysis of Princeton, a firm engaged in engineering
research. Trustee/Director of each of the funds in the
Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other investment companies advised by the
Date of Birth: 08/22/39 Advisers or Van Kampen Management Inc. Trustee/Director
of each of the funds in the Fund Complex, and
Trustee/Managing General Partner of other investment
companies advised by the Advisers or Van Kampen
Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/ National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993.
Washington, D.C. 20418 Director of Neurogen Corporation, a pharmaceutical
Date of Birth: 12/27/41 company, since January 1998. Director of the German
Marshall Fund of the United States, Trustee of Colorado
College, and Vice Chair of the Board of the Council for
Excellence in Government. Trustee/Director of each of the
funds in the Fund Complex. Prior to 1993, Executive
Director of the Commission on Behavioral and Social
Sciences and Education at the National Academy of
Sciences/National Research Council. From 1980 through
1989, Partner of Coopers & Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network system
233 South Wacker Drive solutions, COMARCO, Inc., a wireless communications
Suite 9700 products company and APAC Customer Services, Inc., a
Chicago, IL 60606 provider of outsourced customer contact services.
Date of Birth: 10/29/53 Trustee/Director of each of the funds in the Fund
Complex. Prior to May 1996, President of Advance Ross
Corporation, an international transaction services and
pollution control equipment manufacturing company.
</TABLE>
------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-16
<PAGE> 103
OFFICERS
Messrs. McDonnell, Smith, Santo, Hegel, Sullivan, and Wood are located at 1
Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL 60181-5555. The Fund's other
officers are located at 2800 Post Oak Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
Dennis J. McDonnell.................. Currently Executive Vice President and Director of Van
Date of Birth: 05/20/42 Kampen Investments, and employed by Van Kampen Investments
Executive Vice President and Chief since March 1983. President, Chief Operating Officer and
Investment Officer Director of the Advisers, Van Kampen Advisors Inc., and Van
Kampen Management Inc. Executive Vice President and Chief
Investment Officer of each of the funds in the Fund Complex,
since 1998. Chief Investment Officer, Executive Vice
President and Trustee/Managing General Partner of other
investment companies advised by the Advisers or Van Kampen
Management Inc. ("Management Inc.") since the inception of
funds advised by Advisory Corp. and Management Inc. and
since 1998 for funds advised by Asset Management. Director
of Global Decisions Group LLC, a financial research firm,
and its affiliates MCM Asia Pacific and MCM Europe. Prior to
1998, President, Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital Management, Inc.;
Director of Van Kampen American Capital, Inc.; and
President, Chief Executive Officer and Trustee of each of
the funds advised by Advisory Corp. Prior to July 1998,
Director and Executive Vice President of VK/AC Holding, Inc.
(predecessor of Van Kampen Investments). Prior to April
1998, President and Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April 1997, Director of Van Kampen
Merritt Equity Holdings Corp. Prior to September 1996, Chief
Executive Officer and Director of MCM Group, Inc. and
McCarthy, Crisanti & Maffei, Inc., a financial research
firm, and Chairman of MCM Asia Pacific Company, Limited and
MCM (Europe) Limited. Prior to December 1991, Senior Vice
President of Van Kampen Merritt Inc.
A. Thomas Smith III.................. Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van Kampen
Vice President and Secretary Advisors Inc., Van Kampen Management Inc., the Distributor,
American Capital Contractual Services, Inc., Van Kampen
Exchange Corp., Van Kampen Recordkeeping Services Inc.,
Investor Services, Van Kampen Insurance Agency of Illinois
Inc. and Van Kampen System Inc. Vice President and
Secretary/Vice President, Principal Legal Officer and
Secretary of other investment companies advised by the
Advisers or their affiliates. Vice President and Secretary
of each of the funds in the Fund Complex. Prior to January
1999, Vice President and Associate General Counsel to New
York Life Insurance Company ("New York Life"), and prior to
March 1997, Associate General Counsel of New York Life.
Prior to December 1993, Assistant General Counsel of The
Dreyfus Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, a Staff
Attorney at the Securities and Exchange Commission, Division
of Investment Management, Office of Chief Counsel.
</TABLE>
B-17
<PAGE> 104
<TABLE>
<CAPTION>
Name, Age, Positions and Principal Occupations
Offices with Fund During Past 5 Years
------------------------ ---------------------
<S> <C>
Michael H. Santo..................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/22/55 Director of Van Kampen Investments, the Advisers, the
Vice President Distributor, Van Kampen Advisors Inc., Van Kampen Management
Inc. and Van Kampen Investor Services Inc., and serves as a
Director or Officer of certain other subsidiaries of Van
Kampen Investments. Vice President of each of the funds in
the Fund Complex and certain other investment companies
advised by the Advisers and their affiliates. Prior to 1998,
Senior Vice President and Senior Planning Officer for
Individual Asset Management of Morgan Stanley Dean Witter
and its predecessor since 1994. From 1990-1994, First Vice
President and Assistant Controller in Dean Witter's
Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice President
Vice President of each of the funds in the Fund Complex and certain other
investment companies advised by the Advisers or their
affiliates. Prior to September 1996, Director of McCarthy,
Crisanti & Maffei, Inc, a financial research company.
Stephen L. Boyd...................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Vice President funds in the Fund Complex and certain other investment
companies advised by the Advisers or their affiliates. Prior
to October 1998, Vice President and Senior Portfolio Manager
with AIM Capital Management, Inc. Prior to February 1998,
Senior Vice President of Van Kampen American Capital Asset
Management, Inc., Van Kampen American Capital Investment
Advisory Corp. and Van Kampen American Capital Management,
Inc.
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Vice President, Chief Financial Treasurer of each of the funds in the Fund Complex and
Officer and Treasurer certain other investment companies advised by the Advisers
or their affiliates.
Curtis W. Morell..................... Senior Vice President of the Advisers, Vice President and
Date of Birth: 08/04/46 Chief Accounting Officer of each of the funds in the Fund
Vice President and Chief Accounting Complex and certain other investment companies advised by
Officer the Advisers or their affiliates.
Edward C. Wood III................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Vice President President and Chief Operating Officer of the Distributor.
Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
Tanya M. Loden....................... Vice President of Van Kampen Investments and the Advisers.
Date of Birth: 11/19/59 Controller of each of the funds in the Fund Complex and
Controller other investment companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 65 operating funds in the Fund Complex. Each trustee/ director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in
B-18
<PAGE> 105
the Fund Complex. Each fund in the Fund Complex provides a deferred compensation
plan to its Non-Affiliated Trustees that allows trustees/directors to defer
receipt of their compensation and earn a return on such deferred amounts.
Deferring compensation has the economic effect as if the Non-Affiliated Trustee
reinvested his or her compensation into the funds. Each fund in the Fund Complex
provides a retirement plan to its Non-Affiliated Trustees that provides
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met as more fully described below.
The compensation of each Non-Affiliated Trustee includes an annual retainer
in an amount equal to $50,000 per calendar year, due in four quarterly
installments on the first business day of each quarter. Payment of the annual
retainer is allocated among the funds in the Fund Complex on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
B-19
<PAGE> 106
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $2,457 $35,691 $60,000 $125,200
Jerry D. Choate(1) 1999 1,019 0 60,000 0
Linda Hutton Heagy 1995 2,457 3,861 60,000 112,800
R. Craig Kennedy 1995 2,457 2,652 60,000 125,200
Jack E. Nelson 1995 2,457 18,385 60,000 125,200
Phillip B. Rooney 1997 2,457 6,002 60,000 125,200
Fernando Sisto 1979 2,457 68,615 60,000 125,200
Wayne W. Whalen 1995 2,457 12,658 60,000 125,200
Suzanne H. Woolsey(1) 1999 1,019 0 60,000 0
Paul G. Yovovich(1) 1998 2,257 0 60,000 25,300
</TABLE>
---------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Yovovich became a member of the Board of Trustees for the Fund
and other funds in the Fund Complex on October 22, 1998 and therefore does
not have a full year of information to report. Mr. Choate and Ms. Woolsey
became members of the Board of Trustees for the Fund and other funds in the
Fund Complex on May 26, 1999 and therefore do not have a full year of
information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended August 31, 1999. The
following trustees deferred compensation from the Fund during the fiscal
year ended August 31, 1999: Mr. Branagan, $2,457; Mr. Choate, $492; Ms.
Heagy, $2,457; Mr. Kennedy, $1,229; Mr. Nelson, $2,457; Mr. Rooney, $2,257;
Mr. Sisto, $1,229; Mr. Whalen, $2,457 and Mr. Yovovich, $1,735. Amounts
deferred are retained by the Fund and earn a rate of return determined by
reference to either the return on the common shares of the Fund or other
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, each fund may invest in securities of those funds selected
by the Non-Affiliated Trustees in order to match the deferred compensation
obligation. The cumulative deferred compensation (including interest)
accrued with respect to each trustee, including former trustees, from the
Fund as of August 31, 1999 is as follows: Mr. Branagan, $7,960; Mr. Caruso,
$2,537; Mr. Choate, $492; Mr. Gaughan, $188; Ms. Heagy, $8,992; Mr. Kennedy,
$5,969; Mr. Miller, $2,596; Mr. Nelson, $13,087; Mr. Rees, $30,187; Mr.
Robinson, $5,258; Mr. Rooney, $5,743; Mr. Sisto, $26,421; Mr. Whalen,
$10,729; and Mr. Yovovich, $1,829. The deferred compensation plan is
described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating investment companies in the Fund Complex
for each of the trustees for the funds' respective fiscal years ended in
1998. The retirement plan is described above the Compensation Table.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1998 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a
B-20
<PAGE> 107
portion of their aggregate compensation from the Fund Complex during the
calendar year ended December 31, 1998. The deferred compensation earns a
rate of return determined by reference to the return on the shares of the
funds in the Fund Complex as selected by the respective Non-Affiliated
Trustee, with the same economic effect as if such Non-Affiliated Trustee had
invested in one or more funds in the Fund Complex. To the extent permitted
by the 1940 Act, the Fund may invest in securities of those investment
companies selected by the Non-Affiliated Trustees in order to match the
deferred compensation obligation. The Advisers and their affiliates also
serve as investment adviser for other investment companies; however, with
the exception of Mr. Whalen, the Non-Affiliated Trustees were not trustees
of such investment companies. Combining the Fund Complex with other
investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $285,825 during the calendar year
ended December 31, 1998.
As of December 1, 1999, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
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 the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including distribution
fees, service fees, custodian fees, legal and auditing fees, the costs of
reports to shareholders, compensation of trustees of the Trust (other than those
who are affiliated persons of the Adviser, Distributor or Van Kampen
Investments) and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any actions or omissions if it acted without willful
misfeasance, bad faith, negligence or reckless disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser, as compensation
for the services rendered, facilities furnished, and expenses paid by it, a
monthly fee payable computed based upon an annual rate applied to the average
daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
------------------------ -----------
<S> <C>
First $150 million.......................................... 0.625 of 1.00%
Next $150 million........................................... 0.550 of 1.00%
Over $300 million........................................... 0.500 of 1.00%
</TABLE>
The Fund's average daily net assets are determined by taking the average of
all of the determinations of the net assets during a given calendar month. Such
fee is payable for each calendar month as soon as practicable after the end of
that month.
The fee payable to the Adviser will 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 Van Kampen
Investments in connection with the purchase and sale of portfolio investments
less any direct expenses incurred by such subsidiary of Van Kampen Investments,
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 Van Kampen Investments to receive in connection
with the Fund's portfolio transactions or other arrangements which may benefit
the Fund.
B-21
<PAGE> 108
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the distribution plans.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by a vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal years ended August 31, 1999, 1998 and 1997, the Adviser
received approximately $4,751,400, $4,358,630 and $3,377,516, respectively, in
advisory fees from the Fund.
OTHER AGREEMENTS
Accounting Services Agreement The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund 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 pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. The Fund shares together with the other Van Kampen funds in the
cost of providing such services with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such costs based proportionally on their respective net assets
per fund.
During the fiscal years ended August 31, 1999, 1998 and 1997, Advisory
Corp. received approximately $216,800, $201,962 and $98,686, respectively, in
accounting services fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
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 Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
B-22
<PAGE> 109
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal periods are shown in the chart below.
<TABLE>
<CAPTION>
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
<S> <C> <C>
Fiscal Year Ended August 31, 1999........................... $1,782,740 $213,923
Fiscal Year Ended August 31, 1998........................... $1,996,112 $252,193
Fiscal Year Ended August 31, 1997........................... $1,248,686 $131,363
</TABLE>
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
--------------------------- REALLOWED
AS % OF AS % OF TO DEALERS
OFFERING NET AMOUNT AS A % OF
SIZE OF INVESTMENT PRICE INVESTED OFFERING PRICE)
------------------ -------- ---------- ---------------
<S> <C> <C> <C>
Less than $100,000................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000...................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000...................... 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000.................... 2.00% 2.04% 1.75%
$1,000,000 or more................................... * * *
</TABLE>
------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed on a percentage of the dollar value of such
shares sold as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution
fees on Class B Shares and Class C Shares of the Fund are paid to the
Distributor and are used by the Distributor to defray its distribution related
expenses in connection with the sale of the Fund's shares, such as the payment
to authorized dealers for selling such shares. With respect to Class C Shares,
the authorized dealers generally are paid the ongoing commission and transaction
fees of up to 0.75% of the average daily net assets of the Fund's Class C Shares
annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying authorized dealers for certain services or activities
which are primarily intended to result in sales of shares of the Fund or other
Van Kampen funds. Fees may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives for meetings or seminars of a business nature. In some
B-23
<PAGE> 110
instances additional compensation or promotional incentives may be offered to
brokers, dealers or financial intermediaries that have sold or may sell
significant amounts of shares during specified periods of time. The Distributor
may provide additional compensation to Edward D. Jones & Co. or an affiliate
thereof based on a combination of its sales of shares and increases in assets
under management. All of the foregoing payments are made by the Distributor out
of its own assets. Such fees paid for such services and activities with respect
to the Fund will not exceed in the aggregate 1.25% of the average total daily
net assets of the Fund on an annual basis. These programs will not change the
price an investor will pay for shares or the amount that a Fund will receive
from such sale.
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 1940 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
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and 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 financial intermediaries 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 financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary was
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 financial intermediary would result in any material adverse consequences
to the Fund.
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 of
shares all amounts paid under the Distribution Plan 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 any 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 any 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.
The Plans generally provide for the Fund to reimburse the lesser of (i) the
distribution and service fees at the rates specified in the prospectus or (ii)
the amount of the Distributor's actual expenses incurred less any deferred sales
charges it received. For Class A Shares, to the extent the Distributor is not
fully reimbursed in a given year, there is no carryover of such unreimbursed
amounts to succeeding years. For each of the Class B Shares and Class C Shares,
to the extent the Distributor is not fully reimbursed in a given year, any
unreimbursed expenses for such class will be carried forward and paid by the
Fund in future years so long as such Plans are in effect. Except as mandated by
applicable law, the Fund does not impose any limit with respect to the number of
years into the future that such unreimbursed expenses may be carried forward (on
a Fund level basis). Because such expenses are accounted on a Fund level basis,
in periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B Share or Class C Share may be greater or
B-24
<PAGE> 111
less than the amount of the initial commission (including carrying cost) paid by
the Distributor with respect to such share. In such circumstances, a shareholder
of a share may be deemed to incur expenses attributable to other shareholders of
such class. As of August 31, 1999, there were $12,552,149 and $710,381 of
unreimbursed distribution-related expenses with respect to Class B Shares and
Class C Shares, respectively, representing 4.01% and 1.11% of the Fund's net
assets attributable to Class B Shares and Class C Shares, respectively. If the
Plans were terminated or not continued, the Fund would not be contractually
obligated to pay the Distributor for any expenses not previously reimbursed by
the Fund or recovered through contingent deferred sales charges.
For the fiscal year ended August 31, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $1,223,715 or 0.23% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended August 31, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $3,120,977 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $2,335,469 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $785,508
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Shares Plans. For the fiscal year ended August 31,
1999, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$634,559 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $372,164 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $262,395 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Plans.
The Distributor has entered into agreements with (i) The Prudential
Insurance Company of America ("Prudential") under which the Fund shall be
offered pursuant to the PruArray Programs and (ii) Merrill Lynch ("Merrill")
under which the Fund shall be offered pursuant to the Merrill Program. Trustees
and other fiduciaries of retirement plans seeking to invest in multiple fund
families through broker-dealer retirement plan alliance programs should contact
Prudential or Merrill for further information concerning the PruArray and
Merrill Programs including, but not limited to, minimum investment and
operational requirements.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas
City, MO 64121-8256. The transfer agency prices are determined through
negotiations with the Fund's Board of Trustees and are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the Trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market 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 a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed bonds on a exchange, which are effected through brokers who charge a
commission for their services.
B-25
<PAGE> 112
The Adviser is responsible for placing portfolio transactions and does so
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 the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund. The Adviser also may place portfolio transactions, to the extent
permitted by law, with brokerage firms affiliated with the Fund, the Adviser or
the Distributor and with brokerage firms participating in the distribution of
the Fund's shares if it reasonably believes that the quality of execution and
the commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, 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.
Effective October 31, 1996, Morgan Stanley & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. Discover & Co. ("Dean Witter") became an affiliate of the
Adviser. The Trustees have adopted certain policies incorporating the standards
of Rule 17e-1 issued by the SEC under the 1940 Act which require that the
commissions paid to affiliates of the Fund must be reasonable and fair compared
to the commissions, fees or other remuneration received or to be received by
other brokers in connection with comparable transactions involving similar
securities during a comparable period of time. The rule and procedures also
contain review requirements and require the Adviser to furnish reports to the
Trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the Trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to affiliated brokers.
B-26
<PAGE> 113
The Fund paid the following commissions to all brokers and affiliated
brokers during the periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
------------------
ALL MORGAN DEAN
BROKERS STANLEY WITTER
------- ------- ------
<S> <C> <C> <C>
Commissions paid:
Fiscal year ended August 31, 1999......................... $13,052 -- --
Fiscal year ended August 31, 1998......................... $ 1,000 -- --
Fiscal year ended August 31, 1997......................... $ 1,625 -- --
-------
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions........... -0- -- --
Value of brokerage transactions with affiliate to total
transactions........................................... -0- -- --
</TABLE>
During the fiscal year end August 31, 1999, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, 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 any of the
Participating Funds (as defined in the prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends 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
gain dividends and systematic purchases or redemptions. Additional shares may be
purchased at any time through authorized dealers or by mailing a check directly
to Investor Services.
SHARE CERTIFICATES
Generally, 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, requesting an
"Affidavit of Loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate
the fee for replacing the lost certificate equal to no more than 2.00% of the
net asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA,
B-27
<PAGE> 114
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. Redemption proceeds 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 ACH. 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 redemption proceeds are to be deposited together with the
completed application. Once Investor Services 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 Investor Services.
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and capital gain dividends paid on a class of shares of the Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. 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 per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account $10,000 or
more at the next determined net asset value per share at the time the plan is
established. If a shareholder owns shares in a single account valued at $5,000
or more at the next determined net asset value per share at the time the plan is
established, the shareholder may establish a quarterly, semiannual 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 payment represents
the proceeds of 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 $25. Such a systematic withdrawal
plan may also be maintained by an investor purchasing shares for a retirement
plan established on a form made available by the Fund.
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic payment. Dividends and capital gain dividends on shares
held in accounts with systematic withdrawal plans are reinvested in additional
shares at the next determined net asset value per share. If periodic withdrawals
continuously exceed reinvested dividends and capital gain dividends, the
shareholder's original investment will be correspondingly reduced and ultimately
exhausted. Redemptions made concurrently with the purchase of additional shares
ordinarily will be disadvantageous to the shareholder because of the duplication
of sales charges. Any gain or loss realized by the shareholder upon redemption
of shares is a taxable event. The Fund
B-28
<PAGE> 115
reserves the right to amend or terminate the systematic withdrawal program upon
30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made during a rolling 365-day period. If
exchange privileges are suspended, subsequent exchange requests for redemption
out of that Fund during the stated period will not be processed. Exchange
privileges will be restored when the account history shows fewer than eight
exchanges in the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange plans
or employee-sponsored retirement plans.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any contingent deferred sales
charge paid upon such redemption. Such reinstatement is made at the net asset
value per share (without sales charge) next determined after the order is
received, which must be made within 180 days after the date of the redemption.
Reinstatement at net asset value per share is also offered to participants in
those eligible retirement plans held or administered by Van Kampen Trust Company
for repayment of principal (and interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. 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) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines 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.
Additionally, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. Shareholders may
incur brokerage charges and a gain or loss for federal income tax purposes upon
the sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE-CLASS A ("CDSC-CLASS A")
As described in the Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
B-29
<PAGE> 116
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
("CDSC-CLASS B AND C")
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge. The CDSC-Class B and C is waived on redemptions of Class B Shares and
Class C Shares in the circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder 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 of 1986, as
amended (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 death or disability, 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.
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 CDSC-Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), the financial hardship of the
employee pursuant to United States Treasury Regulations Section 401(k)-1(d)(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.
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal plan, a dollar amount of a participating shareholder's investment in
the Fund will be redeemed systematically by the Fund on a periodic basis, and
the proceeds mailed to the shareholder. The amount to be redeemed and frequency
of the systematic withdrawals will be specified by the shareholder upon his or
her election to participate in the systematic withdrawal plan. The CDSC-Class B
and C will be waived on redemptions made under the systematic withdrawal plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-
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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 systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC -- Class B and C in circumstances under which
no commission or transaction fee is paid to authorized dealers at the time of
purchases of shares.
INVOLUNTARY REDEMPTIONS OF SHARES
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 value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 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.
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.
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the source of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including taxable income and net
short-term capital gain, but not net capital gain, which is the excess of net
long-term capital gain over net short-term capital loss), and meets certain
other requirements, it will not be required to pay federal income taxes on any
income it distributes to shareholders. The Fund intends to distribute at least
the minimum amount of net investment income necessary to satisfy the 90%
distribution requirement. The Fund will not be subject to federal income tax on
any net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31st of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
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If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid income and excise taxes. In order
to generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of the Fund's net investment income are taxable to
shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gain as capital gain dividends, if any, are taxable to
shareholders as long-term capital gains regardless of the length of time shares
of the Fund have been held by such shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see "Capital Gains Rates" below. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
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purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.
Certain, foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) the Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, the Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gain. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) will be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the tax rates applicable
to capital gains (including capital gain dividends), see "Capital Gains Rates"
below. Any loss recognized upon a taxable disposition of shares held for six
months or less will be treated as a long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. For purposes of
determining whether shares have been held for six months or less, the holding
period is suspended for any periods during which the shareholder's risk of loss
is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers is (i) the same as the maximum
ordinary income tax rate for capital assets held for one year or less or (ii)
20% for capital assets held for more than one year. The maximum long-term
capital gains rate for corporations is 35%.
NON-U.S. SHAREHOLDERS
A shareholder who is not (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized under the laws of the
United States or any state thereof, (iii) an estate, the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries who have
the authority to control all substantial decisions of the trust (a "Non-U.S.
Shareholder") generally will be subject to withholding of United States federal
income tax at a 30% rate (or lower applicable treaty rate) on dividends from the
Fund (other than capital gain dividends) that are not "effectively connected"
with a United States trade or business carried on by such shareholder.
Accordingly, investment in the Fund is likely to be appropriate for a Non-U.S.
Shareholder only if such person can utilize a foreign tax credit or
corresponding tax benefit in respect of such U.S. withholding tax.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to United States federal income tax in
the case of (i) a Non-U.S. Shareholder that is a corporation and (ii) a Non-U.S.
Shareholder that is not present in the United States for more than 182 days
during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Shareholders may nonetheless be subject to backup
withholding on capital gain dividends and gross proceeds paid to them upon the
sale of their shares. See "Backup Withholding" below.
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If income from the Fund or gains realized from the sale of shares is
effectively connected with a Non-U.S. Shareholder's United States trade or
business, then such amounts will be subject to United States federal income tax
on a net basis at the tax rates applicable to United States citizens or domestic
corporations. Non-U.S. Shareholders that are corporations may also be subject to
an additional "branch profits tax" with respect to income from the Fund that is
effectively connected with a United States trade or business.
Final United States Treasury Regulations effective for payments made after
December 31, 2000, modify the withholding, backup withholding and information
reporting rules, including the procedures to be followed by Non-U.S.
Shareholders in establishing foreign status. Prospective investors should
consult their tax advisors concerning the applicability and effect of such
Treasury Regulations on an investment in shares of the Fund.
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Non-U.S. Shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their tax advisers with respect to the
tax implications of purchasing, holding and disposing of shares of the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder fails
to certify that he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a Shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each Non-U.S. Shareholder
the amount of dividends paid to such shareholder and the amount, if any, of tax
withheld with respect to such dividends. In case of a Non-U.S. Shareholder this
information may also be made available to the tax authorities in such Non-U.S.
Shareholder's country of residence.
GENERAL
The federal income tax discussion set forth above is for general
information only. Prospective investors and shareholders should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one year, five year and ten year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all
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income dividends or capital gain dividends during the period are reinvested in
Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Since Class A Shares of the Fund were offered at a maximum sales charge of 6.75%
prior to June 12, 1989, actual Fund total return would have been somewhat less
than that computed on the basis of the current maximum sales charge. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends and capital gain dividends
paid by the Fund or to reflect the fact no 12b-1 fees were incurred prior to
October 1, 1989.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if contingent deferred sales charge
imposed at the time of redemption were reflected, it would reduce the
performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
of the class of shares will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and
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unrealized appreciation or depreciation of such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Fund's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Fund. Distribution rates will be
computed separately for each class of the Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings. Materials may also
mention how the Distributor believes the Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their funds shares in direct or sales force distribution channels. The
study showed that investors working with a professional representative have
tended over time to earn higher returns than those who invested directly. The
Fund may also be marketed on the internet.
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 rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, Salomon
Brothers Corporate Bond Index, Shearson Lehman Corporate Bond Index, Merrill
Lynch Corporate Master Index, Merrill Lynch Corporate and Government Index,
Bloomberg Financial Markets Indices, other appropriate indices of investment
securities, or with investment or savings vehicles. The performance information
may also include evaluations of the Fund published by nationally recognized
ranking or rating services and by nationally recognized financial publications.
Such comparative performance information will be stated in the same terms in
which the comparative data or indices are stated. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. For these purposes, the performance of the
Fund, as well as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce the Fund's
performance. The Fund will include performance data for each class of 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. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the back cover of the Prospectus.
CLASS A SHARES
The Fund's average annual total return assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
August 31, 1999 was -.51%, (ii) the five-year period ended August 31, 1999 was
7.55% and (iii) the ten-year period ended August 31, 1999 was 7.57%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to August 31, 1999 was 474.43%.
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<PAGE> 123
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to August 31, 1999 was 503.27%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended August 31, 1999 was -.18%, (ii) the five-year period ended August
31, 1999 was 7.50% and (iii) the approximately seven-year, one-month period
since July 2, 1992, the commencement of distribution for Class B Shares of the
Fund, through August 31, 1999 was 8.16%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
July 2, 1992 (the commencement of distribution of Class B Shares) to August 31,
1999 was 75.40%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
July 2, 1992 (the commencement of distribution of Class B Shares) to August 31,
1999 was 75.40%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended August 31, 1999 was 2.48%, (ii) the five-year period ended August
31, 1999 was 7.74% and (iii) the approximately six-year, one-month period since
July 6, 1993, the commencement of distribution for Class C Shares of the Fund,
through August 31, 1999 was 6.70%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
July 6, 1993 (the commencement of distribution for Class C Shares) to August 31,
1999 was 49.04%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
July 6, 1993 (the commencement of distribution for Class C Shares) to August 31,
1999 was 49.04%.
The annualized current yield for Class A Shares, Class B Shares and Class C
Shares of the Fund for the 30-day period ending August 31, 1999 was 10.31%,
9.97% and 10.02%, respectively. The yield for Class A Shares, Class B Shares and
Class C Shares is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices.
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 West Franklin Street,
Boston, Massachusetts 02110, as Custodian. The Custodian also provided
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
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INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 200 East Randolph Drive, Chicago, Illinois
60601, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, State, Meagher & Flom (Illinois).
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Van Kampen High Income Corporate Bond Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen High Income Corporate
Bond Fund (the "Fund") at August 31, 1999, the results of its operations, the
changes in its net assets and the financial highlights for each of the 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 August
31, 1999 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
October 6, 1999
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<PAGE> 126
PORTFOLIO OF INVESTMENTS
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CORPORATE DEBT OBLIGATIONS 93.4%
CONSUMER DISTRIBUTION 9.5%
$7,500 Agrilink Foods Inc., 144A -
Private Placement (b)................ 11.875% 11/01/08 $ 7,162,500
4,250 Big 5 Corp., Ser B................... 10.875 11/15/07 4,271,250
3,000 Building One Services Corp. ......... 10.500 05/01/09 2,835,000
2,585 Chiquita Brands International,
Inc. ................................ 10.000 06/15/09 2,572,075
9,000 CHS Electronics, Inc. ............... 9.875 04/15/05 3,825,000
3,200 Community Distributors, Inc. ........ 10.250 10/15/04 2,832,000
9,255 Del Monte Foods Co., Ser B (a)....... 0/12.500 12/15/07 6,941,250
3,750 Disco SA (Argentina)................. 9.125 05/15/03 3,328,125
2,750 Disco SA (Argentina)................. 9.875 05/15/08 2,358,125
4,000 Duane Reade, Inc. ................... 9.250 02/15/08 4,020,000
3,700 Express Scripts, Inc., 144A - Private
Placement (b)........................ 9.625 06/15/09 3,746,250
2,000 Gruma SA (Mexico).................... 7.625 10/15/07 1,745,000
1,200 Jitney Jungle Stores America,
Inc. ................................ 12.000 03/01/06 966,000
5,500 King Pharmaceuticals, Inc. .......... 10.750 02/15/09 5,623,750
4,000 Luiginos, Inc., 144A - Private
Placement (b)........................ 10.000 02/01/06 3,800,000
8,255 Musicland Group, Inc. ............... 9.875 03/15/08 7,800,975
7,250 Pantry, Inc. ........................ 10.250 10/15/07 7,250,000
3,735 Pathmark Stores, Inc. ............... 12.625 06/15/02 3,781,688
6,000 Pathmark Stores, Inc. (a)............ 0/10.750 11/01/03 5,865,000
945 Phar Mor, Inc. ...................... 11.720 09/11/02 959,175
1,750 Stater Brothers Holdings, Inc.,
144A - Private Placement (b)......... 10.750 08/15/06 1,798,125
------------
83,481,288
------------
CONSUMER DURABLES 4.2%
8,900 Aetna Industries, Inc. .............. 11.875 10/01/06 9,122,500
1,000 Cambridge Industries, Inc., Ser B.... 10.250 07/15/07 705,000
6,000 Oxford Automotive, Inc., Ser D,
144A - Private Placement (b)......... 10.125 06/15/07 5,730,000
4,000 Sleepmaster LLC, 144A - Private
Placement (b)........................ 11.000 05/15/09 4,000,000
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 127
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONSUMER DURABLES (CONTINUED)
$6,430 Talon Automotive Group, Inc., Ser
B.................................... 9.625% 05/01/08 $ 5,176,150
4,500 Venture Holdings, Inc. .............. 9.500 07/01/05 4,230,000
2,000 Venture Holdings, Inc., 144A -
Private Placement (b)................ 12.000 06/01/09 1,980,000
6,300 Webb (Del E.) Corp. ................. 10.250 02/15/10 5,985,000
------------
36,928,650
------------
CONSUMER NON-DURABLES 5.7%
6,000 Cluett American Corp., Ser B......... 10.125 05/15/08 4,170,000
3,500 CMI Industries, Inc. ................ 9.500 10/01/03 3,281,250
8,900 Consoltex Group, Inc. (Canada)....... 11.000 10/01/03 9,033,500
3,000 Decora Industries, Inc. ............. 11.000 05/01/05 2,805,000
4,250 Delta Mills Insurance, Ser B......... 9.625 09/01/07 3,591,250
1,800 French Fragrances, Inc., Ser B....... 10.375 05/15/07 1,755,000
5,000 French Fragrances, Inc., Ser D....... 10.375 05/15/07 4,875,000
4,750 Globe Manufacturing Corp. ........... 10.000 08/01/08 3,206,250
6,000 Outsourcing Services Group, Inc., Ser
B.................................... 10.875 03/01/06 5,760,000
1,500 Simmons Co., 144A - Private Placement
(b).................................. 10.250 03/15/09 1,488,750
4,500 St John Knits International, Inc.,
144A - Private Placement (b)......... 12.500 07/01/09 4,365,000
1,750 United Industries Corp.,
144A - Private Placement (b)......... 9.875 04/01/09 1,548,750
3,950 Vlassic Foods International, Inc.,
144A - Private Placement (b)......... 10.250 07/01/09 3,693,250
------------
49,573,000
------------
CONSUMER SERVICES 22.2%
5,200 Amazon.com, Inc. (a)................. 0/10.000 05/01/08 3,458,000
3,000 American Plumbing & Mechanical,
144A - Private Placement (b)......... 11.625 10/15/08 2,865,000
8,050 Americredit Corp. ................... 9.250 02/01/04 8,090,250
3,000 Americredit Corp., 144A - Private
Placement (b)........................ 9.875 04/15/06 3,045,000
2,410 Argosy Gaming Co., 144A - Private
Placement (b)........................ 10.750 06/01/09 2,494,350
9,750 Booth Creek Ski Holdings, Inc., Ser
B.................................... 12.500 03/15/07 8,165,625
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 128
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONSUMER SERVICES (CONTINUED)
$2,400 Bresnan Communications Group, 144A -
Private Placement (b)................ 8.000% 02/01/09 $ 2,388,000
2,500 Cadmus Communications Corp.,
144A - Private Placement (b)......... 9.750 06/01/09 2,509,375
10,020 Capstar Broadcasting Partners (a).... 0/12.750 02/01/09 8,567,100
6,900 Casino Magic Louisiana Corp., Ser
B.................................... 13.000 08/15/03 7,831,500
6,250 Cathay International Ltd., 144A -
Private Placement (Japan) (b)........ 13.500 04/15/08 2,343,750
8,085 Charter Communications Holdings LLC,
144A - Private Placement (b)......... 8.250 04/01/07 7,660,537
2,500 Citadel Broadcasting Co. ............ 9.250 11/15/08 2,506,250
5,500 Citadel Broadcasting Co., Ser B...... 10.250 07/01/07 5,775,000
1,375 Classic Cable, Inc., 144A - Private
Placement (b)........................ 9.375 08/01/09 1,354,375
4,250 Coaxial Commerce Central Ohio,
Inc. ................................ 10.000 08/15/06 4,313,750
1,750 Diamond Cable Co. (United Kingdom)
(a).................................. 0/11.750 12/15/05 1,561,875
2,250 Frontiervision Holdings L.P. (a)..... 0/11.875 09/15/07 1,912,500
2,875 Frontiervision Holdings L.P., Ser B
(a).................................. 0/11.875 09/15/07 2,443,750
4,000 Globo Communicacoes Participation,
144A - Private Placement (Brazil)
(b).................................. 10.625 12/05/08 2,890,000
3,500 Gray Communications Systems, Inc. ... 10.625 10/01/06 3,644,375
6,500 Grupo Televisa Corp. (Mexico)........ * 05/15/08 5,411,250
2,000 Grupo Televisa Corp., Ser B
(Mexico)............................. 11.875 05/15/06 2,060,000
5,796 Helicon Group L.P. .................. 11.000 11/01/03 6,085,800
4,000 Hollywood Casino Corp.,
144A - Private Placement (b)......... 11.250 05/01/07 4,060,000
1,770 Hollywood Casino Shreveport,
144A - Private Placement (b)......... 13.000 08/01/06 1,814,250
4,000 Hollywood Park, Inc., Ser B.......... 9.500 08/01/07 3,960,000
2,000 Horseshoe Gaming LLC,
144A - Private Placement (b)......... 8.625 05/15/09 1,930,000
7,000 IHF Holdings, Inc., Ser B (a)........ 0/15.000 11/15/04 945,000
5,500 International Cabletel, Inc. (a)..... 0/11.500 02/01/06 4,785,000
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 129
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONSUMER SERVICES (CONTINUED)
$4,500 Isle of Capri Casinos, Inc.,
144A - Private Placement (b)......... 8.750% 04/15/09 $ 4,230,000
875 James Cable Partners L.P. ........... 10.750 08/15/04 894,688
4,500 Louisiana Petite Academy, Inc., Ser
B.................................... 10.000 05/15/08 4,038,750
5,000 Majestic Star Casino LLC, 144A -
Private Placement (b)................ 10.875 07/01/06 4,900,000
7,500 Multicanal Participacoes, Ser B
(Brazil)............................. 12.625 06/18/04 7,200,000
4,500 Muzak LLC, 144A - Private Placement
(b).................................. 9.875 03/15/09 4,455,000
6,050 Northland Cable Television, Inc. .... 10.250 11/15/07 6,155,875
3,000 Park N View, Inc., Ser B............. 13.000 05/15/08 915,000
3,950 Port Arthur Finance Corp., Ser A,
144A - Private Placement (b)......... 12.500 01/15/09 3,969,750
7,400 Premier Parks, Inc. (a).............. 0/10.000 04/01/08 4,921,000
7,000 Radio Unica Corp. (a)................ 0/11.750 08/01/06 4,270,000
1,960 SFX Broadcasting, Inc. .............. 10.750 05/15/06 2,107,000
1,350 Sinclair Broadcast Group, Inc. ...... 8.750 12/15/07 1,284,187
7,000 Splitrock Services, Inc., Ser B...... 11.750 07/15/08 6,335,000
3,150 Station Casinos, Inc., 144A - Private
Placement (b)........................ 8.875 12/01/08 3,071,250
4,190 Telewest Communications PLC
(United Kingdom) (a)................. 0/11.000 10/01/07 3,697,675
2,000 Telewest Communications PLC, 144A -
Private Placement (United Kingdom)
(a) (b).............................. 0/9.250 04/15/09 1,205,000
5,000 UIH Australia/Pacific, Inc., Ser B
(a).................................. 0/14.000 05/15/06 3,775,000
11,250 United International Holdings, Inc.
(a).................................. 0/10.750 02/15/08 6,496,875
6,250 Young America Corp., Ser B........... 11.625 02/15/06 4,125,000
------------
194,918,712
------------
ENERGY 2.5%
1,000 Canadian Forest Oil Ltd. ............ 8.750 09/15/07 955,000
8,500 Hurricane Hydrocarbons Ltd., 144A -
Private Placements (Canada) (b)
(f).................................. 11.750 11/01/04 1,912,500
5,750 Hydrochem Industrial Services, Inc.,
Ser B................................ 10.375 08/01/07 5,175,000
5,500 KCS Energy, Inc. (f)................. 11.000 01/15/03 4,152,500
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 130
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
ENERGY (CONTINUED)
$5,000 Pride Petroleum Services, Inc. ...... 9.375% 05/01/07 $ 5,025,000
6,000 Universal Compression, Inc. (a)...... 0/9.875 02/15/08 3,720,000
1,000 Universal Compression, Inc. (a)...... 0/11.375 02/15/09 600,000
------------
21,540,000
------------
FINANCE 1.7%
4,750 Americo Life, Inc., 144A - Private
Placement (b)........................ 9.250 06/01/05 4,773,750
4,000 Avis Rent A Car, Inc., 144A - Private
Placement (b)........................ 11.000 05/01/09 4,130,000
3,000 Chatwins Group, Inc. ................ 13.000 05/01/03 2,790,000
3,000 Contifinancial Corp. ................ 7.500 03/15/02 1,185,000
2,250 Superior National Capital Trust 1.... 10.750 12/01/17 2,148,750
------------
15,027,500
------------
HEALTHCARE 3.4%
4,000 Alliance Imaging, Inc. .............. 9.625 12/15/05 3,800,000
3,900 Biovail Corporation International.... 10.875 11/15/05 4,056,000
2,250 DJ Orthopedics LLC, 144A - Private
Placement (b)........................ 12.625 06/15/09 2,148,750
2,250 Lifepoint Hospitals Holdings, Inc.,
144A - Private Placement (b)......... 10.750 05/15/09 2,261,250
2,655 Maxxim Medical, Inc., 144A - Private
Placement (b)........................ 10.500 08/01/06 2,827,575
3,000 Mediq, Inc. ......................... 11.000 06/01/08 2,355,000
1,490 Owens & Minor, Inc. ................. 10.875 06/01/06 1,557,050
8,265 Oxford Health Plans, Inc.,
144A - Private Placement (b)......... 11.000 05/15/05 8,223,675
3,000 Triad Hospitals Holdings, Inc.,
144A - Private Placement (b)......... 11.000 05/15/09 3,000,000
------------
30,229,300
------------
PRODUCER MANUFACTURING 5.5%
9,750 Carpenter W R North America, Inc. ... 10.625 06/15/07 8,482,500
500 Cemex International Capital, Inc. ... 9.660 11/29/49 465,000
3,355 Compass Aerospace Corp.,
144A - Private Placement (b)......... 10.125 04/15/05 3,002,725
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 131
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
$4,500 Eagle Picher Industries, Inc. ....... 9.375% 03/01/08 $ 4,286,250
5,500 Filtronic PLC, 144A - Private
Placement (b)........................ 10.000 12/01/05 5,307,500
5,255 GS Technologies Operating, Inc. ..... 12.000 09/01/04 4,138,313
8,000 IMO Industries, Inc. ................ 11.750 05/01/06 8,160,000
1,750 Juno Lighting, Inc., 144A - Private
Placement (b)........................ 11.875 07/01/09 1,732,500
2,000 Numatics, Inc. ...................... 9.625 04/01/08 1,740,000
3,000 Terex Corp. ......................... 8.875 04/01/08 2,857,500
4,500 Terex Corp., Ser D................... 8.875 04/01/08 4,286,250
6,750 Waxman Industries, Inc., Ser B (a)... 0/12.750 06/01/04 3,408,750
------------
47,867,288
------------
RAW MATERIALS/PROCESSING INDUSTRIES 9.8%
2,175 Acetex Corp. (Canada)................ 9.750 10/01/03 1,968,375
4,500 AEP Industries, Inc. ................ 9.875 11/15/07 4,387,500
4,200 Anchor Lamina, Inc. (Canada)......... 9.875 02/01/08 3,685,500
4,540 Aracruz Celulose SA, 144A - Private
Placement (Brazil) (b)............... 10.375 01/31/02 4,517,300
4,500 Doe Run Resources Corp., Ser B....... 11.250 03/15/05 4,207,500
1,500 Doman Industries Ltd., 144A - Private
Placement (b)........................ 12.000 07/01/04 1,500,000
1,000 Galey & Lord, Inc. .................. 9.125 03/01/08 500,000
1.7 units Intersil Corp., 144A - Private
Placement (b) (e).................... 13.250 08/15/09 1,751,000
2,500 Kappa Beheer Bv, 144A - Private
Placement (b)........................ 10.625 07/15/09 2,559,375
5,000 Lyondell Chemical Co. ............... 10.875 05/01/09 5,087,500
3,600 Pacifica Papers, Inc., 144A - Private
Placement (b)........................ 10.000 03/15/09 3,654,000
5,750 Packaging Corp. of America, 144A -
Private Placement (b)................ 9.625 04/01/09 5,821,875
5,054 Pioneer Americas Acquisition
Corp. ............................... 9.250 06/15/07 3,664,150
10,025 Printpack, Inc. ..................... 10.625 08/15/06 9,373,375
3,250 Radnor Holdings, Inc., Ser B......... 10.000 12/01/03 3,298,750
5,000 Renco Steel Holdings, Inc. .......... 10.875 02/01/05 4,275,000
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 132
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES (CONTINUED)
2.8
units Republic Technologies International,
144A - Private Placement (b) (e)..... 13.750% 07/15/09 2,782,500
$2,250 Scovill Fasteners, Inc. ............. 11.250 11/30/07 1,293,750
6,010 Tekni-Plex, Inc., Ser B.............. 11.250 04/01/07 6,400,650
2,025 TeleCorp PCS, Inc., 144A - Private
Placement (a) (b).................... 0/11.625 04/15/09 1,189,687
4,000 Tritel PCS, Inc., 144A - Private
Placement (a) (b).................... 0/12.750 05/15/09 2,300,000
2,750 Vicap SA (Mexico).................... 10.250 05/15/02 2,433,750
6,250 Vicap SA (Mexico).................... 11.375 05/15/07 5,281,250
4,550 WHX Corp. ........................... 10.500 04/15/05 4,368,000
------------
86,300,787
------------
TECHNOLOGY 3.5%
5,500 Advanced Micro Devices, Inc. ........ 11.000 08/01/03 5,142,500
6,600 Century Communications Corp. ........ * 01/15/08 2,829,750
2,000 Crown Castle International Corp.,
144A - Private Placement (b)......... 9.500 08/01/11 1,955,000
6,000 DecisionOne Holdings Corp. (f)....... 9.750 08/01/07 270,000
3
units DecisionOne Holdings Corp. (a) (e)... 0/11.500 08/01/08 22,500
3,660 Dictaphone Corp. .................... 11.750 08/01/05 2,653,500
7,500 Fairchild Semiconductor Corp.,
144A - Private Placement (b)......... 10.375 10/01/07 7,387,500
7,550 PSINet, Inc. ........................ 11.500 11/01/08 7,682,125
2,375 PSINet, Inc., 144A - Private
Placement (b)........................ 11.000 08/01/09 2,386,875
------------
30,329,750
------------
TRANSPORTATION 4.8%
4,000 American Commercial Lines LLC........ 10.250 06/30/08 3,950,000
7,500 Atlas Air, Inc. ..................... 10.750 08/01/05 7,687,500
6,750 Atlas Air, Inc. ..................... 9.375 11/15/06 6,547,500
1,800 Atlas Air, Inc. ..................... 9.250 04/15/08 1,705,500
2,700 Cenargo International PLC............ 9.750 06/15/08 2,308,500
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 133
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TRANSPORTATION (CONTINUED)
$7,250 Greyhound Lines, Inc. ............... 11.500% 04/15/07 8,192,500
$5,950 MRS Logistica SA, Ser B,
144A - Private Placement (Brazil)
(b).................................. 10.625 08/15/05 3,778,250
6,250 Pegasus Shipping Hellas Ltd., Ser
A.................................... 11.875 11/15/04 2,281,250
4,500 Stena AB (Sweden).................... 10.500 12/15/05 4,500,000
1,800 Transport World Airlines, Inc., 144A
-Private Placement (b)............... 11.500 12/15/04 1,539,000
------------
42,490,000
------------
UTILITIES 20.6%
5,500 American Cellular Corp. ............. 10.500 05/15/08 5,678,750
6,250 Centennial Cellular Operating Co. ... 10.750 12/15/08 6,500,000
9,750 Clearnet Communications, Inc.
(Canada) (a)......................... 0/14.750 12/15/05 9,067,500
6,000 Compania De Transporte Energia, 144A
-Private Placement (Argentina) (b)... 9.250 04/01/08 4,980,000
3,950 Crown Castle International Corp.
(a).................................. 0/10.625 11/15/07 2,784,750
7,000 CTI Holdings SA (a).................. 0/11.500 04/15/08 3,360,000
11,160 E Spire Communications, Inc. (a)..... 0/13.000 11/01/05 6,779,700
3,180 E Spire Communications, Inc. (a)..... 0/12.750 04/01/06 1,788,750
1,175 Globe Telecom, Inc., 144A - Private
Placement (b)........................ 13.000 08/01/09 1,179,406
4,300 Globenet Communications Group Ltd.,
144A - Private Placement (b)......... 13.000 07/15/07 4,192,500
2,570 GST Network Funding, Inc., 144A -
Private Placement (a) (b)............ 0/10.500 05/01/08 1,464,900
568 GST Telecommunciations, Inc., 144A -
Private Placement (Canada) (a) (b)... 0/13.875 12/15/05 721,360
2,550 ICG Holdings, Inc. (a)............... 0/13.500 09/15/05 2,269,500
2,500 ICG Holdings, Inc. (a)............... 0/12.500 05/01/06 1,975,000
9,100 Intermedia Communications of Florida,
Inc. (a)............................. 0/12.500 05/15/06 7,507,500
8,250 IXC Communications, Inc. ............ 9.000 04/15/08 8,115,938
7,000 KMC Telecommunications Holdings, Inc.
(a).................................. 0/12.500 02/15/08 3,815,000
4,000 Level 3 Communications, Inc. ........ 9.125 05/01/08 3,740,000
2,000 Level 3 Communications, Inc. (a)..... 0/10.500 12/01/08 1,140,000
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 134
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTILITIES (CONTINUED)
$5,750 McLeodusa, Inc. (a).................. 0/10.500% 03/01/07 4,312,500
2,300 Metromedia Fiber Network, Inc. ...... 10.000 11/15/08 2,277,000
1,500 Metronet Communications Corp.
(Canada) (a)......................... 0/10.750 11/01/07 1,207,500
1,250 Metronet Communications Corp.
(Canada) (a)......................... 0/9.950 06/15/08 956,250
9,510 Microcell Telecommunications, Ser B
(a).................................. 0/14.000 06/01/06 7,869,525
9,000 Millicom International Cellular SA
(Luxemburg) (a)...................... 0/13.500 06/01/06 6,322,500
10,250 Netia Holdings, Inc., Ser B
(Netherlands) (a).................... 0/11.250 11/01/07 6,560,000
3,750 Nextel Communications, Inc. (a)...... 0/10.650 09/15/07 2,756,250
1,000 Nextel Communications, Inc. ......... 12.000 11/01/08 1,115,000
4,500 NTL, Inc. (a)........................ 0/9.750 04/01/08 2,947,500
5,125 Optel, Inc., Ser B, 144A - Private
Placement (b)........................ 13.000 02/15/05 3,613,125
10,450 Pinnacle Holdings, Inc. (a).......... 0/10.000 03/15/08 6,008,750
4,450 Price Communications Wireless........ 11.750 07/15/07 4,872,750
4,500 Price Communications Wireless, Ser
B.................................... 9.125 12/15/06 4,590,000
6,400 Primus Telecommunications Group...... 11.750 08/01/04 6,272,000
1,750 Primus Telecommunications Group...... 11.250 01/15/09 1,671,250
3,750 Rural Cellular Corp. ................ 9.625 05/15/08 3,825,000
2,250 Satelites Mexicanos SA (Mexico)...... 10.125 11/01/04 1,777,500
10,250 SBA Communications Corp. (a)......... 0/12.000 03/01/08 5,893,750
8,100 Startec Global Communications........ 12.000 05/15/08 6,925,500
1,000 Telecom Argentina, Ser J, 144A -
Private Placement (Argentina) (b).... 9.750 07/12/01 1,007,500
1,500 Transtel, 144A - Private Placement
(Columbia) (a) (b)................... 14.500 11/01/07 750,000
5,675 Triton Communications LLC (a)........ 0/11.000 05/01/08 3,887,375
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 135
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
--------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
UTILITIES (CONTINUED)
$3,500 United Pan-Europe Communications NV
144A - Private Placement
(Netherlands) (b).................... 10.875% 08/01/09 3,521,875
6,740 Verio, Inc. ......................... 10.375 04/01/05 6,706,300
4,300 Verio, Inc. ......................... 11.250 12/01/08 4,375,250
2,000 Worldwide Fiber, Inc., 144A - Private
Placement (b)........................ 12.000 08/01/09 2,000,000
------------
181,082,504
------------
TOTAL CORPORATE DEBT OBLIGATIONS 93.4%...................... 819,768,779
------------
FOREIGN GOVERNMENT OBLIGATIONS 0.7%
2,000 Republic of Argentina (Argentina).... 11.375 01/30/17 1,747,500
4,000 United Mexican States Debt
(Mexico)............................. 11.500 05/15/26 4,342,500
------------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS......................... 6,090,000
------------
EQUITIES 2.0%
American Telecasting, Inc. (1,750 Common Stock Warrants) (c)........ 1,750
Contour Energy Co. (75,000 Common Shares) (c)....................... 152,344
Crown Castle International Corp. (20,637 Preferred Shares, 12.75%
coupon, $1,000 par per share) (c) (d)............................... 2,115,292
Dairy Mart Convenience Stores (14,998 Common Stock Warrants) (c).... 5,399
Day International Group, Inc. (1,741 Preferred Shares, 12.25%
coupon, $1,000 par per share) (c) (d)............................... 1,410,210
KMC Telecommunications Holdings, Inc., 144A - Private Placement
(7,000 Common Stock Warrants) (b) (c)............................... 70,000
Metronet Communications Corp., 144A - Private Placement (9,250
Common Stock Warrants) (Canada) (b) (c)............................. 740,000
NTL, Inc., 144A - Private Placement (6,889 Common Stock Warrants)
(b) (c)............................................................. 89,557
Optel, Inc. (3,275 Common Shares) (c)............................... 6,550
Park N View, Inc., 144A - Private Placement (3,000 Common Stock
Warrants) (b) (c)................................................... 750
Price Communications Corp. (221,141 Common Shares) (c).............. 4,547,212
Primus Telecommunications Group (2,000 Common Stock Warrants) (c)... 41,000
Rural Cellular Corp. (7,046 Preferred Shares, 11.375% coupon, $1,000
par per share) (c) (d).............................................. 7,116,460
Signature Brands, Inc. (4,000 Common Stock Warrants) (c)............ 86,000
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 136
PORTFOLIO OF INVESTMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
--------------------------------------------------------------------------------------
<S> <C>
EQUITIES (CONTINUED)
Splitrock Services, Inc., 144A - Private Placement
(7,000 Common Stock Warrants) (b) (c)............................... 420,000
Star Gas Partners, L.P. (1,219 Units of Limited Partnership
Interests).......................................................... 19,809
Startec Global Communications (8,100 Common Stock Warrants) (c)..... 8,100
Terex Corp. (28,000 Common Stock Rights) (c)........................ 504,000
Total Renal Care Holdings, Inc. (10,000 Common Shares) (c).......... 80,625
UIH Australia Pacific, Inc. (5,000 Common Stock Warrants) (c)....... 15,000
Urohealth Sysytems, Inc., 144A - Private Placement (4,750 Common
Stock Warrants) (b) (c)............................................. 47
Wright Medical Technolgy, Inc. (4,118 Common Stock Warrants) (c).... 412
------------
TOTAL EQUITIES 2.0%.................................................. 17,430,517
------------
TOTAL LONG-TERM INVESTMENTS 96.1%
(Cost $934,678,073)................................................. 843,289,296
------------
SHORT-TERM INVESTMENTS 2.2%
REPURCHASE AGREEMENT 1.4%
BankAmerica Securities ($12,029,000 par collateralized by U.S.
Government obligations in a pooled cash account, dated 08/31/99, to
be sold on 09/01/99 at $12,030,824)................................. 12,029,000
U.S. GOVERNMENT AGENCY OBLIGATION 0.8%
Federal Home Loan Bank Consolidated Discount Note ($7,551,000 par,
yielding 5.40%, 09/01/99 maturity).................................. 7,549,868
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $19,578,868).................................................. 19,578,868
------------
TOTAL INVESTMENTS 98.3%
(Cost $954,256,941)................................................. 862,868,164
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%........................... 15,012,278
------------
NET ASSETS 100.0%.................................................... $877,880,442
============
</TABLE>
* Zero coupon bond
(a) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified Institutional buyers.
(c) Non-income producing security.
(d) Payment-in-kind security.
(e) One unit represents one million par of senior notes and one warrant.
(f) Non-income producing as this bond is currently in default.
See Notes to Financial Statements
F-12
<PAGE> 137
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $954,256,941)....................... $ 862,868,164
Cash........................................................ 3,656
Receivables:
Interest.................................................. 20,136,344
Fund Shares Sold.......................................... 1,792,775
Other....................................................... 88,435
--------------
Total Assets.......................................... 884,889,374
--------------
LIABILITIES:
Payables:
Income Distributions...................................... 3,596,194
Fund Shares Repurchased................................... 1,953,435
Distributor and Affiliates................................ 628,665
Investment Advisory Fee................................... 396,504
Accrued Expenses............................................ 244,848
Trustees' Deferred Compensation and Retirement Plans........ 189,286
--------------
Total Liabilities..................................... 7,008,932
--------------
NET ASSETS.................................................. $ 877,880,442
==============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $1,055,778,413
Accumulated Undistributed Net Investment Income............. 944,173
Net Unrealized Depreciation................................. (91,388,777)
Accumulated Net Realized Loss............................... (87,453,367)
--------------
NET ASSETS.................................................. $ 877,880,442
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $492,378,343 and 86,742,193 shares of
beneficial interest issued and outstanding)........... $ 5.68
Maximum sales charge (4.75%* of offering price)......... .28
--------------
Maximum offering price to public........................ $ 5.96
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $318,228,218 and 55,993,172 shares of
beneficial interest issued and outstanding)........... $ 5.68
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $67,273,881 and 11,903,905 shares of
beneficial interest issued and outstanding)........... $ 5.65
==============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-13
<PAGE> 138
STATEMENT OF OPERATIONS
For the Year Ended August 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $100,657,191
Dividends................................................... 1,012,021
Other....................................................... 3,123,947
------------
Total Income............................................ 104,793,159
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B, and C of $1,210,079, $3,128,896 and $640,673,
respectively)............................................. 4,979,648
Investment Advisory Fee..................................... 4,751,418
Shareholder Services........................................ 1,711,046
Custody..................................................... 102,732
Trustees' Fees and Related Expenses......................... 46,153
Legal....................................................... 38,780
Other....................................................... 522,300
------------
Total Expenses.............................................. 12,152,077
Less Credits Earned on Overnight Cash Balances.............. 45,952
------------
Net Expenses............................................ 12,106,125
------------
NET INVESTMENT INCOME....................................... $ 92,687,034
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(26,018,022)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (63,501,755)
End of the Period......................................... (91,388,777)
------------
Net Unrealized Depreciation During the Period............... (27,887,022)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(53,905,044)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 38,781,990
============
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 139
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended August 31, 1999 and 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
August 31, 1999 August 31, 1998
-------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................ $ 92,687,034 $ 74,061,466
Net Realized Gain/Loss........................... (26,018,022) 18,269,123
Net Unrealized Depreciation During the Period.... (27,887,022) (89,734,268)
------------- ------------
Change in Net Assets from Operations............. 38,781,990 2,596,321
------------- ------------
Distributions from Net Investment Income:
Class A Shares................................. (56,432,461) (49,213,216)
Class B Shares................................. (31,245,715) (21,538,906)
Class C Shares................................. (6,424,163) (3,848,005)
------------- ------------
Total Distributions............................ (94,102,339) (74,600,127)
------------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES..................................... (55,320,349) (72,003,806)
------------- ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................ 377,609,982 398,226,626
Net Asset Value of Shares Issued Through Dividend
Reinvestment................................... 50,110,723 41,295,995
Cost of Shares Repurchased....................... (332,658,016) (226,785,118)
------------- ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS................................... 95,062,689 212,737,503
------------- ------------
TOTAL INCREASE IN NET ASSETS..................... 39,742,340 140,733,697
NET ASSETS:
Beginning of the Period.......................... 838,138,102 697,404,405
------------- ------------
End of the Period (Including accumulated
undistributed net investment income of $944,173
and $4,912,228, respectively).................. $ 877,880,442 $838,138,102
============= ============
</TABLE>
See Notes to Financial Statements
F-15
<PAGE> 140
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------
Class A Shares 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $6.060 $6.548 $6.298 $ 6.15 $ 6.12
------ ------ ------ ------ ------
Net Investment Income............. .626 .614 .604 .607 .55
Net Realized and Unrealized
Gain/Loss....................... (.370) (.479) .267 .139 .0515
------ ------ ------ ------ ------
Total from Investment
Operations...................... .256 .135 .871 .746 .6015
Less Distributions from Net
Investment Income............... .640 .623 .621 .598 .5715
------ ------ ------ ------ ------
Net Asset Value, End of the
Period.......................... $5.676 $6.060 $6.548 $6.298 $ 6.15
====== ====== ====== ====== ======
Total Return (a).................. 4.41% 1.66% 14.44% 12.66% 10.48%
Net Assets at End of the Period
(In millions)................... $492.4 $499.3 $468.6 $421.4 $411.9
Ratio of Expenses to Average Net
Assets (b)...................... 1.03% 1.00% 1.08% 1.08% 1.12%
Ratio of Net Investment Income to
Average Net Assets (b).......... 10.65% 9.33% 9.37% 9.65% 9.23%
Portfolio Turnover................ 51% 90% 75% 76% 49%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended August 31, 1997 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-16
<PAGE> 141
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------
Class B Shares 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $6.064 $6.558 $6.310 $ 6.16 $ 6.14
------ ------ ------ ------ ------
Net Investment Income........... .584 .571 .559 .559 .51
Net Realized and Unrealized
Gain/Loss..................... (.373) (.490) .262 .141 .0335
------ ------ ------ ------ ------
Total from Investment
Operations...................... .211 .081 .821 .700 .5435
Less Distributions from Net
Investment Income............... .592 .575 .573 .550 .5235
------ ------ ------ ------ ------
Net Asset Value, End of the
Period.......................... $5.683 $6.064 $6.558 $6.310 $ 6.16
====== ====== ====== ====== ======
Total Return (a).................. 3.57% 0.77% 13.58% 11.78% 9.41%
Net Assets at End of the Period
(In millions)................... $318.2 $283.1 $198.0 $114.6 $ 89.9
Ratio of Expenses to Average Net
Assets (b)...................... 1.79% 1.79% 1.86% 1.87% 1.93%
Ratio of Net Investment Income to
Average Net Assets (b).......... 9.88% 8.52% 8.60% 8.86% 8.42%
Portfolio Turnover................ 51% 90% 75% 76% 49%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended August 31, 1997 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-17
<PAGE> 142
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------
Class C Shares 1999 1998 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $6.035 $6.528 $6.284 $ 6.14 $ 6.11
------ ------ ------ ------ ------
Net Investment Income........... .582 .570 .561 .557 .51
Net Realized and Unrealized
Gain/Loss..................... (.374) (.488) .256 .137 .0435
------ ------ ------ ------ ------
Total from Investment
Operations...................... .208 .082 .817 .694 .5535
Less Distributions from Net
Investment Income............... .592 .575 .573 .550 .5235
------ ------ ------ ------ ------
Net Asset Value, End of the
Period.......................... $5.651 $6.035 $6.528 $6.284 $ 6.14
====== ====== ====== ====== ======
Total Return (a).................. 3.42% 0.93% 13.64% 11.66% 9.63%
Net Assets at End of the Period
(In millions)................... $ 67.3 $ 55.8 $ 30.8 $ 17.5 $ 15.7
Ratio of Expenses to Average Net
Assets (b)...................... 1.79% 1.79% 1.86% 1.87% 1.93%
Ratio of Net Investment Income to
Average Net Assets (b).......... 9.87% 8.49% 8.57% 8.86% 8.42%
Portfolio Turnover................ 51% 90% 75% 76% 49%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended August 31, 1997 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen's
reimbursement of certain expenses was less than 0.01%.
See Notes to Financial Statements
F-18
<PAGE> 143
NOTES TO FINANCIAL STATEMENTS
August 31, 1999
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen High Income Corporate Bond Fund (the "Fund"), a Delaware business
trust, is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective is to provide maximum current income through investment in high
yielding, high risk fixed-income securities. The Fund commenced investment
operations on October 2, 1978. The Fund commenced distribution of its Class B
and Class C shares on July 2, 1992 and July 6, 1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Fixed income investments and preferred stock are stated
at value using market quotations or indications of value obtained from an
independent pricing service. Investments in securities listed on a securities
exchange are valued at the sale price as of the close of such securities
exchange. Unlisted securities and listed securities for which the last sales
price is not available are valued at the mean of the bid and asked prices. For
those securities where quotations or prices are not available as noted above,
valuations are determined in accordance with procedures established in good
faith by the Board of Trustees. Short-term securities with remaining maturities
of 60 days or less are valued at amortized cost.
Fund investments include lower-rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal and
interest payments. At the end of the period, debt securities rated below
investment grade and comparable unrated securities represented approximately 98%
of the investment portfolio. At August 31, 1999, approximately 15% of the Fund's
long-term investments were in non-U.S. issuers, of which the largest geographic
exposure was Canada with 3%.
F-19
<PAGE> 144
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At August 31, 1999, there were no
when issued or delayed delivery purchase commitments.
The Fund may invest in repurchase agreements, which are short-term
investments 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 Asset Management Inc. (the "Adviser") or its
affiliates (collectively, "Van Kampen"), the daily aggregate of which is
invested in repurchase agreements. Repurchase agreements are fully
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. INCOME AND EXPENSES--Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date. Discounts on debt
securities purchased are amortized over the life of the respective security.
Premiums on debt securities are not amortized. Income and expenses of the Fund
are allocated on a pro rata basis to each class of shares, except for
distribution and service fees and transfer agency costs which are unique to each
class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At August 31, 1999, the Fund
F-20
<PAGE> 145
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
had an accumulated capital loss carryforward for tax purposes of $68,001,037
which expires between August 31, 2000 and August 31, 2007. Of this amount,
$45,375,504 will expire in 2000. Net realized gains or losses may differ for
financial reporting and tax purposes primarily as a result of market discount
from bonds sold, post October 31 losses which are not realized for tax purposes
until the first day of the following fiscal year and the deferral of losses
relating to wash sales transactions.
At August 31, 1999, for federal income tax purposes, cost of long- and
short-term investments is $954,541,201, the aggregate gross unrealized
appreciation is $13,096,054 and the aggregate gross unrealized depreciation is
$104,769,091, resulting in net unrealized depreciation on long- and short-term
investments of $91,673,037.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included in ordinary income for
tax purposes.
Due to inherent differences in the recognition of income, expenses and
realized gain/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between financial and tax basis
reporting for the 1999 fiscal year have been identified and appropriately
reclassified. Permanent book and tax basis differences relating to the
recognition of market discount on bonds disposed of in the prior period totaling
$807,089 and a resulting adjustment to the amount of capital loss carryforward
which expired was reclassified in the current period from accumulated
undistributed net investment income to capital. Permanent book and tax basis
differences relating to the expiration of a portion of the capital loss
carryforward totaling $125,160,730 were reclassified from accumulated net
realized gain/loss to capital. Permanent book and tax basis differences relating
to the recognition of market discount on bonds totaling $184,649 were
reclassified from accumulated net realized gain/loss to accumulated
undistributed net investment income. Additionally, permanent differences of
$1,930,310 related to consent fee income was reclassified from accumulated
undistributed net investment income to accumulated net realized gain/loss.
F-21
<PAGE> 146
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
F. EXPENSE REDUCTIONS--During the year ended August 31, 1999, the Fund's custody
fee was reduced by $45,952 as a result of credits earned on overnight cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
---------------------------------------------------------------------
<S> <C>
First $150 million.................................... .625 of 1%
Next $150 million..................................... .550 of 1%
Over $300 million..................................... .500 of 1%
</TABLE>
For the year ended August 31, 1999, the Fund recognized expenses of
approximately $38,800 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended August 31, 1999, the Fund recognized expenses of
approximately $216,800 representing Van Kampen's cost of providing accounting
services to the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent of the Fund. For the year ended August 31, 1999,
the Fund recognized expenses of approximately $1,278,700. Transfer agency fees
are determined through negotiations with the Fund's Board of Trustees and are
based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
F-22
<PAGE> 147
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
At August 31, 1999, capital aggregated $698,093,022, $293,770,644 and
$63,914,747 for Class A, B and C shares, respectively. For the year ended August
31, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
--------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 32,072,403 $ 188,609,487
Class B.................................... 25,472,343 150,618,753
Class C.................................... 6,517,433 38,381,742
----------- -------------
Total Sales.................................. 64,062,179 $ 377,609,982
=========== =============
Dividend Reinvestment:
Class A.................................... 5,422,970 $ 31,977,983
Class B.................................... 2,538,917 14,977,036
Class C.................................... 538,024 3,155,704
----------- -------------
Total Dividend Reinvestment.................. 8,499,911 $ 50,110,723
=========== =============
Repurchases:
Class A.................................... (33,140,278) $(196,504,687)
Class B.................................... (18,690,883) (110,387,970)
Class C.................................... (4,391,924) (25,765,359)
----------- -------------
Total Repurchases............................ (56,223,085) $(332,658,016)
=========== =============
</TABLE>
F-23
<PAGE> 148
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
At August 31, 1998, capital aggregated $743,728,332, $283,660,303 and
$57,680,730 for Class A, B and C shares, respectively. For the year ended August
31, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
--------------------------------------------------------------------------
<S> <C> <C>
Sales
Class A.................................... 28,314,218 $ 187,996,517
Class B.................................... 25,445,038 169,122,792
Class C.................................... 6,221,313 41,107,317
----------- -------------
Total Sales.................................. 59,980,569 $ 398,226,626
=========== =============
Dividend Reinvestment:
Class A.................................... 4,382,061 $ 28,862,654
Class B.................................... 1,568,905 10,333,349
Class C.................................... 320,344 2,099,992
----------- -------------
Total Dividend Reinvestment.................. 6,271,310 $ 41,295,995
=========== =============
Repurchases:
Class A.................................... (21,870,630) $(144,129,518)
Class B.................................... (10,532,646) (69,416,384)
Class C.................................... (2,018,608) (13,239,216)
----------- -------------
Total Repurchases............................ (34,421,884) $(226,785,118)
=========== =============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares purchased
on or after June 1, 1996 will automatically convert to Class A shares after the
eighth year following purchase. Class B shares purchased before June 1, 1996
automatically convert to Class A shares after the sixth year following purchase.
For the year ended August 31, 1999, 11,279,092 Class B shares automatically
converted to Class A shares. The CDSC will be imposed on
F-24
<PAGE> 149
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
most redemptions made within five years of the purchase for Class B and one year
of the purchase for Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
--------------------------------------------------------------------------
<S> <C> <C>
First.......................................... 4.00% 1.00%
Second......................................... 4.00% None
Third.......................................... 3.00% None
Fourth......................................... 2.50% None
Fifth.......................................... 1.50% None
Sixth and Thereafter........................... None None
</TABLE>
For the year ended August 31, 1999, Van Kampen, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$218,800 and CDSC on redeemed shares of approximately $773,300. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $510,175,034 and $426,498,986,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio or generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a futures contract. In this instance,
the recognition of gain or loss is postponed until the disposal of the security
underlying the futures contract.
The Fund may invest in futures contracts, a type of derivative. A futures
contract is an agreement involving the delivery of a particular asset on a
specified future date at an agreed upon price. The Fund generally invests in
futures on U.S. Treasury Notes. These contracts are generally used to manage the
portfolio's effective maturity and duration.
F-25
<PAGE> 150
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
August 31, 1999
--------------------------------------------------------------------------------
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin).
There were no transactions in futures contracts for the year ended August
31, 1999.
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 average net assets and
1.00% each for Class B and Class C average net assets are accrued daily.
Included in these fees for the year ended August 31, 1999, are payments retained
by Van Kampen of approximately $2,742,700.
F-26
<PAGE> 151
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN SERIES FUND, INC.
DATED APRIL 3, 2000, AS SUPPLEMENTED ON MAY 25, 2000
<PAGE> 152
VAN KAMPEN SERIES FUND, INC.
ON BEHALF OF ITS SERIES
VAN KAMPEN AMERICAN VALUE FUND
VAN KAMPEN ASIAN GROWTH FUND
VAN KAMPEN EMERGING MARKETS FUND
VAN KAMPEN EQUITY GROWTH FUND
VAN KAMPEN EUROPEAN EQUITY FUND
VAN KAMPEN FOCUS EQUITY FUND
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
VAN KAMPEN GLOBAL EQUITY FUND
VAN KAMPEN GLOBAL FIXED INCOME FUND
VAN KAMPEN HIGH YIELD AND TOTAL RETURN FUND
VAN KAMPEN INTERNATIONAL MAGNUM FUND
VAN KAMPEN LATIN AMERICAN FUND
VAN KAMPEN MID CAP GROWTH FUND
VAN KAMPEN TAX MANAGED GLOBAL FRANCHISE FUND
VAN KAMPEN VALUE FUND
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
SUPPLEMENT DATED MAY 25, 2000 TO THE
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 3, 2000,
SUPERCEDING ALL PRIOR SUPPLEMENTS
The Statement of Additional Information is hereby supplemented as follows:
(1) The section entitled "DIRECTORS AND OFFICERS" is hereby amended by
deleting all information pertaining to Paul G. Yovovich, effective April 14,
2000.
(2) The section entitled "DIRECTORS AND OFFICERS--OFFICERS" is hereby
amended by deleting all information pertaining to Edward C. Wood, III and
Stephen L. Boyd, effective April 17, 2000, and Peter W. Hegel, effective May 31,
2000, and by adding the following:
<TABLE>
<S> <C>
Stephen L. Boyd...................... Executive Vice President and Chief Investment Officer of Van
Date of Birth: 11/16/40 Kampen Investments, and President and Chief Operating
Executive Vice President and Officer of the Advisers. Executive Vice President and Chief
Chief Investment Officer Investment Officer of each of the funds in the Fund Complex
and certain other investment companies advised by the
Advisers or their affiliates. Prior to April 2000, Vice
President and Chief Investment Officer of the Advisers.
Prior to October 1998, Vice President and Senior Portfolio
Manager with AIM Capital Management, Inc. Prior to February
1998, Senior Vice President and Portfolio Manager of Van
Kampen American Capital Asset Management, Inc., Van Kampen
American Capital Investment Advisory Corp. and Van Kampen
American Capital Management, Inc.
John H. Zimmermann, III.............. Senior Vice President and Director of Van Kampen
Date of Birth: 11/25/57 Investments, President and Director of the Distributor and
Vice President President of Van Kampen Insurance Agency of Illinois Inc.
Vice President of each of the funds in the Fund Complex.
From November 1992 to December 1997, Senior Vice President
of the Distributor.
</TABLE>
(3) The footnote to the "CLASS A SHARES SALES CHARGE TABLE" at the end of
the second paragraph in the section entitled "DISTRIBUTION AND SERVICE" is
hereby deleted in its entirety and replaced with the following:
* No sales charge is payable at the time of purchase on investments of
$1 million or more, although the Funds may impose a contingent deferred
sales charge of 1.00% on certain redemptions made within
MS SPT SAI
<PAGE> 153
one year of purchase. A commission or transaction fee will be paid by the
Distributor at the time of purchase directly out of the Distributor's
assets (and not out of the Fund's assets) to authorized dealers who
initiate and are responsible for purchases of $1 million or more computed
on a percentage of the dollar value of such shares sold as follows: 1.00%
on sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $3 million. For single purchases of $20 million or more by an
individual retail investor the Distributor will pay, at the time of
purchase and directly out of the Distributor's assets (and not out of the
Fund's assets), a commission or transaction fee of 1.00% to authorized
dealers who initiate and are responsible for such purchases. The commission
or transaction fee of 1.00% will be computed on a percentage of the dollar
value of such shares sold.
(4) The section entitled "DISTRIBUTION AND SERVICE" is hereby amended by
adding at the end of the section the following:
The Distributor has entered into agreements with The Prudential Insurance
Company of America with respect to the High Yield and Total Return Fund and the
Tax Managed Global Franchise Fund. Shares of these funds will be offered
pursuant to such firm's retirement plan alliance program(s). Trustees and other
fiduciaries of retirement plans seeking to invest in multiple fund families
through broker-dealer retirement plan alliance program should contact the firm
mentioned above for further information concerning the program(s) including, but
not limited to, minimum investment and operational requirements.
(5) The information in the section entitled "OTHER
INFORMATION -- INDEPENDENT ACCOUNTANTS" is hereby deleted in its entirety and
replaced with the following:
Independent accountants for the Fund perform an annual audit of the Fund's
financial statements. The Fund's Board of Directors has engaged Deloitte &
Touche LLP, located at Two Prudential Plaza, 180 N. Stetson Avenue, Chicago,
Illinois 60601, to be the Fund's independent accountants, effective May 18,
2000. PricewaterhouseCoopers LLP, located at 200 East Randolph Drive, Chicago,
Illinois 60601 ("PWC"), ceased being the Fund's independent accountants
effective May 18, 2000. The cessation of the client-auditor relationship between
the Fund and PWC was based solely on a possible future business relationship by
PWC with an affiliate of the Fund's investment adviser. The change in
independent accountants was approved by the Fund's audit committee and the
Fund's Board of Directors, including Directors who are not "interested persons"
of the Fund (as defined in the 1940 Act).
RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
<PAGE> 154
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN SERIES FUND, INC.
Van Kampen Series Fund, Inc. (the "Company") is an open-end management
investment company. The Company currently consists of the following nineteen
investment portfolios designed to offer a range of investment choices (each, a
"Fund" and collectively, the "Funds"): Van Kampen American Value Fund, Van
Kampen Asian Growth Fund, Van Kampen Emerging Markets Debt Fund, Van Kampen
Emerging Markets Fund, Van Kampen Equity Growth Fund, Van Kampen European Equity
Fund, Van Kampen Focus Equity Fund (formerly known as Van Kampen Aggressive
Equity Fund), Van Kampen Global Equity Allocation Fund, Van Kampen Global Equity
Fund, Van Kampen Global Fixed Income Fund, Van Kampen Growth and Income Fund II,
Van Kampen High Yield & Total Return Fund, Van Kampen International Magnum Fund,
Van Kampen Japanese Equity Fund, Van Kampen Latin American Fund, Van Kampen Mid
Cap Growth Fund, Van Kampen Tax Managed Global Franchise Fund (formerly known as
Van Kampen Global Franchise Fund), Van Kampen Value Fund and Van Kampen
Worldwide High Income Fund. For ease of reference, the words "Van Kampen" which
begin the name of each Fund, are not used hereinafter.
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information should be read in conjunction with each Fund's
prospectus (the "Prospectus") dated as of October 28, 1999 for all Funds except
the Tax Managed Global Franchise Fund dated as of April 3, 2000. This Statement
of Additional Information does not include all the information that a
prospective investor should consider before purchasing shares of a Fund.
Investors should obtain and read the Prospectus of a Fund prior to purchasing
shares of such Fund. A Prospectus for each of the Funds may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, Oakbrook
Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833 for the
hearing impaired).
------------------------------------
TABLE OF CONTENTS
------------------------------------
PAGE
----
General Information............................................ 2
Investment Objectives, Policies and Risks...................... 7
Investment Restrictions........................................ 25
Directors and Officers......................................... 28
Investment Advisory Agreements................................. 34
Other Agreements............................................... 37
Distribution and Service....................................... 38
Transfer Agent................................................. 43
Portfolio Transactions and Brokerage Allocation................ 43
Shareholder Services........................................... 46
Redemption of Shares........................................... 47
Contingent Deferred Sales Charge -- Class A.................... 47
Waiver of Class B and Class C Contingent Deferred Sales
Charges....................................................... 48
Taxation....................................................... 49
Performance Information........................................ 52
Other Information.............................................. 56
Appendix A -- Description of Securities Ratings................ A-1
Reports of Independent Accountants, Financial Statements and
Notes to Financial Statements................................. F-1
--------------------------------------------------------------------------------
Date: April 3, 2000 1
<PAGE> 155
GENERAL INFORMATION
The Company is a corporation established under the laws of the state of
Maryland by Articles of Incorporation dated August 12, 1992 (the "Articles").
The Articles permit the Board of Directors to create one or more separate
investment portfolios and issue a series of shares for each portfolio. The
Articles also permit the Board of Directors to create multiple classes of shares
for each series. The Company's name at the time of its organization was Morgan
Stanley Series Fund, Inc. The company changed its name to Van Kampen Series
Fund, Inc. in July 1998. Similarly each Fund described herein at the time of its
organization began its name with the words "Morgan Stanley" and each Fund
changed its name to begin with the words "Van Kampen" in July 1998 (except for
the Equity Growth Fund which made this name change in June 1998 and the Global
Franchise Fund which has always had Van Kampen in its name since its
organization in June 1998 and added the words "Tax Managed" to its name in March
2000).
Van Kampen Investment Advisory Corp. ("Advisory Corp.") is the investment
adviser (the "Adviser") and the administrator (the "Administrator") for the
Funds. Morgan Stanley Dean Witter Investment Management Inc. ("MSDWIM") is a
sub-adviser (a "Sub-Adviser") to the Funds, other than Van Kampen Mid Cap Growth
Fund and Van Kampen Value Fund. Miller, Anderson & Sherrard, LLP ("MAS") is a
sub-adviser (a "Sub-Adviser") to Van Kampen Mid Cap Growth Fund and Van Kampen
Value Fund. The Funds are distributed by Van Kampen Funds Inc. (the
"Distributor") and the Funds receive certain shareholder services from Van
Kampen Investor Services Inc. ("Investor Services"). Other service providers for
the Funds are described herein under "Other Agreements" or "Other Information".
Advisory Corp., the Distributor, and Investor Services are wholly owned
subsidiaries of Van Kampen Investments Inc. ("Van Kampen Investments"), which is
an indirect wholly owned subsidiary of Morgan Stanley Dean Witter & Co. ("Morgan
Stanley Dean Witter"). MSDWIM and MAS are wholly owned subsidiaries of Morgan
Stanley Dean Witter. The principal office of the Company, each Fund, the
Adviser, the Distributor and Van Kampen Investments is located at 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555. The principal office of Investor
Services is located at PO Box 218256, Kansas City, Missouri 64121-8256. The
principal office of MSDWIM is located at 1221 Avenue of the Americas, New York,
New York 10020. The principal office of MAS is located at One Tower Bridge, West
Conshocken, Pennsylvania 19428.
Morgan Stanley Dean Witter is a preeminant global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
The authorized capitalization of the Company consists of 21,375,000,000
shares of common stock, par value $0.001 per share, which can be divided into
series, such as the Funds, and further subdivided into classes of each series.
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.
Each Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Articles. Each class of shares
of a Fund generally is identical in all respects except that each class bears
certain distribution expenses and has exclusive voting rights with respect to
its distribution fee. Shares of the Company entitle their holders to one vote
per share; however, separate votes are taken by each series on matters affecting
an individual series and separate votes are taken by each class of a series on
matters affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Company does not contemplate holding regular meetings of shareholders to
elect Directors or otherwise. Each Fund will assist shareholders in
communicating with other shareholders of such Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of each Fund is entitled to
its portion of all of such Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be lower than to holders of
Class A Shares.
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 a part, each such statement being
qualified in all respects by such reference.
2
<PAGE> 156
As of March 7, 2000, no person was known by the Company to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of any Fund, except as follows:
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
FUND NAME & ADDRESS OF HOLDER OWNERSHIP CLASS OWNERSHIP
---- ------------------------ --------- ----- -------------
<S> <C> <C> <C> <C>
American Value Fund MLPF&S For the Sole Benefit 5,809,238 A 30.81 %
of its customers
Attn Fund Administration 97B64
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Edward Jones & CO 1,103,505 A 5.85 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
MLPF&S For the Sole Benefit 2,220,950 B 13.66 %
of its customers
Attn Fund Administration 97B65
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
MLPF&S For the Sole Benefit 1,762,159 C 20.60 %
of its customers
Attn Fund Administration 97CSB
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Asian Growth Fund Charles Schwab & Co Inc 337,467 A 5.47 %
Exclusive Benefit of its
customers
101 Montgomery Street
San Francisco, CA 94104-4122
MLPF&S For the Sole Benefit 252,021 B 6.48 %
of its customers
Attn Fund Administration 97FK4
4800 Deer Lake Drive E 2nd Floor
Jacksonville, FL 32246-6484
Emerging Markets Fund Charles Schwab & Co Inc 1,518,932 A 21.83 %
Exclusive Benefit of its
customers
101 Montgomery Street
San Francisco, CA 94104-4122
Equity Growth Fund Edward Jones & CO 347,505 A 15.77 %
Attn: Mutual Fund 111,190 C 12.02 %
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
MLPF&S For the Sole Benefit 188,705 B 6.97 %
of its customers
Attn Fund Administration 97238
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette 57,078 C 6.17 %
Securities Corp Inc
P.O. Box 2052
Jersey City, NJ 07303-2052
Focus Equity Fund Edward Jones & CO 568,803 A 10.50 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
</TABLE>
3
<PAGE> 157
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
FUND NAME & ADDRESS OF HOLDER OWNERSHIP CLASS OWNERSHIP
---- ------------------------ --------- ----- -------------
<S> <C> <C> <C> <C>
MLPF&S For the Sole Benefit 99,657 C 5.18 %
of its customers
Attn Fund Administration 97B63
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Global Equity Fund Edward Jones & CO 659,603 A 10.09 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Global Equity Allocation Fund Edward Jones & CO 1,433,905 A 9.10 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Global Fixed Income Fund Charles Schwab & Co Inc 18,585 A 7.96 %
Exclusive Benefit of its
Customers
101 Montgomery Street
San Francisco, CA 94104-4122
First Union Securities, Inc. 17,921 A 7.67 %
A/C 1352-7748
FBO James H. Begay
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
James Brown Cust 16,334 A 6.99 %
Prof Sh Pl Script Care Inc
DTD 01/01/1997
87 Interstate 10 N Ste 100
Beaumont, TX 77707-2542
Prudential Securities Inc FBO 10,832 B 7.48 %
Marlane Investments L.P.
4002 Marlane Drive
Pensacola, FL 32526-2149
First Union Securities, Inc. 13,190 C 10.23 %
A/C 2755-2685
Geraldine M. Falkiner 1987
111 East Kilbourn Avenue
Milwaukee, WI 53202-6611
Salomon Smith Barney Inc 11,943 C 9.26 %
00117947308
333 West 34th Street -- 3rd Floor
New York, NY 10001-2483
High Yield & Total Return Fund Edward Jones & CO 117,606 A 17.63 %
Attn: Mutual Fund 35,406 C 6.48 %
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Charles Schwab & Co Inc 77,647 A 11.64 %
Exclusive Benefit of its
Customers
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
4
<PAGE> 158
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
FUND NAME & ADDRESS OF HOLDER OWNERSHIP CLASS OWNERSHIP
---- ------------------------ --------- ----- -------------
<S> <C> <C> <C> <C>
MLPF&S For the Sole Benefit 59,879 A 8.97 %
of its customers
Attn Fund Administration 97N81
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Donaldson Lufkin Jenrette 38,935 A 5.84 %
Securities Corp Inc
P.O. Box 2052
Jersey City, NJ 07303-2052
MLPF&S For the Sole Benefit 108,656 B 5.72 %
of its customers
Attn Fund Administration 97N82
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
MLPF&S For the Sole Benefit 50,802 C 9.30 %
of its customers
Attn Fund Administration 97N83
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
International Magnum Fund Edward Jones & CO 997,937 A 30.10 %
Attn: Mutual Fund 275,816 B 7.76 %
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
MLPF&S For the Sole Benefit 67,676 C 6.96 %
of its customers
Attn Fund Administration 97N88
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Latin American Fund Charles Schwab & Co Inc 135,438 A 6.20 %
Exclusive Benefit of its
Customers
101 Montgomery Street
San Francisco, CA 94104-4122
MLPF&S For the Sole Benefit 87,051 B 5.76 %
of its customers
Attn Fund Administration 97N90
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
MLPF&S For the Sole Benefit 83,791 C 9.93 %
of its customers
Attn Fund Administration 97N81
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Mid Cap Growth Fund MLPF&S For the Sole Benefit 227,998 A 11.14 %
of its customers 158,273 B 9.30 %
Attn Fund Administration 97238 211,174 C 19.35 %
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Edward Jones & CO 227,016 A 11.10 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
</TABLE>
5
<PAGE> 159
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
FUND NAME & ADDRESS OF HOLDER OWNERSHIP CLASS OWNERSHIP
---- ------------------------ ---------- ----- -------------
<S> <C> <C> <C> <C>
NFSC FEBO # APW-309281 116,189 A 5.67 %
Susan Priester TR
Priester CRT
U/A 8/1/97
119 Cliffwood Lane
Greer, SC 29650-3006
Van Kampen Funds 60,000 C 5.50 %
Distributors Inc.
Attn: Dominick Cogliandro
One Chase Manhattan Plaza
37th Floor
New York, NY 10005-1401
Tax Managed Global Franchise Fund Van Kampen Funds 40,000 A 35.67 %
Distributors Inc. 30,000 B 39.65 %
Attn: Dominick Cogliandro 30,000 C 26.36 %
One Chase Manhattan Plaza
37th Floor
New York, NY 10005-1401
Dean Witter For the Benefit of 23,233 A 20.72 %
Mitchell M. Merin
P.O. Box 250 Church Street
Station
New York, NY 10008-0250
Edward Jones & CO 15,541 A 13.86 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Donaldson Lufkin Jenrette 4,430 B 5.85 %
Securities Corp Inc
P.O. Box 2052
Jersey City, NJ 07303-2052
Kathleen M. Radcliffe TR 4,296 B 5.68 %
Kathleen M. Radcliffe Living
Trust
DTD 10/09/1997
6 Andover Drive
Prospect Heights, IL 60070-1170
Hercules Worldwide Corp 33,706 C 29.62 %
P.O. Box 621 54 Bath Street
St. Helier Jersey Channel Island
JE4 8YD United Kingdom
Warrant Trustees Limited 16,474 C 14.48 %
REF TC 6732
Discretionary Trust
PO Box 218 38/39 The Esplanade
St. Helier Jersey JE4 8SD
United Kingdom
Warrant Trustees Limited 8,454 C 7.43 %
REF TC 6730
Discretionary Trust
PO Box 218 38/39 The Esplanade
St. Helier Jersey JE4 8SD
United Kingdom
</TABLE>
6
<PAGE> 160
<TABLE>
<CAPTION>
AMOUNT OF PERCENTAGE OF
FUND NAME & ADDRESS OF HOLDER OWNERSHIP CLASS OWNERSHIP
---- ------------------------ ---------- ----- -------------
<S> <C> <C> <C> <C>
Value Fund Edward Jones & CO 1,368,173 A 21.55 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
MLPF&S For the Sole Benefit 917,492 B 10.50 %
of its customers
Attn Fund Administration 97P52
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
MLPF&S For the Sole Benefit 102,508 C 5.74 %
of its customers
Attn Fund Administration 97P53
4800 Deer Lake Drive E. 2nd Floor
Jacksonville, FL 32246-6484
Worldwide High Income Fund Charles Schwab & Co Inc 468,108 A 9.94 %
Exclusive Benefit of its
Customers
101 Montgomery Street
San Francisco, CA 94104-4122
Edward Jones & CO 281,495 A 5.98 %
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
</TABLE>
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following disclosure supplements the disclosure set forth in the
"Investment Objective(s), Policies and Risks" sections in each Fund's Prospectus
and does not, standing alone, present a complete or accurate explanation of the
matters disclosed. Readers must refer also to this caption in the Fund's
Prospectus for a complete presentation of the matters disclosed below.
BORROWING AND LEVERAGE
To the extent allowed by the Funds' investment restrictions described
herein, certain Funds may engage in borrowing for temporary or emerging
purposes. To the extent allowed by the Funds' investment restrictions described
herein, certain Funds may engage in borrowing for investment purposes, also
known as leverage. Leveraging will magnify declines as well as increases in the
net asset value of a Fund's shares and in the return on a Fund's investments.
The extent to which a Fund may borrow will depend upon the availability of
credit. No assurance can be given that a Fund will be able to borrow on terms
acceptable to the
7
<PAGE> 161
Fund and the Adviser. Borrowing by a Fund will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. Borrowing will create interest expenses for a Fund which can
exceed the income from the assets obtained with the proceeds. To the extent the
income derived from securities purchased with funds obtained through borrowing
exceeds the interest and other expenses that a Fund will have to pay in
connection with such borrowing, such Fund's net income will be greater than if
the Fund did not borrow. Conversely, if the income from the assets obtained
through borrowing is not sufficient to cover the cost of borrowing, the net
income of the Fund will be less than if the Fund did not borrow, and therefore
the amount available for distribution to shareholders will be reduced. A Fund's
use of leverage may impair the ability of the Fund to maintain its qualification
for federal income tax purposes as a regulated investment company. The rights of
any lenders to a Fund to receive payments of interest on and repayments of
principal of borrowings will be senior to the rights of such Fund's
shareholders, and the terms of a Fund's borrowings may contain provisions that
limit certain activities of such Fund and could result in precluding the
purchase of securities and instruments that the Fund would otherwise purchase.
CONVERTIBLE SECURITIES, RIGHTS OR WARRANTS AND EQUITY-LINKED SECURITIES
Certain Funds may invest in convertible securities, rights or warrants to
purchase common stocks and other equity-linked securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock or other
equity security of the same or a different issuer or into cash within a
particular period of time at a specified price or formula. A convertible
security generally entitles the holder to receive interest paid or accrued on
debt securities or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities generally have characteristics similar to both debt and
equity securities. The value of convertible securities tends to decline as
interest rates rise and, because of the conversion feature, tends to vary with
fluctuations in the market value of the underlying equity securities.
Convertible securities ordinarily provide a stream of income with generally
higher yields than those of common stock of the same or similar issuers.
Convertible securities generally rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Convertible securities generally do not participate directly in any
dividend increases or decreases of the underlying equity security although the
market prices of convertible securities may be affected by any such dividend
changes or other changes in the underlying equity securities. Rights and
warrants are instruments giving holders the right, but not the obligation, to
buy shares of a company at a given price during a specified period. Rights are
similar to warrants except that they have a substantially shorter duration.
Rights and warrants may be considered more speculative and less liquid than
certain other types of investments in that they do not entitle a holder to
dividends or voting rights with respect to the underlying securities nor do they
represent any rights in the assets of the issuing company and may lack a
secondary market. Equity-linked securities are instruments whose value is based
upon the value of one or more underlying equity securities, a reference rate or
an index. Equity-linked securities come in many forms and may include features,
among others, such as the following: (i) may be issued by the issuer of the
underlying equity security or by a company other than the one to which the
instrument is linked (usually an investment bank), (ii) may convert into equity
securities, such as common stock, within a stated period from the issue date or
may be redeemed for cash or some combination of cash and the linked security at
a value based upon the value of the underlying equity security within a stated
period from the issue date, (iii) may have various conversion features prior to
maturity at the option of the holder or the issuer or both, (iv) may limit the
appreciation value with caps or collars of the value of underlying equity
security and (v) may have fixed, variable or no interest payments during the
life of the security which reflect the actual or a structured return relative to
the underlying dividends of the linked equity security. Investments in
equity-linked securities may subject the Fund to additional risks not ordinarily
associated with investments in other equity securities. Because equity-linked
securities are sometimes issued by a third party other than the issuer of the
linked security, the Fund is subject to risks if the underlying stock
underperforms and if the issuer defaults on the payment of the dividend or the
common stock at maturity. In addition, the trading market for particular
equity-linked securities may be less liquid, making it difficult for the Fund to
dispose of a particular security when necessary and reduced liquidity in the
secondary market for any such securities may make it more difficult to obtain
market quotations for valuing the Fund's portfolio.
DEPOSITARY RECEIPTS
Certain Funds may invest in American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and other
depositary receipts, to the extent that such depositary receipts become
available. ADRs are securities, typically issued by a U.S. financial institution
(a "depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. ADRs include American Depositary Shares and New York Shares
and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly
by a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of depositary receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing the unsponsored depositary receipt. The depositary
of an unsponsored depositary receipt is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through to the holders of the unsponsored depositary receipt
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voting rights with respect to the deposited securities or pool of securities.
Depositary receipts are not necessarily denominated in the same currency as the
underlying securities to which they may be connected. Generally, depositary
receipts in registered form are designed for use in the U.S. securities market
and depositary receipts in bearer form are designed for use in securities
markets outside the United States. For purposes of the Funds' investment
policies, a Fund's investments in depositary receipts will be deemed to be
investments in the underlying securities.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
and time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that pertain
to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across its borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes, and the
expropriation or nationalization of foreign issuers.
FOREIGN INVESTING
Certain Funds may or will invest in securities of foreign issuers. Such
securities may be denominated in U.S. dollars and in currencies other than U.S.
dollars. The percentage of assets invested in securities of a particular country
or denominated in a particular currency will vary in accordance with the
Adviser's assessment of the relative yield, appreciation potential and the
relationship of a country's currency to the U.S. dollar, which is based upon
such factors as fundamental economic strength, credit quality and interest rate
trends. Investments in foreign securities present certain risks not ordinarily
associated with investments in securities of U.S. issuers. These risks include
fluctuations in foreign currency exchange rates, political, economic or legal
developments (including war or other instability, expropriation of assets,
nationalization and confiscatory taxation), the imposition of foreign exchange
limitations (including currency blockage), withholding taxes on dividend or
interest payments or capital transactions or other restrictions, higher
transaction costs (including higher brokerage, custodial and settlement costs
and currency translation costs) and possible difficulty in enforcing contractual
obligations or taking judicial action. Also, foreign securities may not be as
liquid and may be more volatile than comparable domestic securities.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting, financial reporting and
disclosure requirements than domestic issuers. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the U.S., and, with respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of exchanges, brokers and
dealers than there is in the U.S., a Fund may experience settlement difficulties
or delays not usually encountered in the U.S.
Delays in making trades in foreign securities relating to volume
constraints, limitations or restrictions, clearance or settlement procedures, or
otherwise could impact yields and result in temporary periods when assets are
not fully invested or attractive investment opportunities are foregone.
In addition to the increased risks of investing in foreign issuers, there
are often increased transactions costs associated with investing in foreign
securities including the costs incurred in connection with converting
currencies, higher foreign brokerage or dealer costs, and higher settlement
costs or custodial costs.
Ratings of a non-U.S. debt instrument, to the extent that those ratings are
undertaken, are related to evaluations of the country in which the issuer of the
instrument is located. Ratings generally take into account the currency in which
a non-U.S. debt instrument is denominated. Instruments issued by a foreign
government in other than the local currency, for example, typically have a lower
rating than local currency instruments due to the existence of an additional
risk that the government will be unable to obtain the required foreign currency
to service its foreign currency-denominated debt. In general, the ratings of
debt securities or obligations issued by a non-U.S. public or private entity
will not be higher than the rating of the currency or the foreign currency debt
of the central government of the country in which the issuer is located,
regardless of the intrinsic creditworthiness of the issuer.
The governments of some countries have been engaged in programs of selling
part or all of their stakes in government owned or controlled enterprises
("privatization"). The Adviser believes that privatization may offer investors
opportunities for significant capital appreciation and intends to invest assets
of the Fund in privatization in appropriate circumstances. In certain countries,
the ability of foreign entities, such as the Fund, to participate in
privatization may be limited by local law, or the terms on which the Fund may be
permitted to participate may be less advantageous than those for local
investors. There can be no assurance that governments will continue to sell
companies currently owned or controlled by them or that any privatization
programs in which the Fund participates will be successful.
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FOREIGN CURRENCY EXCHANGE RISKS. To the extent a Fund invests in securities
denominated or quoted in currencies other than the U.S. dollar, such Fund will
be affected by changes in foreign currency exchange rates (and exchange control
regulations) which affect the value of investments in the Fund and the accrued
income and unrealized appreciation or depreciation of the investments. Changes
in foreign currency exchange ratios relative to the U.S. dollar will affect the
U.S. dollar value of the Fund's assets denominated in that currency and the
Fund's yield on such assets as well as any temporary uninvested reserves in bank
deposits in foreign currencies. In addition, the Fund will incur costs in
connection with conversions between various currencies. The Funds do not intend
to invest in any security in a country where the currency is not freely
convertible to U.S. dollars, unless the Fund has obtained the necessary
governmental licensing to convert such currency or other appropriately licensed
or sanctioned contractual guarantee to protect such investment against loss of
that currency's external value, or the Fund has a reasonable expectation at the
time the investment is made that such governmental licensing or other
appropriately licensed or sanctioned guarantee would be obtained or that the
currency in which the security is quoted would be freely convertible at the time
of any proposed sale of the security by the Fund.
A Fund's foreign currency exchange transactions may be conducted on a spot
basis (that is, cash basis) at the spot rate for purchasing or selling currency
prevailing in the foreign currency exchange market. A Fund also may enter into
contracts with banks, brokers or dealers to purchase or sell securities or
foreign currencies at a future date ("forward contracts"). A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract. These contracts are traded in
the interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for such
trades.
A Fund may attempt to protect against adverse changes in the value of the
U.S. dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency option or futures
contract for such amount. Such strategies may be employed before the Fund
purchases a foreign security traded in the currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Seeking to protect against a
change in the value of a foreign currency in the foregoing manner does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Furthermore, such transactions reduce
or preclude the opportunity for gain if the value of the currency should move in
the direction opposite to the position taken. Unanticipated changes in currency
prices may result in poorer overall performance for the Fund than if it had not
entered into such contracts. The Funds generally will not enter into a forward
contract with a term of greater than one year. At the maturity of a forward
contract, a Fund may either accept or make delivery of the currency specified in
the contract or, prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. A Fund will
only enter into such a forward contract if it is expected that there will be a
liquid market in which to close out such contract. There can, however, be no
assurance that such a liquid market will exist in which to close a forward
contract, in which case the Fund may suffer a loss.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that such Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If a Fund engages in an offsetting transaction, such Fund will incur a gain
or a loss to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between a Fund entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, such Fund would suffer a loss to the extent that the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Funds are not required to enter into such transactions with regard to
their foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time. Additionally, although such contracts tend
to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
In addition, Funds may cross-hedge currencies by entering into a transaction
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a portfolio has or expects to have
portfolio exposure. These Funds may also engage in proxy hedging, which is
defined as entering into positions in one currency to hedge investments
denominated in another currency, where two currencies are economically linked. A
Fund's entry into forward contracts, as well as any use of proxy or cross
hedging techniques, will generally require the Fund to hold liquid securities or
cash equal to the Fund's obligations in a segregated account throughout the
duration of the contract. Funds may combine forward contracts with investments
in securities denominated in other currencies in order to achieve desired
security and currency exposures. Such
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combinations are generally referred to as synthetic securities. For example, in
lieu of purchasing a foreign bond, a Fund may purchase a U.S. dollar-denominated
security and at the same time enter into a forward contract to exchange U.S.
dollars for the contract's underlying currency at a future date. By matching the
amount of U.S. dollars to be exchanged with the anticipated value of the U.S.
dollar-denominated security, the Fund may be able to lock in the foreign
currency value of the security and adopt a synthetic position reflecting the
credit quality of the U.S. dollar-denominated security.
