<PAGE> 1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Performance Results.............................. 3
Performance in Perspective....................... 4
Glossary of Terms................................ 5
Portfolio Management Review...................... 6
Portfolio Highlights............................. 10
Portfolio of Investments......................... 11
Statement of Assets and Liabilities.............. 16
Statement of Operations.......................... 17
Statement of Changes in Net Assets............... 18
Financial Highlights............................. 19
Notes to Financial Statements.................... 22
Report of Independent Accountants................ 29
</TABLE>
HAR ANR 2/99
<PAGE> 2
LETTER TO SHAREHOLDERS
January 20, 1999
Dear Shareholder,
The past decade has been a remarkable time for investors. Together, we've
witnessed one of the greatest bull markets in investment history, unprecedented
growth in mutual fund investing, and a surge in personal retirement planning.
The coming millennium promises to hold even more opportunities.
To lead us into this new era of investing, Richard F. Powers III has joined
Van Kampen as Chairman and Chief Executive Officer. He comes to us from our
parent company, Morgan Stanley Dean Witter & Co., where he served as Executive
Vice President and Director of Marketing. He brings 27 years of experience in
the financial services industry, including an extensive background in product
management, strategic planning and brand development.
Although former Chairman Don G. Powell retired on January 1, he will remain
active in the industry and the community. Mr. Powell plans to continue his
service as a member of the board of directors of the Investment Company
Institute, the leading mutual fund industry association, and he will remain a
trustee of your fund.
ECONOMIC OVERVIEW
Despite a stormy year in the global economy, the United States ended 1998
with only a moderate slowdown in growth. The nation's gross domestic product, a
measure of economic health, grew 3.9 percent during the year, matching 1997's
growth rate and indicating that our nation's economy remains strong. A
continuation of low inflation--only a 1.6 percent increase in the consumer price
index over the last 12 months--also helped sustain the domestic economy and kept
inflation-adjusted interest rates attractive.
Although the year ended on a positive note, the economic environment was
quite unsettled in the third quarter, with the Asian financial crisis
contributing to slowing corporate profits in the United States. Given the
uncertainty surrounding emerging market nations and the near-collapse of a major
U.S. hedge fund, the stock and bond markets experienced significant volatility
during this period. With instability as a backdrop, American and foreign
investors alike pursued a flight to quality--seeking the relative safety of
large-company stocks and government bonds.
In the last few months of the year the global financial situation improved
in conjunction with the Federal Reserve's interest rate decreases. In response
to declining corporate profits and mounting international concerns, the Fed
lowered interest rates three times, with 0.25 percent cuts in September,
October, and November. These rate cuts, coupled with a wave of corporate mergers
and cost-cutting measures, lent the support needed to keep the economy growing.
Dozens of foreign central banks also reduced interest rates in an effort to
stimulate their economies. These actions gave a boost to investor confidence and
encouraged a return to a more diversified range of investments in the last few
months of the year.
Continued on page 2
1
<PAGE> 3
MARKET REVIEW
Despite bouts of volatility, the stock market experienced impressive returns
during 1998. Large-company stocks were responsible for much of this as investors
favored the perceived stability of established, high-quality companies. The Dow
Jones Industrial Average rose more than 16 percent during the year and hit a
record high of 9374 in November before falling back to more moderate levels.
Technology companies generally fared well during the year, with the
technology-heavy Nasdaq composite index up almost 40 percent for the year. On
the other hand, commodity-based stocks--especially those of oil
companies--suffered from declining commodity prices. Small-company stocks also
significantly underperformed the rest of the market, with the Russell 2000 index
actually losing 3.45 percent during the 12-month period.
OUTLOOK
Our outlook for the domestic economy is positive, and we anticipate
continued low inflation and healthy economic growth. However, the aftereffects
of the global economic slowdown may continue to put pressure on corporate
earnings in the first half of the year. Internationally, we anticipate that low
interest rates and declining inflation will lead to improvements in troubled
areas such as Asia and Latin America. With the successful launch of the euro,
the new European transnational currency, we believe that many foreign markets
will become increasingly attractive in 1999.
