<PAGE> 1
- --------------------------------------------------------------------------------
VAN KAMPEN HARBOR FUND
- --------------------------------------------------------------------------------
Van Kampen Harbor Fund (the "Fund") is a diversified, open-end management
investment company, commonly known as a mutual fund. The Fund's investment
objective is to seek to provide current income, capital appreciation, and
conservation of capital. The Fund seeks to achieve its investment objective by
investing principally in debt securities, primarily convertible bonds, and
convertible preferred stocks. There is no assurance that the Fund will achieve
its investment objective.
The Fund's investment adviser is Van Kampen Asset Management Inc. (the
"Adviser"). This Prospectus sets forth certain information that a prospective
investor should know before investing in the Fund. Please read it carefully and
retain it for future reference. The address of the Fund is 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181, and its telephone number is (800) 341-2911.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 30, 1998, as supplemented
on July 14, 1998 and November 2, 1998, containing additional information about
the Fund is hereby incorporated in its entirety into this Prospectus. A copy of
the Statement of Additional Information may be obtained without charge by
calling (800) 341-2911 or for Telecommunications Device for the Deaf at
(800) 421-2833. The Statement of Additional Information has been filed with the
Securities and Exchange Commission ("SEC") and is available along with other
related materials at the SEC's internet web site (http://www.sec.gov).
VAN KAMPEN FUNDS LOGO
THIS PROSPECTUS IS DATED APRIL 30, 1998, AS SUPPLEMENTED ON JULY 14, 1998,
NOVEMBER 12, 1998 AND DECEMBER 1, 1998.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Shareholder Transaction Expenses............................ 4
Annual Fund Operating Expenses and Example.................. 5
Financial Highlights........................................ 6
The Fund.................................................... 8
Investment Objective and Policies........................... 8
Risks of Medium and Lower-Rated Securities.................. 10
Investment Practices........................................ 11
Investment Advisory Services................................ 13
Alternative Sales Arrangements.............................. 14
Purchase of Shares.......................................... 16
Shareholder Services........................................ 22
Redemption of Shares........................................ 24
Distribution and Service Plans.............................. 26
Distributions from the Fund................................. 28
Tax Status.................................................. 28
Fund Performance............................................ 31
Description of Shares of the Fund........................... 32
Additional Information...................................... 32
Appendix -- Ratings of Senior Securities.................... 33
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
<PAGE> 3
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
THE FUND. Van Kampen Harbor Fund (the "Fund") is a diversified, open-end
management investment company organized as a Delaware business trust.
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment for each class of shares (or less as
described under "Purchase of Shares").
INVESTMENT OBJECTIVE. The investment objective of the Fund is to seek current
income, capital appreciation and conservation of capital. There is no assurance
that the Fund will achieve its investment objective. See "Investment Objective
and Policies."
INVESTMENT POLICY AND RISKS. The Fund seeks to achieve its investment objective
by investing principally in debt securities, primarily convertible bonds, and
convertible preferred stocks. The Fund may invest in lower-rated convertible
securities (commonly referred to as "junk bonds") which involve additional
risks. See "Risks of Medium and Lower-Rated Securities." Use of options, futures
contracts and related options may involve additional risks. See "Investment
Practices -- Using Options, Futures Contracts and Related Options."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table of
"Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
public, each with its own sales charge structure: Class A shares, Class B shares
and Class C shares. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class of shares that best
suits their circumstances and objectives. Each class of shares represents an
interest in the same portfolio of investments of the Fund. See "Alternative
Sales Arrangements." For information on redeeming shares see "Redemption of
Shares."
Class A Shares. Class A shares are offered at net asset value per share plus a
maximum initial sales charge of 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge ("CDSC") of 1.00% may be imposed on
redemptions made within one year of purchase. Class A shares are subject to an
annual service fee of up to 0.25% of its average daily net assets attributable
to such class of shares. See "Purchase of Shares --Class A Shares" and
"Distribution and Service Plans."
Class B Shares. Class B shares are offered at net asset value per share and
are subject to a maximum CDSC of 5.00% on redemptions made within the first year
after purchase and declining thereafter to 0.00% after the fifth year. See
"Redemption of Shares." Class B shares are subject to a combined annual
distribution fee and service fee of up to 1.00% of the Fund's average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class B
Shares" and "Distribution and Service Plans." Class B shares convert
automatically to Class A shares eight years after the end of the calendar month
in which the shareholder's order to purchase was accepted. See "Alternative
Sales Arrangements -- Conversion Feature."
Class C Shares. Class C shares are offered at net asset value per share and
are subject to a CDSC of 1.00% on redemptions made within one year of purchase.
See "Redemption of Shares." Class C shares are subject to a combined annual
distribution fee and service fee of up to 1.00% of the Fund's average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution and Service Plans."
INVESTMENT ADVISER. Van Kampen Asset Management Inc. (the "Adviser") is the
Fund's investment adviser.
DISTRIBUTOR. Van Kampen Funds, Inc. (the "Distributor") distributes the Fund's
shares.
DISTRIBUTIONS FROM THE FUND. Dividends from net investment income are
distributed quarterly. Capital gains, if any, are distributed at least annually.
Such distributions are automatically reinvested in shares of the Fund at net
asset value per share (without sales charge) unless payment in cash is
requested. See "Distributions from the Fund."
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
3
<PAGE> 4
- --------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge imposed on purchases (as a percentage
of offering price)........................................ 5.75%(1) None None
Maximum sales charge imposed on reinvested dividends (as a
percentage of offering price)............................. None None None
Deferred sales charge (as a percentage of the lesser of
original purchase price or redemption proceeds)........... None(2) Year 1--5.00% Year 1--1.00%
Year 2--4.00% After--None
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage of amount redeemed)........ None None None
Exchange fee................................................ None None None
</TABLE>
- --------------------------------------------------------------------------------
(1) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a CDSC of 1.00% may be imposed on redemptions made
within one year of purchase. See "Purchase of Shares -- Class A Shares."
4
<PAGE> 5
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average daily net
assets)................................................... 0.54% 0.54% 0.54%
12b-1 Fees (as a percentage of average daily net
assets)(1)................................................ 0.23% 1.00%(2) 1.00%(2)
Other Expenses (as a percentage of average daily net
assets)................................................... 0.27% 0.28% 0.28%
Total Fund Operating Expenses (as a percentage of average
daily net assets)......................................... 1.04% 1.82% 1.82%
</TABLE>
- --------------------------------------------------------------------------------
(1) Class A shares are subject to an annual 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. See "Distribution and Service Plans."
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (i) an operating expense ratio of 1.04% for Class
A shares, 1.82% for Class B shares and 1.82% for Class C
shares, (ii) a 5.00% annual return and (iii) redemption at
the end of each time period:
Class A................................................... $67 $89 $112 $177
Class B................................................... $68 $87 $114 $193*
Class C................................................... $28 $57 $ 99 $214
You would pay the following expenses on the same $1,000
investment assuming no redemption at the end of each time
period:
Class A................................................... $67 $89 $112 $177
Class B................................................... $18 $57 $ 99 $193*
Class C................................................... $18 $57 $ 99 $214
</TABLE>
- --------------------------------------------------------------------------------
* Based on conversion to Class A shares after eight years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and is
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5.00% annual
return assumption. The ten year amount with respect to Class B shares of the
Fund reflects the lower aggregate 12b-1 and service fees applicable to such
shares after conversion to Class A shares. Class B shares acquired through the
exchange privilege are subject to the CDSC schedule relating to the Class B
shares of the fund from which the purchase of Class B shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B shares were exchanged
from a fund with a higher CDSC. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services," "Redemption of Shares" and "Distribution and Service Plans."