To the extent required by the rules and regulations of the Securities and
Exchange Commission ("SEC"), the Fund will earmark or place cash or other liquid
assets into a segregated account in an amount equal to the value of such Fund's
total assets committed to the consummation of forward foreign currency exchange
contracts. If the value of the securities placed in the segregated account
declines, additional cash or liquid assets will be placed in the account on a
daily basis so that the value of the account will be at least equal to the
amount of such Fund's commitments with respect to such contracts. See also
"Strategic Transactions".
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES. Foreign currency warrants are
warrants which entitle the holder to receive from their issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt offerings by
major corporate issuers in an attempt to reduce the foreign currency exchange
risk which, from the point of view of prospective purchasers of the securities,
is inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case where the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by the OCC, the
terms of foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to complex political or economic factors.
Principal exchange rate linked securities are debt obligations the principal
on which is payable at maturity in an amount that may vary based on the exchange
rate between the U.S. dollar and a particular foreign currency at or about that
time. The return on "standard" principal exchange rate linked securities is
enhanced if the foreign currency to which the security is linked appreciates
against the U.S. dollar, and is adversely affected by increases in the foreign
exchange value of the U.S. dollar; "reverse" principal exchange rate linked
securities are like the "standard" securities, except that their return is
enhanced by increases in the value of the U.S. dollar and adversely impacted by
increases in the value of foreign currency. Interest payments on the securities
are generally made in U.S. dollars at rates that reflect the degree of foreign
currency risk assumed or given up by the purchaser of the notes (i.e., at
relatively higher interest rates if the purchaser has assumed some of the
foreign exchange risk, or relatively lower interest rates if the issuer has
assumed some of the foreign exchange risk, based on the expectations of the
current market). Principal exchange rate linked securities may in limited cases
be subject to acceleration of maturity (generally, not without the consent of
the holders of the securities), which may have an adverse impact on the value of
the principal payment to be made at maturity.
Performance indexed paper is U.S. dollar-denominated commercial paper the
yield of which is linked to certain foreign exchange rate movements. The yield
to the investor on performance indexed paper is between the U.S. dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is
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below, and a potential maximum rate of return that is above, market yields on
U.S. dollar-denominated commercial paper, with both the minimum and maximum
rates of return on the investment corresponding to the minimum and maximum
values of the spot exchange rate two business days prior to maturity.
INVESTING IN EMERGING MARKET COUNTRIES. The risks of foreign investment are
heightened when the issuer is from an emerging market country. The extent of
economic development, political stability and market depth of such countries
varies widely and investments in the securities of issuers in such countries
typically involve greater potential gain or loss than investments in securities
of issuers in more developed countries. Emerging market countries tend to have
economic structures that are less diverse and mature and political systems that
are less stable than developed markets. Emerging market countries may be more
likely to experience political turmoil or rapid changes in economic conditions
than more developed markets and the financial condition of issuers in emerging
market countries may be more precarious than in other countries. Certain
countries depend to a larger degree upon international trade or development
assistance and, therefore, are vulnerable to changes in trade or assistance
which, in turn, may be affected by a variety of factors. A Fund may be
particularly sensitive to changes in the economies of certain countries
resulting from any reversal of economic liberalization, political unrest or the
imposition of sanctions by the U.S. or other countries.
A Fund's purchase and sale of portfolio securities in emerging market
countries may be constrained by limitations as to daily changes in the prices of
listed securities, periodic or sporadic trading or settlement or limitations on
aggregate holdings by foreign investors. Such limitations may be computed based
on the aggregate trading volume by or holdings of such Fund, the Fund's
investment adviser, its affiliates or their respective clients or other service
providers. The Fund may not be able to sell securities in circumstances where
price, trading or settlement volume limitations have been reached. Foreign
investment in the securities markets of certain emerging market countries is
restricted or controlled to varying degrees which may limit investment in such
countries or increase the administrative costs of such investments. For example,
certain countries may require governmental approval prior to investments by
foreign persons or limit investment by foreign persons to only a specified
percentage of an issuer's outstanding securities or a specific class of
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. In addition,
certain countries may restrict or prohibit investment opportunities in issuers
or industries deemed important to national interests. Such restrictions may
affect the market price, liquidity and rights of securities that may be
purchased by the Fund. The repatriation of both investment income and capital
from certain emerging market countries is subject to restrictions such as the
need for governmental consents. Due to restrictions on direct investment in
securities in certain countries, it is anticipated that the Fund may invest in
such countries through other investment funds in such countries.
Many emerging market countries have experienced currency devaluations and
substantial (and, in some cases, extremely high) rates of inflation, which have
had a negative effect on the economies and securities markets of such countries.
Economies in emerging market countries generally are dependent heavily upon
commodity prices and international trade and, accordingly, have been and may
continue to be affected adversely by the economies of their trading partners,
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures or negotiated by the countries with
which they trade.
Many emerging market countries are subject to a substantial degree of
economic, political and social instability. Governments of some emerging
countries are authoritarian in nature or have been installed or removed as a
result of military coups, while governments in other emerging market countries
have periodically used force to suppress civil dissent. Disparities of wealth,
the pace and success of political reforms, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some emerging markets countries. Unanticipated political
or social developments may result in sudden and significant investment losses.
Settlement procedures in emerging market countries are frequently less
developed and reliable than those in developed markets. In addition, significant
delays are common in certain markets in registering the transfer of securities.
Settlement or registration problems may make it more difficult for a Fund to
value its portfolio securities and could cause such Fund to miss attractive
investment opportunities, to have a portion of its assets uninvested or to incur
losses due to the failure of a counterparty to pay for securities the Fund has
delivered or the Fund's inability to complete its contractual obligations. The
creditworthiness of the local securities firms used by the Fund in emerging
market countries may not be as sound as the creditworthiness of firms used in
more developed countries. As a result, the Fund may be subject to a greater risk
of loss if a securities firm defaults in the performance of its
responsibilities.
The small size and inexperience of the securities markets in certain
emerging market countries and the limited volume of trading in securities in
those countries may make a Fund's investments in such countries less liquid and
more volatile than investments in countries with more developed securities
markets. A Fund's investments in emerging market countries are subject to the
risk that the liquidity of a particular investment, or investments generally, in
such countries will shrink or disappear suddenly and without warning as a result
of adverse economic, market or political conditions or adverse investor
perceptions, whether or not accurate. Because of the lack of sufficient market
liquidity, the Fund may incur losses because it will be required to effect sales
at a disadvantageous time and only then at a substantial drop in price.
Investments in emerging market countries may be more difficult to price
precisely because of the characteristics discussed above and lower trading
volumes.
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A Fund's use of foreign currency management techniques in emerging market
countries may be limited. Due to the limited market for these instruments in
emerging market countries, the Funds' investment adviser does not currently
anticipate that a significant portion of the Funds' currency exposure in
emerging market countries, if any, will be covered by such instruments.
Investments in emerging market country government debt securities involve
special risks. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and unemployment. The issuer or
governmental authority that controls the repayment of an emerging market
country's debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. As a result of the
foregoing, a government obligor may default on its obligations. If such an event
occurs, a Fund may have limited legal recourse against the issuer and/or
guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign government
debt securities to obtain recourse may be subject to the political climate in
the relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government debt obligations in the event of default under their commercial bank
loan agreements.
Debt securities of corporate issuers in emerging market countries may
include debt securities or obligations issued (i) by banks located in emerging
market countries or by branches of emerging market country banks located outside
the country or (ii) by companies organized under the laws of an emerging market
country. Determinations as to eligibility will be made by the Adviser based on
publicly available information and inquiries made to the issuer.
EUROPEAN INVESTING. In recent years there have been two key issues
influencing the investment environment and economic conditions of Europe: the
creation of the single market and the emergence of Eastern European economies.
Both of these factors have helped European companies by opening up new markets
for growth.
In connection with efforts to create a single market, eleven of the fifteen
member countries of the European Union established fixed conversion rates
between their existing sovereign currencies and a new common currency, the euro,
effective January 1, 1999. The introduction of the euro is expected to reshape
financial markets, banking systems and monetary policies in Europe and other
parts of the world. The participating countries will issue sovereign debt
exclusively in the euro and will redenominate outstanding sovereign debt.
Financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in euros.
Monetary policy for participating countries will be uniformly managed by a new
central bank, the European Central Bank (ECB).
The transition to the euro may change the economic environment and behavior
of investors, particularly in European markets. For example, the process of
implementing the euro may adversely affect financial markets world-wide and may
result in changes in the relative strength and value of the U.S. dollar or other
major currencies, as well as possible adverse tax consequences. The transition
to the euro is likely to have a significant impact on fiscal and monetary policy
in the participating countries and may produce unpredictable effects on trade
and commerce generally. These resulting uncertainties could create increased
volatility in financial markets world-wide.
Governments across Europe have also initiated major privatization programs
shifting a greater share of economic activity into the more efficient private
sector. Private companies have sought quotation, following the need to compete
in the capital markets, as much as in the market place for their products and
services. Those companies already quoted have begun to appreciate the value of
their being listed. To achieve a high rating on their equity, companies need to
produce transparent accounts, communicate effectively with their shareholders
and manage their businesses and assets to their shareholders' advantage. The
restructuring, management incentives and rationalization of companies has lead
to lower wage structures and greater flexibility. This has enabled European
companies to match the competitive cost environment of developing economies.
Demand for equity will grow hand in hand with supply; driven by pension fund
reform, growth in life insurance, shifts in European investing from fixed income
to equities and the emergence of European mutual funds. All of these factors
together will improve the quality of the markets in which European equities are
traded.
RUSSIAN INVESTING. The registration, clearing and settlement of securities
transactions in Russia are subject to significant risks not normally associated
with securities transactions, in the United States and other more developed
markets. Ownership of shares in Russian companies is evidenced by entries in a
company's share register (except where shares are held through depositories that
meet the requirements of the 1940 Act) and the issuance of extracts from the
register or, in certain limited cases, by formal share certificates. However,
Russian share registers are frequently unreliable and the Fund could possibly
lose its registration through oversight, negligence or fraud. Moreover, Russia
lacks a centralized registry to record securities transactions and registrars
located throughout Russia or the companies themselves maintain share registers.
Registrars are under no obligation to provide extracts to potential purchasers
in a timely manner or at all and are not necessarily subject to effective state
supervision. In addition, while registrars are liable under law for losses
resulting from their errors, it may be difficult for the Fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Although Russian companies with more than
1,000 shareholders are required by law to employ an independent company to
maintain share registers, in practice, such companies have not always followed
this law. Because of this lack of independence of registrars, management of a
Russian company may be able to exert considerable influence over who can
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purchase and sell the company's shares by illegally instructing the registrar to
refuse to record transactions on the share register. Furthermore, these
practices may prevent the Fund from investing in the securities of certain
Russian companies deemed suitable by the Adviser and could cause a delay in the
sale of Russian securities by the fund if the company deems a purchaser
unsuitable, which may expose the Fund to potential loss on its investment.
In light of the risks described above, the Board of Directors has approved
certain procedures concerning the Fund's investments in Russian securities.
Among these procedures is a requirement that the Fund will not invest in the
securities of a Russian company unless that issuer's registrar has entered into
a contract with the Fund's sub-custodian containing certain protective
conditions, including, among other things, the sub-custodian's right to conduct
regular share confirmations on behalf of the Fund. This requirement will likely
have the effect of precluding investments in certain Russian companies that the
Fund would otherwise make.
BRADY BONDS. Funds that invest in foreign debt securities may invest in debt
obligations customarily referred to as "Brady Bonds." Brady Bonds are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury Nicholas F. Brady (the "Brady Plan").
Brady Bonds may be collateralized or uncollateralized and issued in various
currencies (although most are U.S. dollar-denominated) and they are actively
traded in the over-the-counter secondary market. A Fund may purchase Brady Bonds
either in the primary or secondary markets. The price and yield of Brady Bonds
purchased in the secondary market will reflect the market conditions at the time
of purchase, regardless of the stated face amount and the stated interest rate.
With respect to Brady Bonds with no or limited collateralization, a Fund will
rely for payment of interest and principal primarily on the willingness and
ability of the issuing government to make payment in accordance with the terms
of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed rate
par bonds or floating rate discount bonds, are generally collateralized in full
as to principal due at maturity by U.S. Treasury zero coupon obligations which
have the same maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an amount that, in
the case of fixed rate bonds, is equal to at least one year of rolling interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter. Certain Brady Bonds
are entitled to "value recovery payments" in certain circumstances, which in
effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds should be viewed as speculative.
ILLIQUID SECURITIES
Each Fund may invest a portion of its assets in illiquid securities, which
includes securities that are not readily marketable, repurchase agreements which
have a maturity of longer than seven days and generally includes securities that
are restricted from sale to the public without registration under the Securities
Act of 1933, as amended (the "1933 Act"). The sale of such securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of liquid securities trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities are often purchased at a discount from the market price of
unrestricted securities of the same issuer reflecting the fact that such
securities may not be readily marketable without some time delay. Investments in
securities for which market quotations are not readily available are valued at
fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Fund's Board of Directors. Ordinarily, a Fund would
invest in restricted securities only when it receives the issuer's commitment to
register the securities without expense to the Fund. However, registration and
underwriting expenses (which typically may range from 7% to 15% of the gross
proceeds of the securities sold) may be paid by a Fund. Restricted securities
which can be offered and sold to qualified institutional buyers under Rule 144A
under the 1933 Act ("144A Securities") and are determined to be liquid under
guidelines adopted by and subject to the supervision of the Fund's Board of
Directors are not subject to the limitation on illiquid securities; however,
such securities are still subject to any Fund limitation on the securities
subject to legal or contractual restrictions on resale as described in the
Fund's investment restrictions. Such 144A Securities are subject to monitoring
and may become illiquid to the extent qualified institutional buyers become, for
a time, uninterested in purchasing such securities. Factors used to determine
whether 144A Securities are liquid include, among other things, a security's
trading history, the availability of reliable pricing information, the number of
dealers making quotes or making a market in such security and the number of
potential purchasers in the market for such security.
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INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities of other open-end or closed-end
investment companies, by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations or as may otherwise be permitted by the 1940 Act.
Some emerging market countries have laws and regulations that currently
preclude direct foreign investment in the securities of their companies.
However, indirect foreign investment in the securities of companies listed and
traded on the stock exchanges in these countries is permitted by certain
emerging market countries through investment funds which have been specifically
authorized. Certain Funds may invest in these investment funds, including those
advised by Adviser or its affiliates, subject to applicable provisions of the
1940 Act, and other applicable laws.
If a Fund invests in such investment companies or investment funds, the
Fund's shareholders will bear not only their proportionate share of the expenses
of the Fund (including operating expenses and the fees of the Adviser), but also
will indirectly bear similar expenses of the underlying investment companies or
investment funds.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer of sovereign or corporate debt
obligations and one or more financial institutions ("Lenders"). Such Funds'
investments in Loans are expected in most instances to be in the form of
participations in Loans ("Participations") and assignments of all or a portion
of Loans ("Assignments") from third parties. In the case of Participations, a
Fund will have the right to receive payments of principal, interest and any fees
to which it is entitled only from the Lender selling the Participations and only
upon receipt by the Lender of the payments from the borrower. In the event of
the insolvency of the Lender selling a Participation, a Fund may be treated as a
general creditor of the Lender and may not benefit from any set-off between the
Lender and the borrower. A Fund will acquire Participations only if the Lender
interpositioned between the Fund and the borrower is determined by the Adviser
to be creditworthy.
When a Fund purchases Assignments from Lenders it will acquire direct rights
against the borrower on the Loan. Because Assignments are arranged through
private negotiations between potential assignees and potential assignors,
however, the rights and obligations acquired by a Fund as the purchaser of an
Assignment may differ from, and be more limited than, those held by the
assigning Lender. Because there is no liquid market for such securities, the
Funds anticipate that such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market may have an
adverse impact on the value of such securities and a Fund's ability to dispose
of particular Assignments or Participations when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of a liquid
secondary market for Assignments and Participations also may make it more
difficult for a Fund to assign a value to these securities for purposes of
valuing the Fund's portfolio and calculating its net asset value.
LOWER-GRADE SECURITIES
Certain Funds may invest in lower-grade income securities. Securities which
are in the lower-grade categories generally offer higher yields than are offered
by higher-grade securities of similar maturities, but they also generally
involve greater risks, such as greater credit risk, greater market risk and
volatility, greater liquidity concerns and potentially greater manager risk.
Investors should carefully consider the risks of owning shares of a portfolio
which invests in lower-grade securities.
Credit risk relates to the issuer's ability to make timely payment of
interest and principal when due. Lower-grade securities are considered more
susceptible to nonpayment of interest and principal or default than higher-grade
securities. Increases in interest rates or changes in the economy may
significantly affect the ability of issuers of lower-grade debt securities to
pay interest and to repay principal, to meet projected financial goals or to
obtain additional financing. In the event that an issuer of securities held by a
Fund experiences difficulties in the timely payment of principal and interest
and such issuer seeks to restructure the terms of its borrowings, such Fund may
incur additional expenses and may determine to invest additional assets with
respect to such issuer or the project or projects to which the Fund's securities
relate. Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings, and the Fund may be unable to
obtain full recovery on such amounts.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the debt securities market and as a result of real or perceived
changes in credit risk. The value of such a Fund's investments can be expected
to fluctuate over time. When interest rates decline, the value of a portfolio
invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Debt securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than debt securities with shorter maturities. However, the secondary
market prices of lower-grade debt securities generally are less sensitive to
changes in interest rate and are more sensitive to general adverse economic
changes or specific developments with respect to the particular issuers than are
the secondary market prices of higher-grade debt securities. A significant
increase in interest rates or a general economic downturn could severely disrupt
the market for lower-grade securities and adversely affect the market value of
such securities. Such events also could lead
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to a higher incidence of default by issuers of lower-grade securities as
compared with higher-grade securities. In addition, changes in credit risks,
interest rates, the credit markets or periods of general economic uncertainty
can be expected to result in increased volatility in the market price of the
lower-grade securities in such a Fund and thus in the net asset value of the
Fund. Adverse publicity and investor perceptions, whether or not based on
rational analysis, may affect the value, volatility and liquidity of lower-grade
securities.
The markets for lower-grade securities may be less liquid than the markets
for higher-grade securities. Liquidity relates to the ability of a fund to sell
a security in a timely manner at a price which reflects the value of that
security. To the extent that there is no established retail market for some of
the lower-grade securities in which a Fund may invest, trading in such
securities may be relatively inactive. Prices of lower-grade securities may
decline rapidly in the event a significant number of holders decide to sell.
Changes in expectations regarding an individual issuer of lower-grade securities
generally could reduce market liquidity for such securities and make their sale
by the Fund more difficult, at least in the absence of price concessions. The
effects of adverse publicity and investor perceptions may be more pronounced for
securities for which no established retail market exists as compared with the
effects on securities for which such a market does exist. An economic downturn
or an increase in interest rates could severely disrupt the market for such
securities and adversely affect the value of outstanding securities or the
ability of the issuers to repay principal and interest. Further, a Fund may have
more difficulty selling such securities in a timely manner and at their stated
value than would be the case for securities for which an established retail
market does exist.
The Adviser is responsible for determining the net asset values of the
Funds, subject to the supervision of the Board of Directors. During periods of
reduced market liquidity or in the absence of readily available market
quotations for lower-grade securities, the ability of the Adviser to value the
securities becomes more difficult and the judgment of the Adviser may play a
greater role in the valuation of such securities due to the reduced availability
of reliable objective data.
A Fund may invest in securities not producing immediate cash income,
including securities in default, zero-coupon securities or pay-in-kind
securities, when their effective yield over comparable instruments producing
cash income make these investments attractive. Prices on non-cash-paying
instruments may be more sensitive to changes in the issuer's financial
condition, fluctuation in interest rates and market demand/supply imbalances
than cash-paying securities with similar credit ratings and thus may be more
speculative. In addition, the accrued interest income earned on such instruments
is included in investment company taxable income, thereby increasing the
required minimum distributions to shareholders without providing the
corresponding cash flow with which to pay such distributions. The Adviser will
weigh these concerns against the expected total returns from such instruments.
A Fund's investments may include securities with the lowest-grade assigned
by the recognized rating organizations and unrated securities of comparable
quality. Securities assigned such ratings include those of companies that are in
default or are in bankruptcy or reorganization. Such a Fund may invest in or own
securities of companies in various stages of financial restructuring, bankruptcy
or reorganization which are not currently paying interest or dividends. A Fund
may have limited recourse in the event of default on such debt instruments. A
Fund may invest in loans, assignments of loans and participation in loans.
Securities of such companies are regarded by the rating agencies as having
extremely poor prospects of ever attaining any real investment standing and are
usually available at deep discounts from the face values of the instruments. A
security purchased at a deep discount may currently pay a very high effective
yield. In addition, if the financial condition of the issuer improves, the
underlying value of the security may increase, resulting in capital
appreciation. If the company defaults on its obligations or remains in default,
or if the plan of reorganization does not provide sufficient payments for
debtholders, the deep discount securities may stop generating income and lose
value or become worthless. The Adviser will balance the benefits of deep
discount securities with their risks. While a broad portfolio of investments may
reduce the overall impact of a deep discount security that is in default or
loses its value, the risk cannot be eliminated.
Many lower-grade debt securities are not listed for trading on any national
securities exchange, and many issuers of lower-grade debt securities choose not
to have a rating assigned to their obligations by any recognized rating
organization. As a result, a Fund's portfolio may consist of a higher portion of
unlisted or unrated securities as compared with an investment company that
invests primarily in higher-grade securities. Unrated securities are usually not
as attractive to as many buyers as are rated securities, a factor which may make
unrated securities less marketable. These factors may have the effect of
limiting the availability of the securities for purchase by a Fund and may also
limit the ability of a Fund to sell such securities at their fair value either
to meet redemption requests or in response to changes in the economy or the
financial markets. Further, to the extent a Fund owns or may acquire illiquid or
restricted lower-grade securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
The Funds will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. The amount of available information
about the financial condition of certain lower-grade issuers may be less
extensive than other issuers. In its analysis, the Adviser may consider the
credit ratings of recognized rating organizations in evaluating securities
although the Adviser does not rely primarily on these ratings. Ratings evaluate
only the safety of principal and interest payments, not the market value risk.
Additionally, ratings are general and not absolute standards of quality, and
credit ratings are subject to the risk that the creditworthiness of an issuer
may change and the rating agencies may fail to change such ratings in a timely
fashion. A rating downgrade does not require a Fund to dispose of a security.
The Adviser continuously monitors the issuers of securities held in a Fund.
Additionally, since most foreign debt securities are not rated, a Fund will
invest in such securities based
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on the Adviser's analysis without any guidance from published ratings. Because
of the number of investment considerations involved in investing in lower-grade
securities and foreign debt securities, achievement of such Fund's investment
objectives may be more dependent upon the investment adviser's credit analysis
than is the case with investing in higher-grade securities.
New or proposed laws may have an impact on the market for lower-grade
securities. The Adviser is unable at this time to predict what effect, if any,
legislation may have on the market for lower-grade securities.
Special tax considerations are associated with investing in certain
lower-grade securities, such as zero-coupon or pay-in-kind securities. A Fund
accrues income on these securities prior to the receipt of cash payments. A Fund
must distribute substantially all of its income to its shareholders to qualify
for pass-through treatment under federal income tax law and may, therefore, have
to dispose of its portfolio securities to satisfy distribution requirements.
MORTGAGE-RELATED DEBT SECURITIES
Mortgage-related debt securities represent ownership interests in individual
pools of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. Each mortgagor's
monthly payment to his lending institution on his residential mortgage is
"passed-through" to investors. Mortgage pools consist of whole mortgage loans or
participations in loans. The terms and characteristics of the mortgage
instruments are generally uniform within a pool but may vary among pools.
Lending institutions which originate mortgages for the pools are subject to
certain standards, including credit and underwriting criteria for individual
mortgages included in the pools.
The coupon rate of interest on mortgage-related securities is lower than the
interest rates paid on the mortgages included in the underlying pool, but only
by the amount of the fees paid to the mortgage pooler, issuer, and/or guarantor
of payment of the securities for the guarantee of the services of passing
through monthly payments to investors. Actual yield may vary from the coupon
rate, however, if mortgage-related securities are purchased at a premium or
discount, traded in the secondary market at a premium or discount, or to the
extent that mortgages in the underlying pool are prepaid as noted above. In
addition, interest on mortgage-related securities is earned monthly, rather than
semi-annually as is the case for traditional bonds, and monthly compounding may
tend to raise the effective yield earned on such securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
"illiquid" and subject to a Fund's limitations on investment in illiquid
securities.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS
For purposes of the Funds' investment policies with respect to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. Investments in bank
obligations will include obligations of domestic branches of foreign banks and
foreign branches of domestic banks. Such investments may involve risks that are
different from investments in securities of domestic branches of U.S. banks. See
"Foreign Investing" above for a discussion of the risks of foreign investments.
These institutions may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and record keeping requirements than
those applicable to domestic branches of U.S. banks.
REPURCHASE AGREEMENTS
The Funds may engage in repurchase agreements with broker-dealers, banks or
other financial institutions in order to earn a return on temporarily available
cash. A repurchase agreement is a short-term investment in which the purchaser
(i.e., the Fund) acquires ownership of a security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the holding period. Repurchase agreements involve certain risks
in the event of default by the other party. A Fund may enter into repurchase
agreements with broker-dealers, banks or other financial institutions deemed to
be
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creditworthy by the Adviser under guidelines approved by the Board of Directors.
A Fund will not invest in repurchase agreements maturing in more than seven days
if any such investment, together with any other illiquid securities held by the
Fund, would exceed the Fund's limitation on illiquid securities described
herein. A Fund does not bear the risk of a decline in value of the underlying
security unless the seller defaults under its repurchase obligation. In the
event of the bankruptcy or other default of a seller of a repurchase agreement,
a Fund could experience both delays in liquidating the underlying securities and
losses 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 certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
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
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Funds than would be available to the Funds investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an exemptive order from the SEC permitting this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. A Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, or its agencies or
instrumentalities) may have maturity dates exceeding one year.
REVERSE REPURCHASE AGREEMENTS
To the extent allowed by the Fund's investment restrictions, certain Funds
may enter into reverse repurchase agreements with brokers, dealers, banks or
other financial institutions that meet the credit guidelines set by the
Company's Board of Directors. In a reverse repurchase agreement, a Fund sells a
security and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by a Fund. A Fund's investment of the
proceeds of a reverse repurchase agreement is the speculative factor known as
leverage. A Fund will enter into a reverse repurchase agreement only if the
interest income from investment of the proceeds is expected to be greater than
the interest expense of the transaction and the proceeds are invested for a
period no longer than the term of the agreement. A Fund will maintain with an
appropriate custodian a separate account with a segregated portfolio of cash or
liquid assets in an amount at least equal to its purchase obligations under
these agreements (including accrued interest). If interest rates rise during a
reverse repurchase agreement, it may adversely affect a Fund's net asset value.
In the event that the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, the buyer or its trustee or receiver
may receive an extension of time to determine whether to enforce the Fund's
repurchase obligation, and the Fund's use of proceeds of the agreement may
effectively be restricted pending such decision.
SECURITIES LENDING
Certain Funds may lend investment securities to qualified broker-dealers,
banks or other recognized institutional borrowers who need to borrow securities
in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities or completing arbitrage operations. By
lending its investment securities, a Fund attempts to increase its net
investment income through the receipt of interest on the loan. Any gain or loss
in the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Fund. Each Fund may lend its investment
securities to qualified brokers-dealers, domestic and foreign banks or other
recognized institutional borrowers, so long as the terms, structure and the
aggregate amount of such loans are not inconsistent with the 1940 Act, or the
rules and regulations or interpretations of the SEC thereunder, which currently
require that (a) the borrower pledge and maintain with the Fund collateral
consisting of cash, an irrevocable letter of credit issued by a domestic U.S.
bank, or liquid securities having a value at all times not less than 100% of the
value of the securities loaned, including accrued interest, (b) the borrower add
to such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Fund at any time, and (d) the Fund receive reasonable
interest on the loan (which may include the Fund investing any cash collateral
in interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. There may be risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. However, loans will only be
made to borrowers deemed by the Adviser to be of good standing and when, in the
judgment of the Adviser, the consideration which can be earned currently from
such securities loans justifies the attendant risk. All relevant facts and
circumstances, including the creditworthiness of the broker-dealer, bank or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Directors.
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At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Directors. In addition, voting rights may pass with the
loaned securities, but if a material event will occur affecting an investment on
loan, the loan must be called and the securities voted.
SHORT SALES
Unless limited by a Fund's fundamental investment restrictions described
herein, each Fund may from time to time sell securities short. A short sale is a
transaction in which a Fund sells a security in anticipation that the market
price of such security will decline. Unless limited by a Fund's fundamental
investment restrictions described herein, each Fund may sell securities it owns
or has the right to acquire at no added cost (i.e., "against the box") or it
does not own. When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
in order to satisfy its obligation to deliver the security upon conclusion of
the sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral of cash or liquid securities. Depending on arrangements made with the
broker-dealer from which it borrowed the security regarding payment over of any
payments received by the Fund on such security, the Fund may not receive any
payments (including interest) on its collateral deposited with such
broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Fund's gain is limited to the price at which
it sold the security short, its potential loss is theoretically unlimited.
STRATEGIC TRANSACTIONS
Each Fund may, but is not required to, use various Strategic Transactions
(as defined in the prospectuses) to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the Fund's Adviser seeks to use such transactions to further the Fund's
investment objective(s), no assurance can be given that these transactions will
achieve this result.
FUTURES CONTRACTS. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
or a specific currency at a specified future time and at a specified price.
Futures contracts, which are standardized as to maturity date and underlying
financial instrument, index or currency, traded in the United States are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures position is done by taking an opposite
position ("buying" a contract which has previously been "sold" or "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Unless otherwise limited in a Fund's prospectus or herein, each Fund may
sell indexed financial futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of securities in its
portfolio that might otherwise result. An index futures contract is an agreement
to take or make delivery of an amount of cash equal to the difference between
the value of the index at the beginning and at the end of the contract period.
Successful use of index futures will be subject to the Adviser's ability to
predict correctly movements in the direction of the relevant securities market.
No assurance can be given that the Adviser's judgment in this respect will be
correct.
Unless otherwise limited in a Fund's prospectus or herein, each Fund may buy
indexed financial futures contracts in anticipation of or during a market
advance to attempt to capture the increase in market value of securities. For
example, if the Adviser believes that a portion of a Fund's assets should be
invested in emerging market country securities but such investments have not
been fully made and the Adviser anticipates a significant market advance, the
Fund may purchase index futures in order to gain rapid market exposure that may
in part or entirely offset increases in the cost of securities that it intends
to purchase. In a substantial majority of these transactions, the Fund will
purchase such securities upon termination of the futures position but, under
unusual market conditions, a futures position may be terminated without the
corresponding purchase of such securities.
Futures traders are required to make a good faith margin deposit in cash or
liquid securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold for prices that
may range upward from less than 5% of the value of the contract being traded.
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After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts that they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Funds intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Funds require generally that all
futures transactions constitute bona fide hedging transactions. A Fund may
engage in futures transactions for other purposes so long as the aggregate
initial margin and premiums required for such transaction will not exceed 5% of
the liquidation value of the Fund's portfolio, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into. The Funds generally will only sell futures contracts to protect securities
owned against declines in price or purchase contracts to protect against an
increase in the price of securities intended for purchase. As evidence of this
hedging interest, the Funds expect that approximately 75% of their respective
futures contracts will be "completed"; that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Fund upon sale
of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Funds will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet its daily margin
requirement at a time when it may be disadvantageous to do so. In addition, the
Fund may be required to make delivery of the instruments underlying futures
contracts it holds. The inability to close options and futures positions also
could have an adverse impact on the Fund's ability to effectively hedge.
The Funds will minimize the risk that they will be unable to close out a
futures contract by generally entering into futures which are traded on
recognized international or national futures exchanges and for which there
appears to be a liquid secondary market, however, the Funds may enter into
over-the-counter futures transactions to the extent permitted by applicable law.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if, at the time of
purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the Funds engage
in futures strategies only for hedging purposes, the Adviser does not believe
that the Funds are subject to the risks of loss frequently associated with
futures transactions. The Fund would presumably have sustained comparable losses
if, instead of the futures contract, the Fund had invested in the underlying
security or currency and sold it after the decline.
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities or currencies being
hedged. It is also possible that a Fund could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by a Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a futures
contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
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OPTIONS TRANSACTIONS. Unless otherwise limited in a Fund's prospectus or
herein, each Fund may write (i.e., sell) covered call options which give the
purchaser the right to buy the underlying security covered by the option from
the Fund at the stated exercise price. A "covered" call option means that so
long as a Fund is obligated as the writer of the option, it will own (i) the
underlying securities subject to the option, or (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option.
A Fund will receive a premium from writing call options, which increases the
Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund will limit
its opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. Thus, in some periods a Fund will
receive less total return and in other periods greater total return from writing
covered call options than it would have received from its underlying securities
had it not written call options.
A Fund may sell put options to receive the premiums paid by purchasers and
to close out a long put option position. In addition, when the Adviser wishes to
purchase a security at a price lower than its current market price, a Fund may
write a covered put at an exercise price reflecting the lower purchase price
sought.
A Fund may purchase call options to close out a covered call position or to
protect against an increase in the price of a security it anticipates
purchasing. A Fund may purchase put options on securities which it holds in its
portfolio to protect itself against a decline in the value of the security. If
the value of the underlying security were to fall below the exercise price of
the put purchased in an amount greater than the premium paid for the option, the
Fund would incur no additional loss. A Fund may also purchase put options to
close out written put positions in a manner similar to call option closing
purchase transactions. There are no other limits on a Fund's ability to purchase
call and put options.
Unless the parties provide for it, there is no central clearing or guaranty
function in an over-the-counter option ("OTC Option"). As a result, if the
counterparty fails to make or take delivery of the security, currency or other
instrument underlying an OTC Option it has entered into with a Fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
the Fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such counterparty or any guarantor of credit
enhancement of the counterparty's credit to determine the likelihood that the
terms of the OTC Options will be satisfied. The staff of the SEC currently takes
the position that OTC Options purchased by a Fund or sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid unless the Fund has
entered into a special arrangement to dispose of the security, and are subject
to the Fund's limitation on investing in illiquid securities.
Investments in options involve some of the same considerations that are
involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
or securities, an option may or may not be less risky than ownership of the
futures contract or actual securities. In general, the market prices of options
can be expected to be more volatile than the market prices on the underlying
futures contract or securities. In the opinion of the Adviser, the risk that a
Fund will be unable to close out an options contract will be minimized by only
entering into options transactions for which there appears to be a liquid
secondary market.
OPTIONS ON FOREIGN CURRENCIES. Unless otherwise limited in a Fund's
prospectus or herein, each Fund may attempt to accomplish objectives similar to
those described herein with respect to forward foreign currency exchange
contracts and futures contracts for currency by means of purchasing put or call
options on foreign currencies on exchanges. A put option gives a Fund the right
to sell a currency at the exercise price until the expiration of the option. A
call option gives a Fund the right to purchase a currency at the exercise price
until the expiration of the option.
The Funds may purchase and write options on foreign currencies in a manner
similar to that in which futures contracts on foreign currencies, or forward
contracts, will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminution in the value of
portfolio securities, the Funds may purchase put options on the foreign
currency. If the value of the currency does decline, the Funds will have the
right to sell such currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on their portfolios which
otherwise would have resulted. Conversely, where a rise in the dollar value of a
currency in which securities to be acquired are denominated is projected,
thereby increasing the cost of such securities, the Funds may purchase call
options thereon. The purchase of such options could offset, at least partially,
the effects of the adverse movements in exchange rates. As in the case of other
types of options, however, the benefit to the Funds derived from purchases of
foreign currency options will be reduced by the amount of the premium and
related transaction costs. In addition, where currency exchange rates do not
move in the direction or to the extent anticipated, the Funds could sustain
losses on transactions in foreign currency options which would require them to
forego a portion or all of the benefits of advantageous changes in such rates.
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Funds may write options on foreign currencies for the same purposes. For
example, where a Fund anticipates a decline in the dollar value of foreign
currency denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the anticipated decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received. Similarly, instead of purchasing a call
option to hedge against an anticipated increase in the dollar cost of securities
to be acquired, the Fund could write a put option on the relevant currency
which, if rates move in the manner projected, will expire unexercised and allow
the portfolio to hedge such increased cost up to the amount of the premium. As
in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to purchase or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the Fund also
may be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates.
Funds may only write covered call options on foreign currencies. A call
option written on a foreign currency by the portfolio is "covered" if the Fund
owns the underlying foreign currency covered by the call, an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated account
by the Custodian) or upon conversion or exchange of other foreign currency held
in its portfolio. A written call option is also covered if the Fund has a call
on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price of the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or other
liquid securities in a segregated account with the Custodian, or (c) maintains
in a segregated account cash or other liquid securities in an amount not less
than the value of the underlying foreign currency in U.S. dollars,
marked-to-market daily.
Funds may also write call options on foreign currencies for cross-hedging
purposes. A call option on a foreign currency is for cross-hedging purposes if
it is designed to provide a hedge against a decline in the U.S. dollar value of
a security which the portfolio owns or has the right to acquire due to an
adverse change in the exchange rate and which is denominated in the currency
underlying the option. In such circumstances, the Fund will either "cover" the
transaction as described above or collateralize the option by maintaining in a
segregated account with the Fund's Custodian, cash or other liquid securities in
an amount not less than the value of the underlying foreign currency in U.S.
dollars marked-to-market daily.
CAPS, FLOORS AND COLLARS. Unless otherwise limited by a Fund's prospectus or
herein, each Fund may invest in caps, floors and collars, which are instruments
analogous to options transactions described above. In particular, a cap is the
right to receive the excess of a reference rate over a given rate and is
analogous to a put option. A floor is the right to receive the excess of a given
rate over a reference rate and is analogous to a call option. Finally, a collar
is an instrument that combines a cap and a floor. That is, the buyer of a collar
buys a cap and writes a floor, and the writer of a collar writes a cap and buys
a floor. The risks associated with caps, floors and collars are similar to those
associated with options. In addition, caps, floors and collars are subject to
risk of default by the counterparty because they are privately negotiated
instruments.
COMBINED TRANSACTIONS. Unless otherwise limited by a Fund's prospectus or
herein, each Fund may enter into multiples of the forwards, futures and options
transactions described above, including multiple options transactions, multiple
futures transactions, multiple foreign currency transactions (including forward
foreign currency exchange contracts) and any combination of futures, options and
foreign currency transactions, instead of a single transaction, as part of a
single portfolio management or hedging strategy when, in the opinion of the
Adviser, it is in the best interest of the Fund to do so. A combined
transaction, while part of a single strategy, may contain elements of risk that
are present in each of its component transactions and will be structured in
accordance with applicable SEC regulations and SEC staff guidelines.
RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON
FOREIGN CURRENCIES. Options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchase of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, the option writer and a trader of forward contracts could lose amounts
substantially in excess of their initial investments.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Furthermore, a
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liquid secondary market in options traded on a national securities exchange may
be more readily available than in the over-the-counter market, potentially
permitting a Fund to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options of foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decision, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during non
business hours in the United States, (iv) the imposition of different exercise
and settlement terms and procedures and margin requirements than in the United
States, and (v) lesser trading volume.
STRUCTURED NOTES. Structured Notes are derivatives on which the amount of
principal repayment and/or interest payments is based upon the movement of one
or more factors. These factors may include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and LIBOR) and
stock indices such as the S&P 500 Index. In some cases, the impact of the
movements of these factors may increase or decrease through the use of
multipliers or deflators. The Funds may use structured notes to tailor their
investments to the specific risks and returns the Adviser is willing to accept
while avoiding or reducing certain other risks.
SWAP CONTRACTS. A swap contract is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
payment streams are calculated by reference to a specified index and agreed upon
notional amount. The term "specified index" may include, but is not limited to,
currencies, fixed interest rates, prices, total return on interest rate indices,
fixed income indices, stock indices and commodity indices (as well as amounts
derived from arithmetic operations on these indices). For example, a Fund may
agree to swap the return generated by a fixed-income index for the return
generated by a second fixed-income index. The currency swaps in which a Fund may
enter will generally involve an agreement to pay interest streams in one
currency based on a specified index in exchange for receiving interest streams
denominated in another currency. Such swaps may involve initial and final
exchanges that correspond to the agreed upon notional amount.
The swaps in which the noted Funds may engage also include rate caps, floors
and collars under which one party pays a single or periodic fixed amount(s) (or
premium), and the other party pays periodic amounts based on the movement of a
specified index. Swaps do not involve the delivery of securities, other
underlying assets, or principal. Accordingly, the risk of loss with respect to
swaps is limited to the net amount of payments that the Fund is contractually
obligated to make. If the other party to a swap defaults, the Fund's risk of
loss consists of the net amount of payments that the Fund is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the counterparty, the Fund may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors, and collars are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Funds will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the
portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash or
liquid securities, to avoid any potential leveraging of the Fund. To the extent
that these swaps, caps, floors, and collars are entered into for hedging
purposes, the Adviser believes such obligations do not constitute "senior
securities" under the 1940 Act and, accordingly, will not treat them as being
subject to the Fund's borrowing restrictions. Funds may enter into OTC
derivatives transactions (swaps, caps, floors, puts, etc., but excluding foreign
exchange contracts) with counterparties that are approved by the Adviser in
accordance with guidelines established by the Board of Directors. These
guidelines provide for a minimum credit rating for each counterparty and various
credit enhancement techniques (for example, collateralization of amounts due
from counterparties) to limit exposure to counterparties with ratings below AA.
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The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Adviser is incorrect in its forecasts of market
values, interest rates, and currency exchange rates, the investment performance
of the portfolio would be less favorable than it would have been if this
investment technique were not used.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that a Fund segregate cash and liquid
securities with its custodian to the extent such Fund's obligations are not
otherwise "covered" as described above. In general, either the full amount of
any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered (or securities convertible into the needed securities without
additional consideration), or, subject to applicable regulatory restrictions, an
amount of cash or liquid securities at least equal to the current amount of the
obligation must be segregated with the custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. In the case of a futures
contract or an option thereon, the Fund must deposit initial margin and possible
daily variation margin in addition to segregating cash and liquid securities
sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. With respect to swaps, the Fund will accrue the net amount of
the excess, if any, of its obligations over its entitlements with respect to
each swap on a daily basis and will segregate an amount of cash or liquid
securities having a value equal to the accrued excess. Caps, floors and collars
require segregation of cash and liquid securities with a value equal to the
Fund's net obligation, if any. Strategic Transactions may be covered by other
means when consistent with applicable regulatory policies. The Fund may also
enter into offsetting transactions so that its combined position, coupled with
any segregated cash and liquid securities, equals its net outstanding
obligation.
U.S. GOVERNMENT OBLIGATIONS
Examples of types of U.S. Government obligations include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage Association, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Maritime
Administration, International Bank for Reconstruction and Development (the
"World Bank"), the Asian-American Development Bank and the Inter-American
Development Bank.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Funds may purchase securities on a when-issued or delayed delivery
basis. In such transactions, instruments are bought with payment and delivery
taking place in the future in order to secure what is considered to be an
advantageous yield or price at the time of the transaction. The payment
obligation and the interest rates that will be received are each fixed at the
time a Fund enters into the commitment, and no interest accrues to the Fund
until settlement. Thus, it is possible that the market value at the time of
settlement could be higher or lower than the purchase price if the general level
of interest rates has changed. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or portfolio securities having an aggregate value equal
to the amount of such purchase commitments until payment is made.
ZERO COUPON BONDS
Zero coupon bonds is a term used to describe notes and bonds which have been
stripped of their unmatured interest coupons, or the coupons themselves, and
also receipts or certificates representing interest in such stripped debt
obligations and coupons. The timely payment of coupon interest and principal on
zero coupon bonds issued by the U.S. Treasury remains guaranteed by the "full
faith and credit" of the United States government.
A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value"--what it will be worth at maturity. The
difference between a security's issue or purchase price and its face value
represents the imputed interest an investor will earn if the security is held
until maturity. For tax purposes, a portion of this imputed interest is deemed
to be income received by zero coupon bondholders each year. Each Fund, which
expects to qualify as a regulated investment company, intends to pass along such
interest as a component of the Fund's distributions of net investment income.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
Zero Coupon Treasury Bonds are sold under a variety of different names, such
as: Certificate of Accrual on Treasury Securities ("CATS"), Treasury Receipts
("TRs"), Separate Trading of Registered Interest and Principal of Securities
("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
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INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment policies which are either
fundamental investment limitations or non-fundamental investment limitations.
Fundamental investment limitations may not be changed without shareholder
approval by the vote of a majority of its outstanding voting securities, which
is defined by the 1940 Act as the lesser of: (1) 67% or more of the voting
securities of the Fund 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 (2) more than 50% of the outstanding voting securities of the Fund.
Non-fundamental investment limitations may be changed by the Board of Directors
of the Company without shareholder approval.
Each Fund is designated as either a diversified fund or a non-diversified
fund as those terms are defined under the 1940 Act. Like fundamental investment
restrictions, a fund which is designated as a diversified fund may not change
its status to a non-diversified fund without approval by the vote of a majority
of its outstanding voting securities. The following Funds are diversified funds:
American Value Fund, Asian Growth Fund, Equity Growth Fund, European Equity
Fund, Global Equity Allocation Fund, Global Equity Fund, Growth and Income Fund
II, High Yield and Total Return Fund, Japanese Equity Fund, Mid Cap Growth Fund,
Tax Managed Global Franchise Fund, and Value Fund. The following Funds are
non-diversified funds: Emerging Markets Debt Fund, Emerging Markets Fund, Focus
Equity Fund, Global Fixed Income Fund, International Magnum Fund, Latin American
Fund, and Worldwide High Income Fund. As described in the prospectuses for the
non-diversified funds, such funds may invest a greater portion of their assets
in a more limited number of issuers than diversified funds, and therefore,
non-diversified funds are subject to greater risk because the changes in the
financial condition of a single issuer may cause greater fluctuation in the
value of such funds' shares. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. With respect to the limitation on borrowings and illiquid
securities, the percentage limitations apply at the time of purchase and on an
ongoing basis.
For the purpose of describing fundamental investment limitations, the Funds
have been divided into two separate groups, which limitations apply only to the
Funds that form a part of that group. The groups are comprised as follows:
Category I Funds: American Value Fund, Asian Growth Fund, Emerging
Markets Fund, European Equity Fund, Focus Equity Fund,
Global Equity Allocation Fund, Global Fixed Income Fund,
Growth and Income Fund II, High Yield & Total Return Fund,
International Magnum Fund, Japanese Equity Fund, Latin
American Fund and Worldwide High Income Fund.
Category II Funds: Emerging Markets Debt Fund, Equity Growth Fund,
Global Equity Fund, Mid Cap Growth Fund Tax Managed Global
Franchise Fund, and Value Fund.
CATEGORY I FUNDS
The following are fundamental investment limitations with respect to the
Category I Funds. No Category I Fund will:
(1) invest in commodities, except that each of the American Value Fund,
Emerging Markets Fund, European Equity Fund, Focus Equity Fund, Growth and
Income Fund II, Latin American Fund and Worldwide High Income Fund may invest in
futures contracts and options to the extent that not more than 5% of its total
assets are required as deposits to secure obligations under futures contracts
and not more than 20% of its total assets are invested in futures contracts and
options at any time.
(2) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal in real
estate and may purchase and sell securities which are secured by interests in
real estate.
(3) underwrite the securities of other issuers.
(4) invest for the purpose of exercising control over management of any
company.
(5) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation.
(6) except with respect to the Latin American Fund, acquire any securities
of companies within one industry if, as a result of such acquisition, more than
25% of the value of the Fund's total assets would be invested in securities of
companies within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
(7) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases.
(8) purchase on margin or sell short except as specified above in (1) and
except that the Emerging Markets Fund, European Equity Fund, Focus Equity Fund,
Latin American Fund and Worldwide High Income Fund may enter into short sales in
accordance with its investment objective and policies.
(9) purchase or retain securities of an issuer if those officers and
Directors of the Company or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities.
25
<PAGE> 179
(10) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the Fund's
total assets valued at the lower of market or cost and a Fund may not purchase
additional securities when borrowings exceed 5% of total assets, except that the
Growth and Income Fund II, Latin American Fund and Worldwide High Income Fund
may enter into reverse repurchase agreements in accordance with its investment
objective and policies and except that each of the Focus Equity Fund, Latin
American Fund and Worldwide High Income Fund may borrow amounts up to 33 1/3% of
its total assets (including the amount borrowed), less all liabilities and
indebtedness other than the borrowing.
(11) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 10% of its total assets at fair market value, except that each of the Focus
Equity Fund, Latin American Fund and Worldwide High Income Fund may pledge,
mortgage or hypothecate its assets to secure borrowings in amounts up to 33 1/3%
of its assets (including the amount borrowed).
(12) invest more than an aggregate of 15% of the total assets of the Fund,
determined at the time of investment, in illiquid assets, including repurchase
agreements having maturities of more than seven days or invest in fixed time
deposits with a duration of from two business days to seven calendar days if
more than 10% of the Fund's total assets would be invested in these time
deposits; provided, however, that no Fund shall invest (i) more than 10% of its
total assets in securities subject to legal or contractual restrictions on
resale, except that the High Yield & Total Return Fund may invest up to 20% of
its total assets in 144A Securities (as defined in the Statement of Additional
Information), and (ii) in fixed time deposits with a duration of over seven
calendar days.
(13) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act.
(14) issue senior securities.
(15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (12) above) which are publicly distributed, and (ii) by lending its
portfolio securities to banks, brokers, dealers and other financial institutions
so long as such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the SEC thereunder.
(16) except for the Emerging Markets Fund, Focus Equity Fund, Global Fixed
Income Fund, International Magnum Fund, Latin American Fund and Worldwide High
Income Fund, purchase more than 10% of any class of the outstanding securities
of any issuer.
(17) except for the Emerging Markets Fund, Focus Equity Fund, Global Fixed
Income Fund, International Magnum Fund, Latin American Fund and Worldwide High
Income Fund, purchase securities of an issuer (except obligations of the U.S.
government and its instrumentalities) if as the result, with respect to 75% of
its total assets, more than 5% of the Fund's total assets, at market value,
would be invested in the securities of such issuer.
The following are non-fundamental investment limitations with respect to the
Category I Funds. As a matter of non-fundamental policy, no Category I Fund
will:
(1) purchase warrants if, by reason of such purchase, more than 5% of the
value of the Fund's net assets would be invested in warrants valued at the lower
of cost or market. Included in this amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants that are not listed on a nationally
recognized stock exchange.
(2) invest in oil, gas or other mineral leases; invest up to 25% of its
total assets in privately placed securities; or invest more than 15% of its net
assets in illiquid securities.
(3) except with respect to the Latin American Fund, acquire any securities
of companies within one industry if, as a result of such acquisition, 25% or
more of the value of the Fund's total assets would be invested in securities of
companies within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
The percentage limitations contained in these restrictions apply at the time
of purchase of securities, except for limitations on borrowings and illiquid
securities which apply on an ongoing basis.
CATEGORY II FUNDS
The following are fundamental investment limitations with respect to the
Category II Funds. No Category II Fund will:
(1) invest in physical commodities or contracts on physical commodities,
except that any Fund may acquire physical commodities as a result of ownership
of securities or other instruments and may purchase or sell options or futures
contracts or invest in securities or other instruments backed by physical
commodities.
26
<PAGE> 180
(2) purchase or sell real estate, although each Fund may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate.
(3) make loans except: (i) by purchasing debt securities in accordance with
their respective investment objectives and policies, or entering into repurchase
agreements, subject to the limitations described in non-fundamental investment
limitation (9) below, (ii) by lending their portfolio securities, and (iii) by
lending portfolio assets to other Funds, banks, brokers, dealers and other
financial institutions, so long as such loans are not inconsistent with the 1940
Act, the rules, regulations, interpretations or orders of the SEC and its staff
thereunder.
(4) except for the Emerging Markets Debt Fund, with respect to 75% of each
Fund's assets, purchase a security if, as a result, the Fund would hold more
than 10% (taken at the time of such investment) of the outstanding voting
securities of any issuer.
(5) except for the Emerging Markets Debt Fund, with respect to 75% of each
Fund's assets, purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets, taken at market value at the time of such
investment, would be invested in the securities of such issuer except that this
restriction does not apply to securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
(6) issue any class of senior security or sell any senior security of which
it is the issuer, except that each Fund may borrow money as a temporary measure
for extraordinary or emergency purposes, provided that such borrowings do not
exceed 33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings) and except that the Emerging Markets Debt
Fund may borrow from banks in an amount not in excess of 33 1/3% of its total
assets (including the amount borrowed) less liabilities in accordance with its
investment objective and policies. The term "senior security" shall not include
any temporary borrowings that do not exceed 5% of the value of a Fund's total
assets at the time the Fund makes such temporary borrowing. Notwithstanding the
foregoing limitations on issuing or selling senior securities and borrowing, a
Fund may engage in investment strategies that obligate it either to purchase
securities or segregate assets, or enter into reverse repurchase agreements,
provided that it will segregate assets to cover its obligations pursuant to such
transactions in accordance with applicable rules, orders, or interpretations of
the SEC or its staff. This investment limitation shall not preclude a Fund from
issuing multiple classes of shares in reliance on SEC rules or orders.
(7) underwrite the securities of other issuers (except to the extent that a
Fund may be deemed to be an underwriter within the meaning of the 1933 Act in
connection with the disposition of restricted securities).
(8) Acquire any securities of companies within one industry, if as a result
of such acquisition, more than 25% of the value of the Fund's total assets would
be invested in securities of companies within such industry; provided, however,
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, when any
such Fund adopts a temporary defensive position.
The following are non-fundamental investment limitations with respect to the
Category II Funds. As a matter of non-fundamental policy, no Category II Fund
will:
(1) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, provided that
each Fund may make margin deposits in connection with transactions in options,
futures, and options on futures.
(2) sell short unless the Fund (i) owns the securities sold short, (ii) by
virtue of its ownership of other securities, has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, or (ii) maintains in a
segregated account on the books of the Fund's custodian an amount that, when
combined with the amount of collateral deposited with the broker in connection
with the short sale, equals the current market value of the security sold short
or such other amount as the SEC or its staff may permit by rule, regulation,
order, or interpretation, except that the Emerging Markets Debt Fund may from
time to time sell securities short without limitation but consistent with
applicable legal requirements as stated in its Prospectus; provided that
transactions in futures contracts and options are not deemed to constitute
selling securities short.
(3) purchase or retain securities of an issuer if those Officers and
Directors of the Company or any of its investment advisers owning more than 1/2
of 1% of such securities together own more than 5% of such securities.
(4) borrow money other than from banks or other Funds of the Company,
provided that a Fund may borrow from banks or other Funds of the Company so long
as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or,
except for the Emerging Markets Debt Fund, purchase additional securities when
borrowings exceed 5% of total assets.
(5) pledge, mortgage or hypothecate assets in an amount greater than 10% of
its total assets in the case of the Emerging Markets Debt Fund, Equity Growth
Fund and Global Equity Funds or 50% of its total assets in the case of the Mid
Cap Growth Fund and Value Fund, provided that each Fund may segregate assets
without limit in order to comply with the requirements of Section 18(f) of the
1940 Act and applicable rules, regulations or interpretations of the SEC and its
staff.
27
<PAGE> 181
(6) invest more than an aggregate of 15% of the net assets of the Fund in
illiquid securities provided that this limitation shall not apply to any
investment in securities that are not registered under the 1933 Act but that can
be sold to qualified institutional investors in accordance with Rule 144A under
the 1933 Act and are determined to be liquid securities under guidelines or
procedures adopted by the Board of Directors.
(7) invest for the purpose of exercising control over management of any
company.
(8) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act.
(9) in the case of the Emerging Markets Debt Fund, Equity Growth Fund and
Global Equity Fund, make loans as described in fundamental investment
limitations 3(ii) and 3(iii), above, in an amount exceeding 33 1/3% of its total
assets.
If a percentage limitation on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of the Fund's
assets will not be considered a violation of the restriction, and the sale of
securities will not be required, except for the limitation on borrowings and
illiquid securities which apply on an ongoing basis.
DIRECTORS AND OFFICERS
The business and affairs of the Funds are managed under the direction of the
Company's Board of Directors and each Fund's officers appointed by the Board of
Directors. The tables below list the directors and officers of the Funds and
their principal occupations for the last five years and their affiliations, if
any, with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen
Investment Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc.
("Asset Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen
Management Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of
Illinois Inc., Van Kampen Insurance Agency of Texas Inc., Van Kampen System
Inc., Van Kampen Recordkeeping Services Inc., American Capital Contractual
Services, Inc., Van Kampen Trust Company, Van Kampen Exchange Corp. and
Van Kampen Investor Services Inc. ("Investor Services"). Advisory Corp. and
Asset Management sometimes are referred to herein collectively as the
"Advisers". For purposes hereof, the term "Fund Complex" includes each of the
open-end investment companies advised by the Advisers (excluding Van Kampen
Exchange Fund).
DIRECTORS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Trustee/Director of each of the funds in
1632 Morning Mountain Road the Fund Complex. Co-founder, and prior to August 1996,
Raleigh, NC 27614 Chairman, Chief Executive Officer and President, MDT
Date of Birth: 07/14/32 Corporation (now known as Getinge/Castle, Inc., a subsidiary
Age: 67 of Getinge Industrier AB), a company which develops,
manufactures, markets and services medical and scientific
equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological company.
53 Monarch Bay Drive Trustee/Director of each of the funds in the Fund Complex.
Dana Point, CA 92629 Prior to January 1999, Chairman and Chief Executive Officer
Date of Birth: 09/16/38 of The Allstate Corporation ("Allstate") and Allstate
Age: 61 Insurance Company. Prior to January 1995, President and
Chief Executive Officer of Allstate. Prior to August 1994,
various management positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive search
Sears Tower firm. Trustee/Director of each of the funds in the Fund
233 South Wacker Drive Complex. Prior to 1997, Partner, Ray & Berndtson, Inc., an
Suite 7000 executive recruiting and management consulting firm.
Chicago, IL 60606 Formerly, Executive Vice President of ABN AMRO, N.A., a
Date of Birth: 06/03/48 Dutch bank holding company. Prior to 1992, Executive Vice
Age: 51 President of LaSalle National Bank. Trustee on the
University of Chicago Hospitals
Board, Vice Chair of the Board of
The YMCA of Metropolitan Chicago and
a member of the Women's Board of the
University of Chicago. Prior to
1996, Trustee of The International
House Board.
</TABLE>
28
<PAGE> 182
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the United
11 DuPont Circle, N.W. States, an independent U.S. foundation created to deepen
Washington, D.C. 20016 understanding, promote collaboration and stimulate exchanges
Date of Birth: 02/29/52 of practical experience between Americans and Europeans.
Age: 48 Trustee/Director of each of the funds in the Fund Complex.
Formerly, advisor to the Dennis
Trading Group Inc., a managed
futures and option company that
invests money for individual and
institutions. Prior to 1992,
President and Chief Executive
Officer, Director and Member of the
Investment Committee of the Joyce
Foundation, a private foundation.
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset Management of
Two World Trade Center Morgan Stanley Dean Witter since December 1998. President
66th Floor and Director since April 1997 and Chief Executive Officer
New York, NY 10048 since June 1998 of Morgan Stanley Dean Witter Advisors Inc.
Date of Birth: 08/13/53 and Morgan Stanley Dean Witter Services Company Inc.
Age: 46 Chairman, Chief Executive Officer and Director of Morgan
Stanley Dean Witter Distributors Inc. since June 1998.
Chairman and Chief Executive Officer since June 1998, and
Director since January 1998, of Morgan Stanley Dean Witter
Trust FSB. Director of various Morgan Stanley Dean Witter
subsidiaries. President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series since May 1999.
Trustee/Director of each of the funds in the Fund Complex.
Previously Chief Strategic Officer of Morgan Stanley Dean
Witter Advisors Inc. and Morgan Stanley Dean Witter Services
Company Inc. and Executive Vice President of Morgan Stanley
Dean Witter Distributors Inc. April 1997-June 1998, Vice
President of the Morgan Stanley Dean Witter Funds and
Discover Brokerage Index Series May 1997-April 1999, and
Executive Vice President of Dean Witter, Discover & Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company and registered
Winter Park, FL 32789 investment adviser in the State of Florida. President and
Date of Birth: 02/13/36 owner, Nelson Ivest Brokerage Services Inc., a member of the
Age: 64 National Association of Securities Dealers, Inc. and
Securities Investors Protection Corp. Trustee/Director of
each of the funds in the Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer of Van
1 Parkview Plaza Kampen Investments. Chairman, Director and Chief Executive
P.O. Box 5555 Officer of the Advisers, the Distributor, Van Kampen
Oakbrook Terrace, IL 60181-5555 Advisors Inc. and Van Kampen Management Inc. Director and
Date of Birth: 02/02/46 officer of certain other subsidiaries of Van Kampen
Age: 54 Investments. Trustee/Director and President of each of the
funds in the Fund Complex. Trustee, President and Chairman
of the Board of other investment companies advised by the
Advisers and their affiliates, and Chief Executive Officer
of Van Kampen Exchange Fund. Prior to May 1998, Executive
Vice President and Director of Marketing at Morgan Stanley
Dean Witter and Director of Dean Witter Discover & Co. and
Dean Witter Realty. Prior to 1996, Director of Dean Witter
Reynolds Inc.
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director (since 1994)
One ServiceMaster Way of The ServiceMaster Company, a business and consumer
Downers Grove, IL 60515 services company. Director of Illinois Tool Works, Inc., a
Date of Birth: 07/08/44 manufacturing company and the Urban Shopping Centers Inc., a
Age: 55 retail mall management company. Trustee, University of Notre
Dame. Trustee/ Director of each of the funds in the Fund
Complex. Prior to 1998, Director of Stone Smurfit Container
Corp., a paper manufacturing company. From May 1996 through
February 1997 he was President, Chief Executive Officer and
Chief Operating Officer of Waste Management, Inc., an
environmental services company, and from November 1984
through May 1996 he was President and Chief Operating
Officer of Waste Management, Inc.
Fernando Sisto............................ Emeritus Professor Prior to August 1996, a George M. Bond
155 Hickory Lane Chaired Professor with Stevens Institute of Technology and
Closter, NJ 07624 prior to 1995, Dean of the Graduate School, Stevens
Date of Birth: 08/02/24 Institute of Technology. Director, Dynalysis of Princeton, a
Age: 75 firm engaged in engineering research. Trustee/Director of
each of the funds in the Fund Complex.
</TABLE>
29
<PAGE> 183
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher &
333 West Wacker Drive Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other investment companies advised by the
Date of Birth: 08/22/39 Advisers or Van Kampen Management Inc. Trustee/Director of
Age: 60 each of the funds in the Fund Complex, and Trustee/Managing
General Partner of other investment companies advised by the
Advisers or Van Kampen Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy of
2101 Constitution Ave., N.W. Sciences/National Research Council, an independent,
Room 206 federally chartered policy institution, since 1993. Director
Washington, D.C. 20418 of Neurogen Corporation, a pharmaceutical company, since
Date of Birth: 12/27/41 January 1998. Director of the German Marshall Fund of the
Age: 58 United States Trustee of Colorado College and Vice Chair of
the Board of the Council for Excellence in Government.
Trustee/Director of each of the funds in the Fund Complex.
Prior to 1993, Executive Director of the Commission on
Behavioral and Social Sciences and Education at the National
Academy of Sciences/ National Research Council. From 1980
through 1989, Partner of Coopers & Lybrand.
Paul G. Yovovich.......................... Private investor. Director of 3Com Corporation, which
Sears Tower provides information access products and network system
233 South Wacker Drive solutions, COMARCO, Inc., a wireless communications products
Suite 9700 company and APAC Customer Services, Inc., a provider of
Chicago, IL 60606 outsourced customer contact services. Trustee/Director of
Date of Birth: 10/29/53 each of the funds in the Fund Complex. Prior to May 1996,
Age: 46 President of Advance Ross Corporation, an international
transaction services and pollution control equipment
manufacturing company.
</TABLE>
--------------
* Such director is an "interested person" (within the meaning of
Section 2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of the
Funds by reason of his firm currently acting as legal counsel to the Funds.
Messrs. Merin and Powers are interested persons of the Funds and the Advisers
by reason of their positions with Morgan Stanley Dean Witter or its
affiliates.
OFFICERS
Messrs. Smith, Santo, Hegel, Sullivan and Wood are located at 1 Parkview
Plaza, Oakbrook Terrace, IL 60181-5555. Mr. Boyd is located at 2800 Post Oak
Boulevard, Houston TX 77056 and Mr. Stadler is located at 1221 Avenue of the
Americas, New York, NY 10020.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
----------------- -------------------
<S> <C>
A. Thomas Smith III....................... Executive Vice President, General Counsel, Secretary and
Date of Birth: 12/14/56 Director of Van Kampen Investments, the Advisers, Van Kampen
Age: 43 Advisors Inc., Van Kampen Management Inc., the Distributor,
Vice President and Secretary American Capital Contractual Services, Inc., Van Kampen
Exchange Corp., Van Kampen Recordkeeping Services Inc.,
Investor Services, Van Kampen Insurance Agency of Illinois
Inc. and Van Kampen System Inc. Vice President and
Secretary/Vice President, Principal Legal Officer and
Secretary of other investment companies advised by the
Advisers or their affiliates. Vice President and Secretary
of each of the funds in the Fund Complex. Prior to
January 1999, Vice President and Associate General Counsel
to New York Life Insurance Company ("New York Life"), and
prior to March 1997, Associate General Counsel of New York
Life. Prior to December 1993, Assistant General Counsel of
The Dreyfus Corporation. Prior to August 1991, Senior
Associate, Willkie Farr & Gallagher. Prior to January 1989,
Staff Attorney at the Securities and Exchange Commission,
Division of Investment Management, Office of Chief Counsel.
</TABLE>
30
<PAGE> 184
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
----------------- -------------------
<S> <C>
Michael H. Santo.......................... Executive Vice President, Chief Administrative Officer and
Date of Birth: 10/25/55 Director of Van Kampen Investments, the Advisers, the
Age: 44 Distributor, Van Kampen Advisors Inc, Van Kampen Management
Vice President Inc. and Van Kampen Investor Services Inc. and serves as a
Director or Officer of certain other subsidiaries of Van
Kampen Investments. Vice President of each of the funds in
the Fund Complex and certain other investment companies
advised by the Advisers and their affiliates. Prior to 1998,
Senior Vice President and Senior Planning Officer for
Individual Asset Management of Morgan Stanley Dean Witter
and its predecessor since 1994. From 1990-1994, First Vice
President and Assistant Controller in Dean Witter's
Controller's Department.
Peter W. Hegel............................ Executive Vice President of the Advisers, Van Kampen
Date of Birth: 06/25/56 Management Inc. and Van Kampen Advisors Inc. Vice President
Age: 43 of each of the funds in the Fund Complex and certain other
Vice President investment companies advised by the Advisers or their
affiliates. Prior to September 1996, Director of McCarthy,
Crisanti & Maffei, Inc, a financial research company.
Stephen L. Boyd........................... Vice President and Chief Investment Officer for Equity
Date of Birth: 11/16/40 Investments of the Advisers. Vice President of each of the
Age: 59 funds in the Fund Complex and certain other investment
Vice President companies advised by the Advisers or their affiliates. Prior
to October 1998, Vice President and Senior Portfolio Manager
with AIM Capital Management, Inc. Prior to February 1998,
Senior Vice President of Van Kampen American Capital Asset
Management, Inc., Van Kampen American Capital Investment
Advisory Corp. and Van Kampen American Capital
Management, Inc.
Joseph P. Stadler......................... Since 1998, Principal of Morgan Stanley & Co. Incorporated
Date of Birth: 06/07/54 and Morgan Stanley Dean Witter Investment Management Inc. He
Age: 45 joined Morgan Stanley & Co. Incorporated and Morgan Stanley
Vice President Dean Witter Investment Management Inc. in 1993. Accountant
with Price Waterhouse LLP (now PricewaterhouseCoopers LLP)
(an accounting firm) from 1983 to 1993. Vice President of
various U.S. registered investment companies managed by
Morgan Stanley Dean Witter Investment Management Inc.
John L. Sullivan.......................... Senior Vice President of Van Kampen Investments and the
Date of Birth: 08/20/55 Advisers. Vice President, Chief Financial Officer and
Age: 44 Treasurer of each of the funds in the Fund Complex and
Treasurer, Vice President and Chief certain other investment companies advised by the Advisers
Financial Officer or their affiliates.
Edward C. Wood, III....................... Senior Vice President of the Advisers, Van Kampen
Date of Birth: 01/11/56 Investments and Van Kampen Management Inc. Senior Vice
Age: 44 President and Chief Operating Officer of the Distributor.
Vice President Vice President of each of the funds in the Fund Complex and
certain other investment companies advised by the Advisers
or their affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees/directors to defer receipt of their compensation
and earn a return on such deferred amounts. Deferring compensation has the
economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The compensation of each Non-Affiliated Trustee includes an annual retainer
in an amount equal to $50,000 per calendar year, due in four quarterly
installments on the first business day of each quarter. Payment of the annual
retainer is allocated among the funds in the Fund Complex on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
31
<PAGE> 185
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the respective Funds and earn a rate of return determined by reference to the
return on the common shares of such Fund or other funds in the Fund Complex as
selected by the respective Non-Affiliated Trustee, with the same economic effect
as if such Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Funds may invest in
securities of those funds selected by the Non-Affiliated Trustees in order to
match the deferred compensation obligation. The deferred compensation plan is
not funded and obligations thereunder represent general unsecured claims against
the general assets of each individual Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Directors of the Funds
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
------------------------------------------------------------------------------
AGGREGATE
AGGREGATE ESTIMATED TOTAL
COMPENSATION AGGREGATE PENSION MAXIMUM ANNUAL COMPENSATION
BEFORE DEFERRAL OR RETIREMENT BENEFITS FROM THE BEFORE DEFERRAL
FROM BENEFITS ACCRUED AS FUND UPON FROM FUND
NAME(1) THE COMPANY(2) PART OF EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- --------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan.......... $ 22,100 $ 40,303 $ 60,000 $126,000
Jerry D. Choate(1)......... 4,036 0 60,000 88,700
Linda Hutton Heagy......... 22,100 5,045 60,000 126,000
R. Craig Kennedy........... 22,100 3,571 60,000 125,600
Jack E. Nelson............. 22,100 21,664 60,000 126,000
Phillip B. Rooney.......... 19,100 7,787 60,000 113,400
Fernando Sisto............. 22,100 72,060 60,000 126,000
Wayne W. Whalen............ 22,100 15,189 60,000 126,000
Suzanne H. Woolsey(1)...... 4,036 0 60,000 88,700
Paul G. Yovovich(1)........ 15,283 2,845 60,000 126,000
</TABLE>
--------------
(1) Directors not eligible for compensation are not included in the
Compensation Table. Mr. Yovovich became a member of the Board of Directors
for the Funds and other funds in the fund complex on October 22, 1998 and
therefore does not have a full fiscal year of information to report.
Mr. Choate and Ms. Woolsey became members of the Board of Trustees for the
Funds and other funds in the Fund Complex on May 26, 1999 and therefore do
not have a full year of information to report.
(2) The amounts shown in this column represent the Aggregate Compensation
before Deferral from all operating series of the Company with respect to
the Company's fiscal period ended June 30, 1999. The details of aggregate
compensation before deferral for each series are shown in Table A below.
Certain directors' deferred compensation from the Company during the
fiscal period ended June 30, 1999; the aggregate compensation deferred
from all series of the Company is as follows: Mr. Branagan, $22,100;
Ms. Heagy, $22,100; Mr. Kennedy, $11,054; Mr. Nelson, $22,100;
Mr. Rooney, $19,100; Mr. Sisto, $11,054; Mr. Whalen, $22,100; and
Mr. Yovovich, $11,162. The details of amounts deferred for each series are
shown in Table B below. Amounts deferred are retained by the Funds and
earn a rate of return determined by reference to either the return on the
shares of the respective Fund or other funds in the Fund Complex as
selected by the respective Non-Affiliated Trustee, with the same economic
effect as if such Non-Affiliated Trustee had invested in one or more funds
in the Fund Complex. To the extent permitted by the 1940 Act, each Fund
may invest in securities of those funds selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
cumulative deferred compensation (including interest) accrued with respect
to each director, including former directors, from all operating series of
the Company as of the Company's fiscal period ended June 30, 1999 is as
follows: Mr. Branagan, $40,043; Mr. Gaughan, $311; Ms. Heagy, $35,983;
Mr. Kennedy, $22,104; Mr. Miller, $1,715; Mr. Nelson, $48,568;
Mr. Robinson, $3,510; Mr. Rooney, $36,084; Mr. Sisto, $24,364;
Mr. Whalen, $41,735; and Mr. Yovovich, $11,996. The details of cumulative
deferred compensation (including interest) for each series of the Company
are shown in Table C. The deferred compensation plan is described above
the Compensation Table.
32
<PAGE> 186
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating investment companies in the Fund Complex
for each of the directors for the Funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each director, this is the sum of the estimated maximum annual
benefits payable by the funds in the Fund Complex for each year of the
10-year period commencing in the year of such director's anticipated
retirement. The Retirement Plan is described above the Compensation Table.
Each Non-Affiliated Trustee has served as a member of the Board of
Directors since the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all funds in the Fund Complex as of December 31, 1999 before deferral
by the directors under the deferred compensation plan. Because the funds
in the Fund Complex have different fiscal year ends, the amounts shown in
this column are presented on a calendar year basis. Certain directors
deferred all or a portion of their aggregate compensation from the Fund
Complex during the calendar year ended December 31, 1999. The deferred
compensation earns a rate of return determined by reference to the return
on the shares of the funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if
such Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Funds may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
Non-Affiliated Trustees were not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the
Advisers and their affiliates, Mr. Whalen received Total Compensation of
$279,250 during the calendar year ended December 31, 1999.
The Funds, the Adviser, the Subadvisers and the Distributor have adopted
Codes of Ethics (collectively, the "Code of Ethics") that set forth general and
specific standards relating to the securities trading activities of their
employees. The Code of Ethics does not prohibit employees from acquiring
securities that may be purchased or held by the Funds, but is intended to ensure
that all employees conduct their personal transactions in a manner that does not
interfere with the portfolio transactions of the Funds or other Van Kampen
funds, or that such employees take unfair advantage of their relationship with
the Funds. Among other things, the Code of Ethics prohibits certain types of
transactions absent prior approval, imposes various trading restrictions (such
as time periods during which personal transactions may or may not be made) and
requires quarterly reporting of securities transactions and other reporting
obligations. All reportable securities transactions and other required reports
are to be reviewed by appropriate personnel for compliance with the Code of
Ethics. Additional restrictions apply to portfolio managers, traders, research
analysts and others who may have access to nonpublic information about the
trading activities of the Funds or other Van Kampen funds or who otherwise are
involved in the investment advisory process. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular circumstances
after review by appropriate personnel.
As of March 1, 2000, the directors and officers of the Funds owned as a
group 1.175% of the shares of the Van Kampen Tax Managed Global Franchise Fund,
and as a group owned less than 1% of the shares of each of the remaining Funds.
As of June 30, 1999, the following four Funds had not yet commenced
investment operations and therefore are not reported in tables A-D below: Van
Kampen Emerging Markets Debt Fund Van, Kampen Growth and Income Fund II, Van
Kampen Japanese Equity Fund and Van Kampen Mid Cap Growth Fund.
FISCAL YEAR 1999 AGGREGATE COMPENSATION FROM THE COMPANY AND EACH PORTFOLIO
TABLE A
<TABLE>
<CAPTION>
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
American Value Fund................. $2,086 $405 $2,086 $2,086 $2,086 $1,886 $2,086
Asian Growth Fund................... 1,350 238 1,350 1,350 1,350 1,150 1,350
Emerging Markets Fund............... 1,356 233 1,356 1,356 1,356 1,156 1,356
Equity Growth Fund.................. 1,241 215 1,241 1,241 1,241 1,041 1,241
European Equity Fund................ 1,003 203 1,003 1,003 1,003 803 1,003
Focus Equity Fund................... 1,521 285 1,521 1,521 1,521 1,321 1,521
Global Equity Allocation Fund....... 2,011 386 2,011 2,011 2,011 1,811 2,011
Global Equity Fund.................. 2,270 446 2,270 2,270 2,270 2,070 2,270
Global Fixed Income Fund............ 1,213 203 1,213 1,213 1,213 1,013 1,213
High Yield & Total Return Fund...... 1,254 214 1,254 1,254 1,254 1,054 1,254
International Magnum Fund........... 1,374 238 1,374 1,374 1,374 1,174 1,374
Latin American Fund................. 1,283 218 1,283 1,283 1,283 1,083 1,283
Tax Managed Global Franchise Fund... 1,000 200 1,000 1,000 1,000 800 1,000
Value Fund.......................... 1,593 280 1,593 1,593 1,593 1,393 1,593
Worldwide High Income Fund.......... 1,545 272 1,545 1,545 1,545 1,345 1,545
------- ------ ------- ------- ------- ------- -------
Company Total..................... $22,100 $4,036 $22,100 $22,100 $22,100 $19,100 $22,100
------- ------ ------- ------- ------- ------- -------
<CAPTION>
FUND NAME WHALEN WOOLSEY YOVOVICH
--------- -------- -------- --------
<S> <C> <C> <C>
American Value Fund................................... $2,086 $405 $1,462
Asian Growth Fund..................................... 1,350 238 912
Emerging Markets Fund................................. 1,356 233 905
Equity Growth Fund.................................... 1,241 215 839
European Equity Fund.................................. 1,003 203 803
Focus Equity Fund..................................... 1,521 285 1,041
Global Equity Allocation Fund......................... 2,011 386 1,388
Global Equity Fund.................................... 2,270 446 1,589
Global Fixed Income Fund.............................. 1,213 203 810
High Yield & Total Return Fund........................ 1,254 214 841
International Magnum Fund............................. 1,374 238 925
Latin American Fund................................... 1,283 218 853
Tax Managed Global Franchise Fund..................... 1,000 200 800
Value Fund............................................ 1,593 280 1,078
Worldwide High Income Fund............................ 1,545 272 1,037
------- ------ -------
Company Total....................................... $22,100 $4,036 $15,283
------- ------ -------
</TABLE>
33
<PAGE> 187
1999 AGGREGATE COMPENSATION DEFERRED FROM THE COMPANY AND EACH PORTFOLIO
TABLE B
<TABLE>
<CAPTION>
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- --------- ------ -------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
American Value Fund .................. $ 2,086 $ 0 $ 2,086 $ 1,043 $ 2,086 $ 1,886 $ 1,043
Asian Growth Fund .................... 1,350 0 1,350 675 1,350 1,150 675
Emerging Markets Fund ................ 1,356 0 1,356 678 1,356 1,156 678
Equity Growth Fund ................... 1,241 0 1,241 621 1,241 1,041 621
European Equity Fund ................. 1,003 0 1,003 502 1,003 803 502
Focus Equity Fund .................... 1,521 0 1,521 761 1,521 1,321 761
Global Equity Allocation Fund ........ 2,011 0 2,011 1,006 2,011 1,811 1,006
Global Equity Fund ................... 2,270 0 2,270 1,135 2,270 2,070 1,135
Global Fixed Income Fund ............. 1,213 0 1,213 607 1,213 1,013 607
High Yield & Total Return Fund ....... 1,254 0 1,254 627 1,254 1,054 627
International Magnum Fund ............ 1,374 0 1,374 687 1,374 1,174 687
Latin American Fund .................. 1,283 0 1,283 642 1,283 1,083 642
Tax Managed Global Franchise Fund .... 1,000 0 1,000 500 1,000 800 500
Value Fund ........................... 1,593 0 1,593 797 1,593 1,393 797
Worldwide High Income Fund ........... 1,545 0 1,545 773 1,545 1,345 773
------- ----- ------- ------- ------- ------- -------
Company Total ...................... $22,100 $ 0 $22,100 $11,054 $22,100 $19,100 $11,054
------- ----- ------- ------- ------- ------- -------
<CAPTION>
FUND NAME WHALEN WOOLSEY YOVOVICH
--------- -------- -------- --------
<S> <C> <C> <C>
American Value Fund................................... $ 2,086 $ 0 $ 1,036
Asian Growth Fund..................................... 1,350 0 676
Emerging Markets Fund................................. 1,356 0 667
Equity Growth Fund.................................... 1,241 0 629
European Equity Fund.................................. 1,003 0 603
Focus Equity Fund..................................... 1,521 0 766
Global Equity Allocation Fund......................... 2,011 0 985
Global Equity Fund.................................... 2,270 0 1,121
Global Fixed Income Fund.............................. 1,213 0 606
High Yield & Total Return Fund........................ 1,254 0 627
International Magnum Fund............................. 1,374 0 682
Latin American Fund................................... 1,283 0 634
Tax Managed Global Franchise Fund..................... 1,000 0 600
Value Fund............................................ 1,593 0 778
Worldwide High Income Fund............................ 1,545 0 752
------- ------ -------
Company Total....................................... $22,100 $ 0 $11,162
------- ------ -------
</TABLE>
CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST) FROM THE COMPANY AND EACH
PORTFOLIO
TABLE C
<TABLE>
<CAPTION>
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN
--------- -------- ------ ----- ------- ------- ------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
American Value Fund................ $ 3,521 $ 0 $ 3,095 $ 1,838 $ 4,068 $ 3,371 $ 1,626 $ 3,506
Asian Growth Fund.................. 2,435 0 2,070 1,273 2,810 2,266 1,122 2,425
Emerging Markets Fund.............. 2,490 0 2,121 1,302 2,872 2,323 1,145 2,480
Equity Growth Fund................. 1,434 0 1,360 745 1,678 1,227 678 1,424
European Equity Fund............... 1,153 0 1,095 597 1,339 937 549 1,143
Focus Equity Fund.................. 2,637 0 2,262 1,378 3,048 2,470 1,217 2,625
Global Equity Allocation Fund...... 6,498 0 6,816 4,585 9,797 4,980 8,854 8,347
Global Equity Fund................. 3,998 0 3,541 2,088 4,600 3,861 1,841 3,981
Global Fixed Income Fund........... 2,152 0 1,804 1,126 2,491 1,977 993 2,143
High Yield & Total Return Fund..... 2,212 0 1,861 1,157 2,560 2,037 1,020 2,203
International Magnum Fund.......... 2,421 0 2,057 1,266 2,799 2,250 1,116 2,410
Latin American Fund................ 2,342 0 1,982 1,225 2,704 2,172 1,078 2,333
Tax Managed Global Franchise Fund.. 1,150 0 1,092 596 1,336 934 547 1,139
Value Fund......................... 2,827 0 2,439 1,478 3,265 2,667 1,302 2,815
Worldwide High Income Fund......... 2,773 0 2,388 1,450 3,201 2,612 1,276 2,761
------- ------- ------- ------- ------- ------- ------- -------
Company Total.................... $40,043 $ 0 $35,983 $22,104 $48,568 $36,084 $24,364 $41,735
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
FORMER DIRECTORS
------------------------------
FUND NAME WOOLSEY YOVOVICH GAUGHAN MILLER ROBINSON
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
American Value Fund................. $ 0 $ 1,119 $ 0 $ 0 $ 0
Asian Growth Fund................... 0 725 0 0 0
Emerging Markets Fund............... 0 715 0 0 0
Equity Growth Fund.................. 0 674 0 0 0
European Equity Fund................ 0 645 0 0 0
Focus Equity Fund................... 0 823 0 0 0
Global Equity Allocation Fund....... 0 1,063 311 1,715 3,510
Global Equity Fund.................. 0 1,212 0 0 0
Global Fixed Income Fund............ 0 649 0 0 0
High Yield & Total Return Fund...... 0 672 0 0 0
International Magnum Fund........... 0 732 0 0 0
Latin American Fund................. 0 679 0 0 0
Tax Managed Global Franchise Fund... 0 642 0 0 0
Value Fund.......................... 0 838 0 0 0
Worldwide High Income Fund.......... 0 808 0 0 0
------- ------- ---- ------ ------
Company Total..................... $ 0 $11,996 $311 $1,715 $3,510
------- ------- ---- ------ ------
</TABLE>
YEAR OF ELECTION TO EACH PORTFOLIO OF THE COMPANY
TABLE D
<TABLE>
<CAPTION>
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO
--------- -------- ------ ----- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
American Value Fund................. 1997 1999 1997 1997 1997 1997 1997
Asian Growth Fund................... 1997 1999 1997 1997 1997 1997 1997
Emerging Markets Fund............... 1997 1999 1997 1997 1997 1997 1997
Equity Growth Fund.................. 1997 1999 1997 1997 1997 1997 1997
European Equity Fund................ 1997 1999 1997 1997 1997 1997 1997
Focus Equity Fund................... 1997 1999 1997 1997 1997 1997 1997
Global Equity Allocation Fund....... 1997 1999 1997 1997 1997 1997 1997
Global Equity Fund.................. 1997 1999 1997 1997 1997 1997 1997
Global Fixed Income Fund............ 1997 1999 1997 1997 1997 1997 1997
High Yield & Total Return Fund...... 1997 1999 1997 1997 1997 1997 1997
International Magnum Fund........... 1997 1999 1997 1997 1997 1997 1997
Latin American Fund................. 1997 1999 1997 1997 1997 1997 1997
Tax Managed Global Franchise Fund... 1997 1999 1997 1997 1997 1997 1997
Value Fund.......................... 1997 1999 1997 1997 1997 1997 1997
Worldwide High Income Fund.......... 1997 1999 1997 1997 1997 1997 1997
<CAPTION>
FUND NAME WHALEN WOOLSEY YOVOVICH
--------- -------- -------- --------
<S> <C> <C> <C>
American Value Fund........................... 1997 1999 1998
Asian Growth Fund............................. 1997 1999 1998
Emerging Markets Fund......................... 1997 1999 1998
Equity Growth Fund............................ 1997 1999 1998
European Equity Fund.......................... 1997 1999 1998
Focus Equity Fund............................. 1997 1999 1998
Global Equity Allocation Fund................. 1997 1999 1998
Global Equity Fund............................ 1997 1999 1998
Global Fixed Income Fund...................... 1997 1999 1998
High Yield & Total Return Fund................ 1997 1999 1998
International Magnum Fund..................... 1997 1999 1998
Latin American Fund........................... 1997 1999 1998
Tax Managed Global Franchise Fund............. 1997 1999 1998
Value Fund.................................... 1997 1999 1998
Worldwide High Income Fund.................... 1997 1999 1998
</TABLE>
INVESTMENT ADVISORY AGREEMENTS
Each Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, each Fund retains the
Adviser to manage the investment of its assets, including the placing of orders
for the purchase and sale of portfolio securities. The Adviser obtains and
evaluates economic, statistical and financial information to formulate strategy
and implement the Fund's investment objectives. The Adviser also furnishes
offices, necessary facilities and
34
<PAGE> 188
equipment, provides administrative services to the Fund, renders periodic
reports to the Board of Directors and permits its officers and employees to
serve without compensation as directors of the Company or officers of the Fund
if elected to such positions. The Funds, however, bear the cost of its
day-to-day operations, including distribution fees, service fees, custodian
fees, legal and independent accountant fees, the costs of providing reports to
shareholders, compensation of directors of the Company (other than those who are
affiliated persons of the Adviser, Distributor or Van Kampen Investments) and
all other ordinary business expenses not specifically assumed by the Adviser.
The Advisory Agreement also provides that the Adviser shall not be liable to a
Fund for any errors of judgment or of law, or for any loss suffered by the Funds
in connection with matters to which the agreement relates, except loss resulting
from willful misfeasance, bad faith, or gross negligence on the part of the
Adviser in the performance of its obligations and duties, or by reason of its
reckless disregard of its obligations and duties under the agreement.
The Advisory Agreement also provides that, in the event the expenses of a
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction where such Fund's shares are qualified for offer
and sale, the compensation due the Adviser will be reduced by the amount of such
excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the fiscal year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by a Fund's Board of Directors or (ii) by a
vote of a majority of such Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of the Directors 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.
35
<PAGE> 189
During the fiscal years ended June 30, 1999 and 1998, the Adviser received
the approximate advisory fees (net of fee waivers) from the Funds as set forth
in the table below. During the fiscal year ended June 30, 1997, MSWDIM was the
investment adviser for each Fund (except the Mid Cap Growth Fund and Value Fund)
and MAS was the investment adviser for the Mid Cap Growth Fund and Value Fund,
and they earned the approximate advisory fees (net of fee waivers) from the
respective Fund as set forth in the table below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
--------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
American Value Fund............................ $5,367,000 $2,424,000 $ 297,000
Asian Growth Fund.............................. 1,023,000 1,557,000 4,057,000
Emerging Markets Debt Fund(1).................. -- -- --
Emerging Markets Fund.......................... 1,098,000 1,909,000 1,624,000
Equity Growth Fund(2).......................... 110,000 0 --
European Equity Fund(3)........................ 0 -- --
Focus Equity Fund.............................. 1,816,000 848,000 41,000
Global Equity Allocation Fund.................. 5,422,000 2,107,000 1,264,000
Global Equity Fund(4).......................... 7,424,000 4,344,000 --
Global Fixed Income Fund....................... 0 0 0
Growth and Income Fund II(1)................... -- -- --
High Yield & Total Return Fund................. 108,000 27,000 0
International Magnum Fund...................... 904,000 561,000 0
Japanese Equity Fund(1)........................ -- -- --
Latin American Fund............................ 573,000 1,247,000 324,000
Mid Cap Growth Fund(1)......................... -- -- --
Tax Managed Global Franchise Fund(3)........... 0 -- --
Value Fund(5).................................. 2,088,000 1,311,000 --
Worldwide High Income Fund..................... 1,743,000 1,864,000 1,086,000
</TABLE>
------------------
(1) Not operational as of June 30, 1999.
(2) Fund inception May 29, 1998.
(3) Fund inception September 25, 1998.
(4) Fund inception October 29, 1997.
(5) Fund inception July 7, 1997.
During the fiscal years ended June 30, 1999, 1998 and 1997, the Adviser (and
the predecessor adviser, where applicable) waived approximate advisory fees from
the Funds as set forth in the table below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
--------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
American Value Fund............................ -- 267,000 135,000
Asian Growth Fund.............................. 85,000 266,000 --
Emerging Markets Debt Fund(1).................. -- -- --
Emerging Markets Fund.......................... 239,000 553,000 33,000
Equity Growth Fund(2).......................... 164,000 -- --
European Equity Fund(3)........................ 39,000 -- --
Focus Equity Fund.............................. 252,000 279,000 204,000
Global Equity Allocation Fund.................. 152,000 292,000 293,000
Global Equity Fund(4).......................... -- -- --
Global Fixed Income Fund....................... 62,000 69,000 79,000
Growth and Income Fund II(1)................... -- -- --
High Yield & Total Return Fund................. 180,000 158,000 113,000
International Magnum Fund...................... 39,000 148,000 168,000
Japanese Equity Fund(1)........................ -- -- --
Latin American Fund............................ 137,000 169,000 248,000
Mid Cap Growth Fund(1)......................... -- -- --
Tax Managed Global Franchise Fund(3)........... 12,000 -- --
Value Fund(5).................................. 43,000 278,000 --
Worldwide High Income Fund..................... -- -- --
</TABLE>
------------------
(1) Not operational as of June 30, 1999.
(2) Fund inception May 29, 1998.
(3) Fund inception September 25, 1998.
(4) Fund inception October 29, 1997.
(5) Fund inception July 7, 1997.
36
<PAGE> 190
MSDWIM is the investment sub-adviser of all of the Funds except the Mid Cap
Growth Fund and Value Fund. MAS is the investment sub-adviser of the Mid Cap
Growth Fund and Value Fund. The Sub-Advisers provide investment advice and
portfolio management services pursuant to investment sub-advisory agreements
and, subject to the supervision of the Adviser and the Company's Board of
Directors, make the Funds' investment decisions, arrange for the execution of
portfolio transactions and generally manage the Funds' investments.
The Sub-Advisers are entitled to receive sub-adisory fees computed daily and
paid monthly. Except for the Mid Cap Growth Fund, if the average daily net
assets of a Fund during the monthly period are less than or equal to $500
million, the Adviser shall pay MSDWIM or MAS, as appropriate, one-half of the
total investment advisory fee payable to the Adviser by the Fund (after
application of any fee waivers in effect) for such monthly period; and a Fund's
average daily net assets for the monthly period are greater than $500 million,
the Adviser shall pay MSDWIM or MAS, as appropriate, a fee for such monthly
period equal to the greater of (a) one-half of what the total investment
advisory fee payable to the Adviser by the Fund (after application of any fee
waivers in effect) for such monthly period would have been had the Fund's
average daily net assets during such period been equal to $500 million, or (b)
forty-five percent of the total investment adisory fee payable to the Adviser by
the Fund (after application of any fee waivers in effect) for such monthly
period. For the Mid Cap Growth Fund, the Adviser shall pay MAS at an annual rate
of .40% of the average daily net assets of such Fund.
OTHER AGREEMENTS
ADMINISTRATION AGREEMENT. Pursuant to an administration agreement between
the Adviser and the Company, the Adviser provides administrative services to the
Funds. The services provided under the Administration Agreement are subject to
the supervision of the officers of the Fund and Board of Directors of the
Company and include day-to-day administration of matters related to the
corporate existence of the Company, maintenance of its records, preparation of
reports, supervision of the Company's arrangements with its custodian and
assistance in the preparation of the Company's registration statements under
federal and state laws. The Administration Agreement also provides that the
Administrator through its agents will provide the Company dividend disbursing
and transfer agent services. The Administration Agreement also provides that the
Administrator shall not be liable to the Company for any actions or omissions if
it or its agents or any of their employees acted without gross negligence or
willful misfeasance.
During the fiscal years ended June 30, 1999 and 1998, the Adviser received
the approximate administrative fees from the Funds as set forth in the table
below. During the fiscal year ended June 30, 1997, MSDWIM was the administrator
for each Fund, and MSDWIM received the approximate administration fees from the
Funds as set forth in the table below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
--------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
American Value Fund............................ $1,590,000 $ 799,000 $ 139,000
Asian Growth Fund.............................. 287,000 463,000 1,080,000
Emerging Markets Debt Fund(1).................. -- -- --
Emerging Markets Fund.......................... 285,000 522,000 445,000
Equity Growth Fund(2).......................... 91,000 1,000 --
European Equity Fund(3)........................ 14,000 -- --
Focus Equity Fund.............................. 579,000 316,000 76,000
Global Equity Allocation Fund.................. 1,473,000 657,000 473,000
Global Equity Fund(4).......................... 1,867,000 1,089,000 --
Global Fixed Income Fund....................... 26,000 27,000 34,000
Growth and Income Fund II(1)................... -- -- --
High Yield & Total Return Fund................. 99,000 64,000 42,000
International Magnum Fund...................... 318,000 237,000 73,000
Japanese Equity Fund(1)........................ -- -- --
Latin American Fund............................ 161,000 335,000 151,000
Mid Cap Growth Fund(1)......................... -- -- --
Tax Managed Global Franchise Fund(3)........... 7,000 -- --
Value Fund(5).................................. 672,000 500,000 --
Worldwide High Income Fund..................... 585,000 626,000 388,000
</TABLE>
------------------
(1) Not operational as of June 30, 1999.
(2) Fund inception May 29, 1998.
(3) Fund inception September 25, 1998.
(4) Fund inception October 29, 1997.
(5) Fund inception July 7, 1997.
37
<PAGE> 191
Under a sub-administration agreement between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a
corporate affiliate of Chase, provides certain administrative services to the
Company. The Administrator supervises and monitors such administrative services
provided by CGFSC. The services provided under the sub-administration agreement
are subject to the supervision of the Board of Directors of the Company. The
Board of Directors of the Company has approved the provision of services
described above pursuant to the sub-administration agreement as being in the
best interests of the Company. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913.
LEGAL SERVICES AGREEMENT. The Funds and certain of the other Van Kampen
funds advised by the Adviser or its affiliates and distributed by the
Distributor have entered into legal services agreements pursuant to which Van
Kampen Investments provides legal services, including without limitation:
accurate maintenance of the fund's minute books and records, preparation and
oversight of the fund's regulatory reports, and other information provided to
shareholders, as well as responding to day-to-day legal issues on behalf of the
funds. Payment by the Funds for such services is made on a cost basis for the
salary and salary-related benefits, including but not limited to bonuses, group
insurance and other regular wages for the employment of personnel, as well as
overhead and the expenses related to the office space and the equipment
necessary to render the legal services. Other funds distributed by the
Distributor also receive legal services from Van Kampen Investments. 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 monthly time
records.
During the fiscal years ended June 30, 1999, 1998 and 1997, the Adviser
received the following fees from the Funds pursuant to the legal services
agreement:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
--------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
American Value Fund............................ $10,876 $ 8,993 $ --
Asian Growth Fund.............................. 5,482 6,152 --
Emerging Markets Debt Fund(1).................. -- -- --
Emerging Markets Fund.......................... 5,550 6,610 --
Equity Growth Fund(2).......................... 3,442 4 --
European Equity Fund(3)........................ 0 N/A --
Focus Equity Fund.............................. 6,382 6,317 --
Global Equity Allocation Fund.................. 10,534 9,334 --
Global Equity Fund(4).......................... 11,824 11,423 --
Global Fixed Income Fund....................... 4,280 4,885 --
Growth and Income Fund II(1)................... -- -- --
High Yield & Total Return Fund................. 4,546 5,055 --
International Magnum Fund...................... 5,385 5,610 --
Japanese Equity Fund(1)........................ -- -- --
Latin American Fund............................ 4,727 5,687 --
Mid Cap Growth Fund(1)......................... -- -- --
Tax Managed Global Franchise Fund(3)........... 3,211 N/A --
Value Fund(5).................................. 7,141 9,199 --
Worldwide High Income Fund..................... 6,616 8,061 --
</TABLE>
------------------
(1) Not operational as of June 30, 1999.
(2) Fund inception May 29, 1998.
(3) Fund inception September 25, 1998.
(4) Fund inception October 29, 1997.
(5) Fund inception July 7, 1997.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Funds' shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Funds through
authorized dealers on a continuous basis. 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 a Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by a Fund's Board of
Directors or (ii) by a vote of a majority of such Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Directors who are
not parties to the Distribution and Service Agreement or interested persons of
any party, by votes cast in person at a meeting called for such
38
<PAGE> 192
purpose. The Distribution and Service Agreement provides that it will terminate
if assigned, and that it may be terminated without penalty by either party on 90
days' written notice. Total underwriting commissions on the sale of shares of
the Funds for the last three fiscal years are shown in the chart below.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997
-------------------------- -------------------------- --------------------------
TOTAL AMOUNTS TOTAL AMOUNTS TOTAL AMOUNTS
UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY
FUND NAME COMMISSIONS DISTRIBUTOR COMMISSIONS DISTRIBUTOR COMMISSIONS DISTRIBUTOR
--------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
American Value Fund............. $2,919,020 $228,560 $4,773,186 $658,912 $349,953 $ 47,963
Asian Growth Fund............... 397,591 25,451 749,053 98,417 832,975 103,092
Emerging Markets Debt Fund(1)... -- -- -- -- -- --
Emerging Markets Fund........... 344,275 21,951 638,827 85,770 612,339 84,793
Equity Growth Fund(2)........... 526,879 67,063 0 0 N/A N/A
European Equity Fund(3)......... 30,192 3,501 N/A N/A N/A N/A
Focus Equity Fund............... 1,229,038 83,560 1,640,138 229,561 656,053 87,259
Global Equity Allocation Fund... 1,266,693 110,283 1,033,797 135,086 310,083 39,966
Global Equity Fund(4)........... 3,117,074 62,141 3,370,697 466,837 N/A N/A
Global Fixed Income Fund........ 23,425 1,613 9,204 1,082 34,196 1,954
Growth and Income Fund II(1).... -- -- -- -- -- --
High Yield & Total Return Fund.. 121,267 7,888 132,102 13,824 25,581 2,379
International Magnum Fund....... 484,186 34,803 1,045,607 140,250 380,391 52,266
Japanese Equity Fund(1)......... -- -- -- -- -- --
Latin American Fund............. 217,094 13,361 986,259 133,298 706,758 94,909
Mid Cap Growth Fund(1).......... -- -- -- -- -- --
Tax Managed Global Franchise
Fund(3)........................ 12,337 1,748 N/A N/A N/A N/A
Value Fund(5)................... 1,338,133 70,253 6,293,710 856,595 N/A N/A
Worldwide High Income Fund...... 950,093 34,465 1,276,023 135,143 648,293 73,078
</TABLE>
------------------
(1) Not operational as of June 30, 1999.
(2) Fund inception May 29, 1998.
(3) Fund inception September 25, 1998.