In the long term, we are optimistic that the stock market will continue its
record growth, although we could experience additional volatility in the months
ahead if concerns about high stock valuations and increasing earnings pressure
become more pronounced. Combined with growing questions about corporate and
government reactions to the Year 2000 computer problem, we could see an
increasingly cautious market by mid-year.
Additional details about your fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to share with you the progress of your
investment.
Sincerely,
[SIG.]
Richard F. Powers III
Chairman
Van Kampen Asset Management Inc.
[SIG.]
Dennis J. McDonnell
President
Van Kampen Asset Management Inc.
2
<PAGE> 4
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1998
VAN KAMPEN HARBOR FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
<S> <C> <C> <C>
TOTAL RETURNS
One-year total return based on NAV(1).... 7.52% 6.70% 6.65%
One-year total return(2)................. 1.33% 1.77% 5.66%
Five-year average annual total
return(2)................................ 8.76% 8.99% 9.19%
Ten-year average annual total
return(2)................................ 10.76% N/A N/A
Life-of-Fund average annual total
return(2)................................ 9.78% 10.18% 9.02%
Commencement date........................ 11/15/56 12/20/91 10/26/93
</TABLE>
N/A = Not Applicable
(1)Assumes reinvestment of all distributions for the period and does not include
payment of the maximum sales charge (5.75% for A shares) or contingent deferred
sales charge for early withdrawal (5% for B shares and 1% for C shares).
(2)Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or contingent
deferred sales charge for early withdrawal (B and C shares).
See the Prior Performance section of the current prospectus. An investment
should be made with an understanding of the risks that an investment in equity
securities entails. These include the risk that the financial condition of the
issuers of the securities in the portfolio, or the condition of the stock market
in general, may worsen and therefore, the value of Fund shares may decline. Past
performance does not guarantee future results. Investment return and net asset
value will fluctuate with market conditions. Market volatility may have
adversely affected fund performance since December 31, 1998. Fund shares, when
redeemed, may be worth more or less than their original cost.
Debt securities acquired by the Fund are not subject to any ratings limitations
and may include high-, medium-, lower-and non-rated debt securities. Lower-rated
and comparable non-rated securities are regarded as speculative with respect to
capacity to pay interest and repay principal.
Market forecasts provided in this report may not necessarily come to pass.
3
<PAGE> 5
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment performance at regular intervals. A
comparison of your Fund's performance to an applicable benchmark can:
- Illustrate the market environment in which your Fund is being managed.
- Reflect the impact of favorable market trends or difficult market
conditions.
- Help you evaluate how your Fund's management team has responded to
opportunities and challenges.