5
<PAGE> 6
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for a share of beneficial interest
outstanding throughout each of the periods indicated)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report thereon was unqualified. The most
recent annual report (which contains financial highlights for the last five
years) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover page of this Prospectus. This information should be read in conjunction
with the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
------ ------ ------- ------- ------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $15.054 $15.05 $13.24 $15.12 $14.95 $14.92 $12.93 $14.05 $12.39 $11.48
------- ------ ------- ------- ------ ------- ------ ------- ------ ------
Net Investment Income............. .600 .566 0.68 0.63 0.69 0.75 0.825 0.995 0.895 0.85
Net Realized and Unrealized
Gain/Loss....................... 1.854 1.173 2.25 (1.5625) 1.365 0.6275 2.085 (1.1525) 1.605 1.03
------ ------ ------- ------- ------ ------- ------ ------- ------ ------
Total from Investment Operations... 2.454 1.739 2.93 (0.9325) 2.055 1.3775 2.91 (0.1575) 2.50 1.88
------ ------ ------- ------- ------ ------- ------ ------- ------ ------
Less:
Distributions From and in Excess
of Net Investment Income........ .730 .555 0.7025 0.62 0.66 0.84 0.92 0.87 0.84 0.84
Distributions From and in Excess
of Net Realized Gain............ 1.719 1.180 0.4175 0.108 1.225 0.5075 -- 0.0925 -- 0.13
Total Distributions................ 2.449 1.735 1.12 0.9475 1.885 1.3475 0.92 0.9625 0.84 0.97
------ ------ ------- ------- ------ ------- ------ ------- ------ ------
Net Asset Value, End of the
Period............................ $15.059 $15.05 $15.05 $13.24 $15.12 $14.95 $14.92 $12.93 $14.05 $12.39
======= ====== ======= ======= ====== ======= ====== ======= ====== ======
Total Return(a).................... 16.91% 12.08% 22.46% (6.43%) 13.56% 9.63% 23.08% (1.23%) 20.59% 16.76%
Net Assets, at End of the Period
(In Millions)..................... $376.4 $373.1 $394.5 $369.7 $432.3 $394.1 $385.5 $336.9 $387.3 $342.1
Ratio of Expenses to Average Net
Assets(b)......................... 1.04% 1.09% 1.00% 1.04% 1.02% 0.99% 0.91% 0.89% 0.76% 0.71%
Ratio of Net Investment Income to
Average Net Assets(b)............. 3.58% 3.60% 4.62% 4.39% 4.37% 5.00% 5.86% 7.29% 6.52% 6.82%
Portfolio Turnover................. 170% 129% 130% 105% 134% 85% 91% 71% 94% 95%
Average Commission Paid Per Equity
Share Traded(b)................... $.0599 $.0605 -- -- -- -- -- -- -- --
</TABLE>
(Table and footnotes continued on following page)
6
<PAGE> 7
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993(D) 1992(D)(E)
-------- -------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $14.992 $14.99 $13.20 $15.07 $14.90 $14.91
-------- -------- -------- -------- ------- --------
Net Investment Income............. 0.470 0.437 0.56 0.51 0.56 0.595
Net Realized and Unrealized
Gain/Loss on Securities......... 1.848 1.180 2.23 (1.5505) 1.375 0.63
-------- -------- -------- -------- ------- --------
Total from Investment Operations... 2.318 1.617 2.79 (1.0405) 1.935 1.225
-------- -------- -------- -------- ------- --------
Less:
Distributions from and in Excess
of Net Investment Income........ 6.10 0.435 0.5825 0.502 0.54 0.7275
Distributions from and in Excess
of Net realized gain on
securities...................... 1.719 1.180 0.4175 0.3275 1.225 0.5075
-------- -------- -------- -------- ------- --------
Total Distributions................ 2.329 1.615 1.00 0.8295 1.765 1.235
-------- -------- -------- -------- ------- --------
Net Asset Value, End of the
Period............................ $14.981 $14.992 $14.99 $13.20 $15.07 $14.90
======== ======== ======== ======== ======= ========
Total Return (a)................... 15.98% 11.19% 21.46% (7.11%) 12.68% 8.56%
Net Assets at End of the Period (In
millions)......................... $81.3 $78.9 $78.1 $71.1 $60.1 $20.0
Ratio of Expenses to Average Net
Assets (b)........................ 1.82% 1.88% 1.81% 1.84% 1.73% 1.88%
Ratio of Net Investment Income to
Average Net Assets (b)............ 2.80% 2.81% 3.81% 3.63% 3.62% 4.08%
Portfolio Turnover................. 170% 129% 130% 105% 134% 85%
Average Commission Paid Per
Equity Share Traded (c)........... $.0599 $.0605 -- -- -- --
<CAPTION>
CLASS C SHARES
-----------------------------------------------------------
OCTOBER 26,
1993
(COMMENCEMENT
YEAR ENDED DECEMBER 31, OF DISTRIBUTION
----------------------------------------- TO DECEMBER 31,
1997 1996 1995 1994 1993(D)
-------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................ $15.079 $15.07 $13.25 $15.13 $16.14
-------- -------- -------- -------- --------
Net Investment Income............. .448 0.439 0.56 0.52 0.15
Net Realized and Unrealized
Gain/Loss on Securities......... 1.882 1.185 2.26 (1.5705) (0.0325)
-------- -------- -------- -------- --------
Total from Investment Operations... 2.330 1.624 2.82 (1.0505) 0.1175
-------- -------- -------- -------- --------
Less:
Distributions from and in Excess
of Net Investment Income........ .610 0.435 0.5825 0.502 0.125
Distributions from and in Excess
of Net realized gain on
securities...................... 1.719 1.180 0.4175 0.3275 1.0025
-------- -------- -------- -------- --------
Total Distributions................ 2.329 1.615 1.00 0.8295 1.1275
-------- -------- -------- -------- --------
Net Asset Value, End of the
Period............................ $15.080 $15.079 $15.07 $13.25 $15.13
======== ======== ======== ======== ========
Total Return (a)................... 15.96% 11.20% 21.52% (7.14%) 0.93%*
Net Assets at End of the Period (In
millions)......................... $4.6 $3.6 $3.6 $3.3 $1.1
Ratio of Expenses to Average Net
Assets (b)........................ 1.82% 1.88% 1.80% 1.84% 1.90%
Ratio of Net Investment Income to
Average Net Assets (b)............ 2.79% 2.81% 3.80% 3.72% 3.88%
Portfolio Turnover................. 170% 129% 130% 105% 134%
Average Commission Paid Per
Equity Share Traded (c)........... .0599 $.0605 -- -- --
</TABLE>
- ------------
* Non-annualized
(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) The impact on the Ratios of Expenses and Net Investment Income to Average
Net Assets due to the Adviser's reimbursement of certain expenses was less
than 0.01%.
(c) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
(d) Based on average month-end shares outstanding.
(e) Sales of Class B shares commenced on December 20, 1991 at a net asset value
of $14.32 per share. At December 31, 1991, there were 15,738 Class B shares
outstanding with a per share net asset value of $14.91. The increase in net
asset value was due principally to unrealized appreciation; there were no
dividends or distributions paid during the period. Other financial
highlights for the Class B shares for this short period are not presented as
they are not meaningful.
7
<PAGE> 8
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
The Fund is a diversified, open-end management investment company, commonly
known as a mutual fund. A mutual fund provides, for those who have similar
investment goals, a practical and convenient way to invest in a diversified
portfolio of securities by combining their resources in an effort to achieve
such goals.
Van Kampen Asset Management Inc. (the "Adviser") provides investment advisory
and administrative services to the Fund. The Adviser or its affiliates also act
as investment adviser to other mutual funds distributed by Van Kampen Funds Inc.
(the "Distributor"). To obtain prospectuses and other information on any of
these other funds, please call the telephone number on the cover page of the
Prospectus.
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- --------------------------------------------------------------------------------
The Fund's investment objective is to seek to provide current income, capital
appreciation, and conservation of capital. The Fund seeks to achieve its
investment objective by investing principally in debt securities, primarily
convertible bonds, and convertible preferred stocks. The Fund has a fundamental
investment policy of investing, under normal market conditions, at least 50% of
the Fund's total assets, exclusive of cash, cash equivalents and government
securities, in convertible debt securities. There can be no assurance that the
Fund will achieve its investment objective.
Convertible bonds and preferred stocks generally are securities that do not
participate in any dividend increases or decreases of the underlying common
stocks. However, the market prices of convertible bonds and preferred stocks may
be affected by any such dividend changes. The Fund will give priority, where
consistent with its other objectives, to the convertible securities and common
stocks of companies whose common stocks appear to have good prospects for
capital appreciation. This policy will ordinarily emphasize companies that have
an established record of growth. However, the Fund may invest in more cyclical
companies when the investment can be made at prices considered attractive by the
Adviser. The Fund has a fundamental investment policy of not investing more than
45% of its total assets in common stocks.
Convertible securities rank senior to common stocks in a corporation's capital
structure and generally entail less risk than the corporation's common stock,
although the extent to which such risk is reduced depends in large measure upon
the degree to which the convertible security sells above its value as a fixed
income security. Through careful selection of individual securities,
diversification of investments, and by continuing supervision of the investment
portfolio, the Adviser strives to reduce risk and thereby conserve principal.
While attractive convertible securities of desired quality may not be available
in all industries at all times, their general availability is considered by the
Adviser to be more than adequate in light of the Fund's investment objectives.
Debt securities acquired by the Fund are not subject to any limitations as to
ratings and may include high, medium, lower and non-rated debt securities. To
the extent that the Fund invests a large portion of its total assets in
lower-rated securities, the Fund's ability to conserve shareholder capital may
be diminished.
Medium grade debt securities are those rated BBB by Standard & Poor's ("S&P")
or Baa by Moody's Investors Service, Inc. ("Moody's"), comparably rated
short-term debt obligations and unrated debt securities determined by the
Adviser to be of comparable quality. Debt securities rated BBB by S&P generally
are regarded by S&P as having an adequate capacity to pay interest and repay
principal; adverse economic conditions or changing circumstances are, however,
more likely in S&P's view to lead to a weakened capacity to pay interest and
repay principal as compared with higher rated debt securities. Debt securities
rated Baa by Moody's generally are considered by Moody's as medium grade
obligations, i.e., they are neither highly protected nor poorly secured. In
Moody's view, interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. In Moody's view,
such securities lack outstanding investment characteristics and have speculative
characteristics as well.