(4) Fund inception October 29, 1997.
(5) Fund inception July 7, 1997.
With respect to sales of Class A Shares of the Funds, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLES
With respect to Emerging Markets Debt Fund, Global Fixed Income Fund, High
Yield & Total Return Fund and Worldwide High Income Fund:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
---------------------- REALLOWED
AS % OF AS % OF NET TO DEALERS
SIZE OF OFFERING AMOUNT AS A % OF
INVESTMENT PRICE INVESTED OFFERING PRICE
---------- -------- ----------- --------------
<S> <C> <C> <C>
Less than $100,000.......................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000............................. 3.75% 3.90% 3.25%
$250,000 but less than $500,000............................. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........................... 2.00% 2.04% 1.75%
$1,000,000 or more.......................................... * * *
</TABLE>
With respect to all of the remaining Funds:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
---------------------- REALLOWED
AS % OF AS % OF NET TO DEALERS
SIZE OF OFFERING AMOUNT AS A % OF
INVESTMENT PRICE INVESTED OFFERING PRICE
---------- -------- ----------- --------------
<S> <C> <C> <C>
Less than $50,000........................................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000.............................. 4.75% 4.99% 4.00%
$100,000 but less than $250,000............................. 3.75% 3.90% 3.00%
$250,000 but less than $500,000............................. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........................... 2.00% 2.04% 1.75%
$1,000,000 or more.......................................... * * *
</TABLE>
--------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed on a percentage of the dollar value of such
shares sold as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
39
<PAGE> 193
With respect to sales of Class B Shares and Class C Shares, a commission or
transaction fee generally will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution fees
on Class B Shares and Class C Shares are paid to the Distributor and are used by
the Distributor to defray its distribution related expenses in connection with
the sale of the Fund's shares, such as the payment to authorized dealers for
selling such shares. With respect to Class C Shares, the authorized dealers
generally are paid the ongoing commission and transaction fees of up to 0.75% of
the average daily net assets of a Fund's Class C Shares annually commencing in
the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying authorized dealers for certain services or
activities which are primarily intended to result in sales of shares of the Fund
or other Van Kampen funds. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives for meetings or seminars of a business nature. In some instances
additional compensation or promotional incentives may be offered to brokers,
dealers or financial intermediaries that have sold or may sell significant
amounts of shares during specified periods of time. The Distributor may provide
additional compensation to Edward D. Jones & Co. or an affiliate thereof based
on a combination of its quarterly sales of shares of the Funds and other Van
Kampen funds and increases in net assets of the Funds and other Van Kampen funds
over specified thresholds. All of the foregoing payments are made by the
Distributor out of its own assets. Such fees paid for such services and
activities with respect to a Fund will not exceed in the aggregate 1.25% of the
average total daily net assets of such Fund on an annual basis. These programs
will not change the price an investor will pay for shares or the amount that a
Fund will receive from such sale.
The Funds have each adopted a distribution plan (the "Distribution Plan")
with respect to each class of its shares pursuant to Rule 12b-1 under the 1940
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 a Fund
may spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Distribution Plan and the Service Plan are
being implemented through the Distribution and Service Agreement with the
Distributor of each class of the Fund's shares and 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 a Fund and financial intermediaries 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 financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under the law from
providing certain underwriting or distribution services. If a financial
intermediary 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 financial intermediary would result in any material adverse consequences
to the Fund.
The Distributor must submit quarterly reports to the Board of Directors,
with respect to each Fund setting forth separately by class of shares all
amounts paid under the Distribution Plan and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Board of Directors. 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 Board of Directors, and
also by a vote of the disinterested Directors, 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 any 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 Board of Directors and
also by the disinterested Directors. Each of the Plans may be terminated with
respect to any class of shares at any time by a vote of a majority of the
disinterested Directors or by a vote of a majority of the outstanding voting
shares of such class.
The Plans obligate the Funds to accrue and pay to the Distributor the fee
agreed to under its Distribution Agreement. The Plans do not obligate the Funds
to reimburse the Distributor for the actual expenses the Distributor may incur
in fulfilling its obligations under the Plan. Thus, under each Plan, even if the
Distributor's actual expenses exceed the fee payable to it thereunder at any
given time, the Funds will not be obligated to pay more than that fee.
Because each Fund is a series of the Company, amounts paid to the
Distributor as reimbursement for expenses of one series of the Company may
indirectly benefit the other Funds which are series of the Company. The
Distributor will endeavor to
40
<PAGE> 194
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
As of June 30, 1999, the unreimbursed distribution-related expenses with
respect to Class B Shares and Class C shares, and the percentage of the Fund's
net assets attributable to Class B Shares and Class C Shares are represented
below.
<TABLE>
<CAPTION>
B SHARES C SHARES
---------------------------- ----------------------------
PERCENTAGE OF PERCENTAGE OF
UNREIMBURSED FUND'S NET UNREIMBURSED FUND'S NET
FUND NAME DISTRIBUTION ASSETS DISTRIBUTION ASSETS
--------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
American Value Fund......................... $10,138,207 2.97% $152,210 0.09%
Asian Growth Fund........................... 2,450,266 5.71 22,692 0.06
Emerging Markets Fund....................... 1,836,551 4.79 17,012 0.08
Equity Growth Fund.......................... 606,348 2.53 22,770 0.31
European Equity Fund........................ 14,804 0.48 1,508 0.10
Focus Equity Fund........................... 4,521,932 2.57 20,961 0.08
Global Equity Fund.......................... 19,894,984 3.34 47,093 0.07
Global Equity Allocation Fund............... 1,956,904 0.84 169,199 0.17
Global Fixed Income Fund.................... 87,937 5.65 2,100 0.14
High Yield & Total Return Fund.............. 711,833 3.14 16,111 0.20
International Magnum Fund................... 1,651,126 3.43 5,147 0.04
Latin American Fund......................... 1,036,423 5.58 17,977 0.17
Tax Managed Global Franchise Fund........... 6,435 1.05 1,380 0.29
Value Fund.................................. 4,179,000 3.27 81,668 0.28
Worldwide High Income Fund.................. 5,193,409 4.85 66,211 0.16
</TABLE>
41
<PAGE> 195
As reimbursement for providing distribution services to the Company for the
fiscal year ended June 30, 1999, the Distributor received aggregate fees of
approximately $23,977,000 which were attributable approximately as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED PERCENTAGE OF
JUNE 30, 1999 AVERAGE DAILY
FUND NAME (000) NET ASSETS
--------- ----------------- -------------
<S> <C> <C>
American Value Fund -- Class A.............................. $ 540 .25%
American Value Fund -- Class B.............................. 2,840 1.00%
American Value Fund -- Class C.............................. 1,313 1.00%
Asian Growth Fund -- Class A................................ 130 .25%
Asian Growth Fund -- Class B................................ 291 1.00%
Asian Growth Fund -- Class C................................ 295 1.00%
Emerging Markets Debt Fund -- Class A(1).................... --%
Emerging Markets Debt Fund -- Class B(1).................... --%
Emerging Markets Debt Fund -- Class C(1).................... --%
Emerging Markets Fund -- Class A............................ 141 .25%
Emerging Markets Fund -- Class B............................ 299 1.00%
Emerging Markets Fund -- Class C............................ 205 1.00%
Equity Growth Fund -- Class A............................... 30 .25%
Equity Growth Fund -- Class B............................... 163 1.00%
Equity Growth Fund -- Class C............................... 58 1.00%
European Equity Fund -- Class A............................. 3 .25%
European Equity Fund -- Class B............................. 17 1.00%
European Equity Fund -- Class C............................. 10 1.00%
Focus Equity Fund -- Class A................................ 155 .25%
Focus Equity Fund -- Class B................................ 1,433 1.00%
Focus Equity Fund -- Class C................................ 244 1.00%
Global Equity Allocation Fund -- Class A.................... 588 .25%
Global Equity Allocation Fund -- Class B.................... 2,243 1.00%
Global Equity Allocation Fund -- Class C.................... 998 1.00%
Global Equity Fund -- Class A............................... 191 .25%
Global Equity Fund -- Class B............................... 6,007 1.00%
Global Equity Fund -- Class C............................... 657 1.00%
Global Fixed Income Fund -- Class A......................... 11 .25%
Global Fixed Income Fund -- Class B......................... 17 1.00%
Global Fixed Income Fund -- Class C......................... 18 1.00%
Growth and Income Fund II -- Class A(1)..................... --%
Growth and Income Fund II -- Class B(1)..................... --%
Growth and Income Fund II -- Class C(1)..................... --%
High Yield & Total Return Fund -- Class A................... 23 .25%
High Yield & Total Return Fund -- Class B................... 209 1.00%
High Yield & Total Return Fund -- Class C................... 82 1.00%
International Magnum Fund -- Class A........................ 138 .25%
International Magnum Fund -- Class B........................ 482 1.00%
International Magnum Fund -- Class C........................ 144 1.00%
Japanese Equity Fund -- Class A(1).......................... --%
Japanese Equity Fund -- Class B(1).......................... --%
Japanese Equity Fund -- Class C(1).......................... --%
Latin American Fund -- Class A.............................. 75 .25%
Latin American Fund -- Class B.............................. 169 1.00%
Latin American Fund -- Class C.............................. 96 1.00%
Mid Cap Growth Fund -- Class A(1)........................... --%
Mid Cap Growth Fund -- Class B(1)........................... --%
Mid Cap Growth Fund -- Class C(1)........................... --%
Tax Managed Global Franchise Fund -- Class A................ 2 .25%
Tax Managed Global Franchise Fund -- Class B................ 3 1.00%
Tax Managed Global Franchise Fund -- Class C................ 3 1.00%
Value Fund -- Class A....................................... 270 .25%
Value Fund -- Class B....................................... 1,279 1.00%
Value Fund -- Class C....................................... 306 1.00%
Worldwide High Income Fund -- Class A....................... 173 .25%
Worldwide High Income Fund -- Class B....................... 1,158 1.00%
Worldwide High Income Fund -- Class C....................... 468 1.00%
</TABLE>
------------------
(1) Not operational as of June 30, 1999.
42
<PAGE> 196
TRANSFER AGENT
The Funds' transfer agent, shareholder service agent and divided disbursing
agent is Van Kampen Investor Services Inc., PO Box 218256, Kansas City, MO
64121-8256. The transfer agency prices are determined through negotiations with
the Fund's Board of Directors and are based on competitive benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Funds, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transaction. While
the Adviser will be primarily responsible for the placement of each Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the Board of Directors.
With respect to the Emerging Markets Debt Fund, the Global Fixed Income
Fund, the High Yield & Total Return Fund and the Worldwide High Income Fund;
most transactions made by such Funds are principal transactions at net prices
and the Funds generally incur little or no brokerage costs. The portfolio
securities in which these Funds invest are normally purchased directly from the
issuer or in the over-the-counter market 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 a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
These Funds may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed securities on an exchange, which are effected through brokers who
charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so in
a manner deemed fair and reasonable to the Funds and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker/dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Funds.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Funds, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Funds' shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Funds' shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for a 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 such Fund. In making such allocations among a
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, 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.
Morgan Stanley & Co. Incorporated is an affiliate of the Adviser (and the
predecessor adviser) of the Funds. Effective May 31, 1997, Dean Witter Reynolds,
Inc. ("Dean Witter") became an affiliate of the Adviser (and the predecessor
adviser) of the Funds. The Board of Directors have adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act
which requires that the commissions paid to affiliates of the Funds must be
reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the Board of Directors and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the Board of Directors will consider from time to time whether the
advisory fee for each Fund will be reduced by all or a portion of the brokerage
commission given to affiliated brokers.
The Funds paid the following commissions to all brokers and affiliated
brokers during the periods shown:
43
<PAGE> 197
<TABLE>
<CAPTION>
EMERGING
AMERICAN ASIAN MARKETS EMERGING EQUITY EUROPEAN FOCUS
FISCAL YEAR ENDED VALUE GROWTH DEBT MARKETS GROWTH EQUITY EQUITY
JUNE 30, 1999 FUND FUND FUND(1) FUND FUND FUND FUND
----------------- -------- ------ -------- -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions............... $ 5,210,669 $ 1,059,398 $ -- $ 892,711 $ 96,599 $ 20,070 $ 1,158,339
Commissions with Morgan
Stanley................... $ 2,130 $ 53,519 $ -- $ 49,419 $ 1,755 $ 1,984 $ 13,980
Percentage of total
commissions.............. 0.04% 5.05% --% 5.54% 1.82% 9.89% 1.21%
Commissions with Dean
Witter.................... $ 1,356 $ 0 $ -- $ 0 $ 0 $ 0 $ 0
Percentage of total
commissions.............. 0.03% 0% --% 0% 0% 0% 0%
Percentage of total value of
brokerage transactions
with Morgan Stanley....... 0.06% 5.30% --% 4.72% 2.19% 7.33% 1.75%
Percentage of total value of
brokerage transactions
with Dean Witter.......... 0.01% 0% --% 0% 0% 0% 0%
Commissions for research
services.................. $ 4,704,647 $ 1,059,398 $ -- $ 892,711 $ 76,151 $ 20,070 $1,109,511
Value of research
transactions.............. $1,968,924,455 $283,946,042 $ -- $263,588,372 $67,510,503 $10,392,253 $876,267,703
<CAPTION>
GLOBAL
EQUITY GLOBAL
FISCAL YEAR ENDED ALLOCATION EQUITY
JUNE 30, 1999 FUND FUND
----------------- ---------- ------
<S> <C> <C>
Total brokerage
commissions............... $ 723,144 $ 1,180,688
Commissions with Morgan
Stanley................... $ 1,790 $ 106,499
Percentage of total
commissions.............. 0.25% 9.02%
Commissions with Dean
Witter.................... $ 0 $ 0
Percentage of total
commissions.............. 0% 0%
Percentage of total value of
brokerage transactions
with Morgan Stanley....... 0.08% 8.54%
Percentage of total value of
brokerage transactions
with Dean Witter.......... 0% 0%
Commissions for research
services.................. $ 723,144 $ 1,180,688
Value of research
transactions.............. $740,411,692 $537,623,505
</TABLE>
<TABLE>
<CAPTION>
HIGH
GLOBAL GROWTH YIELD & INTER-
FIXED AND TOTAL NATIONAL JAPANESE LATIN MID CAP
FISCAL YEAR ENDED INCOME INCOME RETURN MAGNUM EQUITY AMERICAN GROWTH
JUNE 30, 1999 FUND FUND II(1) FUND FUND FUND(1) FUND FUND(1)
----------------- ------ ---------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions............... $ 0 $ -- $ 0 $ 369,509 $ -- $ 509,214 $ --
Commissions with Morgan
Stanley................... $ 0 $ -- $ 0 $ 8,443 $ -- $ 7,942 $ --
Percentage of total
commissions.............. 0% --% 0% 2.28% --% 1.56% --%
Commissions with Dean
Witter.................... $ 0 $ -- $ 0 $ 0 $ -- $ 0 $ --
Percentage of total
commissions.............. 0% --% 0% 0% --% 0% --%
Percentage of total value of
brokerage transactions
with Morgan Stanley....... 0% --% 0% 2.09% --% 2.71% --%
Percentage of total value of
brokerage transactions
with Dean Witter.......... 0% --% 0% 0% --% 0% --%
Commissions for research
services.................. $ -- $ -- $ -- $ 369,509 $ -- $ 509,214 $ --
Value of research
transactions.............. $ -- $ -- $ -- $147,219,049 $ -- $172,872,826 $ --
<CAPTION>
TAX
MANAGED WORLDWIDE
GLOBAL HIGH
FISCAL YEAR ENDED FRANCHISE VALUE INCOME
JUNE 30, 1999 FUND FUND FUND
----------------- --------- ----- ---------
<S> <C> <C> <C>
Total brokerage
commissions............... $ 4,237 $ 463,294 $ 626
Commissions with Morgan
Stanley................... $ 314 $ 0 $ 0
Percentage of total
commissions.............. 7.41% 0.0% 0%
Commissions with Dean
Witter.................... $ 0 $ 0 $ 0
Percentage of total
commissions.............. 0% 0% 0%
Percentage of total value of
brokerage transactions
with Morgan Stanley....... 6.66% 0% 0%
Percentage of total value of
brokerage transactions
with Dean Witter.......... 0% 0% 0%
Commissions for research
services.................. $ 4,237 $ 458,024 $ 626
Value of research
transactions.............. $1,839,734 $303,327,814 $18,919,240
</TABLE>
--------------------
(1) Not operational as of June 30, 1999.
44
<PAGE> 198
<TABLE>
<CAPTION>
EMERGING GLOBAL
AMERICAN ASIAN MARKETS EMERGING EQUITY EUROPEAN FOCUS EQUITY
FISCAL YEAR ENDED VALUE GROWTH DEBT MARKETS GROWTH EQUITY EQUITY ALLOCATION
JUNE 30, 1998 FUND FUND FUND(1) FUND FUND(2) FUND(3) FUND FUND
----------------- -------- ------ -------- -------- ------- -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions............... $1,863,022 $2,171,340 $ -- $1,122,264 $4,685 $ -- $836,700 $382,680
Commissions with Morgan
Stanley................... $ 0 $ 157,183 $ -- $ 41,792 $ 0 $ -- $ 0 $ 981
Commissions with Dean
Witter.................... $ 0 $ 0 $ -- $ 0 $ 0 $ -- $ 0 $ 0
<CAPTION>
GLOBAL
FISCAL YEAR ENDED EQUITY
JUNE 30, 1998 FUND(4)
----------------- -------
<S> <C>
Total brokerage
commissions............... $775,168
Commissions with Morgan
Stanley................... $188,780
Commissions with Dean
Witter.................... $ 0
</TABLE>
<TABLE>
<CAPTION>
HIGH TAX
GLOBAL GROWTH YIELD & INTER- MANAGED
FIXED AND TOTAL NATIONAL JAPANESE LATIN MID CAP GLOBAL
FISCAL YEAR ENDED INCOME INCOME RETURN MAGNUM EQUITY AMERICAN GROWTH FRANCHISE
JUNE 30, 1998 FUND FUND II(1) FUND FUND FUND(1) FUND FUND(1) FUND(3)
----------------- ------ ---------- ------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions............... $ 0 $ -- $2,940 $243,789 $ -- $1,251,018 $ -- $ --
Commissions with Morgan
Stanley................... $ 0 $ -- $ 0 $ 8,123 $ -- $ 53,140 $ -- $ --
Commissions with Dean
Witter.................... $ 0 $ -- $ 0 $ 0 $ -- $ 0 $ -- $ --
<CAPTION>
WORLDWIDE
HIGH
FISCAL YEAR ENDED VALUE INCOME
JUNE 30, 1998 FUND FUND
----------------- ----- ---------
<S> <C> <C>
Total brokerage
commissions............... $475,178 $ 0
Commissions with Morgan
Stanley................... $ 0 $ 0
Commissions with Dean
Witter.................... $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
EMERGING GLOBAL
AMERICAN ASIAN MARKETS EMERGING EQUITY EUROPEAN FOCUS EQUITY
FISCAL YEAR ENDED VALUE GROWTH DEBT MARKETS GROWTH EQUITY EQUITY ALLOCATION
JUNE 30, 1997 FUND FUND FUND(1) FUND FUND FUND FUND FUND
----------------- -------- ------ -------- -------- ------ -------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions............... $130,098 $2,757,149 $ -- $922,655 $ -- $ -- $174,610 $118,044
Commissions with Morgan
Stanley................... $ 0 $ 326,044 $ -- $ 79,641 $ -- $ -- $ 0 $ 0
Commissions with Dean
Witter.................... $ 1,302 $ 0 $ -- $ 0 $ -- $ -- $ 168 $ 0
<CAPTION>
GLOBAL
FISCAL YEAR ENDED EQUITY
JUNE 30, 1997 FUND
----------------- ------
<S> <C>
Total brokerage
commissions............... $ --
Commissions with Morgan
Stanley................... $ --
Commissions with Dean
Witter.................... $ --
</TABLE>
<TABLE>
<CAPTION>
HIGH TAX
GLOBAL GROWTH YIELD & INTER- MANAGED
FIXED AND TOTAL NATIONAL JAPANESE LATIN MID CAP GLOBAL
FISCAL YEAR ENDED INCOME INCOME RETURN MAGNUM EQUITY AMERICAN GROWTH FRANCHISE
JUNE 30, 1997 FUND FUND II(1) FUND FUND FUND(1) FUND FUND(1) FUND
----------------- ------ ---------- ------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total brokerage
commissions............... $ 0 $ -- $ 0 $155,283 $ -- $742,521 $ -- $ --
Commissions with Morgan
Stanley................... $ 0 $ -- $ 0 $ 15,487 $ -- $ 40,849 $ -- $ --
Commissions with Dean
Witter.................... $ 0 $ -- $ 0 $ 0 $ -- $ 0 $ -- $ --
<CAPTION>
WORLDWIDE
HIGH
FISCAL YEAR ENDED VALUE INCOME
JUNE 30, 1997 FUND(5) FUND
----------------- ------- ---------
<S> <C> <C>
Total brokerage
commissions............... $ -- $ 0
Commissions with Morgan
Stanley................... $ -- $ 0
Commissions with Dean
Witter.................... $ -- $ 0
</TABLE>
--------------------
(1) Not operational as of June 30, 1999.
(2) Fund inception May 29, 1998.
(3) Fund inception September 25, 1998.
(4) Fund inception October 29, 1997.
(5) Fund inception July 7, 1997.
45
<PAGE> 199
SHAREHOLDER SERVICES
The Funds offer a number of shareholder services designed to facilitate
investment in their respective shares at little or no extra cost to the
investor. Below is a description of such services. The following information
supplements the section in each Fund's Prospectus captioned "Shareholder
Services."
INVESTMENT ACCOUNT
Each shareholder of each Fund has an investment account under which the
investor's shares of the Fund are held by Investor Services, the Funds' transfer
agent. Investor Services performs bookkeeping, data processing and
administrative services related to the maintenance of shareholder accounts.
Except as described in the Prospectus and this Statement of Additional
Information, 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 any of the Participating Funds (as defined in the Funds'
Prospectuses) will receive statements quarterly from Investor Services showing
any reinvestments of dividends and capital gain dividends 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 gain dividends. Additional shares may be
purchased at any time through authorized dealers or by mailing a check directly
to Investor Services.
SHARE CERTIFICATES
Generally, a Fund will not issue share certificates. However, upon written
or telephone request to such 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 an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc. c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, requesting an
"Affidavit of Loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate
the fee for replacing the lost certificate equal to no more than 1.50% of the
net asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Money Purchase and Profit Sharing
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
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds 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 ACH. 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 redemption proceeds are to be deposited together with the
completed application. Once Investor Services 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 Investor Services or by calling (800) 341-2911 ((800) 421-4833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, by completing the appropriate
section of the application form accompanying the Prospectus or by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired), elect to have all dividends
and capital gain dividends paid on a class of shares of a Fund invested into
shares of the same class of any Participating Fund so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit
of the same individual. 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 per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a
46
<PAGE> 200
shareholder owns shares in a single account valued at $5,000 or more at the next
determined net asset value per share at the time the plan is established, the
shareholder may establish a quarterly, semiannual 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 payment represents the proceeds
of 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 $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan established on
a form made available by such Fund.
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the applicable Fund are redeemed to
provide the amount of the periodic withdrawal. Dividends and capital gain
dividends on shares held in accounts with systematic withdrawal plans are
reinvested in additional shares at the next determined net asset value per
share. If periodic withdrawals continuously exceed reinvested dividends and
capital gain dividends, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Redemptions made concurrently
with the purchase of additional shares ordinarily will be disadvantageous to the
shareholder because of the duplication of sales charges. Any gain or loss
realized by the shareholder upon redemption of shares is a taxable event. Each
Fund reserves the right to amend or terminate the systematic withdrawal program
upon 30 days' notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight (8) exchanges per fund during a
rolling 365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight (8) exchanges out of that fund are made by a shareholder during a rolling
365-day period. If exchange privileges are suspended, subsequent exchange
requests during the stated period will not be processed. Exchange privileges
will be restored when the account history shows fewer than eight (8) exchanges
in the rolling 365-day period.
This policy change does not apply to money market funds, systematic exchange
plans, or employer-sponsored retirement plans.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of a
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of such Fund. A Class C Shareholder who has redeemed shares of
the Fund may reinstate any portion or all of the net proceeds of such redemption
in Class C Shares of the Fund with credit given for any contingent deferred
sales charge paid upon such redemption. Such reinstatement is made at the net
asset value per share (without sales charge) next determined after the order is
received, which must be made within 180 days after the date of the redemption.
Reinstatement at net asset value per share is also offered to participants in
those eligible retirement plans held or administered by Van Kampen Trust Company
for repayment of principal (and interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. 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) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for such Fund to fairly determine the value of its net assets; or
(d) the SEC, by order, so permits.
Additionally, if the Board of Directors determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of a Fund, such Fund may pay the redemption proceeds in whole or in
part by a distribution-in-kind of portfolio securities held by the Fund in lieu
of cash in conformity with applicable rules of the SEC. Shareholders may incur
brokerage charges and a gain or loss for federal income tax purposes upon the
sale of portfolio securities so received in payment of redemptions.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
As described in the Funds' Prospectuses under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to
47
<PAGE> 201
purchase shares subject to a CDSC-Class A rather than a front-end load sales
charge. In determining whether a CDSC-Class A is payable, it is assumed that
shares being redeemed first are any shares in the shareholder's account not
subject to a contingent deferred sales charge, followed by shares held the
longest in the shareholder's account.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Funds' Prospectuses under "Redemption of Shares,"
redemptions of Class B Shares and Class C Shares will be subject to a contingent
deferred sales charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived
on redemptions of Class B Shares and Class C Shares in the circumstances
described below:
REDEMPTION UPON DEATH OR DISABILITY
A Fund will waive the CDSC-Class B and C on redemptions following the death
or disability of a Class B shareholder 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 of 1986, as amended
(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
Funds do 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 death or disability, 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.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
A 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
CDSC-Class B and C will be waived upon the tax-free rollover or transfer of
assets to another retirement plan invested in one or more Participating Funds;
in such event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution pursuant to Section 408(d)(4)
or (5) of the Code, the return of excess deferral amounts pursuant to Code
Section 401(k)(8) or 402(g)(2), the financial hardship of the employee pursuant
to United States Treasury Regulation Section 401(k)-1(d)(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 Funds do not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in a Fund. Under the systematic
withdrawal 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 sent to the designated payee of record. The amount to be redeemed
and frequency of the systematic withdrawals will be specified by the shareholder
upon his or her election to participate in the systematic withdrawal plan. The
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the 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 systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
A Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares. See "Purchase of Shares--Waiver of Contingent Deferred Sales
Charge" in the Prospectuses.
48
<PAGE> 202
INVOLUNTARY REDEMPTIONS OF SHARES
Each Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Funds' Prospectuses.
Prior to such redemptions, shareholders will be notified in writing and allowed
a specified period of time to purchase additional shares to bring the value of
the account up to the required minimum balance. Each Fund will waive the
CDSC-Class B and C upon such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of a Fund may reinvest at net
asset value, with credit for any CDSC-Class C paid on the redeemed shares, any
portion or all of his or her redemption proceeds (plus that amount necessary to
acquire a fractional share to round off his or her purchase to the nearest full
share) in Class C Shares of the Fund, provided that the reinvestment is effected
within 180 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.
REDEMPTION BY ADVISER
A 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 such Fund.
TAXATION
FEDERAL INCOME TAXATION OF THE FUNDS
The Company and each of the Funds will be treated as separate corporations
for federal income tax purposes. The Funds have elected and qualified (in their
first year of operations), and intend to continue to qualify each year, to be
treated as regulated investment companies under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To qualify as a regulated
investment company, each Fund must comply with certain requirements of the Code
relating to, among other things, the source of its income and diversification of
its assets.
If a Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (generally taxable income and
net short-term capital gain, but not net capital gain, which is the excess of
net long-term capital gain over net short-term capital loss) and meets certain
other requirements, it will not be required to pay federal income taxes on any
income it distributes to shareholders. Each Fund intends to distribute at least
the minimum amount of investment company taxable income necessary to satisfy the
90% distribution requirement. A Fund will not be subject to federal income tax
on any net capital gain distributed to shareholders.
In order to avoid a 4% excise tax, each Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31st of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, a Fund will be treated as having been distributed.
If a Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, such Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, such Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Funds' investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of a
Fund, affect the holding period of the securities held by such Fund and alter
the character of the gains or losses realized by the Fund. These provisions may
also require the Fund to recognize income or gain without receiving cash with
which to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. Each Fund will monitor its transactions and may make certain tax
elections in order to mitigate the effect of these rules and prevent its
disqualification as a regulated investment company.
Investments of a Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, a
Fund will be required to accrue as income each year a portion of the discount
and to
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distribute such income each year in order to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, such Fund may
have to dispose of securities that it would otherwise have continued to hold.
PASSIVE FOREIGN INVESTMENT COMPANIES. A Fund may invest in the stock of
"passive foreign investment companies" ("PFICs"). A PFIC is a foreign
corporation that, in general, meets either of the following tests: (i) at least
75% of its gross income is passive income or (ii) an average of at least 50% of
its assets produce, or are held for the production of, passive income. Under
certain circumstances, a regulated investment company that holds stock of a PFIC
will be subject to federal income tax on (i) a portion of any "excess
distribution" received on such stock or (ii) any gain from a sale or disposition
of such stock (collectively, "PFIC income"), plus interest on such amounts, even
if the regulated investment company distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the regulated investment company's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If a Fund invests in a PFIC and elects to treat the PFIC as
a "qualified electing fund," then in lieu of the foregoing tax and interest
obligation, such Fund would be required to include in income each year its pro
rata share of the qualified electing fund's annual ordinary earnings and net
capital gain, which most likely would have to be distributed to satisfy the 90%
distribution requirement and the distribution requirement for avoiding income
and excise taxes. In most instances it will be very difficult to make this
election due to certain requirements imposed with respect to the election.
As an alternative to making the above-described election to treat the PFIC
as a qualified electing fund, a Fund may make an election to annually
mark-to-market PFIC stock that it owns (a "PFIC Mark-to-Market Election").
"Marking-to-market," in this context, means recognizing as ordinary income or
loss each year an amount equal to the difference between such Fund's adjusted
tax basis in such PFIC stock and its fair market value. Losses will be allowed
only to the extent of net mark-to-market gain previously included by the Fund
pursuant to the election for prior taxable years. A Fund may be required to
include in its taxable income for the first taxable year in which it makes a
PFIC Mark-to-Market Election an amount equal to the interest charge that would
otherwise accrue with respect to distributions on, or dispositions of, the PFIC
stock. This amount would not be deductible from the Fund's taxable income. The
PFIC Mark-to-Market Election applies to the taxable year for which made and to
all subsequent taxable years, unless the Internal Revenue Service ("IRS")
consents to revocation of the election. By making the PFIC Mark-to-Market
Election, the Fund could ameliorate the adverse tax consequences arising from
its ownership of PFIC stock, but in any particular year may be required to
recognize income in excess of the distributions it receives from the PFIC and
proceeds from the dispositions of PFIC stock.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of a Fund's investment company taxable income are taxable to
shareholders as ordinary income to the extent of such Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of a Fund's net capital gain as capital gain dividends, if any, are taxable to
shareholders as long-term capital gains regardless of the length of time shares
of such Fund have been held by such shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the maximum tax rates applicable to capital
gains (including capital gain dividends), see "Capital Gains Rates" below.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from a Fund.
Shareholders receiving distributions in the form of additional shares issued
by a Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.
Each Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Some portion of
the distributions from a Fund may be eligible be eligible for the dividends
received deduction for corporations if such Fund receives qualifying dividends
during the year and if certain other requirements of the Code are satisfied.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by a Fund and received
by the shareholders on the December 31st prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
a Fund may be "spilled back" and treated as paid by such Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by a Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of a Fund may be
entitled to claim United States foreign tax credits with respect to such taxes,
subject to certain provisions and limitations contained in the Code. If more
than 50% in value of a Fund's total assets at the close of its fiscal year
consists of securities of foreign issuers and such Fund meets certain holding
period requirements with respect to the securities, the Fund will be eligible to
file, and may file, elections with the IRS pursuant to which shareholders of
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such Fund will be required (i) to include their respective pro rata portions of
such taxes in their United States income tax returns as gross income and (ii) to
treat such respective pro rata portions as taxes paid by them. Each shareholder
will be entitled, subject to certain limitations, either to deduct his pro rata
portion of such foreign taxes in computing his taxable income or to credit them
against his United States federal income taxes. No deduction for such foreign
taxes may be claimed by a shareholder who does not itemize deductions. Each
shareholder of a Fund that may be eligible to file the election described in
this paragraph will be notified annually whether the foreign taxes paid by such
Fund will "pass through" for that year and, if so, such notification will
designate (i) the shareholder's portion of the foreign taxes paid to each
country and (ii) the portion of dividends that represent income derived from
sources within each country. The amount of foreign taxes for which a shareholder
may claim a credit in any year will be subject to an overall limitation such
that the credit may not exceed the shareholder's United States federal income
tax attributable to the shareholder's foreign source taxable income. This
limitation generally applies separately to certain specific categories of
foreign source income including "passive income," which includes dividends and
interest. Because application of the foregoing rules depends on the particular
circumstances of each shareholder, shareholders are advised to consult their tax
advisers.
Certain foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) a Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, such Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gains. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the maximum tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares. For
purposes of determining whether shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in a Fund is (i) the
same as the maximum ordinary income tax rate for capital assets held for one
year or less or (ii) 20% for capital assets held for more than one year. The
maximum long-term capital gains rate for corporations is 35%.
NON-U.S. SHAREHOLDERS
A shareholder who is not (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized under the laws of the
United States or any state thereof, (iii) an estate, the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries who have
the authority to control all substantial decisions of the trust (a "Non-U.S.
Shareholder") generally will be subject to withholding of United States federal
income tax at a 30% rate (or lower applicable treaty rate) on dividends from the
Fund (other than capital gain dividends) that are not "effectively connected"
with a United States trade or business carried on by such shareholder.
Accordingly, investment in certain Funds that invest primarily in debt
securities or securities of foreign issuers is likely to be appropriate for a
Non-U.S. Shareholder only if such person can utilize a foreign tax credit or
corresponding tax benefit in respect of such United States withholding tax.
Non-effectively connected capital gain dividends and gains realized from the
sale of shares will not be subject to United States federal income tax in the
case of (i) a Non-U.S. Shareholder that is a corporation and (ii) an individual
Non-U.S. Shareholder that is not present in the United States for more than 182
days during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Shareholders may nonetheless be subject to backup
withholding on capital gain dividends and gross proceeds paid to them upon the
sale of their shares. See "Backup Withholding" below.
If income from a Fund or gains realized from the sale of shares is
effectively connected with a Non-U.S. Shareholder's United States trade or
business, then such amounts will be subject to United States federal income tax
on a net basis at the tax rates applicable to United States citizens or domestic
corporations. Non-U.S. Shareholders that are corporations may also be subject to
an additional "branch profits tax" with respect to income from the Fund that is
effectively connected with a United States trade or business.
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United States Treasury Regulations, effective for payments made after
December 31, 2000, modify the withholding, backup withholding and information
reporting rules, including the procedures to be followed by Non-U.S.
Shareholders in establishing foreign status. Prospective investors should
consult their tax advisers concerning the applicability and effect of such
Treasury Regulations on an investment in shares of a Fund.
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Non-U.S. Shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their tax advisers with respect to the
tax implications of purchasing, holding and disposing of shares of a Fund.
BACKUP WITHHOLDING
A Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish such Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder fails
to certify that he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's United States federal income tax liability,
if any, provided that the required information is furnished to the IRS.
INFORMATION REPORTING
Each Fund must report annually to the IRS and to each shareholder the amount
of dividends paid to such shareholder and the amount, if any, of tax withheld
with respect to such dividends. This information may also be made available to
the tax authorities in a Non-U.S. Shareholder's country of residence.
GENERAL
The federal income tax discussion set forth above is for general information
only. Prospective investors and shareholders should consult their advisors
regarding the specific federal tax consequences of purchasing, holding and
disposing of shares, as well as the effects of state, local and foreign tax law
and any proposed tax law changes.
PERFORMANCE INFORMATION
The Company may from time to time quote various performance figures to
illustrate the Funds' past performance.
Performance quotations by investment companies are subject to rules adopted
by the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance quotations may be furnished
by the Company but must be accompanied by certain standardized performance
information computed as required by the SEC. Current yield and average annual
compounded total return quotations used by the Company are based on the
standardized methods of computing performance mandated by the SEC. An
explanation of those and other methods used by the Company to compute or express
performance follows.
TOTAL RETURN
From time to time the Funds may advertise total return. Total return figures
are based on historical earnings and are not intended to indicate future
performance. The average annual total return is determined by finding the
average annual compounded rates of return over 1-, 5-, and 10-year periods (or
over the life of the Fund) that would equate an initial hypothetical $1,000
investment to its ending redeemable value. The calculation assumes that all
dividends and distributions are reinvested when paid. The quotation assumes the
amount was completely redeemed at the end of each 1-, 5-, and 10- year period
(or over the life of the Fund) and the deduction of all applicable Company
expenses on an annual basis.
Total return figures are calculated according to the following formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical $1,000 payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of the
1-, 5-, or 10-year periods (or fractional portion thereof).
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Calculated using the formula above, the average annualized total return,
exclusive of a sales charge or deferred sales charge, for each of the Funds that
commenced operations prior to June 30, 1999 for the one, three and five year
periods ended June 30, 1999 and for the period from the inception of each Fund
through June 30, 1999 are as follows:
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR INCEPTION
INCEPTION PERIOD ENDED PERIOD ENDED THROUGH
DATE JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999
--------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Global Equity Allocation Fund
Class A Shares.......................................... 01/04/93 8.41% 15.09% 14.76%
Class B Shares(1)....................................... 08/01/95 7.50 N/A 15.41
Class C Shares(1)....................................... 01/04/93 7.61 14.23 13.92
Global Fixed Income Fund
Class A Shares.......................................... 01/04/93 0.95 5.38 5.44
Class B Shares(1)....................................... 08/01/95 .05 N/A 3.04
Class C Shares(1)....................................... 01/04/93 .05 4.53 4.61
Asian Growth Fund
Class A Shares.......................................... 06/23/93 75.69 (4.76) 0.20
Class B Shares(1)....................................... 08/01/95 74.48 N/A (8.57)
Class C Shares(1)....................................... 06/23/93 74.13 (5.50) (.55)
American Value Fund
Class A Shares.......................................... 10/18/93 17.41 21.59 18.47
Class B Shares(1)....................................... 08/01/95 16.50 N/A 21.74
Class C Shares(1)....................................... 10/18/93 16.55 20.66 17.56
Worldwide High Income Fund
Class A Shares.......................................... 04/21/94 (11.14) 8.87 9.12
Class B Shares(1)....................................... 08/01/95 (11.82) N/A 8.34
Class C Shares(1)....................................... 04/21/94 (11.83) 8.04 8.27
Emerging Markets Fund
Class A Shares.......................................... 07/06/94 23.92 N/A (1.39)
Class B Shares(1)....................................... 08/01/95 22.99 N/A (0.25)
Class C Shares(1)....................................... 07/06/94 23.09 N/A (2.09)
Latin American Fund
Class A Shares.......................................... 07/06/94 3.00 N/A 7.52
Class B Shares(1)....................................... 08/01/95 2.47 N/A 14.69
Class C Shares(1)....................................... 07/06/94 2.28 N/A 6.70
Focus Equity Fund
Class A Shares.......................................... 01/02/96 25.57 N/A 30.80
Class B Shares.......................................... 01/02/96 24.59 N/A 29.85
Class C Shares.......................................... 01/02/96 24.67 N/A 29.85
High Yield & Total Return Fund
Class A Shares.......................................... 05/01/96 1.90 N/A 9.60
Class B Shares.......................................... 05/01/96 1.28 N/A 8.80
Class C Shares.......................................... 05/01/96 1.28 N/A 8.80
International Magnum Fund
Class A Shares.......................................... 07/01/96 (5.54) N/A 6.28
Class B Shares.......................................... 07/01/96 (6.28) N/A 5.48
Class C Shares.......................................... 07/01/96 (6.25) N/A 5.47
Japanese Equity Fund
Class A Shares.......................................... N/A -- -- --
Class B Shares.......................................... N/A -- -- --
Class C Shares.......................................... N/A -- -- --
Growth and Income Fund II
Class A Shares.......................................... N/A -- -- --
Class B Shares.......................................... N/A -- -- --
Class C Shares.......................................... N/A -- -- --
European Equity Fund
Class A Shares.......................................... 9/25/98 N/A N/A 6.75
Class B Shares.......................................... 9/25/98 N/A N/A 6.26
Class C Shares.......................................... 9/25/98 N/A N/A 5.96
Equity Growth Fund
Class A Shares.......................................... 5/29/98 21.90 N/A 23.10
Class B Shares.......................................... 5/29/98 21.14 N/A 22.29
Class C Shares.......................................... 5/29/98 21.04 N/A 22.20
Global Equity Fund
Class A Shares.......................................... 10/29/97 4.05% N/A 9.24%
Class B Shares.......................................... 10/29/97 3.29 N/A 8.45
Class C Shares.......................................... 10/29/97 3.39 N/A 8.45
</TABLE>
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<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR INCEPTION
INCEPTION PERIOD ENDED PERIOD ENDED THROUGH
DATE JUNE 30, 1999 JUNE 30, 1999 JUNE 30, 1999
--------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Emerging Markets Debt Fund
Class A Shares.......................................... N/A -- -- --
Class B Shares.......................................... N/A -- -- --
Class C Shares.......................................... N/A -- -- --
Mid Cap Growth Fund
Class A Shares.......................................... N/A -- -- --
Class B Shares.......................................... N/A -- -- --
Class C Shares.......................................... N/A -- -- --
Value Fund
Class A Shares.......................................... 7/7/97 5.83 N/A 6.34
Class B Shares.......................................... 7/7/97 5.02 N/A 5.57
Class C Shares.......................................... 7/7/97 5.13 N/A 5.53
Tax Managed Global Franchise Fund
Class A Shares.......................................... 9/25/98 N/A N/A 21.22
Class B Shares.......................................... 9/25/98 N/A N/A 20.40
Class C Shares.......................................... 9/25/98 N/A N/A 21.40
</TABLE>
------------------
The Emerging Markets Debt, Growth and Income II, Japanese Equity and Mid Cap
Growth Funds had not commenced operations in the fiscal year ended June 30,
1999.
(1) The Class B shares listed above were created on May 1, 1995. The original
Class B shares were renamed Class C shares, as listed above, on May 1, 1995.
The Class B shares commenced operations on August 1, 1995.
YIELD FOR CERTAIN FUNDS
From time to time certain of the Funds may advertise yield.
Current yield reflects the income per share earned by a Fund's investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
Current yield figures are obtained using the following formula:
Yield = 2 [ ( a-b
--cd+ 1) (6) -1]
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive income distributions
d = the maximum offering price per share on the last day of the
period
The respective current yields for the following Funds 30-day period ended
June 30, 1999 were as follows:
CLASS A CLASS B CLASS C
FUND NAME SHARES SHARES SHARES
--------- -------- -------- --------
Global Fixed Income Fund 2.76% 2.14% 2.14%
Worldwide High Income Fund 11.18% 10.97% 10.97%
High Yield & Total Return Fund 8.52% 8.18% 8.18%
COMPARISONS
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding the Company may discuss
various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the composition of investments in the Company's Funds, that the
averages are generally unmanaged, and that the items included in the
calculations of such averages may not be identical to the formula used by the
Company to calculate its performance. In addition, there can be no assurance
that the Company will continue this performance as compared to such other
averages.
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GENERAL PERFORMANCE INFORMATION
Each Fund's performance will fluctuate, unlike bank deposits or other
investments which pay a fixed yield for a stated period of time. Past
performance is not necessarily indicative of future return. Actual performance
will depend on such variables as portfolio quality, average portfolio maturity,
the type of portfolio instruments acquired, changes in interest rates, portfolio
expenses and other factors. Performance is one basis investors may use to
analyze a Fund as compared to other funds and other investment vehicles.
However, performance of other funds and other investment vehicles may not be
comparable because of the foregoing variables, and differences in the methods
used in valuing their portfolio instruments, computing net asset value and
determining performance.
From time to time, a Fund's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Funds to one another in appropriate categories over specific periods of time may
also be quoted in advertising.
Fund advertising may include data on historical returns of the capital
markets in the United States compiled or published by research firms such as
Ibbotson Associates of Chicago, Illinois ("Ibbotson"), including returns on
common stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury bills,
the U.S. rate of inflation (based on the Consumer Price Index), and combinations
of various capital markets. The performance of these capital markets is based on
the returns of different indices. The Funds may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Funds. The Funds may also compare their performance to that of other
compilations or indices that may be developed and made available in the future.
The Funds may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of a Fund. In addition, advertisements may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and various investment alternatives. The Funds may also from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund investment are reinvested by being paid in additional
Fund shares, any future income or capital appreciation of a Fund would increase
the value, not only of the original investment in the Fund, but also of the
additional Fund shares received through reinvestment.
The Funds may include in its advertisements, discussions or illustrations of
the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, goal setting, questionnaires designed to help
create a personal financial profile, worksheets used to project savings needs
based on assumed rates of inflation and hypothetical rates of return and action
plans offering investment alternatives), investment management techniques,
policies or investment suitability of a Fund (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments). Advertisements and sales materials
relating to a Fund may include information regarding the background and
experience of its portfolio managers; the resources, expertise and support made
available to the portfolio managers and the portfolio managers' goals,
strategies and investment techniques.
The Funds' advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
U.S., a foreign, or the global economy and the U.S., a foreign, or the global
economy as a whole and the effects of inflation. The Funds may include
discussions and illustrations of the growth potential of various global markets
including, but not limited to, Africa, Asia, Europe, Latin America, North
America, South America, Emerging Markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market performance;
and the underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the Funds'
shareholder reports (including the investment composition of a Fund), as well as
views as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund.
The Funds may quote various measures of volatility and benchmark correlation
in advertising. The Funds may compare these measures to those of other funds.
Measures of volatility seek to compare the historical share price fluctuations
or total returns to those of a benchmark. Measures of benchmark correlation
indicate how valid a comparative benchmark may be. Measures of volatility and
correlation may be calculated using averages of historical data. A Fund may also
advertise its current interest rate sensitivity, duration, weighted average
maturity or similar maturity characteristics.
The Funds may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer
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<PAGE> 209
shares when prices are high and more shares when prices are low. While such a
strategy does not assure a profit or guard against loss in a declining market,
the investor's average cost per share can be lower than if fixed numbers of
shares are purchased at the same intervals. In evaluating such a plan, investors
should consider their ability to continue purchasing shares during periods of
low price levels.
From time to time marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Funds' marketing materials may also show each Fund's asset class
diversification, top sector holdings and largest holdings. Materials may also
mention how the Distributor believes a Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their funds in direct or sales force distribution channels. The study
showed that investors working with a professional representative have tended
over time to earn higher returns than those who invested directly. The
performance of the funds purchased by the investors in the Dalbar study and the
conclusions based thereon are not necessarily indicative of future performance
of such funds or conclusions that may result from similar studies in the future.
The Funds may also be marketed on the Internet.
OTHER INFORMATION
CUSTODY OF ASSETS
The Chase Manhattan Bank serves as the Company's custodian.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 200 East Randolph Drive, Chicago, Illinois
60601, the independent accountants for the Funds, performs an annual audit of
each Fund's financial statements.
LEGAL COUNSEL
Counsel to the Funds is Skadden, Arps, Slate, Meagher & Flom (Illinois).
56
<PAGE> 210
APPENDIX A -- DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follow:
A S&P corporate or municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration 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 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.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment -- capacity and willingness of the obligor to meet its
financial commitment on an obligation 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 creditor's rights.
1. LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meets its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
A-1
<PAGE> 211
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
C: the "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk -- such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain ratings or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
2. COMMERCIAL PAPER
A S&P 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: The 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-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: This rating is assigned to short-term debt obligations currently vulnerable
to nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired,
A-2
<PAGE> 212
unless S&P believes that such payments will be made during such grace period.
The "D" rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
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 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.
3. PREFERRED STOCK
A S&P preferred stock rating is an assessment of the capacity and willingness of
an issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the bond rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.
The preferred stock ratings are based on the following considerations:
i. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.
ii. Nature of, and provisions of, the issuer.
iii. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality, fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA".
A: An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
BB, B and CCC: Preferred stock rated "BB", "B", and "CCC" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations.
"BB" indicates the lowest degree of speculation and "CCC" the highest. While
such issues will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC: The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C: A preferred stock rated "C" is a nonpaying issue.
D: A preferred stock rated "D" is a nonpaying issue with the issuer in default
on debt instruments.
NR: This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy. PLUS (+) or MINUS (-): To provide more
detailed indications of preferred stock quality, ratings
A-3
<PAGE> 213
from "AA" to "CCC" may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
MOODY'S INVESTORS SERVICE -- a brief description of the applicable Moody's
Investors Service (Moody's) rating symbols and their meanings (as published by
Moody's Investors Service) follows:
1. LONG-TERM DEBT
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
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than 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.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
A-4
<PAGE> 214
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issues:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment or senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure 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 alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt 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, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes of the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
AAA: An issue which is rated "AAA" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
AA: An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
A: An issue which is rated "A" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the "AAA"
and "AA" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
A-5
<PAGE> 215
BAA: An issue which is rated "BAA" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
BA: An issue which is rated "BA" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
B: An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
CAA: An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
CA: An issue which is rated "CA" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
C: This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
A-6
<PAGE> 216
VAN KAMPEN AMERICAN VALUE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc. --
Van Kampen American Value Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen American Value Fund
(the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for each of the 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 June 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-1
<PAGE> 217
VAN KAMPEN AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS(89.0%)
AEROSPACE(0.8%)
(a)Alliant TechSystems, Inc. ................. 29,800 $ 2,578
(a)Gulfstream Aerospace Corp. ................ 64,900 4,385
------------
6,963
------------
BANKING (3.3%)
Bank United Corp. 'A' ........................ 105,200 4,228
Comerica, Inc. ............................... 74,200 4,410
Greenpoint Financial Corp. ................... 101,700 3,337
Hudson United Bancorp ........................ 117,900 3,610
Mellon Bank Corp. ............................ 143,700 5,227
Mercantile Bankshares Corp. .................. 44,600 1,578
New England Community Bancorp, Inc. 'A' ...... 39,800 1,097
Prime Bancshares, Inc. ....................... 117,200 2,095
TCF Financial Corp. .......................... 67,400 1,879
Western Bancorp .............................. 10,000 435
------------
27,896
------------
BUILDING (1.4%)
Vulcan Materials Co. ......................... 36,500 1,761
York International Corp. ..................... 236,900 10,142
------------
11,903
------------
CAPITAL GOODS (11.0%)
(a)Aeroflex, Inc. ........................... 265,900 5,251
(a)Asyst Technologies, Inc. ................. 193,400 5,790
(a)Atmel Corp. .............................. 160,600 4,206
Cummins Engine Co., Inc. .................... 147,300 8,414
(a)Electronics for Imaging, Inc. ............ 149,500 7,680
Flowserve Corp. ............................. 218,200 4,132
Manitowoc Co., Inc. ......................... 58,550 2,437
(a)Mentor Graphics Corp. .................... 346,200 4,436
New Holland N.V. ............................ 913,400 15,642
(a)PRI Automation, Inc. ..................... 44,100 1,599
(a)Republic Services, Inc. 'A' .............. 146,500 3,626
(a)Safety-Kleen Corp. ....................... 244,575 4,433
Stewart & Stevenson Services, Inc ........... 618,100 9,426
Tecumseh Products Co. 'A' ................... 47,500 2,877
Titan International, Inc. ................... 91,000 1,081
(a)Tower Automotive, Inc. ................... 487,800 12,408
------------
93,438
------------
CHEMICALS(3.3%)
Lubrizol Corp. .............................. 105,800 2,883
M.A. Hanna Co. .............................. 214,900 3,532
Quaker Chemical Corp. ....................... 17,400 283
(a)W.R. Grace & Co. ......................... 429,000 7,883
Wellman, Inc. ............................... 530,300 8,452
Witco Corp. ................................. 260,300 5,206
------------
28,239
------------
COMMUNICATIONS(6.8%)
A. Schulman, Inc. ........................... 85,500 1,469
ADTRAN, Inc. ................................ 210,500 7,657
(a)Advanced Radio Telecom Corp. ............. 1,200 17
(a)Aerial Communications, Inc. .............. 63,500 857
Cincinnati Bell, Inc. ....................... 143,200 3,571
(a)Digital Microwave Corp. .................. 142,400 1,816
(a)General Instrument Corp. ................. 151,000 6,417
(a)GST Telecommunications, Inc. ............. 2,000 26
(a)IDT Corp. ................................ 131,200 2,919
(a)ITC DeltaCom, Inc. ....................... 69,600 1,949
(a)Journal Register Co. ..................... 56,400 1,269
(a)Pacific Gateway Exchange, Inc. ........... 109,400 3,186
(a)Powerwave Technologies, Inc. ............. 275,000 8,869
(a)QUALCOMM, Inc. ........................... 37,600 5,396
(a)RCN Corp. ................................ 41,800 1,740
(a)Saville Systems plc ADR .................. 66,900 970
(a)VoiceStream Wireless Corp. ............... 220,200 6,262
(a)Winstar Communications, Inc. ............. 69,000 3,364
------------
57,754
------------
COMPUTERS(5.0%)
(a)BEA Systems, Inc. ........................ 248,100 7,086
(a)Complete Business Solutions .............. 25,500 458
(a)GenRad, Inc. ............................. 281,100 5,850
(a)Goto.com, Inc. ........................... 17,600 493
(a)Network Solutions, Inc. 'A' .............. 20,300 1,606
(a)Networks Associates, Inc. ................ 358,400 5,264
(a)Pinnacle Systems, Inc. ................... 404,700 13,608
Ryder Systems, Inc. ......................... 90,200 2,345
(a)SanDisk Corp. ............................ 10,600 477
(a)SoftNet Systems, Inc. .................... 112,400 3,133
(a)WorldGate Communications, Inc. ........... 37,200 1,907
------------
42,227
------------
CONSUMER--DURABLES (1.3%)
Arvin Industries, Inc. ...................... 15,300 579
Earthgrains Co. ............................. 90,200 2,328
Michael Foods, Inc. ......................... 72,300 1,699
(a)Splash Technology Holdings, Inc. ......... 149,900 1,054
(a)Sybron International Corp. ............... 185,600 5,116
------------
10,776
------------
CONSUMER--RETAIL (6.2%)
(a)Action Performance Cos., Inc. ............ 55,900 1,845
(a)American Eagle Outfitters, Inc. .......... 34,000 1,547
(a)Ames Department Stores, Inc. ............. 137,500 6,273
(a)Ann Taylor Stores Corp. .................. 109,000 4,905
Bausch & Lomb, Inc. ......................... 23,400 1,790
(a)Blyth Industries, Inc. ................... 115,300 3,963
Callaway Golf Co. ........................... 82,500 1,207
Casey's General Stores, Inc. ................ 140,300 2,104
Claire's Stores, Inc. ....................... 73,500 1,883
(a)Dress Barn, Inc. ......................... 151,800 2,429
(a)Sunglass Hut International, Inc. ......... 1,031,600 17,731
Tandy Corp. ................................. 64,400 3,148
(a)Zale Corp. ............................... 104,800 4,192
------------
53,017
------------
CONSUMER--SERVICE & GROWTH (1.8%)
(a)NOVA Corp. ............................... 23,000 575
(a)Quanta Services, Inc. .................... 303,800 13,367
(a)School Specialty, Inc. ................... 89,900 1,444
------------
15,386
------------
CONSUMER STAPLES (1.9%)
Alpharma, Inc. .............................. 167,500 5,957
(a)800-JR Cigar, Inc. ....................... 101,400 1,255
(a)Fresh Del Monte Produce, Inc. ............ 479,400 6,772
(a)General Cigar Holdings, Inc. ............. 121,400 948
(a)Omega Protein Corp. ...................... 238,500 1,252
------------
16,184
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 218
VAN KAMPEN AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC (1.9%)
(a)Cherry Corp. ............................. 2,600 $ 37
DPL, Inc. ................................... 152,600 2,804
(a)Electroglas, Inc. ........................ 70,000 1,400
Florida Progress Corp. ...................... 26,900 1,111
(a)LTX Corp. ................................ 115,400 1,536
Potomac Electric Power Co. .................. 321,400 9,461
------------
16,349
------------
ENERGY (6.5%)
(a)BJ Services Co. .......................... 179,400 5,281
Black Hills Corp. ........................... 2,700 63
Energy East Corp. ........................... 129,700 3,372
(a)Global Marine, Inc. ...................... 761,000 11,748
(a)Grey Wolf, Inc. .......................... 134,400 336
Illinova Corp. .............................. 394,400 10,747
MCN Corp. ................................... 33,700 699
Minnesota Power & Light Co. ................. 61,100 1,214
Nicor, Inc. ................................. 14,700 560
(a)Ocean Energy, Inc. ....................... 639,924 6,159
(a)Smith International, Inc. ................ 126,000 5,473
Suburban Propane Partners, L.P. ............. 38,000 741
Sunoco, Inc. ................................ 46,400 1,401
Union Pacific Resources Group,
Inc. ..................................... 124,200 2,026
Valero Energy Corp. ......................... 197,000 4,223
(a)Wisconsin Energy Corp. ................... 36,400 912
------------
54,955
------------
ENTERTAINMENT (2.3%)
(a)Bally Total Fitness Holdings
Co. ...................................... 686,500 19,480
(a)Imax Corp. ............................... 9,300 209
------------
19,689
------------
FINANCIAL SERVICES (4.3%)
(a)Billing Concepts Corp. ................... 127,500 1,426
Federated Investors, Inc. ................... 176,900 3,173
Heller Financial, Inc. ...................... 355,300 9,882
Hospitality Properties, Inc. ................ 316,500 8,585
Investors Financial Services
Corp. .................................... 49,800 1,992
(a)Knight/Trimark Group, Inc. 'A' ........... 86,600 5,283
Reliastar Financial Corp. ................... 139,600 6,107
------------
36,448
------------
HEALTH CARE (6.1%)
(a)Amerisource Health Corp. 'A' ............. 85,900 2,190
(a)Centocor, Inc. ........................... 103,900 4,844
(a)Coulter Pharmaceutical, Inc. ............. 66,300 1,496
(a)Coventry Health Care, Inc. ............... 189,900 2,077
(a)Del Global Technologies Corp. ............ 600,400 5,854
(a)Guilford Pharmaceuticals, Inc. ........... 181,000 2,308
(a)Henry Schein, Inc. ....................... 113,600 3,600
ICN Pharmaceuticals, Inc. ................... 198,600 6,392
(a)MedImmune, Inc. .......................... 21,100 1,430
(a)MedPartners, Inc. ........................ 530,900 4,015
(a)Mid Atlantic Medical Services, Inc. ...... 265,000 2,617
Teva Pharmaceutical Industries Ltd. ADR ..... 100,700 4,934
(a)Trigon Healthcare, Inc. .................. 245,700 8,937
(a)VISX, Inc. ............................... 16,200 1,283
------------
51,977
------------
INDUSTRIAL (2.4%)
(a)Cooper Cameron Corp. ..................... 190,700 $ 7,068
(a)Global Industries Ltd. ................... 396,400 5,079
(a)Nabors Industries, Inc. .................. 253,600 6,197
(a)Precision Drilling Corp. ................. 97,100 1,851
ProLogis Trust .............................. 9,600 195
------------
20,390
------------
INSURANCE (1.6%)
Allmerica Financial Corp. ................... 41,500 2,524
American Medical Security Group ............. 241,300 2,081
Everest Reinsurance Holdings,
Inc. ..................................... 87,400 2,851
Nationwide Health Properties,
Inc. ..................................... 16,300 311
Reinsurance Group of America,
Inc ...................................... 85,400 3,010
XL Capital Ltd. 'A' ......................... 42,600 2,407
------------
13,184
------------
METALS (2.7%)
Agnico-Eagle Mines Ltd. ..................... 169,600 1,049
Ashann Goldfields ........................... 140,300 973
Barrick Gold Corp. .......................... 158,000 3,061
(a)Lone Star Technologies, Inc. ............. 27,600 490
(a)Mueller Industries, Inc. ................. 87,400 2,966
(a)Steel Dynamics, Inc. ..................... 148,400 2,296
(a)Stillwater Mining Co. .................... 82,950 2,712
Tosco Corp. ................................. 359,700 9,330
------------
22,877
------------
PAPER & PACKAGING (1.1%)
Boise Cascade Corp. ......................... 23,600 1,015
(a)Valassis Communications, Inc. ............ 231,050 8,462
------------
9,477
------------
REAL ESTATE (5.4%)
AMB Property Corp. .......................... 598,900 14,074
Arden Realty Group, Inc. .................... 210,500 5,184
(a)Cadillac Fairview Corp. .................. 21,700 410
Cousins Properties, Inc. .................... 50,100 1,694
Crescent Real Estate Equities Co. REIT ...... 235,100 5,584
Developers Diversified Realty Corp. ......... 155,700 2,588
Duke Realty Investment, Inc. ................
REIT ........................................ 207,900 4,691
First Washington Realty Trust, Inc. ......... 35,000 818
Glenborough Realty Trust, Inc. .............. 26,500 464
JDN Realty Corp. ............................ 57,000 1,275
Lasalle Hotel Properties REIT ............... 36,100 553
Liberty Property Trust REIT ................. 48,600 1,209
Manufactured Home Communities, Inc. REIT .... 58,500 1,521
(a)NBTY, Inc. ............................... 382,700 2,487
Newhall Land & Farming Co., L.P. ............ 28,800 709
Radian Group, Inc. .......................... 29,700 1,450
Simon Property Group, Inc. .................. 49,300 1,251
(a)Wellsford Properties, Inc. ............... 5,250 56
------------
46,018
------------
RESTAURANTS (0.6%)
CKE Restaurants, Inc. ....................... 240,100 3,902
(a)Friendly Ice Cream Corp. ................. 152,700 1,221
------------
5,123
------------
SERVICES (2.6%)
(a)AC Nielsen Corp. ......................... 136,500 4,129
(a)Corinthian Colleges, Inc. ................ 29,000 547
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 219
VAN KAMPEN AMERICAN VALUE FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------
<S> <C> <C>
</TABLE>
SERVICES (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------
<S> <C> <C>
(a)Innotrac Corp. ........................... 48,600 $ 984
Luby's, Inc. ................................ 190,300 2,855
Ogden Corp. ................................. 26,800 722
Olsten Corp. ................................ 305,300 1,927
(a)Snyder Communications, Inc. .............. 180,700 5,918
(a)Tetra Technologies, Inc. ................. 525,900 4,832
------------
21,914
------------
TECHNOLOGY (2.6%)
Adobe Systems, Inc. ......................... 21,800 1,791
(a)Barnesandnoble.com, Inc. ................. 57,300 1,031
(a)Galileo International, Inc. .............. 223,300 11,933
Galileo Technology Ltd. ..................... 36,300 1,645
(a)Go2Net, Inc. ............................. 10,900 1,001
(a)Veritas DGC, Inc. ........................ 135,500 2,481
(a)Webtrends, Inc. .......................... 42,200 1,947
------------
21,829
------------
TRANSPORTATION (4.5%)
Air Express International Corp. ............. 210,700 5,347
Canadian National Railway Co. ............... 42,900 2,874
CNF Transportation, Inc. .................... 75,700 2,905
(a)Gaylord Container Corp. 'A' .............. 1,303,100 10,343
(a)Jevic Transportation, Inc. ............... 15,000 208
(a)Navistar International Corp. ............. 99,800 4,990
SkyWest, Inc. ............................... 59,100 1,474
Teekay Shipping Corp. ....................... 70,400 1,241
(a)U.S. Xpress Enterprises, Inc. 'A' ........ 55,700 595
Wabash National Corp. ....................... 372,800 7,223
Wisconsin Central Transportation Corp ....... 78,700 1,486
------------
38,686
------------
</TABLE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES (1.6%)
Allegheny Energy, Inc. ...................... 84,100 $ 2,697
CalEnergy Co., Inc. ......................... 207,400 7,181
Eastern Enterprises ......................... 15,500 616
Montana Power Co. ........................... 26,000 1,833
Public Service Co. of New Mexico ............ 45,200 898
SJW Corp. ................................... 5,300 422
------------
13,647
------------
TOTAL LONG-TERM INVESTMENTS (89.0%) (COST $674,747) 756,346
------------
<CAPTION>
PAR
VALUE
(000)
---------
<S> <C> <C>
SHORT-TERM INVESTMENT (12.5%)
REPURCHASE AGREEMENT (12.5%)
Chase Securities, Inc., 4.55%, dated $ 106,601
6/30/99, due 7/1/99, to be repurchased
at $106,614, collateralized by $111,955
Federal National Mortgage Association,
5.125%, due 2/13/04, valued at $109,546
(COST $106,601)................................... 106,601
---------
TOTAL INVESTMENTS (101.5%) (COST $781,348).............. 862,947
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.5%)........... (12,684)
---------
NET ASSETS (100%)....................................... $ 850,263
=========
</TABLE>
----------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
ADR -- American Depositary Receipt
REIT -- Real Estate Investment Trust
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 220
VAN KAMPEN AMERICAN VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
(000)
-------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $781,348) (including repurchase
agreement of $106,601) ................................ $ 862,947
Cash ..................................................... 7
Receivable for:
Investments Sold ...................................... 24,576
Fund Shares Sold ...................................... 4,800
Dividends ............................................. 351
Interest .............................................. 14
Other .................................................... 27
---------
Total Assets .......................................... 892,722
---------
LIABILITIES:
Payable for:
Investments Purchased ................................. 37,629
Fund Shares Redeemed .................................. 3,038
Distribution Fees ..................................... 871
Investment Advisory Fees .............................. 521
Administrative Fees ................................... 154
Transfer Agent Fees ................................... 93
Shareholder Reporting Expenses ........................ 64
Professional Fees ..................................... 40
Custody Fees .......................................... 26
Directors' Fees and Expenses .......................... 21
Other ................................................. 2
---------
Total Liabilities ..................................... 42,459
---------
NET ASSETS ............................................... $ 850,263
=========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) ........................................ $ 36
Paid in Capital in Excess of Par ......................... 730,047
Unrealized Appreciation on Investments ................... 81,599
Accumulated Net Realized Gain ............................ 38,603
Accumulated Net Investment Loss .......................... (22)
---------
NET ASSETS .................................................. $ 850,263
=========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $343,003,465 and 14,545,320 Shares
Outstanding) .......................................... $ 23.58
=========
Maximum Sales Charge ..................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100 / (100 - maximum sales charge)) ........... $ 25.02
=========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $341,908,423 and 14,721,507 Shares
Outstanding)* ......................................... $ 23.23
=========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $165,351,391 and 7,116,164 Shares
Outstanding)* ......................................... $ 23.24
=========
</TABLE>
---------------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 221
VAN KAMPEN AMERICAN VALUE FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
(000)
----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ............................................. $ 6,513
Interest .............................................. 3,071
---------
Total Income ........................................ 9,584
---------
EXPENSES:
Investment Advisory Fees .............................. 5,367
Distribution Fees (Attributed to Classes A, B, and C of
$540, $2,840, and $1,313, respectively) ............. 4,693
Administrative Fees ................................... 1,590
Transfer Agent Fees ................................... 326
Custodian Fees ........................................ 197
Shareholder Reports ................................... 170
Professional Fees ..................................... 82
Filing and Registration Fees .......................... 67
Directors' Fees and Expenses .......................... 16
Other ................................................. 17
---------
Total Expenses ...................................... 12,525
---------
Net Investment Income/Loss .......................... (2,941)
---------
NET REALIZED GAIN/LOSS ON:
Investments ........................................... 44,491
---------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ............................... 16,746
---------
End of the Period
Investments ......................................... 81,599
---------
Net Unrealized Appreciation/Depreciation During the
Period ................................................ 64,853
---------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ............................. 109,344
---------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................ $ 106,403
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 222
VAN KAMPEN AMERICAN VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss ............................... $ (2,941) $ (1,791)
Net Realized Gain/Loss ................................... 44,491 45,496
Net Unrealized Appreciation/Depreciation ................. 64,853 4,044
--------- ---------
Net Increase/Decrease in Net Assets Resulting from
Operations ............................................. 106,403 47,749
--------- ---------
DISTRIBUTIONS:
In Excess of Net Investment Income:
Class A .................................................. -- (122)
Class B .................................................. -- (29)
Class C .................................................. -- (25)
--------- ---------
-- (176)
--------- ---------
Net Realized Gain:
Class A .................................................. (12,659) (5,303)
Class B .................................................. (17,437) (5,203)
Class C .................................................. (7,981) (3,629)
--------- ---------
(38,077) (14,135)
--------- ---------
Net Decrease in Net Assets Resulting from Distributions (38,077) (14,311)
--------- ---------
CAPITAL SHARE TRANSACTIONS(1):
Subscribed ............................................... 344,367 558,778
Distributions Reinvested ................................. 31,597 12,507
Redeemed ................................................. (211,364) (69,473)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ..................................... 164,600 501,812
--------- ---------
Total Increase/Decrease in Net Assets .................... 232,926 535,250
NET ASSETS--Beginning of Period ............................. 617,337 82,087
--------- ---------
NET ASSETS--End of Period (Including
accumulated/distributions in excess of net investment
income/loss of $(22) and $(6), respectively) ............. $ 850,263 $ 617,337
========= =========
--------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
Shares:
Subscribed ............................................. 8,979 9,937
Distributions Reinvested ............................... 579 269
Redeemed ............................................... (5,327) (1,843)
--------- ---------
Net Increase/Decrease in Class A Shares Outstanding ...... 4,231 8,363
========= =========
Dollars:
Subscribed ............................................. $ 190,079 $ 205,042
Distributions Reinvested ............................... 11,025 5,049
Redeemed ............................................... (104,033) (37,455)
--------- ---------
Net Increase/Decrease .................................... $ 97,071 $ 172,636
========= =========
Ending Paid in Capital .................................. $ 295,061+ $ 197,990
========= =========
Class B:
Shares:
Subscribed ............................................. 4,895 12,495
Distributions Reinvested ............................... 769 239
Redeemed ............................................... (3,673) (875)
--------- ---------
Net Increase/Decrease in Class B Shares Outstanding ...... 1,991 11,859
========= =========
Dollars:
Subscribed ............................................. $ 98,965 $ 257,479
Distributions Reinvested ............................... 14,494 4,461
Redeemed ............................................... (70,265) (18,025)
--------- ---------
Net Increase/Decrease .................................... $ 43,194 $ 243,915
========= =========
Ending Paid in Capital ................................... $ 301,083+ $ 257,889
========= =========
Class C:
Shares:
Subscribed ............................................. 2,707 4,675
Distributions Reinvested ............................... 322 160
Redeemed ............................................... (1,921) (671)
--------- ---------
Net Increase/Decrease in Class C Shares Outstanding ...... 1,108 4,164
========= =========
Dollars:
Subscribed ............................................. $ 55,323 $ 96,257
Distributions Reinvested ............................... 6,078 2,997
Redeemed ............................................... (37,066) (13,993)
--------- ---------
Net Increase/Decrease .................................... $ 24,335 $ 85,261
========= =========
Ending Paid in Capital ................................... $ 134,054+ $ 109,719
========= =========
</TABLE>
----------
<TABLE>
<S> <C>
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 223
VAN KAMPEN AMERICAN VALUE FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------- --------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
----------------------------------------------------- ---------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995 1999# 1998# 1997
----------------------------------------------------------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ... $ 21.339 $ 17.59 $ 14.63 $ 12.89 $ 11.70 $ 21.196 $ 17.59 $ 14.63
-------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .......... 0.006 (0.02) 0.20 0.27 0.27 (0.142) (0.17) 0.09
Net Realized and Unrealized
Gain/Loss ......................... 3.437 4.84 4.05 1.94 1.44 3.371 4.83 4.05
-------- -------- -------- -------- -------- -------- -------- --------
Total from Investment Operations .... 3.443 4.82 4.25 2.21 1.71 3.229 4.66 4.14
-------- -------- -------- -------- -------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income ............... -- (0.03) (0.20) (0.27) (0.28) -- (0.01) (0.09)
In Excess of Net Investment Income .. -- (0.00)++ (0.00)++ (0.01) -- -- (0.00)++ (0.00)++
Net Realized Gain ................... (1.200) (1.04) (1.09) (0.19) (0.24) (1.200) (1.04) (1.09)
-------- -------- -------- -------- -------- -------- -------- --------
Total Distributions ................. (1.200) (1.07) (1.29) (0.47) (0.52) (1.200) (1.05) (1.18)
NET ASSET VALUE, END OF PERIOD ......... $ 23.582 $ 21.34 $ 17.59 $ 14.63 $ 12.89 $ 23.225 $ 21.20 $ 17.59
======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN/(1) ....................... 17.41% 28.26% 30.68% 17.41% 15.01% 16.50% 27.30% 29.77%
======== ======== ======== ======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ...... $343,004 $220,100 $ 34,331 $ 19,674 $ 20,675 $341,908 $269,836 $ 15,331
Ratio of Expenses to Average Net
Assets .............................. 1.49% 1.50% 1.50% 1.50% 1.50% 2.24% 2.25% 2.25%
Ratio of Net Investment Income/Loss to
Average Net Assets .................. 0.03% (0.09)% 1.25% 1.90% 2.29% (0.72)% (0.84)% 0.40%
Portfolio Turnover Rate ................ 283% 207% 73% 41% 23% 283% 207% 73%
-----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income/Loss ....................... $ -- $ 0.02 $ 0.04 $ 0.04 $ 0.05 $ -- $ 0.02 $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets ...... -- 1.58% 1.76% 1.81% 1.96% -- 2.33% 2.48%
Net Investment Income/Loss to Average
Net Assets ........................ -- (0.18)% 0.98% 1.59% 1.83% -- (0.93)% 0.14%
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
AUGUST 1, 1995+
TO JUNE 30,
SELECTED PER SHARE DATA AND RATIOS 1996
----------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ... $ 13.37
--------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .......... 0.15
Net Realized and Unrealized
Gain/Loss ......................... 1.46
--------
Total from Investment Operations .... 1.61
--------
DISTRIBUTIONS
Net Investment Income ............... (0.15)
In Excess of Net Investment Income .. (0.01)
Net Realized Gain ................... (0.19)
--------
Total Distributions ................. (0.35)
NET ASSET VALUE, END OF PERIOD ......... $ 14.63
========
TOTAL RETURN/(1) ....................... 12.29%*
========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ...... $ 2,485
Ratio of Expenses to Average Net
Assets .............................. 2.25%
Ratio of Net Investment Income/Loss to
Average Net Assets .................. 1.18%
Portfolio Turnover Rate ................ 41%
----------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment
Income/Loss ....................... $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets ...... 2.61%
Net Investment Income/Loss to Average
Net Assets ........................ 0.82%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------
YEAR ENDED JUNE 30,
-------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................ $ 21.205 $ 17.59 $ 14.64 $ 12.89
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ................................ (0.142) (0.17) 0.08 0.16
Net Realized and Unrealized Gain/Loss ..................... 3.373 4.83 4.05 1.94
------------ ------------ ------------ ------------
Total from Investment Operations .......................... 3.231 4.66 4.13 2.10
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income ..................................... -- (0.01) (0.09) (0.15)
In Excess of Net Investment Income ........................ -- (0.00)++ (0.00)++ (0.01)
Net Realized Gain ......................................... (1.200) (1.04) (1.09) (0.19)
------------ ------------ ------------ ------------
Total Distributions ....................................... (1.200) (1.05) (1.18) (0.35)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD .............................. $ 23.236 $ 21.20 $ 17.59 $ 14.64
============ ============ ============ ============
TOTAL RETURN/(1) ............................................ 16.55% 27.28% 29.67% 16.50%
============ ============ ============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........................... $ 165,351 $ 127,401 $ 32,425 $ 21,193
Ratio of Expenses to Average Net Assets ..................... 2.24% 2.25% 2.25% 2.25%
Ratio of Net Investment Income/Loss to Average Net Assets ... (0.72)% (0.84)% 0.49% 1.17%
Portfolio Turnover Rate ..................................... 283% 207% 73% 41%
---------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment Income/Loss ........... $ -- $ 0.02 $ 0.04 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets ............................ -- 2.33% 2.47% 2.58%
Net Investment Income/Loss to Average Net Assets .......... -- (0.92)% 0.22% 0.84%
<CAPTION>
CLASS C
-------------------
YEAR ENDED JUNE 30,
-------------------
SELECTED PER SHARE DATA AND RATIOS 1995
---------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........................ $ 11.69
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ................................ 0.17
Net Realized and Unrealized Gain/Loss ..................... 1.44
------------
Total from Investment Operations .......................... 1.61
------------
DISTRIBUTIONS
Net Investment Income ..................................... (0.17)
In Excess of Net Investment Income ........................ --
Net Realized Gain ......................................... (0.24)
------------
Total Distributions ....................................... (0.41)
------------
NET ASSET VALUE, END OF PERIOD .............................. $ 12.89
============
TOTAL RETURN/(1) ............................................ 14.13%
============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........................... $ 13,867
Ratio of Expenses to Average Net Assets ..................... 2.25%
Ratio of Net Investment Income/Loss to Average Net Assets ... 1.54%
Portfolio Turnover Rate ..................................... 23%
---------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment Income/Loss ........... $ 0.05
Ratios Before Expense Limitation:
Expenses to Average Net Assets ............................ 2.71%
Net Investment Income/Loss to Average Net Assets .......... 1.08%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Non-Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share.
(1) Total return is calculated exclusive of sales charges or
deferred sales charges.
# Changes per share are based upon monthly average shares
outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE> 224
VAN KAMPEN AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen American Value Fund (the "Fund") is organized as a separate
diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation, which
is registered as an open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective seeks high
total return by investing in equity securities of small-
to medium-sized corporations. The Fund commenced operations on October 18, 1993.
The Fund currently offers three classes of shares, Class A, Class B, and
Class C shares. Class A shares are sold with a front-end sales charge of up to
5.75%. For certain purchases of Class A shares, the front-end sales charge may
be waived and a contingent deferred sales charge of 1.00% imposed in the event
of certain redemptions within one year of the purchase. Class B and Class C
shares are offered without a front end sales charge, but are subject to a
contingent deferred sales charge ("CDSC"). Class B shares will automatically
convert to Class A shares after the eighth year following purchase. The CDSC
will be imposed on most redemptions made within five years of the purchase for
Class B shares and one year of the purchase for Class C shares as detailed in
the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
-----------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First ............. 5.00% 1.00%
Second ............ 4.00% None
Third ............. 3.00% None
Fourth ............ 2.50% None
Fifth ............. 1.50% None
Thereafter ........ None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights. The Fund began offering the current Class B shares on August 1,
1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date.
Interest income is recognized on an accrual basis except where collection is in
doubt. Income, expenses (other than class specific expenses), and realized and
unrealized gains or losses are allocated to each class of shares based upon
their relative net assets. Distributions from the Fund are recorded on the
ex-distribution date.
4. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
Net capital losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 to June 30, 1999 the Fund incurred and elected
to defer until July 1, 1999, for U.S. Federal income tax purposes, net capital
losses of approximately $599,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
----- ----- ----- -------------
<S> <C> <C> <C>
$783,848 $105,035 $(25,936) $79,099
</TABLE>
5. Distribution of Income and Gains: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital. For the year ended June
30, 1999, approximately $2,810,000 has been reclassified from accumulated net
realized gain/loss and approximately $115,000 has been reclassified from paid in
capital, totaling approximately $2,925,000 posted to accumulated net investment
income/loss.
F-9
<PAGE> 225
VAN KAMPEN AMERICAN VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.), Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), and Miller Anderson & Sherrerd LLP, wholly
owned subsidiaries of Morgan Stanley Dean Witter & Co., provide the Fund with
investment advisory services at a fee paid monthly and calculated at the annual
rates based on average daily net assets as indicated below. The Adviser has
agreed to reduce advisory fees payable to it and to reimburse the Fund, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
0.85% 1.50% 2.25%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$31,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $1,637,168 for Class A shares and deferred sales charges of $11,295,
$1,191,362, and $79,195 for Class A shares, Class B shares, and Class C shares,
respectively.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $1,731,740,000 and sales of approximately
$1,633,241,000 of investment securities other than long-term U.S. government
securities and short-term investments. There were no purchases or sales of
long-term U.S. government securities.
F-10
<PAGE> 226
VAN KAMPEN ASIAN GROWTH FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Asian Growth Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Asian Growth Fund (the
"Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the results of
its operations, the changes in its net assets and the financial highlights for
each of the 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 June 30, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-11
<PAGE> 227
VAN KAMPEN ASIAN GROWTH FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (91.5%)
HONG KONG (30.1%)
Asia Satellite Telecommunications
Holdings Ltd. ............................................. 127,000 $ 299
Axa China Region Ltd. ....................................... 904,700 723
Cathay Pacific Airways Ltd. ................................. 920,000 1,411
Cheung Kong Holdings Ltd. ................................... 733,000 6,519
China Telecom Ltd. .......................................... 458,000 1,272
Citic Pacific Ltd. .......................................... 396,400 1,265
CLP Holdings Ltd. ........................................... 260,200 1,264
Cosco Pacific Ltd. .......................................... 776,200 645
Dao Heng Bank Group Ltd. .................................... 384,900 1,726
Hengan International Group Co., Ltd. ........................ 1,220,000 617
Hong Kong & China Gas Co., Ltd. ............................. 15,590 23
Hong Kong Telecommunications Ltd. ........................... 2,432,900 6,319
Hutchison Whampoa Ltd. ...................................... 1,186,300 10,742
Johnson Electric Holdings Ltd. .............................. 118,000 487
Kerry Properties Ltd. ....................................... 341,000 451
Li & Fung Ltd. .............................................. 735,000 1,762
New World Development Co., Ltd. ............................. 536,000 1,606
New World Infrastructure Ltd. ............................... 281,550 530
(a)Shandong International Power
Development Co., Ltd. ..................................... 1,626,000 367
SmarTone Telecommunications Holdings Ltd. ................... 572,900 2,038
Sun Hung Kai Properties Ltd. ................................ 766,000 6,985
Swire Pacific Ltd. 'A' ...................................... 408,000 2,019
Television Broadcasts Ltd. .................................. 505,000 2,369
Yanzhou Coal Mining Co., Ltd. 'H' ........................... 1,052,000 377
----------
51,816
----------
INDIA (1.4%)
Castrol Ltd. ................................................ 100 1
Digital Equipment Ltd. ...................................... 32,000 315
Hero Honda Motors Ltd. ...................................... 1,477 37
ICICI Ltd. .................................................. 550,000 931
NIIT Ltd. ................................................... 5,350 251
Reckitt & Coleman of India Ltd. ............................. 550 6
SmithKline Beecham Consumer Healthcare Ltd. ................. 50 1
Software Solution Integrated Ltd. ........................... 25,000 249
Tata Infotech Ltd. .......................................... 24,363 597
----------
2,388
----------
INDONESIA (2.2%)
PT Gudang Garam Tbk (Foreign) ............................... 570,500 1,549
PT Semen Gresik Tbk ......................................... 270,500 589
PT Telekomunikasi Indonesia ADR ............................. 113,184 1,408
Unilever Indonesia Tbk (Foreign) ............................ 34,200 199
----------
3,745
----------
KOREA (20.1%)
Daewoo Securities, Co. ...................................... 33,290 647
Good Morning Securities Co., Ltd. ........................... 67,740 418
Hana Bank ................................................... 51,740 760
Hankuk Glass Industry Co., Ltd. ............................. 16,740 448
Housing & Commercial Bank ................................... 57,530 1,814
Kookmin Bank ................................................ 33,060 671
(a)Kookmin Bank GDR ......................................... 13,600 277
Koram Bank .................................................. 59,960 751
Korea Chemical Co., Ltd. .................................... 8,860 796
Korea Electric Power Corp. .................................. 22,340 928
Korea Electric Power Corp. ADR .............................. 239,490 4,910
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Korea Exchange Bank ......................................... 138,110 $ 776
(b)Korea Telecom Corp. ...................................... 20,220 1,342
(a)Korea Telecom Corp. ADR .................................. 97,900 3,916
LG Chemical Ltd. ............................................ 17,390 473
LG Electronics .............................................. 37,810 1,045
Pohang Iron & Steel Co., Ltd. ADR ........................... 44,900 1,510
(b)Pohang Iron & Steel Co., Ltd. (Foreign) .................. 17,579 2,164
Samsung Electro-Mechanics Co. ............................... 36,152 1,249
Samsung Electronics Co. (Foreign) ........................... 49,376 5,418
Samsung Fire & Marine Insurance ............................. 2,642 1,860
(b)SK Telecom Co., Ltd. ..................................... 604 829
SK Telecom Co., Ltd. ADR .................................... 39,920 679
SK Corp. .................................................... 35,799 1,030
----------
34,711
----------
MALAYSIA (5.4%)
Carlsberg Brewery Malaysia Bhd .............................. 542,000 1,541
Commerce Asset-Holding Bhd .................................. 199,000 492
Malayan Banking Bhd ......................................... 445,400 1,336
Nestle Bhd .................................................. 262,000 1,034
Public Bank Bhd ............................................. 643,000 489
Rothmans of Pall Mall Bhd ................................... 318,000 2,406
Telekom Malaysia Bhd ........................................ 563,000 2,104
----------
9,402
----------
PHILIPPINES (2.1%)
(a)La Tondena Distillers, Inc. .............................. 452,850 537
Manila Electric Co. 'B' ..................................... 149,230 538
Philippine Long Distance Telephone Co. 'B' ADR .............. 18,090 553
(a)Philippine National Bank ................................. 150,680 409
San Miguel Corp. 'B' ........................................ 509,905 1,114
SM Prime Holdings, Inc. 'B' ................................. 1,891,680 428
----------
3,579
----------
SINGAPORE (9.9%)
(a)Asia Pulp & Paper Co., Ltd. ADR .......................... 40,500 390
City Developments Ltd. ...................................... 203,000 1,300
Gul Technologies ............................................ 333,000 317
NatSteel Electronics Ltd. ................................... 378,000 1,654
Oversea-Chinese Banking Corp., Ltd. (Foreign) ............... 204,000 1,702
Overseas Union Bank Ltd. (Foreign) .......................... 155,000 747
Parkway Holdings Ltd. ....................................... 210,000 518
Rothmans Industries Ltd. .................................... 49,000 412
Sembcorp Logistics Ltd. ..................................... 220,900 869
(a)Singapore Airlines Ltd. .................................. 3,184,000 2,843
Singapore Press Holdings Ltd. ............................... 144,200 2,456
Singapore Technology Engineering Ltd. ....................... 553,000 627
United Overseas Bank Ltd. (Foreign) ......................... 187,000 1,307
Venture Manufacturing Ltd. .................................. 256,800 1,976
----------
17,118
----------
TAIWAN (17.1%)
(a)Advanced Semiconductor
Engineering, Inc. ......................................... 210,000 709
(a)Asia Cement Corp. ........................................ 360,000 323
Asustek Computer, Inc. ...................................... 268,396 3,025
Bank Sinopac ................................................ 910,000 634
Cathay Life Insurance Co., Ltd. ............................. 226,000 812
China Steel Corp. ........................................... 1,170,100 884
China Steel Corp. GDR ....................................... 21,105 327
(a)Chinatrust Business Bank ................................. 654,000 786
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 228
VAN KAMPEN ASIAN GROWTH FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
--------------------------------------------------------------------------------
<S> <C> <C>
TAIWAN (CONT.)
Compal Electronics, Inc. ...................... 339,218 $ 1,334
(a)Compeq Manufacturing Co., Ltd. ............. 62,700 355
(a)CTCI Corp. ................................. 284,000 337
(a)E. Sun Commercial Bank ..................... 853,000 475
(a)Evergreen Marine Corp. ..................... 255,000 319
(a)Far Eastern International Bank ............. 860,000 315
(a)Far Eastern Textile Ltd. ................... 1,117,343 1,660
First Commercial Bank ......................... 167,000 318
Formosa Chemicals & Fibre Corp. ............... 404,000 493
(a)Hon Hai Precision Industry ................. 338,400 3,059
Hua Nan Commercial Bank ....................... 158,000 313
International Commercial Bank of China ........ 714,000 924
Nan Ya Plastic Corp. .......................... 713,000 1,181
(a)President Chain Store Corp. ................ 199,000 675
Quanta Computer Inc. .......................... 57,120 684
Siliconware Precision Industries Co............ 327,696 624
(a)Taishin International Bank ................. 1,178,000 875
(a)Taiwan Semiconductor Co. ................... 1,565,935 5,987
(a)United Micro Electronics Corp., Ltd......... 591,650 1,273
United World Chinese Commercial Bank .......... 302,000 467
Yang Ming Marine Transport .................... 481,000 313
---------
29,481
---------
THAILAND (3.2%)
Advanced Information Services Public
Co., Ltd. (Foreign) ......................... 99,800 1,353
BEC World Public Co., Ltd.
(Foreign) ................................... 151,100 942
Delta Electronics Public Co., Ltd.
(Foreign) ................................... 78,855 663
(b)Golden Land Property Development
Public Co., Ltd. ............................ 745,000 439
Shin Corp. Public Co., Ltd.
(Foreign) ................................... 40,300 188
Siam Cement Public Co., Ltd.
(Foreign) ................................... 22,900 695
Siam City Cement Public Co., Ltd.
(Foreign) ................................... 162,733 671
Thai Farmer's Bank Public Co., Ltd.
(Foreign) ................................... 189,300 585
---------
5,536
---------
TOTAL COMMON STOCKS .............................................. 157,776
---------
PREFERRED STOCK (0.1%)
THAILAND (0.1%)
(a)Siam Commercial Bank Public Co.,
Ltd. 5.25% (Foreign) ........................ 114,300 163
---------
<CAPTION>
NO. OF
RIGHTS
------
<S> <C> <C>
RIGHT (0.0%)
KOREA (0.0%)
(a,b)SK Telecom Co., Ltd., expiring
7/27/99 ......................................... 604 76
----------
<CAPTION>
NO. OF
WARRANTS
----------
<S> <C> <C>
WARRANTS (1.2%)
HONG KONG (0.3%)
(a)Credit Lyonnais HSBC Holdings,
expiring 10/13/99 .............................. 919,000 462
----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
WARRANTS (000)
--------------------------------------------------------------------------------
<S> <C> <C>
PHILIPPINES (0.2%)
(a)Jollibee Food, expiring
3/24/03 ...................................... 536,000 $ 275
----------
SINGAPORE (0.3%)
(a)Oversea-Chinese Banking Corp.,
expiring 3/28/02 ............................. 708,000 528
----------
THAILAND (0.4%)
(a)Siam Commercial Bank Public Co.,
Ltd., expiring 5/10/02 ....................... 1,066,300 686
----------
TOTAL WARRANTS ...................................... 1,951
----------
<CAPTION>
PAR
VALUE
(000)
---------
CONVERTIBLE DEBENTURE (0.7%)
<S> <C> <C>
SINGAPORE (0.7%)
Finlayson Global Corp. 0.00%,
2/19/04 ........................................ $ 780 1,178
----------
TOTAL LONG-TERM INVESTMENTS (93.5%) (COST $115,649) ... 161,144
----------
SHORT-TERM INVESTMENT (7.5%)
REPURCHASE AGREEMENT (7.5%)
Chase Securities, Inc., 4.55%, dated 12,988
6/30/99, due 7/1/99, to be repurchased
at $12,990 collateralized by $13,640
Federal National Mortgage
Association, 5.125%, due 2/13/04,
valued at $13,347 (COST $12,988) .............. 12,988
----------
TOTAL INVESTMENTS IN SECURITIES (101.0%) (COST
$128,637) ............................................ 174,132
----------
FOREIGN CURRENCY (0.7%) (COST $1,318) ................ 1,310
----------
TOTAL INVESTMENTS (101.7%) (COST $129,955) ........... 175,442
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.7%) ........ (3,023)
----------
NET ASSETS (100%) .................................... $ 172,419
==========
</TABLE>
----------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(b) -- Security valued at fair value -- see note A-1 to
financial statements.
ADR -- American Depositary Receipt
GDR -- Global Depositary Receipt
</TABLE>
--------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- ---------- ----------
<S> <C> <C>
Finance ............................................. $ 44,637 25.9%
Services ............................................ 37,762 21.9
Capital Equipment ................................... 26,971 15.6
Consumer Goods ...................................... 17,049 9.9
Multi-Industry ...................................... 14,345 8.3
Materials ........................................... 12,350 7.2
Energy .............................................. 8,030 4.7
---------- ----------
$ 161,144 93.5%
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE> 229
VAN KAMPEN ASIAN GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost $128,637) ......... $ 174,132
Foreign Currency (Cost $1,318) .............................. 1,310
Receivable for:
Fund Shares Sold .......................................... 2,168
Dividends ................................................. 468
Investments Sold .......................................... 327
Foreign Withholding Tax Reclaim ........................... 41
Interest Receivable ....................................... 2
Other ......................................................... 38
---------
Total Assets ............................................ 178,486
---------
LIABILITIES:
Payable for:
Investments Purchased ..................................... 3,488
Fund Shares Redeemed ...................................... 796
Deferred Country Tax ...................................... 670
Bank Overdraft ............................................ 552
Custody Fees .............................................. 157
Distribution Fees ......................................... 155
Investment Advisory Fees .................................. 99
Shareholder Reporting Expenses ............................ 35
Professional Fees ......................................... 35
Administrative Fees ....................................... 32
Transfer Agent Fees ....................................... 32
Directors' Fees and Expenses .............................. 14
Other ........................................................ 2
---------
Total Liabilities ....................................... 6,067
---------
NET ASSETS .................................................... $ 172,419
=========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) ............................................ $ 15
Paid in Capital in Excess of Par ............................ 254,175
Net Unrealized Appreciation on Investments and Foreign
Currency Translations* .................................... 44,850
Accumulated Net Investment Loss ............................. (25)
Accumulated Net Realized Loss ............................... (126,596)
---------
NET ASSETS .................................................... $ 172,419
=========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $88,808,301 and 7,733,211 Shares
Outstanding) .............................................. $ 11.48
=========
Maximum Sales Charge ........................................ 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100/ (100 - maximum sales charge)) ................ $ 12.18
=========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $42,905,212 and 3,897,898 Shares
Outstanding)** ............................................ $ 11.01
=========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $40,705,672 and 3,709,699 Shares
Outstanding)** ............................................ $ 10.97
=========
</TABLE>
----------
<TABLE>
<S> <C>
* Net of accrual for deferred country tax of approximately
U.S. $632,000.
** Redemption price may be subject to a contingent deferred
sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-14
<PAGE> 230
VAN KAMPEN ASIAN GROWTH FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
--------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ............................................. $ 2,517
Interest .............................................. 163
Less Foreign Taxes Withheld ........................... (195)
--------
Total Income ........................................ 2,485
--------
EXPENSES:
Investment Advisory Fees .............................. 1,108
Distribution Fees (Attributed to Classes A, B, and
C of $130, $291, and $295, respectively) ............ 716
Administrative Fees ................................... 287
Custodian Fees ........................................ 250
Shareholder Reports ................................... 83
Transfer Agent Fees ................................... 82
Professional Fees ..................................... 39
Filing & Registration Fees ............................ 36
Interest Expense ...................................... 36
Country Tax Expense ................................... 28
Directors' Fees and Expenses .......................... 13
Other ................................................. 17
--------
Total Expenses ...................................... 2,695
Less Expense Reductions ............................. (85)
--------
Net Expenses ........................................ 2,610
--------
Net Investment Income/Loss .............................. (125)
--------
NET REALIZED GAIN/LOSS ON:
Investments ........................................... 280
Foreign Currency Transactions ......................... (285)
--------
Net Realized Gain/Loss .............................. (5)
--------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period .............................. (23,483)
--------
End of the Period:
Investments ........................................ 45,495
Foreign Currency Translations ...................... (645)
--------
44,850
--------
Net Unrealized Appreciation/Depreciation During the
Period .................................................. 68,333
--------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ............................... 68,328
--------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS .............................................. $ 68,203
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-15
<PAGE> 231
VAN KAMPEN ASIAN GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
<S> <C> <C>
------------------------------------------------------------------------------------------------------
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................... $ (125) $ (1,379)
Net Realized Gain/Loss ........................................ (5) (117,195)
Net Unrealized Appreciation/Depreciation ...................... 68,333 (58,612)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from
Operations .................................................. 68,203 (177,186)
--------- ---------
DISTRIBUTIONS:
In Excess of Net Realized Gain:
Class A ....................................................... -- (135)
Class B ....................................................... -- (60)
Class C ....................................................... -- (84)
--------- ---------
Net Decrease in Net Assets Resulting from Distributions ....... -- (279)
--------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed .................................................... 84,305 114,898
Distributions Reinvested ...................................... -- 258
Redeemed ...................................................... (82,166) (188,300)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions .......................................... 2,139 (73,144)
--------- ---------
Total Increase/Decrease in Net Assets ......................... 70,342 (250,609)
NET ASSETS--Beginning of Period ................................. 102,077 352,686
--------- ---------
NET ASSETS--End of Period (Including accumulated net
investment loss of $(25) and $(1,200), respectively) .......... $ 172,419 $ 102,077
========= =========
-----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
--------
Shares:
Subscribed .................................................... 8,906 9,205
Distributions Reinvested ...................................... -- 15
Redeemed ...................................................... (8,391) (12,556)
--------- ---------
Net Increase/Decrease in Class A Shares Outstanding ............. 515 (3,336)
========= =========
Dollars:
Subscribed .................................................... $ 70,587 $ 80,960
Distributions Reinvested ...................................... -- 125
Redeemed ...................................................... (61,673) (123,834)
--------- ---------
Net Increase/Decrease ........................................... $ 8,914 $ (42,749)
========= =========
Ending Paid in Capital .......................................... $ 121,936+ $ 113,022
========= =========
Class B:
--------
Shares:
Subscribed .................................................... 944 2,181
Distributions Reinvested ...................................... -- 7
Redeemed ...................................................... (1,189) (1,929)
--------- ---------
Net Increase/Decrease in Class B Shares Outstanding ............. (245) 259
========= =========
Dollars:
Subscribed .................................................... $ 7,734 $ 19,723
Distributions Reinvested ...................................... -- 55
Redeemed ...................................................... (8,813) (19,925)
--------- ---------
Net Increase/Decrease ........................................... $ (1,079) $ (147)
========= =========
Ending Paid in Capital .......................................... $ 62,911+ $ 63,990
========= =========
Class C:
--------
Shares:
Subscribed .................................................... 807 1,702
Distributions Reinvested ...................................... -- 10
Redeemed ...................................................... (1,680) (4,222)
--------- ---------
Net Increase/Decrease in Class C Shares Outstanding ............. (873) (2,510)
========= =========
Dollars:
Subscribed .................................................... $ 5,984 $ 14,215
Distributions Reinvested ...................................... -- 78
Redeemed ...................................................... (11,680) (44,541)
--------- ---------
Net Increase/Decrease ........................................... $ (5,696) $ (30,248)
========= =========
Ending Paid in Capital .......................................... $ 70,942+ $ 76,638
========= =========
</TABLE>
----------
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
The accompanying notes are an integral part of the financial statements.