The following graph compared your Fund's performance to that of the Russell
2000 Stock Index and the Lipper Convertible Securities Fund Index over time.
These indexes are broad-based, statistical composite that do not include any
commissions that would be paid by an investor purchasing the securities they
represent.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen Harbor Fund vs. the Russell 2000 Stock Index and the Lipper
Convertible Securities Fund Index (December 31, 1988 through December 31,
1998)
[INVESTMENT PERFORMANCE CHART]
<TABLE>
<CAPTION>
Lipper Convertible Securities
Van Kampen Harbor Fund Russell 2000 Stock Index Fund Index
---------------------- ------------------------ -----------------------------
<S> <C> <C> <C>
Dec 1988 9422.00 10000.00 10000.00
9886.00 10447.00 10383.00
9833.00 10523.00 10360.00
10015.00 10771.00 10441.00
10386.00 11241.00 10760.00
10680.00 11725.00 10968.00
10795.00 11457.00 10957.00
11235.00 11900.00 11370.00
11329.00 12190.00 11592.00
11314.00 12229.00 11570.00
11170.00 11505.00 11260.00
11274.00 11582.00 11372.00
Dec 1989 11362.00 11626.00 11436.00
10942.00 10611.00 11018.00
10990.00 10940.00 11141.00
11194.00 11365.00 11295.00
10923.00 10994.00 11087.00
11539.00 11773.00 11631.00
11680.00 11796.00 11654.00
11688.00 11278.00 11579.00
11101.00 9776.00 10975.00
10693.00 8911.00 10509.00
10573.00 8367.00 10209.00
11016.00 9005.00 10673.00
Dec 1990 11223.00 9362.00 10937.00
11526.00 10208.00 11366.00
11986.00 11347.00 11939.00
12188.00 12146.00 12112.00
12197.00 12115.00 12254.00
12399.00 12692.00 12539.00
12142.00 11953.00 12232.00
12562.00 12372.00 12524.00
12938.00 12830.00 12872.00
12957.00 12931.00 12935.00
13211.00 13273.00 13187.00
13020.00 12659.00 12853.00
Dec 1991 13812.00 13672.00 13570.00
13849.00 14780.00 13918.00
13997.00 15211.00 14169.00
13794.00 14697.00 13997.00
13813.00 14182.00 14041.00
14066.00 14370.00 14280.00
13849.00 13691.00 14132.00
14231.00 14167.00 14505.00
14164.00 13767.00 14427.00
14392.00 14085.00 14705.00
14499.00 14532.00 14845.00
14818.00 15644.00 15214.00
Dec 1992 15155.00 16189.00 15526.00
15509.00 16737.00 15875.00
15509.00 16351.00 15877.00
15969.00 16881.00 16396.00
15773.00 16418.00 16292.00
16145.00 17145.00 16657.00
16365.00 17251.00 16793.00
16302.00 17490.00 16894.00
16867.00 18245.00 17356.00
17025.00 18760.00 17484.00
17109.00 19243.00 17748.00
16793.00 18610.00 17589.00
Dec 1993 17210.00 19246.00 17830.00
17699.00 19849.00 18283.00
17426.00 19778.00 18126.00
16554.00 18733.00 17488.00
16368.00 18845.00 17265.00
16402.00 18633.00 17242.00
16073.00 18000.00 17098.00
16402.00 18296.00 17377.00
16743.00 19316.00 17869.00
16481.00 19251.00 17727.00
16517.00 19175.00 17694.00
16101.00 18401.00 17200.00
Dec 1994 16104.00 18895.00 17179.00
16384.00 18656.00 17338.00
16700.00 19433.00 17750.00
16939.00 19767.00 18160.00
17296.00 20207.00 18472.00
17702.00 20554.00 18872.00
18036.00 21620.00 19271.00
18658.00 22866.00 19849.00
18720.00 23339.00 19996.00
19092.00 23756.00 20300.00
18866.00 22693.00 19969.00
19444.00 23647.00 20568.00
Dec 1995 19721.00 24271.00 20798.00
20075.00 24245.00 21170.00
20272.00 25000.00 21498.00
20415.00 25509.00 21705.00
20737.00 26873.00 22211.00
21127.00 27932.00 22572.00
20924.00 26785.00 22273.00
20098.00 24446.00 21490.00
20721.00 25865.00 22252.00
21495.00 26876.00 22957.00
21590.00 26462.00 23067.00
22137.00 27552.00 23857.00
Dec 1996 22103.00 28274.00 23842.00
22867.00 28839.00 24557.00
22720.00 28140.00 24445.00
21952.00 26812.00 23964.00
22160.00 26887.00 24128.00
23276.00 29878.00 25275.00
24006.00 31158.00 26079.00
25207.00 32608.00 27284.00
25027.00 33354.00 27278.00
26303.00 35795.00 28504.00
25412.00 34223.00 27786.00
25548.00 34002.00 27696.00
Dec 1997 25841.00 34597.00 27871.00
25704.00 34051.00 27916.00
27128.00 36569.00 29141.00
28041.00 38077.00 30042.00
28058.00 38288.00 30180.00
27150.00 36225.00 29573.00
27417.00 36302.00 29457.00
27223.00 33363.00 28914.00
23047.00 26885.00 25551.00
23678.00 28988.00 25920.00
24924.00 30171.00 26657.00
26062.00 31751.00 27735.00
Dec 1998 27785.00 33716.00 28658.00
</TABLE>
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (5.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
- ------------------------------
Fund's Total Return
1 Year Avg. Annual = 1.33%
5 Year Avg. Annual = 8.76%
10 Year Avg. Annual = 10.76%
Inception Avg. Annual = 9.78%
- ------------------------------
4
<PAGE> 6
GLOSSARY OF TERMS
BOND: A debt security issued by a government or corporation that pays a
bondholder a stated rate of interest and repays the principal at the
maturity date.