Lower grade debt securities are those rated between BB and D (inclusive) by
S&P, Ba and C by Moody's, comparably rated short-term debt obligations and
unrated debt securities determined by the Adviser to be of comparable quality,
which securities sometimes are referred to as "junk bonds". Debt securities
rated BB, B, CCC, CC and C by S&P generally are regarded by S&P, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
8
<PAGE> 9
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation with
respect to such securities. While such debt will likely have some quality and
protective characteristics, in S&P's view these are outweighed by large
uncertainties or major risk exposures to adverse conditions. Securities rated D
by S&P are in default. Securities rated Ba are, in Moody's view, judged to have
speculative elements; their future cannot be considered as well assured. In
Moody's view, often the protection of interest and principal payments may be
very moderate and thereby not as well safeguarded during both good and bad times
in the future. Securities rated B by Moody's are viewed by Moody's as generally
lacking characteristics of a desirable investment. In Moody's view, assurance of
interest and principal payments or of maintenance of other terms of the contract
over any long period of time may be small. Bonds which are rated Caa by Moody's
are of poor standing. Such issues may be in default or there may be present
elements of danger with respect to principal or interest. Bonds which are rated
Ca by Moody's represent obligations which are speculative in a high degree. Such
issues are often in default or have other market shortcomings. Bonds which are
rated C by Moody's 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. A complete description of the various S&P and Moody's
rating categories is included as Appendix A to this Prospectus.
During the fiscal year ended December 31, 1997, the average percentage of the
Fund's assets invested in debt securities within the various rating categories
(based on the higher of the S&P or Moody's ratings), and the non-rated debt
securities, determined on a dollar weighted average, were as follows:
<TABLE>
<CAPTION>
ACTUAL IMPLIED TOTAL
------ ------- ------
<S> <C> <C> <C>
AAA......................................................... 2.38% 0.00% 2.38%
AA.......................................................... 5.16% 0.00% 5.16%
A........................................................... 21.98% 2.01% 23.99%
BBB......................................................... 18.39% 1.87% 20.26%
BB.......................................................... 11.36% 1.96% 13.32%
B........................................................... 25.41% 8.38% 33.79%
CCC......................................................... 0.52% 0.55% 1.07%
CC.......................................................... 0.00% 0.03% 0.03%
C........................................................... 0.00% 0.00% 0.00%
D........................................................... 0.00% 0.00% 0.00%
----- ----- ------
85.20% 14.80% 100.00%
===== ===== ======
</TABLE>
In abnormal market conditions, the Fund may invest up to 100% of its assets in
cash, cash equivalents and government securities for temporary defensive
purposes. Cash equivalents include certificates of deposit, prime commercial
paper, bankers' acceptances and repurchase agreements.
An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.
YEAR 2000 RISKS. Like other mutual funds, financial and business organizations
and individuals around the world, the Fund could be adversely affected if the
computer systems used by the Adviser and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem". The Adviser is
taking steps that it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems that it uses and to obtain reasonable
assurances that comparable steps are being taken by the Fund's other major
service providers. At this time, there can be no assurance that these steps will
be sufficient to avoid any adverse impact upon the Fund. In addition, the Year
2000 Problem may adversely affect the markets and the issuers of securities in
which the Fund may invest which, in turn, may adversely affect the net asset
value of the Fund. Improperly functioning trading systems may result in
settlement problems and liquidity issues. In addition, corporate and
governmental data processing errors may result in production problems for
individual companies and overall economic uncertainties. Earnings of individual
issuers will be affected by remediation costs, which may be substantial and may
be reported inconsistently in U.S. and foreign financial statements.
Accordingly, the Fund's investments may be adversely affected.
9
<PAGE> 10
- --------------------------------------------------------------------------------
RISKS OF MEDIUM AND LOWER-RATED SECURITIES
- --------------------------------------------------------------------------------
Debt securities which are in the medium and lower grade categories generally
offer a higher current yield than is offered by higher grade debt securities,
but they also generally involve greater price volatility and greater credit and
market risk. Credit risk relates to the issuer's ability to make timely payment
of interest and principal when due. Market risk relates to the changes in market
value that occur as a result of variation in the level of prevailing interest
rates and yield relationships in the debt securities market and as a result of
real or perceived changes in credit risk.
The value of the Fund's portfolio securities 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. However, the secondary market prices of
medium and lower grade debt securities are less sensitive to changes in interest
rate and are more sensitive to adverse economic changes or developments with
respect to the particular issues 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 debt
securities and adversely affect the market value of such securities. Such events
also could lead to a higher incidence of default by issuers of lower grade debt
securities as compared with historical default rates. In addition, changes in
interest rates and periods of economic uncertainty can be expected to result in
increased volatility in the market price of the debt securities in the Fund's
portfolio 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 and liquidity of medium and lower grade debt securities.
Increases in interest rates and changes in the economy may adversely affect
the ability of issuers of medium and lower grade debt securities to pay interest
and to repay principal, to meet projected financial goals and to obtain
additional financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the 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 portfolio
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 thereof.
To the extent that there is no established retail market for some of the
medium or lower grade debt securities in which the Fund may invest, trading in
such securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees. During periods of reduced market liquidity and in the absence
of readily available market quotations for medium and lower grade debt
securities held in the Fund's portfolio, the ability of the Adviser to value the
Fund's securities becomes more difficult and the Adviser's use of judgment may
play a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. 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. Further, the 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. To
the extent that the Fund purchases illiquid debt securities or securities which
are restricted as to resale, the Fund may be required to incur costs in
connection with the registration of restricted securities in order to dispose of
such securities, although under Rule 144A under the Securities Act of 1933, as
amended (the "1933 Act"), such securities may become more liquid.
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In its analysis, the Adviser may
consider the credit ratings of Moody's and S&P in evaluating debt securities
although it does not rely primarily on these ratings. Such ratings evaluate only
the safety of principal and interest payments, not market value risk.
Additionally, because the creditworthiness of an issuer may change more rapidly
than is able to be timely reflected in changes in credit ratings, the Adviser
continuously monitors the issuers of debt securities held in the Fund's
portfolio. Because of the nature of medium and lower rated debt securities,
achievement by the Fund of its investment objective may be more dependent on the
credit analysis of the Adviser than is the case for an investment company which
invests primarily in higher grade securities.
10
<PAGE> 11
CONVERTIBLE SECURITIES. A "convertible security" includes any debt security
which has the right to be converted into any other security or which carries
with it the right to purchase any other security, any unit including one of the
foregoing, and any other security for which it is expected that one of the
foregoing will be received in exchange within a reasonably short period of time
in a merger, acquisition, reorganization, recapitalization, or otherwise. A
convertible security entitles the holder to exchange it for a fixed number of
shares of common stock or other equity security, usually of the same company, at
fixed prices within a specified period of time. A convertible security entitles
the holder to receive the income of a bond or the dividend preference of a
preferred stock until the holder elects to exercise the conversion privilege.
The difference between the market price of the convertible security and the
market price of the securities into which it may be converted is called the
"premium." When the premium is small, the convertible security has performance
characteristics similar to an equity security; when the premium is large, the
convertible security has performance characteristics similar to a debt security.
The conversion privilege may take the form of warrants attached to the bond or
preferred stock which entitle the holder to purchase a specific number of shares
of common stock or other equity security, usually of the same company, at fixed
prices for a specified period of time.
- --------------------------------------------------------------------------------
INVESTMENT PRACTICES
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks or broker-dealers in order to earn a return on temporarily available cash.
A repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the holding period. Repurchase agreements involve certain risks
in the event of default by the other party. The Fund may invest up to 25% of its
assets in repurchase agreements but will not invest in repurchase agreements
that do not mature within seven days if any such investment, together with any
other illiquid securities held by the Fund, would exceed 10% of the value of its
net assets. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and loss including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto, (b) possible lack of access to income on the underlying security
during this period and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that 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 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 SEC exemptive order authorizing this practice, which
conditions are designed to ensure the fair administration of the joint account
and to protect the amounts in that account.
RESTRICTED SECURITIES. The Fund may invest up to 10% of its net assets in
restricted securities and other illiquid assets. As used herein, restricted
securities are those that have been sold in the United States without
registration under the 1933 Act and are thus subject to restrictions on resale.
Excluded from the limitation, however, are any restricted securities which are
eligible for resale pursuant to Rule 144A under the 1933 Act and which have been
determined to be liquid by the Trustees or by the Adviser pursuant to guidelines
established by the Trustees. Restricted securities generally may be resold only
in privately negotiated transactions with a limited number of purchasers or in a
public offering registered under the 1933 Act. Considerable delay could be
encountered in either event. These difficulties and delays could result in the
Fund's inability to realize a favorable price upon disposition of restricted
securities, and in some cases might make disposition of such securities at the
time desired by the Fund impossible. Since market quotations may not be readily
available for restricted securities, such securities will be valued by a method
that the Fund's Trustees believe accurately reflects fair value. Also excluded
from this limitation are securities of other investment companies to the extent
permitted by (i) the Investment Company Act of 1940, as amended from time to
time (the "1940 Act"), (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, or (iii) an exemption or other relief from the provisions of
the 1940 Act.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize options, futures contracts and options thereon in several different
ways, depending upon the status of the Fund's portfolio and the Adviser's
expectations
11
<PAGE> 12
concerning the securities markets. The Fund may use one or more of the following
strategies in connection with the equity portion of its portfolio.