F-16
<PAGE> 232
VAN KAMPEN ASIAN GROWTH FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995
<S> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD ............... $ 6.529 $ 16.62 $ 17.15 $ 16.42 $ 15.50
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ....................... 0.022 (0.04) (0.06) (0.04) --
Net Realized and Unrealized Gain/Loss ............ 4.933 (10.03) (0.14) 0.77 1.43
----------- ----------- ----------- ----------- -----------
Total From Investment Operations ................. 4.955 (10.07) (0.20) 0.73 1.43
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Realized Gain ................................ -- -- -- -- (0.49)
In Excess of Net Realized Gain ................... -- (0.02) (0.33) -- (0.02)
----------- ----------- ----------- ----------- -----------
Total Distributions .............................. -- (0.02) (0.33) -- (0.51)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ..................... $ 11.484 $ 6.53 $ 16.62 $ 17.15 $ 16.42
=========== =========== =========== =========== ===========
TOTAL RETURN (1) ................................... 75.69% (60.57)% (1.10)% 4.45% 9.50%
=========== =========== =========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) .................. $ 88,808 $ 47,128 $ 175,440 $ 248,009 $ 178,667
Ratio of Expenses to Average Net Assets ............ 1.95% 1.90% 1.84% 1.88% 1.90%
Ratio of Net Investment Income/Loss to Average
Net Assets ....................................... 0.28% (0.39)% (0.31)% (0.16)% 0.04%
Portfolio Turnover Rate ............................ 138% 130% 74% 38% 34%
-----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment
Income/Loss .................................... $ 0.01 $ 0.01 $ -- $ -- $ --
Ratios Before Expense Limitation:
Expenses to Average Net Assets ................... 2.03% 2.21% -- -- --
Net Investment Income/Loss to Average Net
Assets ......................................... 0.20% (0.53)% -- -- --
Ratio of Net Expenses to Average Net Assets
excluding country tax expense and interest
expense .......................................... 1.90% 1.90% -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
-----------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------- AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 TO JUNE 30, 1996
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD .................. $ 6.306 $ 16.17 $ 16.81 $ 16.51
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .......................... (0.033) (0.10) (0.16) (0.03)
Net Realized and Unrealized Gain/Loss ............... 4.734 (9.74) (0.15) 0.33
----------- ----------- ----------- -----------
Total From Investment Operations .................... 4.701 (9.84) (0.31) 0.30
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Realized Gain ................................... -- -- (0.33) --
In Excess of Net Realized Gain ...................... -- (0.02) -- --
----------- ----------- ----------- -----------
Total Distributions ................................. -- (0.02) (0.33) --
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ........................ $ 11.007 $ 6.31 $ 16.17 $ 16.81
=========== =========== =========== ===========
TOTAL RETURN (1) ...................................... 74.48% (60.89)% (1.79)% 1.82%*
=========== =========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ..................... $ 42,905 $ 26,126 $ 62,786 $ 52,853
Ratio of Expenses to Average Net Assets ............... 2.70% 2.65% 2.59% 2.61%
Ratio of Net Investment Income/Loss to Average
Net Assets .......................................... (0.44)% (1.01)% (1.04)% (0.52)%
Portfolio Turnover Rate ............................... 138% 130% 74% 38%*
-----------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment
Income/Loss ....................................... $ 0.01 $ 0.02 $ -- $ --
Ratios Before Expense Limitation:
Expenses to Average Net Assets ...................... 2.78% 2.96% -- --
Net Investment Income/Loss to Average Net
Assets ............................................ (0.52)% (1.15)% -- --
Ratio of Net Expenses to Average Net Assets
excluding country tax expense and interest
expense ............................................. 2.65% 2.65% -- --
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD .............. $ 6.290 $ 16.14 $ 16.78 $ 16.19 $ 15.40
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ...................... (0.035) (0.12) (0.21) (0.13) (0.12)
Net Realized and Unrealized Gain/Loss ........... 4.718 (9.71) (0.10) 0.72 1.42
----------- ----------- ----------- ----------- -----------
Total From Investment Operations ................ 4.683 (9.83) (0.31) 0.59 1.30
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Realized Gain ............................... -- -- -- -- (0.49)
In Excess of Net Realized Gain .................. -- (0.02) (0.33) -- (0.02)
----------- ----------- ----------- ----------- -----------
Total Distributions ............................. -- (0.02) (0.33) -- (0.51)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD .................... $ 10.973 $ 6.29 $ 16.14 $ 16.78 $ 16.19
=========== =========== =========== =========== ===========
TOTAL RETURN (1) .................................. 74.13% (60.88)% (1.79)% 3.64% 8.71%
=========== =========== =========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ................. $ 40,706 $ 28,823 $ 114,460 $ 168,070 $ 139,497
Ratio of Expenses to Average Net Assets ........... 2.70% 2.65% 2.59% 2.63% 2.63%
Ratio of Net Investment Income/Loss to Average
Net Assets ...................................... (0.48)% (1.17)% (1.06)% (0.94)% (0.77)%
Portfolio Turnover Rate ........................... 138% 130% 74% 38% 34%
---------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment
Income/Loss ................................... $ 0.01 $ 0.01 $ -- $ -- $ --
Ratios Before Expense Limitation:
Expenses to Average Net Assets .................. 2.78% 2.96% -- -- --
Net Investment Income/Loss to Average Net
Assets ........................................ (0.56)% (1.31)% -- -- --
Ratio of Net Expenses to Average Net Assets
excluding country tax expense and interest
expense ......................................... 2.65% 2.65% -- -- --
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Non-Annualized
+ The Fund began offering Class B shares on August 1, 1995. (1) Total return
is calculated exclusive of sales charges or deferred sales charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-17
<PAGE> 233
VAN KAMPEN ASIAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Asian Growth Fund (the "Fund") is organized as a separate
diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation which
is registered as an open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective seeks long-term
capital appreciation through investment primarily in equity securities of Asian
issuers, excluding Japan. The Fund commenced operations on June 23, 1993.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
----------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First..................................... 5.00% 1.00%
Second.................................... 4.00% None
Third..................................... 3.00% None
Fourth.................................... 2.50% None
Fifth..................................... 1.50% None
Thereafter................................ None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights. The Fund began offering the current Class B shares on August 1,
1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which takes into account institutional size trading in similar groups of
securities. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date, net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses),
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from
F-18
<PAGE> 234
VAN KAMPEN ASIAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
changes in the market prices of securities. Realized gains and losses on foreign
currency includes the net realized amount from the sale of the currency and the
amount realized between trade date and settlement date on security and income
transactions. However, the foreign currency portion of gains and losses realized
on sales and maturities of foreign denominated debt securities is treated as
ordinary income for U.S. Federal income tax purposes.
The net assets of the Fund may include issuers located in emerging markets.
There are certain risks inherent in these investments not typically associated
with investments in the United States, including the smaller size of the markets
themselves, lesser liquidity, greater volatility, and potentially less publicly
available information. Emerging markets may be subject to a greater degree of
government involvement in the economy and greater economic and political
uncertainty, which has the potential to extend to government imposed
restrictions on exchange traded transactions and currency transactions. These
restrictions may impact the Fund's ability to buy or sell certain securities or
to repatriate certain currencies to U.S. dollars. Additionally, changes in
currency exchange rates will affect the value of and investment income from such
securities.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains, and net unrealized appreciation, as applicable, as the income is earned
or capital gains are recorded.
At June 30, 1999, the Fund had available capital loss carryforwards to offset
future net capital gains, to the extent provided by U.S. Federal income tax
regulations, of approximately $53,293,000 and $69,761,000 which will expire on
June 30, 2006 and June 30, 2007, respectively.
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by the Fund for gains realized and not distributed. To the extent that capital
gains are so offset, such gains will not be distributed to shareholders.
Net capital losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 to June 30, 1999, the Fund incurred and elected
to defer until July 1, 1999, for U.S. Federal income tax purposes, net capital
losses of approximately $999,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
-------- -------- --------- -------------
<S> <C> <C> <C>
$131,179 $45,500 $(2,547) $42,953
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, and
foreign taxes on net realized gains.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999 approximately $1,599,000 has been reclassified from
paid in capital in excess of par with approximately $1,300,000 posted to
accumulated net investment loss and approximately $299,000 posted to accumulated
net realized loss.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
1.00% 1.90% 2.65%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$3,000 representing legal services
F-19
<PAGE> 235
VAN KAMPEN ASIAN GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
provided by Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the
Fund, of which a director of the Fund is an affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Portfolio a distribution fee, which
is accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $180,695 for Class A shares and deferred sales charges of $4,722,
$184,325, and $27,849 for Class A shares, Class B shares, and Class C shares,
respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of
approximately $48,000. On October 1, 1998, the Chase Manhattan Bank purchased
MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $54,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/dealer.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $149,702,000 and sales of approximately $149,321,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
F-20
<PAGE> 236
VAN KAMPEN EMERGING MARKETS FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Emerging Markets Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Emerging Markets Fund
(the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for each of the 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 June 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-21
<PAGE> 237
VAN KAMPEN EMERGING MARKETS FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (90.4%)
ARGENTINA (0.7%)
Telecom Argentina ADR ............................. 28,526 $ 763
Telefonica de Argentina ADR ....................... 3,248 102
----------
865
----------
BRAZIL (4.4%)
CEMIG ADR ......................................... 19,217 408
Coteminas ......................................... 1,384,100 70
(b,c)Coteminas ADR ................................ 12,645 32
(a)CRT ............................................ 3,828,145 519
CVRD ADR .......................................... 31,619 628
Eletrobras ADR .................................... 24,520 247
Eletrobras S.A .................................... 2,328,560 44
Embratel Participacoes ADR ........................ 21,814 303
(a)Lojas Arupau ADR ............................... 14,225 --
Pao de Acucar ..................................... 4,660,000 87
Pao de Acucar ADR ................................. 3,367 63
Petrobras ADR ..................................... 4,950 76
Tele Celular Sul ADR .............................. 2,790 61
Tele Centro Oeste Sul ............................. 2,311,729 2
Tele Centro Sul ................................... 3,818 212
Tele Nordeste Celular ADR ......................... 1,095 30
Tele Norte Leste .................................. 12,849 239
Telemig Celular ADR ............................... 1,365 34
Telesp Celular ADR ................................ 18,207 487
Telesp ............................................ 7,480 171
TeleSudeste Celular ............................... 3,523 102
Unibanco GDR ...................................... 62,551 1,505
USIMINAS ADR (Registered Shares) .................. 6,605 22
----------
5,342
----------
CHILE (0.6%)
CCU ADR ........................................... 7,506 215
ENDESA ADR ........................................ 12,984 157
Enersis ADR ....................................... 13,863 317
(a)Santa Isabel ADR ............................... 5,015 51
----------
740
----------
CHINA (0.7%)
Huaneng Power International, Inc. ADR ............. 14,095 241
Yanzhou Coal Mining Co. ADR ....................... 18,228 324
Zhenhai Refining & Chemical Co. `H' ............... 1,117,000 338
----------
903
----------
CZECH REPUBLIC (0.6%)
SPT Telecom a.s. .................................. 37,872 611
SPT Telecom a.s. GDR .............................. 10,260 166
----------
777
----------
EGYPT (0.6%)
(a)Al-Ahram Beverages Co. S.A.E GDR ............... 5,988 170
Eastern Tobacco ................................... 7,721 188
Egypt Gas Co. ..................................... 2,900 119
Egyptian Co. for Mobile Services .................. 10,098 228
Industrial & Engineering .......................... 4,975 39
----------
744
----------
GREECE (2.0%)
Commercial Bank of Greece S.A. .................... 613 44
OTE S.A. .......................................... 60,701 1,303
OTE S.A. ADR ...................................... 98,506 1,089
----------
2,436
----------
HUNGARY (0.8%)
Matav Rt. ......................................... 19,822 107
Matav Rt. ADR ..................................... 11,640 320
Matav Rt. ADR ..................................... 9,549 263
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------------
<S> <C> <C>
MOL Magyar Olaj-es Gazipari Rt. GDR ............... 3,796 $ 91
OPT Bank Rt. ...................................... 5,985 250
----------
1,031
----------
INDIA (8.4%)
Bharat Heavy Electricals Ltd. ..................... 155,500 881
Container Corp. of India Ltd. ..................... 109,500 459
Gujarat Ambuja Cements Ltd. ....................... 23,500 173
Hero Honda Motors Ltd. ............................ 41,305 1,028
Hindustan Lever Ltd. .............................. 17,100 938
Housing Development Finance Corp., Ltd. ........... 7,644 391
Infosys Technologies Ltd. ......................... 22,300 1,863
ITC Limited ....................................... 9,000 206
ITC Limited ....................................... 20,100 507
Larson & Tourbo Ltd. `A' .......................... 68,700 453
Mahanagar Telephone Nigam Ltd. .................... 53,000 220
Mahanagar Telephone Nigam Ltd. .................... 40,000 171
MRF Ltd. .......................................... 5,000 220
NIIT Ltd. ......................................... 12,000 562
Satyam Computer Services Ltd. ..................... 28,000 818
(a)State Bank of India ............................ 102,100 558
Tata Engineering & Locomotive Co., Ltd. ........... 49,500 235
Videsh Sanchar Nigam Ltd. GDR ..................... 8,900 114
(a)Zee Telefilms Ltd. ............................. 18,000 603
----------
10,400
----------
INDONESIA (3.4%)
PT Gudang Garam Tbk (Foreign) ..................... 563,925 1,532
PT Indah Kiat Pulp & Paper Corp. (Foreign) ........ 1,260,080 586
PT Semen Gresik Tbk ............................... 224,700 489
PT Telekomunikasi Indonesia ADR ................... 129,384 1,609
----------
4,216
----------
ISRAEL (2.9%)
(a)Amdocs Ltd. .................................... 22,700 516
(a)BackWeb Technologies Ltd. ...................... 2,280 62
Bank Hapoalim Ltd. ................................ 96,700 248
Bank Leumi Le-Israel Ltd. ......................... 124,800 236
(a)Comverse Technology, Inc. ...................... 2,907 220
ECI Telecommunications Ltd. ....................... 16,214 538
Elbit Systems Ltd. ................................ 1 --
(a)Gilat Satellite Networks Ltd. .................. 10,332 543
Koor Industries Ltd. .............................. 3,056 353
(a)NICE-Systems Ltd. .............................. 2,319 63
(a)NICE-Systems Ltd. ADR .......................... 6,220 171
(a)Orbotech Ltd. .................................. 5,256 274
Teva Pharmaceutical Industries Ltd. ADR ........... 6,615 324
----------
3,548
----------
KOREA (16.6%)
Daewoo Securities, Co. ........................... 19,040 370
Good Morning Securities Co., Ltd. ................ 74,860 462
Hana Bank ........................................ 34,640 509
Hankuk Glass Industry Co., Ltd. .................. 9,660 259
Housing & Commercial Bank ........................ 39,250 1,238
Kookmin Bank ..................................... 68,800 1,397
Kookmin Bank GDR ................................. 1,708 35
Koram Bank ....................................... 34,740 435
Korea Electric Power Corp. ....................... 32,690 1,358
Korea Electric Power Corp. ADR ................... 94,180 1,931
Korea Exchange Bank .............................. 85,920 482
(b)Korea Telecom Corp. ........................... 39,080 2,593
(a)Korea Telecom Corp. ADR ....................... 58,600 2,344
LG Securities Co. ................................ 4,820 81
LG Chemical Ltd. ................................. 13,140 358
(b)Pohang Iron & Steel Ltd. (Foreign) ............ 15,866 1,953
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE> 238
VAN KAMPEN EMERGING MARKETS FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------
<S> <C> <C>
Samsung Electro-Mechanics Co. .............. 10,829 $ 374
Samsung Electronics Co. (Foreign) .......... 27,321 2,998
Shinhan Bank Co. Ltd. ...................... 37,000 415
(b)SK Telecom Co., Ltd. .................... 539 740
SK Telecom Co., Ltd. ADR ................... 12,890 219
---------
20,551
---------
MALAYSIA (3.0%)
Commerce Asset-Holdings Bhd ................ 205,000 507
Malayan Banking Bhd ........................ 267,000 801
Nestle Bhd ................................. 60,000 237
Public Bank Bhd ............................ 236,000 180
Rothmans of Pall Mall Bhd .................. 73,000 552
Telekom Malaysia Bhd ....................... 292,000 1,091
Tenaga Nasional Bhd ........................ 150,000 345
---------
3,713
---------
MEXICO (12.9%)
Alfa ....................................... 71,278 296
Banacci `L' ................................ 177,316 433
Banacci `O' ................................ 129,543 327
(a)Carso `A1' .............................. 68,984 320
Cemex `B' .................................. 8,992 45
Cemex `B' ADR .............................. 85,345 843
Cemex CPO .................................. 205,048 1,014
Cemex CPO ADR .............................. 52,824 502
(a)Cifra `C' ............................... 155,524 285
(a)Cifra `V' ............................... 42,653 83
(a)Cifra `V' ADR ........................... 21,660 415
FEMSA ...................................... 361,047 1,445
FEMSA ADR .................................. 30,581 1,219
(a)Grupo Financiero Bancomer S.A. de
C.V. `O' ................................. 447,556 162
(c)Grupo Financiero Bancomer S.A. de
C.V. `O' ADR ............................. 31,915 231
Kimberly `A' ............................... 120,293 495
Telmex ADR ................................. 54,613 4,413
(a)Televisa CPO GDR ........................ 76,887 3,436
---------
15,964
---------
PAKISTAN (0.4%)
Fauji Fertilizer Co., Ltd. ................. 256,900 200
Pakistan State Oil Co., Ltd. ............... 125,572 221
Pakistan Telecommunication Corp. `A' ....... 144,300 55
---------
476
---------
PHILIPPINES (1.0%)
Manila Electric Co. `B' .................... 90,610 327
San Miguel Corp. `B' ....................... 267,557 585
SM Prime Holdings, Inc. .................... 1,560,940 353
---------
1,265
---------
POLAND (2.5%)
(a)Bank Polska Kasa Opieki Pekao
S.A. ..................................... 5,979 69
Elektrim S.A. .............................. 32,995 466
Powszechny Bank Kredytowy S.A. ............. 4,503 108
(a)Powszechny Bank Kredytowy S.A. `C' ...... 1,125 20
Prokom Software GDR ........................ 14,833 243
(a)Telekomunikacja Polska GDR .............. 287,808 2,029
Wielkopolski Bank Kredytowy ............... 15,798 93
---------
3,028
---------
RUSSIA (3.5%)
A.O. Tatneft ADR ........................... 4,300 16
Lukoil Oil Co. ADR ......................... 36,053 1,474
(a,b)Mustcom ............................... 4,570,885 954
(a,b,d)Storyfirst Communications, Inc. ..... 600 453
Surgutneftegaz ADR ......................... 147,009 1,240
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------
<S> <C> <C>
RAO Unified Energy Systems GDR ............. 15,080 $ 146
---------
4,283
---------
SINGAPORE (0.9%)
(a)Asia Pulp & Paper Co., Ltd. ADR ......... 113,725 1,095
---------
SOUTH AFRICA (6.9%)
Amalgamated Banks of South Africa .......... 101,910 577
(a)Anglo American plc ...................... 3,500 166
(a)Anglo American plc ...................... 18,340 857
(a)Anglo American plc ADR .................. 220 11
B.O.E. Corp., Ltd. `N' ..................... 833,254 663
B.O.E. Corp., Ltd. ......................... 104,460 104
Bidvest Group Ltd. ......................... 128,640 1,074
Billiton Plc ............................... 84,200 291
Comparex Holdings Ltd. ..................... 25,640 161
De Beers Centenary AG ...................... 10,840 260
De Beers Consolidated Mines ADR ............ 5,220 125
Ellerine Holdings Ltd. ..................... 60,710 241
Firstrand Ltd. ............................. 616,420 705
Liberty Life Association of Africa Ltd ..... 20,518 263
Nedcor Ltd. ................................ 23,750 545
(a)New Africa Investments Ltd. `N' ......... 394,410 232
Rembrant Group Ltd. ........................ 85,390 712
(a)Sanlam Ltd. ............................. 354,900 421
Sasol Ltd. ................................. 19,800 141
(a)South African Breweries Ltd. ............ 87,490 749
(a)South African Breweries Ltd. ............ 13,140 114
The Education Investment Corp., Ltd ........ 147,892 139
---------
8,551
---------
TAIWAN (10.8%)
(a)Acer, Inc. .............................. 138,000 350
(a)Advanced Semiconductor
Engineering, Inc. ........................ 182,000 614
Asustek Computer, Inc. ..................... 195,980 2,209
Bank Sinopac ............................... 415,000 289
Cathay Life Insurance Co., Ltd. ............ 111,000 399
Chang Hwa Commercial Bank .................. 122,000 183
(a)China Development Corp. ................. 47,000 117
China Steel Corp. .......................... 682,500 516
(a)Chinatrust Commercial Bank .............. 317,000 381
Compal Electronics, Inc. ................... 149,760 589
(a)E. Sun Commercial Bank .................. 173,000 96
(a)Far Eastern Textile Ltd. ................ 562,000 835
First Commercial Bank ...................... 110,000 209
Formosa Plastics Corp. ..................... 213,000 448
(a)Hon Hai Precision Industry .............. 115,000 1,040
Hua Nan Commercial Bank .................... 134,000 266
International Commercial Bank of China ..... 259,000 335
Nan Ya Plastic Corp. ....................... 276,000 457
(a)President Chain Store Corp. ............. 64,153 217
Quanta Computer Inc. ....................... 24,120 289
(a)Shinkong Synthetic Fibers Corp. ......... 1 --
(a)Siliconware Precision Industries Co ..... 220,349 420
(a)Taishin International Bank .............. 464,000 345
(a)Taiwan Semiconductor Co. ................ 645,750 2,469
(a)Taiwan Semiconductor Co. ADR ............ 3,996 136
United World Chinese Commercial Bank ..... 77,000 119
---------
13,328
---------
THAILAND (2.8%)
Advanced Info Service Public Co.,
Ltd. (Foreign) ........................... 93,200 1,263
BEC World Public Co., Ltd. ................. 65,100 406
Delta Electronics Public Co., Ltd.
(Foreign) ................................ 54,337 457
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE> 239
VAN KAMPEN EMERGING MARKETS FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
--------------------------------------------------------------------------------------
<S> <C> <C>
THAILAND (CONT.)
Shin Corp. Public Co., Ltd. ................
(Foreign) ................................ 123,280 $ 575
Siam City Cement Public Co., Ltd. ..........
(Foreign) ................................ 146,833 605
Thai Farmer's Bank Public Co. Ltd. .........
(Foreign) ................................ 29,000 90
-----------
3,396
-----------
TURKEY (4.0%)
Akbank T.A.S. .............................. 35,010,500 515
(c)Akbank T.A.S. ADR ....................... 8,080 24
Dogan Sirketler Grupo Holdings
A.S. ..................................... 44,840,000 595
Ege Biracilik Ve Malt Sanayii .............. 3,565,500 266
(a)Erciyas Biracilik Ve Malt
Sanayii .................................. 1,555,488 36
Kos Holdings A.S. .......................... 2,912,000 183
Migros Turk T.A.S. ......................... 174,000 217
Sabanci Holding ............................ 10,227,000 228
Turkiye Petrol Rafinerileri A.S. ........... 1,910,000 127
(a)Turkiye Garanti Bankasi ................. 39,243,400 293
Turkiye Is Bankasi, `C' .................... 14,848,000 264
(a)Vestel Elektronik Sanayii ve
Ticaret A.S. ............................. 4,563,470 498
Yapi Ve Kredi Bankasi A.S. ................. 112,988,405 1,633
-----------
4,879
-----------
TOTAL COMMON STOCKS ............................ 111,531
-----------
PREFERRED STOCKS (6.7%)
BRAZIL (6.4%)
(a,b)Banco Nacional ........................ 11,156,000 --
Brahma ..................................... 596,081 336
CRT ........................................ 3,828,145 939
CEMIG ...................................... 35,414,681 745
CVRD `A' ................................... 31,083 615
Eletrobras `B' ............................. 3,592,000 72
Embratel Participacoes `A' ................. 8,970,552 124
(a)Lojas Arapua ............................ 12,437,000 --
Petrobras .................................. 7,248,400 1,122
Telebras ADR ............................... 4,839 436
Telebras ................................... 14,958,000 1,338
Tele Celular Sul ADR ....................... 51,006,152 107
Tele Centro Sul ............................ 33,238,552 368
Tele Nordeste Celular ...................... 11,378,752 15
Tele Norte Leste ........................... 5,725,552 104
Tele Sudeste Celular ....................... 46,446,552 262
Telemig Celular ............................ 56,455,552 71
Telerj Celular ............................. 2,082,000 68
Telesp ..................................... 6,990,552 160
Telesp Celular ............................. 33,604,552 348
Telesp Celular ............................. 9,786,261 509
(a)USIMINAS ................................ 37,900 128
-----------
7,867
-----------
COLOMBIA (0.0%)
BanColombia ................................ 7,150 10
-----------
THAILAND (0.3%)
(a)Siam Commercial Bank .................... 238,800 340
-----------
TOTAL PREFERRED STOCKS ......................... 8,217
-----------
INVESTMENT COMPANIES (0.0%)
UNITED STATES (0.0%)
(e)Morgan Stanley Dean Witter Africa
Investment Fund, Inc. .................... 4,470 45
-----------
</TABLE>
<TABLE>
<CAPTION>
NO. OF VALUE
RIGHTS (000)
----------------------------------------------------------------------------------------------
<S> <C> <C>
RIGHTS (0.1%)
BRAZIL (0.0%)
(a,b)CRT .......................................... 3,828,145 $ --
-----------
KOREA (0.1%)
(a,b)SK Telecom Co., Ltd. ......................... 499 63
-----------
SOUTH AFRICA (0.0%)
(a)Liberty International plc....................... 9,565 63
-----------
TOTAL RIGHTS .......................................... 126
-----------
NO. OF
WARRANTS
--------
WARRANTS (0.3%)
THAILAND
(a)Siam Commercial Bank (expiring
12/31/02) ....................................... 111,466 --
(a)Siam Commercial Bank (expiring
5/10/02) ........................................ 658,000 424
-----------
424
-----------
<CAPTION>
PAR
VALUE
(000)
----------
<S> <C> <C>
CONVERTIBLE DEBENTURE (0.5%)
RUSSIA (0.5%)
(a,b)Svyaz Finance Ltd. 17.00%,
8/11/99 ......................................... $ 2,684,488 660
-----------
TOTAL LONG-TERM INVESTMENTS (98.0%) (COST $110,577) ... 121,003
-----------
SHORT-TERM INVESTMENT (2.0%)
REPURCHASE AGREEMENT (2.0%)
Chase Securities, Inc., 4.55%, dated
6/30/99, 2,404
due 7/1/99, to be repurchased at $2,404
collateralized by $2,235 Treasury Bonds,
7.250%, due 5/15/16, valued at $2,484
(COST $2,404) ..................................... 2,404
-----------
TOTAL INVESTMENTS IN SECURITIES (100.0%)
(COST $112,981) ....................................... 123,407
-----------
FOREIGN CURRENCY (0.6%) (COST $776) ................... 774
-----------
TOTAL INVESTMENTS (100.6%) (COST $113,757) ............ 124,181
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.6%) ......... (713)
-----------
NET ASSETS (100%) ..................................... $ 123,468
===========
</TABLE>
----------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(b) -- Security valued at fair value -- see note A-1 to financial
statements
(c) -- 144A Security -- Certain conditions for public sale may exist.
(d) -- Restricted as to public resale. Total value of restricted
securities at June 30, 1999 was $453,000 or 0.37% of net assets
(Total cost $1,500,000).
(e) -- The Fund is advised by an affiliate which earns a management fee as
advisor to the Fund.
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
</TABLE>
--------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- -------- ----------
<S> <C> <C>
Services ..................... $ 39,145 31.7%
Finance ...................... 22,009 17.8
Consumer Goods ............... 16,671 13.5
Capital Equipment ............ 16,595 13.4
Materials .................... 12,824 10.4
Energy ....................... 11,488 9.3
Multi-Industry ............... 2,271 1.9
-------- ----
$121,003 98.0%
======== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE> 240
VAN KAMPEN EMERGING MARKETS FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
----------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost $112,981) ........... $ 123,407
Foreign Currency (Cost $776) .................................. 774
Receivable for:
Investments Sold ............................................ 1,779
Dividends ................................................... 508
Fund Shares Sold ............................................ 446
Interest .................................................... 406
Foreign Withholding Tax Reclaim ............................... 2
Other ......................................................... 18
---------
Total Assets ................................................ 127,340
---------
LIABILITIES:
Payable for:
Investments Purchased ....................................... 2,866
Custody Fees ................................................ 246
Deferred Country Tax ........................................ 231
Distribution Fees ........................................... 134
Fund Shares Redeemed ........................................ 131
Investment Advisory Fees .................................... 81
Bank Overdraft .............................................. 58
Professional Fees ........................................... 35
Administrative Fees ......................................... 25
Transfer Agent Fees ......................................... 25
Shareholder Reporting Expenses .............................. 24
Directors' Fees and Expenses ................................ 14
Other ......................................................... 2
---------
Total Liabilities ......................................... 3,872
---------
NET ASSETS ...................................................... $ 123,468
=========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) .............................................. $ 13
Paid in Capital in Excess of Par .............................. 172,856
Net Unrealized Appreciation on Investments and Foreign
Currency Translations* ...................................... 10,264
Accumulated Net Investment Loss ............................... (554)
Accumulated Net Realized Loss ................................. (59,111)
---------
NET ASSETS ...................................................... $ 123,468
=========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $63,273,132 and 6,413,606 Shares
Outstanding) ................................................ $ 9.87
=========
Maximum Sales Charge .......................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100/ (100 - maximum sales charge)) .................. $ 10.47
=========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $38,312,954 and 4,010,764 Shares
Outstanding)** .............................................. $ 9.55
=========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $21,882,158 and 2,286,771 Shares
Outstanding)** .............................................. $ 9.57
=========
</TABLE>
----------
<TABLE>
<S> <C>
* Net of accrual for deferred country tax of approximately
U.S. $144,000.
** Redemption price may be subject to a contingent deferred
sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE> 241
VAN KAMPEN EMERGING MARKETS FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
----------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ................................................... $ 2,508
Interest .................................................... 607
Less Foreign Taxes Withheld ................................. (136)
--------
Total Income .............................................. 2,979
--------
EXPENSES:
Investment Advisory Fees .................................... 1,337
Distribution Fees (Attributed to Classes A, B, and C of
$141, $299, and $205, respectively) ......................... 645
Custodian Fees .............................................. 476
Administrative Fees ......................................... 285
Country Tax Expense ......................................... 88
Transfer Agent Fees ......................................... 71
Shareholder Reports ......................................... 64
Professional Fees ........................................... 52
Interest Expense ............................................ 45
Filing and Registration Fees ................................ 38
Directors' Fees and Expenses ................................ 11
Other ....................................................... 12
--------
Total Expenses ............................................ 3,124
Less Expense Reductions ................................... (239)
--------
Net Expenses .............................................. 2,885
--------
Net Investment Income/Loss .................................... 94
--------
NET REALIZED GAIN/LOSS ON:
Investments ................................................. (31,019)
Foreign Currency Transactions ............................... (120)
Swaps ....................................................... (226)
--------
Net Realized Gain/Loss ...................................... (31,365)
--------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ..................................... (37,352)
--------
End of the Period:
Investments ............................................... 10,426
Foreign Currency Translations ............................. (162)
--------
10,264
--------
Net Unrealized Appreciation/Depreciation During the
Period ...................................................... 47,616
--------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ................................... 16,251
--------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS .................................................... $ 16,345
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE> 242
VAN KAMPEN EMERGING MARKETS FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
-----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss ............................... $ 94 $ (617)
Net Realized Gain/Loss ................................... (31,365) (23,236)
Net Unrealized Appreciation/Depreciation ................. 47,616 (57,677)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from
Operations ............................................. 16,345 (81,530)
--------- ---------
DISTRIBUTIONS:
Net Realized Gain:
Class A .................................................. -- (6,225)
Class B .................................................. -- (3,112)
Class C .................................................. -- (2,878)
In Excess of Net Realized Gain:
Class A .................................................. (1) (2,361)
Class B .................................................. (1) (1,180)
Class C .................................................. (1) (1,091)
--------- ---------
(3) (16,847)
--------- ---------
Return of Capital:
Class A .................................................. (29) --
Class B .................................................. (14) --
Class C .................................................. (9) --
--------- ---------
(52) --
--------- ---------
Net Decrease in Net Assets Resulting from Distributions .... (55) (16,847)
--------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed ............................................... 59,525 160,772
Distributions Reinvested ................................. 54 15,915
Redeemed ................................................. (92,463) (151,194)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ..................................... (32,884) 25,493
--------- ---------
Total Increase/Decrease in Net Assets .................... (16,594) (72,884)
NET ASSETS--Beginning of Period ............................ 140,062 212,946
--------- ---------
NET ASSETS--End of Period (Including accumulated net
investment loss of $(554) and $(1,090), respectively) .... $ 123,468 $ 140,062
========= =========
-----------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
---------
Shares:
Subscribed ............................................. 6,660 10,304
Distributions Reinvested ............................... 4 891
Redeemed ............................................... (9,639) (10,645)
--------- ---------
Net Increase/Decrease in Class A Shares Outstanding ...... (2,975) 550
========= =========
Dollars:
Subscribed ............................................. $ 48,869 $ 114,410
Distributions Reinvested ............................... 30 8,101
Redeemed ............................................... (68,213) (115,555)
--------- ---------
Net Increase/Decrease .................................... $ (19,314) $ 6,956
========= =========
Ending Paid in Capital ................................... $ 88,430+ $ 107,744
========= =========
Class B:
---------
Shares:
Subscribed ............................................. 935 2,827
Distributions Reinvested ............................... 2 457
Redeemed ............................................... (1,605) (1,321)
--------- ---------
Net Increase/Decrease in Class B Shares Outstanding ...... (668) 1,963
========= =========
Dollars:
Subscribed ............................................ $ 7,223 $ 33,891
Distributions Reinvested .............................. 14 4,064
Redeemed .............................................. (11,281) (13,053)
--------- ---------
Net Increase/Decrease .................................... $ (4,044) $ 24,902
========= =========
Ending Paid in Capital ................................... $ 52,409+ $ 56,453
========= =========
Class C:
---------
Shares:
Subscribed ............................................. 462 1,061
Distributions Reinvested ............................... 1 421
Redeemed ............................................... (1,857) (2,173)
--------- ---------
Net Increase/Decrease in Class C Shares Outstanding ...... (1,394) (691)
========= =========
Dollars:
Subscribed ............................................. $ 3,433 $ 12,471
Distributions Reinvested ............................... 10 3,750
Redeemed ............................................... (12,969) (22,586)
--------- ---------
Net Increase/Decrease .................................... $ (9,526) $ (6,365)
========= =========
Ending Paid in Capital ................................... $ 32,835+ $ 42,361
========= =========
</TABLE>
----------
<TABLE>
<S> <C>
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-27
<PAGE> 243
VAN KAMPEN EMERGING MARKETS FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------- JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 JUNE 30, 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ........................... $ 7.984 $ 13.47 $ 12.06 $ 10.61 $ 12.00
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ....... 0.032 -- 0.01 0.05 0.05
Net Realized and Unrealized
Gain/Loss ...................... 1.853 (4.49) 1.57 1.44 (1.44)
--------- --------- --------- --------- ---------
Total From Investment
Operations ..................... 1.885 (4.49) 1.58 1.49 (1.39)
--------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income ............ -- -- -- (0.04) --
In Excess of Net Investment
Income ......................... -- -- (0.04) -- --
Net Realized Gain ................ -- (0.73) (0.13) -- --
In Excess of Net Realized
Gain ........................... (0.004) (0.27) -- -- --
Return of Capital ................ (0.000)++ -- -- -- --
--------- --------- --------- --------- ---------
Total Distributions .............. (0.004) (1.00) (0.17) (0.04) --
--------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD ..... $ 9.865 $ 7.98 $ 13.47 $ 12.06 $ 10.61
========= ========= ========= ========= =========
TOTAL RETURN (1) ................... 23.92% (34.31)% 13.54% 14.16% (11.58)%**
========= ========= ========= ========= =========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) .......................... $ 63,273 $ 74,959 $ 119,022 $ 114,850 $ 26,091
Ratio of Expenses to Average Net
Assets ........................... 2.34% 2.27% 2.21% 2.16% 2.33%
Ratio of Net Investment Income/
Loss to Average Net Assets ....... 0.44% 0.04% (0.06)% 0.93% 0.81%
Portfolio Turnover Rate ............ 132% 99% 82% 42% 32%**
---------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ......... $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net
Assets ......................... 2.56% 2.60% 2.41% 2.56% 3.10%
Net Investment Income/Loss to
Average Net Assets ............. 0.22% (0.24)% (0.27)% 0.53% 0.04%
Ratio of Expenses to Average Net
Assets excluding country tax
expense and interest expense ..... 2.15% 2.15% 2.15% 2.15% 2.15%
---------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
-----------------------------------------------------------
YEAR ENDED JUNE 30,
-------------------------------------- AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 TO JUNE 30, 1996
----------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................. $ 7.784 $ 13.24 $ 11.94 $ 10.91
--------- --------- --------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ......... (0.021) (0.07) (0.03) 0.01
Net Realized and Unrealized
Gain/Loss .......................... 1.794 (4.39) 1.50 1.02
--------- --------- --------- ------------
Total From Investment
Operations ......................... 1.773 (4.46) 1.47 1.03
--------- --------- --------- ------------
DISTRIBUTIONS
Net Investment Income .............. -- -- -- --
In Excess of Net Investment
Income ............................. -- -- (0.04) --
Net Realized Gain .................. -- (0.73) (0.13) --
In Excess of Net Realized
Gain ............................... (0.004) (0.27) -- --
Return of Capital .................. (0.000)++ -- -- --
--------- --------- --------- ------------
Total Distributions ................ (0.004) (1.00) (0.17) --
--------- --------- --------- ------------
NET ASSET VALUE, END OF PERIOD ..... $ 9.553 $ 7.78 $ 13.24 $ 11.94
========= ========= ========= ============
TOTAL RETURN (1) ................... 22.99% (34.76) $ 12.67 $ 9.45%**
========= ========= ========= ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) ............................ $ 38,313 $ 36,423 $ 35,966 $ 10,416
Ratio of Expenses to Average Net
Assets ............................. 3.09% 3.02% 2.96% 2.91%
Ratio of Net Investment Income/
Loss to Average Net Assets ......... (0.29)% (0.67)% (0.64)% 0.30%
Portfolio Turnover Rate ............ 132% 99% 82% 42%**
----------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ............. $ 0.02 $ 0.03 $ 0.01 $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net
Assets ............................. 3.31% 3.35% 3.17% 3.31%
Net Investment Income/Loss to
Average Net Assets ................. (0.51)% (0.97)% (0.87)% (0.10)%
Ratio of Expenses to Average Net
Assets excluding country tax
expense and interest expense ....... 2.90% 2.90% 2.90% 2.90%
----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------- JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 JUNE 30, 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............... $ 7.791 $ 13.26 $ 11.93 $ 10.53 $ 12.00
--------- --------- --------- --------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ....................... (0.023) (0.08) (0.08) (0.01) --
Net Realized and Unrealized Gain/Loss ............ 1.805 (4.39) 1.55 1.41 (1.47)
--------- --------- --------- --------- ------------
Total From Investment Operations ................. 1.782 (4.47) 1.47 1.40 (1.47)
--------- --------- --------- --------- ------------
DISTRIBUTIONS
Net Investment Income ............................ -- -- -- -- --
In Excess of Net Investment Income ............... -- -- (0.01) -- --
Realized Gain .................................... -- (0.73) (0.13) -- --
In Excess of Net Realized Gain ................... (0.004) (0.27) -- -- --
Return of Capital ................................ (0.000)++ -- -- -- --
--------- --------- --------- --------- ------------
Total Distributions .............................. (0.004) (1.00) (0.14) -- --
--------- --------- --------- --------- ------------
NET ASSET VALUE, END OF PERIOD ..................... $ 9.569 $ 7.79 $ 13.26 $ 11.93 $ 10.53
========= ========= ========= ========= ============
TOTAL RETURN (1) ................................... 23.09% (34.73)% 12.66% 13.30% (12.25)%**
========= ========= ========= ========= ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) .................. $ 21,882 $ 28,680 $ 57,958 $ 43,601 $ 22,245
Ratio of Expenses to Average Net Assets ............ 3.09% 3.01% 2.96% 2.91% 3.08%
Ratio of Net Investment Income/Loss to Average Net
Assets ........................................... (0.32)% (0.76)% (0.79)% (0.11)% 0.06%
Portfolio Turnover Rate ............................ 132% 99% 82% 42% 32%**
---------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period
Per Share Benefit to Net Investment Income/Loss .. $ 0.02 $ 0.03 $ 0.02 $ 0.03 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets ................... 3.31% 3.34% 3.17% 3.34% 3.90%
Net Investment Income/Loss to Average Net Assets . (0.54)% (1.03)% (1.00)% (0.54)% (0.76)%
Ratio of Expenses to Average Net Assets excluding
country tax expense and interest expense ......... 2.90% 2.90% 2.90% 2.90% 2.90%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.001 per share.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-28
<PAGE> 244
VAN KAMPEN EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Emerging Markets Fund, (the "Fund") is organized as a separate
non-diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation,
which is registered as an open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective
seeks long-term capital appreciation by investing primarily in equity securities
of emerging country issues. The Fund commenced operations on July 6, 1994.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED SALES
CHARGE
-------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ --------- ---------
<S> <C> <C>
First................................. 5.00% 1.00%
Second................................ 4.00% None
Third................................. 3.00% None
Fourth................................ 2.50% None
Fifth................................. 1.50% None
Thereafter............................ None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights. The Fund began offering the current Class B shares on August 1,
1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may invest in repurchase agreements, which are short-term investments 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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date, net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses),
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and losses on foreign currency includes the net
realized amount from the sale of the currency and the amount realized between
trade date and settlement date on security and income transactions. However, the
foreign currency portion of gains and losses realized on sales and maturities of
foreign denominated debt securities is treated as ordinary income for U.S.
Federal income tax purposes.
F-29
<PAGE> 245
VAN KAMPEN EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
The net assets of the Fund include issuers located in emerging markets. There
are certain risks inherent in these investments not typically associated with
investments in the United States, including the smaller size of the markets
themselves, lesser liquidity, greater volatility and potentially less publicly
available information. Emerging markets may be subject to a greater degree of
government involvement in the economy and greater economic and political
uncertainty, which has the potential to extend to government imposed
restrictions on exchange traded transactions and currency transactions. These
restrictions may impact the Fund's ability to buy or sell certain securities or
to repatriate certain currencies to U.S. dollars. Additionally, changes in
currency exchange rates will affect the value of and investment income from such
securities.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains and net unrealized appreciation, as applicable, as the income is earned or
capital gains are recorded.
At June 30, 1999, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $45,443,000 which will expire June 30,
2007.
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by the Fund for gains realized and not distributed. To the extent that capital
gains are so offset, such gains will not be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the period from November 1, 1998 to June 30, 1999 the Fund
incurred and elected to defer until July 1, 1999, for U.S. Federal income tax
purposes, net currency and capital losses of approximately $10,331,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for the U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC (DEPREC.) DEPRECIATION
(000) (000) (000) (000)
-------- -------- ---------- -------------
<S> <C> <C> <C>
$116,854 $26,914 $(20,361) $6,553
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, foreign
taxes on net realized gains, deductibility of interest expense on short sales
and gains on certain securities of corporations designated as "passive foreign
investment companies."
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, paid in capital in excess of par. For the
year ended June 30, 1999, approximately $805,000 has been reclassified from paid
in capital in excess of par with approximately $442,000 posted to accumulated
net investment loss and approximately $363,000 posted to accumulated net
realized loss.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
1.25% 2.15% 2.90%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$5,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the portfolio, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the
F-30
<PAGE> 246
VAN KAMPEN EMERGING MARKETS FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Adviser from the fee it receives from the Fund. Transfer Agency services are
provided to the Fund by Van Kampen Investor Services Inc., an affiliate of the
Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B and Class C shares of the Fund, on an
annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $154,972 for Class A shares and deferred sales charges of $9,133,
$174,193, and $5,977 for Class A shares, Class B shares, and Class C shares,
respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of
approximately $104,000. On October 1, 1998, the Chase Manhattan Bank purchased
MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $49,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/ dealer.
At June 30, 1999, the Fund owned shares of affiliated funds for which the Fund
earned dividend income of approximately $30,000 during the period.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $137,936,000 and sales of approximately $171,006,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
D. DERIVATIVE FINANCIAL INSTRUMENTS: A derivative financial instrument in very
general terms refers to security whose value is "derived" from the value of an
underlying asset, reference rate or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, foreign currency
exposure, maturity and duration. All of the Fund's portfolio holdings, including
derivative instruments, are marked-to-market each day with the change in value
reflected in unrealized appreciation/depreciation. Upon disposition, a realized
gain or loss is recognized accordingly, except when exercising a call option
contract or taking delivery of a security underlying a forward contract. In this
instance, the recognition of gain or loss is postponed until the disposal of the
security underlying the option or forward contract. Risks may arise as a result
of the potential inability of the counterparties to meet the terms of their
contracts.
Summarized below are the specific types of derivative financial instruments used
by the Fund.
1. SWAP AGREEMENTS: The Fund may enter into total return swap agreements to
exchange the return generated by one security, instrument or basket of
instruments for the return generated by another security, instrument or basket
of instruments. Total return swaps involve commitments to pay interest in
exchange for a market-linked return based on a notional amount. To the extent
the total return of the security or index underlying the transactions exceeds or
falls short of the offsetting interest obligation, the Fund will receive a
payment from or make a payment to the counterparty, respectively. Total return
swaps are marked-to-market daily based upon quotations from market makers and
the change, if any, is recorded as unrealized gains or losses in the Statement
of Operations. Periodic payments received or made at the end of each measurement
period, but prior to termination, are recorded as realized gains or losses in
the Statement of Operations.
Realized gains or losses on maturity or termination of total return swaps are
presented in the Statement of Operations. Because there is no organized market
for these swap agreements, the value reported in the Statement of Net Assets may
differ from that which would be realized in the event the Fund terminated its
position in the agreement. Risks may arise upon entering into these agreements
from the potential inability of the counterparties to meet the terms of the
agreements and are generally limited to the amount of net interest payments to
be received and/or favorable movements in the value of the underlying security,
if any, at the date of default.
F-31
<PAGE> 247
VAN KAMPEN EQUITY GROWTH FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Equity Growth Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Equity Growth Fund (the
"Fund", a fund of Van Kampen Series Fund Inc.), at June 30, 1999, the results of
its operations, the changes in its net assets and the financial highlights for
each of the 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 June 30, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-32
<PAGE> 248
VAN KAMPEN EQUITY GROWTH FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
--------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (98.2%)
CAPITAL GOODS (20.9%)
General Electric Co. ................... 18,600 $ 2,102
(a)Gulfstream Aerospace Corp. .......... 14,600 986
Pitney Bowes, Inc. ..................... 16,400 1,054
Textron, Inc. .......................... 7,600 626
Tyco International Ltd. ................ 36,300 3,439
United Technologies Corp. .............. 26,300 1,885
(a)WESCO International, Inc. ........... 4,500 92
-------
10,184
-------
COMMUNICATION SERVICES (6.6%)
American Telephone & Telegraph Co. ..... 14,402 804
Bell Atlantic Corp. .................... 11,100 725
(a)Crown Castle International Corp. .... 11,600 241
(a)MCI WorldCom, Inc. .................. 16,600 1,432
-------
3,202
-------
CONSUMER CYCLICALS (13.9%)
(a)Abercrombie & Fitch Co. 'A' ......... 12,800 614
(a)Berkshire Hathaway, Inc. 'B' ........ 274 616
(a)Best Buy Co., Inc. .................. 1,400 95
(a)Costco Cos., Inc. ................... 12,300 985
Gap, Inc. .............................. 15,050 758
Harley-Davidson, Inc. .................. 200 11
Home Depot, Inc. ....................... 19,900 1,282
Intimate Brands, Inc. .................. 6,405 303
(a)Nielsen Media Research, Inc. ........ 6,599 193
(a)Office Depot, Inc. .................. 16,300 360
Omnicom Group, Inc. .................... 6,800 544
Wal-Mart Stores, Inc. .................. 20,300 980
-------
6,741
-------
CONSUMER STAPLES (14.5%)
Anheuser-Busch Cos., Inc. 'A' .......... 4,000 284
(a)AT&T Corp., Liberty Media Group 'A'.. 23,200 853
(a)Brinker International, Inc. ......... 4,900 133
(a)Chancellor Media Corp. 'A' .......... 8,800 485
(a)Clear Channel Communications, Inc. .. 22,500 1,551
Coca-Cola Enterprises, Inc. ............ 8,000 238
Comcast Corp. 'A' ...................... 2,600 93
Comcast Corp. 'A' (Special) ............ 21,400 823
(a)Keebler Foods Co. ................... 7,300 222
(a)MediaOne Group, Inc. ................ 300 22
Philip Morris Cos., Inc. ............... 13,400 538
Procter & Gamble Co. ................... 6,500 580
Time Warner, Inc. ...................... 16,900 1,242
-------
7,064
-------
ENERGY (0.4%)
Exxon Corp. ............................ 2,400 185
-------
FINANCIAL (4.6%)
American Express Co. ................... 6,800 885
Bank of New York Co., Inc. ............. 15,300 561
Citigroup, Inc. ........................ 16,750 796
(a)E-LOAN, Inc. ........................ 100 4
-------
2,246
-------
HEALTH CARE (13.2%)
American Home Products Corp. ........... 3,800 219
(a)Amgen, Inc. ......................... 10,200 621
<CAPTION>
VALUE
SHARES (000)
--------------------------------------------------------------------
<S> <C> <C>
Bristol-Myers Squibb Co. .............. 16,900 $ 1,190
Eli Lilly & Co. ....................... 3,300 236
Johnson & Johnson ..................... 4,800 471
Merck & Co., Inc. ..................... 15,800 1,169
Pfizer, Inc. .......................... 7,800 856
Pharmacia & Upjohn, Inc. .............. 3,700 210
Schering-Plough Corp. ................. 7,800 413
Warner-Lambert Co. .................... 14,600 1,013
---------
6,398
---------
TECHNOLOGY (23.8%)
(a)America Online, Inc. ............... 5,400 597
(a)American Tower Corp. 'A' ........... 13,300 319
(a)Applied Materials, Inc. ............ 6,600 488
Ask Jeeves, Inc. ...................... 300 4
(a)At Home Corp. 'A' .................. 2,300 124
(a)BMC Software, Inc. ................. 3,600 194
(a)CIENA Corp. ........................ 1,500 45
(a)Cisco Systems, Inc. ................ 29,500 1,903
Clarent Corp. ......................... 100 2
(a)Compuware Corp. .................... 6,700 213
(a)General Motors Corp. 'H' ........... 3,600 203
Intel Corp. ........................... 21,800 1,297
(a)Juniper Networks, Inc. ............. 1,300 194
(a)L-3 Communications Holdings, Inc. .. 2,200 106
(a)Litton Industries, Inc. ............ 4,700 337
(a)Loral Space & Communications Ltd. .. 19,100 344
Lucent Technologies, Inc. ............. 6,700 452
(a)Microsoft Corp. .................... 24,900 2,246
Motorola, Inc. ........................ 8,900 843
(a)New Era of Networks, Inc. .......... 4,100 180
(a)Novell, Inc. ....................... 11,900 315
(a)Oracle Corp. ....................... 3,400 126
(a)Quantum Corp. ...................... 8,600 208
(a)Sun Microsystems, Inc. ............. 2,800 193
Texas Instruments, Inc. ............... 2,200 319
(a)Uniphase Corp. ..................... 1,800 299
---------
11,551
---------
UTILITIES (0.3%)
Montana Power Co....................... 2,000 141
---------
TOTAL LONG-TERM INVESTMENTS (98.2%)
(COST $38,538)........................... 47,712
---------
<CAPTION>
PAR
VALUE
(000)
-------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.5%)
REPURCHASE AGREEMENT (2.5%)
Chase Securities, Inc., 4.55%, dated $ 1,242
6/30/99, due 7/1/99, to be repurchased
at $1,242, collateralized by $1,155
U.S. Treasury Bonds, 7.25%, due 5/15/16
valued at $1,284 (COST $1,242)............. 1,242
-------
TOTAL INVESTMENTS (100.7%) (COST $39,780).......... 48,954
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.7%) (356)
-------
NET ASSETS (100%).................................. $48,598
=======
</TABLE>
---------------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE> 249
VAN KAMPEN EQUITY GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
----------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $39,780) ......................... $ 48,954
Receivable for:
Investments Sold .......................................... 515
Fund Shares Sold .......................................... 254
Dividends ................................................. 25
Deferred Organizational Costs ............................. 15
Other ..................................................... 8
----------
Total Assets .............................................. 49,771
----------
LIABILITIES:
Payable for:
Investments Purchased ..................................... 1,000
Distribution Fees ......................................... 56
Fund Shares Redeemed ...................................... 31
Investment Advisory Fees .................................. 19
Professional Fees ......................................... 18
Custody Fees .............................................. 11
Shareholder Reporting Expenses ............................ 11
Administrative Fees ....................................... 10
Directors' Fees and Expenses .............................. 9
Transfer Agent Fees ....................................... 6
Bank Overdraft ............................................ 2
----------
Total Liabilities ......................................... 1,173
----------
NET ASSETS .................................................... $ 48,598
----------
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) ............................................ $ 4
Paid in Capital in Excess of Par .............................. 39,285
Net Unrealized Appreciation on Investments .................... 9,174
Accumulated Net Realized Gain ................................. 143
Accumulated Net Investment Loss ............................... (8)
----------
NET ASSETS .................................................... $ 48,598
==========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $17,185,350 and 1,370,069 Shares
Outstanding) .............................................. $ 12.54
==========
Maximum Sales Charge ........................................ 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share x 100/ (100 - maximum sales charge)) ................ $ 13.31
==========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $23,977,419 and 1,926,071 Shares
Outstanding)* ............................................. $ 12.45
==========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $7,435,116 and 597,570 Shares Outstanding)* ..... $ 12.44
==========
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE> 250
VAN KAMPEN EQUITY GROWTH FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ................................................. $ 230
Interest .................................................. 85
---------
Total Income ............................................ 315
---------
EXPENSES:
Investment Advisory Fees .................................. 274
Distribution Fees (Attributed to Classes A, B, and C of
$30, $163, and $58, respectively) ....................... 251
Custodian Fees ............................................ 85
Filing and Registration Fees .............................. 30
Administrative Fees ....................................... 91
Professional Fees ......................................... 25
Shareholder Reports ....................................... 35
Amortization of Organizational Costs ...................... 19
Directors' Fees and Expenses .............................. 9
Transfer Agent Fees ....................................... 17
Other ..................................................... 7
---------
Total Expenses .......................................... 843
Less Expense Reductions ................................. (164)
---------
Net Expenses ............................................ 679
---------
Net Investment Income/Loss .................................. (364)
---------
NET REALIZED GAIN/LOSS ON:
Investments ............................................... 502
---------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ................................... 138
---------
End of the Period
Investments ............................................. 9,174
---------
Net Unrealized Appreciation/Depreciation During the
Period .................................................... 9,036
---------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ................................. 9,538
---------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ................................................ $ 9,174
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-35
<PAGE> 251
VAN KAMPEN EQUITY GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED MAY 29, 1998*
JUNE 30, 1999 TO JUNE 30, 1998
(000) (000)
-----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................. $ (364) $ --
Net Realized Gain/Loss ...................................... 502 5
Net Unrealized Appreciation/Depreciation .................... 9,036 138
--------- --------------
Net Increase/Decrease in Net Assets Resulting from
Operations ................................................ 9,174 143
--------- --------------
DISTRIBUTIONS:
Net Realized Gain:
Class A ..................................................... (3) --
Class B ..................................................... (4) --
Class C ..................................................... (1) --
--------- --------------
Net Decrease in Net Assets Resulting from Distributions ..... (8) --
--------- --------------
CAPITAL SHARES TRANSACTIONS (1):
Subscribed .................................................. 47,489 --
Distributions Reinvested .................................... 8 --
Redeemed .................................................... (13,208) --
--------- --------------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ........................................ 34,289 --
--------- --------------
Total Increase/Decrease in Net Assets ....................... 43,455 --
NET ASSETS--Beginning of Period ............................... 5,143 5,000
--------- --------------
NET ASSETS--End of Period (Including accumulated net
investment loss of $(8) at June 30, 1999) ................... $ 48,598 $ 5,143
========= ==============
---------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) CLASS A:
Shares:
Subscribed ................................................ 1,629 200
Distributions Reinvested .................................. -- --
Redeemed .................................................. (459) --
--------- --------------
Net Increase/Decrease in Class A Shares Outstanding ......... 1,170 200
========= ==============
Dollars:
Subscribed ................................................ $ 16,596 --
Distributions Reinvested .................................. 3 --
Redeemed .................................................. (4,778) --
--------- --------------
Net Increase/Decrease ....................................... $ 11,821 --
========= ==============
Ending Paid in Capital ...................................... $ 13,821 $ 2,000
========= ==============
CLASS B:
Shares:
Subscribed ................................................ 2,258 150
Distributions Reinvested .................................. -- --
Redeemed .................................................. (482) --
--------- --------------
Net Increase/Decrease in Class B Shares Outstanding ......... 1,776 150
========= ==============
Dollars:
Subscribed ................................................ $ 23,038 --
Distributions Reinvested .................................. 4 --
Redeemed .................................................. (5,054) --
--------- --------------
Net Increase/Decrease $ 17,988 --
========= ==============
Ending Paid in Capital ...................................... $ 19,488 $ 1,500
========= ==============
CLASS C:
Shares:
Subscribed ................................................ 788 150
Distributions Reinvested .................................. -- --
Redeemed .................................................. (340) --
--------- --------------
Net Increase/Decrease in Class C Shares Outstanding 448 150
========= ==============
Dollars:
Subscribed ................................................ $ 7,855 --
Distributions Reinvested .................................. 1 --
Redeemed .................................................. (3,376) --
--------- --------------
Net Increase/Decrease ....................................... $ 4,480 --
========= ==============
Ending Paid in Capital ...................................... $ 5,980 $ 1,500
========= ==============
</TABLE>
--------------------------------------------------------------------------------
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
F-36
<PAGE> 252
VAN KAMPEN EQUITY GROWTH FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------- --------------------------- -----------
YEAR ENDED MAY 29, 1998* YEAR ENDED MAY 29, 1998* YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1999# TO JUNE 30, 1998 JUNE 30, 1999# TO JUNE 30, 1998 JUNE 30, 1999#
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..... $ 10.291 $ 10.00 $ 10.284 $ 10.00 $ 10.284
----------- ----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............. (0.062) -- (0.144) -- (0.141)
Net Realized and Unrealized
Gain/Loss ............................ 2.317 0.29 2.312 0.28 2.302
----------- ----------- ----------- ----------- -----------
Total From Investment Operations ....... 2.255 0.29 2.168 0.28 2.161
----------- ----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Realized Gain ...................... (0.003) -- (0.003) -- (0.003)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ........... $ 12.543 $ 10.29 $ 12.449 $ 10.28 $ 12.442
=========== =========== =========== =========== ===========
TOTAL RETURN (1) ......................... 21.90% 2.90%** 21.14% 2.80%** 21.04%
=========== =========== =========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........ $ 17,185 $ 2,057 $ 23,978 $ 1,543 $ 7,435
Ratio of Expenses to Average Net
Assets ................................. 1.50% 1.50% 2.25% 2.25% 2.25%
Ratio of Net Investment Income/Loss to
Average Net Assets ..................... (0.57)% 0.51% (1.34)% (0.25)% (1.32)%
Portfolio Turnover Rate .................. 126% 19%** 126% 19%** 126%
-----------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/Loss .......................... $ 0.05 $ 0.02 $ 0.05 $ 0.02 $ 0.05
Ratios Before Expense Limitation:
Expenses to Average Net Assets ......... 1.98% 4.06% 2.72% 4.81% 2.75%
Net Investment Income/Loss to Average
Net Assets ........................... (1.05)% (2.05)% (1.81)% (2.81)% (1.81)%
<CAPTION>
CLASS C
----------------
MAY 29, 1998*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1998
<S> <C>
-----------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD ..... $ 10.00
-----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............. --
Net Realized and Unrealized
Gain/Loss ............................ 0.28
-----------
Total From Investment Operations ....... 0.28
-----------
DISTRIBUTIONS
Net Realized Gain ...................... --
-----------
NET ASSET VALUE, END OF PERIOD ........... $ 10.28
===========
TOTAL RETURN (1) ......................... 2.80%**
===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........ $ 1,543
Ratio of Expenses to Average Net
Assets ................................. 2.25%
Ratio of Net Investment Income/Loss to
Average Net Assets ..................... (0.25)%
Portfolio Turnover Rate .................. 19%**
-----------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/Loss .......................... $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets ......... 4.81%
Net Investment Income/Loss to Average
Net Assets ........................... (2.81)%
</TABLE>
--------------------------------------------------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-37
<PAGE> 253
VAN KAMPEN EQUITY GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Equity Growth Fund (the "Fund") is organized as a separate
diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation, which
is registered as an open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to seek
long-term capital appreciation by investing primarily in growth-oriented equity
securities of medium and large capitalization companies. The Fund commenced
operations on May 29, 1998.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
-----------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ---------- ----------
<S> <C> <C>
First ................... 5.00% 1.00%
Second .................. 4.00% None
Third ................... 3.00% None
Fourth .................. 2.50% None
Fifth ................... 1.50% None
Thereafter .............. None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization, and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis except where collection is in
doubt. Income, expenses (other than class specific expenses), and realized and
unrealized gains or losses are allocated to each class of shares based upon
their relative net assets. Distributions from the Fund are recorded on the
ex-distribution date.
4. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Fund's commencement of operations. The Adviser has agreed that in the event
any of the initial shares of the Fund originally purchased by Van Kampen are
redeemed by the Fund during the amortization period, the Fund will be reimbursed
for any unamortized organizational costs in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC DEPRECIATION
(000) (000) (000) (000)
--------------- ------- --------- -------------------
<S> <C> <C> <C>
$40,175 $9,158 $(379) $8,779
</TABLE>
F-38
<PAGE> 254
VAN KAMPEN EQUITY GROWTH FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $356,000 has been reclassified from
accumulated net realized gain and posted to accumulated net investment loss.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment
Management Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of
Morgan Stanley Dean Witter & Co., provide the Fund with investment advisory
services at a fee paid monthly and calculated at the annual rates based on
average daily net assets as indicated below. The Adviser has agreed to reduce
advisory fees payable to it and to reimburse the Fund if necessary, if the
annual operating expenses, as defined, expressed as a percentage of average
daily net assets, exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
--------------------- --------------- --------------
<S> <C> <C>
0.80% 1.50% 2.25%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$3,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B and Class C shares of the Fund, on an
annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $449,522 for Class A shares and deferred sales charges of $1,488,
$69,097, and $6,772 for Class A shares, Class B shares, and Class C shares,
respectively.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $2,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/dealer.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $73,882,000 and sales of approximately $40,725,000 of
investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term
U.S. government securities.
F-39
<PAGE> 255
VAN KAMPEN EUROPEAN EQUITY FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen European Equity Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen European Equity Fund
(the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for the period September 25, 1998 (commencement of operations)
through June 30, 1999, 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 audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at June 30, 1999 by correspondence with the custodian
and brokers, provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-40
<PAGE> 256
VAN KAMPEN EUROPEAN EQUITY FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (94.1%)
BELGIUM (0.5%)
Fortis 'B' ......................... 550 $ 17
G.I.B. Holdings Ltd. ............... 427 16
---------
33
---------
DENMARK (2.4%)
Novo Nordisk A/S 'B' ............... 860 93
Unidanmark A/S 'A' (Registered) .... 940 63
---------
156
---------
FINLAND (3.0%)
KCI Konecranes International plc ... 525 18
Kone Oyj 'B' ....................... 290 36
Merita Ltd. 'A' .................... 14,200 81
Sampo Insurance Co., plc 'A' ....... 2,190 64
---------
199
---------
FRANCE (14.3%)
Alcatel ............................ 460 65
Axa S.A. ........................... 330 40
Banque Nationale de Paris .......... 225 18
Compagnie de Saint-Gobain .......... 490 78
(a)CNP Assurances .................. 3,810 104
Elf Aquitaine ...................... 455 67
Groupe Danone RFD .................. 240 62
Michelin (C.G.D.E.) 'B' ............ 1,940 80
Pernod-Ricard ...................... 1,210 81
Rhone-Poulenc S.A. 'A' ............. 1,820 83
Schneider S.A. ..................... 1,570 88
Suez Lyonnaise des Eaux ............ 190 35
(a)Total S.A. 'B' .................. 1,035 134
---------
935
---------
GERMANY (8.1%)
Adidas-Salomon AG .................. 462 45
BASF AG ............................ 1,760 77
Bayerische AG ...................... 1,275 81
Berliner KraftUnd Litch 'A' ........ 2,701 42
Hoechst AG ......................... 1,873 85
Mannesmann AG ...................... 150 22
Schering AG ........................ 680 73
Siemens AG ......................... 250 19
Volkswagen AG ...................... 1,380 89
---------
533
---------
IRELAND (1.9%)
Bank of Ireland .................... 5,320 90
Greencore Group plc ................ 12,300 38
---------
128
---------
ITALY (5.1%)
Banca Popolare di Bergamo .......... 3,910 86
Marzotto S.p.A. .................... 4,630 36
Mediaset S.p.A. .................... 9,400 84
Telecom Italia S.p.A. .............. 12,500 130
---------
336
---------
NETHERLANDS (5.8%)
ABN Amro Holdings N.V. ............. 1,170 25
Akzo Nobel N.V. .................... 2,180 92
Benckiser N.V. 'B' ................. 700 37
ING Groep N.V. ..................... 2,235 121
<CAPTION>
VALUE
SHARES (000)
---------------------------------------------------------------------------
<S> <C> <C>
Laurus N.V. ................................... 1,094 $ 26
Philips Electronics N.V. ...................... 791 78
---------
379
---------
PORTUGAL (1.8%)
Banco Comercial Portugues S.A. (Registered) ... 1,550 40
Electricidade de Portugal S.A. ................ 4,220 76
---------
116
---------
SPAIN (4.5%)
Banco Popular Espanol S.A. .................... 550 40
Banco Santander Central Hispano S.A. .......... 3,340 35
Endesa S.A. ................................... 3,260 69
Iberdrola S.A. ................................ 4,430 67
(a)Telefonica de Espana ....................... 1,714 83
---------
294
---------
SWEDEN (5.6%)
Autoliv, Inc. SDR ............................. 2,590 79
Ericsson LM 'B' ............................... 1,200 39
ForeningsSparbanker AB ........................ 1,300 18
Nordbanken Holding AB ......................... 12,450 73
Svedala Industri AB ........................... 3,410 62
Svenska Handelsbanken 'A' ..................... 7,920 95
---------
366
---------
SWITZERLAND (12.1%)
Cie Financiere Richemont AG 'A' ............... 108 208
Holderbank Financiere Glarus AG 'B'
(Bearer) .................................... 85 101
Nestle S.A. (Registered) ...................... 111 200
Novartis AG (Registered) ...................... 65 95
Roche Holding AG-Genusshein ................... 7 72
Schindler Holding AG (Registered) ............. 25 39
Union Bank of Switzerland AG (Registered) ..... 255 76
---------
791
---------
UNITED KINGDOM (29.0%)
Aegis Group plc ............................... 23,560 52
Allied Domecq plc ............................. 10,570 102
Allied Zurich plc ............................. 7,950 100
BG plc ........................................ 13,100 80
BOC Group plc ................................. 4,350 85
British Telecommunications plc ................ 7,950 133
Burmah Castrol plc ............................ 3,591 68
Capital Radio plc ............................. 5,950 79
Centrica plc .................................. 23,400 55
Diageo plc .................................... 5,760 60
Glaxo Wellcome plc ............................ 1,200 33
Great Universal Stores plc .................... 8,800 98
Halma plc ..................................... 24,800 41
Imperial Tobacco Group plc .................... 9,300 102
Lloyds TSB Group plc .......................... 4,000 54
Morgan Crucible Co. plc ....................... 10,900 46
Prudential Corp. plc .......................... 5,800 85
Reckitt & Colman plc .......................... 11,294 118
Royal & Sun Alliance Insurance Group plc ...... 6,473 58
Royal Bank of Scotland Group plc .............. 5,320 71
Sainsbury (J) plc ............................. 5,000 32
Scottish & Southern Energy plc ................ 8,200 84
Shell Transport & Trading Co. plc ............. 5,600 42
Smith & Nephew plc ............................ 26,700 81
SSL International plc ......................... 3,200 37
Tesco plc ..................................... 10,800 28
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE> 257
VAN KAMPEN EUROPEAN EQUITY FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
VALUE
SHARES (000)
----------------------------------------------------------------
<S> <C> <C>
</TABLE>
UNITED KINGDOM (CONT.)
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
United News & Media plc .................... 200 $ 2
WPP Group plc .............................. 9,100 77
-------
1,903
-------
TOTAL COMMON STOCKS ........................ 6,169
-------
PREFERRED STOCKS (3.1%)
GERMANY (3.1%)
Fresenius AG ............................... 684 120
Henkel KGaA AG ............................. 735 52
Suedzucker AG-Varzug ....................... 84 33
-------
TOTAL PREFERRED STOCKS ..................... 205
-------
TOTAL LONG-TERM INVESTMENTS (97.2%)
(COST $6,205)............................... 6,374
-------
<CAPTION>
PAR
VALUE
(000)
-------
SHORT-TERM INVESTMENT (5.4%)
<S> <C>
REPURCHASE AGREEMENT (5.4%)
Chase Securities, Inc., 4.55%, dated 6/30/99,............. $ 354
due 7/1/99, to be repurchased at $354, collateralized
by $295 U.S. Treasury Bonds, 11.125%, due 8/15/03,
valued at $364 (COST $354) ............................... 354
TOTAL INVESTMENTS IN SECURITIES (102.6%) (COST $6,559) ... 6,728
-------
FOREIGN CURRENCY (0.3%) (COST $18) ....................... 18
-------
</TABLE>
<TABLE>
<CAPTION>
VALUE
(000)
<S> <C>
-----------------------------------------------------------------
TOTAL INVESTMENTS (102.9%) (COST $6,577) ............... $ 6,746
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.9%) .......... (187)
-------
NET ASSETS (100%) ...................................... $ 6,559
=======
</TABLE>
---------------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
RFD -- Ranked for Dividend
SDR -- Swedish Depositary Receipt
</TABLE>
--------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- ----- ----------
<S> <C> <C>
Consumer Goods .. $ 2,041 31.1%
Finance ......... 1,536 23.4
Services ........ 903 13.8
Energy .......... 785 12.0
Materials ....... 664 10.1
Capital Equipment 445 6.8
--------- ---------
$ 6,374 97.2%
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-42
<PAGE> 258
VAN KAMPEN EUROPEAN EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost $6,559) ............ $6,728
Foreign Currency (Cost $18) .................................. 18
Cash ......................................................... 8
Receivable for:
Investments Sold ........................................... 33
Fund Shares Sold ........................................... 25
Dividends .................................................. 15
Foreign Withholding Tax Reclaim ............................ 6
------
Total Assets ............................................. 6,833
------
LIABILITIES:
Payable for:
Investments Purchased ...................................... 144
Filing and Registration Fees ............................... 34
Professional Fees .......................................... 29
Custody Fees ............................................... 23
Shareholder Reporting Expenses ............................. 14
Distribution Fees .......................................... 8
Advisory Fees .............................................. 7
Transfer Agent Fees ........................................ 6
Directors' Fees and Expenses ............................... 5
Administrative Fees ........................................ 2
Fund Shares Redeemed ....................................... 1
Other ........................................................ 1
------
Total Liabilities ........................................ 274
------
NET ASSETS ..................................................... $6,559
======
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) ............................................. $ 1
Paid in Capital in Excess of Par ............................. 6,296
Net Unrealized Appreciation on Investments ................... 169
Accumulated Net Investment Income ............................ 73
Accumulated Net Realized Gain ................................ 20
------
NET ASSETS ..................................................... $6,559
======
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $2,020,496 and 189,743 Shares
Outstanding) ............................................... $10.65
======
Maximum Sales Charge ......................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share x 100/ (100 - maximum sales charge)) ................. $11.30
======
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $3,081,562 and 290,172 Shares Outstanding)* ...... $10.62
======
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $1,456,542 and 137,493 Shares Outstanding)* ...... $10.59
======
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-43
<PAGE> 259
VAN KAMPEN EUROPEAN EQUITY FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
SEPTEMBER 25, 1998* TO JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends .................................................... $ 130
Interest ..................................................... 18
Less Foreign Taxes Withheld .................................. (17)
-----
Total Income ............................................... 131
-----
EXPENSES:
Shareholder Reports .......................................... 51
Custodian Fees ............................................... 39
Investment Advisory Fees ..................................... 39
Filing and Registration Fees ................................. 38
Professional Fees ............................................ 35
Distribution Fees (Attributed to Classes A, B, and C of
$3, $17, and $10, respectively) ............................ 30
Administrative Fees .......................................... 14
Directors' Fees and Expenses ................................. 6
Transfer Agent Fees .......................................... 6
Other ........................................................ 2
-----
Total Expenses ............................................. 260
Less Expense Reductions .................................... (173)
-----
Net Expenses ............................................... 87
-----
Net Investment Income/Loss ..................................... 44
-----
NET REALIZED GAIN/LOSS ON:
Investments .................................................. 20
Foreign Currency Transactions ................................ (9)
-----
Net Realized Gain/Loss ..................................... 11
-----
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ...................................... --
-----
End of the Period:
Investments ................................................ 169
-----
Net Unrealized Appreciation/Depreciation During the
Period ....................................................... 169
-----
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation .................................... 180
-----
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ................................................... $ 224
=====
</TABLE>
----------
<TABLE>
<S> <C>
* Commencement of operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-44
<PAGE> 260
VAN KAMPEN EUROPEAN EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
SEPTEMBER 25, 1998* TO JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------------
<S> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................. $ 44
Net Realized Gain/Loss ...................................... 11
Net Unrealized Appreciation/Depreciation .................... 169
-------
Net Increase/Decrease in Net Assets Resulting from
Operations ................................................ 224
-------
DISTRIBUTIONS:
Net Investment Income:
Class A ..................................................... (3)
Class B ..................................................... (1)
Class C ..................................................... (1)
-------
Net Decrease in Net Assets Resulting from Distributions ..... (5)
-------
CAPITAL SHARES TRANSACTIONS (1):
Subscribed .................................................. 4,084
Distributions Reinvested .................................... 1
Redeemed .................................................... (745)
-------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ........................................ 3,340
-------
Total Increase/Decrease in Net Assets ....................... 3,559
NET ASSETS--Beginning of Period ............................... 3,000
-------
NET ASSETS--End of Period (Including accumulated net
investment income of $73 at June 30, 1999) .................. $ 6,559
=======
------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (000):
(1) Class A:
----------
Shares:
Subscribed (Initial Shares of 100) ........................ 205
Distributions Reinvested .................................. --
Redeemed .................................................. (15)
-------
Net Increase/Decrease in Class A Shares Outstanding ......... 190
=======
Dollars:
Subscribed ................................................ $ 1,098
Distributions Reinvested .................................. 1
Redeemed .................................................. (157)
-------
Net Increase/Decrease ....................................... $ 942
=======
Beginning Paid in Capital ................................... $ 1,000
=======
Ending Paid in Capital ...................................... $ 1,942+
=======
Class B:
----------
Shares:
Subscribed (Initial Shares of 100) ........................ 305
Distributions Reinvested .................................. --
Redeemed .................................................. (15)
-------
Net Increase/Decrease in Class B Shares Outstanding ......... 290
=======
Dollars:
Subscribed ................................................ $ 2,142
Distributions Reinvested .................................. --
Redeemed .................................................. (152)
-------
Net Increase/Decrease ....................................... $ 1,990
=======
Beginning Paid in Capital ................................... $ 1,000
=======
Ending Paid in Capital ...................................... $ 2,990+
=======
Class C:
----------
Shares:
Subscribed (Initial Shares of 100) ........................ 179
Distributions Reinvested .................................. --
Redeemed .................................................. (42)
-------
Net Increase/Decrease in Class C Shares Outstanding ......... 137
=======
Dollars:
Subscribed ................................................ $ 844
Distributions Reinvested .................................. --
Redeemed .................................................. (436)
-------
Net Increase/Decrease ....................................... $ 408
=======
Beginning Paid in Capital ................................... $ 1,000
=======
Ending Paid in Capital ...................................... $ 1,408+
=======
</TABLE>
----------
<TABLE>
<S> <C>
* Commencement of operations
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 261
VAN KAMPEN EUROPEAN EQUITY FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------- -------------- --------------
SEPTEMBER 25, SEPTEMBER 25, SEPTEMBER 25,
1998* TO 1998* TO 1998* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1999# JUNE 30, 1999# JUNE 30, 1999#
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............. $ 10.000 $ 10.000 $ 10.000
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ..................... 0.133 0.078 0.065
Net Realized and Unrealized Gain/Loss .......... 0.541 0.548 0.534
---------- ---------- ----------
Total From Investment Operations ............... 0.674 0.626 0.599
---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income .......................... (0.025) (0.006) (0.006)
---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ................... $ 10.649 $ 10.620 $ 10.593
========== ========== ==========
TOTAL RETURN (1) ................................. 6.75%** 6.26%** 5.96%**
========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ................ $ 2,020 $ 3,082 $ 1,457
Ratio of Expenses to Average Net Assets .......... 1.70% 2.45% 2.45%
Ratio of Net Investment Income/Loss to
Average Net Assets ............................. 1.64% 0.96% 0.81%
Portfolio Turnover Rate .......................... 51%** 51%** 51%**
-----------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment
Income/Loss .................................... $ 0.36 $ 0.34 $ 0.40
Ratios Before Expense Limitation:
Expenses to Average Net Assets ................. 6.20% 6.61% 7.33%
Net Investment Income/Loss to Average Net
Assets ....................................... (2.87)% (3.20)% (4.13)%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE> 262
VAN KAMPEN EUROPEAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen European Equity Fund (the "Fund") is organized as a separate
diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation, which
is registered as an open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective seeks long-term
capital appreciation. The Fund commenced operations on September 25, 1998.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
-------------------
YEAR OF REDEMPTION CLASS B CLASS C
--------------------------------------------- ------- -------
<S> <C> <C>
First........................................ 5.00% 1.00%
Second....................................... 4.00% None
Third........................................ 3.00% None
Fourth....................................... 2.50% None
Fifth........................................ 1.50% None
Thereafter................................... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization, and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date, net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses),
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The Fund may enter into
foreign currency exchange contracts to attempt to protect securities and related
receivables and payables against changes in future foreign currency exchange
rates. A currency exchange contract is an agreement between two parties to buy
or sell currency at a set price on a future date. The market value of the
contract will fluctuate with changes in currency exchange rates. The contract is
marked-to-market daily and the change in market value is recorded by the Fund as
unrealized gain or loss on foreign currency translation.
Assets and liabilities denominated in foreign currencies and commitments under
forward currency contracts are translated into U.S. dollars at the mean of the
quoted bid and asked prices. Purchases and sales of portfolio securities are
translated at the rate of exchange prevailing when such securities were
purchased or sold. Income and expenses are
F-47
<PAGE> 263
VAN KAMPEN EUROPEAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
translated at rates prevailing when accrued. Realized and unrealized gains and
losses on securities are not segregated for financial reporting purposes from
amounts arising from changes in the market prices of securities. Realized gains
and losses on foreign currency includes the net realized amount from the sale of
the currency and the amount realized between trade date and settlement date on
security and income transactions. However, the foreign currency portion of gains
and losses realized on sales and maturities of foreign denominated debt
securities is treated as ordinary income for U.S. Federal income tax purposes.
Risks may arise upon entering into these contracts from the potential inability
of counterparties to meet the terms of their contracts. Risks may also arise
from the unanticipated movements in the value of a foreign currency relative to
the U.S. dollar.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains, and net unrealized appreciation, as applicable, as the income is earned
or capital gains are recorded.
At June 30, 1999, cost and unrealized appreciation/depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
---------------- ------- ------ -------------
<S> <C> <C> <C>
$6,565 $458 $(295) $163
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $43,000 has been reclassified from
paid in capital in excess of par with approximately $34,000 posted to
accumulated net investment income and approximately $9,000 posted to accumulated
net realized gain.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.), and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------------- -------------- --------------
<S> <C> <C>
1.00% 1.70% 2.45%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$3,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
At June 30, 1999, Van Kampen Funds, Inc. owned 53%, 35%, and 73% of the shares
outstanding of each Class A, B, and C shares in the Fund.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the portfolio, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
F-48
<PAGE> 264
VAN KAMPEN EUROPEAN EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the period ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $27,564 for Class A shares and deferred sales charges of $1,486 and
$1,142 for Class B shares and Class C shares, respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. On October 1, 1998, the Chase Manhattan Bank purchased MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the period ended June 30, 1999, the Fund incurred approximately $2,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/dealer.
C. INVESTMENT TRANSACTIONS: For the period ended June 30, 1999, the Fund made
purchases of approximately $8,423,000 and sales of approximately $2,244,000 of
investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sale of long-term U.S.
government securities.
F-49
<PAGE> 265
VAN KAMPEN FOCUS EQUITY FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Aggressive Equity Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Aggressive Equity Fund
(the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for each of the 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 June 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-50
<PAGE> 266
VAN KAMPEN FOCUS EQUITY FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.4%)
CAPITAL GOODS (24.3%)
AEROSPACE/DEFENSE (1.0%)
(a)Gulfstream Aerospace Corp. .................. 42,600 $ 2,878
---------
ELECTRICAL EQUIPMENT (5.8%)
General Electric Co. ........................... 141,200 15,956
---------
MANUFACTURING (DIVERSIFIED) (14.0%)
Textron, Inc. .................................. 77,500 6,379
Tyco International Ltd. ........................ 227,900 21,594
United Technologies Corp. ..................... 152,500 10,932
---------
38,905
---------
OFFICE EQUIPMENT & SUPPLIES (3.5%)
Pitney Bowes, Inc. ............................. 149,500 9,605
---------
TOTAL CAPITAL GOODS .................................. 67,344
---------
COMMUNICATION SERVICES (12.1%)
TELECOMMUNICATIONS (CELLULAR/WIRELESS) (5.0%)
(a)Associated Group, Inc. 'A' .................... 39,200 2,553
(a)Associated Group, Inc. 'B' .................... 174,100 11,349
---------
13,902
---------
TELECOMMUNICATIONS (LONG DISTANCE) (4.4%)
American Telephone & Telegraph Co. ............... 35,675 1,991
(a)MCI WorldCom, Inc. ............................ 116,900 10,083
---------
12,074
---------
TELEPHONE (2.7%)
Bell Atlantic Corp. .............................. 115,200 7,531
---------
TOTAL COMMUNICATION SERVICES ......................... 33,507
---------
CONSUMER CYCLICALS (13.6%)
RETAIL (BUILDING SUPPLIES) (2.4%)
Home Depot, Inc. ................................. 103,400 6,663
---------
RETAIL (GENERAL MERCHANDISE) (3.1%)
(a)Costco Cos., Inc. ............................. 106,000 8,486
---------
RETAIL (SPECIALTY) (6.1%)
(a)Abercrombie & Fitch Co. 'A' ................... 250,000 12,000
Gap, Inc. ........................................ 98,475 4,961
---------
16,961
---------
SERVICES (COMMERCIAL & CONSUMER) (2.0%)
(a)Nielsen Media Research, Inc. .................. 190,800 5,581
---------
TOTAL CONSUMER CYCLICALS ............................. 37,691
---------
CONSUMER STAPLES (7.7%)
BROADCASTING (TV, RADIO, & CABLE) (5.3%)
(a)AT&T Corp. Liberty Media 'A' .................. 57,400 2,109
(a)Chancellor Media Corp. 'A' .................... 48,300 2,663
(a)Clear Channel
Communications, Inc. ........................... 141,400 9,748
---------
14,520
---------
FOODS (1.2%)
(a)Keebler Foods Co. ............................. 111,600 3,390
---------
HOUSEHOLD PRODUCTS (NON-DURABLES) (1.2%)
Procter & Gamble Co. ............................. 38,400 3,427
---------
TOTAL CONSUMER STAPLES ............................... 21,337
---------
FINANCIAL (3.0%)
BANKS (MAJOR REGIONAL) (1.6%)
Bank of New York Co., Inc. ....................... 121,600 4,461
---------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL (DIVERSIFIED) (1.4%)
Citigroup, Inc. .................................. 82,500 $ 3,919
---------
TOTAL FINANCIAL ...................................... 8,380
---------
HEALTH CARE (13.0%)
HEALTH CARE (DIVERSIFIED) (6.7%)
Bristol-Myers Squibb Co. ......................... 116,300 8,192
Warner-Lambert Co. ............................... 151,000 10,476
---------
18,668
---------
HEALTH CARE (DRUGS--GENERIC & OTHERS) (2.7%)
(a)Amgen, Inc. ................................... 123,800 7,536
---------
HEALTH CARE (DRUGS--MAJOR PHARMACEUTICALS) (3.6%)
Pfizer, Inc. ..................................... 37,700 4,137
Schering-Plough Corp. ............................ 109,300 5,793
---------
9,930
---------
TOTAL HEALTH CARE .................................... 36,134
---------
TECHNOLOGY (20.2%)
COMMUNICATION EQUIPMENT (4.1%)
(a)American Tower Corp. 'A' ...................... 245,900 5,902
Motorola, Inc. ................................... 56,700 5,372
---------
11,274
---------
COMPUTERS (NETWORKING) (5.5%)
(a)Cisco Systems, Inc. ........................... 235,600 15,196
---------
COMPUTERS (SOFTWARE & SERVICES) (6.6%)
(a)America Online, Inc. .......................... 35,700 3,945
(a)Juniper Networks, Inc. ........................ 7,700 1,147
(a)Microsoft Corp. ............................... 145,700 13,141
---------
18,233
---------
ELECTRONICS (SEMICONDUCTORS) (2.0%)
Intel Corp. ...................................... 95,400 5,676
---------
EQUIPMENT (SEMICONDUCTORS) (2.0%)
(a)Applied Materials, Inc. ....................... 75,900 5,607
---------
TOTAL TECHNOLOGY ..................................... 55,986
---------
UTILITIES (2.5%)
ELECTRIC COMPANIES (2.5%)
Montana Power Co. ................................ 98,200 6,923
---------
TOTAL LONG-TERM INVESTMENTS (96.4%) (COST $228,806) .. 267,302
---------
<CAPTION>
PAR
VALUE
(000)
---------
SHORT-TERM INVESTMENT (2.6%)
<S> <C>
REPURCHASE AGREEMENT (2.6%)
Chase Securities, Inc., 4.55%, dated........... $ 7,218
6/30/99, due 7/1/99, to be
repurchased at $7,219
collateralized by $6,705 U.S.
Treasury Bonds, 7.25%, due 5/15/16,
valued at $7,452 (COST $7,218) .............. 7,218
TOTAL INVESTMENTS (99.0%) (COST $236,024) ............... 274,520
---------
OTHER ASSETS IN EXCESS OF LIABILITIES (1.0%) ............ 2,687
---------
NET ASSETS (100%) ....................................... $ 277,207
=========
</TABLE>
----------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-51
<PAGE> 267
VAN KAMPEN FOCUS EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
----------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $236,024) .......................... $ 274,520
Receivable for:
Investments Sold ............................................ 4,394
Fund Shares Sold ............................................ 1,909
Dividends ................................................... 65
Interest .................................................... 1
Deferred Organizational Costs ................................. 15
Other ......................................................... 11
---------
Total Assets ................................................ 280,915
---------
LIABILITIES:
Payable for:
Investments Purchased ....................................... 2,163
Fund Shares Redeemed ........................................ 853
Distribution Fees ........................................... 348
Investment Advisory Fees .................................... 148
Administrative Fees ......................................... 54
Transfer Agent Fees ......................................... 46
Shareholder Reporting Expenses .............................. 33
Professional Fees ........................................... 28
Directors' Fees and Expenses ................................ 15
Custody Fees ................................................ 13
Other ......................................................... 7
---------
Total Liabilities ........................................... 3,708
---------
NET ASSETS .................................................... $ 277,207
=========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) .............................................. $ 12
Paid in Capital in Excess of Par .............................. 221,070
Unrealized Appreciation on Investments ........................ 38,496
Accumulated Net Realized Gain ................................. 17,644
Accumulated Net Investment Loss ............................... (15)
---------
NET ASSETS ...................................................... $ 277,207
=========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $73,828,526 and 3,212,182 Shares
Outstanding) ................................................ $ 22.98
=========
Maximum Sales Charge .......................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100/ (100 - maximum sales charge)) .................. $ 24.38
=========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $176,188,744 and 7,872,472 Shares
Outstanding)* ............................................... $ 22.38
=========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $27,189,247 and 1,215,821 Shares
Outstanding)* ............................................... $ 22.36
=========
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-52
<PAGE> 268
VAN KAMPEN FOCUS EQUITY FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends .................................................. $ 1,309
Interest ................................................... 431
--------
Total Income ............................................. 1,740
--------
EXPENSES:
Investment Advisory Fees ................................... 2,068
Distribution Fees (Attributed to Classes A, B, and C of
$155, $1,433, and $244, respectively) .................... 1,832
Administrative Fees ........................................ 579
Transfer Agent Fees ........................................ 157
Custodian Fees ............................................. 96
Shareholder Reports ........................................ 90
Filing and Registration Fees ............................... 52
Professional Fees .......................................... 49
Directors' Fees and Expenses ............................... 11
Amortization of Organizational Costs ....................... 11
Other ...................................................... 8
--------
Total Expenses ........................................... 4,953
Less Expense Reductions .................................. (252)
--------
Net Expenses ............................................. 4,701
--------
Net Investment Income/Loss ............................... (2,961)
--------
NET REALIZED GAIN/LOSS ON:
Investments ................................................ 24,769
Securities Sold Short ...................................... (176)
--------
Net Realized Gain/Loss ................................... 24,593
--------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period .................................... 6,123
--------
End of the Period
Investments .............................................. 38,496
--------
Net Unrealized Appreciation/Depreciation During the
Period ..................................................... 32,373
--------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation .................................. 56,966
--------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ................................................. $ 54,005
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-53
<PAGE> 269
VAN KAMPEN FOCUS EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................... $ (2,961) $ (1,097)
Net Realized Gain/Loss ........................................ 24,593 23,029
Net Unrealized Appreciation/Depreciation ...................... 32,373 2,644
--------- ---------
Net Increase/Decrease in Net Assets Resulting from
Operations .................................................. 54,005 24,576
--------- ---------
DISTRIBUTIONS:
Net Realized Gain:
Class A ....................................................... (4,962) (3,187)
Class B ....................................................... (11,751) (5,696)
Class C ....................................................... (2,021) (1,157)
--------- ---------
Net Decrease in Net Assets Resulting from Distributions ....... (18,734) (10,040)
--------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed .................................................... 95,378 171,376
Distributions Reinvested ...................................... 17,353 9,563
Redeemed ...................................................... (90,199) (42,384)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions .......................................... 22,532 138,555
--------- ---------
Total Increase/Decrease in Net Assets ......................... 57,803 153,091
NET ASSETS--Beginning of Period ................................. 219,404 66,313
--------- ---------
NET ASSETS--End of Period (Including accumulated net
investment loss of $(15) and $(4), respectively) .............. $ 277,207 $ 219,404
========= =========
-----------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) CLASS A
Shares:
Subscribed .................................................. 1,623 3,038
Distributions Reinvested .................................... 266 177
Redeemed .................................................... (1,877) (1,340)
--------- ---------
Net Increase/Decrease in Class A Shares Outstanding ........... 12 1,875
========= =========
Dollars:
Subscribed .................................................. $ 31,396 $ 59,406
Distributions Reinvested .................................... 4,594 3,064
Redeemed .................................................... (34,991) (26,003)
--------- ---------
Net Increase/Decrease ......................................... $ 999 $ 36,467
========= =========
Ending Paid in Capital ........................................ $ 57,462+ $ 56,463
========= =========
CLASS B:
Shares:
Subscribed .................................................. 2,694 4,818
Distributions Reinvested .................................... 650 314
Redeemed .................................................... (2,106) (539)
--------- ---------
Net Increase/Decrease in Class B Shares Outstanding ........... 1,238 4,593
========= =========
Dollars:
Subscribed .................................................. $ 50,034 $ 92,956
Distributions Reinvested .................................... 10,965 5,363
Redeemed .................................................... (38,411) (10,091)
--------- ---------
Net Increase/Decrease ......................................... $ 22,588 $ 88,228
========= =========
Ending Paid in Capital ........................................ $ 142,680+ $ 120,092
========= =========
CLASS C:
Shares:
Subscribed .................................................. 744 982
Distributions Reinvested .................................... 106 67
Redeemed .................................................... (900) (343)
--------- ---------
Net Increase/Decrease in Class C Shares Outstanding ........... (50) 706
========= =========
Dollars:
Subscribed .................................................. $ 13,948 $ 19,014
Distributions Reinvested .................................... 1,794 1,136
Redeemed .................................................... (16,797) (6,290)
--------- ---------
Net Increase/Decrease ......................................... $ (1,055) $ 13,860
========= =========
Ending Paid in Capital ........................................ $ 20,928+ $ 21,983
========= =========
</TABLE>
----------
<TABLE>
<S> <C>
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-54
<PAGE> 270
VAN KAMPEN FOCUS EQUITY FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------
YEAR ENDED JUNE 30,
----------------------------------------------------- JANUARY 2, 1996*
SELECTED PER SHARE DATA AND RATIOS 1999 # 1998 # 1997 TO JUNE 30, 1996
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 20.007 $ 16.98 $ 14.40 $ 12.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ................ (0.141) (0.07) 0.01 0.06
Net Realized and Unrealized
Gain/Loss ............................... 4.712 5.03 3.95 2.40
----------- ----------- ----------- -----------
Total From Investment Operations .......... 4.571 4.96 3.96 2.46
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income ..................... -- -- (0.03) (0.06)
Net Realized Gain ......................... (1.594) (1.93) (1.35) --
----------- ----------- ----------- -----------
Total Distributions ....................... (1.594) (1.93) (1.38) (0.06)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD .............. $ 22.984 $ 20.01 $ 16.98 $ 14.40
=========== =========== =========== ===========
TOTAL RETURN (1) ............................ 25.57% 30.93% 28.93% 20.52%**
=========== =========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........... $ 73,829 $ 64,035 $ 22,521 $ 5,382
Ratio of Expenses to Average Net
Assets .................................... 1.50% 1.50% 1.57% 2.03%
Ratio of Net Investment Income/Loss to
Average Net Assets ........................ (0.73)% (0.37)% (0.04)% 1.22%
Portfolio Turnover Rate ..................... 282% 308% 241% 204%**
-------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/Loss ............................. $ 0.02 $ 0.04 $ 0.02 $ 0.06
Ratios Before Expense Limitation:
Expenses to Average Net Assets ............ 1.61% 1.71% 2.38% 3.26%
Net Investment Income/Loss to Average
Net Assets .............................. (0.84)% (0.59)% (0.85)% (0.01)%
Ratio of Expenses to Average Net Assets
excluding dividend expense on
securities sold short ..................... 1.50% 1.50% 1.50% 1.50%
-------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
-----------------------------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------------------------- JANUARY 2, 1996*
SELECTED PER SHARE DATA AND RATIOS 1999 # 1998 # 1997 TO JUNE 30, 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ........ $ 19.670 $ 16.85 $ 14.38 $ 12.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ................ (0.282) (0.21) (0.02) 0.03
Net Realized and Unrealized
Gain/Loss ............................... 4.586 4.96 3.86 2.39
------------ ------------ ------------ ------------
Total From Investment Operations .......... 4.304 4.75 3.84 2.42
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income ..................... -- -- (0.02) (0.04)
Net Realized Gain ......................... (1.594) (1.93) (1.35) --
------------ ------------ ------------ ------------
Total Distributions ....................... (1.594) (1.93) (1.37) (0.04)
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD .............. $ 22.380 $ 19.67 $ 16.85 $ 14.38
============ ============ ============ ============
TOTAL RETURN (1) ............................ 24.59% 29.94% 28.01% 20.18%**
============ ============ ============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........... $ 176,189 $ 130,497 $ 34,382 $ 2,426
Ratio of Expenses to Average Net
Assets .................................... 2.25% 2.25% 2.32% 2.67%
Ratio of Net Investment Income/Loss to
Average Net Assets ........................ (1.50)% (1.11)% (0.83)% 0.43%
Portfolio Turnover Rate ..................... 282% 308% 241% 204%**
---------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/Loss ............................. $ 0.02 $ 0.04 $ 0.02 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets ............ 2.36% 2.47% 2.88% 3.79%
Net Investment Income/Loss to Average
Net Assets .............................. (1.61)% (1.34)% (1.43)% (0.69)%
Ratio of Expenses to Average Net Assets
excluding dividend expense on
securities sold short ..................... 2.25% 2.25% 2.25% 2.25%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------------- JANUARY 2, 1996*
SELECTED PER SHARE DATA AND RATIOS 1999 # 1998 # 1997 TO JUNE 30, 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ......................... $ 19.655 $ 16.83 $ 14.37 $ 12.00
----------- ----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ................................. (0.278) (0.21) (0.06) 0.03
Net Realized and Unrealized Gain/Loss ...................... 4.580 4.97 3.89 2.38
----------- ----------- ----------- -----------
Total From Investment Operations ........................... 4.302 4.76 3.83 2.41
----------- ----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income ...................................... -- -- (0.02) (0.04)
Net Realized Gain .......................................... (1.594) (1.93) (1.35) --
----------- ----------- ----------- -----------
Total Distributions ........................................ (1.594) (1.93) (1.37) (0.04)
----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ............................... $ 22.363 $ 19.66 $ 16.83 $ 14.37
=========== =========== =========== ===========
TOTAL RETURN (1) ............................................. 24.67% 29.90% 28.04% 20.10%**
----------- ----------- ----------- -----------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ............................ $ 27,189 $ 24,872 $ 9,410 $ 2,582
Ratio of Expenses to Average Net Assets ...................... 2.25% 2.25% 2.32% 2.67%
Ratio of Net Investment Income/Loss to Average Net Assets .... (1.48)% (1.13)% (0.77)% 0.44%
Portfolio Turnover Rate ...................................... 282% 308% 241% 204%**
---------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period
Per Share Benefit to Net Investment Income/Loss ............ $ 0.02 $ 0.04 $ 0.02 $ 0.07
Ratios Before Expense Limitation:
Expenses to Average Net Assets ............................. 2.36% 2.25% 3.23% 3.80%
Net Investment Income/Loss to Average Net Assets ........... (1.59)% (1.35)% (1.67)% (0.69)%
Ratio of Expenses to Average Net Assets excluding dividend
expense
on securities sold short ................................... 2.25% 2.25% 2.25% 2.25%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-55
<PAGE> 271
VAN KAMPEN FOCUS EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Aggressive Equity Fund (the "Fund") is organized as a separate
non-diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation,
which is registered as an open-end management investment corporation, under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to seek capital appreciation by investing primarily in a non-diversified
portfolio of corporate equity and equity linked securities. The Fund commenced
operations on January 2, 1996.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First............................... 5.00% 1.00%
Second.............................. 4.00% None
Third............................... 3.00% None
Fourth.............................. 2.50% None
Fifth............................... 1.50% None
Thereafter.......................... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date.
Interest income is recognized on an accrual basis except where collection is in
doubt. Income, expenses (other than class specific expenses), and realized and
unrealized gains or losses are allocated to each class of shares based upon
their relative net assets. Distributions from the Fund are recorded on the
ex-distribution date.
4. SHORT SALES: The Fund may sell securities short. A short sale is a
transaction in which the Fund sells securities it may or may not own, but has
borrowed, in anticipation of a decline in the market price of the securities.
The Fund is obligated to purchase securities at the market price to replace the
borrowed securities at the time of replacement. The Fund may have to pay a
premium to borrow the securities as well as pay dividends or interest payable on
the securities until they are replaced. The Fund's obligation to replace the
securities borrowed in connection with a short sale will generally be secured by
collateral deposited with the broker that consists of cash, U.S. government
securities, or other liquid, high grade debt obligations. In addition, the Fund
will place in a segregated account with its Custodian an amount of cash, U.S.
government securities, or other liquid high grade debt obligations equal to the
difference, if any, between (1) the market value of the securities sold at the
time they were sold short, and (2) any cash, U.S. government securities, or
other liquid high grade debt obligations deposited as collateral with the broker
in connection with the short sale (not including the proceeds of the short
sale). Short sales by the Fund involve certain risks and special considerations.
Possible losses from short sales differ from
F-56
<PAGE> 272
VAN KAMPEN FOCUS EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
losses that could be incurred from the purchase of a security, because losses
from short sales may be unlimited, whereas losses from purchases cannot exceed
the total amount invested.
5. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Fund's commencement of operations. The Adviser has agreed that in the event
any of the initial shares of the Fund originally purchased by Van Kampen are
redeemed by the Fund during the amortization period, the Fund will be reimbursed
for any unamortized organizational costs in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.
6. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
At June 30, 1999, cost and unrealized appreciation/depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
-------- -------- -------- -------------
<S> <C> <C> <C>
$236,420 $40,268 $(2,168) $38,100
</TABLE>
7. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital. For the year ended June
30, 1999 approximately $2,962,000 has been reclassified from accumulated net
realized gain/loss with approximately $2,950,000 posted to accumulated net
investment income/loss and approximately $12,000 posted to paid in capital.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
ADVISORY MAX. OPERATING MAX. OPERATING
FEE EXPENSE RATIO EXPENSE RATIO
-------- -------------- --------------
<S> <C> <C>
0.90% 1.50% 2.25%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$9,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $584,668 for Class A shares and deferred sales charges of $613,437
and $30,933 for Class B shares and Class C shares, respectively.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen.
F-57
<PAGE> 273
VAN KAMPEN FOCUS EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Under the deferred compensation plan, Directors may elect to defer all or a
portion of their compensation to a later date. Benefits under the retirement
plan are payable for a ten-year period and are based upon each Director's years
of service to the Fund. The maximum annual benefit per director under the plan
is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $14,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/dealer.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $631,670,000 and sales of approximately $630,129,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
F-58
<PAGE> 274
VAN KAMPEN GLOBAL EQUITY FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Global Equity Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Global Equity Fund (the
"Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the results of
its operations, the changes in its net assets and the financial highlights for
each of the 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 June 30, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-59
<PAGE> 275
VAN KAMPEN GLOBAL EQUITY FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (96.5%)
AUSTRALIA (0.9%)
CSR Ltd. ..................................... 2,291,600 $ 6,528
---------
BELGIUM (1.0%)
Delhaize Freres et Cie 'Le Lion'
S.A. ....................................... 84,360 7,191
---------
CANADA (2.4%)
BCT.Telus Communications, Inc. ............... 281,524 6,761
BCT.Telus Communications, Inc. 'A' ........... 93,841 2,219
Potash Corp. of Saskatchewan, Inc. ........... 131,600 6,798
(a)Renaissance Energy Ltd. ................... 130,000 1,746
---------
17,524
---------
DENMARK (0.5%)
Danisco A/S .................................. 82,550 3,726
---------
FRANCE (10.1%)
Bongrain S.A. ................................ 17,664 6,675
Elf Aquitaine ................................ 100,760 14,805
France Telecom S.A. .......................... 149,900 11,338
Groupe Danone RFD ............................ 54,800 14,146
Michelin (C.G.D.E.) 'B' ...................... 82,420 3,376
Pernod-Ricard ................................ 74,200 4,980
Rhone-Poulenc S.A. 'A' ....................... 221,500 10,134
Scor ......................................... 171,450 8,515
---------
73,969
---------
GERMANY (3.8%)
BASF AG ...................................... 264,350 11,628
Bayer AG ..................................... 138,100 5,753
Veba AG ...................................... 182,400 10,773
---------
28,154
---------
IRELAND (2.4%)
Bank of Ireland .............................. 725,436 12,207
Green Property plc ........................... 988,900 5,463
---------
17,670
---------
ITALY (3.0%)
Mediaset S.p.A. .............................. 1,029,600 9,164
Telecom Italia S.p.A. ........................ 2,326,400 12,635
---------
21,799
---------
JAPAN (9.3%)
Daiichi Pharmaceutical Co., Ltd. ............. 457,000 7,101
Fuji Photo Film Co. .......................... 313,000 11,860
Hitachi Ltd. ................................. 665,000 6,244
KAO Corp. .................................... 607,000 17,074
Nippon Telegraph & Telephone Corp. ADR ....... 1,905 22,223
Sumitomo Marine & Fire Insurance Co. ......... 626,000 3,781
---------
68,283
---------
NETHERLANDS (4.4%)
ABN Amro Holding N.V. ........................ 316,300 6,858
Benckiser N.V. 'B' ........................... 135,935 7,264
ING Groep N.V. ............................... 201,980 10,949
Philips Electronics N.V. ..................... 76,728 7,578
---------
32,649
---------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------------------
<S> <C> <C>
PORTUGAL (0.7%)
Cimpor-Cimentos de Portugal S.A. ............. 192,720 $ 4,975
---------
SPAIN (3.5%)
Iberdrola S.A. ............................... 738,500 11,263
(a)Telefonica de Espana ...................... 302,302 14,580
---------
25,843
---------
SWEDEN (0.9%)
Nordbanken Holding AB ........................ 1,120,650 6,576
---------
SWITZERLAND (8.9%)
Cie Financiere Richemont AG 'A' .............. 13,720 26,437
Forbo Holding AG (Registered) ................ 13,100 5,217
Holderbank Financiere Glarus AG 'B'
(Bearer) ..................................... 7,404 8,756
Nestle S.A. (Registered) ..................... 11,680 21,084
Swisscom AG (Registered) ..................... 10,500 3,958
---------
65,452
---------
UNITED KINGDOM (11.0%)
Allied Domecq plc ............................ 1,047,200 10,110
Blue Circle Industries plc ................... 823,750 5,484
Burmah Castrol plc ........................... 409,487 7,777
Imperial Tobacco Group plc ................... 665,300 7,262
Invensys plc ................................. 1,447,940 6,858
Reckitt & Colman plc ......................... 1,353,243 14,121
Royal & Sun Alliance Insurance Group
plc ........................................ 1,138,911 10,222
Sainsbury (J) plc ............................ 1,479,600 9,336
Wolseley plc ................................. 618,100 4,656
WPP Group plc ................................ 633,000 5,357
---------
81,183
---------
UNITED STATES (33.7%)
Albertson's, Inc. ............................ 446,418 23,018
Aluminum Co. of America ...................... 68,000 4,208
(a)BJ's Wholesale Club, Inc. ................. 273,200 8,213
Boise Cascade Corp. .......................... 135,900 5,844
Borg-Warner Automotive, Inc. ................. 126,450 6,955
(a)Cadiz Land Co., Inc. ...................... 403,898 3,812
Chase Manhattan Corp. ........................ 88,950 7,705
COMSAT Corp. ................................. 453,700 14,745
(a)Data General Corp. ........................ 522,100 7,603
Enhance Financial Services Group,
Inc. ....................................... 393,000 7,762
FINOVA Group, Inc. ........................... 192,605 10,136
(a)GenRad, Inc. .............................. 415,500 8,648
Georgia-Pacific Corp. ........................ 79,700 3,776
Goodrich (B.F.) Co. .......................... 169,200 7,191
Houghton Mifflin Co. ......................... 350,963 16,517
IBP, Inc. .................................... 200,000 4,750
MBIA, Inc. ................................... 215,110 13,928
Mellon Bank Corp. ............................ 312,100 11,353
(a)NCR Corp. ................................. 98,900 4,828
(a)Noble Drilling Corp. ...................... 190,700 3,754
(a)Ocean Energy, Inc. ........................ 498,070 4,794
Pharmacia & Upjohn, Inc. ..................... 33,200 1,886
Philip Morris Cos., Inc. ..................... 640,970 25,759
Rite Aid Corp. ............................... 143,400 3,531
Sears, Roebuck & Co. ......................... 6,500 290
Tenneco, Inc. ................................ 149,400 3,567
Terra Nova (Bermuda) Holdings Ltd. 'A' ....... 199,100 5,363
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-60
<PAGE> 276
VAN KAMPEN GLOBAL EQUITY FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
--------------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
Tupperware Corp. ....................................... 320,400 $ 8,170
Unicom Corp. ........................................... 337,700 13,023
U.S. Bancorp ........................................... 105,600 3,590
UST Corp. .............................................. 124,100 3,754
--------
248,473
--------
TOTAL COMMON STOCKS ........................................ 709,995
--------
PREFERRED STOCK (0.8%)
GERMANY (0.8%)
Volkswagen AG .......................................... 163,600 6,149
--------
TOTAL LONG-TERM INVESTMENTS (97.3%) (COST $654,745) ........ 716,144
--------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE VALUE
(000) (000)
------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.7%)
REPURCHASE AGREEMENT (2.7%)
Chase Securities, Inc., 4.55%, dated
6/30/99, $ 19,800
due 7/1/99, to be repurchased at $19,803,
collateralized by $13,255 U.S. Treasury
Bonds, 11.25%, due 2/15/15, valued at
$20,426 (COST $19,800) .......................... $ 19,800
---------
TOTAL INVESTMENTS IN SECURITIES (100.0%) (COST
$674,545) ........................................... 735,944
FOREIGN CURRENCY (0.1%) (COST $1,140) ................. 1,139
---------
TOTAL INVESTMENTS (100.1%) (COST $675,685) ............ 737,083
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.1%) ......... (873)
---------
NET ASSETS (100%) ..................................... $ 736,210
=========
</TABLE>
----------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
ADR -- American Depositary Receipt
RFD -- Ranked for Dividend
</TABLE>
--------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- -------- ----------
<S> <C> <C>
Consumer Goods ......................... $227,232 30.9%
Services ............................... 162,862 22.1
Finance ................................ 131,976 17.9
Materials .............................. 73,622 10.0
Energy ................................. 64,180 8.7
Capital Equipment ...................... 45,847 6.3
Diversified Operations ................. 10,425 1.4
-------- ----
$716,144 97.3%
======== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-61
<PAGE> 277
VAN KAMPEN GLOBAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
---------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost $674,545) ........... $735,944
Foreign Currency (Cost $1,140) ................................ 1,139
Receivable for:
Dividends ................................................... 2,320
Foreign Withholding Tax Reclaim ............................. 678
Investments Sold ............................................ 498
Fund Shares Sold ............................................ 379
Interest .................................................... 3
Deferred Organizational Costs ................................. 15
Other ......................................................... 90
--------
Total Assets ................................................ 741,066
--------
LIABILITIES:
Payable for:
Investments Purchased ....................................... 1,371
Fund Shares Redeemed ........................................ 1,175
Distribution Fees ........................................... 1,132
Investment Advisory Fees .................................... 605
Administrative Fees ......................................... 152
Transfer Agent Fees ......................................... 101
Custody Fees ................................................ 96
Shareholder Reporting Expenses .............................. 88
Professional Fees ........................................... 73
Bank Overdraft .............................................. 22
Directors' Fees and Expenses ................................ 41
--------
Total Liabilities ........................................... 4,856
--------
NET ASSETS .................................................... $736,210
========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) .............................................. $ 64
Paid in Capital in Excess of Par .............................. 650,388
Net Unrealized Appreciation on Investments and Foreign
Currency Translations ....................................... 61,356
Accumulated Net Realized Gain ................................. 24,214
Undistributed Net Investment Income ........................... 188
--------
NET ASSETS ...................................................... $736,210
========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $76,730,861 and 6,690,456 Shares
Outstanding) ................................................ $ 11.47
========
Maximum Sales Charge .......................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100/ (100 - maximum sales charge)) .................. $ 12.17
========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $596,339,278 and 52,200,891 Shares
Outstanding)* ............................................... $ 11.42
========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $63,139,799 and 5,527,471 Shares
Outstanding)* ............................................... $ 11.42
========
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-62
<PAGE> 278
VAN KAMPEN GLOBAL EQUITY FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
---------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ..................................................... $ 15,474
Interest ...................................................... 1,303
Less Foreign Taxes Withheld ................................... (1,258)
--------
Total Income ................................................ 15,519
--------
EXPENSES:
Investment Advisory Fees ...................................... 7,424
Distribution Fees (Attributed to Classes A, B, and C of
$191, $6,007, and $657, respectively) ....................... 6,855
Administrative Fees ........................................... 1,867
Shareholder Reports ........................................... 311
Transfer Agent Fees ........................................... 264
Custodian Fees ................................................ 214
Professional Fees ............................................. 115
Filing and Registration fees .................................. 75
Amortization of Organizational Costs .......................... 38
Directors' Fees and Expenses .................................. 32
Other ......................................................... 33
--------
Total Expenses .............................................. 17,228
--------
Net Investment Income/Loss ...................................... (1,709)
--------
NET REALIZED GAIN/LOSS ON:
Investments ................................................... 24,305
Foreign Currency Transactions ................................. (535)
--------
Net Realized Gain/Loss ...................................... 23,770
--------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ....................................... 61,355
--------
End of the Period:
Investments ................................................. 61,399
Foreign Currency Translations ............................... (43)
--------
61,356
--------
Net Unrealized Appreciation/Depreciation During the
Period ........................................................ 1
--------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ..................................... 23,771
--------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS .................................................... $ 22,062
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-63
<PAGE> 279
VAN KAMPEN GLOBAL EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 29, 1997* TO
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................... $ (1,709) $ 844
Net Realized Gain/Loss ........................................ 23,770 1,689
Net Unrealized Appreciation/Depreciation ...................... 1 61,355
--------- ---------
Net Increase/Decrease in Net Assets Resulting from
Operations .................................................. 22,062 63,888
--------- ---------
DISTRIBUTIONS:
Net Investment Income:
Class A ....................................................... (532) (88)
Class B ....................................................... (472) (188)
Class C ....................................................... (52) (18)
In Excess of Net Investment Income:
Class A ....................................................... (94) --
Class B ....................................................... (83) --
Class C ....................................................... (9) --
--------- ---------
(1,242) (294)
--------- ---------
Net Realized Gain:
Class A ....................................................... (97) --
Class B ....................................................... (796) --
Class C ....................................................... (87) --
--------- ---------
(980) --
--------- ---------
Net Decrease in Net Assets Resulting from Distributions ....... (2,222) (294)
--------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed .................................................... 166,640 739,265
Distributions Reinvested ...................................... 2,068 276
Redeemed ...................................................... (225,647) (29,826)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions .......................................... (56,939) 709,715
--------- ---------
Total Increase/Decrease in Net Assets ......................... (37,099) 773,309
NET ASSETS--Beginning of Period ................................. 773,309 --
--------- ---------
NET ASSETS--End of Period (Including undistributed net
investment income of $188 and $1,301, respectively) ........... $ 736,210 $ 773,309
========= =========
------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
Shares:
Subscribed .................................................. 7,057 7,876
Distributions Reinvested .................................... 60 8
Redeemed .................................................... (7,666) (645)
--------- ---------
Net Increase/Decrease in Class A Shares Outstanding ........... (549) 7,239
========= =========
Dollars:
Subscribed .................................................. $ 76,578 $ 81,031
Distributions Reinvested .................................... 652 78
Redeemed .................................................... (82,720) (7,009)
--------- ---------
Net Increase/Decrease ......................................... $ (5,490) $ 74,100
========= =========
Ending Paid in Capital ........................................ $ 68,606+ $ 74,096
========= =========
Class B:
-----------------------------------------------------------------
Shares:
Subscribed .................................................. 7,094 57,900
Distributions Reinvested .................................... 118 19
Redeemed .................................................... (11,280) (1,650)
--------- ---------
Net Increase/Decrease in Class B Shares Outstanding ........... (4,068) 56,269
========= =========
Dollars:
Subscribed .................................................. $ 75,705 $ 588,891
Distributions Reinvested .................................... 1,280 180
Redeemed .................................................... (120,388) (17,780)
--------- ---------
Net Increase/Decrease ......................................... $ (43,403) $ 571,291
========= =========
Ending Paid in Capital ........................................ $ 527,856+ $ 571,259
========= =========
Class C:
-----------------------------------------------------------------
Shares:
Subscribed .................................................. 1,344 6,752
Distributions Reinvested .................................... 13 2
Redeemed .................................................... (2,112) (472)
--------- ---------
Net Increase in Class C Shares Outstanding .................... (755) 6,282
========= =========
Dollars:
Subscribed .................................................. $ 14,357 $ 69,343
Distributions Reinvested .................................... 136 18
Redeemed .................................................... (22,539) (5,037)
--------- ---------
Net Increase/Decrease ......................................... $ (8,046) $ 64,324
========= =========
Ending Paid in Capital ........................................ $ 56,274+ $ 64,320
========= =========
----------
* Commencement of operations
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-64
<PAGE> 280
VAN KAMPEN GLOBAL EQUITY FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------ ------------------------------------
YEAR ENDED OCTOBER 29, 1997* YEAR ENDED OCTOBER 29, 1997*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1999# TO JUNE 30, 1998 JUNE 30, 1999# TO JUNE 30, 1998
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .......... $ 11.122 $ 10.00 $ 11.076 $ 10.00
------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .................. 0.047 0.06 (0.033) 0.01
Net Realized and Unrealized Gain/Loss ....... 0.404 1.08 0.405 1.07
------------ ------------ ------------ ------------
Total From Investment Operations ............ 0.451 1.14 0.372 1.08
------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income ....................... (0.076) (0.02) (0.008) --
In Excess of Net Investment Income .......... (0.014) -- (0.002) --
Net Realized Gain ........................... (0.014) -- (0.014) --
------------ ------------ ------------ ------------
Total Distributions ......................... (0.104) (0.02) (0.024) --
------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD ................ $ 11.469 $ 11.12 $ 11.424 $ 11.08
============ ============ ============ ============
TOTAL RETURN (1) .............................. 4.05% 11.38%** 3.29% 10.84%**
============ ============ ============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ............. $ 76,731 $ 80,508 $ 596,339 $ 623,229
Ratio of Expenses to Average Net Assets ....... 1.65% 1.70% 2.40% 2.45%
Ratio of Net Investment Income/Loss to
Average Net Assets .......................... 0.44% 0.88% (0.31)% 0.12%
Portfolio Turnover Rate ....................... 40% 4%** 40% 4%**
<CAPTION>
CLASS C
-----------------------------------
YEAR ENDED OCTOBER 29, 1997*
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1999# TO JUNE 30, 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................. $ 11.075 $ 10.00
----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .......................... (0.034) 0.01
Net Realized and Unrealized Gain/Loss ............... 0.406 1.06
----------- -----------
Total From Investment Operations .................... 0.372 1.07
----------- -----------
DISTRIBUTIONS
Net Investment Income ............................... (0.008) --
In Excess of Net Investment Income .................. (0.002) --
Net Realized Gain ................................... (0.014) --
----------- -----------
Total Distributions ................................. (0.024) --
----------- -----------
NET ASSET VALUE, END OF PERIOD ........................ $ 11.423 $ 11.07
=========== ===========
TOTAL RETURN (1) ...................................... 3.39% 10.74%**
=========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ..................... $ 63,140 $ 69,572
Ratio of Expenses to Average Net Assets ............... 2.40% 2.45%
Ratio of Net Investment Income/Loss to
Average Net Assets .................................. (0.32)% 0.13%
Portfolio Turnover Rate ............................... 40% 4%**
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-65
<PAGE> 281
VAN KAMPEN GLOBAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Global Equity Fund (the "Fund") is organized as a separate
diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation, which
is registered as an open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective seeks long-term
capital appreciation by investing primarily in equity securities of issuers
throughout the world, including U.S. issuers. The Fund commenced operations on
October 29, 1997.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
-------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First........................................ 5.00% 1.00%
Second....................................... 4.00% None
Third........................................ 3.00% None
Fourth....................................... 2.50% None
Fifth........................................ 1.50% None
Thereafter................................... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses),
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and losses on foreign currency includes the net
realized amount from the sale of the currency and the amount realized between
trade date and settlement date on security and income and expenses transactions.
However, the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities is treated as ordinary income
for U.S. Federal income tax purposes.
F-66
<PAGE> 282
VAN KAMPEN GLOBAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
The net assets of the Fund may include issuers located in emerging markets.
There are certain risks inherent in these investments not typically associated
with investments in the United States, including the smaller size of the markets
themselves, lesser liquidity, greater volatility, and potentially less publicly
available information. Emerging markets may be subject to a greater degree of
government involvement in the economy and greater economic and political
uncertainty, which has the potential to extend to government imposed
restrictions on exchange traded transactions and currency transactions. These
restrictions may impact the Fund's ability to buy or sell certain securities or
to repatriate certain currencies to U.S. dollars. Additionally, changes in
currency exchange rates will affect the value of and investment income from such
securities.
5. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Fund's commencement of operations. The Adviser has agreed that in the event
any of the initial shares of the Fund originally purchased by Van Kampen are
redeemed by the Fund during the amortization period, the Fund will be reimbursed
for any unamortized organizational costs in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.
6. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
A portfolio may be subject to taxes imposed by countries in which it invests.
Such taxes are generally based on income earned or gains realized or
repatriated. Taxes are accrued and applied to net investment income, net
realized capital gains, and net unrealized appreciation, as applicable, as the
income is earned or capital gains are recorded.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the period from November 1, 1998 to June 30, 1999 the Fund
incurred and elected to defer until July 1, 1999 for U.S. Federal income tax
purposes, net currency losses of approximately $147,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
-------- -------- --------- -------------
<S> <C> <C> <C>
$674,545 $104,455 $(43,056) $61,399
</TABLE>
7. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, foreign
taxes on net realized gains, and gains on certain securities of corporations
designated as "passive foreign investment companies."
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $2,284,000 has been reclassified
from paid in capital in excess of par with $1,838,000 posted to undistributed
net investment income and $446,000 posted to accumulated net realized gain.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of presenting net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
1.00% 1.80% 2.55%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$35,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the
F-67
<PAGE> 283
VAN KAMPEN GLOBAL EQUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Adviser from the fee it receives from the Fund. Transfer Agency services are
provided to the Fund by Van Kampen Investor Services Inc., an affiliate of the
Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $431,221 for Class A shares and deferred sales charges of $40,909,
$2,591,742, and $53,302 for Class A shares, Class B shares, and Class C shares,
respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of
approximately $49,000. On October 1, 1998, the Chase Manhattan Bank purchased
MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $106,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/ dealer.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $287,379,000 and sales of approximately $318,704,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
F-68
<PAGE> 284
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Global Equity Allocation Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Global Equity Allocation
Fund (the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets, and the financial
highlights for each of the 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 June 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-69
<PAGE> 285
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
<S> <C> <C>
------------------------------------------------------------------------
COMMON STOCKS (86.8%)
AUSTRALIA (2.4%)
Amcor Ltd. ........................... 43,942 $ 243
AMP Ltd. ............................. 63,305 690
Australian Gas Light Co., Ltd. ....... 25,593 155
Boral Ltd. ........................... 76,468 129
Brambles Industries Ltd. ............. 14,761 387
Broken Hill Proprietary Co., Ltd. .... 135,000 1,558
Coca-Cola Amatil Ltd. ................ 64,066 257
Coles Myer Ltd. ...................... 73,971 429
Colonial Ltd. ........................ 60,692 214
CSL Ltd. ............................. 7,167 62
CSR Ltd. ............................. 69,030 197
Faulding (F.H.) & Co. Ltd. ........... 8,373 51
Fosters Brewing Ltd. ................. 119,412 335
General Property Trust................ 92,060 149
GIO Australia Holdings Ltd. .......... 45,469 110
Goodman Fielder Ltd. ................. 90,483 80
Leighton Holdings Ltd. ............... 18,450 72
Lend Lease Corp., Ltd. ............... 36,172 495
Mayne Nickless Ltd. .................. 24,819 85
National Australia Bank Ltd. ......... 89,258 1,471
News Corp., Ltd. ..................... 126,779 1,078
Normandy Mining Ltd. ................. 133,037 88
North Broken Hill Peko Ltd. .......... 64,684 131
Orica Ltd. ........................... 19,541 106
Pacific Dunlop Ltd. .................. 72,472 104
Pioneer International Ltd. ........... 62,368 158
QBE Insurance Group Ltd. ............. 27,089 103
Rio Tinto Ltd. ....................... 12,573 205
Santos Ltd. .......................... 40,735 133
Schroders Property Fund............... 26,497 41
Smith (Howard) Ltd. .................. 13,530 103
Southcorp Holdings Ltd. .............. 42,987 173
(a)Stockland Trust Group.............. 441 1
Stockland Trust Group................. 21,230 48
Suncorp-Metway Ltd. .................. 21,378 127
TABCORP Holdings Ltd. ................ 22,004 148
Telstra Corp., Ltd. .................. 326,031 1,861
Wesfarmers Ltd. ...................... 12,783 115
Westfield Trust....................... 86,614 175
(a)Westfield Trust (New).............. 1,438 3
Westpac Banking Corp., Ltd. .......... 122,607 792
WMC Ltd. ............................. 121,589 520
Woolworths Ltd. ...................... 76,969 255
--------
13,637
--------
AUSTRIA (0.7%)
Austria Mikro Systems International
AG ................................. 503 18
Austria Tabakwerke AG ................ 3,719 217
Austrian Airlines Osterreichische
Luftverkehrs AG .................... 4,142 100
Bank Austria AG ...................... 19,144 1,008
Bau Holdings AG ...................... 795 25
Boehler-Udderholm AG ................. 1,866 93
BWT AG ............................... 285 54
Flughafen Wein AG .................... 3,589 151
Generali AG .......................... 1,197 220
Lenzing AG ........................... 625 36
Mayr-Melnhof Karton AG................ 2,026 92
Oesterreichische Brau-Beteiligungs
AG.................................. 1,548 69
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------
<S> <C> <C>
Oesterreichish Elektrizitaets 'A'..... 5,159 $ 752
OMV AG................................ 4,517 403
Radex-Heraklith Industriebet AG....... 2,366 64
VA Technologies AG.................... 2,535 230
Wienerberger Baustoffindustrie AG..... 11,680 303
--------
3,835
--------
CANADA (1.2%)
Abitibi-Consolidated, Inc. ........... 4,200 48
Agrium, Inc. ......................... 3,100 27
Alberta Energy Co., Ltd. ............. 2,400 77
Alcan Aluminum Ltd. .................. 4,900 155
(a)Anderson Exploration Ltd. ......... 2,800 37
Bank of Montreal...................... 5,600 203
Bank of Nova Scotia................... 10,100 219
Barrick Gold Corp. ................... 8,200 159
Barrick Gold Corp. ................... 9,400 181
BCE, Inc. ............................ 13,500 657
(a)BCT.Telus Communications, Inc. .... 1,865 45
BCT.Telus Communications, Inc. 'A' ... 621 15
Bombardier, Inc. 'A'.................. 13,800 211
Cameco Corp. ......................... 1,200 25
(a)Canadian Hunter Exploration Ltd. .. 1,350 20
Canadian Imperial Bank of Commerce.... 8,400 200
(a)Canadian Natural Resources Ltd. ... 2,100 41
Canadian Occidental Petroleum Ltd. ... 3,000 48
Canadian Pacific Ltd. ................ 7,300 173
Canadian Tire Corp. 'A' .............. 2,000 58
Cominco Ltd. ......................... 1,900 32
Dofasco, Inc. ........................ 2,200 36
Edperbarascan Corp. 'A' .............. 3,600 55
(a)Fairfax Financial Holdings Ltd. ... 200 54
George Weston Ltd. ................... 2,900 128
(a)Gulf Canada Resources Ltd. ........ 19,900 82
Imasco Ltd. .......................... 9,000 242
Imperial Oil Ltd. .................... 10,000 190
Inco Ltd. ............................ 3,600 64
Laidlaw, Inc. 'B' .................... 7,100 52
(a)Loewen Group, Inc. ................ 1,600 1
Macmillan Bloedel Ltd. ............... 3,000 54
Magna International, Inc. 'A' ........ 1,600 90
MDS Inc. 'B' ......................... 1,300 28
National Bank of Canada .............. 3,800 50
(a)Newbridge Networks Corp. .......... 3,600 103
Nexfor, Inc. ......................... 2,354 15
Noranda, Inc. ........................ 5,400 71
Northern Telecom Ltd. ................ 13,600 1,162
NOVA Chemicals Corp. ................. 208 5
Petro-Canada ......................... 6,200 85
Placer Dome, Inc. .................... 22,560 262
(a)Poco Petroleums Ltd. .............. 3,200 26
Potash Corp. of Saskatchewan, Inc. ... 1,200 62
Power Corp. of Canada ................ 3,600 69
Quebecor, Inc. 'B' ................... 1,700 41
(a)Renaissance Energy Ltd. ........... 3,200 43
(a)Rogers Communication, Inc. 'B' .... 3,700 59
Royal Bank of Canada ................. 6,500 287
Seagram Co., Ltd. .................... 7,400 368
Suncor Energy, Inc. .................. 2,400 98
(a)Talisman Energy, Inc. ............. 2,300 62
Thomson Corp. ........................ 12,600 380
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-70
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------------
<S> <C> <C>
CANADA (CONT.)
TransAlta Corp. ................................... 1,800 $ 27
Transcanada Pipelines Ltd. ........................ 10,344 146
Westcoast Energy, Inc. ............................ 2,600 51
--------
7,179
--------
FRANCE (1.8%)
Accor S.A. ........................................ 396 100
Alcatel ........................................... 5,046 711
Axa ............................................... 3,452 422
Banque Nationale de Paris ......................... 2,154 180
BIC Corp. ......................................... 643 34
Bouygues .......................................... 292 77
Canal Plus ........................................ 322 90
Cap Gemini S.A. ................................... 1,817 286
Carrefour S.A. .................................... 2,406 354
Cie de Saint-Gobain ............................... 1,041 166
Dassault Systemes S.A. ............................ 3,172 105
Elf Aquitaine ..................................... 2,911 428
Eridania Beghin-Say S.A. .......................... 451 65
Essilor International ............................. 141 44
Etablissements Economiques du Casino
Guichard-Perrachon .............................. 800 70
France Telecom S.A. ............................... 6,286 475
Groupe Danone RFD ................................. 658 170
Klepierre ......................................... 6,678 627
L'air Liquide ..................................... 959 151
L'Oreal ........................................... 688 466
Lafarge S.A. ...................................... 1,141 109
Lagardere S.C.A. .................................. 1,495 56
Legrand S.A. ...................................... 299 61
(a)LVMH Moet Hennessy Louis Vuitton ............... 921 270
Michelin (C.G.D.E.) 'B' ........................... 2,247 92
Paribas ........................................... 1,846 207
Pernod-Ricard ..................................... 742 50
Pinault-Printemps-Redoute ......................... 1,235 212
Promodes .......................................... 198 130
PSA Peugeot Citroen S.A. .......................... 549 87
Rhone-Poulenc S.A. 'A' ............................ 3,917 179
Sagem ............................................. 30 20
Sanofi-Synthelabo S.A. ............................ 4,528 192
Schneider S.A. .................................... 1,810 102
Silic ............................................. 1,723 271
Simco S.A. (Registered) ........................... 8,930 756
Societe Fonciere Lyonnaise ........................ 1,725 246
Societe Generale .................................. 1,008 178
Sodexho S.A. ...................................... 650 112
Suez Lyonnaise des Eaux ........................... 1,493 270
Thomson CSF S.A. .................................. 1,735 60
(a)Total S.A. 'B' ................................. 2,710 350
Unibail ........................................... 6,450 826
Usinor Sacilor .................................... 3,012 45
(a)Valeo S.A. ..................................... 935 77
Vivendi ........................................... 4,941 401
--------
10,380
--------
GERMANY (3.4%)
Adidas-Salomon AG ................................. 1,483 145
Agiv AG ........................................... 1,450 33
Allianz AG ........................................ 7,292 2,040
<CAPTION>
VALUE
SHARES (000)
----------------------------------------------------------------------------------------
<S> <C> <C>
AMB Aachener & Muenchener Beteiligungs AG ......... 600 $ 60
BASF AG ........................................... 18,500 814
Bayer AG .......................................... 21,300 887
Bayer Vereinsbank AG .............................. 12,025 766
Bilfinger & Berger Bau AG ......................... 1,950 48
Brau und Brunnen AG ............................... 33 2
CKAG Colonia Konzern AG ........................... 717 68
Continental AG .................................... 3,533 85
Daimler-Chrysler AG ............................... 1 --
Daimler-Chrysler AG ............................... 29,729 2,600
(a)Degussa AG ..................................... 2,183 91
Deutsche Bank AG .................................. 15,100 921
(a)Deutsche Telekom AG ............................ 39,688 1,670
Dresdner Bank AG .................................. 14,617 569
FAG Kugelfischer Georg Schaefer AG ................ 4,500 44
Heidelberger Zement AG ............................ 603 49
Hochtief AG ....................................... 3,183 145
Karstadt AG ....................................... 350 167
Kloeckner-Humboldt-Deutz AG ....................... 2,067 14
Linde AG .......................................... 233 140
Lufthansa AG ...................................... 10,700 195
MAN AG ............................................ 3,500 119
Mannesmann AG ..................................... 6,620 991
Merck KGaA AG ..................................... 6,440 209
Metro AG .......................................... 7,057 450
(a)Metro AG ....................................... 600 3
Muenchener Rueckversicherungs-
Gesellschaft AG (Registered) .................... 2,447 462
Muenchener Rueckversicherungs-
Gesellschaft AG (Registered) .................... 2,447 457
Preussag AG ....................................... 5,000 270
RWE AG ............................................ 12,704 589
SAP AG ............................................ 1,727 593
Schering AG ....................................... 2,300 246
Siemens AG ........................................ 16,783 1,296
(a)Thyssen AG ..................................... 12,170 267
VEBA AG ........................................... 14,733 870
Viag AG ........................................... 845 393
Volkswagen AG ..................................... 8,730 564
--------
19,332
--------
GREECE (0.0%)
Alpha Credit Bank S.A. ............................ 1,387 90
--------
HONG KONG (1.0%)
Bank of East Asia.................................. 41,800 106
Cathay Pacific Airways Ltd. ....................... 93,000 143
Cheung Kong Holdings Ltd. ......................... 72,000 640
CLP Holdings Ltd. ................................. 79,500 386
Dickson Concepts International Ltd. ............... 25,000 18
Hang Lung Development Corp. ....................... 48,000 59
Hang Seng Bank Ltd. ............................... 59,200 662
(a)Hong Kong & China Gas Co., Ltd. ................ 150,000 217
Hong Kong Land Holdings Ltd. ...................... 508 1
Hong Kong Shanghai Hotels. ........................ 22,000 19
Hong Kong Telecommunications Ltd. ................. 358,800 932
Hopewell Holdings Ltd. ............................ 51,000 39
Hutchison Whampoa Ltd. ............................ 108,000 978
Hysan Development Co. ............................. 33,781 51
Johnson Electric Holdings Ltd. .................... 26,000 107
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-71
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--------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------------------
<S> <C> <C>
HONG KONG (CONT.)
New World Development Co., Ltd. ................... 67,000 $ 201
Shangri-La Asia Ltd. .............................. 32,000 39
Sino Land Co. ..................................... 74,001 42
South China Morning Post .......................... 62,000 35
Sun Hung Kai Properties Ltd. ...................... 67,000 611
Swire Pacific Ltd. 'A' ............................ 48,500 240
Television Broadcasting Ltd. ...................... 11,000 52
Wharf Holdings Ltd. ............................... 68,000 212
---------
5,790
---------
ITALY (2.5%)
Alitalia .......................................... 62,254 162
Assicurazioni Generali S.p.A. ..................... 44,676 1,550
Banca Commerciale Italiana ........................ 81,300 594
Banco Ambrosiano Veneto ........................... 85,900 413
Banco Popolare di Milano .......................... 11,000 85
Benetton Group S.p.A. ............................. 76,300 150
Burgo Cartiere S.p.A. ............................. 3,700 24
CIR-Compagnie Industriali Riunite
S.p.A. .......................................... 700 1
Credito Italiano S.p.A. ........................... 196,215 863
Edison S.p.A. ..................................... 31,000 269
Ente Nazionale Idrocarburi S.p.A. ................. 360,000 2,152
Falck Acciaierie & Ferriere
Lombarde ........................................ 2,000 15
Fiat S.p.A. ....................................... 261,630 829
Fiat S.p.A. di Risp NCS ........................... 44,970 77
Impreglio S.p.A. .................................. 21,000 18
Istituto Nazionale delle Assicurazioni
(INA) ........................................... 176,680 410
Italcementi S.p.A. ................................ 7,300 93
Italcementi S.p.A. ................................ 10,150 51
Italgas ........................................... 20,400 86
La Rinascente S.p.A. .............................. 9,878 75
Magneti Marelli S.p.A. ............................ 14,000 19
Mediaset S.p.A. ................................... 49,000 436
Mediobanca S.p.A. ................................. 29,260 307
Montedison S.p.A. ................................. 92,616 151
Montedison S.p.A. di Risp NCS ..................... 30,628 36
(a)Olivetti Group ................................. 76,180 183
Parmalat Finanziaria S.p.A. ....................... 79,640 104
Pirelli S.p.A. .................................... 100,000 273
R.A.S. ............................................ 21,769 212
R.A.S. di Risp .................................... 462 4
S.A.I. ............................................ 250 1
S.A.I. ............................................ 6,100 63
San Paolo-Imi S.p.A. .............................. 62,176 847
Sirti S.p.A. ...................................... 8,000 39
Snia BPD S.p.A. ................................... 41,000 51
Telecom Italia Mobile S.p.A. ...................... 178,400 1,067
Telecom Italia Mobile S.p.A. RNC .................. 43,400 160
Telecom Italia S.p.A. ............................. 30,162 164
Telecom Italia S.p.A. ............................. 96,388 1,003
Unione Immobiliare S.p.A. ......................... 2,666,907 1,184
---------
14,221
---------
JAPAN (10.9%)
Acom Co., Ltd. .................................... 4,500 389
Ajinomoto Co., Inc. ............................... 45,800 523
(a)Aoki Corp. ..................................... 47,800 30
Asahi Bank Ltd. ................................... 64,500 310
Asahi Breweries Ltd. .............................. 29,000 361
Asahi Chemical Industry Co., Ltd. ................. 85,400 474
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------------------
<S> <C> <C>
Asahi Glass Co. ................................... 80,600 $ 523
Bank of Tokyo-Mitsubishi Ltd. ..................... 180,600 2,574
Bank of Yokohama .................................. 23,500 60
Bridgestone Corp. ................................. 32,000 969
Canon, Inc. ....................................... 34,800 1,002
Casio Computer Co., Ltd. .......................... 17,000 129
Chiba Bank Ltd. ................................... 22,800 84
Chugai Pharmaceutical Ltd. ........................ 29,800 321
Credit Saison Co., Ltd. ........................... 5,100 107
Dai Nippon Printing Co., Ltd. ..................... 32,800 525
Daiei, Inc. ....................................... 29,800 102
Daikin Industries Ltd. ............................ 28,800 335
Daiwa House Industry .............................. 29,800 314
Daiwa Securities Co., Ltd. ........................ 108,000 715
Denso Corp. ....................................... 10,600 216
East Japan Railway Co. ............................ 170 914
Ebara Corp. ....................................... 19,800 236
Fanuc Co. ......................................... 12,200 656
Fuji Bank ......................................... 171,000 1,194
Fuji Photo Film Co. ............................... 17,000 644
Fujitsu Ltd. ...................................... 70,600 1,422
Furukawa Electric Co., Ltd. ....................... 20,800 96
Gunma Bank Ltd. ................................... 11,000 69
Hankyu Corp. ...................................... 37,000 147
(a)Hazama Corp. ................................... 28,000 23
Hitachi Ltd. ...................................... 143,000 1,343
Honda Motor Co. ................................... 34,000 1,443
Industrial Bank of Japan Ltd. ..................... 79,000 627
Ito-Yokado Co., Ltd. .............................. 14,000 938
Japan Airlines Co., Ltd. .......................... 90,000 298
Japan Energy Corp. ................................ 67,600 79
Joyo Bank ......................................... 11,800 46
Jusco Co. ......................................... 14,800 269
Kajima Corp. ...................................... 55,600 202
Kansai Electric Power Co. ......................... 36,600 696
KAO Corp. ......................................... 37,800 1,063
Kawasaki Steel Corp. .............................. 45,600 85
Kinki Nippon Railway Co., Ltd. .................... 65,600 323
Kirin Brewery Co., Ltd. ........................... 57,600 691
Komatsu Ltd. ...................................... 52,600 336
Kubota Corp. ...................................... 81,400 244
Kumagai Gumi Co., Ltd. ............................ 88,600 99
Kyocera Corp. ..................................... 8,500 499
Kyowa Hakko Kogyo Co., Ltd. ....................... 26,800 154
Marubeni Corp. .................................... 77,200 162
Marui Co., Ltd. ................................... 6,800 113
Matsushita Electric Industrial Co., Ltd. .......... 72,400 1,408
Mitsubishi Chemical Corp. ......................... 86,000 298
Mitsubishi Corp. .................................. 76,000 516
Mitsubishi Electric Corp. ......................... 101,400 390
Mitsubishi Estate Co., Ltd. ....................... 24,000 234
Mitsubishi Heavy Industries Ltd. .................. 155,000 630
Mitsubishi Materials Corp. ........................ 54,600 122
Mitsubishi Trust and Banking Corp. ................ 38,000 370
Mitsui & Co. ...................................... 78,200 546
Mitsui Engineering & Shipbuilding Co., Ltd. ....... 56,600 64
Mitsui Fudosan Co., Ltd. .......................... 18,000 146
Mitsui Trust & Banking Co., Ltd. .................. 1,400 2
Mitsukoshi Ltd. ................................... 29,800 130
Murata Manufacturing Co., Inc. .................... 12,000 790
Mycal Corp. ....................................... 18,800 118
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-72
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONT.)
NEC Corp. ......................................... 50,600 $ 630
New OJI Paper Co., Ltd. ........................... 57,600 334
NGK Insulators Ltd. ............................... 29,800 312
Nippon Express Co., Ltd. .......................... 22,000 132
Nippon Fire & Marine Insurance Co. ................ 26,800 91
Nippon Light Metal Co. ............................ 26,800 40
Nippon Meat Packers, Inc. ......................... 26,800 350
Nippon Oil Co. .................................... 82,600 349
Nippon Steel Corp. ................................ 320,000 744
Nippon Telegraph & Telephone Corp. ADR............. 433 5,051
Nippon Yusen Kabushiki Kaisha ..................... 80,400 310
Nissan Fire & Marine Insurance Co., Ltd. .......... 350 1
Nissan Motor Co., Ltd. ............................ 102,400 490
NKK Corp. ......................................... 168,000 138
Nomura Securities Co., Ltd. ....................... 55,000 645
Odakyu Electric Railway Co. ....................... 31,800 107
Orix Corp. ........................................ 1,300 116
Osaka Gas Co. ..................................... 114,200 388
Penta-Ocean Construction Co., Ltd. ................ 26,800 47
Pioneer Electronic Corp. .......................... 8,000 156
Rohm Co. .......................................... 3,000 470
Sakura Bank Ltd. .................................. 108,200 411
Sankyo Co., Ltd. .................................. 21,800 550
Sanwa Bank Ltd. ................................... 80,000 788
Sanyo Electric Co., Ltd. .......................... 73,400 299
Secom Co. ......................................... 6,800 709
Sega Enterprises Ltd. ............................. 5,800 77
Sekisui House Ltd. ................................ 28,800 311
Sharp Corp. ....................................... 48,600 575
Shimano Inc. ...................................... 8,000 190
Shimizu Corp. ..................................... 40,800 159
Shin-Etsu Chemical Co. ............................ 12,000 402
Shiseido Co., Ltd. ................................ 13,000 195
Shizuoka Bank. .................................... 15,800 158
Showa Denko K.K. .................................. 54,600 70
SMC Corp. ......................................... 2,100 235
Softbank Corp. .................................... 900 183
Sony Corp. ........................................ 12,000 1,296
Sumitomo Bank Ltd. ................................ 69,000 857
Sumitomo Chemical Co. ............................. 108,200 497
Sumitomo Corp. .................................... 55,400 406
Sumitomo Electric Industries ...................... 38,800 442
Sumitomo Forestry Co., Ltd. ....................... 17,000 132
Sumitomo Metal Industries Ltd. .................... 103,400 129
Sumitomo Metal Mining Co. ......................... 28,000 116
Sumitomo Osaka Cement Co., Ltd. ................... 27,800 54
Taisei Corp., Ltd. ................................ 57,600 127
Taisho Pharmaceutical Co. ......................... 17,000 563
Taiyo Yuden Co., Ltd. ............................. 33,000 542
Takeda Chemical Industries ........................ 32,800 1,522
Teijin Ltd. ....................................... 57,600 234
The 77 Bank Ltd. .................................. 12,000 105
Tobu Railway Co. .................................. 36,800 104
Tohoku Electric Power Co., Ltd. ................... 19,500 296
Tokai Bank Ltd. ................................... 53,600 306
Tokio Marine & Fire Insurance Co. ................. 79,400 864
Tokyo Electric Power Co. .......................... 47,300 1,000
Tokyo Electron Ltd. ............................... 4,000 272
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
Tokyo Gas Co. ..................................... 108,200 $ 267
Tokyu Corp. ....................................... 45,800 116
Toppan Printing Co., Ltd. ......................... 37,800 422
Toray Industries, Inc. ............................ 84,500 424
Toto Ltd. ......................................... 29,800 231
Toyobo Ltd. ....................................... 58,600 89
Toyota Motor Corp. ................................ 118,000 3,739
Ube Industries Ltd. ............................... 54,600 118
Yokogawa Electric Corp. ........................... 30,000 177
-------
62,598
-------
NETHERLANDS (3.5%)
ABN Amro Holdings N.V. ............................ 58,059 1,259
Aegon N.V. ........................................ 22,400 1,627
Akzo Nobel N.V. ................................... 13,319 561
Buhrmann N.V. ..................................... 122 2
Elsevier N.V. ..................................... 24,030 279
Getronics N.V. .................................... 2,861 110
Hagemeyer N.V. .................................... 4,384 143
Heineken N.V. ..................................... 12,409 636
ING Groep N.V. .................................... 37,247 2,019
KLM Royal Dutch Airlines N.V. ..................... 3,379 96
Koninklijke Ahold N.V. ............................ 23,809 821
KPN N.V. .......................................... 11,250 529
Oce N.V. .......................................... 3,679 94
Philips Electronics N.V. .......................... 13,222 1,306
Royal Dutch Petroleum ............................. 85,956 5,041
Royal Dutch Petroleum Co., New York Shares ........ 28,700 1,729
Schlumberger Ltd. ................................. 7,900 503
Stork N.V. ........................................ 120 3
TNT Post Group N.V. ............................... 19,569 468
(a)Unilever N.V. CVA. ............................. 23,294 1,572
(a)Unilever N.V. .................................. 7,500 523
Vedior N.V. ....................................... 2,920 50
Wolters Kluwer N.V. ............................... 11,684 466
-------
19,837
-------
SINGAPORE (1.5%)
City Developments Ltd. ............................ 99,000 634
Comfort Group Ltd. ................................ 65,000 40
Creative Technology Ltd. .......................... 11,150 145
Cycle & Carriage Ltd. ............................. 19,000 109
DBS Land Ltd. ..................................... 131,000 262
Development Bank of Singapore Ltd. (Foreign) ...... 76,000 929
First Capital Corp. ............................... 36,000 56
Fraser & Neave Ltd. ............................... 36,000 160
Hotel Properties Ltd. ............................. 49,000 51
Inchcape Bhd. ..................................... 5,000 8
Keppel Corp. ...................................... 105,000 358
NatSteel Ltd. ..................................... 45,000 79
Neptune Orient Lines Ltd. ......................... 28,000 34
Oversea-Chinese Banking Corp., Ltd. (Foreign)...... 119,000 993
Overseas Union Enterprise Ltd. .................... 20,000 63
Parkway Holdings Ltd. ............................. 45,000 111
Sembcorp Industries Ltd. .......................... 148,235 235
Singapore Airlines Ltd. (Foreign) ................. 112,000 1,066
Singapore Press Holdings .......................... 45,000 767
Singapore Technology Engineering Ltd. ............. 355,000 403
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-73
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PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
SINGAPORE (CONT.)
Singapore Telecommunications Ltd. ................. 702,000 $ 1,204
Straits Trading Co., Ltd. ......................... 13,000 17
United Industrial Corp., Ltd. ..................... 167,000 113
United Overseas Bank Ltd. (Foreign) ............... 87,000 608
United Overseas Land Ltd. ......................... 74,000 83
Venture Manufacturing Ltd. ........................ 25,000 192
-------
8,720
-------
SPAIN (2.1%)
Acerinox S.A. ..................................... 3,764 110
ACS S.A. .......................................... 2,802 80
Argentaria S.A. ................................... 26,319 600
Autopistas Concesionaria Espanola S.A. ............ 13,943 163
Azucarere Ebro Agricolas S.A. ..................... 3,766 58
Banco Bilbao Vizcaya S.A. (Registered) ............ 104,767 1,516
Banco Santander Central Hispano S.A. .............. 179,712 1,874
Corporacion Financiera Alba S.A. .................. 753 122
Corporacion Mapfre S.A. ........................... 3,696 75
Empresa Nacional de Cellulosas S.A. ............... 34 1
Endesa S.A. ....................................... 49,484 1,057
Energia y Industrias Aragonesas S.A. .............. 12 --
Fomento de Construcciones y Contratas S.A. ........ 3,764 216
Gas Natural SDG S.A. 'E' .......................... 7,527 548
General de Aguas de Barcelona S.A. ................ 2,379 124
Gropo Dragados, S.A. .............................. 8,955 105
Iberdrola S.A. .................................... 45,207 689
Immobiliaria Metropolitana Vasco Central S.A. ..... 27,499 539
Prima Inmobiliaria S.A. ........................... 30,600 237
Repsol S.A. ....................................... 48,858 999
Sol Melia S.A. .................................... 1,647 70
Tabacalera S.A. 'A' ............................... 8,964 181
(a)Telefonica S.A. ................................ 33,095 1,596
(a)TelePizza S.A. ................................. 10,943 57
Union Electrica Fenosa S.A. ....................... 14,986 196
Vallehermoso S.A. ................................. 90,415 877
(a)Viscofan Industria Navarra de
Envolturas Calulosicas S.A. .................... 68 1
Zardoya-Otis S.A. ................................. 1,264 32
-------
12,123
-------
SWEDEN (1.7%)
ABB AB 'A' ........................................ 9,900 132
ABB AB 'B' ........................................ 700 9
(a)ABB Ltd ........................................ 3,005 282
AGA AG 'B' ........................................ 8,400 104
Atlas Copco AB 'A' ................................ 6,650 182
Atlas Copco AB 'B' ................................ 3,600 97
Castellum AB ...................................... 31,600 299
Diligentia AB ..................................... 51,786 404
Drott AB 'B' ...................................... 32,300 263
Electrolux AB 'B' ................................. 15,900 334
Ericsson AB ....................................... 68,700 2,211
Fastighets AB Tornet .............................. 17,610 240
ForeningsSparbanken AB ............................ 27,450 389
Hennes & Mauritz AB 'B' ........................... 42,400 1,051
(a)NetCom Systems AB 'B' .......................... 3,400 115
OM Gruppen AB ..................................... 3,800 43
Sandvik AB 'A' .................................... 10,200 223
Sandvik AB 'B' .................................... 4,200 93
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
SCA AB 'B' ........................................ 11,500 $ 299
Securitas AB 'B' .................................. 20,200 303
Skandia Forsakrings AB ............................ 26,700 501
Skandinaviska Enskilda Banken AB 'A' .............. 31,100 364
Skanska AB 'B' .................................... 6,500 246
SKF AB 'B' ........................................ 4,500 83
Svenska Handelsbanken 'A' ......................... 33,600 405
Svenskt Stal AB 'A' ............................... 6,300 79
Trelleborg AB 'B' ................................. 7,600 67
Volvo AB 'A' ...................................... 7,600 220
Volvo AB 'B' ...................................... 15,900 463
Wm-Data AB 'B' .................................... 2,700 103
-------
9,604
-------
SWITZERLAND (2.2%)
ABB Ltd. (New) .................................... 3,969 375
Adecco S.A. (Registered) .......................... 470 252
Alusuisse-Lonza Holding AG (Registered) ........... 160 187
CS Holding AG (Registered) ........................ 6,850 1,188
Georg Fischer AG (Registered) ..................... 85 28
Holderbank Financiere Glarus AG (Bearer) .......... 175 207
Nestle S.A. (Registered) .......................... 1,005 1,814
Novartis AG (Registered) .......................... 1,636 2,393
Roche Holding AG (Bearer) ......................... 42 693
Roche Holding AG-Genusshein ....................... 177 1,823
Sairgroup (Registered) ............................ 405 85
Schweizerische Rueckver (Registered) .............. 375 715
SGS Societe Generale de Surveillance
Holding S.A. (Bearer) ........................... 50 52
SMH AG (Bearer) ................................... 135 91
Sulzer AG (Registered) ............................ 110 67
Swisscom AG (Registered) .......................... 1,090 411
UBS AG (Registered) ............................... 5,181 1,549
Valora Holding AG (Registered) .................... 165 38
Zurich Allied AG (New) ............................ 1,205 686
-------
12,654
-------
UNITED KINGDOM (10.5%)
Abbey National plc ................................ 40,603 763
Albert Fisher Group plc ........................... 58,227 12
Alldays plc ....................................... 3,096 4
Allders plc ....................................... 4,039 9
Allied Zurich plc ................................. 43,182 543
Amec plc .......................................... 11,811 48
Anglian Water plc ................................. 31,582 350
Arjo Wiggins Appleton plc ......................... 28,433 99
Associated British Foods plc ...................... 25,719 170
Associated British Ports Holdings plc ............. 83,014 376
AstraZeneca Group ................................. 13,873 537
AstraZeneca plc ................................... 26,569 1,038
BAA plc ........................................... 31,685 305
Barclays plc ...................................... 40,838 1,189
Barrat Developments plc ........................... 16,890 95
Bass plc .......................................... 23,324 339
BBA Group plc ..................................... 2,022 16
Beazer Group plc .................................. 38,215 121
Berisford plc ..................................... 26,471 101
BG plc ............................................ 112,642 689
BICC plc .......................................... 31,967 46
Blue Circle Industries plc ........................ 52,594 350
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-74
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PORTFOLIO OF INVESTMENTS (CONT.)
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONT.)
BOC Group plc ..................................... 16,708 $ 327
Boots Co. plc ..................................... 28,579 340
BP Amoco plc ...................................... 234,126 4,199
BPB Industries plc ................................ 77,860 462
British Aerospace plc ............................. 55,389 360
British Airways plc ............................... 31,222 216
British American Tobacco plc ...................... 43,182 406
British Land Co. plc .............................. 224,516 1,879
British Sky Broadcasting Group plc ................ 46,468 431
British Steel plc ................................. 78,328 203
British Telecommunications plc .................... 103,228 1,731
Burmah Castrol plc ................................ 34,128 648
Cable & Wireless plc .............................. 37,650 480
Cadbury Schweppes plc ............................. 55,210 352
Capital Shopping Centers plc ...................... 60,550 384
Caradon plc ....................................... 97,945 232
Carpetright plc ................................... 16,769 104
Centrica plc ...................................... 128,580 302
Cobham plc ........................................ 19,249 307
Commercial Union plc .............................. 27,431 397
Compass Group plc ................................. 20,035 199
Delta plc ......................................... 3,953 9
Diageo plc ........................................ 98,750 1,032
Dialog Corporation plc ............................ 7,331 11
Emap plc .......................................... 9,770 171
EMI Group plc ..................................... 80,014 642
Enterprise Oil plc ................................ 40,199 262
Firstgroup plc .................................... 38,972 212
FKI plc ........................................... 31,227 97
General Electric plc .............................. 79,686 813
GKN plc ........................................... 42,906 733
Glaxo Wellcome plc ................................ 85,295 2,372
Granada Group plc ................................. 25,911 481
Grantchester Holdings plc ......................... 273,830 741
Great Portland Estates plc ........................ 140,530 486
Great Universal Stores plc ........................ 29,417 326
Greycoat plc ...................................... 8,968 36
Halifax plc ....................................... 66,139 790
Hammerson plc ..................................... 100,910 756
Hanson plc ........................................ 59,228 526
Hilton Group plc .................................. 43,911 174
House of Fraser plc ............................... 22,703 31
HSBC Holdings plc ................................. 66,014 2,339
Hyder plc ......................................... 39,193 467
IMI plc ........................................... 37,585 152
Imperial Chemical Industries plc .................. 21,041 208
Invensys plc ...................................... 215,159 1,019
Jarvis plc ........................................ 21,676 101
JBA Holdings plc .................................. 2,387 4
Johnson Matthey plc ............................... 44,295 433
Kingfisher plc .................................... 43,082 496
Laird Group plc ................................... 10,539 44
Land Securities plc ............................... 201,165 2,707
Lasmo plc ......................................... 135,898 311
Legal & General Group plc ......................... 149,612 381
Lex Service plc ................................... 21,762 201
LIMIT plc ......................................... 87,179 184
Lloyds TSB Group plc .............................. 144,074 1,955
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
London Clubs International plc .................... 31,795 $ 72
London Forfaiting Co., plc ........................ 11,737 11
Lonmin plc ........................................ 35,802 333
Low & Bonar plc ................................... 3,132 10
Manchester United plc ............................. 3,027 10
Marks & Spencer plc ............................... 79,288 459
Mayflower Corporation plc ......................... 396 1
McKechnie plc ..................................... 3,630 28
Meggitt plc ....................................... 9,288 29
MEPC plc .......................................... 169,153 1,377
Mirror Group News Ord plc ......................... 32,562 127
Misys plc ......................................... 72,884 624
National Power plc ................................ 36,850 269
Next plc .......................................... 42,540 517
NFC plc ........................................... 64,004 208
Ocean Group plc ................................... 1,489 25
(a)Parity plc ..................................... 14,245 140
Pearson plc ....................................... 1 --
Peninsular & Oriental Steam Navigation Co ......... 21,474 323
Pennon Group plc .................................. 17,517 293
Pilkington plc .................................... 213,754 311
Powerscreen International plc ..................... 3,303 10
Provident Financial plc ........................... 7 --
Prudential Corp. plc .............................. 54,935 809
Racal Electronic plc .............................. 15,431 94
Railtrack Group plc ............................... 13,746 281
Rank Group plc .................................... 68,009 271
Reed International plc ............................ 33,290 222
Rentokil Initial plc .............................. 78,591 307
Reuters Holdings plc .............................. 40,134 528
Rexam plc ......................................... 22,695 92
Rio Tinto plc ..................................... 31,413 527
RMC Group plc ..................................... 12,110 195
Rolls-Royce plc ................................... 56,619 240
Royal & Sun Alliance Insurance Group plc .......... 38,002 341
Rugby Group plc ................................... 20,156 36
Safeway plc ....................................... 30,418 122
Sainsbury (J) plc ................................. 52,895 334
Schroders Property Fund ........................... 4,417 90
Scotia Holdings plc ............................... 8,881 16
Scottish & Southern Energy plc .................... 34,834 357
Scottish Power plc ................................ 36,236 313
Skillsgroup plc ................................... 2,700 13
Slough Estates plc ................................ 189,716 1,077
SmithKline Beecham plc ............................ 146,865 1,910
Smiths Industries plc ............................. 8,351 110
Stagecoach Holdings plc ........................... 68,744 246
Tarmac plc ........................................ 40,831 77
Tate & Lyle plc ................................... 21,085 132
Taylor Woodrow plc ................................ 19,736 57
Tesco plc ......................................... 89,024 229
Thames Water plc .................................. 14,894 236
The Berkeley Group plc ............................ 10,202 123
TI Group plc ...................................... 17,948 120
Torotrac plc ...................................... 2,634 8
Unilever plc ...................................... 95,100 847
United Utilities .................................. 19,397 236
Vickers plc ....................................... 4,410 11
Vodafone Group plc ................................ 49,284 972
Wickes plc ........................................ 1,852 11
William Baird plc ................................. 25,635 46
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-75
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PORTFOLIO OF INVESTMENTS (CONT.)
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<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
UNITED KINGDOM (CONT.)
WPP Group plc ..................................... 45,398 $ 384
Yorkshire Water plc ............................... 29,111 203
-------
60,262
-------
UNITED STATES (41.4%)
A.G. Edwards, Inc. ................................ 2,500 81
A.H. Belo Corp., 'A' .............................. 4,200 83
A.O. Smith Corp. .................................. 6,800 190
AAR Corp. ......................................... 6,600 150
Abbott Laboratories ............................... 20,600 937
(a)Abercrombie & Fitch Co. 'A' .................... 3,000 144
ABM Industries, Inc. .............................. 4,600 141
(a)Acnielsen Corp. ................................ 2,100 64
(a)Acxiom Corp. ................................... 14,500 362
Adac Laboratories, Inc. ........................... 4,300 31
(a)ADC Telecom, Inc. .............................. 3,900 178
(a)Advo Inc. ...................................... 4,600 95
(a)AES Corp. ...................................... 3,600 209
AETNA, Inc. ....................................... 2,400 215
AFLAC, Inc. ....................................... 7,400 354
AGL Resources, Inc. ............................... 2,100 39
Air Express International Corp. ................... 8,100 206
Air Products & Chemicals, Inc. .................... 5,500 221
Airborne Freight Corp. ............................ 2,000 55
AK Steel Holding Corp. ............................ 2,900 65
(a)Alaska Air Group, Inc. ......................... 1,100 46
Albertson's, Inc. ................................. 6,146 317
Alcoa, Inc. ....................................... 6,900 427
Aliant Communications, Inc. ....................... 1,500 69
Allegheny Energy, Inc. ............................ 3,100 99
Alliant Energy Corp. .............................. 3,800 108
(a)Alliant Techsystems, Inc. ...................... 2,800 242
Allied Signal, Inc. ............................... 7,900 498
(a)Allied Waste Industries, Inc. .................. 5,400 107
Allstate Corp. .................................... 11,300 405
Alltel Corp. ...................................... 3,800 272
Alpharma, Inc. .................................... 5,900 210
(a)Altera Corp. ................................... 5,600 206
(a)Alza Corp. 'A' ................................. 3,000 153
AMBAC Financial Group, Inc. ....................... 2,000 114
Amerada Hess Corp. ................................ 2,400 143
Ameren Corp. ...................................... 1,800 69
American Bankers Insurance Group, Inc. ............ 9,100 495
American Electric Power Co., Inc. ................. 2,700 101
American Express Co. .............................. 5,900 768
American Financial Group, Inc. .................... 2,200 75
American General Corp. ............................ 4,100 309
American Home Products Corp. ...................... 17,600 1,012
American International Group, Inc. ................ 19,230 2,251
(a)American Management Systems, Inc. .............. 8,500 273
(a)American Power Conversion Corp. ................ 5,600 113
(a)American Standard Companies, Inc. .............. 2,400 115
(a)American Telephone & Telegraph Co. ............. 45,145 2,520
American Water Works, Inc. ........................ 2,400 74
(a)Americredit Corp. .............................. 13,500 216
Ameritech Corp. ................................... 15,100 1,110
(a)Amgen, Inc. .................................... 7,300 444
(a)AMR Corp. ...................................... 2,400 164
(a)Analog Devices ................................. 5,000 251
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------------------------
<S> <C> <C>
Analogic Corp. .................................... 3,000 $ 93
Analysts International Corp. ...................... 5,200 75
Anchor Bancorp Wisconsin, Inc. .................... 3,500 62
Anheuser-Busch Cos., Inc. 'A' ..................... 6,900 489
(a)Anixter International, Inc. .................... 10,800 197
(a)Ann Taylor Stores Corp. ........................ 4,800 216
Aon Corp. ......................................... 4,500 186
Apogee Enterprises, Inc. .......................... 9,400 126
(a)Apollo Group, Inc. 'A' ......................... 2,600 69
Applebee's International, Inc. .................... 6,400 193
Applied Industrial Technologies, Inc. ............. 7,300 139
(a)Applied Material, Inc. ......................... 6,000 443
Applied Power, Inc. 'A' ........................... 8,300 227
Aptar Group, Inc. ................................. 8,500 255
Arch Chemicals, Inc. .............................. 1,200 29
Archer Daniels Midland Co. ........................ 9,500 147
(a)Arrow Electronics, Inc. ........................ 3,600 68
Arvin Industries, Inc. ............................ 1,500 57
(a)Aspect Telecommunications Corp. ................ 11,200 109
Associated Banc-Corp. ............................. 2,400 100
Associates First Capital Corp. 'A' ................ 9,603 426
(a)Astec Industries, Inc. ......................... 4,200 171
Astoria Financial Corp ............................ 11,700 514
AT&T Corp. Liberty Media 'A' ...................... 11,576 425
Atlantic Richfield Co. ............................ 5,000 418
(a)Atmel Corp. .................................... 4,100 107
Atmos Energy Corp. ................................ 5,700 142
Automatic Data Processing, Inc. ................... 7,900 348
Avery Dennison Corp. .............................. 3,000 181
(a)Avid Technology, Inc. .......................... 5,500 89
Avnet, Inc. ....................................... 1,400 65
Avon Products, Inc. ............................... 4,200 233
Baker Hughes, Inc. ................................ 5,600 188
Baldor Electric Co. ............................... 9,500 189
Ballard Medical Products .......................... 7,300 170
Bank of New York Co., Inc. ........................ 9,300 341
Bank One Corp. .................................... 15,900 947
BankAmerica Corp. ................................. 23,000 1,686
BankBoston Corp. .................................. 4,400 225
Banknorth Group, Inc. ............................. 3,200 106
(a)Barnes & Noble, Inc. ........................... 2,100 57
Barnes Group, Inc. ................................ 5,000 109
(a)Barr Laboratories, Inc. ........................ 4,700 187
(a)Barrett Resources Corp. ........................ 5,800 223
Baxter International, Inc. ........................ 4,300 261
BB&T Corp. ........................................ 4,900 180
(a)BE Aerospace, Inc. ............................. 5,200 97
Beckman Coulter, Inc. ............................. 1,200 58
Becton & Dickinson & Co. .......................... 4,500 135
(a)Bed Bath & Beyond, Inc. ........................ 4,000 154
Belden, Inc. ...................................... 8,900 213
Bell Atlantic Corp. ............................... 21,000 1,373
BellSouth Corp. ................................... 26,300 1,233
Bergen Brunswig Corp. 'A' ......................... 3,000 52
(a)Best Buy Co., Inc. ............................. 6,000 405
Bestfoods ......................................... 4,300 213
(a)Billing Concepts Corp. ......................... 7,300 82
Bindley Western Industries, Inc. .................. 6,667 154
(a)Biogen, Inc. ................................... 4,200 270
(a)BISYS Group, Inc. .............................. 6,200 363
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-76
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PORTFOLIO OF INVESTMENTS (CONT.)
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<TABLE>
<CAPTION>
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SHARES (000)
------------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
(a)BJ Services Co. ................................ 2,700 $ 79
(a)BJ's Wholesale Club, Inc. ...................... 2,800 84
Black & Decker Corp. .............................. 2,400 151
Blout International, Inc. 'A' ..................... 8,900 242
(a)BMC Software, Inc. ............................. 7,185 388
Boeing Co. ........................................ 13,800 610
Borg-Warner Automotive, Inc. ...................... 5,035 277
(a)Boston Scientific Corp. ........................ 6,900 303
Bowater, Inc. ..................................... 2,000 95
Bowne & Co. ....................................... 8,500 111
Brady Corp. 'A' ................................... 4,900 159
(a,c)BREED Technologies, Inc. ..................... 13,300 30
(a)Brightpoint, Inc. .............................. 11,800 72
(a)Brinker International, Inc. .................... 2,500 68
Bristol-Myers Squibb Co. .......................... 27,000 1,902
Browning-Ferris Industries, Inc. .................. 3,100 133
Brush Wellman, Inc. ............................... 6,100 111
(a)Buckeye Technologies, Inc. ..................... 8,500 129
Burlington Northern Railroad Co. .................. 5,700 177
Burlington Resources, Inc. ........................ 3,100 134
(a)Burr-Brown Corp. ............................... 8,000 293
(a)C-Cube Microsystems, Inc. ...................... 8,400 266
(a)Cable Design Technologies Corp. ................ 6,900 107
Cabot Corp. ....................................... 2,600 63
Cabot Oil & Gas Corp. 'A' ......................... 6,800 127
(a)Cadence Design Systems, Inc. ................... 6,500 83
Cambrex Corp. ..................................... 6,300 165
(a)Cambridge Tech Partner, Inc. ................... 1,900 33
Campbell Soup Co. ................................. 5,400 250
(a)Canandaigua Brands, Inc. 'A' ................... 3,800 199
Capital One Financial Corp. ....................... 3,300 184
Capital Re Corp. .................................. 7,700 124
Caraustar Industries, Inc. ........................ 6,000 148
Cardinal Health, Inc. ............................. 4,258 273
Carlisle Cos., Inc. ............................... 1,100 53
Carolina Power & Light Co. ........................ 1,900 81
Carpenter Technology Corp. ........................ 1,200 34
Case Corp. ........................................ 9,200 443
Caseys General Stores, Inc. ....................... 12,000 180
(a)Catalina Marketing Corp. ....................... 3,800 350
Caterpillar, Inc. ................................. 6,000 360
Cato Corp., 'A' ................................... 7,000 81
CBRL Group, Inc. .................................. 2,500 43
(a)CBS, Inc. ...................................... 10,900 473
CCB Financial Corp. ............................... 1,300 69
(a)CDI Corp. ...................................... 4,900 167
(a)CEC Entertainment, Inc. ........................ 3,600 152
(a)Cendant Corp. .................................. 13,100 269
(a)Centocor, Inc. ................................. 2,200 103
Central & South West Corp. ........................ 2,600 61
Central Hudson Gas & Electric Corp. ............... 3,800 160
Central Parking Corp. ............................. 6,000 205
Centura Banks, Inc. ............................... 4,900 276
Century Telephone Enterprises, Inc. ............... 3,900 155
(a)Ceridian Corp. ................................. 2,600 85
(a)Cerner Corp. ................................... 6,400 134
(a)Champion Enterprises, Inc. ..................... 10,000 186
Charter One Financial, Inc. ....................... 4,000 111
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------------------
<S> <C> <C>
Chase Manhattan Corp. ............................. 12,000 $1,039
Chemed Corp. ...................................... 4,000 133
ChemFirst, Inc. ................................... 4,600 112
Chevron Corp. ..................................... 8,800 838
Chiquita Brands International, Inc. ............... 13,900 125
(a)Chiron Corp. ................................... 5,500 114
(a)Chris-Craft Industries, Inc. ................... 1,545 73
Chubb Corp. ....................................... 2,400 167
(a)Ciber, Inc. .................................... 11,100 212
Cigna Corp. ....................................... 3,100 276
CILCORP, Inc. ..................................... 3,100 194
Cincinnati Bell, Inc. ............................. 4,500 112
Cincinnati Financial Corp. ........................ 2,900 109
Cinergy Corp. ..................................... 2,200 70
Cintas Corp. ...................................... 3,100 208
(a)Cisco Systems, Inc. ............................ 42,600 2,748
Citigroup, Inc. ................................... 46,200 2,194
(a)Citrix Systems, Inc. ........................... 2,600 147
City National Corp. ............................... 1,500 56
Cke Restaurants, Inc. ............................. 10,200 166
CLARCOR, Inc. ..................................... 6,000 115
Clayton Homes, Inc. ............................... 4,800 55
(a)Clear Channel Communications, Inc. ............. 3,800 262
Clorox Co. ........................................ 1,988 212
CMS Energy Corp. .................................. 2,800 117
CNF Transportation, Inc. .......................... 1,800 69
Coastal Corp. ..................................... 4,600 184
Coca-Cola Bottling Co. ............................ 2,100 118
Coca-Cola Co. ..................................... 32,600 2,037
Coca-Cola Enterprises, Inc. ....................... 5,900 176
(a)Cognex Corp. ................................... 8,000 252
Colgate Palmolive Co. ............................. 4,100 405
Columbia HCA/Healthcare Corp. ..................... 10,400 237
Comair Holdings, Inc. ............................. 18,900 393
Comcast Corp. ..................................... 10,400 400
Comdisco, Inc. .................................... 4,800 123
Comerica, Inc. .................................... 2,500 149
Commerce Bancorp, Inc. ............................ 4,700 201
Commercial Federal Corp. .......................... 12,700 294
Commercial Metals Co. ............................. 5,000 142
Commonwealth Energy Systems ....................... 4,200 176
(a)CommScope, Inc. ................................ 8,800 271
Compaq Computer Corp. ............................. 23,500 557
Computer Associates International, Inc. ........... 7,800 429
(a)Computer Sciences Corp. ........................ 2,400 166
Computer Task Group, Inc. ......................... 4,700 80
Comsat Corp. ...................................... 900 29
(a)Comverse Technology, Inc. ...................... 1,950 147
Conagra, Inc. ..................................... 7,300 194
(a)Concord EFS, Inc. .............................. 2,900 123
Conectiv, Inc. .................................... 4,100 100
(a)Conexant Systems, Inc. ......................... 1,800 105
Conseco, Inc. ..................................... 4,400 134
Consolidated Edison, Inc. ......................... 3,500 158
(a)Consolidated Graphics, Inc. .................... 3,300 165
Consolidated Papers, Inc. ......................... 3,900 104
(a)Consolidated Stores Corp. ...................... 2,400 65
(a)Convergys Corp. ................................ 4,400 85
Cooper Companies, Inc. ............................ 4,400 110
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-77
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PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
Cooper Industries, Inc. ........................... 3,000 $ 156
Corn Products International, Inc. ................. 7,100 216
Corning, Inc. ..................................... 3,900 273
(a)Costco Cos., Inc. .............................. 3,200 256
Countrywide Credit Industries, Inc. ............... 2,200 94
(a) Covance, Inc. ................................. 1,800 43
(a) Coventry Health Care, Inc. .................... 12,000 131
Crompton & Knowles Corp. .......................... 2,800 55
Cross Timbers Oil Co. ............................. 10,600 158
CSX Corp. ......................................... 3,500 159
CTS Corp. ......................................... 4,100 287
Cullen/Frost Bankers, Inc. ........................ 10,600 292
Cummins Engine .................................... 300 17
CVS Corp. ......................................... 5,800 297
D.R. Horton, Inc. ................................. 12,000 199
Dallas Semiconductor Corp. ........................ 6,700 338
Dana Corp. ........................................ 4,000 184
Dayton Hudson Corp. ............................... 6,700 435
Dean Foods Co. .................................... 1,200 50
Deere & Co. ....................................... 3,700 147
(a)Dell Computer Corp. ............................ 35,000 1,295
(a)Delphi Automotive Systems Corp. ................ 6,709 125
Delphi Financial Group, Inc. 'A' .................. 4,692 168
Delta & Pine Land Co. ............................. 8,000 252
Delta Airlines, Inc. .............................. 1,900 109
DENTSPLY International, Inc. ...................... 2,300 66
Devon Energy Corp. ................................ 7,000 250
(a)DeVry, Inc. .................................... 13,800 309
Diagnostic Products Corp. ......................... 5,000 138
Dial Corp. ........................................ 3,200 119
Diebold, Inc. ..................................... 1,900 55
Dime Bancorp, Inc. ................................ 2,500 50
Dimon, Inc. ....................................... 9,100 47
(a) Dionex Corp. .................................. 5,000 202
(a) Discount Auto Parts, Inc. ..................... 4,600 111
Dole Food Co., Inc. ............................... 2,000 59
(a) Dollar Tree Stores, Inc. ...................... 1,900 84
Dominion Resources, Inc. .......................... 3,600 156
Donaldson Co., Inc. ............................... 3,400 83
Dover Corp. ....................................... 4,300 150
Dow Chemical Co. .................................. 4,200 533
Downey Financial Corp. ............................ 5,900 129
DPL, Inc. ......................................... 3,700 68
(a) Dress Barn, Inc. .............................. 7,100 114
DTE Energy Co. .................................... 1,800 72
Du Pont (EI) de Nemours Co. ....................... 16,000 1,093
Duke Power Co. .................................... 4,500 245
Dun & Brandstreet Corp. ........................... 4,000 142
(a) E(*)TRADE Group, Inc. ......................... 43,600 1,741
Earthgrains Co. ................................... 8,300 214
Eastern Utilities Association ..................... 5,600 163
Eastman Kodak Co. ................................. 4,700 318
Eaton Vance Corp. ................................. 6,100 210
Edison International Corp. ........................ 5,100 136
El Paso Energy Corp. .............................. 3,100 109
Electronic Data Systems Corp. ..................... 6,900 390
Electronics For Imaging, Inc. ..................... 2,000 109
Eli Lilly & Co. ................................... 14,900 1,067
(a) EMC Corp. ..................................... 14,000 770
Emerson Electric Co. .............................. 5,800 365
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------------
<S> <C> <C>
Energen Corp. ..................................... 6,400 $ 119
Energy East Corp. ................................. 3,600 94
Enhance Financial Services Group,
Inc. ............................................ 8,100 160
Enron Corp. ....................................... 4,900 401
Ensco International, Inc. ......................... 4,200 84
Entergy Corp. ..................................... 3,700 116
(a) Enzo Biochem, Inc. ............................ 9,800 97
Equifax, Inc. ..................................... 2,300 82
(a) Etec Systems, Inc. ............................ 5,000 166
Ethan Allen Interiors, Inc. ....................... 9,600 362
Executive Risk, Inc. .............................. 3,000 255
Expeditors International of
Washington, Inc. ................................ 10,000 272
(a) Express Scripts, Inc. 'A' ..................... 6,700 403
Exxon Corp. ....................................... 32,200 2,483
Fair, Issac & Co., Inc. ........................... 3,600 126
Family Dollar Stores, Inc. ........................ 5,400 130
(a) Family Golf Centers, Inc. ..................... 5,800 45
Fannie Mae Corp. .................................. 13,600 930
Fastenal Co. ...................................... 1,400 73
(a) FDX Corp. ..................................... 5,000 271
Federal Home Loan Mortgage Corp. .................. 8,700 505
Federal Signal Corp. .............................. 2,400 51
Federal-Mogul Corp. ............................... 2,000 104
(a) Federated Department Stores ................... 3,900 206
Fidelity National Financial, Inc. ................. 6,270 132
Fifth Third Bancorp ............................... 4,000 266
Finova Group, Inc. ................................ 1,700 89
First American Financial Corp. .................... 10,800 193
First Data Corp. .................................. 6,700 328
First Midwest Bancorp, Inc. ....................... 5,900 235
First Security Corp. .............................. 5,100 139
First Tennessee National Corp. .................... 3,500 134
First Union Corp. (N.C.) .......................... 12,800 602
First Virginia Banks, Inc. ........................ 1,500 74
Firstbancorp/Puerto Rico .......................... 6,000 135
Firstenergy Corp. ................................. 3,500 109
Firstmerit Corp. .................................. 13,000 365
(a) Fiserv, Inc. .................................. 3,300 103
Fleet Financial Group, Inc. ....................... 7,200 319
Fleming Cos., Inc. ................................ 10,100 117
Florida Progress Corp. ............................ 1,900 78
Florida Rock Industries, Inc. ..................... 4,300 196
Flowers Industries, Inc. .......................... 3,700 80
(a) Foodmaker, Inc. ............................... 8,600 244
(a) Footstar, Inc. ................................ 5,500 205
Ford Motor Co. .................................... 17,100 965
(a) Forest Laboratories, Inc. 'A' ................. 2,500 116
Fort James Corp. .................................. 4,100 155
Fortune Brands, Inc. .............................. 3,300 137
(a) Foundation Health Systems 'A' ................. 6,600 99
FPL Group, Inc. ................................... 2,100 115
(a)Franklin Covey Co. ............................. 6,700 49
Franklin Resources, Inc. .......................... 3,900 158
Fremont General Corp. ............................. 13,700 259
Frontier Corp. .................................... 3,100 183
Frontier Insurance Group, Inc. .................... 9,400 145
(a) Furniture Brands International,
Inc. .......................................... 1,800 50
G & K Services Inc. 'A' ........................... 4,500 236
Gallagher (Arthur J.) & Co. ....................... 3,200 158
Gannett Co., Inc. ................................. 3,900 278
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-78
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PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
Gap, Inc. ........................... 12,525 $ 631
(a)Gateway 2000, Inc. ............... 2,600 153
Gatx Corp. .......................... 2,600 99
General Dynamics Corp. .............. 2,200 151
General Electric Co. ................ 45,700 5,164
General Mills, Inc. ................. 2,700 217
General Motors Corp. ................ 9,600 634
(a)Genesis Health Ventures, Inc. .... 8,800 26
(a)Gentex Corp. ..................... 13,800 386
(a)Genzyme Corp. .................... 2,400 116
(a)Genzyme Surgical Products ........ 429 2
Geon Co. ............................ 5,200 168
Georgia-Pacific Corp. ............... 6,600 313
Georgia-Pacific Corp. (Timber
Group) ............................ 3,100 78
Gerber Scientific, Inc. ............. 5,900 130
Gillette Co. ........................ 15,300 627
(a)Global Marine, Inc. .............. 5,800 90
(a)Golden State Bancorp, Inc. ....... 1,000 1
Golden West Financial Corp. ......... 1,100 108
Goodyear Tire & Rubber Co. .......... 4,200 247
GPU, Inc. ........................... 2,100 89
Graco, Inc. ......................... 3,700 109
Greenpoint Financial Corp. .......... 2,400 79
GTE Corp. ........................... 13,100 992
Guidant Corp. ....................... 4,500 231
Guilford Mills, Inc. ................ 9,500 99
(a)Gulfstream Aerospace Corp. ....... 2,400 162
H.J. Heinz Co. ...................... 5,100 256
(a)Ha-Lo Industries, Inc. ........... 8,850 87
(a)Hadco Corp. ...................... 3,000 119
Halliburton Co. ..................... 6,300 285
Hannaford Brothers Co. .............. 1,900 102
Harley-Davidson, Inc. ............... 4,700 256
Harman International Industries,
Inc. .............................. 4,400 194
Harsco Corp. ........................ 1,500 48
Hartford Financial Services Group ... 3,000 175
(a)Health Management Associates, Inc.
'A' ............................... 7,400 83
(a)HEALTHSOUTH Corp. ................ 9,000 134
(a)Heartland Express, Inc. .......... 7,000 115
Henry (Jack) & Associates ........... 4,100 161
Herman Miller, Inc. ................. 2,500 53
Hershey Foods Corp. ................. 2,100 125
Hewlett-Packard Co. ................. 14,500 1,457
Hibernia Corp. 'A' .................. 5,100 80
Hillenbrand Industries, Inc. ........ 2,200 95
Hilton Hotels Corp. ................. 4,500 64
(a)HNC Software, Inc. ............... 5,200 160
Home Depot, Inc. .................... 19,600 1,263
HON INDUSTRIES, Inc. ................ 2,100 61
Honeywell, Inc. ..................... 2,100 243
Hormel Foods Corp. .................. 2,400 97
Household International, Inc. ....... 6,800 322
Hubbell Inc. 'B' .................... 2,900 132
Hudson United Bancorp ............... 8,000 245
Hughes Supply, Inc. ................. 6,200 184
Huntington Bancshares, Inc. ......... 3,700 130
(a)Hutchinson Technology, Inc. ...... 5,700 158
(a)Hyperion Solutions Corp. ......... 6,000 107
IBP, Inc. ........................... 3,200 76
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
ICN Pharmaceuticals, Inc. ........... 2,800 $ 90
(a)IDEXX Laboratories, Inc. ......... 8,100 189
(a)IHOP Corp. ....................... 5,200 125
Illinois Tool Works, Inc. ........... 4,000 328
Illinova Corp. ...................... 2,900 79
IMC Global, Inc. .................... 4,000 71
IMS Health, Inc. .................... 5,600 175
(a)Inacom Corp. ..................... 6,272 79
(a)Incyte Pharmaceuticals, Inc. ..... 6,300 167
(a)Informix Corp. ................... 5,600 48
Ingersoll-Rand Co. .................. 2,800 181
(a)Input/Output, Inc. ............... 10,300 78
(a)Insituform Technologies, Inc. ....
'A' ............................... 8,200 177
(a)Integrated Health Services, Inc. . 12,400 99
Intel Corp. ......................... 45,600 2,713
Inter-Tel, Inc. ..................... 6,100 111
Interface, Inc. ..................... 13,000 112
(a)Interim Services, Inc. ........... 10,600 219
Intermet Corp. ...................... 6,000 91
International Business Machines
Corp............................... 25,400 3,283
International Game Technology ....... 4,000 74
International Paper Co. ............. 6,400 323
(a)International Rectifier Corp. .... 14,200 189
Interstate Bakeries Corp. ........... 2,300 52
(a)Intuit, Inc. ..................... 1,700 153
(a)Ionics, Inc. ..................... 4,400 161
IPALCO Enterprises, Inc. ............ 3,400 72
ITT Industries, Inc. ................ 2,400 92
Ivacare Corp. ....................... 6,800 182
J.C. Penney Co., Inc. ............... 3,900 189
Jefferson-Pilot Corp. ............... 1,500 99
JLG Industries, Inc. ................ 9,500 194
John H. Harland Co. ................. 7,100 142
Johnson & Johnson ................... 17,800 1,744
(a)Jones Apparel Group, Inc. ........ 3,300 113
Jones Pharma., Inc. ................. 6,200 244
JSB Financial ....................... 1,800 92
(a)Just For Feet, Inc. .............. 7,300 47
Justin Industries ................... 7,300 102
Kaman Corp. 'A' ..................... 7,600 119
Kansas City Southern Industries,
Inc. .............................. 3,300 211
Kaydon Corp. ........................ 1,300 44
(a)Keane, Inc. ...................... 2,000 45
Kellogg Co. ......................... 5,100 168
Kellwood Co. ........................ 5,600 152
Kelly Services Inc. 'A' ............. 1,600 51
(a)Kemet Corp. ...................... 8,600 197
(a)Kent Electronics Corp. ........... 8,300 164
Keycorp ............................. 6,500 209
Keyspan Energy Corp. ................ 4,100 108
Keystone Financial, Inc. ............ 11,900 352
Kimberly-Clark Corp. ................ 7,400 422
(a)Kirby Corp. ...................... 3,600 76
(a)Kmart Corp. ...................... 9,700 159
KN Energy, Inc. ..................... 2,200 29
(a)Kohls Corp. ...................... 2,600 201
(a)Kroger Co. ....................... 13,200 369
(a)Kulicke & Soffa Industries ....... 5,900 158
La-Z-Boy, Inc. ...................... 10,900 251
(a)Lakes Gaming, Inc. ............... 2,950 32
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-79
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PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
Lancaster Colony Corp. .............. 1,900 $ 66
(a)Landstar System, Inc. ............ 2,100 76
(a)Lattice Semiconductor Corp. ...... 5,000 311
(a)Lear Corp. ....................... 2,100 104
Lee Enterprises ..................... 2,700 82
(a)Legato Systems, Inc. ............. 1,100 64
Legg Mason, Inc. .................... 12,300 474
Leggett & Platt, Inc. ............... 5,800 161
Lehman Brothers Holdings, Inc. ...... 3,500 218
(a)Lexmark International Group,
Inc. .............................. 3,800 251
LG&E Energy Corp. ................... 2,900 61
Libbey, Inc. ........................ 3,700 107
(a)LifePoint Hospitals, Inc. ........ 547 7
Lilly Industries, Inc. 'A' .......... 5,200 97
(a)Lincare Holdings, Inc. ........... 2,100 53
Lincoln National Corp. .............. 3,200 167
Linear Technology Corp. ............. 4,400 296
(a)Linens 'n Things, Inc. ........... 7,800 341
Litton Industries, Inc. ............. 1,500 108
Lockheed Martin Corp. ............... 5,900 220
Loews Corp. ......................... 1,800 142
Lone Star Industries, Inc. .......... 5,300 199
Lowe's Cos., Inc. ................... 8,840 501
Lubrizol Corp. ...................... 3,100 84
Luby's Cafeterias, Inc. ............. 8,800 132
Lucent Technologies, Inc. ........... 41,045 2,768
Lyondell Petrochemical Co. .......... 2,900 60
Macdermid, Inc. ..................... 5,400 251
(a)Macromedia, Inc. ................. 8,300 293
Maf Bancorp, Inc. ................... 2,800 68
(a)Mandalay Resort Group ............ 3,700 78
Manitowoc Co., Inc. ................. 5,550 231
Manpower, Inc. ...................... 2,700 61
Marriott International 'A' .......... 4,700 176
Marsh & McLennan Cos., Inc. ......... 3,600 272
Marshall & Ilsley Corp. ............. 2,900 187
(a)Marshall Industries .............. 6,700 241
Martin Marietta Corp. ............... 1,700 100
Masco Corp. ......................... 5,300 153
Mattel, Inc. ........................ 4,200 111
(a)Maxim Integrated Products ........ 3,800 253
May Department Stores Co. ........... 6,000 245
Maytag Corp. ........................ 2,400 167
MBIA, Inc. .......................... 2,300 149
MBNA Corp. .......................... 10,300 315
McCormick & Co., Inc. ............... 2,900 92
McDonald's Corp. .................... 18,300 756
McGraw-Hill Cos., Inc. .............. 3,700 200
MCI WorldCom, Inc. .................. 24,200 2,087
Mckesson Corp. ...................... 7,699 247
MCN Corp. ........................... 2,400 50
Media General, Inc. 'A' ............. 1,400 71
(a)MediaOne Group, Inc. ............. 8,400 625
(a)Medimmune, Inc. .................. 10,700 725
(a)Medquist, Inc. ................... 4,900 214
Medtronic, Inc. ..................... 6,700 522
Mellon Bank Corp. ................... 7,200 262
(a)Men's Warehouse, Inc. ............ 6,800 173
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
Mercantile Bancorp .................. 2,600 $ 149
Mercantile Bankshares Corp. ......... 2,600 92
Merck & Co., Inc. ................... 31,700 2,346
(a)Mercury Interactive .............. 7,600 269
Merrill Lynch & Co., Inc. ........... 4,900 392
Methode Electronics 'A' ............. 8,600 197
(a)Metro Networks, Inc. ............. 3,500 187
MGIC Investment Corp. ............... 2,500 122
(a)Michaels Stores, Inc. ............ 6,400 196
(a)Microchip Technology, Inc. ....... 1,600 76
(a)Micron Technology, Inc. .......... 3,800 153
(a)Micros Systems, Inc. ............. 3,500 119
(a)Microsoft Corp. .................. 66,200 5,970
MidAmerican Energy Holdings Co. ..... 2,300 80
Midas, Inc. ......................... 1 --
(a)Midway Games, Inc. ............... 8,800 114
Minnesota Mining & Manufacturing
Co. ............................... 5,800 504
Minnesota Power & Light Co. ......... 3,000 60
Mississippi Chemical Corp. .......... 7,300 72
Mobil Corp. ......................... 10,500 1,039
(a)Modis Professional Services,
Inc. .............................. 3,800 52
(a)Mohawk Industries, Inc. .......... 10,600 322
Molex, Inc. ......................... 4,800 178
Monsanto ............................ 8,800 347
Montana Power Co. ................... 1,500 106
Morgan (J.P.) & Co., Inc. ........... 2,700 379
(a)Morrison Knudsen Corp. ........... 13,600 140
Motorola, Inc. ...................... 9,100 862
(a)MS Carriers ...................... 4,700 139
(a)Mueller Industries, Inc. ......... 8,800 299
Murphy Oil Corp. .................... 2,500 122
Mutual Risk Management Ltd. ......... 7,700 257
Myers Industries, Inc. .............. 5,000 100
Mylan Laboratories, Inc. ............ 3,900 103
Nabisco Group Holdings Corp. ........ 4,700 92
(a)Nabors Industries, Inc. .......... 3,400 83
National City Corp. ................. 3,900 255
National Computer Systems, Inc. ..... 6,500 219
National Data Corp. ................. 8,300 355
National Fuel Gas Co. ............... 1,400 68
(a)National Instruments Corp. ....... 6,600 266
(a)Nautica Enterprises, Inc. ........ 8,500 143
(a)NBTY, Inc. ....................... 13,900 90
NCR Corp. ........................... 3,100 151
(a)NCS Healthcare, Inc. ............. 5,300 29
(a)Networks Associates, Inc. ........ 3,700 54
Nevada Power Co. .................... 3,100 78
New England Business Services, Inc. . 3,500 108
New England Electric System ......... 2,100 105
New Jersey Resources Corp. .......... 4,100 153
New York Times Co. 'A' .............. 3,100 114
Newell Rubbermaid Inc. .............. 5,501 256
(a)Newfield Exploration Co. ......... 7,600 216
(a)Nextel Communications Inc. 'A' ... 5,600 281
(a)NFO Worldwide, Inc. .............. 12,600 176
Nike, Inc. 'B' ...................... 4,500 285
NiSource Inc. ....................... 2,500 65
Noble Affiliates, Inc. .............. 2,300 65
(a)Noble Drilling Corp. ............. 4,000 79
Norfolk Southern Corp. .............. 5,200 157
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-80
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PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
Norrell Corp. ....................... 7,700 $ 145
Nortel Networks Corp. ............... 8,800 764
(a)North American Vaccine, Inc. ..... 6,400 31
North Fork Bancorp, Inc. ............ 2,900 62
(a)Northeast Utilities .............. 4,000 71
Northern Trust Corp. ................ 2,100 204
Northwest Natural Gas Co. ........... 5,500 133
(a)Nova Corp/Georgia ................ 2,200 55
(a)Novell, Inc. ..................... 5,900 156
(a)Novellus Systems, Inc. ........... 7,700 526
(a)O'Reilly Automotive, Inc. ........ 4,800 242
(a)Oak Industries, Inc. ............. 4,300 188
Oakwood Homes Corp. ................. 10,100 133
Occidental Petroleum Corp. .......... 5,300 112
(a)Office Depot, Inc. ............... 11,250 248
Ogden Corp. ......................... 2,000 54
OGE Energy Corp. .................... 4,400 105
Old Kent Financial Corp. ............ 3,045 128
Old Republic International Corp. .... 3,100 54
Olin Corp. .......................... 2,400 32
Om Group, Inc. ...................... 5,600 193
Omnicare, Inc. ...................... 2,800 35
Omnicon Group, Inc. ................. 3,300 264
(a)Oracle System Corp. .............. 20,100 746
Orange & Rockland Utilities, Inc. ... 2,200 129
(a)Orbital Sciences Corp. ........... 7,700 182
Orion Capital Corp. ................. 6,700 240
(a)Orthodontic Centers of America ... 11,500 162
(a)Outback Steakhouse, Inc. ......... 2,400 94
Owens & Minor, Inc. ................. 8,800 97
(a)Owens-Illinois, Inc. ............. 3,300 108
(a)Oxford Health Plans, Inc. ........ 2,600 40
Pacific Century Financial Corp. ..... 3,400 73
(a)Pacific Sunwear of California .... 6,000 146
(a)Pacificare Health Systems ........ 1,400 101
PacifiCorp .......................... 4,400 81
Paine Webber Group, Inc. ............ 4,000 187
(a)Parexel International Corp. ...... 4,700 63
(a)Park Place Entertainment Corp. ... 11,800 114
(a)Patterson Dental Co. ............. 6,200 215
(a)Paxar ............................ 11,100 100
Paychex, Inc. ....................... 3,750 120
Peco Energy Co. ..................... 3,100 130
(a)Pediatrix Medical Group, Inc. .... 3,400 72
Pennsylvania Enterprises, Inc. ...... 4,000 123
Pentair, Inc. ....................... 1,500 69
Pepsico, Inc. ....................... 20,100 778
Pfizer, Inc. ........................ 17,600 1,932
PG&E Corp. .......................... 5,700 185
(a)Pharmaceutical Product
Development ....................... 4,900 134
Pharmacia & Upjohn, Inc. ............ 7,300 415
Philadelphia Suburban Corp. ......... 6,300 145
Philip Morris Cos., Inc. ............ 32,600 1,310
Phillips Petroleum Co. .............. 4,100 206
Phillips-Van Heusen Corp. ........... 9,800 97
(a)Photronics, Inc. ................. 5,900 145
(a)Phycor, Inc. ..................... 16,500 122
Piedmont Natural Gas Co. ............ 4,800 149
Pier 1 Imports, Inc. ................ 21,800 245
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
Pillowtex Corp. ..................... 3,900 $ 64
Pinnacle West Capital Corp. ......... 2,300 93
(a)Pioneer Group, Inc. .............. 6,400 110
Pioneer Hi-Bred International, Inc. . 3,700 144
Pitney Bowes, Inc. .................. 4,400 283
Pittston Brinks Group ............... 1,800 48
(a)Plains Resources, Inc. ........... 5,900 112
(a)Platinum Technology, Inc. ........ 2,800 82
PMI Group, Inc. ..................... 1,000 63
PNC Bank Corp. ...................... 4,100 236
Pogo Producing Co. .................. 10,800 201
Polaris Industries, Inc. ............ 5,300 231
(a)Policy Management Systems Corp. .. 1,200 36
Potomac Electric Power Co. .......... 3,000 88
PPG Industries, Inc. ................ 4,600 272
Praxair, Inc. ....................... 3,500 171
Premark International, Inc. ......... 2,500 94
(a)Prepaid Legal Services, Inc. ..... 5,400 147
(a)Pride International, Inc. ........ 10,900 115
(a)Primark Corp. .................... 5,600 157
(a)Prime Hospitality Corp. .......... 14,200 170
(a)Priority Healthcare Corp. ........ 3,426 118
Procter & Gamble Co. ................ 17,600 1,571
(a)Progress Software Corp. .......... 3,700 105
Progressive Corp. ................... 1,200 174
(a)Promus Company, Inc. ............. 2,800 87
Protective Life Corp. ............... 2,300 76
(a)Protein Design Labs, Inc. ........ 3,800 84
Provident Financial Group ........... 1,400 61
Providian Financial Corp. ........... 2,750 257
Public Service Co. of New Mexico .... 2,600 52
Public Service Enterprise Group,
Inc. .............................. 3,000 123
Puget Sound Energy, Inc. ............ 3,000 72
Quaker Oats, Co. .................... 2,600 173
(a)Qualcomm, Inc. ................... 4,200 603
(a)Quantum Corp. .................... 5,300 128
Queens County Bancorp, Inc. ......... 4,400 142
Questar Corp. ....................... 2,900 55
(a)Quintiles Transnational Corp. .... 7,996 336
(a)R.J. Reynolds Tobacco Holdings,
Inc. .............................. 1,566 49
(a)Ralcorp Holdings, Inc. ........... 7,000 112
Ralston-Ralston Purina Group ........ 4,700 143
Raymond James Financial, Inc. ....... 10,100 242
Rayonier, Inc. ...................... 1,400 70
Raytheon Co., 'B' ................... 5,500 387
(a)Read-Rite Corp. .................. 10,800 67
Regal Beloit ........................ 4,900 116
Regions Financial Corp. ............. 3,700 142
Regis Corp. ......................... 7,650 147
Reliance Steel & Aluminum ........... 4,000 156
Reliant Energy, Inc. ................ 3,800 105
Reliastar Financial Corp. ........... 2,300 101
(a)Renal Care Group, Inc. ........... 9,200 238
Republic New York Corp. ............. 1,800 123
(a)Respironics, Inc. ................ 7,000 106
Reynolds & Reynolds Co. 'A' ......... 2,700 63
Richfood Holdings, Inc. ............. 9,900 174
Riggs National Corp. of Washington
D.C ............................... 5,800 119
Rite Aid Corp. ...................... 3,800 94
(a)Robert Half International, Inc. .. 2,800 73
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-81
<PAGE> 297
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PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
(a)Roberts Pharmaceutical Corp. ..... 7,400 $ 179
Rockwell International Corp. ........ 3,800 231
Rohm & Haas Co. ..................... 5,100 219
Rollins Truck Leasing Corp. ......... 12,600 140
Roper Industries, Inc. .............. 8,000 256
Ross Stores, Inc. ................... 1,400 71
RPM, Inc. ........................... 4,700 67
Ruby Tuesday, Inc. .................. 7,300 139
Russ Berrie & Co., Inc. ............. 5,600 139
(a)Ryan's Family Steak Houses, Inc. . 11,400 133
(a)Safe Skin Corp. .................. 11,000 132
Safeco Corp. ........................ 2,200 97
(a)Saks, Inc. ....................... 4,100 118
(a)Samina Corp. ..................... 8,500 645
(a)Santa Fe Snyder Corp. ............ 36,455 278
Sara Lee Corp. ...................... 12,700 288
SBC Communications, Inc. ............ 25,798 1,496
Scana Corp. ......................... 2,500 58
Schering-Plough Corp. ............... 19,900 1,055
Schwab (Charles) Corp. .............. 5,900 648
(a)SCI Systems, Inc. ................ 1,900 90
(a)Seagate Technology, Inc. ......... 3,900 100
Seagram Co., Ltd. ................... 5,400 272
Sears, Roebuck & Co. ................ 5,800 258
SEI Corp. ........................... 3,700 327
Selective Insurance Group, Inc. ..... 7,200 137
Sempra Energy ....................... 4,401 100
(a)Sepracor Inc. .................... 800 65
Service Corp. International ......... 3,900 75
(a)Service Experts, Inc. ............ 4,300 94
(a)Shaw Industries, Inc. ............ 4,400 73
Sherwin-Williams Co. ................ 4,300 119
(a)Shopko Stores, Inc. .............. 5,900 214
(a)Shorewood Packaging .............. 6,200 114
(a)Siebel Systems, Inc. ............. 2,500 166
(a)Sierra Health Services, Inc. ..... 6,700 97
Sierra Pac Res Com .................. 4,700 171
(a)Silicon Valley Bancshares ........ 4,900 121
Skywest, Inc. ....................... 4,900 122
SLM Holding Corp. ................... 2,500 115
(a)Smith International, Inc. ........ 1,700 74
(a)Smithfield Foods, Inc. ........... 7,700 257
(a)Snyder Communications, Inc. ...... 2,100 69
(a)Sola International, Inc. ......... 6,400 124
Solutia, Inc. ....................... 3,400 72
Sonat, Inc. ......................... 2,500 83
Sonoco Products Co. ................. 3,100 93
Sotheby's Holdings, Inc. 'A' ........ 2,100 80
Southdown, Inc. ..................... 1,500 96
Southern Co. ........................ 10,700 284
Southtrust Corp. .................... 4,600 177
Southwest Airlines Co. .............. 4,200 131
Southwest Gas Corp. ................. 6,400 183
Southwestern Energy Co. ............. 8,500 90
Sovereign Bancorp, Inc. ............. 5,800 70
Sprint Corp. ........................ 11,800 623
(a)Sprint Corp. ..................... 3,050 174
(a)SPS Technologies, Inc. ........... 2,900 109
(a)SPX Corp. ........................ 1,200 100
St. John Knits, Inc. ................ 4,400 129
St. Paul Bancorp, Inc. .............. 7,600 194
St. Paul Cos., Inc. ................. 4,901 156
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------
<S> <C> <C>
Standard Motor Products ............. 3,700 $ 91
Standard Products Co. ............... 6,400 164
(a)Staples, Inc. .................... 7,250 224
(a)Starbucks Corp. .................. 5,400 203
Statestreet Corp. ................... 3,000 256
(a)Steris Corp. ..................... 2,100 41
(a)Sterling Commerce, Inc. .......... 2,600 95
(a)Sterling Software, Inc. .......... 2,500 67
Stewart Enterprises, Inc. 'A' ....... 3,600 52
(a)Stillwater Mining Co. ............ 7,200 235
Stone & Webster, Inc. ............... 3,700 99
(a)Storage Technology Corp. ......... 3,000 68
Stride Rite Corp. ................... 9,700 100
Stryker Corp. ....................... 2,800 168
Sturm Ruger & Co., Inc. ............. 6,700 72
Summit Bancorp ...................... 3,200 134
(a)Sun Microsystems, Inc. ........... 10,800 744
(a)Sunguard Data Systems, Inc. ...... 3,000 104
(a)Sunrise Medical, Inc. ............ 7,900 56
Suntrust Banks, Inc. ................ 3,100 215
(a)Superior Services, Inc. .......... 5,900 157
Susquehanna Bancshares, Inc. ........ 6,100 108
(a)Sybron International Corp. ....... 3,300 91
Symbol Technologies, Inc. ........... 2,700 100
(a)Synopsys, Inc. ................... 2,000 110
Synovus Financial Corp. ............. 4,400 87
Sysco Corp. ......................... 5,600 167
T. Rowe Price Associates, Inc. ...... 3,500 134
(a)TALK.com, Inc. ................... 15,000 169
TCA Cable TV, Inc. .................. 1,800 100
TCF Financial Corp. ................. 2,500 70
(a)Tech Data Corp. .................. 1,600 61
Technitrol, Inc. .................... 4,300 139
(a)Technology Solutions Co. ......... 9,700 105
Teco Energy, Inc. ................... 2,900 66
Teleflex, Inc. ...................... 1,700 74
Telephone & Data Systems, Inc. ...... 2,100 153
(a)Tellabs, Inc. .................... 8,000 540
(a)Tenet Healthcare Corp. ........... 5,200 97
(a)Teradyne, Inc. ................... 2,500 179
Texaco, Inc. ........................ 7,200 450
Texas Industries, Inc. .............. 4,600 178
Texas Instruments, Inc. ............. 5,600 812
Texas Utilities Co. ................. 3,900 161
Textron, Inc. ....................... 3,000 247
(a)The Cheesecake Factory, Inc. ..... 4,600 140
The Interpublic Group of Cos., Inc. . 2,800 243
The Limited, Inc. ................... 4,100 186
The Marcus Corporation .............. 7,900 97
(a)The Scott Company ................ 4,500 214
Thomas Industries, Inc. ............. 5,300 109
(a)3Com Corp. ....................... 5,200 139
Tidewater, Inc. ..................... 2,000 61
Tiffany & Co. ....................... 1,300 125
(a)Timberland Co. 'A' ............... 3,000 204
Time Warner, Inc. ................... 16,400 1,205
Times Mirror Co. 'A' ................ 1,300 77
TJX Companies, Inc. ................. 5,000 167
TNP Enterprises, Inc. ............... 3,300 120
(a)Toll Brothers, Inc. .............. 7,800 167
Torchmark Corp. ..................... 2,300 78
Tosco Corp. ......................... 4,600 119
(a)Total Renal Care Holdings, Inc. .. 2,600 40
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-82
<PAGE> 298
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT.)