In times of stable or rising stock prices, the Fund generally seeks to be
fully invested in the equity securities market. Even when the Fund is fully
invested, however, prudent management requires that at least a small portion of
assets be available as cash to honor redemption requests and for other
short-term needs. The Fund also may have cash on hand that has not yet been
invested. The portion of the Fund's assets that is invested in cash equivalents
does not fluctuate with security market prices, so that, in times of rising
market prices, the Fund may underperform the market in proportion to the amount
of cash equivalents in its portfolio. By purchasing stock index futures
contracts, however, the Fund can compensate for the cash portion of its assets
and may obtain performance equivalent to investing 100% of its assets in equity
securities.
If the Adviser forecasts a market decline, the Fund may seek to reduce its
exposure to the securities markets by increasing its cash position. By selling
stock index futures contracts instead of portfolio securities, a similar result
can be achieved to the extent that the performance of the futures contracts
correlates to the performance of the Fund's portfolio securities. Sales of
futures contracts frequently may be accomplished more rapidly and at less cost
than the actual sale of securities. Once the desired hedged position has been
effected, the Fund could then liquidate securities in a more deliberate manner,
reducing its futures position simultaneously to maintain the desired balance, or
it could maintain the hedged position.
As an alternative to selling futures contracts, the Fund can purchase puts, or
futures puts, to hedge the portfolio's risk in a declining market. Since the
value of a put increases as the underlying security declines below a specified
level, the value is protected against a market decline to the degree the
performance of the put correlates with the performance of the Fund's investment
portfolio. If the market remains stable or advances, the Fund can refrain from
exercising the put and its portfolio will participate in the advance, having
incurred only the premium cost for the put.
In addition, the Fund would pay commissions and other costs in connection with
such investments, which may increase the Fund's expenses and reduce its return.
The Fund is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC Options are purchased from or sold to securities dealers,
financial institutions or other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. The Fund will sell only OTC Options
(other than over-the-counter currency options) that are subject to a buy-back
provision permitting the Fund to require 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 investing no more than 10% of its assets in illiquid
securities. The Fund will not enter into a futures contract or related option
(except for closing transactions) other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options, thereon would exceed 5% of the Funds
total assets taken at current value. 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. Use of options and futures would be likely to
increase the Fund's portfolio turnover rate and increase transaction costs.
POTENTIAL RISKS OF OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. In certain
cases, the options and futures markets provide investment or risk management
opportunities that are not available from direct investments in securities. In
addition, some strategies can be performed with greater ease and at lower cost
by utilizing the options and futures markets than by purchasing or selling
portfolio securities. However, the purchase and sale of options, futures
contracts and related options involve risks different from those involved with
direct investments in underlying securities. While utilization of options,
futures contracts and similar instruments may be advantageous to the Fund, if
the Adviser is not successful in employing such instruments in managing the
Fund's investments, the Fund's performance will be worse than if the Fund did
not make such investments.
In order to prevent leverage in connection with the purchase of futures
contracts thereon 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.
Capital gains realized by the Fund from transactions in options and futures
contracts may increase shareholders' tax liability if not offset by capital
losses realized by the Fund. A more complete discussion of the potential risks
involved in transactions in options, futures contracts and related options is
contained in the Statement of Additional Information.
12
<PAGE> 13
PORTFOLIO TURNOVER. The Fund may purchase and sell securities without regard
to the length of time the security is anticipated to be or has been held. The
Fund's annual portfolio turnover is shown in the table of "Financial
Highlights." The rate may exceed 100% in any given year, which is higher than
that of many other investment companies. A 100% turnover rate occurs, for
example, if all the Fund's portfolio securities are replaced during one year.
High portfolio activity 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 lower portfolio turnover. To the extent
short-term trading results in realization of gains on securities held for one
year or less, shareholders are subject to taxes at ordinary income rates. The
turnover rate will not be a limiting factor, however, if the Adviser deems
portfolio changes appropriate.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Fund and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuing basis. The Adviser may place portfolio transactions, to the
extent permitted by law, with brokerage firms affiliated with the Fund, the
Adviser or the Distributor and with firms participating in the distribution of
shares of the Fund if it reasonably believes that the quality of the execution
and the commissions are comparable to that available from other qualified firms.
The Adviser is authorized to pay higher commissions to brokerage firms that
provide it with investment and research information than to firms which do not
provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. The information
received may be used by the Adviser in managing the assets of other advisory
accounts as well as in the management of the assets of the Fund.
INVESTMENT RESTRICTIONS. The Fund has adopted certain restrictions which, like
the investment objective, may not be changed without approval by a vote of a
majority of the outstanding voting shares of the Fund (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")). See the Statement
of Additional Information. One of these restrictions provides that the Fund may
not invest more than 25% of its assets in securities issued by companies in any
one industry.
In addition to the foregoing, the Fund has adopted additional investment
restrictions which may be changed by the Trustees without a vote of
shareholders. One of these restrictions provides that the Fund may not invest
more than 15% of the value of its total assets in securities of foreign issuers.
Such securities may be subject to foreign government taxes which would reduce
the income yield on such securities. Foreign investments involve certain risks,
such as political or economic instability of the issuer or of the country of
issue, the difficulty of predicting international trade patterns, fluctuating
exchange rates and the possibility of imposition of exchange controls. Such
securities may also be subject to greater fluctuations in price than securities
of domestic corporations or of the United States Government. In addition, there
may be less publicly available information about a foreign company than about a
domestic company. Foreign companies generally are not subject to uniform
accounting, auditing and financial reporting standards comparable to those
applicable to domestic companies. There is generally less government regulation
of stock exchanges, brokers and listed companies abroad than in the United
States, and, with respect to certain foreign countries, there is a possibility
of expropriation or confiscatory taxation, or diplomatic developments which
could affect investment in those countries. Finally, in the event of a default
on any such foreign debt obligations, it may be more difficult for the Fund to
obtain or to enforce a judgment against the issuers of such securities.
Another of these restrictions provides that the Fund may not invest more than
10% of its net assets, determined at the time of investment, in illiquid
securities and repurchase agreements that have a maturity of longer than seven
days.
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- --------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen
Investments Inc. ("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 $65 billion
under management or supervision. Van Kampen's more than 50 open-end and 39
closed-end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide. Van Kampen Funds Inc., the
distributor of the Fund and the sponsor of the funds mentioned above, is also a
wholly owned subsidiary of Van Kampen. Van Kampen is an indirect wholly owned
subsidiary of Morgan Stanley Dean Witter & Co. The Adviser's principal office is
located at 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181.
13
<PAGE> 14
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset 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.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to average daily net assets of the
Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
------------------------ -------------
<S> <C>
First $350 million.......................................... 0.55 of 1.00%
Next $350 million........................................... 0.50 of 1.00%
Next $350 million........................................... 0.45 of 1.00%
Over $1.05 billion.......................................... 0.40 of 1.00%
</TABLE>
Under the Advisory Agreement, the Fund also reimburses the Adviser for the cost
of the Fund's accounting services, which include maintaining its financial books
and records and calculating its daily net asset value. Operating expenses paid
by the Fund include service fees, distribution fees, custodian fees, legal and
accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons, as defined in the 1940 Act,
of the Adviser, Distributor, Van Kampen Investor Services Inc. ("Investor
Services"), Van Kampen or Morgan Stanley Dean Witter & Co.), and all other
business expenses not specifically assumed by the Adviser. Advisory (management)
fee and total operating expense ratios are shown under the caption "Annual Fund
Operating Expenses and Example" herein.
From time to time the Adviser or Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them to the extent
of, or bearing expenses in excess of, such limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Investment
Advisory Corp. ("Advisory Corp.").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. The Fund is managed by a management team headed by
Christine Drusch. Ms. Drusch has been primarily responsible for managing the
Fund's investment portfolio since February 1998. Ms. Drusch has been an
Assistant Vice President of the Adviser and Advisory Corp. since September 1995.
Prior to that time, Ms. Drusch was Associate Portfolio manager of the Adviser.
Matthew Hart and David McLaughlin are co-managers, responsible for the
day-to-day management of the Fund's investment portfolio. Mr. Hart has been
Associate Portfolio Manager of the Adviser and Advisory Corp. since August 1997.
Prior to that time, Mr. Hart was with AIM Capital Management. Mr. McLaughlin has
been Associate Portfolio Manager of the Adviser and Advisory Corp. since October
1998. Mr. McLaughlin has worked for the Adviser since 1986.
- --------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- --------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares of the Fund that is most beneficial given the amount of the
purchase and the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 5.75% of the offering price (6.10% of the net
amount invested), reduced on investments of $50,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a CDSC of 1.00% may be imposed on certain
14
<PAGE> 15
redemptions made within one year of the purchase. Class A shares are subject to
an ongoing service fee at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Certain purchases
of Class A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within five years of purchase. Class B
shares are subject to an ongoing service fee at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class B shares
and an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class B shares. Class B
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. Class B shares convert
automatically to Class A shares eight years after the end of the calendar month
in which the shareholder's order to purchase was accepted. See "Purchase of
Shares -- Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares."
CONVERSION FEATURE. Class B shares purchased on or after June 1, 1996, and any
dividend reinvestment plan shares received thereon, 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 shares received thereon, automatically convert to
Class A shares six years after the end of the calendar month in which the shares
were purchased. Class C shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge. The conversion schedule applicable to a share acquired through the
exchange privilege is determined by reference to the Participating Fund (defined
below) from which such share was originally purchased.
The conversion of such shares to Class A shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Internal Revenue Code of 1986, as amended
(the "Code"), and (ii) the conversion of shares does not constitute a taxable
event under federal income tax law. The conversion may be suspended if such an
opinion is no longer available and such shares might continue to be subject to
the higher aggregate fees applicable to such shares for an indefinite period.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the higher aggregate fees and CDSC on Class B shares and Class C shares would be
less than the initial sales charge on Class A shares purchased at the same time,
and to what extent such differential would be offset by the potentially higher
dividends per share on Class A shares. To assist investors in making this
determination, the table under the caption "Annual Fund Operating Expenses and
Example" sets forth examples of the charges applicable to each class of shares.
In this regard, Class A shares may be more beneficial to the investor who
qualifies for reduced initial sales charges or purchases shares at net asset
value. It is presently the policy of the Distributor not to accept any order of
$500,000 or more for Class B shares or any order of $1 million or more for Class
C shares as it would ordinarily be more beneficial for such an investor to
purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a CDSC. Ongoing distribution fees on Class B shares and
Class C shares may be offset to the extent of the additional funds originally
invested and any return realized on those funds. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. For
15
<PAGE> 16
investments held for ten years or more, the relative value upon liquidation of
the three classes tends to favor Class A shares or Class B shares, rather than
Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges or have a longer-term investment horizon.
Class B shares may be appropriate for investors who wish to avoid a front-end
sales charge, put 100% of their investment dollars to work immediately or have a
longer-term investment horizon. Class C shares may be appropriate for investors
who wish to avoid a front-end sales charge, put 100% of their investment dollars
to work immediately, have a shorter-term investment horizon or desire a short
CDSC schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Sales personnel of broker-dealers distributing the Fund's shares and
other persons entitled to receive compensation for selling such shares may
receive differing compensation for selling such shares. INVESTORS SHOULD
UNDERSTAND THAT THE PURPOSE AND FUNCTION OF THE CDSC AND ONGOING DISTRIBUTION
FEE WITH RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE
OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution
and Service Plans."
GENERAL. Dividends paid by the Fund with respect to Class A shares, Class B
shares and Class C shares will be calculated in the same manner at the same time
on the same day, except that the higher distribution fees and transfer agency
costs relating to Class B shares or Class C shares will be borne by the
respective class. See "Distributions from the Fund." Shares of the Fund may be
exchanged, subject to certain limitations, for shares of the same class of
certain other mutual funds advised by the Adviser and its affiliates and
distributed by the Distributor. See "Shareholder Services -- Exchange
Privilege."
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
The Fund offers three classes of shares to the public on a continuous basis
through the Distributor as principal underwriter, which is located at 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered through members
of the National Association of Securities Dealers, Inc. ("NASD") who are acting
as securities dealers ("dealers") and NASD members or eligible non-NASD members
who are acting as brokers or agents for investors ("brokers"). The "dealers" and
"brokers" are sometimes referred to collectively herein as "authorized dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
also may be purchased by completing the application accompanying this Prospectus
and forwarding the application, through the authorized dealer, to the
shareholder service agent, Investor Services, a wholly owned subsidiary of Van
Kampen. When purchasing shares of the Fund, investors must specify whether the
purchase is for Class A shares, Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or deferred sales charge depending on the class of shares chosen by
the investor, as shown in the tables herein. Net asset value per share for each
class is determined once daily as of the close of trading on the New York Stock
Exchange (the "Exchange") (currently 4:00 p.m., New York time) each day the
Exchange is open. Net asset value per share for each class is determined by
dividing the value of the Fund's securities, cash and other assets (including
accrued interest) attributable to such class, less all liabilities (including
accrued expenses) attributable to such class by the total number of shares of
the class outstanding.
Securities and options listed or traded on a national securities exchange are
valued at the last sale price. Unlisted securities and listed securities for
which the last sale price is not available are valued at the most recent bid
price, except unlisted convertible securities, which are valued at the higher of
their bid price or the value of the securities issuable on conversion. Listed
options for which the last sale price is not available are valued at the mean
between the bid and asked
16
<PAGE> 17
prices. Short-term investments are valued in the manner described in the notes
to the financial statements contained in the Statement of Additional
Information.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class A
shares, Class B shares and Class C shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable with respect to the Class B shares and Class C
shares and the differential in the dividends paid on the classes of shares. The
price paid for shares purchased is based on the next calculation of net asset
value (plus sales charges, where applicable) after an order is received by an
authorized dealer provided such order is transmitted to the Distributor prior to
the Distributor's close of business on such day. Orders received by authorized
dealers after the close of the Exchange are priced based on the next close,
provided they are received by the Distributor prior to the Distributor's close
of business on such day. It is the responsibility of authorized dealers to
transmit orders received by them to the Distributor so they will be received
prior to such time. Orders of less than $500 are mailed by the authorized dealer
and processed at the offering price next calculated after acceptance by Investor
Services.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights except that (i) Class B shares
and Class C shares bear the expenses of the deferred sales arrangement and any
expenses (including the higher distribution fee and transfer agency costs)
resulting from such sales arrangement, (ii) generally, each class has exclusive
voting rights with respect to approvals of the Rule 12b-1 distribution plan
pursuant to which its distribution fee or service fee is paid, (iii) each class
of shares has different exchange privileges, (iv) certain classes of shares are
subject to a conversion feature and (v) certain classes of shares have different
shareholder service options available. The net income attributable to Class B
shares and Class C shares and the dividends payable on Class B shares and Class
C shares will be reduced by the amount of the distribution fee and other
expenses associated with such shares. Sales personnel of authorized dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling Class A shares, Class B shares or Class C shares.
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 dealers 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. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. 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. 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 the Fund will receive from such sale.
17
<PAGE> 18
CLASS A SHARES
The public offering price of Class A shares is the net asset value plus a
sales charge, as set forth below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
AS % OF AS % OF DEALERS (AS
SIZE OF OFFERING NET AMOUNT % OF OFFERING
INVESTMENT PRICE INVESTED 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 for such investments the Fund imposes a CDSC of
1.00% on redemptions made within one year of the purchase. A commission
will be paid to authorized dealers who initiate and are responsible for
purchases of $1 million or more 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.
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to authorized dealers that sell shares of the Fund. Authorized
dealers which are reallowed all or substantially all of the sales commissions
may be deemed to be underwriters for purposes of the 1933 Act.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to authorized dealers described herein. Such
financial institutions, other industry professionals and authorized dealers are
hereinafter referred to as "Service Organizations." Banks are currently
prohibited from providing certain underwriting or distribution services. If
banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretation of federal law
expressed herein and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their authorized dealers, must notify the Fund at the time of
the purchase order whenever a quantity discount is applicable to purchases. Upon
such notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their authorized
dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and children under 21 years of age and any corporation, partnership
or sole proprietorship which is 100% owned, either alone or in combination, by
any of the foregoing; a trustee or other fiduciary purchasing for a single trust
or for a single fiduciary account, or a "company" as defined in Section 2(a)(8)
of the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by the Adviser or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales charge
table applies to the total dollar amount being invested by any person in shares
of the Fund, or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
18
<PAGE> 19
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a
thirteen-month period to determine the sales charge as outlined in the preceding
sales charge table. The size of investment shown in the preceding table also
includes purchases of shares of the Participating Funds over a thirteen-month
period based on the total amount of intended purchases plus the value of all
shares of the Participating Funds previously purchased and still owned. An
investor may elect to compute the thirteen-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. If the goal is not achieved within the period, the investor
must pay the difference between the sales charges applicable to the purchases
made and the sales charges previously paid. The initial purchase must be for an
amount equal to at least 5% of the minimum total purchase amount of the level
selected. If trades not initially made under a Letter of Intent subsequently
qualify for a lower sales charge through the 90-day back-dating provisions, an
adjustment will be made at the expiration of the Letter of Intent to give effect
to the lower charge. Such adjustments in sales charge will be used to purchase
additional shares for the shareholder at the applicable discount category.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit investment trust reinvestment programs and purchases by
registered representatives of selling firms or purchases by persons affiliated
with the Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
Unit Investment Trust Reinvestment Programs. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
shares of the Fund at net asset value and with no minimum initial or subsequent
investment requirement if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all other investments made
from unit trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the authorized dealer,
if any, through which such participation in the qualifying program was initiated
0.50% of the offering price as a dealer concession or agency commission. Persons
desiring more information with respect to this program, including the applicable
terms and conditions thereof, should contact their authorized dealer or the
Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each participating investor in a computerized format fully
compatible with Investor Services' processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Advisory Corp. and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above, or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
19
<PAGE> 20
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
their spouses and children under 21 years of age when purchasing for any
accounts they beneficially own, or, in the case of any such financial
institution, when purchasing for retirement plans for such institution's
employees, provided that such purchases are otherwise permitted by such
institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers
through which purchases are made an amount up to 0.50% of the amount
invested over a twelve-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such alliance
programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distribution from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen Trust Company served as custodian will not
be eligible for net asset value purchases based on the aggregate
investment made by the plan or the number of eligible employees, except
under certain uniform criteria established by the Distributor from time to
time. Prior to February 1, 1997, a commission will be paid to authorized
dealers who initiate and are responsible for such purchases within a
rolling twelve-month period as follows: 1.00% on sales to $5 million, plus
0.50% on the next $5 million and 0.25% on the excess over $10 million. For
purchases on February 1, 1997 and thereafter, a commission will be paid as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million,
plus 0.50% on the next $47 million and 0.25% on the excess over $50
million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified
group does not include one whose sole organizational nexus, for example,
is that its participants are credit card holders of the same institution,
policy holders of an insurance company, customers of a bank or
broker-dealer, clients of an investment adviser or other similar groups.