Transamerica Corp. ................... 1,700 $ 128
Transocean Offshore, Inc. ............ 2,900 76
Tredegar Industries, Inc. ............ 7,100 154
Trenwick Group, Inc. ................. 3,000 74
(a)Triad Hospitals, Inc. ............. 547 7
(a)Triarc Companies .................. 6,800 144
Tribune Co. .......................... 2,200 192
(a)Tricon Global Restaurants, Inc. ... 2,400 130
(a)Trigon Healthcare, Inc. ........... 1,600 58
Trinity Industries, Inc. ............. 1,500 50
True North Communications, Inc. ...... 9,500 285
Trustco Bank Corp. ................... 5,000 134
TRW, Inc. ............................ 2,500 137
(a)Tuboscope, Inc. ................... 10,900 149
Tyco International Ltd. .............. 12,328 1,168
Tyson Foods, Inc. .................... 6,500 146
(a)U.S. Airways Group, Inc. .......... 1,600 70
U.S. Bancorp ......................... 10,400 354
(a)U.S. Foodservice, Inc. ............ 1,500 64
U.S. Freightways Corp. ............... 5,500 255
(a)U.S. Home Corp. ................... 3,700 131
(a)U.S. Oncology, Inc. ............... 7,000 84
U.S. Trust Corp. ..................... 3,500 324
U.S. West, Inc. ...................... 6,800 399
Ultramar Diamond Shamrock Corp. ...... 2,900 63
(a)Ultratech Stepper, Inc. ........... 5,200 78
Unicom Corp. ......................... 3,700 143
Union Carbide Corp. .................. 3,600 175
Union Pacific Corp. .................. 3,600 210
Union Planters Corp. ................. 2,600 116
(a)Unisys Corp. ...................... 4,000 156
United Bankshares, Inc. .............. 7,400 196
United Healthcare Corp. .............. 3,500 219
United Illuminating Co. .............. 3,400 144
United Technologies Corp. ............ 7,948 570
United Water Resources, Inc. ......... 8,600 195
(a)Unitrode Corp. .................... 8,500 244
Universal Corp. ...................... 1,500 43
Universal Foods Corp. ................ 2,600 55
(a)Universal Health Services, Inc. ... 7,000 334
Unocal Corp. ......................... 4,500 178
UNUM Corp. ........................... 2,300 126
UST, Inc. ............................ 3,100 91
USX-Marathon Group ................... 5,000 163
UtliCorp. United, Inc. ............... 3,750 91
(a)Valassis Communications, Inc. ..... 10,950 401
Valmont Industries ................... 5,700 97
(a)Vertex Pharmaceuticals, Inc. ...... 5,500 133
(a)Viacom, Inc., 'B' ................. 10,200 449
Viad Corp. ........................... 3,300 102
(a)Vicor Corp. ....................... 11,800 250
Vintage Petroleum, Inc. .............. 13,000 140
(a)Visx, Inc. ........................ 12,400 982
(a)Vitesse Semiconductor ............. 14,500 978
Vodafone Group plc ADR ............... 4,200 827
Vulcan Materials Co. ................. 3,300 159
Wabash National Corp. ................ 6,400 124
Wachovia Corp. ....................... 2,600 222
Wal-Mart Stores, Inc. ................ 59,984 2,894
Walgreen Co. ......................... 12,900 379
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------
<S> <C> <C>
Wallace Computer Services, Inc. ...... 2,100 $ 53
Walt Disney Co. ...................... 27,900 860
Warnaco Group ........................ 2,100 56
Warner-Lambert Co. ................... 11,200 777
Washington Mutual, Inc. .............. 8,100 287
Washington Post Co. 'B' .............. 400 215
Waste Management, Inc. ............... 8,200 441
Watsoc, Inc. ......................... 5,200 85
(a)Watson Pharmaceuticals, Inc. ...... 2,600 91
WD-40 Co. ............................ 6,000 150
(a)Weatherford International, Inc. ... 3,500 128
Wells Fargo Co. ...................... 21,400 915
Werner Enterprises, Inc. ............. 9,900 205
Westpoint Stevens, Inc. .............. 2,300 69
(a)Westwood One Inc. ................. 7,100 253
Weyerhaeuser Co. ..................... 4,500 309
Whitman Corp. ........................ 3,800 68
Whitney Holding Corp. ................ 4,100 163
(a)Whittman-Hart, Inc. ............... 9,800 311
(a)Whole Foods Market, Inc. .......... 5,300 255
Wicor, Inc. .......................... 9,800 274
Williams Cos., Inc. .................. 6,500 277
(a)Williams-Sonoma, Inc. ............. 11,200 390
Wilmington Trust Corp. ............... 1,200 69
Winn-Dixie Stores, Inc. .............. 2,200 81
Wisconsin Energy ..................... 3,100 78
WM. Wrigley Jr. Co. .................. 1,900 171
Wolverine World Wide, Inc. ........... 11,800 165
(a)World Color Press, Inc. ........... 8,000 220
Wynn's International Inc. ............ 5,300 98
Xerox Corp. .......................... 9,500 561
(a)Xilinx, Inc. ...................... 4,200 240
(a)Xircom, Inc. ...................... 4,700 141
XL Capital Ltd. 'A' .................. 3,385 191
(a)Yellow Corp. ...................... 6,400 114
York International Corp. ............. 2,200 94
(a)Zale Corp. ........................ 7,800 312
(a)Zebra Technologies Corp. 'A' ...... 6,700 258
Zenith National Insurance ............ 4,000 99
Zions Bancorp ........................ 2,200 140
--------
237,535
--------
TOTAL COMMON STOCKS..................... 497,797
--------
PREFERRED STOCKS (0.3%)
AUSTRALIA (0.2%)
News Corp., Ltd. ................... 112,250 852
--------
AUSTRIA (0.0%)
Bau Holdings AG .................... 5 --
--------
GERMANY (0.1%)
SAP AG ............................. 1,226 488
Volkswagen AG ...................... 2,800 105
--------
593
--------
ITALY (0.0%)
Fiat S.p.A. (Privilegiate) ......... 57,550 93
--------
NETHERLANDS (0.0%)
(a)Unilever N.V .................... 26,089 140
--------
TOTAL PREFERRED STOCKS.................. 1,678
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-83
<PAGE> 299
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
--------------------------------------------------------------
<S> <C> <C>
INVESTMENT COMPANIES (0.8%)
UNITED STATES (0.8%)
(b)Latin American Discovery Fund,
Inc. ............................... 381,900 $ 3,580
(a,b)Morgan Stanley Asia-Pacific
Fund, Inc. ......................... 124,800 1,201
-------
TOTAL INVESTMENT COMPANIES.............. 4,781
-------
<CAPTION>
NO. OF
RIGHTS
------
<S> <C> <C>
RIGHTS (0.0%)
FRANCE (0.0%)
(a)Bouygues........................... 292 1
(a)LVMH Moet Hennessy Louis Vuitton... 921 27
-------
28
-------
ITALY (0.0%)
(a)Olivetti S.p.A..................... 76,180 15
-------
TOTAL RIGHTS............................. 43
-------
<CAPTION>
NO. OF
WARRANTS
--------
WARRANTS (0.0%)
<S> <C> <C>
HONG KONG (0.0%)
(a)Hong Kong and China Gas Co., Ltd.,
expiring 9/30/99 ................. 15,300 2
-------
<CAPTION>
PAR
VALUE
(000)
--------
CONVERTIBLE DEBENTURES (0.0%)
<S> <C> <C>
FRANCE (0.0%)
Casino Guichard Perrachon 4.50%,
7/12/01........................... FRF 32 28
Sodexho S.A., 6.00%, 6/7/04......... -- 4
-------
32
-------
PORTUGAL (0.0%)
(a)Jeromimo Martins................. $ 34 21
-------
TOTAL CONVERTIBLE DEBENTURES........... 53
-------
TOTAL LONG-TERM INVESTMENTS (87.9%)
(COST $426,747)........................ 504,354
-------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE VALUE
(000) (000)
--------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (11.2%)
REPURCHASE AGREEMENT (11.2%)
Chase Securities, Inc., 4.55%, dated...................... $ 64,369
6/30/99, due 7/1/99, to be repurchased at
$64,377, collateralized by $67,600
Federal National Mortgage Association,
5.125%, due 2/13/04, valued at $65,779
(COST $64,369).......................................... $ 64,369
--------
TOTAL INVESTMENTS IN SECURITIES (99.1%) (COST
$491,116)................................................... 568,723
FOREIGN CURRENCY (0.2%) (COST $1,098)....................... 1,090
--------
TOTAL INVESTMENTS (99.3%) (COST $492,214)................... 569,813
OTHER ASSETS IN EXCESS OF LIABILITIES (0.7%)................ 3,965
--------
NET ASSETS (100%)........................................... $573,778
========
</TABLE>
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(b) -- The Fund is advised by an affiliate which earns a
management fee as advisor to the Fund.
(c) -- All or a portion of security on loan at June 30, 1999.
ADR -- American Depositary Receipt
CVA -- Share Certificates
FRF -- French Franc
NCS -- Non Convertible Shares
RFD -- Ranked for Dividend
RNC -- Non-Convertible Savings Shares
</TABLE>
---------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
(000) NET ASSETS
-------- ----------
<S> <C> <C>
Finance........................... $114,118 19.9%
Services.......................... 112,281 19.6
Consumer Goods.................... 97,450 17.0
Capital Goods & Equipment......... 74,713 13.0
Energy............................ 49,083 8.6
Materials......................... 29,424 5.1
Multi-Industry.................... 19,677 3.4
Investment Companies.............. 4,781 0.8
Technology........................ 2,739 0.5
Gold Mines........................ 88 0.0
-------- ----
$504,354 87.9%
======== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-84
<PAGE> 300
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
<S> <C>
-------------------------------------------------------------------------------
ASSETS:
Investments in Securities, at Value (Cost $491,116)
(including repurchase agreement of $64,369) ................. $ 568,723
Foreign Currency (Cost $1,098) ................................ 1,090
Cash .......................................................... 68
Margin Deposit on Futures ..................................... 1,903
Receivable for:
Fund Shares Sold ............................................ 3,579
Variation of Futures Contracts .............................. 1,199
Dividends ................................................... 894
Investments Sold ............................................ 531
Foreign Withholding Tax Reclaim ............................. 210
Security Lending Income ..................................... 19
Interest .................................................... 9
Cash, Held as Collateral for Securities Loaned ................ 25
Other ......................................................... 28
---------
Total Assets ................................................ 578,278
---------
LIABILITIES:
Payable for:
Fund Shares Redeemed ........................................ 1,038
Investments Purchased ....................................... 689
Distribution Fees ........................................... 689
Investment Advisory Fees .................................... 393
Custody Fees ................................................ 195
Administrative Fees ......................................... 121
Shareholder Reporting Expenses .............................. 87
Directors' Fees and Expenses ................................ 53
Professional Fees ........................................... 50
Collateral on Securities Loaned ............................. 25
Securities Lending Expense .................................. 14
Net Unrealized Loss on Foreign Currency Exchange
Contracts ................................................... 982
Other ......................................................... 164
---------
Total Liabilities ........................................... 4,500
---------
NET ASSETS ...................................................... $ 573,778
=========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) .............................................. $ 35
Paid in Capital in Excess of Par .............................. 474,021
Net Unrealized Appreciation on Investments, Foreign
Currency Translations and Futures ........................... 77,822
Accumulated Net Realized Gain ................................. 22,117
Distributions in Excess of Net Investment Income .............. (217)
---------
NET ASSETS ...................................................... $ 573,778
=========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $240,121,069 and 14,242,656 Shares
Outstanding) ................................................ $ 16.86
=========
Maximum Sales Charge .......................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share x 100 / (100 - maximum sales charge)) ................. $ 17.89
=========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $232,643,456 and 14,287,124 Shares
Outstanding)* ............................................... $ 16.28
=========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $101,013,000 and 6,136,614 Shares
Outstanding)* ............................................... $ 16.46
=========
</TABLE>
----------
* Redemption price may be subject to a contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
F-85
<PAGE> 301
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ..................................................... $ 8,772
Interest ...................................................... 3,795
Security Lending .............................................. 216
Less Foreign Taxes Withheld ................................... (682)
--------
Total Income ................................................. 12,101
--------
EXPENSES:
Investment Advisory ........................................... 5,574
Distribution Fees (Attributed to Classes A, B, and C of
$588, $2,243, and $998, respectively) ........................ 3,829
Administrative Fees ........................................... 1,473
Transfer Agent Fees ........................................... 399
Custodian Fees ................................................ 386
Shareholder Reports ........................................... 235
Professional Fees ............................................. 58
Filing and Registration Fees .................................. 49
Other ......................................................... 40
--------
Total Expenses ............................................... 12,043
Less Expense Reductions ...................................... (152)
--------
Net Expenses ................................................. 11,891
--------
Net Investment Income/Loss ...................................... 210
--------
NET REALIZED GAIN/LOSS ON:
Investments ................................................... 39,780
Foreign Currency Transactions ................................. (4,520)
Futures ....................................................... 5,283
--------
Net Realized Gain/Loss ........................................ 40,543
--------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ....................................... 79,385
--------
END OF THE PERIOD:
Investments ................................................... 77,607
Foreign Currency Translations ................................. (992)
Futures ....................................................... 1,207
--------
77,822
--------
Net Unrealized Appreciation/Depreciation During the
Period ........................................................ (1,563)
--------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ..................................... 38,980
--------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS .................................................... $ 39,190
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-86
<PAGE> 302
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
-----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................. $ 210 $ 1,993
Net Realized Gain/Loss ...................................... 40,543 33,576
Net Unrealized Appreciation/Depreciation .................... (1,563) 47,298
--------- ---------
Net Increase/Decrease in Net Assets Resulting from
Operations ................................................ 39,190 82,867
--------- ---------
DISTRIBUTIONS:
Net Investment Income:
Class A ....................................................... (1,038) (1,628)
Class B ....................................................... (488) (1,028)
Class C ....................................................... (217) (1,187)
In Excess of Net Investment Income
Class A ....................................................... (2,120) --
Class B ....................................................... (996) --
Class C ....................................................... (444) --
--------- ---------
(5,303) (3,843)
--------- ---------
Net Realized Gain:
Class A ..................................................... (12,336) (8,369)
Class B ..................................................... (12,000) (6,610)
Class C ..................................................... (5,364) (9,026)
--------- ---------
(29,700) (24,005)
--------- ---------
Net Decrease in Net Assets Resulting from Distributions ..... (35,003) (27,848)
--------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed .................................................. 172,653 399,475
Distributions Reinvested .................................... 31,543 26,341
Redeemed .................................................... (230,685) (74,620)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ........................................ (26,489) 351,196
--------- ---------
Total Increase/Decrease in Net Assets ....................... (22,302) 406,215
NET ASSETS--Beginning of Period ............................... 596,080 189,865
--------- ---------
NET ASSETS--End of Period (Including
undistributed/distributions in excess of net investment
income of $(217) and $4,082, respectively) .................. $ 573,778 $ 596,080
========= =========
-----------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
-----------------------------------------------------------------------------------------
Shares:
Subscribed ................................................ 6,401 13,220
Distributions Reinvested .................................. 953 658
Redeemed .................................................. (8,806) (2,571)
--------- ---------
Net Increase/Decrease in Class A Shares Outstanding ......... (1,452) 11,307
========= =========
Dollars:
Subscribed ................................................ $ 102,532 $ 193,752
Distributions Reinvested .................................. 14,538 9,235
Redeemed .................................................. (139,451) (41,983)
--------- ---------
Net Increase/Decrease ....................................... $ (22,381) $ 161,004
========= =========
Ending Paid in Capital ...................................... $ 192,898+ $ 215,279
========= =========
Class B:
---------------------------------------------------------------------------------------
Shares:
Subscribed ................................................ 3,651 11,944
Distributions Reinvested .................................. 790 533
Redeemed .................................................. (4,141) (902)
--------- ---------
Net Increase/Decrease in Class B Shares Outstanding ......... 300 11,575
========= =========
Dollars:
Subscribed ................................................ $ 56,414 $ 170,660
Distributions Reinvested .................................. 11,694 7,277
Redeemed .................................................. (64,043) (14,280)
--------- ---------
Net Increase/Decrease ....................................... $ 4,065 $ 163,657
========= =========
Ending Paid in Capital ...................................... $ 202,973+ $ 198,908
========= =========
Class C:
-----------------------------------------------------------------------------------------
Shares:
Subscribed ................................................ 871 2,310
Distributions Reinvested .................................. 355 713
Redeemed .................................................. (1,755) (1,171)
--------- ---------
Net Increase/Decrease in Class C Shares Outstanding ......... (529) 1,852
========= =========
Dollars:
Subscribed ................................................ $ 13,707 $ 35,063
Distributions Reinvested .................................. 5,311 9,829
Redeemed .................................................. (27,191) (18,357)
--------- ---------
Net Increase/Decrease ....................................... $ (8,173) $ 26,535
========= =========
Ending Paid in Capital ...................................... $ 78,195+ $ 86,368
========= =========
</TABLE>
--------
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
The accompanying notes are an integral part of the financial statements.
F-87
<PAGE> 303
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 16.670 $ 16.57 $ 14.75 $ 12.60 $ 11.99
------------ ------------ ------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............ 0.075 0.21 0.10 0.19 0.12
Net Realized and Unrealized
Gain/Loss ............................. 1.211 2.07 2.76 2.82 0.67
------------ ------------ ------------ ------------ ------------
Total From Investment Operations ...... 1.286 2.28 2.86 3.01 0.79
------------ ------------ ------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income ................. (0.073) (0.35) (0.55) (0.39) --
In Excess of Net Investment Income .... (0.150) -- -- -- (0.05)
Net Realized Gain ..................... (0.874) (1.83) (0.49) (0.47) (0.13)
------------ ------------ ------------ ------------ ------------
Total Distributions ................... (1.097) (2.18) (1.04) (0.86) (0.18)
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD .......... $ 16.859 $ 16.67 $ 16.57 $ 14.75 $ 12.60
============ ============ ============ ============ ============
TOTAL RETURN (1) ........................ 8.41% 16.17% 20.61% 24.62% 6.69%
============ ============ ============ ============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ....... $ 240,121 $ 261,633 $ 72,704 $ 63,706 $ 42,586
Ratio of Expenses to Average Net
Assets ................................ 1.70% 1.61% 1.70% 1.70% 1.70%
Ratio of Net Investment Income/Loss to
Average Net Assets .................... 0.47% 1.30% 0.59% 0.71% 1.01%
Portfolio Turnover Rate ................. 84% 108% 45% 44% 39%
-----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/ Loss ........................ $ 0.00++ $ 0.02 $ 0.03 $ 0.10 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets ........ 1.73% 1.62% 1.90% 2.06% 2.03%
Net Investment Income/Loss to Average
Net Assets .......................... 0.44% 1.30% 0.40% 0.35% 0.68%
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
--------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .... $ 16.144 $ 16.15 $ 14.46
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............ (0.043) 0.09 (0.05)
Net Realized and Unrealized
Gain/Loss ............................. 1.164 2.01 2.73
------------ ------------ ------------
Total From Investment Operations ...... 1.121 2.10 2.68
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income ................. (0.035) (0.28) (0.50)
In Excess of Net Investment Income .... (0.073) -- --
Net Realized Gain ..................... (0.874) (1.83) (0.49)
------------ ------------ ------------
Total Distributions ................... (0.982) (2.11) (0.99)
------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD .......... $ 16.283 $ 16.14 $ 16.15
============ ============ ============
TOTAL RETURN (1) ........................ 7.50% 15.33% 19.64%
============ ============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ....... $ 232,644 $ 225,797 $ 38,962
Ratio of Expenses to Average Net
Assets .................................. 2.45% 2.35% 2.45%
Ratio of Net Investment Income/Loss to
Average Net Assets .................... (0.27)% 0.60% (0.11)%
Portfolio Turnover Rate ................. 84% 108% 45%
-----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/ Loss ........................ $ 0.00++ $ 0.02 $ 0.09
Ratios Before Expense Limitation:
Expenses to Average Net Assets ........ 2.49% 2.36% 2.65%
Net Investment Income/Loss to Average
Net Assets .......................... (0.30)% 0.60% (0.30)%
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------
AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1996
------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..... $ 13.01
----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............. 0.30
Net Realized and Unrealized Gain/Loss .. 1.98
----------
Total From Investment Operations ....... 2.28
----------
DISTRIBUTIONS
Net Investment Income .................. (0.35)
In Excess of Net Investment Income ..... --
Net Realized Gain ...................... (0.48)
----------
Total Distributions .................... (0.83)
----------
NET ASSET VALUE, END OF PERIOD ........... $ 14.46
==========
TOTAL RETURN (1) ......................... 18.08%*
==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........ $ 14,786
Ratio of Expenses to Average Net Assets .. 2.45%
Ratio of Net Investment Income/Loss to
Average Net Assets ..................... 0.45%
Portfolio Turnover Rate .................. 44%*
-------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/ Loss.......................... $ 0.22
Ratios Before Expense Limitation:
Expenses to Average Net Assets.......... 2.81%
Net Investment Income/Loss to Average Net
Assets................................ 0.09%
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....................... $ 16.298 $ 16.24 $ 14.49
------------ ------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............................... (0.043) 0.08 (0.03)
Net Realized and Unrealized Gain/Loss .................... 1.187 2.05 2.73
------------ ------------ ------------
Total From Investment Operations ......................... 1.144 2.13 2.70
------------ ------------ ------------
DISTRIBUTIONS
Net Investment Income .................................... (0.035) (0.24) (0.46)
In Excess of Net Investment Income ....................... (0.072) -- --
Net Realized Gain ........................................ (0.874) (1.83) (0.49)
------------ ------------ ------------
Total Distributions ...................................... (0.981) (2.07) (0.95)
------------ ------------ ------------
NET ASSET VALUE, END OF PERIOD ............................. $ 16.461 $ 16.30 $ 16.24
============ ============ ============
TOTAL RETURN (1) ........................................... 7.61% 15.37% 19.69%
============ ============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) .......................... $ 101,013 $ 108,650 $ 78,199
Ratio of Expenses to Average Net Assets .................... 2.45% 2.55% 2.45%
Ratio of Net Investment Income/Loss to Average Net Assets .. (0.28)% 0.52% (0.16)%
Portfolio Turnover Rate .................................... 84% 108% 45%
-----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment Income/Loss .......... $ 0.00++ $ 0.02 $ 0.03
Ratios Before Expense Limitation:
Expenses to Average Net Assets ........................... 2.48% 2.56% 2.65%
Net Investment Income/Loss to Average Net Assets ......... (0.30)% 0.52% (0.34)%
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
-----------------------------
YEAR ENDED JUNE 30,
-----------------------------
1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....................... $ 12.43 $ 11.90
------------ ------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............................... 0.12 0.04
Net Realized and Unrealized Gain/Loss .................... 2.75 0.65
------------ ------------
Total From Investment Operations ......................... 2.87 0.69
------------ ------------
DISTRIBUTIONS
Net Investment Income .................................... (0.33) --
In Excess of Net Investment Income ....................... -- (0.03)
Net Realized Gain ........................................ (0.48) (0.13)
------------ ------------
Total Distributions ...................................... (0.81) (0.16)
------------ ------------
NET ASSET VALUE, END OF PERIOD ............................. $ 14.49 $ 12.43
============ ============
TOTAL RETURN (1) ........................................... 23.65% 5.84%
============ ============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) .......................... $ 63,025 $ 40,460
Ratio of Expenses to Average Net Assets .................... 2.45% 2.45%
Ratio of Net Investment Income/Loss to Average Net Assets .. (0.04)% 0.25%
Portfolio Turnover Rate .................................... 44% 39%
-----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net Investment Income/Loss .......... $ 1.16 $ 0.05
Ratios Before Expense Limitation:
Expenses to Average Net Assets ........................... 2.81% 2.78%
Net Investment Income/Loss to Average Net Assets ......... (0.40)% (0.08)%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Non-Annualized
+ The Fund began offering Class B shares on August 1, 1995.
++ Amount is less than $0.01 per share.
(1) Total return is calculated exclusive of sale charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-88
<PAGE> 304
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Global Equity Allocation Fund (the "Fund") is organized as a
separate diversified fund of Van Kampen Series Fund, Inc., a Maryland
Corporation, which is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective seeks long-term capital appreciation by investing in equity securities
of U.S. and non-U.S. issuers in accordance with country weightings determined by
the Adviser and with stock selection within each country designed to replicate a
broad market index. The Fund commenced operations on January 4, 1993.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charges may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
----------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First........................................ 5.00% 1.00%
Second....................................... 4.00% None
Third........................................ 3.00% None
Fourth....................................... 2.50% None
Fifth........................................ 1.50% None
Thereafter................................... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights. The Fund began offering the current Class B shares on August 1,
1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. Debt securities purchased with
remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. All other securities and assets for which market
values are not readily available are valued at fair value as determined in good
faith by the Board of Directors, although the actual calculations may be done by
others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses),
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and losses on foreign currency includes the net
realized amount from the sale of the currency and the amount realized
F-89
<PAGE> 305
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
between trade date and settlement date on security and income transactions.
However, the foreign currency portion of gains and losses realized on sales and
maturities of foreign denominated debt securities is treated as ordinary income
for U.S. Federal income tax purposes.
5. SECURITY LENDING: The Fund may lend investment securities to qualified
institutional investors who borrow securities in order to complete certain
transactions. By lending its investment securities, the Fund attempts to
increase its net investment income through the receipt of interest on the loan.
Any gain or loss in the market price of the securities loaned that might occur
and any interest earned or dividends declared during the term of the loan would
accrue to the account of the Fund. Risks of delay in recovery of the securities
or even loss of rights in the collateral may occur should the borrower of the
securities fail financially. Risks may also arise to the extent that the value
of the collateral decreases below the value of the securities loaned.
Upon entering into a securities lending transaction the Fund receives cash,
securities issued or guaranteed by the U.S. government, or letters of credit as
collateral in an amount equal to or exceeding 100% of the current market value
of the loaned securities. Any cash received as collateral is generally invested
in interest bearing repurchase agreements with approved counterparties. A
portion of the interest received on the repurchase agreements is retained by the
Fund and the remainder is rebated to the borrower of the securities. The net
amount of interest earned and interest rebated is included in the Statement of
Operations as interest income. The value of loaned securities and related
collateral outstanding at June 30, 1999 is as follows:
<TABLE>
<CAPTION>
VALUE OF LOANED VALUE OF
SECURITIES COLLATERAL
(000) (000)
--------------- ----------
<S> <C>
$18 $25
</TABLE>
Morgan Stanley Trust Company, a former affiliate of the Investment Subadviser,
administers the security lending program and for its services the Fund incurred
fees in the amount of $26,674 for the year ended June 30, 1999.
6. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains, and net unrealized appreciation, as applicable, as the income is earned
or capital gains are recorded.
Net currency losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 the Fund incurred and elected to defer until
July 1, 1999, for U.S. Federal income tax purposes, net currency losses of
approximately $3,539,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
-------- -------- --------- -------------
<S> <C> <C> <C>
$499,287 $ 94,317 $(24,881) $69,436
</TABLE>
7. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, foreign
taxes on net realized gains and gains on certain securities of corporations
designated as "passive foreign investment companies."
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $2,548,000 has been reclassified
from distributions in excess of net investment income with $2,517,000 posted to
accumulated net realized gain and $31,000 posted to paid in capital in excess of
par.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of presenting net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
1.00% 1.70% 2.45%
</TABLE>
F-90
<PAGE> 306
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$5,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $776,766 for Class A shares and deferred sales charges of $2,318,
$477,072, and $10,537 for Class A shares, Class B shares, and Class C shares,
respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of
approximately $96,000. On October 1, 1998, the Chase Manhattan Bank purchased
MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $2,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/ dealer.
At June 30, 1999, the Fund owned shares of affiliated funds for which the Fund
earned dividend income of approximately $103,000 during the period.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $393,338,000 and sales of approximately $411,550,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
D. DERIVATIVE FINANCIAL INSTRUMENTS: A derivative financial instrument in very
general terms refers to a security whose value is "derived" from the value of an
underlying asset, reference rate, or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the Fund's foreign currency exposure. All of the Fund's
portfolio holdings, including derivative instruments, are marked-to-market each
day with the change in value reflected in unrealized appreciation/depreciation.
Upon disposition, a realized gain or loss is recognized accordingly, except when
exercising a call option contract or taking delivery of a security underlying a
forward contract. In this instance, the recognition of gain or loss is postponed
until the disposal of the security underlying the option or forward contract.
Risks may arise as a result of the potential inability of the counterparties to
meet the terms of their contracts.
Summarized below are the specific types of derivative financial instruments used
by the Fund.
1. FORWARD CURRENCY CONTRACTS: These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The
gain/loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on foreign currency transactions.
F-91
<PAGE> 307
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
At June 30, 1999, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
FORWARD CURRENCY CONTRACTS (000) (000)
-------------------------- -------- -------------
<S> <C> <C>
LONG CONTRACTS:
Australian Dollar, 14,033,089 expiring
7/1/99 ................................. $ 8,809 $ (444)
British Pound, 3,751,000 expiring
8/12/99 ................................ 6,070 151
Japanese Yen, 172,092,000 expiring
8/24/99 ................................ 1,401 (34)
Swedish Krona, 2,236,649 expiring
7/6/99 ................................. 263 (1)
-------- --------
$ 16,543 (328)
======== ========
SHORT CONTRACTS:
Australian Dollar, 14,033,103 expiring
7/1/99 ................................. $ 9,253 165
British Pound, 3,751,000 expiring
8/12/99 ................................ 5,919 (187)
Euro, 21,158,750 expiring
7/16/99-9/10/99 ........................ 21,942 (285)
Japanese Yen, 2,262,897,090 expiring
8/24/99-9/16/99 ........................ 18,907 (347)
-------- --------
$ 56,021 (654)
======== ========
$ (982)
========
</TABLE>
2. FUTURES CONTRACTS: A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures of equity indices and typically closes the
contract prior to the delivery date.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash and/or securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). The potential risk of loss
associated with a futures contract in excess of the variation margin is
reflected on the Statement of Assets and Liabilities. The cost of securities
acquired through delivery under a contract is adjusted by the unrealized gain or
loss on the contract.
Transactions in futures contracts for the year ended June 30, 1999, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS
---------
<S> <C>
Outstanding at June 30, 1998 ...... 486
Futures Opened .................... 6,574
Futures Closed .................... (6,545)
------
Outstanding at June 30, 1999 ...... 515
======
</TABLE>
The futures contracts outstanding as of June 30, 1999, and the descriptions and
the unrealized appreciation/ depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
DEPRECIATION
CONTRACTS (000)
--------- -------------
<S> <C> <C>
LONG CONTRACTS:
CAC 40 Index--September 1999 (Current
notional value $4,554 per
contract) .............................. 291 $ 152
DAX Index--September 1999 (Current
notional value $5,389 per
contract) .............................. 34 116
MIB 30 Index--September 1999 (Current
notional value $34,993 per
contract) .............................. 34 (65)
SHORT CONTRACTS:
TOPIX Index--September 1999 (Current
notional value $1,407 per
contract) .............................. 156 1,004
------- -------
515 $ 1,207
======= =======
</TABLE>
E. PLAN OF REORGANIZATION: On June 12, 1998, the Global Equity Allocation Fund
acquired all of the assets and liabilities of the Van Kampen American Capital
Global Equity Fund (the "VK Fund"), through a tax-free reorganization approved
by the VK Fund shareholders on June 12, 1998. Included in these net assets were
cumulative book and tax differences resulting in re-classifications of
undistributed capital gains of $(3,301,076), undistributed net investment income
of $3,342,357, and paid in capital of $(41,281).
F-92
<PAGE> 308
VAN KAMPEN GLOBAL FIXED INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Global Fixed Income Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Global Fixed Income Fund
(the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for each of the 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 June 30, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-93
<PAGE> 309
VAN KAMPEN GLOBAL FIXED INCOME FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE VALUE
(000) (000)
<S> <C> <C>
--------------------------------------------------------------------
FIXED INCOME SECURITIES (95.0%)
AUSTRALIAN DOLLAR (1.7%)
U.S. GOVERNMENT & AGENCY OBLIGATIONS--GLOBAL
$ 50 Federal National Mortgage Association
6.50%, 7/10/02....................... $ 34
60 Federal National Mortgage Association
6.375%, 8/15/07...................... 39
AUD 50 Government of Australia 10.00%,
10/15/02............................. 37
------
110
------
BRITISH POUND (7.4%)
GOVERNMENT BOND
GBP 250 United Kingdom Treasury Gilt 8.50%,
7/16/07.............................. 474
------
CANADIAN DOLLAR (3.9%)
GOVERNMENT BOND
CAD 320 Government of Canada 8.75%, 12/1/05.... 255
------
DANISH KRONE (7.0%)
GOVERNMENT BONDS
DKK 1,800 Kingdom of Denmark 8.00%, 5/15/03...... 284
1,000 Kingdom of Denmark 8.00%, 3/15/06...... 164
------
448
------
EURO (34.1%)
GOVERNMENT BONDS
EUR 100 Buoni Poliennali Del Tesoro 9.50%,
2/1/06............................... 133
50 Deutsche Ausgleichsbank 4.00%,
7/4/09............................... 48
610 Deutschland Republic 8.375%, 5/21/01... 688
200 Deutschland Republic 6.50%, 10/14/05... 232
180 Deutschland Republic 6.25%, 1/4/24..... 206
100 Government of France 4.50%, 7/12/02.... 106
200 Government of France 6.00%, 10/25/25... 222
200 Government of Spain 5.15%, 7/30/09..... 212
200 Government of The Netherlands 8.25%,
2/15/02.............................. 231
100 Kingdom of Belgium 9.20%, 6/28/10...... 118
------
2,196
------
<CAPTION>
PAR
VALUE
(000)
--------------------------------------------------------------------
<S> <C> <C>
JAPANESE YEN (10.5%)
GOVERNMENT BOND (5.9%)
JPY 50,000 Government of Japan 0.90%, 12/22/08.... $ 378
------
EUROBOND (4.6%)
30,000 IBRD 4.75%, 12/20/04................... 295
------
TOTAL JAPANESE YEN...................................... 673
------
SWEDISH KRONA (4.5%)
GOVERNMENT BONDS
SEK 1,000 Swedish Government 13.00%, 6/15/01..... 137
1,200 Swedish Government 6.00%, 2/9/05....... 151
------
288
------
UNITED STATES DOLLAR (25.9%)
CORPORATE BOND (0.7%)
$ (a)50 Monsanto Co. 6.60%, 12/1/28............ 44
------
U.S. TREASURY BONDS (12.7%)
300 8.125%, 8/15/19........................ 362
460 6.25%, 8/15/23......................... 460
------
822
------
U.S. TREASURY NOTES (12.5%)
440 6.25%, 10/31/01........................ 446
350 6.25%, 2/15/07......................... 357
------
803
------
TOTAL UNITED STATES DOLLAR.............................. 1,669
------
TOTAL LONG-TERM INVESTMENTS (95.0%) (COST $6,479)......... 6,113
------
SHORT-TERM INVESTMENT (4.6%)
REPURCHASE AGREEMENT (4.6%)
$ 294 Chase Securities, Inc., 4.55%, dated
6/30/99, due 7/1/99, to be
repurchased at $294, collateralized
by $275 U.S. Treasury Bonds, 7.25%,
due 5/15/16, valued at $306
(COST $294).......................... 294
------
TOTAL INVESTMENTS (99.6%) (COST $6,773)................... 6,407
OTHER ASSETS IN EXCESS OF LIABILITIES (0.4%).............. 24
------
NET ASSETS (100%)......................................... $6,431
======
</TABLE>
----------
<TABLE>
<S> <C>
(a) 144A Security--Certain conditions for public sale may exist.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-94
<PAGE> 310
VAN KAMPEN GLOBAL FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $6,773)........................... $6,407
Receivable for:
Interest................................................... 109
Fund Shares Sold........................................... 12
Net Unrealized Gain on Foreign Currency Contracts............ 7
Foreign Withholding Tax Reclaim.............................. 3
------
Total Assets............................................... 6,538
------
LIABILITIES:
Payable for:
Professional Fees.......................................... 25
Dividends Declared......................................... 21
Fund Shares Redeemed....................................... 16
Directors' Fees and Expenses............................... 12
Shareholder Reporting Expenses............................. 8
Distribution Fees.......................................... 6
Bank Overdraft............................................. 5
Custody Fees............................................... 4
Transfer Agent Fees........................................ 3
Investment Advisory Fees................................... 3
Administrative Fees........................................ 2
Other........................................................ 2
------
Total Liabilities........................................ 107
------
NET ASSETS..................................................... $6,431
======
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000)............................................. $ 1
Paid in Capital in Excess of Par............................. 6,777
Accumulated Net Realized Gain................................ 93
Distributions in Excess of Net Investment Income............. (78)
Net Unrealized Depreciation on Investments and Foreign
Currency Translations...................................... (362)
------
NET ASSETS..................................................... $6,431
======
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $3,391,538 and 357,818 Shares
Outstanding)............................................... $ 9.48
======
Maximum Sales Charge......................................... 4.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100/ (100 - maximum sales charge))................. $ 9.95
======
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $1,556,467 and 165,575 Shares Outstanding)*...... $ 9.40
======
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $1,483,381 and 158,021 Shares Outstanding)*...... $ 9.39
======
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-95
<PAGE> 311
VAN KAMPEN GLOBAL FIXED INCOME FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest.................................................. $ 369
Less Foreign Taxes Withheld............................... (3)
-----
Total Income............................................. 366
-----
EXPENSES:
Investment Advisory Fees.................................. 62
Distribution Fees (Attributed to Classes A, B, and C of
$11, $17, and $18, respectively)........................ 46
Professional Fees......................................... 34
Shareholder Reports....................................... 30
Filing and Registration Fees.............................. 28
Administrative Fees....................................... 26
Custodian Fees............................................ 14
Transfer Agent Fees....................................... 13
Directors' Fees and Expenses.............................. 9
Interest Expense.......................................... 2
Other..................................................... 5
-----
Total Expenses........................................... 269
Less Expense Reductions.................................. (122)
-----
Net Expenses............................................. 147
-----
Net Investment Income/Loss.................................. 219
-----
NET REALIZED GAIN/LOSS ON:
Investments............................................... 392
Foreign Currency Transactions............................. 59
-----
Net Realized Gain/Loss................................... 451
-----
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period................................... 60
-----
End of the Period:
Investments.............................................. (366)
Foreign Currency Translations............................ 4
-----
(362)
-----
Net Unrealized Appreciation/Depreciation During the
Period.................................................... (422)
-----
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation................................. 29
-----
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS................................................ $ 248
=====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-96
<PAGE> 312
VAN KAMPEN GLOBAL FIXED INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
--------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss................................ $ 219 $ 336
Net Realized Gain/Loss.................................... 451 (59)
Net Unrealized Appreciation/Depreciation.................. (422) 178
------- -------
Net Increase/Decrease in Net Assets Resulting from
Operations.............................................. 248 455
------- -------
DISTRIBUTIONS:
Net Investment Income:
Class A................................................... (124) (219)
Class B................................................... (38) (49)
Class C................................................... (41) (68)
In Excess of Net Investment Income:
Class A................................................... (47) (4)
Class B................................................... (15) (1)
Class C................................................... (15) (1)
------- -------
(280) (342)
------- -------
Net Realized Gain:
Class A................................................... (144) (30)
Class B................................................... (50) (8)
Class C................................................... (52) (11)
------- -------
(246) (49)
------- -------
Net Decrease in Net Assets Resulting from Distributions... (526) (391)
------- -------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed................................................ 5,081 1,701
Distributions Reinvested.................................. 449 329
Redeemed.................................................. (6,547) (4,936)
------- -------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions...................................... (1,017) (2,906)
------- -------
Total Increase/Decrease in Net Assets..................... (1,295) (2,842)
NET ASSETS--Beginning of Period............................. 7,726 10,568
------- -------
NET ASSETS--End of Period (Including distributions in excess
of net investment income of $(78) and $(150),
respectively)............................................. $ 6,431 $ 7,726
======= =======
-----------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
--------
Shares:
Subscribed............................................. 407 72
Distributions Reinvested............................... 28 22
Redeemed............................................... (517) (298)
------- -------
Net Increase/Decrease in Class A Shares Outstanding...... (82) (204)
======= =======
Dollars:
Subscribed............................................. $ 4,142 $ 714
Distributions Reinvested............................... 285 226
Redeemed............................................... (5,371) (2,981)
------- -------
Net Increase/Decrease.................................... $ (944) $(2,041)
======= =======
Ending Paid in Capital................................... $ 3,508 $ 4,452
======= =======
Class B:
--------
Shares:
Subscribed............................................. 69 58
Distributions Reinvested............................... 7 4
Redeemed............................................... (53) (92)
------- -------
Net Increase/Decrease in Class B Shares Outstanding...... 23 (30)
======= =======
Dollars:
Subscribed............................................. $ 707 $ 572
Distributions Reinvested............................... 74 42
Redeemed............................................... (540) (909)
------- -------
Net Increase/Decrease.................................... $ 241 $ (295)
======= =======
Ending Paid in Capital................................... $ 1,675 $ 1,434
======= =======
Class C:
--------
Shares:
Subscribed............................................. 24 42
Distributions Reinvested............................... 8 6
Redeemed............................................... (64) (105)
------- -------
Net Increase/Decrease in Class C Shares Outstanding...... (32) (57)
======= =======
Dollars:
Subscribed............................................. $ 232 $ 415
Distributions Reinvested............................... 90 61
Redeemed............................................... (636) (1,046)
------- -------
Net Increase/Decrease.................................... $ (314) $ (570)
======= =======
Ending Paid in Capital................................... $ 1,595 $ 1,909
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-97
<PAGE> 313
VAN KAMPEN GLOBAL FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------- ------------------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
----------------------------------------- ----------------------- AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995 1999# 1998# 1997 TO JUNE 30, 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.......................... $10.022 $ 9.95 $ 9.94 $10.23 $ 9.53 $ 9.971 $ 9.91 $ 9.91 $ 10.24
------- ------ ------ ------ ------- ------- ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss...... 0.311 0.39 0.44 0.53 0.56 0.229 0.32 0.41 0.64
Net Realized and Unrealized
Gain/Loss..................... (0.181) 0.13 (0.02) (0.01) 0.50 (0.186) 0.13 (0.07) (0.26)
------- ------ ------ ------ ------- ------- ------ ------ -------
Total From Investment
Operations.................... 0.130 0.52 0.42 0.52 1.06 0.043 0.45 0.34 0.38
------- ------ ------ ------ ------- ------- ------ ------ -------
DISTRIBUTIONS
Net Investment Income........... (0.278) (0.39) (0.35) (0.79) (0.36) (0.234) (0.33) (0.29) (0.69)
In Excess of Net Investment
Income........................ (0.106) (0.01) (0.06) (0.02) -- (0.090) (0.01) (0.05) (0.02)
Net Realized Gain............... (0.290) (0.05) -- -- -- (0.290) (0.05) -- --
------- ------ ------ ------ ------- ------- ------ ------ -------
Total Distributions............. (0.674) (0.45) (0.41) (0.81) (0.36) (0.614) (0.39) (0.34) (0.71)
------- ------ ------ ------ ------- ------- ------ ------ -------
NET ASSET VALUE, END OF PERIOD.... $ 9.478 $10.02 $ 9.95 $ 9.94 $ 10.23 $ 9.400 $ 9.97 $ 9.91 $ 9.91
======= ====== ====== ====== ======= ======= ====== ====== =======
TOTAL RETURN (1).................. 0.95% 5.36% 4.27% 5.20% 11.41% 0.05% 4.65% 3.48% 3.76%*
======= ====== ====== ====== ======= ======= ====== ====== =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's)......................... $ 3,392 $4,413 $6,407 $7,432 $11,092 $ 1,556 $1,425 $1,716 $ 1,440
Ratio of Expenses to Average Net
Assets.......................... 1.47% 1.45% 1.45% 1.45% 1.45% 2.23% 2.20% 2.20% 2.20%
Ratio of Net Investment
Income/Loss to Average Net
Assets.......................... 3.03% 3.94% 4.40% 5.02% 5.84% 2.21% 3.21% 3.65% 3.38%
Portfolio Turnover Rate........... 143% 78% 170% 223% 169% 143% 78% 170% 223%*
---------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss........ $ 0.15 $ 0.15 $ 0.12 $ 0.07 $ 0.07 $ 0.15 $ 0.15 $ 0.13 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net
Assets........................ 2.97% 3.00% 2.57% 2.16% 2.22% 3.78% 3.75% 3.37% 3.57%
Net Investment Income to Average
Net Assets.................... 1.54% 2.42% 3.25% 4.31% 5.07% 0.71% 1.65% 2.45% 2.01%
Ratio of Expenses to Average Net
Assets excluding country tax
expense and interest expense.... 1.45% 1.45% 1.45% 1.45% 1.45% 2.20% 2.20% 2.20% 2.20%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------------------------------
YEAR ENDED JUNE 30,
-----------------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD .................................... $ 9.962 $ 9.90 $ 9.90 $ 10.20 $ 9.54
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ................ 0.230 0.32 0.39 0.37 0.49
Net Realized and Unrealized
Gain/Loss ............................... (0.191) 0.13 (0.05) 0.08 0.47
---------- ---------- ---------- ---------- ----------
Total From Investment Operations .......... 0.039 0.45 0.34 0.45 0.96
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income ..................... (0.234) (0.33) (0.29) (0.73) (0.30)
In Excess of Net Investment
Income .................................. (0.090) (0.01) (0.05) (0.02) --
Net Realized Gain ......................... (0.290) (0.05) -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions ....................... (0.614) (0.39) (0.34) (0.75) (0.30)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD .............. $ 9.387 $ 9.96 $ 9.90 $ 9.90 $ 10.20
========== ========== ========== ========== ==========
TOTAL RETURN (1) ............................ 0.05% 4.65% 3.48% 4.47% 10.24%
========== ========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) ................................... $ 1,483 $ 1,888 $ 2,445 $ 2,844 $ 5,965
Ratio of Expenses to Average Net
Assets .................................... 2.23% 2.20% 2.20% 2.20% 2.20%
Ratio of Net Investment
Income/Loss to Average Net
Assets .................................... 2.22% 3.21% 3.65% 4.35% 5.09%
Portfolio Turnover Rate ..................... 143% 78% 170% 223% 169%
--------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss .................... $ 0.15 $ 0.15 $ 0.12 $ 0.06 $ 0.08
Ratios Before Expense Limitation:
Expenses to Average Net
Assets .................................. 3.74% 3.75% 3.35% 2.87% 2.97%
Net Investment Income/Loss to Average
Net Assets .............................. 0.75% 1.67% 2.48% 3.68% 4.32%
Ratio of Net Expenses to Average Net
Assets excluding country tax
expense and interest expense .............. 2.20% 2.20% 2.20% 2.20% 2.20%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Non-Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-98
<PAGE> 314
VAN KAMPEN GLOBAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Global Fixed Income Fund (the "Fund") is organized as a separate
non-diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation,
which is registered as an open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective
seeks to produce an attractive real rate of return by investing in fixed-income
securities of U.S. and foreign issuers denominated in U.S. dollars and in other
currencies. The Fund commenced operations on January 4, 1993.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 4.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
---------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First .................................... 4.00% 1.00%
Second ................................... 4.00% None
Third .................................... 3.00% None
Fourth ................................... 2.50% None
Fifth .................................... 1.50% None
Thereafter ............................... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights. The Fund began offering the current Class B shares on August 1,
1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which takes into account institutional size trading in similar groups of
securities. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Interest income is recognized on the accrual basis
except where collection is in doubt. Discounts and premiums on securities
purchased are amortized according to the effective yield method over their
respective lives. Income, expenses (other than class specific expenses), and
realized and unrealized gains or losses are allocated to each class of shares
based upon their relative net assets. Distributions from the Fund are recorded
on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and
F-99
<PAGE> 315
VAN KAMPEN GLOBAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
losses on foreign currency includes the net realized amount from the sale of the
currency and the amount realized between trade date and settlement date on
security and income transactions. However, the foreign currency portion of gains
and losses realized on sales and maturities of foreign denominated debt
securities is treated as ordinary income for U.S. Federal income tax purposes.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains, and net unrealized appreciation, as applicable, as the income is earned
or capital gains are recorded.
Net currency losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 to June 30, 1999 the Fund incurred and elected
to defer until July 1, 1999, for U.S. Federal income tax purposes, net currency
losses of approximately $27,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
----- ------- ------- -------------
<S> <C> <C> <C>
$6,775..
$66 $(434) $(368)
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, foreign
taxes on net realized gains, and gains on certain securities of corporations
designated as "passive foreign investment companies."
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $133,000 has been reclassified from
accumulated net realized gain and posted to distributions in excess of net
investment income.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.), Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser") and Miller Anderson & Sherrerd LLP, wholly
owned subsidiaries of Morgan Stanley Dean Witter & Co., provide the Fund with
investment advisory services at a fee paid monthly and calculated at the annual
rates based on average daily net assets as indicated below. The Adviser has
agreed to reduce advisory fees payable to it and to reimburse the Fund, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
0.75%
1.45% 2.20%
</TABLE>
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the portfolio, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $12,010 for Class A shares and deferred sales charges of $472,
$10,212, and $731 for Class A shares, Class B shares, and Class C shares,
respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company
F-100
<PAGE> 316
VAN KAMPEN GLOBAL FIXED INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
("MSTC"), a former affiliate of the Subadvisers. Through September 30, 1998, the
Fund incurred MSTC fees of approximately $1,000. On October 1, 1998, the Chase
Manhattan Bank purchased MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $8,110,000 and sales of approximately $8,406,000 of
investment securities other than long-term U.S. government securities and
short-term investments. Purchases and sales of long-term U.S. government
securities for the year ended June 30, 1999 totaled approximately $2,528,000 and
$3,205,000, respectively.
D. DERIVATIVE FINANCIAL INSTRUMENTS: A derivative financial instrument in very
general terms refers to a security whose value is "derived" from the value of an
underlying asset, reference rate or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, foreign currency
exposure, maturity, and duration. All of the Fund's portfolio holdings,
including derivative instruments, are marked-to-market each day with the change
in value reflected in unrealized appreciation/depreciation. Upon disposition, a
realized gain or loss is recognized accordingly, except when exercising a call
option contract or taking delivery of a security underlying a forward contract.
In this instance, the recognition of gain or loss is postponed until the
disposal of the security underlying the option or forward contract. Risks may
arise as a result of the potential inability of the counterparties to meet the
terms of their contracts.
Summarized below are the specific types of derivative financial instruments used
by the Fund.
1. FORWARD CURRENCY CONTRACTS: These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on foreign currency transactions.
At June 30, 1999, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
FORWARD CURRENCY CONTRACTS (000) (000)
-------------------------- --------- -------------
<S> <C> <C>
LONG CONTRACTS:
Australian Dollar,
100,000 expiring 9/16/99 ............................. $ 66 $ --
-------- --------
SHORT CONTRACTS:
Australian Dollar,
100,000 expiring 9/16/99 ............................. $ 66 $ --
-------- --------
Euro,
200,000 expiring 7/12/99 ............................. 207 7
-------- --------
$ 273 $ 7
======== ========
$ 7
========
</TABLE>
F-101
<PAGE> 317
VAN KAMPEN GLOBAL FRANCHISE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Global Franchise Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Global Franchise Fund
(the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for the period September 25, 1998 (commencement of operations)
through June 30, 1999, 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 audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at June 30, 1999 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-102
<PAGE> 318
VAN KAMPEN GLOBAL FRANCHISE FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (100.3%)
CANADA (4.0%)
Torstar Corp. 'B' .......................... 8,230 $ 92
------
FINLAND (4.4%)
Kone Corp. 'B' ............................. 615 77
(a)Rapala Normark Corp ..................... 3,350 24
------
101
------
FRANCE (9.9%)
Groupe Danone RFD .......................... 292 76
Pernod-Ricard .............................. 1,315 88
Societe Television Francaise 1 ............. 267 62
------
226
------
ITALY (4.8%)
Mediaset S.p.A ............................. 7,050 63
Seat Pagine Gialle S.p.A ................... 33,900 46
------
109
------
NETHERLANDS (4.7%)
Benckiser N.V. 'B' ......................... 2,020 108
------
SPAIN (2.3%)
Zardoya-Otis S.A ........................... 2,079 52
------
SWITZERLAND (13.6%)
Cie Financiere Richemont AG 'A' ............ 96 185
Lindt & Spruengli AG ....................... 20 51
Nestle S.A. (Registered) ................... 41 74
------
310
------
UNITED KINGDOM (33.4%)
Aegis Group plc ............................ 38,150 84
Allied Domecq plc .......................... 10,050 97
Burmah Castrol plc ......................... 2,187 42
Capital Radio plc .......................... 5,890 78
Great Universal Stores plc ................. 5,250 58
Imperial Tobacco Group plc ................. 9,260 101
Reckitt & Colman plc ....................... 9,324 97
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------
<S> <C> <C>
Scottish Media Group plc ................... 3,430 $ 47
Time Products plc .......................... 6,800 11
WPP Group plc .............................. 17,560 149
------
764
------
UNITED STATES (23.2%)
Bestfoods .................................. 1,900 94
Brown-Forman Corp. 'B' ..................... 1,670 109
New York Times Co. 'A' ..................... 3,865 142
Philip Morris Cos., Inc .................... 1,978 80
Snap-on, Inc ............................... 1,260 46
WD-40 Co ................................... 2,330 58
------
529
------
TOTAL LONG-TERM INVESTMENTS (100.3%) (COST $2,057) ............. 2,291
------
FOREIGN CURRENCY (0.1%) (COST $2) .............................. 2
------
TOTAL INVESTMENTS (100.4%) (COST $2,059) ....................... 2,293
LIABILITIES IN EXCESS OF OTHER ASSETS (-0.4%) .................. (10)
------
NET ASSETS (100%) .............................................. $2,283
======
</TABLE>
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
RFD -- Ranked for Dividend
</TABLE>
--------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- ----- ----------
<S> <C> <C>
Consumer Goods ...................... $1,170 51.2%
Services ............................ 846 37.0
Capital Equipment ................... 175 7.7
Energy .............................. 100 4.4
------ -----
$2,291 100.3%
====== =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-103
<PAGE> 319
VAN KAMPEN GLOBAL FRANCHISE FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
--------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $2,057) .......................... $2,291
Foreign Currency (Cost $2) .................................. 2
Cash ........................................................ 66
Receivable for:
Dividends ................................................. 8
Foreign Withholding Tax Reclaim ........................... 1
Net Unrealized Gain on Foreign Currency Exchange
Contracts ................................................. 18
Receivable from Investment Adviser .......................... 15
------
Total Assets ............................................ 2,401
======
LIABILITIES:
Payable for:
Professional Fees ......................................... 48
Filing and Registration Fees .............................. 34
Shareholder Reporting Expenses ............................ 14
Directors' Fees and Expenses .............................. 8
Custody Fees .............................................. 5
Transfer Agent Fees ....................................... 5
Distribution Fees ......................................... 2
Administrative Fees ....................................... 1
Other ....................................................... 1
------
Total Liabilities ....................................... 118
------
NET ASSETS .................................................... $2,283
======
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) ............................................ $ --
Paid in Capital in Excess of Par ............................ 1,953
Net Unrealized Appreciation on Investments and Foreign
Currency Translations ..................................... 253
Accumulated Net Investment Income ........................... 48
Accumulated Net Realized Gain ............................... 29
------
NET ASSETS $2,283
======
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $1,189,338 and 99,280 Shares
Outstanding) .............................................. $ 11.98
=======
Maximum Sales Charge ........................................ 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100 / (100 - maximum sales charge)) ............... $12.71
======
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $614,254 and 51,522 Shares Outstanding)* ........ $11.92
======
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $479,666 and 39,914 Shares Outstanding)* ........ $12.02
======
</TABLE>
-----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-104
<PAGE> 320
VAN KAMPEN GLOBAL FRANCHISE FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
SEPTEMBER 25, 1998* TO JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ................................................... $ 42
Interest .................................................... 4
Less Foreign Taxes Withheld ................................. (5)
-----
Total Income .............................................. 41
-----
EXPENSES:
Professional Fees ........................................... 52
Filing and Registration Fees ................................ 49
Shareholder Reports ......................................... 22
Investment Advisory Fees .................................... 12
Custodian Fees .............................................. 10
Directors' Fees and Expenses ................................ 8
Distribution Fees (Attributed to Classes A, B, and C of
$2, $3, and $3, respectively) ............................. 8
Administrative Fees ......................................... 7
Transfer Agent Fees ......................................... 7
Other ....................................................... 2
-----
Total Expenses .............................................. 177
Less Expense Reductions ..................................... (150)
-----
Net Expenses ................................................ 27
-----
Net Investment Income/Loss .................................... 14
-----
NET REALIZED GAIN/LOSS ON:
Investments ................................................. 29
Foreign Currency Transactions ............................... (7)
-----
Net Realized Gain/Loss .................................... 22
-----
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ..................................... --
-----
End of the Period:
Investments ............................................... 234
Foreign Currency Translations ............................. 19
-----
Net Unrealized Appreciation/Depreciation During the
Period ...................................................... 253
-----
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ................................... 275
-----
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS .................................................. $ 289
=====
</TABLE>
<TABLE>
<S> <C>
* Commencement of operations
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-105
<PAGE> 321
VAN KAMPEN GLOBAL FRANCHISE FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
SEPTEMBER 25, 1998* TO JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
<S> <C>
--------------------------------------------------------------------------
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss ................................... $ 14
Net Realized Gain/Loss ....................................... 22
Net Unrealized Appreciation/Depreciation ..................... 253
------
Net Increase/Decrease in Net Assets Resulting from
Operations ................................................. 289
------
DISTRIBUTIONS:
Net Investment Income:
Class A ...................................................... (7)
Class B ...................................................... (4)
Class C ...................................................... (5)
------
Net Decrease in Net Assets Resulting from Distributions ...... (16)
------
CAPITAL SHARES TRANSACTIONS (1):
Subscribed ................................................... 1,012
Distributions Reinvested ..................................... 3
Redeemed ..................................................... (5)
------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ......................................... 1,010
------
Total Increase/Decrease in Net Assets ........................ 1,283
NET ASSETS--Beginning of Period ................................ 1,000
------
NET ASSETS--End of Period (Including accumulated net
investment income of $48 at June 30, 1999) ................... $2,283
======
-------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (000):
(1) CLASS A:
Shares:
Subscribed (Initial Shares of 40) ......................... 99
Distributions Reinvested .................................. --
Redeemed .................................................. --
------
Net Increase/Decrease in Class A Shares Outstanding ......... 99
======
Dollars:
Subscribed ................................................ $ 667
Distributions Reinvested .................................. 2
Redeemed .................................................. (2)
------
Net Increase/Decrease ....................................... $ 667
======
Beginning Paid in Capital ................................... $ 400
======
Ending Paid in Capital ...................................... $1,067+
======
CLASS B:
Shares:
Subscribed (Initial Shares of 30) ......................... 52
Distributions Reinvested .................................. --
Redeemed .................................................. --
------
Net Increase/Decrease in Class B Shares Outstanding ......... 52
======
Dollars:
Subscribed ................................................ $ 242
Distributions Reinvested .................................. 1
Redeemed .................................................. --
------
Net Increase/Decrease ....................................... $ 243
======
Beginning Paid in Capital ................................... $ 300
======
Ending Paid in Capital ...................................... $ 543+
======
CLASS C:
Shares:
Subscribed (Initial Shares of 30) ......................... 40
Distributions Reinvested .................................. --
Redeemed .................................................. --
------
Net Increase/Decrease in Class C Shares Outstanding ......... 40
======
Dollars:
Subscribed ................................................ $ 103
Distributions Reinvested .................................. --
Redeemed .................................................. (3)
------
Net Increase/Decrease ....................................... $ 100
======
Beginning Paid in Capital ................................... $ 300
======
Ending Paid in Capital ...................................... $ 400+
======
</TABLE>
------------
<TABLE>
<S> <C>
* Commencement of operations
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-106
<PAGE> 322
VAN KAMPEN GLOBAL FRANCHISE FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------ ------------------------ ------------------------
SEPTEMBER 25, 1998* TO SEPTEMBER 25, 1998* TO SEPTEMBER 25, 1998* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1999# JUNE 30, 1999# JUNE 30, 1999#
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............. $ 10.000 $ 10.000 $ 10.000
------------- ------------ ---------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ..................... 0.136 0.066 0.059
Net Realized and Unrealized Gain/Loss .......... 1.969 1.962 2.065
------------- ------------ ---------------
Total From Investment Operations ............... 2.105 2.028 2.124
------------- ------------ ---------------
DISTRIBUTIONS
Net Investment Income .......................... (0.125) (0.106) (0.106)
------------- ------------ ---------------
NET ASSET VALUE, END OF PERIOD ................... $ 11.980 $ 11.922 $ 12.018
============= ============ ===============
TOTAL RETURN(1) .................................. 21.22%** 20.40%** 21.40%**
============= ============ ===============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ................ $ 1,189 $ 614 $ 480
Ratio of Expenses to Average Net Assets .......... 1.80% 2.55% 2.55%
Ratio of Net Investment Income/Loss to
Average Net Assets ............................. 1.57% 0.77% 0.69%
Portfolio Turnover Rate .......................... 9%** 9%** 9%**
--------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment
Income/Loss .................................. $ 1.02 $ 1.02 $ 1.16
Ratios Before Expense Limitation:
Expenses to Average Net Assets ................. 13.55% 14.45% 16.07%
Net Investment Income/Loss to Average Net
Assets ....................................... (10.17)% (11.12)% (12.83)%
</TABLE>
------------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-107
<PAGE> 323
VAN KAMPEN GLOBAL FRANCHISE FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Global Franchise Fund (the "Fund") is organized as a separate
diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation, which
is registered as an open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective seeks long-term
capital appreciation. The Fund commenced operations on September 25, 1998.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
-----------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First .................................. 5.00% 1.00%
Second ................................. 4.00% None
Third .................................. 3.00% None
Fourth ................................. 2.50% None
Fifth .................................. 1.50% None
Thereafter ............................. None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date, net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses),
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and losses on foreign currency includes the net
realized amount from the sale of the currency and the amount realized between
trade date and settlement date on security and income transactions. However, the
foreign currency portion of gains and losses realized on sales and maturities of
foreign denominated debt securities is treated as ordinary income for U.S.
Federal income tax purposes.
F-108
<PAGE> 324
VAN KAMPEN GLOBAL FRANCHISE FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains, and net unrealized appreciation, as applicable, as the income is earned
or capital gains are recorded.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
--------------------- ------ ------- -------------
<S> <C> <C> <C>
$2,057 $301 $(67) $234
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $57,000 has been reclassified from
paid in capital in excess of par with approximately $50,000 posted to
accumulated net investment income and approximately $7,000 posted to accumulated
net realized gain.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------------- -------------- --------------
<S> <C> <C>
1.00% 1.80% 2.55%
</TABLE>
At June 30, 1999, Van Kampen Funds, Inc. owned 40%, 58%, and 75% of the shares
outstanding of each Class A, B, and C shares in the Fund.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the portfolio, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the period ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $12,307 for Class A shares and a deferred sales charge of $30 for
Class C shares.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of $394. On
October 1, 1998, the Chase Manhattan Bank purchased MSTC.
F-109
<PAGE> 325
VAN KAMPEN GLOBAL FRANCHISE FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred $314 as brokerage
commissions with Morgan Stanley & Co. Incorporated, an affiliated broker/dealer.
C. INVESTMENT TRANSACTIONS: For the period ended June 30, 1999, the Fund made
purchases of approximately $2,165,000 and sales of approximately $131,000 of
investment securities other than long-term U.S. government securities and short-
term investments. There were no purchases or sales of long-term U.S. government
securities.
D. DERIVATIVE FINANCIAL INSTRUMENTS: A derivative financial instrument in very
general terms refers to a security whose value is "derived" from the value of an
underlying asset, reference rate or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's foreign currency exposure. All of the
Fund's portfolio holdings, including derivative instruments, are
marked-to-market each day with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising a call option contract or taking
delivery of a security underlying a forward contract. In this instance, the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or forward contract. Risks may arise as a result of the
potential inability of the counterparties to meet the terms of their contracts.
Summarized below are the specific types of derivative financial instruments used
by the Fund.
1. FORWARD CURRENCY CONTRACTS: These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on foreign currency transactions.
At June 30, 1999, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
FORWARD CURRENCY CONTRACTS (000) (000)
-------------------------- ------- -------------
<S> <C> <C>
SHORT CONTRACTS:
Euro,
100,000 expiring 11/10/99 ............... $104 $ 5
British Pounds,
235,000 expiring 11/10/99 ............... 371 13
$475 $18
==== ===
</TABLE>
F-110
<PAGE> 326
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen High Yield & Total Return Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen High Yield & Total
Return Fund (the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30,
1999, the results of its operations, the changes in its net assets and the
financial highlights for each of the 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 June 30, 1999 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-111
<PAGE> 327
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE VALUE
(000) (000)
--------------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS & NOTES (89.3%)
AEROSPACE & DEFENSE (1.6%)
$ 200 Jet Equipment Trust, Series C-1,
11.79%, 6/15/13 ............................ $ 248
(b)300 Jet Equipment Trust, Series 1995-D,
11.44%, 11/1/14 ............................ 369
-------
617
-------
AUTOMOTIVE (1.0%)
(b)405 Hayes Lemmerz International 8.25%,
12/15/08 ................................... 385
-------
BROADCAST--RADIO & TELEVISION (3.8%)
575 Chancellor Media Corp., Series B,
8.125%, 12/15/07 ........................... 558
180 Chancellor Media Corp. 9.00%,
10/1/08 .................................... 182
(b)240 RBS Participacoes S.A. 11.00%,
4/1/07 ..................................... 161
775 TV Azteca S.A. de CV, Series B,
10.50%, 2/15/07 ............................ 583
-------
1,484
-------
BUILDING MATERIALS & COMPONENTS (1.7%)
275 American Standard Cos., Inc. 7.375%,
2/1/08 ..................................... 258
(b)410 Nortek, Inc. 8.875%, 8/1/08 .................. 404
-------
662
-------
CABLE TELEVISION (3.9%)
200 Adelphia Communications, Series B,
7.50%, 1/15/04 ............................. 191
125 Adelphia Communications, Series B,
9.875%, 3/1/07 ............................. 130
165 Adelphia Communications, Series B,
8.375%, 2/1/08 ............................. 159
255 CSC Holdings, Inc. 9.875%, 5/15/06 ........... 271
125 CSC Holdings, Inc. 7.25%, 7/15/08 ............ 118
290 Lenfest Communications, Inc. 8.375%,
11/1/05 .................................... 307
300 Rogers Cablesystems Ltd., Series B,
10.00%, 3/15/05 ............................ 323
-------
1,499
-------
CAPITAL GOODS/CONSTRUCTION (1.1%)
460 D.R. Horton, Inc. 8.00%, 2/1/09 .............. 432
-------
CHEMICALS (3.2%)
600 ISP Holdings, Inc., Series B, 9.00%,
10/15/03 ................................... 598
EUR (b)400 Huntsman ICI Chemicals 10.125%,
7/1/09 ..................................... 401
$ (b)250 Lyondell Chemical Co. 9.625%,
5/1/07 ..................................... 255
-------
1,254
-------
COMPUTERS (0.5%)
(d)300 Wam!Net, Inc., Series B, 0.00%,
3/1/05 ..................................... 177
-------
CONSTRUCTION & MINING (0.6%)
275 Murrin Murrin Holdings 9.375%,
8/31/07 .................................... 242
-------
ENERGY (3.3%)
395 CMS Energy 7.50%, 1/15/09 .................... 370
(d)205 Husky Oil Ltd. 8.90%, 8/15/28 ................ 197
100 Quezon Power Ltd. 8.86%, 6/15/17 ............. 81
440 Snyder Oil Corp. 8.75%, 6/15/07 .............. 433
125 Vintage Petroleum 9.75%, 6/30/09 ............. 128
50 Vintage Petroleum 8.625%, 2/1/09 ............. 48
-------
1,257
-------
<CAPTION>
PAR
VALUE
(000)
--------------------------------------------------------------------------
<S> <C> <C>
ENVIRONMENTAL CONTROLS (2.2%)
$ 210 Allied Waste of North America 7.875%,
1/1/09 ..................................... $ 195
(d)600 Norcal Waste Systems, Series B,
13.50%, 11/15/05 ........................... 663
-------
858
-------
FINANCE (1.0%)
(b,d)180 Fuji JGB Investments LLC, Series A,
9.87%, 12/31/49 ............................ 157
(b,d)235 SB Treasury Co. LLC 9.40%, 12/29/49........... 229
-------
386
-------
FOOD (1.7%)
700 Smithfield Foods, Inc. 7.625%,
2/15/08 .................................... 637
-------
FOOD SERVICE & LODGING (1.9%)
400 Hilton Hotels 7.95%, 4/15/07 ................. 405
335 Host Marriott Travel Plaza, Series B,
9.50%, 5/15/05 ............................. 344
-------
749
-------
FOREST PRODUCTS & PAPER (1.8%)
215 Asia Pulp & Paper Co., Ltd.,
Series A, 12.00%, 2/15/04 .................. 141
140 Pindo Deli Fin Mauritius 10.75%,
10/1/07 .................................... 97
305 SD Warren Co., Series B, 12.00%,
12/15/04 ................................... 325
145 Tembec Industries, Inc. 8.625%,
6/30/09 .................................... 144
-------
707
-------
GAMING & LODGING (6.9%)
515 Harrahs Operating Co., Inc. 7.875%,
12/15/05 ................................... 500
(b)460 Horseshoe Gaming Holdings 8.652%,
5/15/09 .................................... 445
(b)590 International Game Technology 8.375%,
5/15/09 .................................... 583
425 Park Place Entertainment 7.875%,
12/15/05 ................................... 404
405 Station Casinos, Inc. 10.125%,
3/15/06 .................................... 418
60 Station Casinos, Inc. 9.75%,
4/15/07 .................................... 61
275 Station Casinos, Inc. 8.875%,
12/1/08 .................................... 269
-------
2,680
-------
HEALTH CARE SUPPLIES & SERVICES (7.3%)
130 Columbia/HCA Healthcare, 8.13%, 8/4/03
MTN ........................................ 128
650 Columbia/HCA Healthcare, 6.91%,
6/15/05 .................................... 601
525 Columbia/HCA Healthcare, 8.85%, 1/1/07
MTN ........................................ 528
200 Columbia/HCA Healthcare, 7.00%,
7/1/07 ..................................... 181
275 Columbia/HCA Healthcare, 7.69%,
6/15/25 .................................... 228
270 Fresenius Medical Capital Trust II
7.875%, 2/1/08 ............................. 254
920 Tenet Healthcare Corp. 8.625%,
1/15/07 .................................... 899
-------
2,819
-------
MINING (0.9%)
410 Glencore Nickel Property Ltd. 9.00%,
12/1/14 .................................... 353
-------
MULTI-INDUSTRY (3.1%)
185 Applied Power, Inc. 8.75%, 4/1/09 ............ 179
150 Axia, Inc. 10.75%, 7/15/08 ................... 148
550 Outdoor Systems, Inc., 8.875%,
6/15/07 .................................... 574
(d)380 PTC International Finance BV 0.00%,
7/1/07 ..................................... 281
-------
1,182
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-112
<PAGE> 328
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE
(000)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
PAPER & PACKAGING (1.8%)
$ 750 Indah Kiat Financial Mauritius 10.00%,
7/1/07................................ $ 517
170 Norampac, Inc. 9.50%, 2/1/08............ 174
-------
691
-------
REAL ESTATE (2.1%)
850 HMH Properties, Inc. Series A 7.875%,
8/1/05................................ 803
-------
RETAIL--GENERAL (4.8%)
375 DR Securitized Lease Trust,
Series 1993-K1, Class A2, 7.43%,
8/15/18............................... 338
436 DR Securitized Lease Trust,
Series 1994-K1, Class A1, 7.60%,
8/15/07............................... 428
100 DR Securitized Lease Trust,
Series 1994-K1, Class A2, 8.375%,
8/15/15............................... 99
150 Fred Meyer, Inc. 7.375%, 3/1/05......... 152
375 Kmart Funding Corp., Series F, 8.80%,
7/1/10................................ 384
75 Musicland Group, Inc. 9.00%,
6/15/03............................... 73
400 Musicland Group, Inc. 9.875%,
3/15/08............................... 392
-------
1,866
-------
SERVICES (0.6%)
240 CEX Holdings, Inc. 9.625%, 6/1/08....... 226
-------
TECHNOLOGY (1.5%)
(b)150 AST Research, Inc. 7.45%, 10/1/02....... 144
75 Entex Information Services 12.50%,
8/1/06................................ 45
(b)325 Hyundai Semiconductor 8.625%,
5/15/07............................... 261
(d)240 Rhythms Netconnections, Inc.,
Series B, 0.00%, 5/15/08.............. 127
-------
577
-------
TELECOMMUNICATIONS (29.9%)
305 American Cellular Corp. 10.50%,
5/15/08............................... 313
300 American Communications Lines LLC,
Series B, 10.25%, 6/30/08............. 300
300 AMSC Acquisition Co., Inc., Series B,
12.25%, 4/1/08........................ 230
(b)285 Centennial Cellular Holdings 10.75%,
12/15/08.............................. 294
(d) 90 Dial Call Communications, Series B,
10.25%, 12/15/05...................... 92
275 Dobson Communications Corp. 11.75%,
4/15/07............................... 289
EUR (d)405 Dolphin Telecommunications plc 0.00%,
6/1/08................................ 202
$ (b)410 Echostar DBS Corp. 9.375%, 2/1/09....... 417
315 Global Crossing Holdings, Ltd. 9.625%,
5/15/08............................... 332
305 Globalstar LP/Capital 11.375%,
2/15/04............................... 201
45 Globalstar LP/Capital 11.50%,
6/1/05................................ 29
275 Hermes Europe Railtel BV 11.50%,
8/15/07............................... 289
(d)520 Hyperion Telecommunications 0.00%,
4/15/03............................... 430
(d)885 Intermedia Communications, Series B,
0.00%, 7/15/07....................... 632
375 Iridium LLC/Capital Corp., Series A,
13.00%, 7/15/05...................... 75
115 IXC Communications, Inc., 9.00%,
4/15/08.............................. 110
150 Lenfest Communications, Inc. 7.625%,
2/15/08.............................. 154
205 Metromedia Fiber Network 10.00%,
11/15/08............................. 211
360 Multicanal S.A. 10.50%, 2/1/07......... 296
315 National Steel Corp., Series D,
9.875%, 3/1/09....................... 320
(d)300 Nextel Communications, Inc. 9.75%,
8/15/04.............................. 304
<CAPTION>
PAR
VALUE
(000)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
$ (d)1700 Nextel Communications, Inc. 0.00%,
9/15/07............................ $ 1,241
(d)590 NEXTLINK Communications, Inc. 0.00%,
4/15/08............................ 353
(b)90 NEXTLINK Communications, Inc. 10.75%,
11/15/08........................... 92
EUR (d)660 NTL, Inc. 0.00%, 4/1/08................ 447
$ (d)400 Occidente Y Caribe 0.00%, 3/15/04...... 268
(b)195 OnePoint Communications Corp., 14.50%,
6/1/08............................. 106
315 Philippine Long Distance
Telephone Co. 7.85%, 3/6/07........ 269
370 Primus Telecommunications Group,
Series B, 9.875%, 5/15/08.......... 351
225 PSINet, Inc., Series B, 10.00%,
2/15/05............................ 224
(d)250 RCN Corp. 0.00%, 10/15/07.............. 168
(b,d)370 RCN Corp. 0.00%, 2/15/08............... 230
150 Rogers Cantel, Inc. 8.30%, 10/1/07..... 148
650 Rogers Communications, Inc. 8.875%,
7/15/07............................ 658
60 Rogers Communications, Inc. 9.125%,
1/15/06............................ 61
17 RSL Communications plc. 12.25%,
11/15/06........................... 18
(d)675 RSL Communications plc 0.00%,
3/1/08............................. 405
EUR 470 RSL Communications plc 9.125%,
3/1/08............................. 431
$ 55 Satelites Mexicanos S.A. Series B,
10.125%, 11/1/04................... 44
EUR (b)160 Tele1 Europe BV 13.00%, 5/15/09........ 166
$ (b)180 Total Access Communications PCL 2.00%,
5/31/06............................ 164
(d)320 Viatel, Inc. Series A 0.00%,
4/15/08............................ 206
-------
11,570
-------
UTILITIES (1.1%)
435 AES Corp. 8.50%, 11/1/07............... 409
-------
TOTAL CORPORATE BONDS & NOTES................................ 34,522
-------
ASSET BACKED SECURITIES (1.5%)
AEROSPACE & DEFENSE (0.4%)
157 Aircraft Lease Portfolio
Securitization Ltd., Series 1996-1,
Class D, 12.75%, 6/15/06............ 157
-------
FINANCIAL SERVICES (1.1%)
(b)233 CA FM Lease Trust 8.50%, 7/15/17....... 217
226 Commercial Financial Services, Inc.,
Series 1997-5, Class A1 7.72%,
6/15/05............................. 56
(b)122 Federal Mortgage Acceptance
Corporation, Series 1996-B,
Class C, 7.929%, 11/1/18............ 93
71 Long Beach Acceptance Auto Grantor
Trust 1997-1, Class B, 14.22%,
10/26/03............................ 70
-------
436
-------
TOTAL ASSET BACKED SECURITIES................................ 593
-------
FOREIGN GOVERNMENT BONDS (2.5%)
BONDS (2.5%)
(c)693 Republic of Argentina, Series L,
5.938%, 3/31/05..................... 592
470 United Mexican States Par Bond 6.25%,
12/31/19............................ 350
-------
TOTAL FOREIGN GOVERNMENT BONDS................................ 942
-------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-113
<PAGE> 329
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE
(000)
------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS (2.2%)
BROADCAST--RADIO & TELEVISION (0.7%)
$ (a)3,200 Paxson Communications 11.625%......... $ 288
-------
TELECOMMUNICATIONS (1.5%)
(a)1,819 Concentric Network Corp. 13.50%....... 172
(a,b)1,500 Dobson Communications Corp. 13.00%.... 145
(a)260 IXC Communications, Inc. PIK 9.00%.... 251
-------
568
-------
TOTAL PREFERRED STOCKS........................................ 856
-------
</TABLE>
<TABLE>
<CAPTION>
NO.OF
WARRANTS
--------
<S> <C> <C>
WARRANTS (0.5%)
COMPUTERS (0.0%)
(a)9,000 Wam!Net, Inc., expiring 3/1/05........ 21
-------
TECHNOLOGY (0.4%)
(a,b)9,600 Rhythms Netconnections, Inc., expiring
5/15/08............................. 138
-------
TELECOMMUNICATIONS (0.1%)
(a,b) 3,000 American Mobile Satellite Corp.,
expiring 4/1/08..................... 11
(a,b) 210 Globalstar Telecom, expiring
2/15/04............................. 11
(a,b)16,000 Occidente Y Caribe, expiring
3/15/04............................. 27
(a,b) 1,950 OnePoint Communications Corp.,
expiring 6/1/08..................... --
-------
49
-------
TOTAL WARRANTS................................................ 208
-------
TOTAL LONG-TERM INVESTMENTS (96.0%) (COST $38,915)............ 37,121
-------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
(000)
-------
<S> <C> <C>
SHORT-TERM INVESTMENT (2.1%)
REPURCHASE AGREEMENT (2.1%)
$ 797 Chase Securities, Inc. 4.55%, dated
6/30/99, due 7/1/99, to be
repurchased at $797, collaterized by
$740 U.S. Treasury Bonds, 7.250%,
due 5/15/16, valued at $822
(COST $797)......................... 797
-------
TOTAL INVESTMENTS (98.1%) (COST $39,712)...................... 37,918
OTHER ASSETS IN EXCESS OF LIABILITIES (1.9%).................. 748
-------
NET ASSETS (100%)............................................. $38,666
=======
</TABLE>
----------------
<TABLE>
<S> <C>
(a) -- Non-income producing security
(b) -- 144A Security--Certain conditions for public sale may
exist.
(c) -- Variable/floating rate security--rate disclosed is as of
June 30, 1999.
(d) -- Step Bond--coupon rate increases in increments to maturity. Rate
disclosed is as of June 30, 1999. Maturity date disclosed is the
ultimate maturity date.
EUR -- Euro
MTN -- Medium Term Note
PCL -- Public Company Limited
PIK -- Payment-In-Kind. Income may be received in additional securities
or cash at the discretion of the issuer.
</TABLE>
--------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY COUNTRY
<TABLE>
<CAPTION>
VALUE PERCENT OF
COUNTRY (000) NET ASSETS
------- ------- ----------
<S> <C> <C>
United States..................... $28,187 72.9%
Canada............................ 1,705 4.4
Germany........................... 1,397 3.6
Mexico............................ 978 2.5
Argentina......................... 888 2.3
Indonesia......................... 755 2.0
Japan............................. 647 1.7
Australia......................... 595 1.5
United Kingdom.................... 574 1.5
Philippines....................... 350 0.9
Colombia.......................... 295 0.8
Poland............................ 281 0.7
Thailand.......................... 164 0.4
Brazil............................ 161 0.4
Korea............................. 144 0.4
------- ----
$37,121 96.0%
======= ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-114
<PAGE> 330
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
--------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $39,712) ............................ $ 37,918
Receivable for:
Interest ..................................................... 714
Investments Sold ............................................. 491
Fund Shares Sold ............................................. 48
Deferred Organizational Costs .................................. 11
----------
Total Assets ................................................. 39,182
----------
LIABILITIES:
Payable for:
Dividends Declared ........................................... 242
Bank Overdraft ............................................... 108
Distribution Fees ............................................ 56
Fund Shares Redeemed ......................................... 35
Professional Fees ............................................ 23
Directors' Fees and Expenses ................................. 12
Investment Advisory Fees ..................................... 11
Administrative Fees .......................................... 9
Shareholder Reporting Expense ................................ 9
Transfer Agent Fees .......................................... 6
Custody Fees ................................................. 3
Other .......................................................... 2
----------
Total Liabilities ............................................ 516
----------
NET ASSETS ....................................................... $ 38,666
==========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) ............................................... $ 3
Paid in Capital in Excess of Par ............................... 40,797
Accumulated Net Investment Income .............................. 95
Distributions in Excess of Net Realized Gain ................... (435)
Unrealized Depreciation on Investments ......................... (1,794)
----------
NET ASSETS ....................................................... $ 38,666
==========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $8,120,144 and 695,094 Shares
Outstanding) ................................................. $ 11.68
==========
Maximum Sales Charge ........................................... 4.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share x 100/ (100 - maximum sales charge)) ................... $ 12.26
==========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $22,666,658 and 1,944,751 Shares
Outstanding)* ................................................ $ 11.66
==========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $7,878,820 and 675,698 Shares Outstanding)* ........ $ 11.66
==========
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-115
<PAGE> 331
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ................................................ $ 12
Interest ................................................. 3,684
----------
Total Income ........................................... 3,696
----------
EXPENSES:
Distribution Fees (Attributed to Classes A, B, and C of
$23, $209, and $82, respectively) ...................... 314
Investment Advisory Fees ................................. 288
Administrative Fees ...................................... 99
Filing and Registration Fees ............................. 44
Professional Fees ........................................ 37
Shareholder Reports ...................................... 34
Custodian Fees ........................................... 22
Transfer Agent Fees ...................................... 22
Directors' Fees and Expenses ............................. 10
Other .................................................... 10
----------
Total Expenses ......................................... 880
Less Expense Reductions ................................ (180)
----------
Net Expenses ........................................... 700
----------
Net Investment Income/Loss ................................. 2,996
----------
NET REALIZED GAIN/LOSS ON:
Investments .............................................. (344)
----------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period .................................. 210
----------
End of the Period
Investments .............................................. (1,794)
----------
Net Unrealized Appreciation/Depreciation During the
Period ................................................... (2,004)
----------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ................................ (2,348)
----------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................... $ 648
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-116
<PAGE> 332
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss ............................... $ 2,996 $ 1,701
Net Realized Gain/Loss ................................... (344) 1,119
Net Unrealized Appreciation /Depreciation ................ (2,004) (585)
----------- -----------
Net Increase/Decrease in Net Assets Resulting from
Operations ............................................. 648 2,235
----------- -----------
DISTRIBUTIONS:
Net Investment Income:
Class A .................................................. (749) (525)
Class B .................................................. (1,540) (854)
Class C .................................................. (603) (343)
----------- -----------
(2,892) (1,722)
----------- -----------
Net Realized Gain:
Class A .................................................. (61) (236)
Class B .................................................. (152) (415)
Class C .................................................. (59) (120)
In Excess of Net Realized Gain:
Class A .................................................. (97) --
Class B .................................................. (244) --
Class C .................................................. (94) --
----------- -----------
(707) (771)
----------- -----------
Net Decrease in Net Assets Resulting from Distributions .... (3,599) (2,493)
----------- -----------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed ............................................... 27,018 32,419
Distributions Reinvested ................................. 2,061 1,273
Redeemed ................................................. (21,840) (21,623)
----------- -----------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ..................................... 7,239 12,069
----------- -----------
Total Increase/Decrease in Net Assets .................... 4,288 11,811
NET ASSETS--Beginning of Period ............................ 34,378 22,567
----------- -----------
NET ASSETS--End of Period (Including accumulated net
investment income of $95 and $36, respectively) .......... $ 38,666 $ 34,378
=========== ===========
</TABLE>
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
<TABLE>
Shares:
<S> <C> <C>
Subscribed ............................................ 1,215 786
Distributions Reinvested .............................. 43 33
Redeemed .............................................. (1,180) (900)
---------- ----------
Net Increase/Decrease in Class A Shares Outstanding ..... 78 (81)
========== ==========
Dollars:
Subscribed ............................................ $ 14,702 $ 10,149
Distributions Reinvested .............................. 520 420
Redeemed .............................................. (14,249) (11,731)
Net Increase/Decrease ................................... $ 973 $ (1,162)
========== ==========
Ending Paid in Capital .................................. $ 8,385+ $ 7,412
========== ==========
Class B:
Shares:
Subscribed ............................................ 768 1,167
Distributions Reinvested .............................. 89 48
Redeemed .............................................. (371) (427)
---------- ----------
Net Increase/Decrease in Class B Shares Outstanding ..... 486 788
========== ==========
Dollars:
Subscribed ............................................ $ 9,251 $ 15,056
Distributions Reinvested .............................. 1,068 615
Redeemed .............................................. (4,454) (5,588)
---------- ----------
Net Increase/Decrease ................................... $ 5,865 $ 10,083
========== ==========
Ending Paid in Capital .................................. $ 24,185+ $ 18,320
========== ==========
Class C:
Shares:
Subscribed ............................................ 255 562
Distributions Reinvested .............................. 40 19
Redeemed .............................................. (264) (323)
---------- ----------
Net Increase/Decrease in Class C Shares Outstanding ..... 31 258
========== ==========
Dollars:
Subscribed ............................................ $ 3,065 $ 7,214
Distributions Reinvested .............................. 473 238
Redeemed .............................................. (3,137) (4,304)
---------- ----------
Net Increase/Decrease ................................... $ 401 $ 3,148
========== ==========
Ending Paid in Capital .................................. $ 8,227+ $ 7,826
========== ==========
</TABLE>
----------
<TABLE>
<S> <C>
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-117
<PAGE> 333
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------ -----------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
--------------------------------- MAY 1, 1996* TO -----------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 JUNE 30, 1996 1999# 1998# 1997
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD .......................... $ 12.661 $ 12.86 $ 11.92 $ 12.00 $ 12.630 $ 12.86 $ 11.93
-------- -------- -------- ---------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ...... 1.006 0.97 1.07 0.13 0.912 0.87 0.98
Net Realized and Unrealized
Gain/Loss ..................... (0.790) 0.35 0.99 (0.09) (0.776) 0.34 0.99
-------- -------- -------- ---------- -------- -------- --------
Total From Investment
Operations .................... 0.216 1.32 2.06 0.04 0.136 1.21 1.97
-------- -------- -------- ---------- -------- -------- --------
DISTRIBUTIONS
Net Investment Income ........... (0.967) (0.97) (1.07) (0.12) (0.883) (0.89) (0.99)
Net Realized Gain ............... (0.088) (0.55) (0.05) -- (0.088) (0.55) (0.05)
In Excess of Net Realized
Gain .......................... (0.140) -- -- -- (0.140) -- --
-------- -------- -------- ---------- -------- -------- --------
Total Distributions ............. (1.195) (1.52) (1.12) (0.12) (1.111) (1.44) (1.04)
-------- -------- -------- ---------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD .... $ 11.682 $ 12.66 $ 12.86 $ 11.92 $ 11.655 $ 12.63 $ 12.86
======== ======== ======== ========== ======== ======== ========
TOTAL RETURN (1) .................. 1.90% 10.81% 18.12% 0.29%** 1.28% 9.86% 17.22%
======== ======== ======== ========== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) ......................... $ 8,120 $ 7,813 $ 8,980 $ 3,907 $ 22,667 $ 18,420 $ 8,617
Ratio of Expenses to Average Net
Assets .......................... 1.25% 1.25% 1.25% 1.25% 2.00% 2.00% 2.00%
Ratio of Net Investment
Income/Loss to Average Net
Assets .......................... 8.39% 7.42% 8.83% 6.85% 7.63% 6.70% 7.99%
Portfolio Turnover Rate ........... 41% 81% 104% 10%** 41% 81% 104%
----------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ........ $ 0.06 $ 0.08 $ 0.10 $ 0.04 $ 0.06 $ 0.08 $ 0.10
Ratios Before Expense Limitation:
Expenses to Average Net
Assets ........................ 1.72% 1.89% 2.04% 3.51% 2.48% 2.64% 2.82%
Net Investment Income/Loss to
Average Net Assets ............ 7.93% 6.78% 8.04% 4.59% 7.16% 6.04% 7.17%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------
MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1996
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................... $ 12.00
----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ........... 0.12
Net Realized and Unrealized
Gain/Loss .......................... (0.09)
----------
Total From Investment
Operations ......................... 0.03
----------
DISTRIBUTIONS
Net Investment Income ................ (0.10)
Net Realized Gain .................... --
In Excess of Net Realized
Gain ............................... --
----------
Total Distributions .................. (0.10)
----------
NET ASSET VALUE, END OF PERIOD ......... $ 11.93
==========
TOTAL RETURN (1) ....................... 0.21%**
==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) .............................. $ 3,421
Ratio of Expenses to Average Net
Assets ............................... 2.00%
Ratio of Net Investment
Income/Loss to Average Net
Assets ............................... 6.08%
Portfolio Turnover Rate ................ 10%**
-----------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ............. $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net
Assets ............................. 4.25%
Net Investment Income/Loss to
Average Net Assets ................. 3.83%
-----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------
YEAR ENDED JUNE 30,
---------------------------------------- MAY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 JUNE 30, 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ....................... $ 12.634 $ 12.86 $ 11.93 $ 12.00
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............................... 0.912 0.86 0.99 0.12
Net Realized and Unrealized Gain/Loss .................... (0.775) 0.35 0.98 (0.09)
---------- ---------- ---------- ----------
Total From Investment Operations ......................... 0.137 1.21 1.97 0.03
---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income .................................... (0.883) (0.89) (0.99) (0.10)
Net Realized Gain ........................................ (0.088) (0.55) (0.05) --
In Excess of Net Realized Gain ........................... (0.140) -- -- --
---------- ---------- ---------- ----------
Total Distributions ...................................... (1.111) (1.44) (1.04) (0.10)
---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ............................. $ 11.660 $ 12.63 $ 12.86 $ 11.93
========== ========== ========== ==========
TOTAL RETURN (1) ........................................... 1.28% 9.86% 17.21% 0.21%**
========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) .......................... $ 7,879 $ 8,145 $ 4,970 $ 3,316
Ratio of Expenses to Average Net Assets .................... 2.00% 2.00% 2.00% 2.00%
Ratio of Net Investment Income/Loss to Average Net Assets .. 7.61% 6.63% 8.03% 6.07%
Portfolio Turnover Rate .................................... 41% 81% 104% 10%**
----------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period
Per Share Benefit to Net Investment Income/Loss .......... $ 0.06 $ 0.08 $ 0.11 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets ........................... 2.48% 2.64% 2.88% 4.25%
Net Investment Income/Loss to Average Net Assets ......... 7.14% 6.01% 7.15% 3.82%
----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
1 Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-118
<PAGE> 334
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen High Yield & Total Return Fund (the "Fund") is organized as a
separate diversified fund of Van Kampen Series Fund, Inc., a Maryland
Corporation, which is registered as an open-end management investment Company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective seeks to maximize total return by investing in a diversified portfolio
of high-yield, high-risk income that offer a yield above what is generally
available on debt securities in the four highest categories of the recognized
rating services. The Fund commenced operations on May 1, 1996.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 4.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First ......... 4.00% 1.00%
Second ........ 4.00% None
Third ......... 3.00% None
Fourth ........ 2.50% None
Fifth ......... 1.50% None
Thereafter .... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which takes into account institutional size trading in similar groups of
securities. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
At June 30, 1999, approximately 86% of the net assets of the Fund consisted of
high-yield securities rated below investment grade. Investments in high-yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
Certain securities may be valued on the basis of bid prices provided by one
principal market maker.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may invest in repurchase agreements, which are short-term investments 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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date.
Interest income is recognized on an accrual basis except where collection is in
doubt. Discounts and premiums on securities purchased are amortized according to
the effective yield method over their respective lives. Income, expenses (other
than class specific expenses), and realized and unrealized gains or losses are
allocated to each class of shares based upon their relative net assets.
Distributions from the Fund are recorded on the ex-distribution date.
4. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a
F-119
<PAGE> 335
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
period of five years beginning with the Fund's commencement of operations. The
Adviser has agreed that in the event any of the initial shares of the Fund
originally purchased by Van Kampen are redeemed by the Fund during the
amortization period, the Fund will be reimbursed for any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the number of initial shares at the time of redemption.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
Net capital losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 to June 30, 1999 the Fund incurred and elected
to defer until July 1, 1999, for U.S. Federal income tax purposes, net capital
losses of approximately $435,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
------- ------- --------- -------------
<S> <C> <C> <C>
$39,712 $ 614 $ (2,408) $ (1,794)
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $45,000 has been reclassified from
accumulated net investment income with approximately $42,000 posted to
distributions in excess of net realized gain and approximately $3,000 posted to
paid in capital in excess of par.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.), Morgan Stanley Dean Witter Investment
Management Inc. ("MSDWIM" or a "Subadviser"), and Miller Anderson &
Sherrerd LLP, wholly owned subsidiaries of Morgan Stanley Dean Witter & Co.,
provide the Fund with investment advisory services at a fee paid monthly and
calculated at the annual rates based on average daily net assets as indicated
below. The Adviser has agreed to reduce advisory fees payable to it and to
reimburse the Fund, if necessary, if the annual operating expenses, as defined,
expressed as a percentage of average daily net assets, exceed the maximum ratios
indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
0.75% 1.25% 2.00%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$1,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $65,881 for Class A shares and deferred sales charges of $49,073 and
$6,313 for Class B shares and Class C shares, respectively.
F-120
<PAGE> 336
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Company ("MSTC"), a former affiliate of the Subadvisers.
On October 1, 1998, the Chase Manhattan purchased MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $25,944,000 and sales of approximately $14,451,000 of
investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term
U.S. government securities.
F-121
<PAGE> 337
VAN KAMPEN INTERNATIONAL MAGNUM FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.--
Van Kampen International Magnum Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen International Magnum
Fund (the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for each of the 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 June 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-122
<PAGE> 338
VAN KAMPEN INTERNATIONAL MAGNUM FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (97.8%)
AUSTRALIA (2.8%)
AMP Ltd. .............................................................. 8,250 $ 90
Brambles Industries Ltd. .............................................. 5,000 131
Broken Hill Proprietary Co., Ltd. ..................................... 17,750 205
Cable & Wireless Optus Ltd. ........................................... 36,900 84
Colonial Ltd. ......................................................... 25,550 90
Fosters Brewing Group Ltd. ............................................ 64,900 182
Lend Lease Corp., Ltd. ................................................ 13,800 189
National Australia Bank Ltd. .......................................... 24,300 401
News Corp., Ltd. ...................................................... 37,740 321
Normandy Mining Ltd. .................................................. 71,300 47
Oil Search Ltd. ....................................................... 58,200 86
Quantas Airlines. ..................................................... 36,400 120
Rio Tinto Ltd. ........................................................ 17,150 280
Telstra Corp., Ltd. ................................................... 74,950 428
Westpac Banking Corp., Ltd. ........................................... 40,150 259
WMC Ltd. .............................................................. 16,950 72
---------
2,985
---------
BELGIUM (0.2%)
Fortis 'B' ............................................................ 6,400 201
---------
DENMARK (1.2%)
Nova Nordisk A/S 'B' .................................................. 9,110 983
Unidanmark A/S 'A' (Registered) ....................................... 4,300 287
---------
1,270
---------
FINLAND (2.2%)
KCI Konecranes International plc ...................................... 9,370 322
Kone Oyj 'B' .......................................................... 3,285 411
Merita Ltd. 'A' plc ................................................... 166,970 950
Sampo Insurance Co., Ltd.'A' .......................................... 24,580 713
---------
2,396
---------
FRANCE (10.3%)
Alcatel Alsthom ....................................................... 4,380 617
Axa ................................................................... 3,710 453
Cie de Saint Gobain ................................................... 5,492 876
(a) CNP Assurances .................................................... 47,350 1,295
Elf Aquitaine ......................................................... 5,180 761
Groupe Danone RFD ..................................................... 2,793 721
Michelin (C.G.D.E.) 'B' ............................................... 24,930 1,021
Pernod-Ricard ......................................................... 15,110 1,014
Rhone-Poulenc S.A. 'A' ................................................ 20,400 934
Suez Lyonnaise des Eaux ............................................... 2,200 397
Schneider S.A. ........................................................ 21,630 1,216
(a) Total S.A. 'B' .................................................... 14,110 1,823
---------
11,128
---------
GERMANY (5.9%)
Adidas-Salomon AG ..................................................... 5,250 512
BASF AG ............................................................... 21,260 935
Bayer AG .............................................................. 19,200 1,223
Bewag AG .............................................................. 20,907 324
Hoechst AG ............................................................ 20,000 902
Mannesmann AG ......................................................... 1,740 261
Schering AG ........................................................... 8,660 926
Siemens AG ............................................................ 3,150 243
Volkswagen AG ......................................................... 15,270 987
---------
6,313
---------
HONG KONG (2.7%)
Cathay Pacific Airways Ltd. ........................................... 55,900 86
Cheung Kong Holdings Ltd. ............................................. 67,500 600
China Telecom Ltd. .................................................... 103,500 288
Dao Heng Bank Group Ltd. .............................................. 19,000 85
Hong Kong & Shanghai Bank Holdings plc ................................ 7,400 270
Hong Kong Telecommunications Ltd. ..................................... 106,600 277
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hutchison Whampoa Ltd. ................................................ 50,600 $ 458
Li & Fung Ltd. ........................................................ 55,900 134
New World Development Co. Ltd. ........................................ 22,000 66
SmarTone Telecom Holdings Ltd. ........................................ 34,300 122
Sun Hung Kai Properties Ltd. .......................................... 39,300 358
Swire Pacific Ltd. 'A' ................................................ 30,000 149
Television Broadcasts Ltd. ............................................ 12,000 56
---------
2,949
---------
IRELAND (1.3%)
Bank of Ireland ....................................................... 60,004 1,010
Greencore Group plc ................................................... 127,000 393
---------
1,403
---------
ITALY (3.5%)
Banca Popolare di Bergamo S.p.A. ...................................... 44,660 982
Marzotto (Gaetano) & Figli S.p.A. ..................................... 53,300 415
Mediaset S.p.A. ....................................................... 105,500 939
Telecom Italia S.p.A. ................................................. 140,000 1,457
---------
3,793
---------
JAPAN (24.9%)
Aiwa Co., Ltd. ........................................................ 8,000 265
Amada Co., Ltd. ....................................................... 53,000 375
Canon, Inc. ........................................................... 29,000 835
Casio Computer Co., Ltd. .............................................. 35,000 266
Dai Nippon Printing Co., Ltd. ......................................... 26,000 416
Daicel Chemical Industries Ltd. ....................................... 96,000 353
Daifuku Co., Ltd. ..................................................... 51,000 357
Daikin Industries Ltd. ................................................ 46,000 535
FamilyMart Co., Ltd. .................................................. 7,200 331
Fuji Machine Manufacturing Co. ........................................ 19,000 586
Fuji Photo Film Co. ................................................... 20,000 758
Fujitec Co. Ltd. ...................................................... 32,000 304
Fujitsu Ltd. .......................................................... 54,000 1,088
Furukawa Electric Co., Ltd. ........................................... 77,000 354
Hitachi Credit Corp. .................................................. 19,700 390
Hitachi Ltd. .......................................................... 109,000 1,023
Kaneka Corp. .......................................................... 66,000 622
Kurita Water Industries Ltd. .......................................... 22,000 395
Kyocera Corp. ......................................................... 8,400 493
Kyudenko Co., Ltd. .................................................... 25,000 143
Lintec Corp. .......................................................... 20,000 201
Matsushita Electric Industrial Co., Ltd. .............................. 36,000 700
Minebea Co., Ltd. ..................................................... 36,000 402
Mitsubishi Chemical Corp. ............................................. 90,000 312
Mitsubishi Estate Co., Ltd. ........................................... 40,000 391
Mitsubishi Heavy Industries Ltd. ...................................... 97,000 394
Mitsumi Electric Co., Ltd. ............................................ 25,000 699
NEC Corp. ............................................................. 77,000 959
Nifco, Inc. ........................................................... 25,000 241
Nintendo Corp., Ltd. .................................................. 8,300 1,168
Nippon Telegraph & Telephone Corp. ADR. ............................... 78 910
Nissan Motor Co., Ltd. ................................................ 150,000 717
Nissha Printing Co., Ltd. ............................................. 20,000 146
Ono Pharmaceutical Co., Ltd. .......................................... 15,000 521
Ricoh Co., Ltd. ....................................................... 70,000 965
Rinnai Corp. .......................................................... 13,900 320
Rohm Co. .............................................................. 3,000 470
Ryosan Co. ............................................................ 10,000 199
Sangetsu Co., Ltd. .................................................... 9,000 192
Sankyo Co., Ltd. ...................................................... 32,000 807
Sanwa Shutter Corp. ................................................... 44,000 239
Sekisui Chemical Co. .................................................. 42,000 244
Sekisui House Ltd. .................................................... 34,000 367
Shin-Etsu Polymer Co., Ltd. ........................................... 44,000 247
Sony Corp. ............................................................ 8,400 907
Suzuki Motor Co., Ltd. ................................................ 31,000 494
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-123
<PAGE> 339
VAN KAMPEN INTERNATIONAL MAGNUM FUND
PORTFOLIO OF INVESTMENTS (CONT.)
------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TDK Corp. ............................................................. 8,000 $ 733
Toshiba Corp. ......................................................... 133,000 950
Toyota Motor Corp. .................................................... 21,000 665
Tsubakimoto Chain Co. ................................................. 76,000 271
Yamaha Corp. .......................................................... 30,000 361
Yamanouchi Pharmaceutical Co. ......................................... 21,000 804
---------
26,885
---------
NETHERLANDS (4.2%)
ABN Amro Holdings N.V. ................................................ 10,200 221
Akzo Nobel N.V. ....................................................... 32,315 1,362
Benckiser N.V. 'B' .................................................... 7,900 422
ING Groep N.V. ........................................................ 27,573 1,495
Laurus N.V. ........................................................... 6,150 143
Philips Electronics N.V. .............................................. 9,075 896
---------
4,539
---------
NEW ZEALAND (0.1%)
Telecom Corp. of New Zealand Ltd. ..................................... 30,000 129
---------
PORTUGAL (1.0%)
Banco Comercial Portugues S.A. (Registered) ........................... 2,600 68
Electricidade de Portugal S.A. ........................................ 54,150 976
---------
1,044
---------
SINGAPORE (1.8%)
City Developments Ltd. ................................................ 25,900 166
Development Bank of Singapore Ltd. (Foreign) .......................... 28,000 342
NatSteel Ltd. ......................................................... 40,000 175
Oversea-Chinese Banking Corp., Ltd. (Foreign) ......................... 17,000 142
Overseas Union Bank Ltd. (Foreign) .................................... 23,000 111
Sembcorp Logistics Ltd. ............................................... 19,000 75
Singapore Airlines Ltd. (Foreign) ..................................... 22,000 209
Singapore Press Holdings Ltd. ......................................... 15,000 255
Singapore Telecommunications Ltd. ..................................... 87,000 149
United Overseas Bank Ltd. (Foreign) ................................... 17,000 119
Venture Manufacturing Ltd. ............................................ 24,000 185
---------
1,928
---------
SPAIN (3.4%)
Banco Popular Espanol S.A. ............................................ 6,310 455
Banco Santander Central Hispano S.A. .................................. 42,000 438
Endesa S.A. ........................................................... 34,300 732
Iberdrola S.A. ........................................................ 50,800 775
(a) Telefonica de Espana .............................................. 25,320 1,221
---------
3,621
---------
SWEDEN (4.0%)
Autoliv, Inc. SDR ..................................................... 29,000 887
Ericsson LM 'B' ....................................................... 8,850 285
ForeningsSparbanken AB ................................................ 6,900 98
Nordbanken Holding AB ................................................. 160,200 940
Svedala Industri AB ................................................... 50,000 903
Svenska Handelsbanken 'A' ............................................. 101,100 1,217
---------
4,330
---------
SWITZERLAND (8.6%)
Cie Financiere Richemont AG 'A' ....................................... 1,238 2,386
Holderbank Financiere Glarus AG 'B' (Bearer) .......................... 982 1,161
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nestle S.A. (Registered) .............................................. 1,275 $ 2,302
Novartis AG (Registered) .............................................. 470 688
Roche Holding AG-Genusshein ........................................... 68 700
Schindler Holding AG (Registered) ..................................... 269 416
Swisscom AG (Registered) .............................................. 2,110 795
Union Bank of Switzerland AG (Registered) ............................. 2,900 867
---------
9,315
---------
UNITED KINGDOM (19.7%)
Aegis Group plc ....................................................... 270,280 597
Allied Domecq plc ..................................................... 110,800 1,070
Allied Zurich plc ..................................................... 91,400 1,150
BG plc ................................................................ 148,428 907
BOC Group plc ......................................................... 49,250 963
British Telecommunications plc ........................................ 90,800 1,523
Burmah Castrol plc .................................................... 40,217 764
Capital Radio plc ..................................................... 75,000 994
Centrica plc .......................................................... 227,790 535
Diageo plc ............................................................ 66,983 700
Glaxo Wellcome plc .................................................... 13,400 373
Great Universal Stores plc ............................................ 102,670 1,139
Halma plc ............................................................. 417,400 698
Imperial Tobacco Group plc ............................................ 106,300 1,160
Lloyds TSB Group plc .................................................. 47,400 643
Morgan Crucible Co. plc ............................................... 107,300 454
Prudential Corp. plc .................................................. 66,100 974
Reckitt & Colman plc .................................................. 138,768 1,448
Royal & Sun Alliance Insurance Group plc .............................. 73,977 664
Royal Bank of Scotland Group plc ...................................... 61,082 809
Sainsbury (J) plc ..................................................... 62,000 391
Scottish & Southern Energy plc ........................................ 102,400 1,048
Shell Transport & Trading Co. plc ..................................... 66,400 498
Smith & Nephew plc .................................................... 50,900 155
SSL International plc ................................................. 36,400 418
Tesco plc ............................................................. 128,300 330
WPP Group plc ......................................................... 99,600 843
---------
21,248
---------
TOTAL COMMON STOCKS ....................................................... 105,477
---------
PREFERRED STOCKS (1.8%)
GERMANY (1.8%)
Fresenius AG .......................................................... 7,915 1,389
Henkel KGaA AG ........................................................ 8,300 581
---------
1,970
---------
TOTAL LONG-TERM INVESTMENTS (99.6%) (COST $99,365) ........................ 107,447
---------
FOREIGN CURRENCY (1.7%) (COST $1,799) ..................................... 1,793
---------
TOTAL INVESTMENTS (101.3%) (COST $101,164) ................................ 109,240
LIABILITIES IN EXCESS OF OTHER ASSETS (-1.3%) ............................. (1,384)
---------
NET ASSETS (100%) ......................................................... $ 107,856
=========
</TABLE>
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
ADR -- American Depositary Receipt
RFD -- Ranked for Dividend
SDR -- Swedish Depositary Receipt
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-124
<PAGE> 340
VAN KAMPEN INTERNATIONAL MAGNUM FUND
PORTFOLIO OF INVESTMENTS (CONT.)
-------------------------------------------------------------------------------
JUNE 30, 1999
-------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- -------- ----------
<S> <C> <C>
Consumer Goods ..... $ 31,260 29.0%
Finance ............ 21,222 19.7
Capital Equipment... 18,558 17.2
Services ........... 15,655 14.5
Materials .......... 10,462 9.7
Energy ............. 9,435 8.7
Multi-Industry ..... 855 0.8
-------- ---------
$107,447 99.6%
======== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-125
<PAGE> 341
VAN KAMPEN INTERNATIONAL MAGNUM FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
(000)
--------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $99,365) ......................... $ 107,447
Foreign Currency (Cost $1,799) .............................. 1,793
Margin Deposit on Futures ................................... 701
Receivable for:
Investments Sold .......................................... 734
Dividends ................................................. 320
Fund Shares Sold .......................................... 294
Foreign Withholding Tax Reclaim ........................... 90
Net Unrealized Gain on Foreign Currency Exchange
Contracts ................................................. 8
Other ....................................................... 20
---------
Total Assets ............................................. 111,407
=========
LIABILITIES:
Payable for:
Custodian Overdraft ...................................... 1,666
Investments Purchased .................................... 1,362
Fund Shares Redeemed ..................................... 165
Distribution Fees ........................................ 123
Custody Fees ............................................. 65
Investment Advisory Fees ................................. 65
Administrative Fees ...................................... 25
Professional Fees ........................................ 24
Transfer Agent Fees ...................................... 21
Shareholder Reporting Expense ............................ 19
Directors' Fees and Expenses ............................. 14
Other ...................................................... 2
---------
Total Liabilities ........................................ 3,551
---------
NET ASSETS ................................................... $ 107,856
=========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) $ 8
Paid in Capital in Excess of Par ........................... 106,226
Net Unrealized Appreciation on Investments and Foreign
Currency Translations .................................... 8,068
Distributions in Excess of Net Investment Income ........... (23)
Accumulated Net Realized Loss .............................. (6,423)
---------
NET ASSETS ................................................... $ 107,856
=========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $45,573,218 and 3,358,578 Shares
Outstanding) ........................................... $ 13.57
=========
Maximum Sales Charge ..................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100 / (100 - maximum sales charge)) ............ $ 14.40
=========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $48,095,622 and 3,571,823 Shares
Outstanding)* .......................................... $ 13.47
=========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $14,187,085 and 1,049,263 Shares
Outstanding)* .......................................... $ 13.52
=========
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-126
<PAGE> 342
VAN KAMPEN INTERNATIONAL MAGNUM FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
(000)
-----------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ............................................. $ 2,262
Interest .............................................. 441
Less Foreign Taxes Withheld ........................... (256)
--------
Total Income ......................................... 2,447
--------
EXPENSES:
Investment Advisory Fees .............................. 943
Distribution Fees (Attributed to Classes A, B, and C of
$138, $482, and $144, respectively) ................. 764
Administrative Fees ................................... 318
Custodian Fees ........................................ 139
Transfer Agent Fees ................................... 116
Shareholder Reports ................................... 66
Professional Fees ..................................... 43
Filing and Registration Fees .......................... 40
Directors' Fees and Expenses .......................... 11
Amortization of Organizational Costs .................. 8
Other ................................................. 32
--------
Total Expenses ....................................... 2,480
Less Expense Reductions .............................. (39)
--------
Net Expenses ......................................... 2,441
--------
Net Investment Income/Loss .............................. 6
--------
NET REALIZED GAIN/LOSS ON:
Investments ........................................... (5,131)
Foreign Currency Transactions ......................... (1,176)
Futures ............................................... (544)
--------
Net Realized Gain/Loss ............................... (6,851)
--------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ............................... 10,250
--------
End of the Period:
Investments ......................................... 8,082
Foreign Currency Translations ....................... (14)
--------
8,068
--------
Net Unrealized Appreciation/Depreciation During the
Period ................................................ (2,182)
--------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ............................. (9,033)
--------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................ $ (9,027)
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-127
<PAGE> 343
VAN KAMPEN INTERNATIONAL MAGNUM FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
---------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss ............................... $ 6 $ 679
Net Realized Gain/Loss ................................... (6,851) 1,875
Net Unrealized Appreciation/Depreciation ................. (2,182) 6,066
--------- ---------
Net Increase/Decrease in Net Assets Resulting from
Operations ............................................. (9,027) 8,620
--------- ---------
DISTRIBUTIONS:
Net Investment Income:
Class A .................................................. (1,075) (488)
Class B .................................................. (551) (330)
Class C .................................................. (161) (53)
In Excess of Net Investment Income:
Class A .................................................. (14) --
Class B .................................................. (7) --
Class C .................................................. (2) --
--------- ---------
(1,810) (871)
--------- ---------
Net Realized Gain:
Class A .................................................. -- (33)
Class B .................................................. -- (31)
Class C .................................................. -- (9)
In Excess of Net Realized Gain:
Class A .................................................. (709) --
Class B .................................................. (611) --
Class C .................................................. (179) --
--------- ---------
(1,499) (73)
--------- ---------
Net Decrease in Net Assets Resulting from Distributions .. (3,309) (944)
--------- ---------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed ............................................... 79,794 106,801
Distributions Reinvested ................................. 2,837 850
Redeemed ................................................. (96,317) (30,781)
--------- ---------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ..................................... (13,686) 76,870
--------- ---------
Total Increase/Decrease in Net Assets .................... (26,022) 84,546
NET ASSETS--Beginning of Period ............................ 133,878 49,332
--------- ---------
NET ASSETS--End of Period (Including distributions in
excess/undistributed net investment income of $(23) and
$1,524, respectively) .................................... $ 107,856 $ 133,878
========= =========
------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
Shares:
Subscribed ............................................ 1,848 4,160
Distributions Reinvested .............................. 120 38
Redeemed .............................................. (3,110) (1,276)
--------- ---------
Net Increase/Decrease in Class A Shares Outstanding ..... (1,142) 2,922
========= =========
Dollars:
Subscribed ............................................ $ 24,712 $ 58,246
Distributions Reinvested .............................. 1,503 473
Redeemed .............................................. (40,959) (17,581)
--------- ---------
Net Increase/Decrease ................................... $ (14,744) $ 41,138
========= =========
Ending Paid in Capital .................................. $ 46,134+ $ 60,878
========= =========
Class B:
Shares:
Subscribed ............................................ 1,344 2,713
Distributions Reinvested .............................. 84 26
Redeemed .............................................. (1,357) (556)
--------- ---------
Net Increase/Decrease in Class B Shares Outstanding ..... 71 2,183
========= =========
Dollars:
Subscribed ............................................ $ 17,633 $ 37,386
Distributions Reinvested .............................. 1,048 322
Redeemed .............................................. (17,469) (7,487)
--------- ---------
Net Increase/Decrease ................................... $ 1,212 $ 30,221
========= =========
Ending Paid in Capital .................................. $ 48,048+ $ 46,836
========= =========
Class C:
Shares:
Subscribed ............................................ 2,928 809
Distributions Reinvested .............................. 23 4
Redeemed .............................................. (2,952) (425)
--------- ---------
Net Increase/Decrease in Class C Shares Outstanding ..... (1) 388
========= =========
Dollars:
Subscribed ............................................ $ 37,449 $ 11,169
Distributions Reinvested .............................. 286 55
Redeemed .............................................. (37,889) (5,713)
--------- ---------
Net Increase/Decrease ................................... $ (154) $ 5,511
========= =========
Ending Paid in Capital .................................. $ 13,362+ $ 13,516
========= =========
</TABLE>
----------
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
The accompanying notes are an integral part of the financial statements.
F-128
<PAGE> 344
VAN KAMPEN INTERNATIONAL MAGNUM FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------- ----------------------------------------
YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30,
-------------------- JULY 1, 1996* TO ---------------------- JULY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# JUNE 30, 1997 1999# 1998# JUNE 30, 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............ $ 14.845 $ 13.91 $ 12.00 $ 14.724 $ 13.84 $ 12.00
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .................... 0.049 0.17 0.17 (0.043) 0.05 0.10
Net Realized and Unrealized Gain/Loss ......... (0.910) 0.96 1.88 (0.903) 0.97 1.85
--------- --------- --------- --------- --------- ---------
Total From Investment Operations .............. (0.861) 1.13 2.05 (0.946) 1.02 1.95
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income ......................... (0.248) (0.18) (0.13) (0.147) (0.13) (0.10)
In Excess of Net Investment Income ............ (0.003) -- -- (0.002) -- --
Net Realized Gain ............................. -- (0.01) (0.01) -- (0.01) (0.01)
In Excess of Net Realized Gain ................ (0.164) -- -- (0.164) -- --
--------- --------- --------- --------- --------- ---------
Total Distributions ........................... (0.415) (0.19) (0.14) (0.313) (0.14) (0.11)
--------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD .................. $ 13.569 $ 14.85 $ 13.91 $ 13.465 $ 14.72 $ 13.84
========= ========= ========= ========= ========= =========
TOTAL RETURN (1) ................................ (5.54)% 8.32% 17.30%** (6.28)% 7.55% 16.40%**
========= ========= ========= ========= ========= =========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ............... $ 45,573 $ 66,817 $ 21,961 $ 48,096 $ 51,541 $ 18,215
Ratio of Expenses to Average Net Assets ......... 1.65% 1.65% 1.65% 2.40% 2.40% 2.40%
Ratio of Net Investment Income/Loss to Average
Net Assets .................................... 0.37% 1.19% 1.39% (0.33)% 0.40% 0.54%
Portfolio Turnover Rate ......................... 70% 35% 22%** 70% 35% 22%**
------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During
the Period
Per Share Benefit to Net Investment
Income/Loss ................................. $ 0.00+ $ 0.02 $ 0.11 $ 0.00+ $ 0.02 $ 0.17
Ratios Before Expense Limitation:
Expenses to Average Net Assets ................ 1.71% 1.82% 2.50% 2.46% 2.57% 3.34%
Net Investment Income/Loss to Average Net
Assets ...................................... 0.33% 1.02% 0.52% (0.37)% 0.23% (0.42)%
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------
YEAR ENDED
JUNE 30,
--------------------------- JULY 1, 1996* TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# JUNE 30, 1997
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ......................... $ 14.782 $ 13.83 $ 12.00
----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ................................. (0.034) 0.05 0.06
Net Realized and Unrealized Gain/Loss ...................... (0.914) 0.99 1.88
----------- ----------- -----------
Total From Investment Operations ........................... (0.948) 1.04 1.94
----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income ...................................... (0.147) (0.08) (0.10)
In Excess of Net Investment Income ......................... (0.002) -- --
Net Realized Gain .......................................... -- (0.01) (0.01)
In Excess of Net Realized Gain ............................. (0.164) -- --
----------- ----------- -----------
Total Distributions ........................................ (0.313) (0.09) (0.11)
----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ............................... $ 13.521 $ 14.78 $ 13.83
=========== =========== ===========
TOTAL RETURN (1) ............................................. (6.25)% 7.55% 16.27%**
=========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ............................ $ 14,187 $ 15,520 $ 9,156
Ratio of Expenses to Average Net Assets ...................... 2.40% 2.40% 2.40%
Ratio of Net Investment Income/Loss to Average Net Assets .... (0.26)% 0.36% 0.29%
Portfolio Turnover Rate ...................................... 70% 35% 22%**
----------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period
Per Share Benefit to Net Investment Income/Loss ............ $ 0.00+ $ 0.02 $ 0.21
Ratios Before Expense Limitation:
Expenses to Average Net Assets ............................. 2.46% 2.56% 3.45%
Net Investment Income/Loss to Average Net Assets ........... (0.30)% 0.20% (0.77)%
</TABLE>
-------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
+ Amount is less than $0.01 per share.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-129
<PAGE> 345
VAN KAMPEN INTERNATIONAL MAGNUM FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen International Magnum Fund (the "Fund") is organized as a separate
non-diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation,
which is registered as an open-end management company under the Investment
Company Act of 1940, as amended. The Fund's investment objective seeks long-term
capital appreciation by investing primarily in equity securities of non-U.S.
issuers in accordance with EAFE country weightings determined by the Adviser.
The Fund commenced operations on July 1, 1996.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
------------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First ........................................ 5.00% 1.00%
Second ....................................... 4.00% None
Third ........................................ 3.00% None
Fourth ....................................... 2.50% None
Fifth ........................................ 1.50% None
Thereafter ................................... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Securities listed on a foreign exchange are valued at
their closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. All other securities and assets for which market values are not readily
available are valued at fair value as determined in good faith by the Board of
Directors, although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date, net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses)
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and losses on foreign currency includes the net
realized amount from the sale of the currency and the amount realized between
trade date and settlement date on security and income transactions. However, the
foreign currency portion of gains and losses realized on sales and maturities of
foreign denominated debt securities is treated as ordinary income for U.S.
Federal income tax purposes.
5. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Fund's commencement of operations. The Adviser has agreed that in the event
any of the initial shares of the Fund originally purchased by Van Kampen are
redeemed by the Fund during
F-130
<PAGE> 346
VAN KAMPEN INTERNATIONAL MAGNUM FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
the amortization period, the Fund will be reimbursed for any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
6. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains, and net unrealized appreciation, as applicable, as the income is earned
or capital gains are recorded.
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by a Fund for gains realized and not distributed. To the extent that capital
gains are so offset, such gains will not be distributed to shareholders.
At June 30, 1999, the Fund had available capital loss carryforward for U.S.
Federal income tax purposes of approximately $2,624,000 which will expire June
30, 2007.
Net capital losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 to June 30, 1999 the Fund incurred and elected
to defer until July 1, 1999, for U.S. Federal income tax purposes, net capital
losses of approximately $3,163,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
----- ------- ------- -------------
<S> <C> <C> <C>
$ 100,001 $12,463 $(5,017) $7,446
</TABLE>
7. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, foreign
taxes on net realized gains, deductibility of interest expense on short sales
and gains on certain securities of corporations designated as "passive foreign
investment companies."
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss and paid in capital in excess of par. For the
year ended June 30, 1999, approximately $1,310,000 has been reclassified from
paid in capital in excess of par with approximately $257,000 posted to
distributions in excess of net investment income and approximately $1,053,000
posted to accumulated net realized loss.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
0.80% 1.65% 2.40%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$4,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the portfolio, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Portfolio a distribution fee, which
is accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to
F-131
<PAGE> 347
VAN KAMPEN INTERNATIONAL MAGNUM FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
1.00% of the Class B and Class C shares of the Fund, on an annualized basis, of
the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $239,826 for Class A shares and deferred sales charges of $8,799,
$206,929, and $28,632 for Class A shares, Class B shares, and Class C shares,
respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of
approximately $27,000. On October 1, 1998, the Chase Manhattan Bank purchased
MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $8,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/ dealer.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Portfolio made
purchases of approximately $77,070,000 and sales of approximately $77,028,000 of
investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
D. DERIVATIVE FINANCIAL INSTRUMENTS: A derivative financial instrument in very
general terms refers to a security whose value is "derived" from the value of an
underlying asset, reference rate or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's foreign currency exposure. All of the
Fund's portfolio holdings, including derivative instruments, are
marked-to-market each day with the change in value reflected in unrealized
appreciation/depreciation. Upon disposition, a realized gain or loss is
recognized accordingly, except when exercising a call option contract or taking
delivery of a security underlying a forward contract. In this instance, the
recognition of gain or loss is postponed until the disposal of the security
underlying the option or forward contract. Risks may arise as a result of the
potential inability of the counterparties to meet the terms of their contracts.
Summarized below are the specific types of derivative financial instruments used
by the Fund.
1. FORWARD CURRENCY CONTRACTS: These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on foreign currency transactions.
At June 30, 1999, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
FORWARD CURRENCY CONTRACTS (000) (000)
-------------------------- ------- -------------
<S> <C> <C>
SHORT CONTRACTS:
Japanese Yen,
322,227,600 expiring 7/19/99.......... $2,674 $8
====== ==
</TABLE>
2. FUTURES CONTRACTS: A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures of U.S. Treasury Notes and typically closes
the contract prior to the delivery date.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin). The potential risk of loss associated
with a futures contract is in excess of the variation margin reflected on the
Statement of Assets and Liabilities. The cost of securities acquired through
delivery under a contract is adjusted by the unrealized gain or loss on the
contract.
Transactions in futures contracts for the year ended June 30, 1999, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS
---------
<S> <C>
Outstanding at June 30, 1998......................... -0-
Futures Opened....................................... 516
Futures Closed....................................... (516)
----
Outstanding at June 30, 1999......................... -0-
====
</TABLE>
F-132
<PAGE> 348
VAN KAMPEN LATIN AMERICAN FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Latin American Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Latin American Fund (the
"Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the results of
its operations, the changes in its net assets and the financial highlights for
each of the 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 June 30, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. RANDOLPH DR.
CHICAGO, ILLINOIS 60601
AUGUST 6, 1999
F-133
<PAGE> 349
VAN KAMPEN LATIN AMERICAN FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (75.3%)
ARGENTINA (6.4%)
Banco Rio de La Plata ADR............ 24,505 $ 233
Quilmes Industrial ADR............... 100,955 1,249
Telecom Argentina ADR................ 62,418 1,670
Telefonica de Argentina ADR.......... 27,398 859
-------
4,011
-------
BRAZIL (11.9%)
CEMIG ADR............................ 31,273 665
(c)CEMIG ADR......................... 835 18
(a)Cia Electric de Est Rio Janerio... 1,911,759,000 454
Copel 'B' ADR........................ 37,525 314
Cia Siderurgica Nacional............. 18,244,000 477
Coteminas............................ 2,492,000 127
(b,c)Coteminas ADR................... 22,545 57
CVRD 'A'............................. 5,000 70
Eletrobras ADR....................... 5,440 52
Eletrobras 'B' ADR................... 43,930 442
Eletrobras S.A....................... 21,024,000 397
Embratel Participacoes ADR........... 64,520 895
(a)Lojas Arupau ADR.................. 10,410 --
(c)Petrobras ADR..................... 22,943 358
Petrobras ADR........................ 15,640 241
(c)Rossi Residencial S.A. GDR........ 44,287 50
Rossi Residencial S.A. GDS........... 187,805 211
Tele Leste Celular ADR............... 1,160 35
Tele Norte Leste ADR................. 23,523 437
Tele Sudeste Celular ADR............. 2,290 66
Telesp Celular ADR................... 21,330 571
Telesp ADR........................... 25,710 588
Unibanco GDR......................... 40,390 972
(a)Vale Do Rio Doce ADR.............. 31,997 --
-------
7,497
-------
CHILE (8.8%)
Banco Edwards ADR.................... 25,362 368
Banco Santander ADR.................. 7,549 117
Banco Santiago ADR................... 13,910 267
CCU ADR.............................. 28,067 803
Chilectra ADR........................ 49,206 1,033
CTC ADR.............................. 65,225 1,614
D & S ADR............................ 18,265 342
ENDESA ADR........................... 15,387 187
Enersis ADR.......................... 14,450 331
Quinenco ADR......................... 27,439 257
(a)Santa Isabel ADR.................. 20,698 210
-------
5,529
-------
COLOMBIA (0.4%)
Bavaria.............................. 46,693 175
Valores Bavaria...................... 74,594 62
-------
237
-------
MEXICO (44.6%)
Alfa................................. 238,666 992
(a)Banacci 'L'....................... 154,310 377
(a)Banacci 'O'....................... 106,488 269
(a)Carso Global Telecom 'A1'......... 155,952 988
Cemex 'B' ADR........................ 131,309 1,297
Cemex CPO............................ 243,975 1,207
Cemex CPO ADR........................ 31,930 303
Cemex 'B'............................ 262,774 1,305
(a)Cifra 'C'......................... 488,695 895
(a)Cifra 'V'......................... 168,221 327
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------
<S> <C> <C>
(a)Cifra 'V' ADR..................... 11,324 $ 217
Empresas ICA S.A..................... 153,950 170
Empresas S.A. ADR.................... 36,571 247
FEMSA................................ 364,497 1,458
FEMSA ADR............................ 33,521 1,337
(a)Grupo Carso 'A1'.................. 182,724 847
Grupo Modelo 'C'..................... 185,448 529
(a)Grupo Financiero Banorte S.A. de
C.V. 'O'............................. 333,298 481
Grupo Financiero Bancomer S.A. de
C.V. 'O'............................. 1,462,500 528
(a)Grupo Industrial Bimbo S.A. de CV
'A'.................................. 73,595 163
Kimberly 'A'......................... 594,916 2,450
(a)Seminis, Inc. 'A'................. 32,800 494
Soriana 'B'.......................... 253,815 1,196
TAMSA ADR............................ 20,777 226
Telmex ADR........................... 83,206 6,724
(a)Televisa CPO GDR.................. 62,941 2,820
Vitro ADR............................ 58,008 297
-------
28,144
-------
PERU (1.1%)
Tel Peru 'B' ADR..................... 47,863 724
-------
VENEZUELA (2.1%)
CANTV ADR............................ 49,285 1,343
-------
TOTAL COMMON STOCKS...................... 47,485
-------
PREFERRED STOCKS (23.4%)
BRAZIL (23.4%)
Banco Bradesco....................... 15,930,000 80
(a,b)Banco Nacional.................. 8,115,000 --
(a)Celular CRT Participacoes S.A..... 6,717,974 911
CEMIG................................ 45,693,270 961
Copel................................ 164,715,900 1,340
CRT.................................. 5,099,574 1,251
CVRD 'A'............................. 61,289 1,212
CVRD................................. 28,970 576
Eletrobras 'B'....................... 24,984,200 504
Embratel Participacoes 'A'........... 60,563,000 835
Gerdau............................... 29,631,867 494
Globex Utilidades S.A................ 8,000 42
Iven................................. 600,500 78
Itaubanco............................ 1,090,641 558
(a)Lojas Arapua S.A.................. 19,195,300 --
Petrobras............................ 12,662,697 1,961
Telebras ADR......................... 7,941 716
Tele Centro Sul...................... 35,820,560 396
Tele Leste Celular................... 370,217,700 226
Tele Nordeste Celular................ 78,574,300 106
Tele Norte Celular................... 339,309,000 196
Tele Norte Leste..................... 63,958,000 1,157
Tele Sudeste Celular................. 53,316,960 301
Telesp Celular....................... 28,850,730 298
Telesp............................... 3,521,000 416
Usiminas............................. 52,200 176
-------
TOTAL PREFERRED STOCK.................... 14,791
-------
<CAPTION>
NO. OF
RIGHTS
-------------
<S> <C> <C>
RIGHTS (0.0%)
BRAZIL (0.0%)
(a,b)CRT............................. 2,184,997 --
-------
TOTAL LONG-TERM INVESTMENTS (98.7%)
(COST $61,089)....................... 62,276
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-134
<PAGE> 350
VAN KAMPEN LATIN AMERICAN FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE VALUE
(000) (000)
-------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENT (4.8%)
REPURCHASE AGREEMENT (4.8%)
Chase Securities, Inc., 4.55%, dated $ 3,032
6/30/99, due 7/1/99, to be
repurchased at $3,032, collaterized
by $3,175 U.S. Treasury Bill,
4.58%, due 1/6/00, valued at $3,096
(COST $3,032) ................................... $ 3,032
-------
TOTAL INVESTMENTS IN SECURITIES (103.5%) (COST $64,121) 65,308
-------
FOREIGN CURRENCY (0.2%) (COST $127) ................... 128
-------
TOTAL INVESTMENTS (103.7%) (COST $64,248) ............. 65,436
LIABILITIES IN EXCESS OF OTHER ASSETS (-3.7%) ......... (2,340)
-------
NET ASSETS (100%) ..................................... $63,096
=======
</TABLE>
----------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(b) -- Security valued at fair value -- see note A-1 to
financial statements.
(c) -- 144A Security -- Certain conditions for public sale may
exist
ADR -- American Depositary Receipt
CPO -- Certificate of Participation
GDR -- Global Depositary Receipt
GDS -- Global Depositary Shares
</TABLE>
----------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- -------- ----------
<S> <C> <C>
Services ........ $29,030 46.0%
Energy .......... 9,257 14.7
Consumer Goods .. 9,248 14.7
Materials ....... 7,414 11.8
Finance ......... 4,510 7.1
Multi-Industry .. 2,174 3.4
Capital Equipment 643 1.0
------- ----
$62,276 98.7%
======= ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-135
<PAGE> 351
VAN KAMPEN LATIN AMERICAN FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-----------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost $64,121) ....... $ 65,308
Foreign Currency (Cost $127) ............................. 128
Receivable for:
Investments Sold ....................................... 1,092
Dividends .............................................. 260
Fund Shares Sold ....................................... 59
Foreign Withholding Tax Reclaim ........................ 3
Other .................................................... 4
--------
Total Assets ............................................... 66,854
--------
LIABILITIES:
Payable for:
Investments Purchased .................................. 3,391
Fund Shares Redeemed ................................... 94
Distribution Fees ...................................... 66
Custody Fees ........................................... 59
Investment Advisory Fees ............................... 49
Professional Fees ...................................... 27
Transfer Agent Fees .................................... 17
Shareholder Reporting Expenses ......................... 16
Administrative Fees .................................... 13
Directors' Fees and Expenses ........................... 13
Deferred Country Tax ................................... 6
Other .................................................... 7
--------
Total Liabilities ...................................... 3,758
--------
NET ASSETS ................................................. $ 63,096
========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) ......................................... $ 6
Paid in Capital in Excess of Par ......................... 90,512
Net Unrealized Appreciation on Investments and Foreign
Currency Translations .................................. 1,156
Distributions in Excess of Net Investment Income ......... (158)
Accumulated Net Realized Loss ............................ (28,420)
--------
NET ASSETS ................................................. $ 63,096
========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $34,139,111 and 2,957,664 Shares
Outstanding) ........................................... $ 11.54
========
Maximum Sales Charge ..................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100/ (100 - maximum sales charge)) ............. $ 12.24
========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $18,569,829 and 1,659,653 Shares
Outstanding)* .......................................... $ 11.19
========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $10,387,176 and 928,886 Shares
Outstanding)* .......................................... $ 11.18
========
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-136
<PAGE> 352
VAN KAMPEN LATIN AMERICAN FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
---------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ............................................. $ 1,694
Interest .............................................. 121
Less Foreign Taxes Withheld ........................... (10)
--------
Total Income ......................................... 1,805
--------
EXPENSES:
Investment Advisory Fees .............................. 710
Distribution Fees (Attributed to Classes A, B, and C of
$75, $169, and $96, respectively) ................... 340
Administrative Fees ................................... 161
Custodian Fees ........................................ 117
Country Tax Expense ................................... 60
Shareholder Reports ................................... 57
Transfer Agent Fees ................................... 53
Professional Fees ..................................... 37
Filing and Registration Fees .......................... 33
Directors' Fees and Expenses .......................... 9
Amortization of Organizational Costs .................. 3
Other ................................................. 9
--------
Total Expenses ....................................... 1,589
Less Expense Reductions .............................. (137)
--------
Net Expenses ......................................... 1,452
--------
Net Investment Income/Loss .............................. 353
--------
NET REALIZED GAIN/LOSS ON:
Investments ........................................... (18,585)
Foreign Currency Transactions ......................... (111)
--------
Net Realized Gain/Loss .............................. (18,696)
--------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ............................... (13,340)
--------
End of the Period:
Investments ......................................... 1,187
Foreign Currency Translations ....................... (31)
--------
1,156
--------
Net Unrealized Appreciation/Depreciation During the
Period ................................................ 14,496
--------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ............................. (4,200)
--------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................ $ (3,847)
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-137
<PAGE> 353
VAN KAMPEN LATIN AMERICAN FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................... $ 353 $ (380)
Net Realized Gain/Loss ........................................ (18,696) 4,576
Net Unrealized Appreciation/Depreciation ...................... 14,496 (27,206)
------------- -------------
Net Increase/Decrease in Net Assets Resulting from
Operations .................................................. (3,847) (23,010)
------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A ....................................................... (120) --
Class B ....................................................... (17) --
Class C ....................................................... (10) --
In Excess of Net Investment Income:
Class A ....................................................... (182) --
Class B ....................................................... (26) --
Class C ....................................................... (15) --
------------- -------------
(370) --
------------- -------------
Net Realized Gain:
Class A ....................................................... -- (7,513)
Class B ....................................................... -- (3,444)
Class C ....................................................... -- (2,645)
In Excess of Net Realized Gain:
Class A ....................................................... (153) (5,098)
Class B ....................................................... (100) (2,337)
Class C ....................................................... (57) (1,795)
------------- -------------
(310) (22,832)
------------- -------------
Net Decrease in Net Assets Resulting from Distributions ....... (680) (22,832)
------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed .................................................... 37,085 115,672
Distributions Reinvested ...................................... 580 20,476
Redeemed ...................................................... (53,264) (126,144)
------------- -------------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions .......................................... (15,599) 10,004
------------- -------------
Total Increase/Decrease in Net Assets ......................... (20,126) (35,838)
NET ASSETS--Beginning of Period ................................. 83,222 119,060
------------- -------------
NET ASSETS--End of Period (Including distributions in excess
of net investment income of $(158) and $(95),
respectively) ................................................. $ 63,096 $ 83,222
============= =============
---------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
--------
Shares:
Subscribed .................................................. 2,939 4,455
Distributions Reinvested .................................... 46 920
Redeemed .................................................... (3,917) (6,340)
------------- -------------
Net Increase/Decrease in Class A Shares Outstanding ........... (932) (965)
============= =============
Dollars:
Subscribed .................................................. $ 28,926 $ 72,239
Distributions Reinvested .................................... 389 11,506
Redeemed .................................................... (37,394) (98,189)
------------- -------------
Net Increase/Decrease ......................................... $ (8,079) $ (14,444)
============= =============
Ending Paid in Capital ........................................ $ 46,039+ $ 54,118
============= =============
Class B:
--------
Shares:
Subscribed .................................................... 386 1,661
Distributions Reinvested ...................................... 15 443
Redeemed ...................................................... (936) (752)
------------- -------------
Net Increase/Decrease in Class B Shares Outstanding ........... (535) 1,352
============= =============
Dollars:
Subscribed .................................................. $ 3,651 $ 26,168
Distributions Reinvested .................................... 124 5,380
Redeemed .................................................... (8,006) (10,163)
------------- -------------
Net Increase/Decrease ......................................... $ (4,231) $ 21,385
============= =============
Ending Paid in Capital ........................................ $ 29,066+ $ 33,297
============= =============
Class C:
--------
Shares:
Subscribed .................................................. 508 1,071
Distributions Reinvested .................................... 8 296
Redeemed .................................................... (908) (1,242)
------------- -------------
Net Increase/Decrease in Class C Shares Outstanding ........... (392) 125
============= =============
Dollars:
Subscribed .................................................. $ 4,508 $ 17,265
Distributions Reinvested .................................... 67 3,590
Redeemed .................................................... (7,864) (17,792)
------------- -------------
Net Increase/Decrease ......................................... $ (3,289) $ 3,063
============= =============
Ending Paid in Capital ........................................ $ 15,478+ $ 18,767
============= =============
</TABLE>
----------
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
The accompanying notes are an integral part of the financial statements.
F-138
<PAGE> 354
VAN KAMPEN LATIN AMERICAN FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------
YEAR ENDED JUNE 30,
--------------------------------------------------- JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 JUNE 30, 1995
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................... $ 11.424 $ 17.39 $ 12.63 $ 9.08 $ 12.00
--------- --------- --------- --------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ........... 0.093 (0.01) 0.02 0.10 (0.02)
Net Realized and Unrealized Gain/
Loss ............................... 0.182 (2.73) 6.46 3.47 (2.70)
--------- --------- --------- --------- ---------------
Total From Investment
Operations ......................... 0.275 (2.74) 6.48 3.57 (2.72)
--------- --------- --------- --------- ---------------
DISTRIBUTIONS
Net Investment Income ................ (0.041) -- -- (0.02) --
In Excess of Net Investment
Income ............................. (0.063) -- (0.09) -- --
Net Realized Gain .................... -- (1.92) (1.63) -- --
In Excess of Net Realized Gain ....... (0.052) (1.31) -- -- --
Return of Capital .................... -- -- -- -- (0.20)
--------- --------- --------- --------- ---------------
Total Distributions .................. (0.156) (3.23) (1.72) (0.02) (0.20)
--------- --------- --------- --------- ---------------
NET ASSET VALUE, END OF PERIOD ......... $ 11.543 $ 11.42 $ 17.39 $ 12.63 $ 9.08
========= ========= ========= ========= ===============
TOTAL RETURN (1) ....................... 3.00% (17.37)% 57.32% 39.35% (23.07)%**
========= ========= ========= ========= ===============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ...... $ 34,139 $ 44,439 $ 84,401 $ 18,701 $ 7,658
Ratio of Expenses to Average Net
Assets ............................... 2.20% 2.25% 2.24% 2.11% 2.46%
Ratio of Net Investment Income/Loss
to Average Net Assets ................ 0.98% (0.09)% (0.08)% 1.18% (0.44)%
Portfolio Turnover Rate ................ 163% 249% 241% 131% 107%**
------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation
During the Period
Per Share Benefit to Net
Investment Income/Loss ............. $ 0.02 $ 0.02 $ 0.10 $ 0.09 $ 0.13
Ratios Before Expense Limitation:
Expenses to Average Net Assets ....... 2.44% 2.41% 2.77% 3.28% 4.30%
Net Investment Income/Loss to
Average Net Assets ................. 0.74% (0.24)% (0.61)% 0.01% (2.26)%
Ratio of Expenses to Average Net
Assets excluding country tax
expense and interest expense ......... 2.10% 2.10% 2.10% 2.10% 2.10%
------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
------------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------- AUGUST 1, 1995+ TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 JUNE 30, 1996
----------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................... $ 11.030 $ 16.99 $ 12.45 $ 9.58
--------- --------- --------- ------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ........... 0.019 (0.08) (0.03) 0.03
Net Realized and Unrealized Gain/
Loss ............................... 0.215 (2.65) 6.28 2.84
--------- --------- --------- ------------------
Total From Investment
Operations ......................... 0.234 (2.73) 6.25 2.87
--------- --------- --------- ------------------
DISTRIBUTIONS
Net Investment Income ................ (0.009) -- -- --
In Excess of Net Investment
Income ............................. (0.014) -- (0.08) --
Net Realized Gain .................... -- (1.92) (1.63) --
In Excess of Net Realized Gain ....... (0.052) (1.31) -- --
Return of Capital .................... -- -- -- --
--------- --------- --------- ------------------
Total Distributions .................. (0.075) (3.23) (1.71) --
--------- --------- --------- ------------------
NET ASSET VALUE, END OF PERIOD ......... $ 11.189 $ 11.03 $ 16.99 $ 12.45
========= ========= ========= ==================
TOTAL RETURN (1) ....................... 2.47% (17.82)% 56.17% 29.26%**
========= ========= ========= ==================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ...... $ 18,570 $ 24,206 $ 14,314 $ 2,041
Ratio of Expenses to Average Net
Assets ............................... 2.96% 2.99% 2.99% 2.87%
Ratio of Net Investment Income/Loss
to Average Net Assets ................ 0.20% (0.58)% (0.78)% 0.88%
Portfolio Turnover Rate ................ 163% 249% 241% 131%**
-------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation
During the Period
Per Share Benefit to Net
Investment Income/Loss ............. $ 0.02 $ 0.02 $ 0.02 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets ....... 3.20% 3.16% 3.55% 3.89%
Net Investment Income/Loss to
Average Net Assets ................. (0.04)% (0.73)% (1.34)% (0.14)%
Ratio of Expenses to Average Net
Assets excluding country tax
expense and interest expense ......... 2.85% 2.85% 2.85% 2.85%
-------------------------------------------------------------------------------------------------------
</TABLE>
----------
<TABLE>
<S> <C>
* Commencement of operations.
** Non-Annualized
+ The Fund began offering Class B shares on August 1, 1995. (1) Total return
is calculated exclusive of sales charges or deferred sales charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-139
<PAGE> 355
VAN KAMPEN LATIN AMERICAN FUND
FINANCIAL HIGHLIGHTS (CONT.)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------------------- JULY 6, 1994* TO
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 JUNE 30, 1995
<S> <C> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD .................. $ 11.037 $ 17.01 $ 12.43 $ 8.99 $ 12.00
--------- --------- -------- -------- ----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .......................... 0.021 (0.11) (0.07) 0.04 (0.08)
Net Realized and Unrealized Gain/Loss ............... 0.199 (2.63) 6.31 3.40 (2.73)
--------- --------- -------- -------- ----------------
Total From Investment Operations .................... 0.220 (2.74) 6.24 3.44 (2.81)
--------- --------- -------- -------- ----------------
DISTRIBUTIONS
Net Investment Income ............................... (0.009) -- -- -- --
In Excess of Net Investment Income .................. (0.014) -- (0.03) -- --
Net Realized Gain ................................... -- (1.92) (1.63) -- --
In Excess of Net Realized Gain ...................... (0.052) (1.31) -- -- --
Return of Capital ................................... -- -- -- -- (0.20)
--------- --------- -------- -------- ----------------
Total Distributions ................................. (0.075) (3.23) (1.66) -- (0.20)
--------- --------- -------- -------- ----------------
NET ASSET VALUE, END OF PERIOD ........................ $ 11.182 $ 11.04 $ 17.01 $ 12.43 $ 8.99
========= ========= ======== ======== ================
TOTAL RETURN (1) ...................................... 2.28% (17.86)% 56.04% 38.26% (23.83)%**
========= ========= ======== ======== ================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ..................... $ 10,387 $ 14,577 $ 20,345 $ 6,780 $ 4,085
Ratio of Expenses to Average Net Assets ............... 2.96% 3.00% 2.99% 2.86% 3.20%
Ratio of Net Investment Income/Loss to Average Net
Assets .............................................. 0.23% (0.77)% (0.79)% 0.42% (1.16)%
Portfolio Turnover Rate ............................... 163% 249% 241% 131% 107%**
--------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the
Period
Per Share Benefit to Net Investment Income/Loss ..... $ 0.02 $ 0.02 $ 0.05 $ 0.12 $ 0.12
Ratios Before Expense Limitation:
Expenses to Average Net Assets ...................... 3.20% 3.16% 3.56% 4.06% 5.20%
Net Investment Income/Loss to Average Net Assets .... (0.01)% (0.93)% (1.36)% (0.78)% (3.16)%
Ratio of Expenses to Average Net Assets excluding
country tax expense and interest expense ............ 2.85% 2.85% 2.85% 2.85% 2.85%
</TABLE>
----------
<TABLE>
<S> <C>
* Commencement of operations.
** Non-Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-140
<PAGE> 356
VAN KAMPEN LATIN AMERICAN FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Latin American Fund (the "Fund") is organized as a separate
non-diversified fund of Van Kampen Series Fund, Inc., a Maryland Corporation
which is registered as an open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective
seeks long-term capital appreciation by investing primarily in equity securities
of Latin American issuers and investing in debt securities issued or guaranteed
by Latin American governments or governmental entities. The Fund commenced
operations on July 6, 1994.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge of 1.00% imposed in the event of
certain redemptions within one year of the purchase. Class B and Class C shares
are offered without a front end sales charge, but are subject to a contingent
deferred sales charge ("CDSC"). Class B shares will automatically convert to
Class A shares after the eighth year following purchase. The CDSC will be
imposed on most redemptions made within five years of the purchase for Class B
shares and one year of the purchase for Class C shares as detailed in the
following schedule:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First ......... 5.00% 1.00%
Second ........ 4.00% None
Third ......... 3.00% None
Fourth ........ 2.50% None
Fifth ......... 1.50% None
Thereafter .... None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights. The Fund began offering the current Class B shares on August 1,
1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date, net
of applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on an accrual basis except where
collection is in doubt. Income, expenses (other than class specific expenses),
and realized and unrealized gains or losses are allocated to each class of
shares based upon their relative net assets. Distributions from the Fund are
recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are translated into U.S. dollars at the mean of the quoted bid and
asked prices. Purchases and sales of portfolio securities are translated at the
rate of exchange prevailing when such securities were purchased or sold. Income
and expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and losses on foreign currency includes the net
realized amount from the sale of the currency and the amount realized between
trade date and settlement date on security and income transactions. However, the
foreign currency portion
F-141
<PAGE> 357
VAN KAMPEN LATIN AMERICAN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
of gains and losses realized on sales and maturities of foreign denominated debt
securities is treated as ordinary income for U.S. Federal income tax purposes.
The net assets of the Fund include issuers located in emerging markets. There
are certain risks inherent in these investments not typically associated with
investments in the United States, including the smaller size of the markets
themselves, lesser liquidity, greater volatility and potentially less publicly
available information. Emerging markets may be subject to a greater degree of
government involvement in the economy and greater economic and political
uncertainty, which has the potential to extend to government imposed
restrictions on exchange traded transactions and currency transactions. These
restrictions may impact the Fund's ability to buy or sell certain securities or
to repatriate certain currencies to U.S. dollars. Additionally, changes in
currency exchange rates will affect the value of and investment income from such
securities
5. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Fund's commencement of operations. The Adviser has agreed that in the event
any of the initial shares of the Fund originally purchased by Van Kampen are
redeemed by the Fund during the amortization period, the Fund will be reimbursed
for any unamortized organizational costs in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.
6. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains, and net unrealized appreciation, as applicable, as the income is earned
or capital gains are recorded.
At June 30, 1999, the Fund had a capital loss carryforward for U.S. Federal
income tax purposes of approximately $16,568,000 which will expire June 30,
2007.
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by the Fund for gains realized and not distributed. To the extent that capital
gains are so offset, such gains will not be distributed to shareholders.
Net capital and net currency losses incurred after October 31 and within the
taxable year are deemed to arise on the first business day of the Fund's next
taxable year. For the period from November 1, 1998 to June 30, 1999 the Fund
incurred
and elected to defer until July 1, 1999, for U.S. Federal income tax purposes,
net currency and capital losses of approximately $6,068,000.
At June 30, 1999, cost and unrealized appreciation/depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
------- ------- ------- ------------
<S> <C> <C> <C>
$70,009 $7,722 $(12,423) $(4,701)
</TABLE>
7. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, foreign
taxes on net realized gains, deductibility of interest expense on short sales
and gains on certain securities of corporations designated as "passive foreign
investment companies."
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss and paid in capital in excess of par. For the
year ended June 30, 1999, approximately $65,000 has been reclassified from paid
in capital in excess of par and approximately $46,000 has been reclassified from
distributions in excess of net investment income, totaling $111,000 posted to
accumulated net realized loss.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
ADVISORY MAX. OPERATING MAX. OPERATING
FEE EXPENSE RATIO EXPENSE RATIO
-------- -------------- --------------
<S> <C> <C>
1.25% 2.10% 2.85%
</TABLE>
F-142
<PAGE> 358
VAN KAMPEN LATIN AMERICAN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$2,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the portfolio, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $98,029 for Class A shares and deferred sales charges of $105,678 and
$13,387 for Class B shares and Class C shares, respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of
approximately $20,000. On October 1, 1998, the Chase Manhattan Bank purchased
MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
During the year ended June 30, 1999, the Fund incurred approximately $8,000 as
brokerage commissions with Morgan Stanley & Co. Incorporated, an affiliated
broker/ dealer.
D. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $89,489,000 and sales of approximately $102,312,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
F-143
<PAGE> 359
VAN KAMPEN VALUE FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.-- Van
Kampen Value Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Value Fund (the "Fund",
a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the results of its
operations, the changes in its net assets and the financial highlights for each
of the 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 June 30, 1999 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-144
<PAGE> 360
VAN KAMPEN VALUE FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (99.5%)
CAPITAL EQUIPMENT (18.3%)
CHEMICALS--DIVERSIFIED (2.1%)
Eastman Chemical Co. ....................... 5,800 $ 300
Lubrizol Corp. ............................. 127,400 3,472
Rohm & Haas Co. ............................ 33,380 1,431
--------
5,203
--------
CONSTRUCTION & HOUSING (1.2%)
Owens Corning .............................. 89,020 3,060
--------
ELECTRICAL & ELECTRONICS (0.5%)
Entergy Corp. .............................. 44,090 1,378
--------
ELECTRONIC COMPONENTS--MISCELLANEOUS (2.6%)
(a) Arrow Electronics, Inc. ................ 98,460 1,871
Avnet, Inc. ................................ 43,500 2,023
Tektronix, Inc. ............................ 90,310 2,726
--------
6,620
--------
ENERGY EQUIPMENT & SERVICES (1.6%)
GTE Corp. .................................. 38,000 2,878
Peco Energy Co. ............................ 27,200 1,139
--------
4,017
--------
MACHINERY & ENGINEERING (6.3%)
Case Corp. ................................. 78,100 3,758
Cummins Engine Co., Inc. ................... 118,000 6,741
Deere & Co. ................................ 300 12
Kennametal, Inc. ........................... 53,250 1,651
Parker-Hannifin Corp. ...................... 83,125 3,803
--------
15,965
--------
MANUFACTURING (3.6%)
Eaton Corp. ................................ 29,400 2,705
(a) FMC Corp. .............................. 49,310 3,368
Tecumseh Products Co. 'A' .................. 48,570 2,942
--------
9,015
--------
PROFESSIONAL SERVICES (0.4%)
Olsten Corp. ............................... 141,370 892
--------
TOTAL CAPITAL EQUIPMENT ........................ 46,150
--------
CONSUMER PRODUCTS--MISCELLANEOUS (28.5%)
APPLIANCES & HOUSEHOLD DURABLES (1.1%)
Whirlpool Corp. ............................ 37,600 2,782
--------
AUTOMOBILES (10.9%)
Dana Corp. ................................. 80,890 3,726
Ford Motor Co. ............................. 114,130 6,441
General Motors Corp. ....................... 157,580 10,400
Goodyear Tire & Rubber Co. ................. 20,000 1,176
(a) Navistar International Corp. ........... 45,900 2,295
TRW, Inc. .................................. 62,860 3,450
--------
27,488
--------
COMPUTERS/SOFTWARE (8.2%)
First Data Corp. ........................... 96,200 4,708
Intel Corp. ................................ 43,800 2,606
International Business Machines
Corp ..................................... 63,400 8,194
(a) Quantum Corp. .......................... 214,000 5,163
--------
20,671
--------
<CAPTION>
VALUE
SHARES (000)
------------------------------------------------------------------------
<S> <C> <C>
RECREATION, OTHER CONSUMER GOODS (0.3%)
Standard Register Co. ...................... 26,670 $ 820
--------
RETAIL--MAJOR DEPARTMENT STORES (3.0%)
Dillards, Inc. 'A' ......................... 55,020 1,933
Sears, Roebuck & Co. ....................... 52,500 2,339
(a) Toys 'R' Us, Inc. ...................... 154,440 3,195
--------
7,467
--------
TEXTILES & APPAREL (4.6%)
Liz Claiborne, Inc. ........................ 123,300 4,500
Springs Industries, Inc. 'A' ............... 41,920 1,829
VF Corp. ................................... 126,140 5,392
--------
11,721
--------
TOBACCO (0.4%)
(a) R.J. Reynolds Tobacco
Holdings, Inc. ........................... 30,346 956
--------
TOTAL CONSUMER PRODUCTS--MISCELLANEOUS ......... 71,905
--------
ENERGY (6.4%)
ELECTRIC--INTEGRATED (0.8%)
Cinergy Corp. .............................. 18,570 594
GPU, Inc. .................................. 34,940 1,474
--------
2,068
--------
OIL & GAS (3.8%)
Coastal Corp. .............................. 37,100 1,484
(a) Nabors Industries, Inc. ................ 136,500 3,336
Tosco Corp. ................................ 44,200 1,146
Transocean Offshore, Inc. .................. 46,600 1,223
Ultramar Diamond Shamrock Corp. ............ 106,570 2,325
--------
9,514
--------
UTILITIES--ELECTRICAL & GAS (1.8%)
DTE Energy Co. ............................. 43,280 1,731
Duke Power Co. ............................. 22,100 1,202
Southern Co. ............................... 58,700 1,556
--------
4,489
--------
TOTAL ENERGY ................................... 16,071
--------
FINANCE (21.9%)
BANKING (6.6%)
Associates First Capital Corp. 'A' ......... 2 --
Bank of America ............................ 56,500 4,142
BankBoston Corp. ........................... 42,400 2,168
Chase Manhattan Corp. ...................... 94,240 8,163
UnionBanCal Corp. .......................... 58,400 2,110
--------
16,583
--------
INSURANCE (7.2%)
ACE Ltd. ................................... 45,200 1,277
Allstate Corp. ............................. 92,580 3,321
American General Corp. ..................... 22,640 1,706
Hartford Financial Services Group .......... 59,540 3,472
Old Republic International Corp. ........... 86,105 1,491
Washington Mutual, Inc. .................... 192,450 6,808
--------
18,075
--------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-145
<PAGE> 361
VAN KAMPEN VALUE FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
SHARES (000)
-------------------------------------------------------------------
<S> <C> <C>
LIFE/HEALTH INSURANCE (2.0%)
CIGNA Corp. ............................. 21,400 $ 1,905
Reliastar Financial Corp. ............... 70,280 3,075
--------
4,980
--------
REINSURANCE (0.8%)
Everest Reinsurance Holdings, Inc. ...... 66,210 2,160
--------
SUPER--REGIONAL BANKS--U.S. (5.3%)
Bank One Corp. .......................... 65,800 3,919
First Union Corp. (N.C.) ................ 40,589 1,908
KeyCorp ................................. 74,500 2,393
PNC Bank Corp. .......................... 89,400 5,152
--------
13,372
--------
TOTAL FINANCE ............................... 55,170
--------
MATERIALS (6.7%)
CHEMICALS (4.7%)
Air Products & Chemicals, Inc. .......... 42,500 1,711
Engelhard Corp. ......................... 160,100 3,622
IMC Global, Inc. ........................ 112,400 1,981
Solutia, Inc. ........................... 99,100 2,112
(a)W.R. Grace & Co. ..................... 127,300 2,339
--------
11,765
--------
METALS--STEEL (0.8%)
Ryerson Tull, Inc. ...................... 85,700 1,934
--------
TELECOMMUNICATIONS EQUIPMENT (1.2%)
U.S. West, Inc. ......................... 53,700 3,155
--------
TOTAL MATERIALS ............................. 16,854
--------
SERVICES (17.7%)
BUSINESS & PUBLIC SERVICES (1.0%)
Service Corp. International ............. 135,500 2,608
--------
FOOD--MISCELLANEOUS/DIVERSIFIED (2.7%)
IBP, Inc. ............................... 63,310 1,504
Nabisco Group Holdings Corp. ............ 156,340 3,058
Universal Foods Corp. ................... 111,820 2,362
--------
6,924
--------
HEALTHCARE SUPPLIES & SERVICES (7.2%)
Beckman Coulter, Inc. ................... 60,030 2,919
Columbia HCA/Healthcare Corp. ........... 63,770 1,455
(a) Foundation Health Systems 'A' ....... 78,000 1,170
(a) HEALTHSOUTH Corp. ................... 418,000 6,244
(a) LifePoint Hospitals, Inc. ........... 4,761 64
<CAPTION>
VALUE
SHARES (000)
-----------------------------------------------------------------------------
<S> <C> <C>
(a) Tenet Healthcare Corp. ........................ 155,400 $ 2,885
(a) Triad Hospitals, Inc. ......................... 4,761 64
United HealthCare Corp. ........................... 51,500 3,225
--------
18,026
--------
TELECOMMUNICATIONS (3.8%)
(a) AMR Corp. ..................................... 74,980 5,117
Bell Atlantic Corp. ............................... 66,700 4,361
--------
9,478
--------
TRANSPORTATION--AIRLINES (1.9%)
CNF Transportation, Inc. .......................... 30,800 1,182
Delta Airlines, Inc. .............................. 64,100 3,694
--------
4,876
--------
TRANSPORTATION--RAIL (0.5%)
Burlington Northern Railroad Co. .................. 40,300 1,249
--------
TRANSPORTATION--TRUCKING (0.6%)
Ryder Systems, Inc. ............................... 60,800 1,581
--------
TOTAL SERVICES ........................................ 44,742
--------
TOTAL LONG-TERM INVESTMENTS (99.5%) (COST $233,558) ... 250,892
--------
<CAPTION>
PAR
VALUE
(000)
-------
<S> <C> <C>
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT (3.3%)
Chase Securities, Inc., 4.55%, dated $8,469
6/30/99, due 7/1/99, to be repurchased at
$8,470, collaterized by $7,040 U.S. ...........
Treasury Bonds, 11.125%, due 8/15/03,
valued at $8,693 (COST $8,469) ................ 8,469
---------
TOTAL INVESTMENTS (102.8%) (COST $242,027) ............ 259,361
LIABILITIES IN EXCESS OF OTHER ASSETS (-2.8%) ......... (7,104)
---------
NET ASSETS (100%) ..................................... $ 252,257
=========
</TABLE>
----------
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-146
<PAGE> 362
VAN KAMPEN VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-----------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $242,027) .......................... $ 259,361
Receivable for:
Investments Sold ............................................ 1,619
Fund Shares Sold ............................................ 351
Dividends ................................................... 205
Interest .................................................... 1
Deferred Organizational Costs ................................. 4
Other Assets .................................................. 12
---------
Total Assets .............................................. 261,553
---------
LIABILITIES:
Payable for:
Investments Purchased ....................................... 7,881
Fund Shares Redeemed ........................................ 786
Distribution Fees ........................................... 303
Investment Advisory Fees .................................... 133
Administrative Fees ......................................... 52
Transfer Agent Fees ......................................... 41
Professional Fees ........................................... 34
Shareholder Reporting Expenses .............................. 29
Directors' Fees and Expenses ................................ 20
Custody Fees ................................................ 9
Other ......................................................... 8
---------
Total Liabilities ......................................... 9,296
---------
NET ASSETS ...................................................... $ 252,257
=========
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) .............................................. $ 23
Paid in Capital in Excess of Par .............................. 244,212
Unrealized Appreciation on Investments ........................ 17,334
Distributions in Excess of Net Investment Income .............. (1)
Accumulated Net Realized Loss ................................. (9,311)
---------
NET ASSETS .................................................... $ 252,257
=========
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $95,207,962 and 8,747,187 Shares
Outstanding) ................................................ $ 10.88
=========
Maximum Sales Charge .......................................... 5.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100 / (100 - maximum sales charge)) ................. $ 11.54
=========
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $127,977,872 and 11,807,261 Shares
Outstanding)* ............................................... $ 10.84
=========
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $29,071,184 and 2,683,913 Shares
Outstanding)* ............................................... $ 10.83
=========
</TABLE>
----------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-147
<PAGE> 363
VAN KAMPEN VALUE FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends ................................................ $ 4,804
Interest ................................................. 984
---------
Total Income ............................................ 5,788
---------
EXPENSES:
Investment Advisory Fees ................................. 2,131
Distribution Fees (Attributed to Classes A, B, and C of
$270, $1,279, and $306, respectively) .................. 1,855
Administrative Fees ...................................... 672
Transfer Agent Fees ...................................... 140
Shareholder Reports ...................................... 78
Professional Fees ........................................ 59
Filing and Registration Fees ............................. 56
Custodian Fees ........................................... 56
Directors' Fees and Expenses ............................. 15
Amortization of Organizational Costs ..................... 2
Other .................................................... 9
---------
Total Expenses .......................................... 5,073
Less Expense Reductions ................................. (43)
---------
Net Expenses ............................................ 5,030
---------
Net Investment Income/Loss ................................. 758
---------
NET REALIZED GAIN/LOSS ON:
Investments .............................................. (9,132)
---------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period .................................. 1,221
---------
End of the Period
Investments ............................................ 17,334
---------
Net Unrealized Appreciation/Depreciation During the
Period ................................................... 16,113
---------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ................................ 6,981
---------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................... $ 7,739
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-148
<PAGE> 364
VAN KAMPEN VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 7, 1997* TO
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss .................................... $ 758 $ 1,260
Net Realized Gain/Loss ........................................ (9,132) 5,893
Net Unrealized Appreciation /Depreciation ..................... 16,113 1,221
---------------- ----------------
Net Increase/Decrease in Net Assets Resulting from
Operations .................................................. 7,739 8,374
---------------- ----------------
DISTRIBUTIONS:
Net Investment Income:
Class A ....................................................... (601) (930)
Class B ....................................................... (91) (264)
Class C ....................................................... (23) (66)
In Excess of Net Investment Income:
Class A ....................................................... (1) (77)
Class B ....................................................... -- (22)
Class C ....................................................... -- (6)
---------------- ----------------
(716) (1,365)
---------------- ----------------
Net Realized Gain:
Class A ....................................................... -- (502)
Class B ....................................................... -- (431)
Class C ....................................................... -- (95)
In Excess of Net Realized Gain:
Class A ....................................................... (2,049) --
Class B ....................................................... (2,409) --
Class C ....................................................... (584) --
---------------- ----------------
(5,042) (1,028)
---------------- ----------------
Net Decrease in Net Assets Resulting from Distributions ....... (5,758) (2,393)
---------------- ----------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed .................................................... 63,721 354,369
Distributions Reinvested ...................................... 5,042 2,140
Redeemed ...................................................... (134,239) (49,738)
---------------- ----------------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions .......................................... (65,476) 306,771
---------------- ----------------
Total Increase/Decrease in Net Assets ......................... (63,495) 312,752
NET ASSETS--Beginning of Period ................................. 315,752 3,000
---------------- ----------------
NET ASSETS--End of Period (Including distributions in excess
of net investment income of $(1) and $(45),
respectively) ................................................. $ 252,257 $ 315,752
================ ================
---------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (000):
(1) Class A:
--------
Shares:
Subscribed (Initial Shares of 100) .......................... 2,585 16,264
Distributions Reinvested .................................... 259 136
Redeemed .................................................... (7,154) (3,343)
---------------- ----------------
Net Increase/Decrease in Class A Shares Outstanding ........... (4,310) 13,057
================ ================
Dollars:
Subscribed .................................................. $ 24,777 $ 167,353
Distributions Reinvested .................................... 2,427 1,393
Redeemed .................................................... (69,185) (35,499)
---------------- ----------------
Net Increase/Decrease ......................................... $ (41,981) $ 133,247
================ ================
Ending Paid in Capital ........................................ $ 92,241+ $ 134,222
================ ================
Class B:
--------
----------------
Shares:
Subscribed (Initial Shares of 100) .......................... 3,052 14,654
Distributions Reinvested .................................... 225 60
Redeemed .................................................... (5,046) (1,138)
---------------- ----------------
Net Increase/Decrease in Class B Shares Outstanding ........... (1,769) 13,576
================ ================
Dollars:
Subscribed .................................................. $ 29,487 $ 150,818
Distributions Reinvested .................................... 2,115 607
Redeemed .................................................... (48,333) (12,023)
---------------- ----------------
Net Increase/Decrease ......................................... $ (16,731) $ 139,402
================ ================
Ending Paid in Capital ........................................ $ 123,644+ $ 140,375
================ ================
Class C:
--------
----------------
Shares:
Subscribed (Initial Shares of 100) .......................... 988 3,584
Distributions Reinvested .................................... 53 14
Redeemed .................................................... (1,743) (212)
---------------- ----------------
Net Increase/Decrease in Class C Shares Outstanding ........... (702) 3,386
================ ================
Dollars:
Subscribed .................................................. $ 9,457 $ 36,198
Distributions Reinvested .................................... 500 140
Redeemed .................................................... (16,721) (2,216)
---------------- ----------------
Net Increase/Decrease ......................................... $ (6,764) $ 34,122
================ ================
Ending Paid in Capital ........................................ $ 28,352+ $ 35,116
================ ================
</TABLE>
----------
<TABLE>
<S> <C>
* Commencement of operations
+ Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-149
<PAGE> 365
VAN KAMPEN VALUE FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------- ----------------------------------
YEAR ENDED JULY 7, 1997* TO YEAR ENDED JULY 7, 1997* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1999# JUNE 30, 1998# JUNE 30, 1999# JUNE 30, 1998#
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................... $ 10.526 $ 10.00 $ 10.514 $ 10.00
-------------- ---------------- -------------- ----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ........... 0.072 0.11 (0.003) 0.03
Net Realized and Unrealized
Gain/Loss .......................... 0.512 0.56 0.509 0.56
-------------- ---------------- -------------- ----------------
Total From Investment
Operations ......................... 0.584 0.67 0.506 0.59
-------------- ---------------- -------------- ----------------
DISTRIBUTIONS
Net Investment Income ................ (0.052) (0.08) (0.007) (0.03)
In Excess of Net Investment
Income ............................. (0.000)+ (0.01) -- (0.00)+
Net Realized Gain .................... -- (0.05) -- (0.05)
In Excess of Net Realized Gain ....... (0.174) -- (0.174) --
-------------- ---------------- -------------- ----------------
Total Distributions .................. (0.226) (0.14) (0.181) (0.08)
-------------- ---------------- -------------- ----------------
NET ASSET VALUE, END OF PERIOD ......... $ 10.884 $ 10.53 $ 10.839 $ 10.51
============== ================ ============== ================
TOTAL RETURN (1) ....................... 5.83% 6.74%** 5.02% 6.01%**
============== ================ ============== ================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) .............................. $ 95,208 $ 137,447 $ 127,978 $ 142,741
Ratio of Expenses to Average Net
Assets ............................... 1.45% 1.45% 2.20% 2.20%
Ratio of Net Investment Income/Loss
to Average Net Assets ................ 0.74% 1.02% (0.03)% 0.28%
Portfolio Turnover Rate ................ 64% 38%** 64% 38%**
--------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ............. $ 0.00+ $ 0.01 $ 0.00+ $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets ....... 1.48% 1.60% 2.23% 2.35%
Net Investment Income/Loss to
Average Net Assets ................. 0.73% 0.88% (0.05)% 0.14%
<CAPTION>
CLASS C
--------------
YEAR ENDED
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1999#
--------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................... $ 10.503
--------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ........... (0.002)
Net Realized and Unrealized
Gain/Loss .......................... 0.512
--------------
Total From Investment
Operations ......................... 0.510
--------------
DISTRIBUTIONS
Net Investment Income ................ (0.007)
In Excess of Net Investment
Income ............................. --
Net Realized Gain .................... --
In Excess of Net Realized Gain ....... (0.174)
--------------
Total Distributions .................. (0.181)
--------------
NET ASSET VALUE, END OF PERIOD ......... $ 10.832
==============
TOTAL RETURN (1) ....................... 5.13%
==============
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) .............................. $ 29,071
Ratio of Expenses to Average Net
Assets ............................... 2.20%
Ratio of Net Investment Income/Loss
to Average Net Assets ................ (0.02)%
Portfolio Turnover Rate ................ 64%
--------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ............. $ 0.00+
Ratios Before Expense Limitation:
Expenses to Average Net Assets ....... 2.23%
Net Investment Income/Loss to
Average Net Assets ................. (0.03)%
<CAPTION>
CLASS C
----------------
JULY 7, 1997* TO
SELECTED PER SHARE DATA AND RATIOS JUNE 30, 1998#
----------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ............................... $ 10.00
----------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ........... 0.03
Net Realized and Unrealized
Gain/Loss .......................... 0.55
----------------
Total From Investment
Operations ......................... 0.58
----------------
DISTRIBUTIONS
Net Investment Income ................ (0.03)
In Excess of Net Investment
Income ............................. (0.00)+
Net Realized Gain .................... (0.05)
In Excess of Net Realized Gain ....... --
----------------
Total Distributions .................. (0.08)
----------------
NET ASSET VALUE, END OF PERIOD ......... $ 10.50
================
TOTAL RETURN (1) ....................... 5.83%**
================
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period
(000's) .............................. $ 35,564
Ratio of Expenses to Average Net
Assets ............................... 2.20%
Ratio of Net Investment Income/Loss
to Average Net Assets ................ 0.29%
Portfolio Turnover Rate ................ 38%**
----------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ............. $ 0.01
Ratios Before Expense Limitation:
Expenses to Average Net Assets ....... 2.35%
Net Investment Income/Loss to
Average Net Assets ................. 0.15%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Commencement of operations
** Non-Annualized
+ Amount is less than $0.01 per share.
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-150
<PAGE> 366
VAN KAMPEN VALUE FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Value Fund (the "Fund") is organized as a separate diversified
fund of Van Kampen Series Fund, Inc., a Maryland Corporation, which is
registered as an open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective seeks to
achieve above-average total return over a market cycle of three to five years,
consistent with reasonable risk. The Fund commenced operations on July 7, 1997.
The Fund currently offers three classes of shares, Class A, Class B, and
Class C shares. Class A shares are sold with a front-end sales charge of up to
5.75%. For certain purchases of Class A shares, the front-end sales charge may
be waived and a contingent deferred sales charge of 1.00% imposed in the event
of certain redemptions within one year of the purchase. Class B and Class C
shares are offered without a front end sales charge, but are subject to a
contingent deferred sales charge ("CDSC"). Class B shares will automatically
convert to Class A shares after the eighth year following purchase. The CDSC
will be imposed on most redemptions made within five years of the purchase for
Class B shares and one year of the purchase for Class C shares as detailed in
the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
-----------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First..................................... 5.00% 1.00%
Second.................................... 4.00% None
Third..................................... 3.00% None
Fourth.................................... 2.50% None
Fifth..................................... 1.50% None
Thereafter................................ None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Debt securities purchased with remaining maturities of 60 days or less
are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements which are short-term investments 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. Repurchase
agreements are fully collateralized by the underlying debt securities. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date.
Interest income is recognized on an accrual basis except where collection is in
doubt. Income, expenses (other than class specific expenses), and realized and
unrealized gains or losses are allocated to each class of shares based upon
their relative net assets. Distributions from the Fund are recorded on the
ex-distribution date.
4. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Fund's commencement of operations. The Adviser has agreed that in the event
any of its initial shares of the Fund originally purchased by Van Kampen are
redeemed by the Fund during the amortization period, the Fund will be reimbursed
for any unamortized organization costs in the same proportion as the number of
shares redeemed bears to the number of initial shares held at the time of
redemption.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
At June 30, 1999, the Fund had a capital loss carryforward for U.S. Federal
Income tax purposes of approximately $4,433,000 which will expire June 30, 2007.
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by the Fund for
F-151
<PAGE> 367
VAN KAMPEN VALUE FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
gains realized and not distributed. To the extent that capital gains are so
offset, such gains will not be distributed to shareholders.
Net capital losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 to June 30, 1999 the Fund incurred and elected
to defer until July 1, 1999, for U.S. Federal income tax purposes, net capital
losses of approximately $1,606,000.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
--------------------- -------- --------- -------------
<S> <C> <C> <C>
$245,340 $30,340 $(16,319) $14,021
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital. For the year ended
June 30, 1999, approximately $2,000 has been reclassified from paid in capital
and posted to accumulated net investment income/loss.
Permanent book to tax basis differences are not included in ending
undistributed/ distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.), Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser") and Miller Anderson & Sherrerd LLP, wholly
owned subsidiaries of Morgan Stanley Dean Witter & Co., provide the Fund with
investment advisory services at a fee paid monthly and calculated at the annual
rates based on average daily net assets as indicated below. The Adviser has
agreed to reduce advisory fees payable to it and to reimburse the Fund, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
--------------------- -------------- --------------
<S> <C> <C>
0.80% 1.45% 2.20%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$15,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $470,484 for Class A shares and deferred sales charges of $9,521,
$835,926, and $22,202 for Class A shares, Class B shares, and Class C shares,
respectively.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $158,329,000 and sales of approximately $186,083,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
F-152
<PAGE> 368
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
To the Board of Directors and Shareholders of Van Kampen Series Fund, Inc.--
Van Kampen Worldwide High Income Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Van Kampen Worldwide High Income
Fund (the "Fund", a fund of Van Kampen Series Fund, Inc.) at June 30, 1999, the
results of its operations, the changes in its net assets and the financial
highlights for each of the 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 June 30, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Dr.
Chicago, Illinois 60601
August 6, 1999
F-153
<PAGE> 369
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE VALUE
(000) (000)
-------------------------------------------------------------------------
<S> <C> <C>
CORPORATES BONDS & NOTES (51.6%)
ARGENTINA (3.3%)
$ (b)1,100 Cablevision S.A. 13.75%, 5/1/09 .............. $ 1,004
ARP (b)6,292 CIA International Telecommunications,
10.375%, 8/1/04 ............................ 4,940
--------
$ (b)945 Multicanal S.A. 13.125%, 4/15/09 ............. 877
6,821
--------
AUSTRALIA (0.7%)
895 Glencore Nickel Property Ltd. 9.00%,
12/1/14 .................................... 770
745 Murrin Murrin Holdings 9.375%,
8/31/07 .................................... 655
--------
1,425
--------
BRAZIL (1.8%)
(b,c)4,500 Banco Nacional Deseny Econ 13.64%,
6/16/08 .................................... 3,780
--------
CANADA (1.6%)
(c)575 Husky Oil Ltd. 8.90%, 8/15/28 ................ 553
400 Rogers Cablesystems Ltd. 10.125%,
9/1/12 ..................................... 432
865 Rogers Cablesystems Ltd., Series B,
10.00%, 3/15/05 ............................ 932
605 Rogers Cantel, Inc. 8.30%, 10/1/07 ........... 597
250 Rogers Communications, Inc. 9.125%,
1/15/06 .................................... 254
100 Rogers Communications, Inc. 8.875%,
7/15/07 Senior Notes ....................... 101
315 Tembec Industries, Inc. 8.625%,
6/30/09 .................................... 313
--------
3,182
--------
CHILE (0.8%)
(b)1,650 Embotelladora Arica S.A. 9.875%,
3/15/06 .................................... 1,681
--------
COLOMBIA (0.7%)
(d)2,000 Occidente Y Caribe 0.00%, 3/15/04 ............ 1,320
--------
INDIA (0.2%)
(b)400 Reliance Industries, Inc. 10.50%,
8/6/46 ..................................... 342
--------
INDONESIA (0.7%)
300 Indah Kiat International, Series B,
11.875%, 6/15/02 ........................... 249
1,500 Tjiwi Kimia International B.V. 13.25%,
8/1/01 ..................................... 1,290
--------
1,539
--------
KOREA (0.4%)
(b)785 Samsung Electronics Co. 7.45%,
10/1/02 .................................... 761
--------
LUXEMBOURG (0.2%)
EUR (b)486 Sirona Dental Systems 9.125%,
7/15/08 .................................... 461
--------
MEXICO (4.2%)
$ (c)2,650 Petroleos Mexicanos 9.369%, 7/15/05 .......... 2,481
(b)2,850 Petroleos Mexicanos 9.50%, 9/15/27 ........... 2,736
4,200 TV Azteca S.A. 10.125%, 2/15/04 .............. 3,423
--------
8,640
--------
NETHERLANDS (1.4%)
975 Hermes Europe Railtel BV 11.50%,
8/15/07 Senior Notes ....................... 1,024
EUR 299 Impress Metal 9.875%, 5/29/07 ................ 342
<CAPTION>
PAR
VALUE
(000)
-------------------------------------------------------------------------
<S> <C> <C>
$ (d)730 PTC International Finance BV 0.00%,
7/1/07 ..................................... $ 539
EUR 875 Tele 1 Europe B.V. 13.00%, 5/15/09 ........... 936
--------
2,841
--------
PHILIPPINES (0.5%)
$ 1,300 Philippine Long Distance Telephone Co.
7.85%, 3/6/07 .............................. 1,111
--------
POLAND (1.5%)
(a,b,d)1,630 @Entertainment 0.00%, 2/1/09 ................. 1,092
EUR 1,900 Netia Holdings 13.50%, 6/15/09 ............... 2,021
--------
3,113
--------
QUATAR (0.3%)
$ (b)725 Ras Laffan Liquid National Gas 8.294%,
3/15/14 .................................... 665
--------
TURKEY (1.2%)
2,440 Cellco Finance 15.00%, 8/1/05 ................ 2,526
--------
UNITED KINGDOM (2.2%)
EUR 964 Colt Telecom Group plc 7.625%,
7/31/08 .................................... 993
(d)940 Dolphin Telecommunications plc 0.00%,
6/1/08 ..................................... 480
$ (b,d)500 Dolphin Telecommunications plc 0.00%,
5/15/09 .................................... 241
EUR 665 Esprit Telecommunication Group plc
11.00%, 6/15/08 ............................ 734
$ 620 HMV Media Group, Inc. 10.875%,
5/15/08 .................................... 1,014
EUR (d)1,611 RSL Communications plc 0.00%,
6/15/08 .................................... 1,025
--------
4,487
--------
UNITED STATES (29.9%)
$ 205 Adelphia Communications, Series B,
7.50%, 1/15/04 ............................. 196
800 Adelphia Communications, Series B,
9.875%, 3/1/07 ............................. 834
600 Adelphia Communications, Series B,
8.375%, 2/1/08 ............................. 577
1,125 AES Corp. 8.50%, 11/1/07 ..................... 1,059
725 American Cellular Corp. 10.50%,
5/15/08 .................................... 743
500 American Communications Lines LLC, 'B',
10.25%, 6/30/08 ............................ 501
EUR 1,150 American Standard Cos., Inc. 7.125%,
6/1/06 ..................................... 1,195
$ 885 AMSC Acquisition Co., Inc., Series B,
12.25%, 4/1/08 ............................. 677
405 Axia, Inc. 10.75%, 7/15/08 ................... 400
(b)932 CA FM Lease Trust 8.50%, 7/15/17 ............. 866
(b)535 Centennial Cellular Holdings 10.75%,
12/15/08 ................................... 552
600 CEX Holdings, Inc., Series B, 9.625%,
6/1/08 ..................................... 564
350 Chancellor Media Corp. 9.00%,
10/1/08 .................................... 355
1,365 Chancellor Media Corp., 'B', 8.125%,
12/15/07 ................................... 1,324
850 CMS Energy 7.50%, 1/15/09 .................... 796
85 Columbia/HCA Healthcare, 8.13%, 8/4/03
MTN ........................................ 84
425 Columbia/HCA Healthcare, 6.91%,
6/15/05 .................................... 393
1,325 Columbia/HCA Healthcare, 8.85%, 1/1/07
MTN ........................................ 1,333
2,500 Columbia/HCA Healthcare, 7.69%,
6/15/25 .................................... 2,070
(d)1,025 Dial Call Communications, Series B,
10.25%, 12/15/05 ........................... 1,045
660 Dobson Communications Corp. 11.75%,
4/15/07 .................................... 693
970 D.R. Horton, Inc. 8.00%, 2/1/09 .............. 912
762 DR Securitized Lease Trust,
Series 1993-K1, Class A1, 6.66%,
8/15/10 .................................... 709
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-154
<PAGE> 370
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE
(000)
-----------------------------------------------------------------------
<C> <S> <C>
$ 891 DR Securitized Lease Trust,
Series 1994-K1, Class A1, 7.60%,
8/15/07 ................................. $ 874
250 DR Securitized Lease Trust,
Series 1994-K1, Class A2, 8.375%,
8/15/15 ................................. 247
150 DR Structured Finance, Series 1994-K2,
CMO, 9.35%, 8/15/19 ..................... 151
(b)1,050 Echostar DBS Corp. 9.375%, 2/1/09 ......... 1,067
(b)300 EES Coke Battery Co., Inc. 9.382%,
4/15/07 ................................. 294
165 Entex Information Services 12.50%,
8/1/06 .................................. 99
900 Fresenius Medical Capital Trust II
7.875%, 2/1/08 .......................... 846
(b,d)500 Fuji JGB Investments LLC, Series A,
9.87%, 12/31/49 ......................... 438
730 Global Crossing Holdings, Ltd. 9.625%,
5/15/08 ................................. 770
770 Globalstar LP/Capital 11.375%,
2/15/04 ................................. 508
125 Globalstar LP/Capital 11.50%, 6/1/05 ...... 80
1,020 Harrahs Operating Co., Inc. 7.875%,
12/15/05 ................................ 989
930 Hilton Hotels 7.95%, 4/15/07 .............. 941
1,355 HMH Properties, Inc. Series A 7.875%,
8/1/05 .................................. 1,280
(b)1,060 Horseshoe Gaming Holdings 8.652%,
5/15/09 ................................. 1,026
950 Host Marriott Travel Plaza, Series B,
9.50%, 5/15/05 .......................... 976
(b)1,175 Huntsman ICI Chemicals 10.125%,
7/1/09 .................................. 1,179
EUR (b)1,150 Huntsman ICI Chemicals 10.125%,
7/1/09 .................................. 1,192
$ (d)845 Hyperiom Telecommunications, 0.00%,
4/15/03 ................................. 698
(d)2,765 Intermedia Communications, Series B,
0.00%, 7/15/07 .......................... 1,974
815 Iridium LLC/Capital Corp., Series A
13.00%, 7/15/05 ......................... 163
(b)300 Jet Equipment Trust, Series C-1,
11.79%, 6/15/13 ......................... 372
(b)300 Jet Equipment Trust, Series 1995-D,
11.44%, 11/1/14 ......................... 369
500 Kmart Funding Corp. 8.80%, 7/1/10 ......... 512
500 Mosaic RE Ltd., Class A, 9.60%,
7/9/99 .................................. 500
500 Musicland Group, Inc. 9.00%, 6/15/03 ...... 485
950 Musicland Group, Inc. 9.875%,
3/15/08 ................................. 931
490 National Steel Corp., Series D, 9.875%,
3/1/09 .................................. 497
(d,e)315 Nextel Communications, Inc. 9.75%,
8/15/04 ................................. 320
(d)2,575 Nextel Communications, Inc. 0.00%,
9/15/07 ................................. 1,880
(d)1,760 NEXTLINK Communications, Inc. 0.00%,
4/15/08 ................................. 1,052
(d)990 Norcal Waste Systems 13.50%,
11/15/05 ................................ 1,094
(b,d)1,100 Nortek, Inc. 8.875%, 8/1/08 ............... 1,083
(b,f)525 NSM Steel Ltd., 12.25%, 2/1/08 ............ 1
GBP (d)1800 NTL, Inc. 0.00%, 4/1/08 ................... 1,920
$ (b)188 Oil Purchase Co. 7.10%, 4/30/02 ........... 179
(b)735 OnePoint Communications Corp., 14.50%,
6/1/08 .................................. 399
1,020 Outdoor Systems, Inc., 8.875%,
6/15/07 ................................. 1,065
(b)500 Pacifica Papers, Inc. 10.00%,
3/15/09 ................................. 515
970 Park Place Entertainment 7.875%,
12/15/05 ................................ 921
700 Primus Telecommunications Group,
Series B, 9.875%, 5/15/08 ............... 664
(b)330 Primus Telecommunications Group,
11.25%, 1/15/09 ......................... 335
515 PSINet, Inc., Series B, 10.00%,
2/15/05 ................................. 512
(d)1325 RCN Corp. 0.00%, 10/15/07 ................. 888
(d)910 Rhythms Netconnections, Inc.,
Series B, 0.00%, 5/15/08 ................ 480
35 RSL Communications Ltd. 12.25%,
11/15/06 ................................ 37
(b)740 RSL Communications Ltd. 9.125%,
3/1/08 .................................. 679
<CAPTION>
PAR
VALUE
(000)
-----------------------------------------------------------------------
<C> <S> <C>
$ (b)1,215 Samsung Electronics Co. 9.75%,
5/1/03 .................................. $ 1,262
(b,d)425 SB Treasury Co. LLC 9.40%, 12/29/49 ....... 413
800 SD Warren Co., Series B, 12.00%,
12/15/04 ................................ 852
805 Smithfield Foods, Inc. 7.625%,
2/15/08 ................................. 733
1,125 Snyder Oil Corp. 8.75%, 6/15/07 ........... 1,108
960 Station Casinos, Inc. 10.125%,
3/15/06 ................................. 990
985 Station Casinos, Inc. 9.75%, 4/15/07 ...... 1,005
(b)500 Tenet Healthcare Corp. 8.125%,
12/1/08 ................................. 472
1,480 Tenet Healthcare Corp. 8.625%,
1/15/07 ................................. 1,447
(d)1,900 Viatel, Inc., Series A, 0.00%,
4/15/08 ................................. 1,221
450 Vintage Petroleum 8.625%, 2/1/09 .......... 430
(d)750 Wam!Net, Inc. 0.00%, 3/1/05 ............... 443
---------
61,736
---------
TOTAL CORPORATES BONDS & NOTES .............................. 106,431
---------
ASSET BACKED SECURITIES (0.7%)
UNITED STATES (0.7%)
858 Commercial Financial Services, Inc.,
Series 1997-5, Class A1, 7.72%,
6/15/05 ................................. 214
270 Long Beach Acceptance Auto Grantor
Trust 1997-1, Class B, 14.22%,
10/26/03 ................................ 268
922 OHA Grantor Trust, 11.00%, 9/15/03 ........ 918
---------
TOTAL ASSET BACKED SECURITIES ............................... 1,400
---------
COLLATERALIZED MORTGAGE OBLIGATIONS (0.9%)
UNITED STATES (0.9%)
629 Aircraft Lease Portfolio Securitization
Ltd., Series 1996-1, Class DX,
12.75%, 6/15/06 ......................... 629
(b,c)36,368 DLJ Mortgage Acceptance Corp.,
Series 1997-CF2, Class S, IO, 0.36%,
10/15/30 ................................ 777
(b)535 Federal Mortgage Acceptance Corp.,
Series 1996-B, Class C, 7.883%,
11/15/18 ................................ 407
---------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS ................... 1,813
---------
EUROBONDS (1.8%)
ARGENTINA (1.8%)
(c)4,269 Republic of Argentina, Series L,
5.938%, 3/31/05 ......................... 3,650
---------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS (37.3%)
ARGENTINA (6.9%)
2,920 Bonos del Tesoro, Series BT02, 8.75%,
5/9/02 .................................. 2,673
4,000 Republic of Argentina 12.125%,
2/15/19 ................................. 3,640
8,690 Republic of Argentina 11.75%, 4/7/09 ...... 7,864
---------
14,177
---------
BRAZIL (9.4%)
3,319 Federated Republic of Brazil, 'C' PIK,
8.00%, 4/15/14 .......................... 2,165
(c)2,080 Federated Republic of Brazil Debt
Conversion Bond, Series Z-L, 5.938%,
4/15/12 ................................. 1,292
(c)6,289 Federative Republic of Brazil,
Series EI-L, 5.875%, 4/15/06 ............ 4,968
(c)2,400 Federated Republic of Brazil,
Series NMB-L 5.938%, 4/15/09 ............ 1,686
9,800 Federated Republic of Brazil 11.625%,
4/15/04 ................................. 9,249
---------
19,360
---------
BULGARIA (2.5%)
(d)8,580 Bulgaria Front Loaded Interest
Reduction Bond 2.50%, 7/28/12 ........... 5,239
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-155
<PAGE> 371
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
PAR
VALUE
(000)
-----------------------------------------------------------------------
<S> <C> <C>
CHILE (0.8%)
$ 1,725 ENDESA 7.75%, 7/15/08 .................... $ 1,615
---------
COLOMBIA (2.6%)
600 Republic of Colombia, Global Bond
10.875%, 3/9/04 ........................ 576
(c)1,460 Republic of Colombia, 9.705%,
8/13/05 ................................ 1,266
4,250 Republic of Colombia, 9.75%, 4/23/09 ..... 3,512
---------
5,354
---------
ECUADOR (0.3%)
(c)1,230 Republic of Ecuador Discount Bond
6.00%, 2/28/25 ......................... 576
---------
JAMAICA (0.1%)
(b)300 Government of Jamaica 10.875%,
6/10/05 ................................ 279
---------
JORDAN (0.4%)
(c)496 Government of Jordan 6.188%,
12/23/23 ............................... 312
(b,c)828 Government of Jordan 6.188%,
12/23/23 ............................... 522
---------
834
---------
MEXICO (7.9%)
12,100 United Mexican States 10.375%,
2/17/09 ................................ 12,297
3,780 United Mexican States 11.375%, 9/15/16
Global Bond ............................ 4,065
---------
16,362
---------
NIGERIA (0.4%)
(d)2,100 Government of Nigeria Promissory Notes
5.092%, 1/5/10 ......................... 839
---------
PANAMA (1.4%)
1,950 Republic of Panama, 9.375%, 4/1/29 ....... 1,862
(d)1,305 Republic of Panama Past Due Interest,
PIK 4.00%, 7/17/16 ..................... 965
---------
2,827
---------
PERU (1.4%)
(b,d)3,950 Republic of Peru Front Loaded Interest
Reduction Bond 3.75%, 3/7/17 ........... 2,188
(d)1,140 Republic of Peru Front Loaded Interest
Reduction Bond 3.75%, 3/7/17 ........... 631
---------
2,819
---------
RUSSIA (2.0%)
(b)8,370 Government of Russia 11.00%, 7/24/18 ..... 4,206
---------
VENEZUELA (1.2%)
(c)3,238 Republic of Venezuela Discount Bond,
Series L, 6.313%, 12/18/07 ............. 2,511
---------
TOTAL FOREIGN GOVERNMENT & AGENCY OBLIGATIONS .............. 76,998
---------
LOAN AGREEMENTS (1.6%)
INDONESIA (0.4%)
(c)300 Republic of Indonesia Syndicated Loan
8.125%, 8/25/00 ........................ 280
(c)500 Republic of Indonesia Syndicated Loan
8.375%, 8/25/01 ........................ 440
(c)100 Republic of Indonesia Syndicated Loan
8.625%, 8/25/02 ........................ 86
---------
806
---------
<CAPTION>
PAR
VALUE
(000)
-----------------------------------------------------------------------
<S> <C> <C>
MOROCCO (1.2%)
$ (c)3,080 Kingdom of Morocco, Series A, 5.906%,
1/1/09 ................................. $ 2,487
---------
TOTAL LOAN AGREEMENTS ...................................... 3,293
---------
<CAPTION>
SHARES
------
PREFERRED STOCKS (0.9%)
<S> <C> <C>
UNITED STATES (0.9%)
(a)6,275 Concentric Network Corp. 13.50% .......... 593
(a)679 IXC Communications, Inc., PIK 12.50% ..... 655
6,931 Paxson Communications 13.25% ............. 624
---------
TOTAL PREFERRED STOCKS ..................................... 1,872
---------
<CAPTION>
NO. OF
WARRANTS
--------
<S> <C> <C>
WARRANTS (0.4%)
ARGENTINA (0.0%)
(a)4,750 Republic of Argentina, expiring
2/25/00 ................................ 5
---------
COLOMBIA (0.1%)
(a,b)80,000 Occidente Y Caribe, expiring 3/15/04 ..... 135
---------
POLAND (0.0%)
(a,b)6,520 @Entertainment, expiring 2/1/09 .......... --
---------
UNITED STATES (0.3%)
(a,b)8,850 American Mobile Satellite Corp.,
expiring 4/1/08 ........................ 32
(a,b)3,323,743 NSM Steel, Inc., expiring 2/1/08 ......... 4
(a,b)7,350 OnePoint Communications Corp., expiring
6/1/08 ................................. 1
(a,b)38,200 Rhythms Netconnections, Inc. expiring
5/15/08 ................................ 550
(a,b)22,500 Wam!Net, Inc., expiring 3/1/05 ........... 51
---------
638
---------
TOTAL WARRANTS ............................................. 778
---------
TOTAL LONG-TERM INVESTMENTS (95.2%) (COST $199,335) ........ 196,235
---------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE
(000)
-------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (2.6%)
TREASURY BILLS (1.3%)
TRL(b)1,146,669,000 Republic of Turkey, Series 14T,
0.00%, 2/9/00 ..................... 1,703
510,772,000 Republic of Turkey, Series 6B,
0.00%, 9/15/99 .................... 1,032
---------
2,735
---------
REPURCHASE AGREEMENT (1.3%)
$ 2,598 Chase Securities, Inc., 4.55%,
dated 6/30/99, due 7/1/99, to
be repurchased at $2,598,
collateralized by $2,415 U.S.
Treasury Bonds, 7.250%
due 5/15/16, valued at
$2,684 ............................ 2,598
---------
TOTAL SHORT-TERM INVESTMENTS (2.6%) (COST $5,663) .......... 5,333
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-156
<PAGE> 372
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
VALUE
(000)
-----------------------------------------------------------------------
<S> <C> <C>
TOTAL INVESTMENTS (COST $204,998) (97.8%) ................... $201,568
OTHER ASSETS IN EXCESS OF LIABILITIES (2.2%) ................ 4,567
--------
NET ASSETS (100%) ........................................... $206,135
========
</TABLE>
<TABLE>
<S> <C> <C>
(a) -- Non-income producing security
(b) -- 144A Security--Certain conditions for public sale may exist.
(c) -- Variable/floating rate security--rate disclosed is as of
June 30, 1999.
(d) -- Step Bond--coupon rate increases in increments to maturity.
Rate disclosed is as of June 30, 1999. Maturity date disclosed
is the ultimate maturity date.
(e) -- Security out on collateral for outstanding futures contracts.
(f) -- Bond is in default.
ARP -- Argentine Peso
CMO -- Collaterized Mortgage Obligation
EUR -- Euro
GBP -- British Pound
IO -- Interest Only
PIK -- Payment-In-Kind. Income may be received in additional securities
or cash at the discretion of the issuer.