Shares purchased in each group's participants account in connection with
this privilege will be subject to a CDSC of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual 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.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
20
<PAGE> 21
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described
herein under "Distribution and Service Plans" on purchases made as described in
(3) through (9) above. The Fund may terminate, or amend the terms of, offering
shares of the Fund at net asset value to such groups at any time.
CLASS B SHARES
Class B shares are offered at net asset value. Class B shares which are
redeemed within five years of purchase are subject to a CDSC at the rates set
forth in the following table charged as a percentage of the dollar amount
subject thereto. The charge is assessed on an amount equal to the lesser of the
then current market value or the cost of the shares being redeemed. Accordingly,
no sales charge is imposed on increases in net asset value above the initial
purchase price. In addition, no charge is assessed on shares derived from
reinvestment of dividends or capital gains distributions. It is presently the
policy of the Distributor not to accept any order for Class B shares in an
amount of $500,000 or more because it ordinarily will be more advantageous for
an investor making such an investment to purchase Class A shares.
The amount of the CDSC, if any, varies depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchase of shares, all payments
during a month are aggregated and deemed to have been made on the last day of
the month.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
<S> <C>
- ----------------------------------------------------------------------------------------------
First....................................................... 5.00%
Second...................................................... 4.00%
Third....................................................... 3.00%
Fourth...................................................... 2.50%
Fifth....................................................... 1.50%
Sixth and after............................................. None
</TABLE>
- --------------------------------------------------------------------------------
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first of any shares in the shareholder's Fund account
that are not subject to a CDSC, second of shares held for over five years and
third of shares held longest during the five year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4.00% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4.00% of the purchase amount will be paid
to authorized dealers at the time of purchase. Additionally, the Distributor
may, from time to time, pay additional promotional incentives, in the form of
cash or other compensation, to authorized dealers that sell Class B shares of
the Fund.
CLASS C SHARES
Class C shares are offered at net asset value. Class C shares which are
redeemed within the first year of purchase are subject to a CDSC of 1.00%. The
charge is assessed on an amount equal to the lower of the then current market
value or the cost of the shares being redeemed. Accordingly, no sales charge is
imposed on increases in net asset value above the initial purchase price. In
addition, no charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. It is presently
21
<PAGE> 22
the policy of the Distributor not to accept any order for Class C shares in an
amount of $1 million or more because it ordinarily will be more advantageous for
an investor making such an investment to buy Class A shares.
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first of any shares in the shareholder's Fund account
that are not subject to a CDSC and second of shares held for more than one year.
A commission or transaction fee of up to 1.00% of the purchase amount will be
generally paid to authorized dealers at the time of purchase. Authorized dealers
also will be paid ongoing commissions and transaction fees of up to 0.75% of the
average daily net assets of the Fund's Class C shares annually commencing in the
second year after purchase. Additionally, the Distributor may, from time to
time, pay additional promotional incentives, in the form of cash or other
compensation, to authorized dealers that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The CDSC is waived on redemptions of Class B shares and Class C shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with required minimum distributions from an IRA or other
retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan but
limited to 12% annually of the initial value of the account and (iv) in
circumstances under which no commission or transaction fee is paid to authorized
dealers at the time of purchase of such shares; and (v) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The CDSC is also waived on redemptions of Class C shares
as it relates to the reinvestment of redemption proceeds in shares of the same
class of the Fund within 180 days after redemption. See the Statement of
Additional Information for further discussion of waiver provisions.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. The
following is a description of such 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
administration services related to the maintenance of shareholder accounts.
Except as described in this Prospectus, after each share transaction in an
account, the shareholder receives a statement showing the activity in the
account. Each shareholder who has an account in certain of the Participating
Funds will receive statements quarterly from Investor Services showing any
reinvestments of dividends and capital gains distributions and any other
activity in the account since the preceding statement. Such shareholders also
will receive separate confirmations for each purchase or sale transaction other
than reinvestment of dividends and capital gains distributions and systematic
purchases or redemptions. Additions to an investment account may be made at any
time by purchasing shares through authorized 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
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen Funds, c/o Van Kampen Investor Services Inc., P.O. Box
418256, Kansas City, MO 64141-9256, 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 a fee for replacing the lost
certificates 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.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value per share (without sales
charge) on the record date. Unless the shareholder instructs otherwise, the
reinvestment plan is automatic. This instruction may be made by telephone by
calling (800) 341-2911 ((800) 421-2833 for the hearing impaired) or in writing
to Investor Services. The investor may, on the initial application or prior to
any declaration, instruct that dividends be paid in cash and capital gains
distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash.
22
<PAGE> 23
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize Investor Services to debit a bank account on a
regular basis to invest predetermined amounts in the Fund. Additional
information is available from the Distributor or authorized dealers.
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 the custodian under the IRA, 403(b)(7) and Keogh plans.
Details regarding fees, as well as full plan administration for profit sharing,
pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of 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 redemptions 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 or by
completing the appropriate section of the application accompanying this
Prospectus, or by calling (800) 341-2911 ((800) 421-2833 for the hearing
impaired), elect to have all dividends and other distributions 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 as of
the payable date of the distribution.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of shares of any Participating Fund based on the next computed net asset
value of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of
the Participating Fund. Shareholders seeking an exchange into a Participating
Fund should obtain and read the current prospectus for such fund.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days. Shares of the Fund registered in a
shareholder's name for less than 30 days may only be exchanged upon receipt of
prior approval of the Adviser. It is the policy of the Adviser, under normal
circumstances, not to approve such requests.
When Class B shares and Class C shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
date of the initial purchase of such shares from a Participating Fund. If such
Class B or Class C shares are redeemed and not exchanged for shares of another
Participating Fund, such Class B or Class C shares are subject to the CDSC
schedule imposed by the Participating Fund from which such shares were
originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to Investor Services or by contacting the telephone transaction line at
(800) 421-5684. A shareholder automatically has telephone exchange privileges
unless otherwise designated in the application accompanying this Prospectus. Van
Kampen and its subsidiaries, including Investor Services (collectively, "VK"),
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal
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<PAGE> 24
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither VK nor the Fund will be liable for following telephone instructions
which it reasonably believes to be genuine. VK and the Fund may be liable for
any losses due to unauthorized or fraudulent instructions if reasonable
procedures are not followed. If the exchanging shareholder does not have an
account in the fund whose shares are being acquired, a new account will be
established with the same registration, dividend and capital gains options
(except dividend diversification) and authorized dealer of record as the account
from which shares are exchanged, unless otherwise specified by the shareholder.
In order to establish a systematic withdrawal plan for the new account or
reinvest dividends from the new account into another fund, however, an
exchanging shareholder must file a specific written request. The Fund reserves
the right to reject any order to acquire its shares through exchange. In
addition, the Fund may modify, restrict or terminate the exchange privilege at
any time on 60 days' notice to its shareholders of any termination or material
amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the offering price next computed after receipt of instructions may
establish a quarterly, semi-annual or annual withdrawal plan. This plan provides
for the orderly use of the entire account, not only the income but also the
capital, if necessary. Each withdrawal constitutes a redemption of shares on
which any capital gain or loss will be recognized. The planholder may arrange
for monthly, quarterly, semi-annual, or annual checks in any amount not less
than $25. Such a systematic withdrawal plan may also be maintained by an
investor purchasing shares for a retirement plan established on a form made
available by the Fund. See "Shareholder Services -- Retirement Plans."