MTN -- Medium Term Note
TRL -- Turkish Lira
</TABLE>
------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<TABLE>
<CAPTION>
VALUE PERCENT OF
INDUSTRY (000) NET ASSETS
-------- ----- ----------
<S> <C> <C>
Foreign Government & Agency
Obligations ....................... $ 76,998 37.4%
Telecommunications ................ 30,924 15.0
Services .......................... 18,115 8.8
Broadcast--Radio & Television ..... 15,637 7.6
Multi-Industry .................... 15,112 7.3
Finance ........................... 10,797 5.2
Materials ......................... 5,243 2.5
Technology ........................ 4,926 2.4
Eurobonds ......................... 3,650 1.8
Utilities ......................... 3,584 1.7
Loan Agreements ................... 3,293 1.6
Collateralized Mortgage
Obligations & Asset Backed
Securities ........................ 3,213 1.6
Consumer Goods .................... 2,807 1.4
Transportation .................... 1,024 0.5
Capital Goods ..................... 912 0.4
---------- ----------
$ 196,235 95.2%
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-157
<PAGE> 373
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at Value (Cost $204,998) ........................ $ 201,568
Margin Deposit on Futures ................................... 199
Receivable for:
Interest .................................................. 4,781
Investments Sold .......................................... 2,710
Fund Shares Sold .......................................... 328
Variation of Futures Contracts ............................ 33
Foreign Withholding Tax Reclaim ........................... 19
Net Unrealized Gain on Foreign Currency Exchange
Contracts ................................................. 271
Other ....................................................... 9
------------
Total Assets .............................................. 209,918
------------
LIABILITIES:
Payable for:
Dividends Declared ........................................ 1,798
Bank Overdraft ............................................ 602
Investments Purchased ..................................... 496
Fund Shares Redeemed ...................................... 293
Distribution Fees ......................................... 284
Investment Advisory Fees .................................. 127
Administrative Fees ....................................... 43
Professional Fees ......................................... 42
Transfer Agent Fees ....................................... 35
Shareholder Reporting Expenses ............................ 23
Custody Fees .............................................. 22
Directors' Fees and Expenses .............................. 16
Other ....................................................... 2
------------
Total Liabilities ......................................... 3,783
------------
NET ASSETS .................................................... $ 206,135
============
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized
2,625,000,000) $ 21
Paid in Capital in Excess of Par ............................ 283,951
Accumulated Net Investment Income ........................... 357
Net Unrealized Depreciation on Investments, Foreign
Currency Translations and Futures ......................... (3,140)
Accumulated Net Realized Loss ............................... (75,054)
------------
NET ASSETS .................................................... $ 206,135
============
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on
Net Assets of $58,506,414 and 5,907,569 Shares
Outstanding) .............................................. $ 9.90
============
Maximum Sales Charge ........................................ 4.75%
Maximum Offering Price Per Share (Net Asset Value Per
Share X 100/ (100 - maximum sales charge)) ................ $ 10.39
============
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $107,012,758 and 10,849,654 Shares
Outstanding)* ............................................. $ 9.86
============
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net
Assets of $40,616,194 and 4,116,484 Shares
Outstanding)* ............................................. $ 9.87
============
</TABLE>
---------
<TABLE>
<S> <C>
* Redemption price may be subject to a contingent deferred
sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-158
<PAGE> 374
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
STATEMENT OF OPERATIONS
--------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(000)
-------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest ................................................. $ 27,856
------------
EXPENSES:
Distribution Fees (Attributed to Classes A, B, and C of
$173, $1,158, and $468, respectively) .................. 1,799
Investment Advisory Fees ................................. 1,743
Administrative Fees ...................................... 585
Shareholder Reports ...................................... 106
Custodian Fees ........................................... 124
Transfer Agent Fees ...................................... 108
Professional Fees ........................................ 66
Filing and Registration Fees ............................. 44
Directors' Fees and Expenses ............................. 12
Other .................................................... 17
------------
Total Expenses ......................................... 4,604
------------
Net Investment Income/Loss ................................. 23,252
------------
NET REALIZED GAIN/LOSS ON:
Investments .............................................. (75,324)
Foreign Currency Transactions ............................ (393)
Futures .................................................. 5
------------
Net Realized Gain/Loss ................................. (75,712)
------------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period .................................. (14,693)
------------
End of the Period:
Investments ............................................ (3,430)
Foreign Currency Translations .......................... 257
Futures ................................................ 33
------------
(3,140)
------------
Net Unrealized Appreciation/Depreciation During the
Period ................................................... 11,553
------------
Net Realized Gain/Loss and Net Unrealized
Appreciation/Depreciation ................................ (64,159)
------------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS ............................................... $ (40,907)
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-159
<PAGE> 375
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
(000) (000)
----------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss ............................... $ 23,252 $ 19,591
Net Realized Gain/Loss ................................... (75,712) 12,018
Net Unrealized Appreciation/Depreciation ................. 11,553 (28,435)
------------ ------------
Net Increase/Decrease in Net Assets Resulting from
Operations ............................................. (40,907) 3,174
------------ ------------
DISTRIBUTIONS:
Net Investment Income:
Class A .................................................. (7,573) (6,930)
Class B .................................................. (11,681) (8,313)
Class C .................................................. (4,723) (3,852)
------------ ------------
(23,977) (19,095)
Net Realized Gain:
Class A .................................................. -- (6,907)
Class B .................................................. -- (8,787)
Class C .................................................. -- (4,230)
In Excess of Net Realized Gain:
Class A .................................................. (42) --
Class B .................................................. (70) --
Class C .................................................. (29) --
------------ ------------
(141) (19,924)
------------ ------------
Net Decrease in Net Assets Resulting from Distributions .. (24,118) (39,019)
------------ ------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed ............................................... 83,177 226,529
Distributions Reinvested ................................. 13,759 25,615
Redeemed ................................................. (123,953) (114,610)
------------ ------------
Net Increase/Decrease in Net Assets Resulting from Capital
Share Transactions ..................................... (27,017) 137,534
------------ ------------
Total Increase/Decrease in Net Assets .................... (92,042) 101,689
NET ASSETS--Beginning of Period ............................ 298,177 196,488
------------ ------------
NET ASSETS--End of Period (Including accumulated net
investment income of $357 and $781, respectively) ........ $ 206,135 $ 298,177
============ ============
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
Shares:
Subscribed ............................................ 3,413 6,811
Distributions Reinvested .............................. 486 743
Redeemed .............................................. (5,339) (5,569)
------------ ------------
Net Increase/Decrease in Class A Shares Outstanding ..... (1,440) 1,985
============ ============
Dollars:
Subscribed ............................................ $ 36,170 $ 93,959
Distributions Reinvested .............................. 4,873 9,850
Redeemed .............................................. (53,258) (77,161)
------------ ------------
Net Increase/Decrease ................................... $ (12,215) $ 26,648
============ ============
Ending Paid in Capital .................................. $ 80,677+ $ 92,892
============ ============
Class B:
Shares:
Subscribed ............................................ 3,007 7,464
Distributions Reinvested .............................. 619 770
Redeemed .............................................. (4,586) (1,939)
------------ ------------
Net Increase/Decrease in Class B Shares Outstanding ..... (960) 6,295
============ ============
Dollars:
Subscribed ............................................ $ 31,134 $ 101,066
Distributions Reinvested .............................. 6,179 10,086
Redeemed .............................................. (45,561) (26,325)
------------ ------------
Net Increase/Decrease ................................... $ (8,248) $ 84,827
============ ============
Ending Paid in Capital .................................. $ 147,844+ $ 156,092
============ ============
Class C:
Shares:
Subscribed ............................................ 1,545 2,312
Distributions Reinvested .............................. 270 432
Redeemed .............................................. (2,552) (825)
------------ ------------
Net Increase/Decrease in Class C Shares Outstanding ..... (737) 1,919
============ ============
Dollars:
Subscribed ............................................ $ 15,873 $ 31,504
Distributions Reinvested .............................. 2,707 5,679
Redeemed .............................................. (25,134) (11,124)
------------ ------------
Net Increase/Decrease ................................... $ (6,554) $ 26,059
============ ============
Ending Paid in Capital .................................. $ 55,455+ $ 62,009
============ ============
</TABLE>
<TABLE>
<S> <C>
+ Ending Paid in Capital amounts do not reflect permanent book
to tax differences.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-160
<PAGE> 376
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
--------------------------------------------------------- ---------------------------------
YEAR ENDED JUNE 30, YEAR ENDED JUNE 30,
--------------------------------------------------------- ---------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995 1999# 1998# 1997
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD .......................... $ 12.464 $ 14.26 $ 12.47 $ 11.57 $ 12.17 $ 12.396 $ 14.20 $ 12.44
--------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ...... 1.062 1.15 1.25 1.36 1.26 0.982 1.04 1.07
Net Realized and Unrealized
Gain/Loss ..................... (2.516) (0.67) 2.30 0.80 (0.52) (2.497) (0.65) 2.35
--------- --------- --------- --------- --------- --------- --------- ---------
Total From Investment
Operations .................... (1.454) 0.48 3.55 2.16 0.74 (1.515) 0.39 3.42
--------- --------- --------- --------- --------- --------- --------- ---------
DISTRIBUTIONS
Net Investment Income ........... (1.100) (1.09) (1.25) (1.26) (1.22) (1.012) (1.00) (1.15)
Net Realized Gain ............... -- (1.19) (0.51) -- (0.12) -- (1.19) (0.51)
In Excess of Net Realized
Gain .......................... (0.006) -- -- -- -- (0.006) -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total Distributions ............. (1.106) (2.28) (1.76) (1.26) (1.34) (1.018) (2.19) (1.66)
--------- --------- --------- --------- --------- --------- --------- ---------
NET ASSET VALUE, END OF PERIOD .... $ 9.904 $ 12.46 $ 14.26 $ 12.47 $ 11.57 $ 9.863 $ 12.40 $ 14.20
========= ========= ========= ========= ========= ========= ========= =========
TOTAL RETURN (1) .................. (11.14)% 3.40% 30.29% 19.61% 6.87% (11.82)% 2.63% 29.14%
========= ========= ========= ========= ========= ========= ========= =========
RATIOS AND SUPPLEMENTAL DATA
Net assets, End of Period
(000's) ......................... $ 58,506 $ 91,579 $ 76,439 $ 41,493 $ 14,819 $ 107,013 $ 146,401 $ 78,340
Ratio of Expenses to Average Net
Assets .......................... 1.45% 1.45% 1.52% 1.55% 1.55% 2.20% 2.20% 2.27%
Ratio of Net Investment
Income/Loss to Average Net
Assets .......................... 10.55% 8.36% 9.73% 11.95% 11.53% 9.81% 7.64% 8.86%
Portfolio Turnover Rate ........... 121% 156% 157% 220% 178% 121% 156% 157%
---------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ........ $ -- $ -- $ -- $ 0.02 $ 0.05 $ -- $ -- $ --
Ratios Before Expense Limitation:
Expenses to Average Net
Assets ........................ -- -- -- 1.69% 1.97% -- -- --
Net Investment Income/Loss to
Average Net Assets ............ -- -- -- 11.81% 11.11% -- -- --
---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
----------------
AUGUST 1, 1995+
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1996
------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD ........................ $ 11.63
------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .... 1.18
Net Realized and Unrealized
Gain/Loss ................... 0.72
------------
Total From Investment
Operations .................. 1.90
------------
DISTRIBUTIONS
Net Investment Income ......... (1.09)
Net Realized Gain ............. --
In Excess of Net Realized
Gain ........................ --
------------
Total Distributions ........... (1.09)
------------
NET ASSET VALUE, END OF PERIOD .. $ 12.44
============
TOTAL RETURN (1) ................ 17.07%*
============
RATIOS AND SUPPLEMENTAL DATA
Net assets, End of Period
(000's) ....................... $ 26,174
Ratio of Expenses to Average Net
Assets ........................ 2.30%
Ratio of Net Investment
Income/Loss to Average Net
Assets ........................ 12.06%
Portfolio Turnover Rate ......... 220%*
-------------------------------------------------------------------------------
Effect of Voluntary Expense
Limitation During the Period
Per Share Benefit to Net
Investment Income/Loss ...... $ 0.02
Ratios Before Expense Limitation:
Expenses to Average Net
Assets ...................... 2.47%
Net Investment Income/Loss to
Average Net Assets .......... 11.89%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------------
YEAR ENDED JUNE 30,
------------------------------------------------------------------
SELECTED PER SHARE DATA AND RATIOS 1999# 1998# 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ..................... $ 12.403 $ 14.21 $ 12.45 $ 11.58 $ 12.16
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ............................. 0.982 1.04 1.16 1.30 1.17
Net Realized and Unrealized Gain/Loss .................. (2.500) (0.66) 2.26 0.77 (0.50)
---------- ---------- ---------- ---------- ----------
Total From Investment Operations ....................... (1.518) 0.38 3.42 2.07 0.67
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS
Net Investment Income .................................. (1.012) (1.00) (1.15) (1.20) (1.13)
Net Realized Gain ...................................... -- (1.19) (0.51) -- (0.12)
In Excess of Net Realized Gain ......................... (0.006) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total Distributions .................................... (1.018) (2.19) (1.66) (1.20) (1.25)
---------- ---------- ---------- ---------- ----------
NET ASSET VALUE, END OF PERIOD ........................... $ 9.867 $ 12.40 $ 14.21 $ 12.45 $ 11.58
========== ========== ========== ========== ==========
TOTAL RETURN (1) ......................................... (11.83)% 2.55% 29.12% 18.71% 6.20%
========== ========== ========== ========== ==========
RATIOS AND SUPPLEMENTAL DATA
Net assets, End of Period (000's) ........................ $ 40,616 $ 60,197 $ 41,709 $ 28,094 $ 11,880
Ratio of Expenses to Average Net Assets .................. 2.20% 2.20% 2.27% 2.30% 2.30%
Ratio of Net Investment Income to Average Net Assets ..... 9.81% 7.62% 9.04% 11.40% 10.72%
Portfolio Turnover Rate .................................. 121% 156% 157% 220% 178%
-------------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period
Per Share Benefit to Net Investment Income/Loss ........ $ -- $ -- $ -- $ 0.04 $ 0.05
Ratios Before Expense Limitation:
Expenses to Average Net Assets ......................... -- -- -- 2.44% 2.74%
Net Investment Income/Loss to Average Net Assets ....... -- -- -- 11.26% 10.28%
</TABLE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
* Non-Annualized
+ The Fund began offering Class B shares on August 1, 1995.
(1) Total return is calculated exclusive of sales charges or
deferred sales charges.
# Changes per share are based upon monthly average shares
outstanding.
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-161
<PAGE> 377
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
JUNE 30, 1999
The Van Kampen Worldwide High Income Fund (the "Fund") is organized as a
separate non-diversified fund of Van Kampen Series Fund, Inc., a Maryland
Corporation, which is registered as an open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective seeks to offer investors high current income consistent with relative
stability of principal and potential for capital appreciation. The Fund
commenced operations on April 21, 1994.
The Fund currently offers three classes of shares, Class A, Class B, and
Class C Shares. Class A shares are sold with a front-end sales charge of up to
4.75%. For certain purchases of Class A shares, the front-end sales charge may
be waived and a contingent deferred sales charge of 1.00% imposed in the event
of certain redemptions within one year of the purchase. Class B and Class C
shares are offered without a front end sales charge, but are subject to a
contingent deferred sales charge ("CDSC"). Class B shares will automatically
convert to Class A shares after the eighth year following purchase. The CDSC
will be imposed on most redemptions made within five years of the purchase for
Class B shares and one year of the purchase for Class C shares as detailed in
the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
------------------ -------- --------
<S> <C> <C>
First............................. 4.00% 1.00%
Second............................ 4.00% None
Third............................. 3.00% None
Fourth............................ 2.50% None
Fifth............................. 1.50% None
Thereafter........................ None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights. The Fund began offering the current Class B shares on August 1,
1995. Class B shares held prior to May 1, 1995 were renamed Class C shares.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which takes into account institutional size trading in similar groups of
securities. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
At June 30, 1999, approximately 86% of the net assets of the Worldwide High
Income Fund consisted of high yield securities rated below investment grade.
Investments in high yield securities are accompanied by a greater degree of
credit risk and the risk tends to be more sensitive to economic conditions than
higher rated securities. Certain securities may be valued on the basis of bid
prices provided by one principal market maker.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis except where collection is in
doubt. Discounts and premiums on securities purchased are amortized according to
the effective yield method over their respective lives. Income, expenses (other
than class specific expenses), and realized and unrealized gains or losses are
allocated to each class of shares based upon their relative net assets.
Distributions from the Fund are recorded on the ex-distribution date.
4. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: Assets and liabilities
denominated in foreign currencies and commitments under forward currency
contracts are
F-162
<PAGE> 378
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
translated into U.S. dollars at the mean of the quoted bid and asked prices.
Purchases and sales of portfolio securities are translated at the rate of
exchange prevailing when such securities were purchased or sold. Income and
expenses are translated at rates prevailing when accrued. Realized and
unrealized gains and losses on securities are not segregated for financial
reporting purposes from amounts arising from changes in the market prices of
securities. Realized gains and losses on foreign currency includes the net
realized amount from the sale of the currency and the amount realized between
trade date and settlement date on security and income transactions. However, the
foreign currency portion of gains and losses realized on sales and maturities of
foreign denominated debt securities is treated as ordinary income for U.S.
Federal income tax purposes.
The net assets of the Fund may include issuers located in emerging markets.
There are certain risks inherent in these investments not typically associated
with investments in the United States, including the smaller size of the markets
themselves, lesser liquidity, greater volatility and potentially less publicly
available information. Emerging markets may be subject to a greater degree of
government involvement in the economy and greater economic and political
uncertainty, which has the potential to extend to government imposed
restrictions on exchange traded transactions and currency transactions. These
restrictions may impact the Fund's ability to buy or sell certain securities or
to repatriate certain currencies to U.S. dollars. Additionally, changes in
currency exchange rates will affect the value of and investment income from such
securities.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
The Fund may be subject to taxes imposed by countries in which it invests. Such
taxes are generally based on income earned or gains realized or repatriated.
Taxes are accrued and applied to net investment income, net realized capital
gains and net unrealized appreciation, as applicable, as the income is earned or
capital gains are recorded.
At June 30, 1999, cost and unrealized appreciation/ depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
(000) (000) (000) (000)
----- ------- ------- -------------
<S> <C> <C> <C>
$212,269 $8,059 $(18,760) $(10,701)
</TABLE>
6. DISTRIBUTIONS OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing book and
tax treatment for foreign currency transactions, net operating losses, foreign
taxes on net realized gains, and gains on certain securities of corporations
designated as "passive foreign investment companies."
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par. For
the year ended June 30, 1999, approximately $297,000 has been reclassified from
accumulated net realized loss and approximately $4,000 has been reclassified
from paid in capital in excess of par totaling $301,000 posted to accumulated
net investment income.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.), Morgan Stanley Dean Witter Investment Management
Inc. ("MSDWIM" or a "Subadviser") and Miller Anderson & Sherrerd LLP, wholly
owned subsidiaries of Morgan Stanley Dean Witter & Co., provide the Fund with
investment advisory services at a fee paid monthly and calculated at the annual
rates based on average daily net assets as indicated below. The Adviser has
agreed to reduce advisory fees payable to it and to reimburse the Fund, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ -------------- --------------
<S> <C> <C>
0.75% 1.55% 2.30%
</TABLE>
For the year ended June 30, 1999, the Fund recognized expenses of approximately
$12,000 representing legal services provided by Skadden, Arps, Slate, Meagher &
Flom (Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the portfolio, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
F-163
<PAGE> 379
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund on
an annualized basis, of the average daily net assets attributable to each Class.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the year ended
June 30, 1999, the Distributor has advised the Fund that it earned initial sales
charges of $308,371 for Class A shares and deferred sales charges of $6,501,
$610,632, and $24,589 for Class A shares, Class B shares, and Class C shares,
respectively.
Prior to October 1, 1998, the Fund's assets held outside the United States were
held by Morgan Stanley Trust Company ("MSTC"), a former affiliate of the
Subadvisers. Through September 30, 1998, the Fund incurred MSTC fees of
approximately $7,000. On October 1, 1998, the Chase Manhattan Bank purchased
MSTC.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
C. INVESTMENT TRANSACTIONS: For the year ended June 30, 1999, the Fund made
purchases of approximately $267,604,000 and sales of approximately $287,663,000
of investment securities other than long-term U.S. government securities and
short-term investments. There were no purchases or sales of long-term U.S.
government securities.
D. DERIVATIVE FINANCIAL INSTRUMENTS: A derivative financial instrument in very
general terms refers to a security whose value is "derived" from the value of an
underlying asset, reference rate or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, foreign currency
exposure, maturity and duration. All of the Fund's portfolio holdings, including
derivative instruments, are marked-to-market each day with the change in value
reflected in unrealized appreciation/depreciation. Upon disposition, a realized
gain or loss is recognized accordingly, except when exercising a call option
contract or taking delivery of a security underlying a forward contract. In this
instance, the recognition of gain or loss is postponed until the disposal of the
security underlying the option or forward contract. Risks may arise as a result
of the potential inability of the counterparties to meet the terms of their
contracts.
Summarized below are the specific types of derivative financial instruments used
by the Fund.
1. FORWARD CURRENCY CONTRACTS: These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on foreign currency transactions.
At June 30, 1999, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
FORWARD CURRENCY CONTRACTS (000) (000)
-------------------------- ------- -------------
<S> <C> <C>
SHORT CONTRACTS:
British Pound,
2,005,000 expiring 9/3/99............. $ 3,165 $ 66
Euro,
9,215,000 expiring 7/26/99-8/20/99.... 9,536 205
------- ----
$12,701 $271
======= ====
</TABLE>
2. FUTURES CONTRACTS: A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures of foreign government bonds and typically
closes the contract prior to the delivery date. These contracts are generally
used to manage the portfolio's effective maturity and duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). The potential risk of loss
associated with a futures contract could be in excess of the variation margin
reflected on the Statement of Assets and Liabilities. The cost of securities
acquired through delivery under a contract is adjusted by the unrealized gain or
loss on the contract.
F-164
<PAGE> 380
VAN KAMPEN WORLDWIDE HIGH INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
JUNE 30, 1999
Transactions in futures contracts for the year ended June 30, 1999, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS
------------------------------------------------------
<S> <C>
Outstanding at June 30, 1998............... -0-
Futures Opened............................. 69
Futures Closed............................. (56)
---
Outstanding at June 30, 1999............... 13
===
</TABLE>
The futures contracts outstanding as of June 30, 1999, and the descriptions and
the unrealized appreciation/ depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
DEPRECIATION
CONTRACTS (000)
------------------------------------------------------------------
<S> <C> <C>
SHORT CONTRACTS:
U.K. Long Gilt September 1999
(Current notional value
$2,329,331).......................... 13 $33
== ===
</TABLE>
F-165
<PAGE> 381
APPENDIX D
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
UNAUDITED FINANCIAL STATEMENTS FOR THE
SIX-MONTH PERIOD ENDED FEBRUARY 29, 2000
<PAGE> 382
PORTFOLIO OF INVESTMENTS
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE DEBT OBLIGATIONS 90.5%
CONSUMER DISTRIBUTION 8.9%
$ 6,500 Agrilink Foods, Inc., 144A -
Private Placement (b)................ 11.875% 11/01/08 $ 6,979,375
4,250 Big 5 Corp........................... 10.875 11/15/07 4,313,750
9,000 CHS Electronics, Inc................. 9.875 04/15/05 8,190,000
3,200 Community Distributors, Inc.......... 10.250 10/15/04 2,944,000
12,700 Del Monte Foods Co., Ser B, 144A -
Private Placement (a) (b)............ 0/12.500 12/15/07 9,207,500
2,750 Disco SA (Argentina)................. 9.125 05/15/03 2,378,750
2,750 Disco SA (Argentina)................. 9.875 05/15/08 2,275,625
4,000 Duane Reade, Inc..................... 9.250 02/15/08 4,160,000
2,500 Group Maintenance America Corp.,
144A - Private Placement (b)......... 9.750 01/15/09 2,562,500
2,000 Gruma SA (Mexico).................... 7.625 10/15/07 1,745,000
3,200 Iron Age Corp........................ 9.875 05/01/08 2,496,000
4,000 King Pharmaceuticals, Inc., 144A -
Private Placement (b)................ 10.750 02/15/09 4,000,000
4,000 Luiginos, Inc., 144A - Private
Placement (b)........................ 10.000 02/01/06 4,010,000
9,000 Musicland Group, Inc................. 9.875 03/15/08 9,270,000
7,250 Pantry, Inc.......................... 10.250 10/15/07 7,576,250
3,735 Pathmark Stores, Inc................. 12.625 06/15/02 3,697,650
6,000 Pathmark Stores, Inc. (a)............ 0/10.750 11/01/03 5,190,000
1,750 Phar Mor, Inc........................ 11.720 09/11/02 1,798,125
-----------
82,794,525
-----------
CONSUMER DURABLES 4.9%
8,900 Aetna Industries, Inc................ 11.875 10/01/06 9,389,500
1,500 Hayes Wheels International, Inc., Ser
B.................................... 9.125 07/15/07 1,586,250
8,500 MCII Holdings USA, Inc.
(Mexico) (a)......................... 0/12.000 11/15/02 7,225,000
6,000 Oxford Automotive, Inc., Ser C,
144A - Private Placement (b)......... 10.125 06/15/07 6,240,000
6,430 Talon Automotive Group, Inc., Ser
B.................................... 9.625 05/01/08 5,787,000
6,168 Venture Holdings, Inc................ 9.750 04/01/04 6,168,000
2,995 Venture Holdings, Inc................ 9.500 07/01/05 3,009,975
</TABLE>
See Notes to Financial Statements
D-1
<PAGE> 383
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER DURABLES (CONTINUED)
$ 2,700 Webb (Del E.) Corp................... 9.375% 05/01/09 $ 2,578,500
3,600 Webb (Del E.) Corp................... 10.250 02/15/10 3,582,000
-----------
45,566,225
-----------
CONSUMER NON-DURABLES 3.9%
6,000 Cluett American Corp., Ser B......... 10.125 05/15/08 5,715,000
3,500 CMI Industries, Inc.................. 9.500 10/01/03 3,465,000
8,900 Consoltex Group, Inc. (Canada)....... 11.000 10/01/03 9,078,000
3,000 Decora Industries, Inc............... 11.000 05/01/05 2,895,000
4,250 Delta Mills Insurance, Ser B......... 9.625 09/01/07 4,303,125
1,800 French Fragrances, Inc., Ser B....... 10.375 05/15/07 1,809,000
5,000 French Fragrances, Inc., Ser D....... 10.375 05/15/07 5,025,000
4,750 Globe Manufacturing Corp., 144A -
Private Placement (b)................ 10.000 08/01/08 3,990,000
-----------
36,280,125
-----------
CONSUMER SERVICES 22.3%
7,200 Amazon.Com, Inc. (a)................. 0/10.000 05/01/08 4,644,000
3,343 American Media Operations, Inc....... 11.625 11/15/04 3,585,367
10,050 Americredit Corp..................... 9.250 02/01/04 9,949,500
1,425 Argosy Gaming Co..................... 12.000 06/01/01 1,453,500
8,300 Argosy Gaming Co..................... 13.250 06/01/04 9,358,250
9,750 Booth Creek Ski Holdings, Inc. Ser
B.................................... 12.500 03/15/07 9,360,000
10,020 Capstar Broadcasting Partners (a).... 0/12.750 02/01/09 8,517,000
4,610 Casino America, Inc.................. 12.500 08/01/03 5,180,487
6,900 Casino Magic Louisiana Corp., Ser
B.................................... 13.000 08/15/03 7,952,250
5,500 Citadel Broadcasting Co., Ser B...... 10.250 07/01/07 6,063,750
2,500 Citadel Broadcasting Co., 144A -
Private Placement (b)................ 9.250 11/15/08 2,662,500
9,015 Diamond Cable Co. (United
Kingdom) (a)......................... 0/13.250 09/30/04 9,195,300
1,750 Diamond Cable Co. (United
Kingdom) (a)......................... 0/11.750 12/15/05 1,540,000
2,250 FrontierVision Holdings L.P. (a)..... 0/11.875 09/15/07 1,957,500
7,375 FrontierVision Holdings L.P., 144A -
Private Placement (a) (b)............ 0/11.875 09/15/07 6,416,250
</TABLE>
See Notes to Financial Statements
D-2
<PAGE> 384
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONSUMER SERVICES (CONTINUED)
$ 4,000 Globo Communicacoes Participation,
144A - Private Placement
(Brazil) (b)......................... 10.625% 12/05/08 $ 2,220,000
3,500 Gray Communications Systems, Inc..... 10.625 10/01/06 3,718,750
6,500 Grupo Televisa Corp. (Mexico)........ * 05/15/08 5,005,000
2,000 Grupo Televisa Corp., Ser B
(Mexico)............................. 11.875 05/15/06 1,990,000
5,796 Helicon Group L.P.................... 11.000 11/01/03 6,107,535
10,100 Hollywood Casino, Inc................ 12.750 11/01/03 10,908,000
4,000 Hollywood Park, Inc., Ser B.......... 9.500 08/01/07 4,040,000
3,500 Hollywood Theaters, Inc. (c)......... 10.625 08/01/07 1,470,000
6,750 Horseshoe Gaming LLC, Ser B.......... 12.750 09/30/00 7,155,000
7,000 IHF Holdings, Inc., Ser B (a)........ 0/15.000 11/15/04 980,000
5,500 International Cabletel, Inc. (a)..... 0/11.500 02/01/06 4,757,500
4,500 Louisiana Petite Academy, Inc., Ser
B.................................... 10.000 05/15/08 4,398,750
9,750 Majestic Star Casino LLC............. 12.750 05/15/03 10,651,875
2,000 Marcus Cable Co. L.P. (a)............ 0/13.500 08/01/04 2,050,000
4,780 Marcus Cable Co. L.P. (a)............ 0/14.250 12/15/05 4,780,000
7,500 Multicanal Participacoes, Ser B
(Brazil)............................. 12.625 06/18/04 5,625,000
6,050 Northland Cable Television, Inc...... 10.250 11/15/07 6,413,000
3,000 Park N View, Inc., Ser B............. 13.000 05/15/08 2,280,000
7,400 Premier Parks, Inc. (a).............. 0/10.000 04/01/08 5,143,000
7,000 Radio Unica Corp. (a)................ 0/11.750 08/01/06 3,850,000
1,960 SFX Broadcasting, Inc................ 10.750 05/15/06 2,165,800
1,350 Sinclairbroadcast Group, Inc......... 8.750 12/15/07 1,368,563
7,000 Splitrock Services, Inc., Ser B...... 11.750 07/15/08 6,405,000
4,000 Telewest PLC (United Kingdom) (a).... 0/11.000 10/01/07 3,500,000
5,000 UIH Australia/Pacific, Inc., Ser
B (a)................................ 0/14.000 05/15/06 2,950,000
8,500 United International Holdings,
Inc. (a)............................. 0/10.750 02/15/08 5,652,500
6,250 Young America Corp., Ser B........... 11.625 02/15/06 3,062,500
-----------
206,483,427
-----------
ENERGY 3.5%
1,000 Canadian Forest Oil Ltd.............. 8.750 09/15/07 890,000
3,000 Gulf Canada Resources Ltd............ 9.000 08/15/99 3,045,000
</TABLE>
See Notes to Financial Statements
D-3
<PAGE> 385
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ENERGY (CONTINUED)
$ 8,500 Hurricane Hydrocarbons Ltd., 144A -
Private Placements (Canada) (b)...... 11.750% 11/01/04 $ 4,165,000
5,750 Hydrochem Industrial Services, Inc.,
Ser B................................ 10.375 08/01/07 5,060,000
5,500 KCS Energy, Inc. .................... 11.000 01/15/03 3,960,000
5,236 Kelley Oil & Gas Partners Ltd........ 7.875 12/15/99 2,618,000
2,300 Pacalta Resources Ltd., Ser B
(Canada)............................. 10.750 06/15/04 1,966,500
1,606 Petroleum Heat & Power, Inc. ........ 12.250 02/01/05 1,557,820
5,000 Pride Petroleum Services, Inc. ...... 9.375 05/01/07 4,650,000
6,000 Universal Compression, Inc. (a)...... 0/9.875 02/15/08 3,720,000
1,000 Universal Compression, Inc. (a)...... 0/11.375 02/15/09 590,000
-----------
32,222,320
-----------
FINANCE 1.6%
4,750 Americo Life, Inc. .................. 9.250 06/01/05 4,868,750
6,000 Chatwins Group, Inc.................. 13.000 05/01/03 6,030,000
3,000 Contifinancial Corp. ................ 7.500 03/15/02 1,950,000
2,250 Superior National Capital Trust 1.... 10.750 12/01/17 2,261,250
-----------
15,110,000
-----------
HEALTHCARE 2.8%
4,000 Alliance Imaging, Inc. .............. 9.625 12/15/05 3,920,000
3,900 Bolvall Corp., 144A - Private
Placement............................ 10.875 11/15/05 3,978,000
9,000 Mariner Post Acute Network, Inc.
(a).................................. 0/10.500 11/01/07 2,700,000
2,380 Maxxim Medical, Inc., 144A -
Private Placement (b)................ 10.500 08/01/06 2,546,600
3,000 Mediq, Inc. ......................... 11.000 06/01/08 2,730,000
1,490 Owens & Minor, Inc................... 10.875 06/01/06 1,635,275
8,265 Oxford Health Plans, Inc., 144A -
Private Placement (b)................ 11.000 05/15/05 8,306,325
1,150 Vencor Operating, Inc. .............. 9.875 05/01/05 511,750
-----------
26,327,950
-----------
PRODUCER MANUFACTURING 6.3%
9,750 Carpenter W R North America, Inc. ... 10.625 06/15/07 9,798,750
3,500 Communications Instrument, Inc. ..... 10.000 09/15/04 3,386,250
</TABLE>
See Notes to Financial Statements
D-4
<PAGE> 386
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRODUCER MANUFACTURING (CONTINUED)
$ 3,355 Compass Aerospace Corp., 144A -
Private Placement (b)................ 10.125% 04/15/05 $ 3,204,025
4,500 Eagle-Picher Industries, Inc. ....... 9.375 03/01/08 4,365,000
5,500 Filtronic PLC, 144A - Private
Placement (b)........................ 10.000 12/01/05 5,692,500
4,950 GS Technologies Operating, Inc. ..... 12.000 09/01/04 3,217,500
8,000 IMO Industries, Inc. ................ 11.750 05/01/06 8,200,000
2,500 Integrated Electric Services, Inc.,
144A - Private Placement (b)......... 9.375 02/01/09 2,562,500
1,750 Interlake Corp. ..................... 12.000 11/15/01 1,872,500
7,050 Interlake Corp. ..................... 12.125 03/01/02 7,155,750
2,000 Numatics, Inc. ...................... 9.625 04/01/08 1,850,000
3,000 Terex Corp. ......................... 8.875 04/01/08 3,015,000
6,750 Waxman Industries, Inc., Ser B (a)... 0/12.750 06/01/04 3,780,000
-----------
58,099,775
-----------
RAW MATERIALS/PROCESSING
INDUSTRIES 7.7%
2,175 Acetex Corp. (Canada)................ 9.750 10/01/03 2,175,000
7,250 AEP Industries, Inc. ................ 9.875 11/15/07 7,304,375
6,000 Anchor Lamina, Inc. (Canada)......... 9.875 02/01/08 5,670,000
4,540 Aracruz Celulose SA, 144A - Private
Placement (Brazil) (b)............... 10.375 01/31/02 3,949,800
4,500 Doe Run Resources Corp., Ser B....... 11.250 03/15/05 3,915,000
1,000 Galey & Lord, Inc. .................. 9.125 03/01/08 755,000
6,000 Outsourcing Services Group, 144A -
Private Placement (b)................ 10.875 03/01/06 5,820,000
5,054 Pioneer Americas Acquisition
Corp. ............................... 9.250 06/15/07 3,815,770
10,025 Printpack, Inc. ..................... 10.625 08/15/06 9,523,750
3,250 Radnor Holdings, Inc., Ser B......... 10.000 12/01/03 3,363,750
5,000 Renco Steel Holdings, Inc. .......... 10.875 02/01/05 4,300,000
5,250 Scovill Fasteners, Inc. ............. 11.250 11/30/07 3,990,000
4,000 Tekni-Plex, Inc., Ser B.............. 11.250 04/01/07 4,420,000
2,750 Viacap SA (Mexico)................... 10.250 05/15/02 2,571,250
</TABLE>
See Notes to Financial Statements
D-5
<PAGE> 387
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES
(CONTINUED)
$ 6,250 Viacap SA (Mexico)................... 11.375% 05/15/07 $ 5,593,750
4,550 WHX Corp............................. 10.500 04/15/05 4,322,500
-----------
71,489,945
-----------
TECHNOLOGY 1.4%
5,500 Advanced Micro Devices, Inc.......... 11.000 08/01/03 5,843,750
6,000 DecisionOne Holdings Corp............ 9.750 08/01/07 1,080,000
3,000 DecisionOne Holdings Corp. (a)....... 0/11.500 08/01/08 120,000
8,050 Dictaphone Corp...................... 11.750 08/01/05 5,876,500
-----------
12,920,250
-----------
TRANSPORTATION 5.1%
4,000 American Commercial Lines LLC........ 10.250 06/30/08 4,140,000
7,500 Atlas Air, Inc....................... 10.750 08/01/05 7,912,500
1,800 Atlas Air, Inc....................... 9.250 04/15/08 1,813,500
6,750 Atlas Air, Inc., 144A - Private
Placement (b)........................ 9.375 11/15/06 6,885,000
2,700 Cenargo International PLC............ 9.750 06/15/08 2,470,500
7,250 Greyhound Lines, Inc................. 11.500 04/15/07 8,337,500
5,950 MRS Logistica SA, Ser B, 144A -
Private Placement (Brazil) (b)....... 10.625 08/15/05 2,499,000
6,250 Pegasus Shipping Hellas Ltd., Ser
A.................................... 11.875 11/15/04 4,500,000
2,750 Sea Containers Ltd., Ser B
(Bermuda)............................ 12.500 12/01/04 3,018,125
4,500 Stena AB (Sweden).................... 10.500 12/15/05 4,590,000
1,800 Transport World Airlines, Inc........ 11.500 12/15/04 1,395,000
-----------
47,561,125
-----------
UTILITIES 22.1%
5,500 American Cellular Corp., 144A -
Private Placement (b)................ 10.500 05/15/08 5,733,750
6,250 Cathay International Ltd., 144A -
Private Placement (Japan) (b)........ 13.000 04/15/08 1,718,750
3,500 Centennial Cellular Operating Co.,
144A - Private Placement (b)......... 10.750 12/15/08 3,753,750
6,000 Clearnet Communications, Inc.
(Canada) (a)......................... 0/14.750 12/15/05 5,400,000
</TABLE>
See Notes to Financial Statements
D-6
<PAGE> 388
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES (CONTINUED)
$ 6,000 Compania De Transporte Energia, 144A
-Private Placement (Argentina) (b)... 9.250% 04/01/08 $ 5,130,000
4,950 Crown Castle International
Corp. (a)............................ 0/10.625 11/15/07 3,588,750
6,000 CTI Holdings SA (a).................. 0/11.500 04/15/08 2,730,000
6,500 E Spire Communications, Inc. (a)..... 0/12.750 04/01/06 3,997,500
9,500 E Spire Communications, Inc. (a)..... 0/13.000 11/01/05 6,222,500
568 GST Telecommunications, Inc., 144A -
Private Placement (Canada) (a) (b)... 0/13.875 12/15/05 408,960
2,550 ICG Holdings, Inc. (a)............... 0/13.500 09/15/05 2,205,750
9,100 Intermedia Communications of
Florida, Inc. (a) (b)................ 0/12.500 05/15/06 7,325,500
7,000 IXC Communications, Inc.............. 9.000 04/15/08 7,385,000
7,000 KMC Telecommunications Holdings,
Inc. (a)............................. 0/12.500 02/15/08 3,710,000
4,000 Level 3 Communications, Inc.......... 9.125 05/01/08 3,900,000
2,000 Level 3 Communications, Inc., 144A -
Private Placement (b)................ * 12/01/08 1,150,000
5,750 McLeodusa, Inc. (a).................. 0/10.500 03/01/07 4,542,500
2,300 Metromedia Fiber Network, Inc., 144A
- Private Placement (b).............. 10.000 11/15/08 2,409,250
9,250 Metronet Communications Corp.
(Canada)............................. 12.000 08/15/07 10,545,000
1,500 Metronet Communications Corp.
(Canada) (a)......................... 0/10.750 11/01/07 1,102,500
5,000 Metronet Communications Corp.
(Canada) (a)......................... 0/9.950 06/15/08 3,425,000
9,510 Microcell Telecommunications, Ser
B (a)................................ 0/14.000 06/01/06 7,608,000
9,000 Millicom International Cellular SA
(Luxemburg) (a)...................... 0/13.500 06/01/06 6,615,000
9,250 Netia Holdings, Inc., Ser B
(Netherlands) (a).................... 0/11.250 11/01/07 5,920,000
3,750 Nextel Communications, Inc. ......... 9.750 08/15/04 3,796,875
3,750 Nextel Communications, Inc. (a)...... 0/10.650 09/15/07 2,568,750
1,000 Nextel Communications, Inc., 144A -
Private Placement (b)................ 12.000 11/01/08 1,120,000
4,500 NTL, Inc. (a)........................ 0/9.750 04/01/08 3,105,000
1,150 Optel, Inc........................... 11.500 07/01/08 1,115,500
</TABLE>
See Notes to Financial Statements
D-7
<PAGE> 389
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES (CONTINUED)
$ 5,125 Optel, Inc., Ser B, 144A -
Private Placement (b)................ 13.000% 02/15/05 $ 5,150,625
10,450 Pinnacle Holdings, Inc. (a).......... 0/10.000 03/15/08 6,531,250
4,387 Price Communication Cellular......... 11.250 08/15/08 4,167,650
4,450 Price Communications Wireless........ 11.750 07/15/07 4,917,250
4,500 Price Communications Wireless, 144A -
Private Placement (b)................ 9.125 12/15/06 4,747,500
6,400 Primus Telecommunications Group,
Inc. ................................ 11.750 08/01/04 6,560,000
1,750 Primus Telecommunications Group,
Inc., 144A - Private Placement (b)... 11.250 01/15/09 1,776,250
7,550 Psinet, Inc., 144A - Private
Placement (b)........................ 11.500 11/01/08 8,456,000
3,750 Rural Cellular Corp. ................ 9.625 05/15/08 3,923,438
9,000 Satelites Mexicanos SA (Mexico)...... 10.125 11/01/04 7,155,000
10,250 SBA Communications Corp. (a)......... 0/12.000 03/01/08 6,406,250
5,000 Sprint Spectrum (a).................. 0/12.500 08/15/06 4,562,500
8,100 Startec Global Communications........ 12.000 05/15/08 7,290,000
1,500 Transtel, 144A - Private Placement
(Columbia) (b)....................... 12.500 11/01/07 630,000
7,700 Triton Communications, LLC (a)....... 0/11.000 05/01/08 4,292,750
6,740 Verio, Inc. ......................... 10.375 04/01/05 6,992,750
2,300 Verio, Inc., 144A - Private
Placement (b)........................ 11.250 12/01/08 2,495,500
-----------
204,288,298
-----------
TOTAL CORPORATE DEBT OBLIGATIONS 90.5%..................... 845,168,965
-----------
FOREIGN GOVERNMENT OBLIGATIONS 0.7%
2,000 Republic of Argentina (Argentina).... 11.375 01/30/17 1,820,000
4,000 United Mexican States Debt
(Mexico)............................. 11.500 05/15/26 4,205,000
-----------
TOTAL FOREIGN GOVERNMENT OBLIGATIONS....................... 6,025,000
-----------
</TABLE>
<TABLE>
<S> <C>
EQUITIES 1.5%
American Telecasting, Inc. (1,750 Common Stock Warrants)
(c)....................................................... 1,750
Dairy Mart Convenience Stores (14,998 Common Stock
Warrants) (c)............................................. 5,249
Day International Group, Inc. (1,640 Preferred Shares,
12.25% coupon, $1,000 par per share) (c) (d).............. 1,517,000
</TABLE>
See Notes to Financial Statements
D-8
<PAGE> 390
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
----------------------------------------------------------------------------
<S> <C>
EQUITIES (CONTINUED)
Kelley Oil & Gas Corp. (50,000 Preferred Shares, 2.625%
coupon, $25 par per share) (c).............................. $ 187,500
KMC Telecommunications Holdings, Inc., 144A - Private
Placement (7,000 Common Stock Warrants) (b) (c)........... 7
Metronet Communications Corp., 144A - Private Placement
(9,250 Common Stock Warrants) (Canada) (b) (c)............ 323,750
NTL, Inc., 144A - Private Placement (6,889 Common Stock
Warrants) (b) (c)......................................... 86,112
Optel Inc. (3,275 Common Shares)............................ 11,462
Park N View, Inc., 144A - Private Placement (3,000 Common
Stock Warrants) (b) (c)................................... 108,000
Petroleum Heat & Power, Inc. (9,331 Junior Convertible
Preferred Shares, convertible into 1,219 Star Gas Common
Units or 9,331 Petroleum Heat & Power Class A Common
Shares) (c)............................................... 9,798
Primus Telecommunications Group (2,000 Common Stock
Warrants) (c)............................................. 30,000
Rural Cellular Corp. (6,663 Preferred Shares, 11.375%
coupon, $1,000 par per share) (c) (d)..................... 6,563,055
Signature Brands, Inc. (4,000 Common Stock
Warrants) (c)............................................. 87,600
Splitrock Services, Inc., 144A - Private Placement (7,000
Common Stock Warrants) (b) (c)............................ 1,050
Startec Global Communications (8,100 Common Stock
Warrants) (c)............................................. 2,025
Supermarkets General Holdings Corp. (151,101 Preferred
Shares, 3.52% coupon, $25 par per share) (c) (d).......... 4,079,727
Terex Corp. (28,000 Common Stock Rights) (c)................ 504,000
Total Renal Care Holdings, Inc. (6,000 Common
Shares) (c)............................................... 88,750
UIH Australia Pacific, Inc. (5,000 Common Stock
Warrants) (c)............................................. 50
Urohealth Systems, Inc., 144A - Private Placement (4,750
Common Stock Warrants) (b) (c)............................ 48
Wright Medical Technology, Inc. (4,118 Common Stock
Warrants) (c)............................................. 412
------------
TOTAL EQUITIES 1.5%.......................................... 13,607,345
------------
TOTAL LONG-TERM INVESTMENTS 92.7%
(Cost $925,096,847)......................................... 858,776,310
------------
</TABLE>
See Notes to Financial Statements
D-9
<PAGE> 391
PORTFOLIO OF INVESTMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
----------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS 5.6%
REPURCHASE AGREEMENT 2.5%
Warburg Dillon Read ($22,781,000 par collateralized by
U.S. Government obligations in a pooled cash account,
dated 02/26/99, to be sold on 03/01/99 at $22,789,998).... $ 22,781,000
U.S. GOVERNMENT AGENCY OBLIGATION 3.1%
Federal Home Loan Bank Discount Note ($28,724,000 par,
yielding 4.68%, 03/01/99 maturity)........................ 28,712,798
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $51,493,798).......................................... 51,493,798
------------
TOTAL INVESTMENTS 98.3%
(Cost $976,590,645)......................................... 910,270,108
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%................... 16,038,285
------------
NET ASSETS 100.0%............................................ $926,308,393
============
</TABLE>
* Zero coupon bond
(a) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(c) Non-income producing security.
(d) Payment-in-kind security.
See Notes to Financial Statements
D-10
<PAGE> 392
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $976,590,645)....................... $ 910,270,108
Cash........................................................ 13,201
Receivables:
Interest.................................................. 19,632,975
Investments Sold.......................................... 10,220,206
Fund Shares Sold.......................................... 4,830,344
Other....................................................... 48,890
--------------
Total Assets.......................................... 945,015,724
--------------
LIABILITIES:
Payables:
Investments Purchased..................................... 10,053,654
Income Distributions...................................... 3,942,690
Fund Shares Repurchased................................... 3,381,495
Distributor and Affiliates................................ 620,061
Investment Advisory Fee................................... 375,788
Trustees' Deferred Compensation and Retirement Plans........ 170,148
Accrued Expenses............................................ 163,495
--------------
Total Liabilities..................................... 18,707,331
--------------
NET ASSETS.................................................. $ 926,308,393
==============
NET ASSETS CONSIST OF:
Capital..................................................... $1,193,984,105
Accumulated Undistributed Net Investment Income............. 1,025,183
Net Unrealized Depreciation................................. (66,320,537)
Accumulated Net Realized Loss............................... (202,380,358)
--------------
NET ASSETS.................................................. $ 926,308,393
==============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $539,712,572 and 91,320,756 shares of
beneficial interest issued and outstanding)............. $ 5.91
Maximum sales charge (4.75%* of offering price)......... .29
--------------
Maximum offering price to public........................ $ 6.20
==============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $319,511,059 and 54,007,560 shares of
beneficial interest issued and outstanding)............. $ 5.92
==============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $67,084,762 and 11,400,294 shares of
beneficial interest issued and outstanding)............. $ 5.88
==============
*On sales of $100,000 or more, the sales charge will be
reduced.
</TABLE>
See Notes to Financial Statements
D-11
<PAGE> 393
STATEMENT OF OPERATIONS
For the Six Months Ended February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 49,171,151
Dividends................................................... 472,659
Other....................................................... 870,899
------------
Total Income............................................ 50,514,709
------------
EXPENSES:
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B, and C of $572,650, $1,485,714 and $291,208,
respectively)............................................. 2,349,572
Investment Advisory Fee..................................... 2,306,846
Shareholder Services........................................ 883,048
Custody..................................................... 24,470
Legal....................................................... 14,860
Trustees' Fees and Expenses................................. 10,343
Other....................................................... 247,417
------------
Net Expenses............................................ 5,836,556
------------
NET INVESTMENT INCOME....................................... $ 44,678,153
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Loss........................................... $(14,038,622)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (63,501,755)
End of the Period:
Investments............................................. (66,320,537)
------------
Net Unrealized Depreciation During the Period............... (2,818,782)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(16,857,404)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 27,820,749
============
</TABLE>
See Notes to Financial Statements
D-12
<PAGE> 394
STATEMENT OF CHANGES IN NET ASSETS
For the Six Months Ended February 28, 1999 and
the Year Ended August 31, 1998 (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
February 28, 1999 August 31, 1998
--------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................ $ 44,678,153 $ 74,061,466
Net Realized Gain/Loss........................... (14,038,622) 18,269,123
Net Unrealized Depreciation During the Period.... (2,818,782) (89,734,268)
------------- ------------
Change in Net Assets from Operations............. 27,820,749 2,596,321
------------- ------------
Distributions from Net Investment Income:
Class A Shares................................. (29,140,305) (49,213,216)
Class B Shares................................. (15,551,339) (21,538,906)
Class C Shares................................. (3,066,465) (3,848,005)
------------- ------------
Total Distributions............................ (47,758,109) (74,600,127)
------------- ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES..................................... (19,937,360) (72,003,806)
------------- ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................ 202,119,370 398,226,626
Net Asset Value of Shares Issued Through Dividend
Reinvestment................................... 25,138,350 41,295,995
Cost of Shares Repurchased....................... (119,150,069) (226,785,118)
------------- ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS................................... 108,107,651 212,737,503
------------- ------------
TOTAL INCREASE IN NET ASSETS..................... 88,170,291 140,733,697
NET ASSETS:
Beginning of the Period.......................... 838,138,102 697,404,405
------------- ------------
End of the Period (Including accumulated
undistributed net investment income of
$1,025,183 and $4,912,228, respectively)....... $ 926,308,393 $838,138,102
============= ============
</TABLE>
See Notes to Financial Statements
D-13
<PAGE> 395
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended August 31,
Ended ---------------------------------
Class A Shares February 28, 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $6.060 $6.548 $6.298 $ 6.15 $ 6.12
------ ------ ------ ------ ------
Net Investment Income................ .308 .614 .604 .607 .55
Net Realized and Unrealized
Gain/Loss.......................... (.126) (.479) .267 .139 .0515
------ ------ ------ ------ ------
Total from Investment Operations..... .182 .135 .871 .746 .6015
Less Distributions from Net
Investment Income.................. .332 .623 .621 .598 .5715
------ ------ ------ ------ ------
Net Asset Value, End of the Period... $5.910 $6.060 $6.548 $6.298 $ 6.15
====== ====== ====== ====== ======
Total Return (a)..................... 3.11%* 1.66% 14.44% 12.66% 10.48%
Net Assets at End of the Period (In
millions).......................... $539.7 $499.3 $468.6 $421.4 $411.9
Ratio of Expenses to Average Net
Assets (b)......................... 1.03% 1.00% 1.08% 1.08% 1.12%
Ratio of Net Investment Income to
Average Net Assets (b)............. 10.58% 9.33% 9.37% 9.65% 9.23%
Portfolio Turnover................... 23%* 90% 75% 76% 49%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended August 31, 1997 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen
reimbursement of certain expenses was less than 0.01%.
* Non-annualized
See Notes to Financial Statements
D-14
<PAGE> 396
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended August 31,
Ended ---------------------------------
Class B Shares February 28, 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................. $6.064 $6.558 $6.310 $ 6.16 $6.14
------ ------ ------ ------- -----
Net Investment Income.............. .289 .571 .559 .559 .51
Net Realized and Unrealized
Gain/Loss........................ (.129) (.490) .262 .141 .0335
------ ------ ------ ------- -----
Total from Investment Operations..... .160 .081 .821 .700 .5435
Less Distributions from Net
Investment Income.................. .308 .575 .573 .550 .5235
------ ------ ------ ------- -----
Net Asset Value, End of the Period... $5.916 $6.064 $6.558 $ 6.310 $6.16
====== ====== ====== ======= =====
Total Return (a)..................... 2.87%* 0.77% 13.58% 11.78% 9.41%
Net Assets at End of the Period (In
millions).......................... $319.5 $283.1 $198.0 $114.6 $89.9
Ratio of Expenses to Average Net
Assets (b)......................... 1.80% 1.79% 1.86% 1.87% 1.93%
Ratio of Net Investment Income to
Average Net Assets (b)............. 9.79% 8.52% 8.60% 8.86% 8.42%
Portfolio Turnover................... 23%* 90% 75% 76% 49%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended August 31, 1997 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen
reimbursement of certain expenses was less than 0.01%.
* Non-annualized
See Notes to Financial Statements
D-15
<PAGE> 397
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended August 31,
Ended --------------------------------
Class C Shares February 28, 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period........................... $ 6.035 $6.528 $6.284 $ 6.14 $6.11
------- ------ ------ ------ -----
Net Investment Income............ .288 .570 .561 .557 .51
Net Realized and Unrealized
Gain/Loss...................... (.131) (.488) .256 .137 .0435
------- ------ ------ ------ -----
Total from Investment Operations... .157 .082 .817 .694 .5535
Less Distributions from Net
Investment Income................ .308 .575 .573 .550 .5235
------- ------ ------ ------ -----
Net Asset Value, End of the
Period........................... $ 5.884 $6.035 $6.528 $6.284 $6.14
======= ====== ====== ====== =====
Total Return (a)................... 2.54%* 0.93% 13.64% 11.66% 9.63%
Net Assets at End of the Period (In
millions)........................ $ 67.1 $ 55.8 $ 30.8 $ 17.5 $15.7
Ratio of Expenses to Average Net
Assets (b)....................... 1.79% 1.79% 1.86% 1.87% 1.93%
Ratio of Net Investment Income to
Average Net Assets (b)........... 9.77% 8.49% 8.57% 8.86% 8.42%
Portfolio Turnover................. 23%* 90% 75% 76% 49%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) For the years ended August 31, 1997 and 1996, the impact on the Ratios of
Expenses and Net Investment Income to Average Net Assets due to Van Kampen
reimbursement of certain expenses was less than 0.01%.
* Non-annualized
See Notes to Financial Statements
D-16
<PAGE> 398
NOTES TO FINANCIAL STATEMENTS
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen High Income Corporate Bond Fund (the "Fund"), a Delaware business
trust, is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective is to provide maximum current income through investment in high
yielding, high risk fixed-income securities. The Fund commenced investment
operations on October 2, 1978. The Fund commenced distribution of its Class B
and Class C shares on July 2, 1992 and July 6, 1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Fixed income investments and preferred stock are stated
at value using market quotations or indications of value obtained from an
independent pricing service. Investments in securities listed on a securities
exchange are valued at the sale price as of the close of such securities
exchange. Unlisted securities and listed securities for which the last sales
price is not available are valued at the mean of the bid and asked prices. For
those securities where quotations or prices are not available as noted above,
valuations are determined in accordance with procedures established in good
faith by the Board of Trustees. Short-term securities with remaining maturities
of 60 days or less are valued at amortized cost.
Fund investments include lower-rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal and
interest payments. At the end of the period, debt securities rated below
investment grade and comparable unrated securities represented approximately 99%
of the investment portfolio. At February 28, 1999, approximately 19% of the
Fund's long-term investments were in non-U.S. issuers, of which the largest
geographic exposure was Canada with 5%.
D-17
<PAGE> 399
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At February 28, 1999, there were no
when issued or delayed delivery purchase commitments.
The Fund may invest in repurchase agreements, which are short-term
investments 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 Asset Management Inc. (the "Adviser") or its
affiliates (collectively, "Van Kampen"), the daily aggregate of which is
invested in repurchase agreements. Repurchase agreements are fully
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. INCOME AND EXPENSES--Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date. Discounts on debt
securities purchased are amortized over the life of the respective security.
Premiums on debt securities are not amortized. Expenses of the Fund are
allocated on a pro rata basis to each class of shares, except for distribution
and service fees and transfer agency costs which are unique to each class of
shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At August 31, 1998, the Fund
D-18
<PAGE> 400
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
had an accumulated capital loss carryforward for tax purposes of $188,101,877
which expires between August 31, 1999 and August 31, 2004. Of this amount,
$125,160,730 will expire in 1999. Net realized gains or losses may differ for
financial reporting and tax purposes primarily as a result of market discount
from bonds sold, paydown on securities and the deferral of losses for tax
purposes resulting from wash sales.
At February 28, 1999, for federal income tax purposes, cost of long- and
short-term investments is $976,830,505, the aggregate gross unrealized
appreciation is $21,911,468 and the aggregate gross unrealized depreciation is
$88,471,865, resulting in net unrealized depreciation on long- and short-term
investments of $66,560,397.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included in ordinary income for
tax purposes.
Permanent book and tax basis differences relating to the recognition of
market discount on bonds disposed of in the prior period totaling $807,089 and a
resulting adjustment to the amount of capital loss carryforward which expired
was reclassified in the current period from accumulated undistributed net
investment income to capital.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
---------------------------------------------------------------------
<S> <C>
First $150 million.................................... .625 of 1%
Next $150 million..................................... .550 of 1%
Over $300 million..................................... .500 of 1%
</TABLE>
For the six months ended February 28, 1999, the Fund recognized expenses of
approximately $14,900 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the six months ended February 28, 1999, the Fund recognized expenses of
approximately $105,100 representing Van Kampen's cost of providing accounting
services to the Fund.
D-19
<PAGE> 401
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent of the Fund. For the six months ended
February 28, 1999, the Fund recognized expenses of approximately $706,800.
Transfer agency fees are determined through negotiations with the Fund's Board
of Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
D-20
<PAGE> 402
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C, each with a par value of $.01 per share. There are an unlimited
number of shares of each class authorized.
At February 28, 1999, capital aggregated $796,139,252, $327,343,107 and
$70,501,746 for Class A, B and C shares, respectively. For the six months ended
February 28, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
---------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................. 17,073,134 $ 100,463,530
Class B.................................. 13,444,814 79,690,432
Class C.................................. 3,714,295 21,965,408
----------- -------------
Total Sales................................ 34,232,243 $ 202,119,370
=========== =============
Dividend Reinvestment:
Class A.................................. 2,727,997 $ 16,203,140
Class B.................................. 1,250,890 7,434,960
Class C.................................. 253,829 1,500,250
----------- -------------
Total Dividend Reinvestment................ 4,232,716 $ 25,138,350
=========== =============
Repurchases:
Class A.................................. (10,867,473) $ (64,736,775)
Class B.................................. (7,360,939) (43,715,384)
Class C.................................. (1,808,202) (10,697,910)
----------- -------------
Total Repurchases.......................... (20,036,614) $(119,150,069)
=========== =============
</TABLE>
D-21
<PAGE> 403
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
At August 31, 1998, capital aggregated $743,728,332, $283,660,303 and
$57,680,730 for Class A, B and C shares, respectively. For the year ended August
31, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
------------------------------------------------------------------------
<S> <C> <C>
Sales
Class A.................................. 28,314,218 $ 187,996,517
Class B.................................. 25,445,038 169,122,792
Class C.................................. 6,221,313 41,107,317
----------- -------------
Total Sales................................ 59,980,569 $ 398,226,626
=========== =============
Dividend Reinvestment:
Class A.................................. 4,382,061 $ 28,862,654
Class B.................................. 1,568,905 10,333,349
Class C.................................. 320,344 2,099,992
----------- -------------
Total Dividend Reinvestment................ 6,271,310 $ 41,295,995
=========== =============
Repurchases:
Class A.................................. (21,870,630) $(144,129,518)
Class B.................................. (10,532,646) (69,416,384)
Class C.................................. (2,018,608) (13,239,216)
----------- -------------
Total Repurchases.......................... (34,421,884) $(226,785,118)
=========== =============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. The CDSC will be imposed on most redemptions made within five years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
-------------------------------------------------------------------------
<S> <C> <C>
First........................................ 4.00% 1.00%
Second....................................... 4.00% None
Third........................................ 3.00% None
Fourth....................................... 2.50% None
Fifth........................................ 1.50% None
Sixth and Thereafter......................... None None
</TABLE>
D-22
<PAGE> 404
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
For the six months ended February 28, 1999, Van Kampen, as Distributor for
the Fund, received commissions on sales of the Fund's Class A shares of
approximately $120,700 and CDSC on redeemed shares of approximately $326,200.
Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $259,762,341 and $184,686,887,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio or generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a futures contract. In this instance,
the recognition of gain or loss is postponed until the disposal of the security
underlying the futures contract.
The Fund may invest in futures contracts, a type of derivative. A futures
contract is an agreement involving the delivery of a particular asset on a
specified future date at an agreed upon price. The Fund generally invests in
futures on U.S. Treasury Notes. These contracts are generally used to manage the
portfolio's effective maturity and duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin).
D-23
<PAGE> 405
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
February 28, 1999 (Unaudited)
--------------------------------------------------------------------------------
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a 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 average net assets and
1.00% each for Class B and Class C average net assets are accrued daily.
Included in these fees for the six months ended February 28, 1999, are payments
retained by Van Kampen of approximately $1,329,300.
D-24
<PAGE> 406
APPENDIX E
VAN KAMPEN HIGH YIELD AND TOTAL RETURN FUND
UNAUDITED FINANCIAL STATEMENTS FOR THE
SIX-MONTH PERIOD ENDED DECEMBER 31, 1999
<PAGE> 407
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PAR
VALUE VALUE
-----------------------------------------------------------------------------
<S> <C>
CORPORATE BONDS & NOTES+ (92.5%)
AEROSPACE & DEFENSE (2.1%)
$ 200,000 Jet Equipment Trust, Series C-1,
11.79%, 6/15/13 .......................... $ 230,354
(b) 300,000 Jet Equipment Trust, Series 1995-D,
11.44%, 11/1/14 .......................... 340,767
225,000 Sequa Corp. 9.00%, 8/1/09 .................. 217,688
----------
788,809
----------
AUTOMOTIVE (2.0%)
(b) 405,000 Hayes Lemmerz International 8.25%,
12/15/08 ................................. 371,839
(b) 385,000 Tenneco, Inc. 11.625%, 10/15/09............. 392,700
----------
764,539
----------
BROADCAST--RADIO & TELEVISION (3.5%)
180,000 Chancellor Media Corp. 9.00%, 10/1/08 ...... 186,750
525,000 Chancellor Media Corp., Series B,
8.125%, 12/15/07 ......................... 522,375
725,000 TV Azteca S.A. de C.V., Series B,
10.50%, 2/15/07 .......................... 627,125
----------
1,336,250
----------
BUILDING MATERIALS & COMPONENTS (1.9%)
375,000 American Standard Cos., Inc.
7.375%, 2/1/08 ........................... 342,705
(b) 410,000 Nortek, Inc. 8.875%, 8/1/08 ................ 391,550
----------
734,255
----------
CABLE TELEVISION (6.3%)
200,000 Adelphia Communications, Series B,
7.50%, 1/15/04 ........................... 188,000
125,000 Adelphia Communications, Series B,
9.875%, 3/1/07 ........................... 126,563
250,000 Adelphia Communications, Series B,
8.375%, 2/1/08 ........................... 233,125
200,000 Adelphia Communications, Series B,
7.75%, 1/15/09 ........................... 179,250
255,000 CSC Holdings, Inc. 9.875%, 5/15/06 ......... 268,387
125,000 CSC Holdings, Inc. 7.25%, 7/15/08 .......... 118,750
290,000 Lenfest Communications, Inc.
8.375%, 11/1/05 .......................... 296,012
150,000 Lenfest Communications, Inc.
7.625%, 2/15/08 .......................... 146,320
(b,c) 700,000 Telewest Communications plc 0.00%,
4/15/09 .................................. 436,625
380,000 United Pan-Europe Communications
10.875%, 8/1/09 .......................... 383,800
----------
2,376,832
----------
CAPITAL GOODS/CONSTRUCTION (1.1%)
460,000 D.R. Horton, Inc. 8.00%, 2/1/09 ............ 423,200
----------
CHEMICALS (3.7%)
(b) 400,000 Huntsman ICI Chemicals 10.125%,
7/1/09 ................................... 413,000
600,000 ISP Holdings, Inc., Series B, 9.00%,
10/15/03 ................................. 591,000
400,000 Lyondell Chemical Co 9.625%, 5/1/07 ........ 409,000
----------
1,413,000
----------
COMPUTERS (0.5%)
(c) 300,000 Wam!Net, Inc., Series B, 0.00%, 3/1/05 ..... 180,000
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE VALUE
-----------------------------------------------------------------------------
<S> <C>
CONSTRUCTION & MINING (1.2%)
$ 80,000 Glencore Nickel Property Ltd. 9.00%,
12/1/14............................... $ 68,200
445,000 Murrin Murrin Holdings 9.375%, 8/31/07.. 398,275
----------
466,475
----------
ENERGY (3.2%)
395,000 CMS Energy 7.50%, 1/15/09............... 360,228
(c) 205,000 Husky Oil Ltd. 8.90%, 8/15/28........... 193,213
440,000 Snyder Oil Corp. 8.75%, 6/15/28......... 438,900
50,000 Vintage Petroleum 8.625%, 2/1/09........ 48,250
150,000 Vintage Petroleum 9.75%, 6/30/09........ 153,750
----------
1,194,341
----------
ENVIRONMENTAL CONTROLS (2.8%)
(c) 345,000 Norcal Waste Systems, Series B,
13.50%, 11/15/05...................... 365,700
305,000 Waste Management, Inc. 7.00%, 10/15/06.. 269,663
160,000 Waste Management, Inc. 7.125%, 10/1/07.. 139,936
(b) 135,000 Waste Management, Inc. 6.875%, 5/15/09.. 114,129
85,000 Waste Management, Inc. 7.65%, 3/15/11... 73,547
100,000 Waste Management, Inc. 7.125%,
12/15/17.............................. 78,717
----------
1,041,692
----------
FINANCE (0.9%)
385,000 Golden State Holdings 7.125%, 8/1/05.... 343,162
----------
FOOD (2.5%)
700,000 Smithfield Foods, Inc. 7.625%, 2/15/08.. 630,000
300,000 Stater Brothers Holdings 10.75%,
8/15/06............................... 303,000
----------
933,000
----------
FOOD SERVICE & LODGING (1.9%)
400,000 Hilton Hotels 7.95%, 4/15/07............ 376,000
335,000 Host Marriott Travel Plaza, Series B,
9.50%, 5/15/05........................ 349,070
----------
725,070
----------
FOREST PRODUCTS & PAPER (1.4%)
140,000 Pindo Deli Fin Mauritius 10.75%,
10/1/07............................... 102,900
305,000 SD Warren Co., Series B, 12.00%,
12/15/04.............................. 319,106
90,000 Tembec Industries, Inc. 8.625%,
6/30/09............................... 90,225
----------
512,231
----------
GAMING & LODGING (7.2%)
605,000 Harrahs Operating Co., Inc. 7.875%,
12/15/05.............................. 582,312
(b) 460,000 Horseshoe Gaming Holdings 8.625%,
5/15/09............................... 441,600
590,000 International Game Technology
8.375%, 5/15/09....................... 565,450
425,000 Park Place Entertainment 7.875%,
12/15/05.............................. 404,812
405,000 Station Casinos, Inc. 10.125%, 3/15/06... 412,594
60,000 Station Casinos, Inc. 9.75%, 4/15/07..... 60,600
275,000 Station Casinos, Inc. 8.875%, 12/1/08.... 264,688
----------
2,732,056
----------
HEALTH CARE SUPPLIES & SERVICES (7.2%)
130,000 Columbia/HCA Healthcare 8.13%,
8/4/03 MTN........................... 127,159
490,000 Columbia/HCA Healthcare 6.91%,
6/15/05.............................. 446,209
525,000 Columbia/HCA Healthcare 6.91%,
6/15/05.............................. 518,574
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-1
<PAGE> 408
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PAR
VALUE VALUE
-----------------------------------------------------------------------------
<S> <C>
HEALTH CARE SUPPLIES & SERVICES (CONT.)
$ 200,000 Columbia/HCA Healthcare 7.00%,
7/1/07.............................. $ 177,632
275,000 Columbia/HCA Healthcare 7.69%,
6/15/25............................. 224,854
350,000 Fresenius Medical Capital Trust II
7.875%, 2/1/08...................... 324,625
920,000 Tenet Healthcare Corp. 8.625%,
1/15/07............................. 887,800
----------
2,706,853
----------
MULTI-INDUSTRY (3.0%)
185,000 Applied Power, Inc. 8.75%, 4/1/09...... 179,912
150,000 Axia, Inc. 10.75%, 7/15/08............. 137,625
550,000 Outdoor Systems, Inc. 8.875%, 6/15/07.. 569,250
(c) 380,000 PTC International Finance BV
0.00%, 7/1/07....................... 256,500
----------
1,143,287
----------
PAPER & PACKAGING (2.1%)
750,000 Indah Kiat Financial Mauritius
10.00%, 7/1/07...................... 555,000
250,000 Norampac, Inc. 9.50%, 2/1/08........... 256,250
----------
811,250
----------
REAL ESTATE (1.9%)
775,000 HMH Properties, Inc., Series A,
7.875%, 8/1/05...................... 720,750
----------
RETAIL--GENERAL (5.1%)
417,157 DR Securitized Lease Trust,
Series 1994-K1,Class A1, 7.60%,
8/15/07............................. 390,797
100,000 DR Securitized Lease Trust,
Series 1994-K1,Class A2, 8.375%,
8/15/15............................. 88,683
150,000 Fred Meyer, Inc. 7.375%, 3/1/05........ 147,745
400,000 HMV Media Group plc 10.25%, 5/15/08.... 352,000
375,000 Kmart Funding Corp., Series F,
8.80%, 7/1/10....................... 359,385
150,000 Musicland Group, Inc. 9.00%, 6/15/03... 144,750
500,000 Musicland Group, Inc. 9.875%, 3/15/08.. 455,000
----------
1,938,360
----------
STEEL (1.4%)
400,000 National Steel Corp., Series D,
9.875%, 3/1/09...................... 411,000
(b) 200,000 Republic Technology/RTI Capital
13.75%, 7/15/09..................... 132,000
----------
543,000
----------
TECHNOLOGY (1.4%)
75,000 Entex Information Services 12.50%,
8/1/06.............................. 30,000
(b) 325,000 Hyundai Semiconductor 8.625%, 5/15/07.. 271,973
(c) 430,000 Rhythms Netconnections, Inc.,
Series B, 0.00%, 5/15/08............ 232,200
----------
534,173
----------
TELECOMMUNICATIONS (27.4%)
305,000 American Cellular Corp. 10.50%,
5/15/08............................. 336,262
300,000 AMSC Acquisition Co., Inc.,
Series B, 12.25%, 4/1/08............ 235,500
(b) 410,000 Bayan Telecommunications 13.50%,
7/15/06............................. 360,800
285,000 Centennial Cellular Holdings 10.75%,
12/15/08............................ 304,950
275,000 Dobson Communications Corp.
11.75%, 4/15/07..................... 317,625
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE VALUE
-----------------------------------------------------------------------------
<S> <C>
(c) 405,000 Dolphin Telecommunications plc
0.00%, 6/1/08 ......................... $ 197,438
(c) 325,000 Dolphin Telecommunications plc
0.00%, 5/15/09 ........................ 151,125
410,000 Echostar DBS Corp. 9.375%, 2/1/09 ....... 411,435
315,000 Global Crossing Holdings Ltd.
9.625%, 5/15/08 ....................... 314,212
305,000 Globalstar LP/Capital 11.375%, 2/15/04 .. 201,300
45,000 Globalstar LP/Capital 11.50%, 6/1/05 .... 29,250
325,000 Hermes Europe Railtel BV 10.375%,
1/15/09 ............................... 321,750
275,000 Hermes Europe Railtel BV 11.50%,
8/15/07 ............................... 283,250
(c) 520,000 Hyperion Telecommunications 0.00%,
4/15/03 ............................... 462,150
(c) 800,000 Intermedia Communications,
Series B, 0.00%, 7/15/07 .............. 596,000
375,000 Iridium LLC/Capital Corp., Series A,
13.00%, 7/15/05 ....................... 16,875
80,000 IXC Communications, Inc. 9.00%,
4/15/08 ............................... 80,800
205,000 Metromedia Fiber Network 10.00%,
11/15/08 .............................. 207,460
445,000 Multicanal S.A. 10.50%, 2/1/07 .......... 384,511
(c) 300,000 Nextel Communications, Inc. 0.00%,
8/15/04 ............................... 309,000
(c) 875,000 Nextel Communications, Inc. 0.00%,
9/15/07 ............................... 656,250
(c) 465,000 NEXTLINK Communications, Inc.
0.00%, 4/15/08 ........................ 304,575
(b) 90,000 NEXTLINK Communications, Inc.
10.75%, 11/15/08 ...................... 92,700
(c) 660,000 NTL, Inc. 0.00%, 4/1/08 ................. 453,750
(c) 400,000 Occidente Y Caribe 0.00%, 3/15/04 ....... 200,000
195,000 OnePoint Communications Corp.
14.50%, 6/1/08 ........................ 127,725
45,000 Primus Telecommunications Group
11.25%, 1/5/09 ........................ 43,538
370,000 Primus Telecommunications Group,
Series B, 9.875%, 5/15/08 ............. 340,400
225,000 PSINet, Inc. 10.00%, 2/15/05 ............ 222,750
165,000 PSINet, Inc., Series B, 11.00%, 8/1/09 .. 168,300
(c) 150,000 RCN Corp. 0.00%, 10/15/07 ............... 106,875
(b,c) 370,000 RCN Corp. 0.00%, 2/15/03 ................ 242,350
17,000 RSL Communications plc 12.25%,
11/15/06 .............................. 17,340
470,000 RSL Communications plc 9.125%, 3/1/08 ... 418,300
(c) 675,000 RSL Communications plc 0.00%, 3/1/08 .... 415,125
280,000 Satelites Mexicanos S.A., Series B,
10.125%, 11/1/04 ...................... 190,400
295,000 Tele1 Europe BV 13.00%, 5/15/09 ......... 306,063
(b) 180,000 Total Access Communications PCL
2.00%, 5/31/06 ........................ 174,600
(c) 425,000 Viatel, Inc., Series A, 0.00%, 4/15/08 .. 267,750
(b) 110,000 Voicestream Wire Co. 10.375%,
11/15/09 .............................. 113,300
-----------
10,383,784
-----------
UTILITIES (0.8%)
335,000 AES Corp. 8.50%, 11/1/07 .................... 313,225
-----------
TOTAL CORPORATE BONDS & NOTES ............................... 35,059,594
-----------
ASSET BACKED SECURITIES+ (1.4%)
AEROSPACE & DEFENSE (0.4%)
150,463 Aircraft Lease Portfolio Securitization
Ltd., Series 1996-1, Class D,
12.75%, 6/15/06 ........................ 150,463
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-2
<PAGE> 409
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
PORTFOLIO OF INVESTMENTS (CONT.)
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PAR
VALUE VALUE
-----------------------------------------------------------------------------
<S> <C>
FINANCIAL SERVICES (1.0%)
$ (b) 228,665 CA FM Lease Trust 8.50%, 7/15/17 ........... $ 212,658
225,609 Commercial Financial Services, Inc.,
1997-5, Class A1, 7.72%, 6/15/05 ......... 56,402
(b) 121,526 Federal Mortgage Acceptance
Corporation, Series 1996-B,
Class C, 7.929%, 11/1/18 ................. 42,532
53,900 Long Beach Acceptance Auto
Grantor Trust,
Series 1997-1, Class B, 14.22%,
10/26/03 ................................. 53,141
----------
364,733
----------
TOTAL ASSET BACKED SECURITIES ................................ 515,196
----------
FOREIGN GOVERNMENT BONDS+ (1.0%)
SOVEREIGN & EMERGING MARKETS (1.0%)
470,000 United Mexican States Par Bond
6.25%, 12/31/19 ............................ 370,419
----------
</TABLE>
<TABLE>
<CAPTION>
Shares
----------------
<S> <C>
PREFERRED STOCKS+ (3.2%)
BROADCAST--RADIO & TELEVISION (0.9%)
3,412 Paxson Communications 11.625% .............. 348,877
----------
RETAIL--GENERAL (0.4%)
3,150 Kmart Financing 7.75% ...................... 138,994
----------
TELECOMMUNICATIONS (1.9%)
(a) 1,944 Concentric Network Corp. 13.50% ............ 192,456
(a) 1,599 Dobson Communications Corp. 13.00% ......... 174,280
(a) 277 IXC Communications, Inc. PIK 9.00% ......... 306,956
(a) 50 Nextel Communications, Inc. 13.00% ......... 54,000
----------
727,692
----------
TOTAL PREFERRED STOCKS ....................................... 1,215,563
==========
</TABLE>
<TABLE>
<CAPTION>
NO. OF
WARRANTS
----------------
<S> <C>
WARRANTS+ (0.4%)
COMPUTERS (0.0%)
(a) 9,000 Wam!Net, Inc., expiring 3/1/05 ............. 20,250
-----------
TELECOMMUNICATIONS (0.4%)
(a,b) 3,000 American Mobile Satellite Corp.,
expiring 4/1/80 .......................... 12,000
(a,b) 210 Globalstar Telecom, expiring 2/15/04 ....... 31,500
(a,b) 16,000 Occidente Y Caribe, expiring 3/15/04 ....... 24,000
(a,b) 1,950 OnePoint Communications Corp.,
expiring 6/1/08 .......................... 195
(a,b) 2,950 Tele1 Europe BV expiring 5/15/09 ........... 50,568
-----------
118,263
-----------
TOTAL WARRANTS .............................................. 138,513
===========
TOTAL LONG-TERM INVESTMENTS (98.5%) (COST $39,342,830) ....... 37,299,285
===========
</TABLE>
<TABLE>
<CAPTION>
PAR
VALUE VALUE
------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENT (1.5%)
REPURCHASE AGREEMENT (1.5%)
$ 567,000 Chase Securities, Inc., 2.60%, dated
12/31/99, due 1/3/00, to be
repurchased at $568,229
collateralized by $578,822 U.S.
Treasury Notes, 6.125%,
due 12/31/01, valued at $578,822
(COST $567,000) ............................ $ 567,000
TOTAL INVESTMENTS (100.0%) (COST $39,909,830) .............. 37,866,285
LIABILITIES IN EXCESS OF OTHER ASSETS (0.0%) ............... (8,468)
NET ASSETS (100%) .......................................... $ 37,857,817
============
</TABLE>
----------
(a) -- Non-income producing security
(b) -- 144A Security--Certain conditions for public sale may exist.
(c) -- Step Bond--coupon rate increases in increments to maturity. Rate
disclosed is as of December 31,1999. Maturity date disclosed is the
ultimate maturity date.
MTN -- Medium Term Note
PCL -- Public Company Limited
PIK -- Payment-In-Kind. Income may be received in additional securities or
cash at the discretion of the issuer.
+ -- Classified by sectors which represent broad groupings of related
industries.
--------------------------------------------------------------------------------
SUMMARY OF LONG-TERM INVESTMENTS BY COUNTRY
<TABLE>
<CAPTION>
PERCENT OF
COUNTRY VALUE NET ASSETS
------- ------------ ----------
<S> <C> <C>
United States.................. $ 30,640,838 80.9%
Netherlands.................... 1,601,931 4.2
Mexico......................... 1,187,944 3.1
United Kingdom................. 788,625 2.1
Indonesia...................... 555,000 1.5
Canada......................... 539,688 1.4
Australia...................... 466,475 1.2
Argentina...................... 384,511 1.0
Philippines.................... 360,800 1.0
Korea.......................... 271,973 0.7
Colombia....................... 224,000 0.6
Thailand....................... 174,600 0.5
Maurtius....................... 102,900 0.3
------------ -----
$ 37,299,285 98.5%
============ =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-3
<PAGE> 410
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at Value (Cost $39,909,830) ....................................................... $ 37,866,285
Cash .......................................................................................... 8,587
Receivable for:
Interest .................................................................................... 788,882
Fund Shares Sold ............................................................................ 8,691
Deferred Organizational Costs ................................................................. 6,764
------------
Total Assets ................................................................................ 38,679,209
------------
LIABILITIES:
Payable for:
Fund Shares Redeemed ........................................................................ 453,027
Dividends Declared .......................................................................... 239,220
Distribution Fees ........................................................................... 53,329
Shareholder Reporting Expense ............................................................... 25,844
Directors' Fees and Expenses ................................................................ 18,195
Professional Fees ........................................................................... 15,109
Administrative Fees ......................................................................... 8,599
Transfer Agent Fees ......................................................................... 3,804
Investment Advisory Fees .................................................................... 997
Custody Fees ................................................................................ 579
Other ......................................................................................... 2,689
------------
Total Liabilities ........................................................................... 821,392
------------
NET ASSETS ...................................................................................... $ 37,857,817
============
NET ASSETS CONSIST OF:
Capital Stock at Par ($.001 par value, Shares Authorized 2,625,000,000) ....................... $ 3,273
Paid in Capital in Excess of Par .............................................................. 40,317,088
Accumulated Net Investment Income ............................................................. 199,063
Accumulated Net Realized Loss ................................................................. (618,062)
Net Unrealized Depreciation on Investments .................................................... (2,043,545)
------------
NET ASSETS ...................................................................................... $ 37,857,817
============
CLASS A SHARES:
Net Asset Value and Redemption Price Per Share (Based on Net Assets of $8,376,655 and 722,909
Shares Outstanding) ......................................................................... $ 11.59
============
Maximum Sales Charge .......................................................................... 4.75%
Maximum Offering Price Per Share (Net Asset Value Per Share x 100 / (100 - maximum
sales charge)) .............................................................................. $ 12.17
============
CLASS B SHARES:
Net Asset Value and Offering Price Per Share (Based on Net Assets of $22,173,616 and
1,917,928 Shares Outstanding)* .............................................................. $ 11.56
============
CLASS C SHARES:
Net Asset Value and Offering Price Per Share (Based on Net Assets of $7,307,546 and 631,964
Shares Outstanding)* ........................................................................ $ 11.56
============
</TABLE>
----------
* Redemption price may be subject to a contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
E-4
<PAGE> 411
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends ....................................................................................... $ 1,889
Interest ........................................................................................ 1,915,735
-----------
Total Income ................................................................................... 1,917,624
===========
EXPENSES:
Distribution Fees (Attributed to Classes A, B and C of $10,276, $114,167 and $39,208,
respectively) ................................................................................. 163,651
Investment Advisory Fees ........................................................................ 145,889
Administrative Fees ............................................................................. 50,140
Shareholder Reports ............................................................................. 32,177
Professional Fees ............................................................................... 17,792
Filing and Registration Fees .................................................................... 14,637
Transfer Agent Fees ............................................................................. 10,885
Directors' Fees and Expenses .................................................................... 10,100
Custodian Fees .................................................................................. 1,923
Other ........................................................................................... 6,805
-----------
Total Expenses ................................................................................. 453,999
Less Expense Reductions ........................................................................ (95,582)
-----------
Net Expenses ................................................................................... 358,417
-----------
Net Investment Income/Loss ........................................................................ 1,559,207
-----------
NET REALIZED GAIN/LOSS ON:
Investments ..................................................................................... (182,924)
-----------
NET UNREALIZED APPRECIATION/DEPRECIATION:
Beginning of the Period ......................................................................... (1,794,264)
-----------
End of the Period:
Investments .................................................................................... (2,043,545)
-----------
Net Unrealized Appreciation/Depreciation During the Period ........................................ (249,281)
-----------
Net Realized Gain/Loss and Net Unrealized Appreciation/Depreciation ............................... (432,205)
-----------
NET INCREASE/DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ..................................... $ 1,127,002
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
E-5
<PAGE> 412
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31, 1999 YEAR ENDED
(UNAUDITED) JUNE 30, 1999
----------------- -------------
<S> <C> <C>
INCREASE/DECREASE IN NET ASSETS
OPERATIONS:
Net Investment Income/Loss ............................................................. $ 1,559,207 $ 2,996,000
Net Realized Gain/Loss ................................................................. (182,924) (344,000)
Net Unrealized Appreciation/Depreciation ............................................... (249,281) (2,004,000)
----------------- -------------
Net Increase/Decrease in Net Assets Resulting from Operations .......................... 1,127,002 648,000
----------------- -------------
DISTRIBUTIONS:
Net Investment Income:
Class A .............................................................................. (331,647) (749,000)
Class B .............................................................................. (836,543) (1,540,000)
Class C .............................................................................. (287,109) (603,000)
----------------- -------------
(1,455,299) (2,892,000)
----------------- -------------
Net Realized Gain:
Class A .............................................................................. -- (61,000)
Class B .............................................................................. -- (152,000)
Class C .............................................................................. -- (59,000)
In Excess of Net Realized Gain:
Class A .............................................................................. -- (97,000)
Class B .............................................................................. -- (244,000)
Class C .............................................................................. -- (94,000)
----------------- -------------
-- (707,000)
----------------- -------------
Net Decrease in Net Assets Resulting from Distributions ................................ (1,455,299) (3,599,000)
----------------- -------------
CAPITAL SHARE TRANSACTIONS (1):
Subscribed ............................................................................. 7,305,630 27,018,000
Distributions Reinvested ............................................................... 807,377 2,061,000
Redeemed ............................................................................... (8,592,515) (21,840,000)
----------------- -------------
Net Increase/Decrease in Net Assets Resulting from Capital Share Transactions .......... (479,508) 7,239,000
----------------- -------------
Total Increase/Decrease in Net Assets .................................................. (807,805) 4,288,000
NET ASSETS--Beginning of Period .......................................................... 38,665,622 34,378,000
----------------- -------------
NET ASSETS--End of Period (Including accumulated net investment income of
$199,063 and $95,000, respectively) .................................................... $ 37,857,817 $ 38,666,000
================= =============
CAPITAL SHARE TRANSACTIONS:
(1) Class A:
Shares:
Subscribed ......................................................................... 343,333 1,215,000
Distributions Reinvested ........................................................... 18,596 43,000
Redeemed ........................................................................... (334,114) (1,180,000)
----------------- -------------
Net Increase/Decrease in Class A Shares Outstanding .................................. 27,815 78,000
================= =============
Dollars:
Subscribed ......................................................................... $ 3,976,466 $ 14,702,000
Distributions Reinvested ........................................................... 213,955 520,000
Redeemed ........................................................................... (3,870,871) (14,249,000)
----------------- -------------
Net Increase/Decrease ................................................................ $ 319,550 $ 973,000
================= =============
Ending Paid in Capital ............................................................... $ 8,705,288 $ 8,385,000+
================= =============
Class B:
Shares:
Subscribed ......................................................................... 215,317 768,000
Distributions Reinvested ........................................................... 36,050 89,000
Redeemed ........................................................................... (278,190) (371,000)
----------------- -------------
Net Increase/Decrease in Class B Shares Outstanding .................................. (26,823) 486,000
================= =============
Dollars:
Subscribed ......................................................................... $ 2,495,263 $ 9,251,000
Distributions Reinvested ........................................................... 413,955 1,068,000
Redeemed ........................................................................... (3,209,236) (4,454,000)
----------------- -------------
Net Increase/Decrease ................................................................ $ (300,018) $ 5,865,000
================= =============
Ending Paid in Capital ............................................................... $ 23,886,253 $ 24,185,000+
================= =============
Class C:
Shares:
Subscribed ......................................................................... 71,941 255,000
Distributions Reinvested ........................................................... 15,627 40,000
Redeemed ........................................................................... (131,302) (264,000)
----------------- -------------
Net Increase/Decrease in Class C Shares Outstanding .................................. (43,734) 31,000
================= =============
Dollars:
Subscribed ......................................................................... $ 833,901 $ 3,065,000
Distributions Reinvested ........................................................... 179,467 473,000
Redeemed ........................................................................... (1,512,408) (3,137,000)
----------------- -------------
Net Increase/Decrease ................................................................ $ (499,040) $ 401,000
================= =============
Ending Paid in Capital ............................................................... $ 7,728,820 $ 8,227,000+
================= =============
</TABLE>
----------
+Ending Paid in Capital amounts do not reflect permanent book to tax
differences.
The accompanying notes are an integral part of the financial statements.
E-6
<PAGE> 413
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED JUNE 30, MAY 1, 1996*
1999 ---------------------------- TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)# 1999# 1998# 1997 JUNE 30, 1996
---------------------------------- ------------ -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ...... $ 11.682 $ 12.661 $ 12.86 $ 11.92 $ 12.00
-------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .............. 0.499 1.006 0.97 1.07 0.13
Net Realized and Unrealized Gain/Loss ... (0.126) (0.790) 0.35 0.99 (0.09)
-------- -------- -------- -------- -------
Total From Investment Operations ........ 0.373 0.216 1.32 2.06 0.04
-------- -------- -------- -------- -------
DISTRIBUTIONS
Net Investment Income ................... (0.468) (0.967) (0.97) (1.07) (0.12)
Net Realized Gain ....................... -- (0.088) (0.55) (0.05) --
In Excess of Net Realized Gain .......... -- (0.140) -- -- --
-------- -------- -------- -------- -------
Total Distributions ..................... (0.468) (1.195) (1.52) (1.12) (0.12)
-------- -------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD ............ $ 11.587 $ 11.682 $ 12.66 $ 12.86 $ 11.92
======== ======== ======== ======== =======
TOTAL RETURN (1) .......................... 3.34%** 1.90% 10.81% 18.12% 0.29%**
======== ======== ======== ======== =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........ $ 8,377 $ 8,120 $ 7,813 $ 8,980 $ 3,907
Ratio of Expenses to Average Net Assets ... 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of Net Investment Income/Loss to
Average Net Assets ...................... 8.61% 8.39% 7.42% 8.83% 6.85%
Portfolio Turnover Rate ................... 18%** 41% 81% 104% 10%**
-------- -------- -------- -------- -------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/Loss ............................ $ 0.03 $ 0.06 $ 0.08 $ 0.10 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets .......... 1.74% 1.72% 1.89% 2.04% 3.51%
Net Investment Income/Loss to Average
Net Assets ............................. 8.11% 7.93% 6.78% 8.04% 4.59%
-------- -------- -------- -------- -------
<CAPTION>
CLASS B
-----------------------------------------------------------
SIX MONTHS
ENDED
DECEMBER 31, YEAR ENDED JUNE 30, MAY 1, 1996*
1999 ---------------------------- TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)# 1999# 1998# 1997 JUNE 30, 1996
---------------------------------- ------------ -------- -------- -------- -------------
NET ASSET VALUE, BEGINNING OF PERIOD ...... $ 11.655 $ 12.630 $ 12.86 $ 11.93 $ 12.00
-------- -------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss .............. 0.454 0.912 0.87 0.98 0.12
Net Realized and Unrealized Gain/Loss ... (0.122) (0.776) 0.34 0.99 (0.09)
-------- -------- -------- -------- -------
Total From Investment Operations ........ 0.332 0.136 1.21 1.97 0.03
-------- -------- -------- -------- -------
DISTRIBUTIONS
Net Investment Income ................... (0.426) (0.883) (0.89) (0.99) (0.10)
Net Realized Gain ....................... -- (0.088) (0.55) (0.05) --
In Excess of Net Realized Gain .......... -- (0.140) -- -- --
-------- -------- -------- -------- -------
Total Distributions ..................... (0.426) (1.111) (1.44) (1.04) (0.10)
-------- -------- -------- -------- -------
NET ASSET VALUE, END OF PERIOD ............ $ 11.561 $ 11.655 $ 12.63 $ 12.86 $ 11.93
======== ======== ======== ======== =======
TOTAL RETURN (1) .......................... 2.88%** 1.28% 9.86% 17.22% 0.21%**
======== ======== ======== ======== =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ........ $ 22,174 $ 22,667 $ 18,420 $ 8,617 $ 3,421
Ratio of Expenses to Average Net Assets ... 2.00% 2.00% 2.00% 2.00% 2.00%
Ratio of Net Investment Income/Loss to
Average Net Assets ...................... 7.86% 7.63% 6.70% 7.99% 6.08%
Portfolio Turnover Rate ................... 18%** 41% 81% 104% 10%**
-------- -------- -------- -------- -------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment
Income/Loss ............................ $ 0.03 $ 0.06 $ 0.08 $ 0.10 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets .......... 2.49% 2.48% 2.64% 2.82% 4.25%
Net Investment Income/Loss to Average
Net Assets ............................. 7.36% 7.16% 6.04% 7.17% 3.83%
-------- -------- -------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JUNE 30,
DECEMBER 31, 1999 ---------------------------- MAY 1, 1996(*) TO
SELECTED PER SHARE DATA AND RATIOS (UNAUDITED)# 1999# 1998# 1997 JUNE 30, 1996
---------------------------------- ----------------- -------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................ $ 11.660 $ 12.634 $ 12.86 $ 11.93 $ 12.00
-------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income/Loss ........................ 0.454 0.912 0.86 0.99 0.12
Net Realized and Unrealized Gain/Loss ............. (0.125) (0.775) 0.35 0.98 (0.09)
-------- -------- ------- ------- -------
Total From Investment Operations .................. 0.329 0.137 1.21 1.97 0.03
-------- -------- ------- ------- -------
DISTRIBUTIONS
Net Investment Income ............................. (0.426) (0.883) (0.89) (0.99) (0.10)
Net Realized Gain ................................. -- (0.088) (0.55) (0.05) --
In Excess of Net Realized Gain .................... -- (0.140) -- -- --
-------- -------- ------- ------- -------
Total Distributions ............................... (0.426) (1.111) (1.44) (1.04) (0.10)
-------- -------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD ...................... $ 11.563 $ 11.660 $ 12.63 $ 12.86 $ 11.93
======== ======== ======= ======= =======
TOTAL RETURN (1) .................................... 2.88%** 1.28% 9.86% 17.21% 0.21%**
======== ======== ======= ======= =======
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) ................... $ 7,307 $ 7,879 $ 8,145 $ 4,970 $ 3,316
Ratio of Expenses to Average Net Assets ............. 2.00% 2.00% 2.00% 2.00% 2.00%
Ratio of Net Investment Income/Loss
to Average Net Assets ............................. 7.86% 7.61% 6.63% 8.03% 6.07%
Portfolio Turnover Rate ............................. 18%** 41% 81% 104% 10%**
----------------- -------- ------- ------- -----------------
Effect of Voluntary Expense Limitation
During the Period
Per Share Benefit to Net Investment Income/Loss ... $ 0.03 $ 0.06 $ 0.08 $ 0.11 $ 0.04
Ratios Before Expense Limitation:
Expenses to Average Net Assets .................... 2.49% 2.48% 2.64% 2.88% 4.25%
Net Investment Income/Loss to Average Net Assets .. 7.36% 7.14% 6.01% 7.15% 3.82%
----------------- -------- ------- ------- -----------------
</TABLE>
* Commencement of operations
** Non-Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges.
# Changes per share are based upon monthly average shares outstanding.
The accompanying notes are an integral part of the financial statements.
E-7
<PAGE> 414
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(UNAUDITED)
The Van Kampen High Yield & Total Return Fund (the "Fund") is organized as a
separate diversified fund of Van Kampen Series Fund, Inc., a Maryland
corporation, which is registered as an open-end management investment Company
under the Investment Company Act of 1940, as amended. The Fund's investment
objective seeks to maximize total return by investing in a diversified portfolio
of high-yield, high-risk income that offer a yield above what is generally
available on debt securities in the four highest categories of the recognized
rating services. The Fund commenced operations on May 1, 1996.
The Fund currently offers three classes of shares, Class A, Class B, and Class C
shares. Class A shares are sold with a front-end sales charge of up to 4.75%.
For certain purchases of Class A shares, the front-end sales charge may be
waived and a contingent deferred sales charge ("CDSC") of 1.00% imposed in the
event of certain redemptions within one year of the purchase. Class B and Class
C shares are offered without a front end sales charge, but are subject to a
CDSC. Class B shares purchased on or after June 1, 1996, and any dividend
reinvestment plan Class B shares received on such shares, automatically convert
to Class A shares eight years after the end of the calendar month in which the
shares were purchased. Class B shares purchased before June 1, 1996, and any
dividend reinvestment plan Class B shares received on such shares, automatically
convert to Class A shares seven years after the end of the calendar month in
which the shares were purchased. For the six months ended December 31, 1999, no
Class B shares converted to Class A shares. The CDSC will be imposed on most
redemptions made within five years of the purchase for Class B shares and one
year of the purchase for Class C shares as detailed in the following schedule:
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
----------------
YEAR OF REDEMPTION CLASS B CLASS C
------------------ ------- -------
<S> <C> <C>
First ....................... 4.00% 1.00%
Second ...................... 4.00% None
Third ....................... 3.00% None
Fourth ...................... 2.50% None
Fifth ....................... 1.50% None
Thereafter .................. None None
</TABLE>
All three classes of shares have identical voting, dividend, liquidation and
other rights.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which takes into account institutional size trading in similar groups of
securities. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
At December 31, 1999, approximately 85% of the net assets of the Fund consisted
of high-yield securities rated below investment grade. Investments in high-yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
Certain securities may be valued on the basis of bid prices provided by one
principal market maker.
2. SECURITY TRANSACTIONS: Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may invest in repurchase agreements, which are short-term investments 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. Repurchase
agreements are fully collateralized by the underlying debt security. A bank as
custodian for the Fund takes possession of the underlying securities, with a
market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
E-8
<PAGE> 415
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1999
(UNAUDITED)
3. INCOME AND EXPENSES: Dividend income is recorded on the ex-dividend date.
Interest income is recognized on an accrual basis except where collection is in
doubt. Discounts and premiums on securities purchased are amortized according to
the effective yield method over their respective lives. Income, expenses (other
than class specific expenses), and realized and unrealized gains or losses are
allocated to each class of shares based upon their relative net assets.
Distributions from the Fund are recorded on the ex-distribution date.
4. ORGANIZATIONAL COSTS: The organizational costs of the Fund are being
amortized on a straight line basis over a period of five years beginning with
the Fund's commencement of operations. The Adviser has agreed that in the event
any of the initial shares of the Fund originally purchased by Van Kampen are
redeemed by the Fund during the amortization period, the Fund will be reimbursed
for any unamortized organizational costs in the same proportion as the number of
shares redeemed bears to the number of initial shares at the time of redemption.
5. TAXES: It is the Fund's intention to qualify as a regulated investment
company and distribute substantially all of its taxable income. Accordingly, no
provision for U.S. Federal income taxes is required in the financial statements.
Net capital losses incurred after October 31 and within the taxable year are
deemed to arise on the first business day of the Fund's next taxable year. For
the period from November 1, 1998 to June 30, 1999 the Fund incurred and elected
to defer until July 1, 1999, for U.S. Federal income tax purposes, net capital
losses of approximately $435,000.
At December 31, 1999, cost and unrealized appreciation/depreciation for U.S.
Federal income tax purposes of the investments of the Fund was:
<TABLE>
<CAPTION>
NET
APPRECIATION/
COST APPREC. DEPREC. DEPRECIATION
---- -------- ------------ -------------
<S> <C> <C> <C>
$39,909,830 $635,133 $(2,678,678) $(2,043,545)
</TABLE>
6. DISTRIBUTION OF INCOME AND GAINS: The amount and the character of income and
capital gain distributions to be paid by the Fund are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book to tax basis differences relating to shareholder distributions
may result in reclassification among accumulated net investment income/loss,
accumulated net realized gain/loss, and paid in capital in excess of par.
Permanent book to tax basis differences are not included in ending
undistributed/distributions in excess of net investment income for the purpose
of calculating net investment income/loss per share in the Financial Highlights.
B. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES: Van
Kampen Investment Advisory Corp. (the "Adviser"), a wholly owned subsidiary of
Van Kampen Investments Inc. (an indirect wholly owned subsidiary of Morgan
Stanley Dean Witter & Co.) and Morgan Stanley Dean Witter Investment Management
Inc. ( "MSDWIM" or a "Subadviser"), a wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., provide the Fund with investment advisory services at a fee
paid monthly and calculated at the annual rates based on average daily net
assets as indicated below. The Adviser has agreed to reduce advisory fees
payable to it and to reimburse the Fund, if necessary, if the annual operating
expenses, as defined, expressed as a percentage of average daily net assets,
exceed the maximum ratios indicated as follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
------------ ------------- -------------
<S> <C> <C>
0.75% 1.25% 2.00%
</TABLE>
For the period ended December 31, 1999, the Fund recognized expenses of $1,464
representing legal services provided by Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel to the Fund, of which a director of the Fund is an
affiliated person.
Van Kampen Investment Advisory Corp. (the "Administrator") also provides the
Fund with administrative services pursuant to an administrative agreement for a
monthly fee which on an annual basis equals 0.25% of the average daily net
assets of the Fund, plus reimbursement of out-of-pocket expenses. Under an
agreement between the Adviser and The Chase Manhattan Bank ("Chase"), through
its corporate affiliate Chase Global Funds Services Company ("CGFSC"), Chase
provides certain administrative services to the Fund. Chase is compensated for
such services by the Adviser from the fee it receives from the Fund. Transfer
Agency services are provided to the Fund by Van Kampen Investor Services Inc.,
an affiliate of the Adviser.
Van Kampen Funds Inc. the ("Distributor") a wholly owned subsidiary of Van
Kampen Investments Inc., an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co., serves as the Distributor of the Fund's shares. The
Distributor is entitled to receive from the Fund a distribution fee, which is
accrued daily and paid quarterly, of an amount of up to 0.25% of the Class A
shares and up to 1.00% of the Class B shares and Class C shares of the Fund, on
an annualized basis, of the average daily net assets attributable to each Class.
E-9
<PAGE> 416
VAN KAMPEN HIGH YIELD & TOTAL RETURN FUND
NOTES TO FINANCIAL STATEMENTS (CONT.)
DECEMBER 31, 1999
(UNAUDITED)
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B shares and Class C shares of the Fund
redeemed within one to five years following such purchase. For the period ended
December 31, 1999, the Distributor has advised the Fund that it earned initial
sales charges of $23,009 for Class A shares and deferred sales charges of
$56,215 and $611 for Class B shares and Class C shares, respectively.
Certain officers and directors of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or directors who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its directors
who are not officers of Van Kampen. Under the deferred compensation plan,
Directors may elect to defer all or a portion of their compensation to a later
date. Benefits under the retirement plan are payable for a ten-year period and
are based upon each Director's years of service to the Fund. The maximum annual
benefit per director under the plan is $2,500.
C. INVESTMENT TRANSACTIONS: For the period ended December 31, 1999, the Fund
made purchases of $6,954,776 and sales of $6,685,094 of investment securities
other than long-term U.S. government securities and short-term investments.
There were no purchases or sales of long-term U.S. government securities.
D. LINE OF CREDIT: In accordance with its investment policies, the Fund may
borrow from banks for temporary purposes and is subject to certain other
customary restrictions. Effective November 30, 1999, the Fund, in conjunction
with certain other funds of Van Kampen, has entered in to a $650,000,000
committed line of credit facility with a group of banks which expires on
November 28, 2000, but is renewable with the consent of the participating banks.
Each Fund is permitted to utilize the facility in accordance with the
restrictions of its prospectus. In the event the demand for the credit facility
meets or exceeds $650 million on a complex-wide basis, each Fund will be
limited to its pro-rata percentage based on the net assets of each participating
fund. Interest on borrowings is charged under the agreement at a rate of 0.50%
above the federal funds rate per annum. An annual commitment fee of 0.09% per
annum is charged on the unused portion of the credit facility, which each Fund
incurs based on its pro-rata percentage of quarterly net assets. The Fund made
no borrowings as of December 31, 1999.
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