Class B shareholders and Class C shareholders who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. 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 withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any gain or loss by the shareholder upon redemption of shares is a
taxable event.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.van-
kampen.com for further instruction. VK and the Fund employ procedures considered
by them to be reasonable to confirm that instructions communicated through the
internet are genuine. Such procedures include requiring use of a personal
identification number prior to acting upon internet instructions and providing
written confirmation of instructions communicated through the internet. If
reasonable procedures are employed, neither VK nor the Fund will be liable for
following instructions through the internet which it reasonably believes to be
genuine. If an account has multiple owners, Investor Services may rely on the
instructions of any one owner.
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REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to Van Kampen Investor Services Inc., P.O. Box 418256, Kansas
City, Missouri 64141-9256. Shareholders may also place redemption requests
through an authorized dealer. Orders received from authorized dealers must be at
least $500 unless transmitted via the FUNDSERV network. The redemption price for
such shares is the net asset value next calculated after an order is received by
an authorized dealer provided such order is transmitted to the Distributor prior
to the Distributor's close of business on such day. It is the
24
<PAGE> 25
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B shares
and Class C shares are subject to a CDSC. In addition, a CDSC of 1.00% may be
imposed on certain redemptions of Class A shares made within one year of
purchase for investments of $1 million or more. The CDSC incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange; registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to Investor Services. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 120 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to Investor Services. Where Van Kampen Trust
Company serves as IRA custodian, special IRA, 403(b)(7), or Keogh distribution
forms must be obtained from and be forwarded to Van Kampen Trust Company, P.O.
Box 944, Houston, Texas 77001-0944. Contact the custodian for information.
In the case of redemption requests sent directly to Investor Services, the
redemption price is the net asset value per share next determined after the
request is received. Payment for shares redeemed will be made by check mailed
within seven days after acceptance by Investor Services of the request and any
other necessary documents in proper order. Such payment may be postponed or the
right of redemption suspended as provided by the rules of the SEC. If the shares
to be redeemed have been recently purchased by check, Investor Services may
delay mailing a redemption check until it confirms the purchase check has
cleared, which may take up to fifteen days. A taxable gain or loss will be
recognized by the shareholder upon redemption of shares.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application
accompanying this Prospectus or call the Fund at (800) 341-2911 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. VK and the Fund employ procedures considered by them to be reasonable
to confirm that instructions communicated by telephone are genuine. Such
procedures include requiring certain personal identification information prior
to acting upon telephone instructions, tape recording telephone communications
and providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VK nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine. VK
and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. Telephone redemptions
may not be available if the shareholder cannot reach Investor Services by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's regular redemption
procedure previously described. Requests received by Investor Services prior to
4:00 p.m., New York time, on a regular business day will be processed at the net
asset value per share determined that day. These privileges are available for
all accounts other than retirement accounts. The telephone redemption privilege
is not available for shares represented by certificates. If an account has
multiple owners, Investor Services may rely on the instructions of any one
owner.
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<PAGE> 26
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual retirement account (IRA) for which Van Kampen Trust Company acts
as custodian. The Fund reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum initial investment as specified in this Prospectus. At least 60 days
advance written notice of any such involuntary redemption will be given and the
shareholder will be given an opportunity to purchase the required value of
additional shares at the next determined net asset value without sales charge.
Any involuntary redemption may only occur if the shareholder account is less
than the minimum initial investment due to shareholder redemptions.
REDEMPTION UPON DEATH OR DISABILITY. The Fund will waive the CDSC on
redemptions following the death or disability of a Class B shareholder or Class
C shareholder. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
CDSC on Class B shares and Class C shares.
In cases of death or disability, the CDSC on Class B shares and Class C shares
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 on Class B shares and Class C shares 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.
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 CDSC
paid upon such redemption. Such reinstatement is made at the net asset value
(without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 180 days after the date of the redemption. Reinstatement at
net asset value is also offered to participants in those eligible retirement
plans held or administered by Van Kampen American Capital Trust Company for
repayment of principal, and interest, on their borrowings on such plans.
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DISTRIBUTION AND SERVICE PLANS
- --------------------------------------------------------------------------------
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 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 each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreement between the Distributor and brokers, dealers or financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year
of the average daily net assets attributable to the Class A shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A shares pursuant to
26
<PAGE> 27
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts. The Fund pays the Distributor the lesser of the balance of the 0.25%
not paid to such brokers, dealers or financial intermediaries or the amount of
the Distributor's actual distribution-related expense. The rates above are 0.15%
with respect to Class A shares in accounts existing on or before September 30,
1989.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C shares up to 0.75% of the Fund's average daily
net assets attributable to Class C shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution-related expense attributable to the Class C shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C shares pursuant to the Service Plan in
connection with the ongoing provision of services to holders of such shares by
the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to Class B shares or Class C
shares for any given year may exceed the amounts payable to the Distributor with
respect to such class of shares under the Distribution Plan, the Service Plan
and payments received pursuant to the CDSC. In such event, with respect to any
such class of shares, any unreimbursed expenses will be carried forward and paid
by the Fund (up to the amount of the actual expenses incurred) in future years
so long as such Distribution Plan is 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 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
December 31, 1997, there were $4,629,226 and $130,835 of unreimbursed
distribution-related expenses with respect to Class B shares and Class C shares,
respectively, representing 5.69% and 2.84% of the Fund's net assets attributable
to Class B shares and Class C shares, respectively. If the Distribution Plan was
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 CDSCs.
The Distributor will not use the proceeds from the CDSC applicable to a
particular class of shares to defray distribution-related expenses attributable
to any other class of shares. Various federal and state laws prohibit national
banks and some state-chartered commercial banks from underwriting or dealing in
the Fund's shares. In addition, state securities laws on this issue may differ
from the interpretations of federal law, and banks and financial institutions
may be required to register as dealers pursuant to state law. In the unlikely
event that a court were to find that these laws prevent such banks from
providing such services described above, the Fund would seek alternate providers
and expects that shareholders would not experience any disadvantage.
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<PAGE> 28
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DISTRIBUTIONS FROM THE FUND
- --------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Dividends from stocks and interest earned from other investments
are the Fund's main source of income. Substantially all of this income, less
expenses, is distributed quarterly as dividends to shareholders. Unless the
shareholder instructs otherwise, dividends are automatically applied to purchase
additional shares of the Fund at the next determined net asset value. See
"Shareholder Services -- Reinvestment Plan."
The per share dividends on Class B shares and Class C shares may be lower than
the per share dividends on Class A shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund distributes to shareholders at
least once a year the excess, if any, of its total profits on the sale of
securities during the year over its total losses on the sale of securities,
including capital losses carried forward from prior years under tax laws. As in
the case of dividends, capital gains distributions are automatically reinvested
in additional shares of the Fund at net asset value unless the shareholder
elects otherwise. See "Shareholders Services -- Reinvestment Plan."
- --------------------------------------------------------------------------------
TAX STATUS
- --------------------------------------------------------------------------------
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 tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay federal income taxes on any income distributed 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 gains
distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 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 31 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.
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
28
<PAGE> 29
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. A
portion of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income when distributed to shareholders.
The 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: (1) at least 75% of its gross income passive or (2) 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 (i) on a portion of
any "excess distribution" received on the stock or (ii) on any gain from a sale
or disposition of the stock (collectively, "PFIC income"), plus interest
thereon, even if the regulated investment company distributes the PFIC income as
a taxable dividend to its stockholders. 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 the 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, the 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 by
the Fund to satisfy the distribution requirement for avoiding income and excise
taxes. In many instances it may 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, the Fund may make an election to annually
mark-to-market certain publicly traded PFIC stock (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 the 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. The 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 proceeds from dispositions
of, the PFIC stock. This amount would not be deductible from the Fund's taxable
income. The PFIC Mark-to-Market Election generally applies to the taxable year
for which made and to all subsequent taxable years, unless the Internal Revenue
Service 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. 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 gains ("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 Under the 1997 Tax
Act" below. Tax-exempt shareholders not subject to federal income tax on their
income generally will not be taxed on distributions from the Fund.
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<PAGE> 30
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. Some portion of
the distributions from the Fund may be eligible for the dividends received
deduction for corporations if the 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 the Fund and
received by the shareholders on the December 31 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
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 and 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.
Under Code Section 988, foreign currency gains or losses from certain forward
contracts not traded in the interbank market as well as certain other gains or
losses attributable to currency exchange rate fluctuations are typically 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.
The Fund is required, in certain circumstances, to withhold 31% of dividends
and certain other payments, including redemptions, paid to shareholders who do
not furnish to the Fund their correct taxpayer identification number (in the
case of individuals, their social security number) and certain required
certifications or who are otherwise subject to backup withholding.
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 capital gain or loss and will be long-term if such shares
have been held for more than one year. For a summary of the tax rates applicable
to capital gains, see "Capital Gains Rates under the 1997 Tax Act" 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 UNDER THE 1997 TAX ACT.. Under the 1997 Tax Act, 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, (ii) 28% for capital assets
held for more than one year but not more than 18 months and (iii) 20% for
capital assets held for more than 18 months. The 1997 Tax Act did not affect the
maximum net capital gains tax rate for corporations, which remains at 35%. The
new tax rates for capital gains under the 1997 Tax Act described above apply to
distributions of capital gain by the Fund (if, as expected, the Fund designates
capital gain dividends as 28% rate gain distributions or 20% rate gain
distributions, in accordance with its holding periods for the securities sold
that generated such capital gain dividends) as well as to sales and exchanges of
shares in the Fund. With respect to capital losses recognized on dispositions of
shares held six months or less where such losses are treated as long-term
capital losses to the extent of prior capital gain dividends received on such
shares (see "Sale of Shares" above),
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<PAGE> 31
it is unclear how such capital losses offset the capital gains referred to
above. Shareholders should consult their own tax advisors as to the application
of the new capital gains rates to their particular circumstances.
GENERAL. The federal, state and local income tax discussion set forth above
is for general information only. Prospective investors 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, five 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 a maximum sales charge of 5.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable CDSC 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 shares of the Fund were
offered at a maximum sales charge at 8.50% prior to June 12, 1989, actual Fund
total return would have been less than that computed on the basis of the current
maximum sales charge, all other things being equal. Total return is based on
historical earnings and asset value fluctuations and is not intended to indicate
future performance. No adjustments are made to reflect any income taxes payable
by shareholders on dividends and distributions paid by the Fund 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.
Total return is calculated separately for Class A shares, Class B shares and
Class C shares. Class A share total return figures include the maximum sales
charge of 5.75%; Class B share and Class C share total return figures include
any applicable CDSC. Because of the differences in sales charges and
distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. 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 unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the 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, the Dow Jones
Industrial Average Index, Standard & Poor's indices, NASDAQ Composite Index
other appropriate indices of investment securities, or with investment or
savings vehicles. The performance information may also include evaluations of
the Fund published by nationally recognized ranking services and by 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
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<PAGE> 32
by the SEC and will be computed separately for each class of the Fund's shares.
For these purposes, the performance of the Fund, as well as the performance of
other mutual funds or indices, do not reflect sales charges, the inclusion of
which would reduce Fund performance. The Fund will include performance data for
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 provided in narrative form. These hypotheticals will be
accompanied by standard performance information required by the SEC as described
above.
The Fund's Annual Report and Semi-Annual Report contains additional
performance information. A copy of the Annual Report and Semi-Annual Report may
be obtained without charge by calling or writing the Fund at the telephone
number and address printed on the cover of this Prospectus.
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- --------------------------------------------------------------------------------
The Fund was originally incorporated in Delaware on July 16, 1956 and was
re-incorporated by merger into a Maryland corporation on December 29, 1978. The
Fund was again reorganized as a business trust under the laws of Delaware as of
August 19, 1995 and on July 14, 1998 adopted its current name.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, divided into classes.
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 Fund's Declaration of Trust. Each
class of shares represents an interest in the same assets of the Fund and
generally are identical in all respects except that each class bears certain
distribution expenses and has exclusive voting rights with respect to its
distribution fee. Except as described herein, there are no conversion,
preemptive or other subscription rights. In the event of liquidation, each of
the shares of the Fund is entitled to its portion of all of the Fund's net
assets after all debt and expenses of the Fund have been paid. Since Class B
shares and Class C shares pay higher distribution fees and transfer agency
costs, the liquidation proceeds to Class B shareholders and Class C shareholders
are likely to be lower than to other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding share may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holder in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Fund is set forth in the
Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders at least semi-annually reports showing the Fund's portfolio and
other information. An annual report, containing financial statements audited by
the Fund's independent accountants, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to the Van Kampen Harbor Fund, 1
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attn: Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 847-2424. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
421-2833.
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APPENDIX -- RATINGS OF SENIOR SECURITIES
- --------------------------------------------------------------------------------
Description of Standard & Poor's ("S&P") and Moody's Investors Service, Inc.
("Moody's") senior securities ratings.
MOODY'S CORPORATE BOND RATINGS:
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 edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA: Bonds which are rated AA are judged to be of high quality by all
standards. Together with the AAA group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuations of
protective elements may be of greater amplitude or there may be other elements
present which make the long term risks appear somewhat larger than in AAA
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated BAA are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA: Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA: Bonds which are rated CAA are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA: Bonds which are rated CA represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from AA through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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, among other reasons, it 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 or companies 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.
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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 which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issues:
PRIME-1:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of 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.
PRIME-2:
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment or 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.
PRIME-3:
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.
NOT PRIME:
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 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.
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BAA: An issue which is rated "BAA" is considered to be a medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and
asset protection appear adequate at present but may be questionable over any
great length of time.
BA: An issue which is rated "BA" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this class.
B: An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
CAA: An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future
status of payments.
CA: An issue which is rated "CA" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
C: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from AA through B in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
S&P'S CORPORATE BOND RATINGS:
STANDARD & POOR'S--A brief description of the applicable Standard & Poor's
Ratings Group (S&P) rating symbols and their meanings (as published by S&P)
follows:
1. DEBT
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
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 default--capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the highest rated
issues only in small degrees.
</TABLE>
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<PAGE> 36
<TABLE>
<S> <C>
A Debt rated 'A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in the higher rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
</TABLE>
SPECULATIVE GRADE
<TABLE>
<S> <C>
BB Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as
B having predominantly speculative characteristics with
CCC respect to capacity to pay interest and repay principal.
CC 'BB' indicates the least degree of speculation and 'C' the
C highest. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major exposures to adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B'
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay
principal. The 'CCC' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC' debt
rating.
C The rating 'C' typically is applied to debt subordinated to
senior debt which is assigned an actual or implied 'CCC-'
debt rating. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating 'CI' is reserved for income bonds on which no
interest is being paid.
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, 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 if debt service payments 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.
NR Not rated.
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 rating or other standards for
obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
</TABLE>
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3. COMMERCIAL PAPER
An 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:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated 'A-1.'
A-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 only speculative
capacity for timely payment.
C This rating is assigned to short-term debt obligations with
a doubtful capacity for payment.
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, unless S&P believes
that such payments will be made during such grace period.
A commercial paper rating is not a recommendation to
purchase, sell, or hold a security inasmuch as it does not
comment as to market price or suitability for a particular
investor. The ratings are based on current information
furnished to S&P by the issuer or obtained by S&P from other
sources it considers reliable. S&P does not perform an audit
in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other
circumstances.
</TABLE>
4. VARIABLE RATE DEMAND BONDS
S&P assigns "dual" ratings to all debt issues that have a put or demand
feature as part of their structure.
The first rating addresses the likelihood of repayment of principal and
interest as due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the long-term
maturity and the commercial paper rating symbols for the put option (for example
'AAA/A+'). With short-term demand debt, S&P's note rating symbols are used with
the commercial paper rating symbols (for example, 'SP-1+/A-1+).
5. NOTES
An S&P note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assignment:
-- Amortization schedule (the longer the final maturity relative to other
maturities the more likely the issue is to be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
Note rating symbols and definitions are as follows:
SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics will be given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term
of the notes.
SP-3 Speculative capacity to pay principal and interest.
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<PAGE> 38
6. PREFERRED STOCK
An 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:
1. 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.
2. Nature of, and provisions of, the issue.
3. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements affecting creditors' rights.
<TABLE>
<S> <C>
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
preferred stock in this category than for issues in the 'A'
category.
BB Preferred stock rated 'BB', 'B' and 'CCC' are regarded, on
B balance, as predominantly speculative with respect to the
CCC issuer's capacity to pay preferred stock obligations. 'BB'
indicates the lowest degree of speculation and 'CCC' the
highest degree of speculation. While such issues will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
CC The rating 'CC' is reserved for a preferred stock issue in
arrears on dividends or sinking fund payments, but that is
currently paying.
C A preferred stock rated 'C' is a non-paying issue.
D A preferred stock rated 'D' is a non-paying issue with the
issuer in default on debt instruments.
PLUS (+) or MINUS (-): To provide more detailed indications
of preferred stock quality, the ratings from 'AA' to 'CCC'
may be modified by the addition of a plus or minus sign to
show relative standing within the major rating categories.
NR This indicates that no rating has been requested, that there
is insufficient information on which to base a rating or
that S&P does not rate a particular type of obligation as a
matter of policy.
</TABLE>
A preferred stock rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the Issuer, and 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.
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<PAGE> 39
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 341-2911
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 421-2833
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424
VAN KAMPEN HARBOR FUND
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN ASSET MANAGEMENT, INC.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen Harbor Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street,
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Harbor Fund
Legal Counsel
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICEWATERHOUSECOOPERS LLP
200 East Randolph Drive
Chicago, IL 60601
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HARBOR FUND
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P R O S P E C T U S
APRIL 30, 1998, AS SUPPLEMENTED ON JULY 14, 1998,
NOVEMBER 12, 1998 AND DECEMBER 1, 1998
VAN KAMPEN FUNDS LOGO
HARPRO 1298