CLASS A SHARES: When Class A shares of a fund are purchased, the share price
includes the net asset value plus a one-time sales charge (or "load"). In
most cases, there is no redemption fee (contingent deferred sales charge).
CONVERTIBLE SECURITY: A security that can be exchanged for common stock at the
option of the security holder for a specified price or rate. Examples
include convertible bonds and convertible preferred stock.
CREDIT RATING: An evaluation of an issuer's credit history and capability of
repaying obligations. Standard & Poor's and Moody's Investors Service are
two companies that assign bond ratings. Standard & Poor's ratings range from
a high of AAA to a low of D, while Moody's ratings range from a high of Aaa
to a low of C.
CREDIT SPREAD: Also called quality spread, the difference in yield between
higher-quality issues (such as Treasury securities) and lower-quality
issues. Normally, lower-quality issues provide higher yields to compensate
investors for the additional credit risk.
DOW JONES INDUSTRIAL AVERAGE: The oldest and most widely recognized stock market
average, which reflects the performance of 30 actively traded stocks of
well-established, blue-chip companies.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank system of the United States. Its
policy-making committee, called the Federal Open Market Committee, meets
eight times a year to establish monetary policy and monitor the economic
pulse of the United States.
FLIGHT TO QUALITY: The flow of funds toward safer investments in times of
marketplace uncertainty or fear.
FUNDAMENTALS: Characteristics of a company, such as revenue growth, earnings
growth, financial strength, market share, and quality of management.
INFLATION: A persistent and measurable rise in the general level of prices.
Inflation is widely measured by the Consumer Price Index, an economic
indicator that measures the change in the cost of purchased goods and
services.
INVESTMENT GRADE: Securities rated BBB and above by Standard & Poor's or Baa and
above by Moody's Investor Services. Bonds rated below BBB or Baa are
noninvestment grade.
NET ASSET VALUE (NAV): The value of a mutual fund share, calculated by deducting
a fund's liabilities from the total assets in its portfolio and dividing
this amount by the number of shares outstanding. The NAV does not include
any initial or contingent deferred sales charge.
VALUATION: The estimated or determined worth of a stock, based on financial
measures such as the stock's current price relative to earnings, revenue,
book value, and cash flow.
VOLATILITY: A measure of the fluctuation in the market price of a security. A
security that is volatile has frequent and large swings in price.
5
<PAGE> 7
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN HARBOR FUND
We recently spoke to the management team of the Van Kampen Harbor Fund about the
key events and economic forces that shaped the markets during the past 12
months. The team includes Christine Drusch, portfolio manager; Matthew Hart and
David McLaughlin, portfolio comanagers; and Stephen L. Boyd, chief investment
officer for equity investments. The following excerpts reflect their views on
the Fund's performance during the 12 months ended December 31, 1998.
Q THE STOCK MARKET WAS UP, DOWN, AND UP AGAIN IN 1998. CAN YOU DESCRIBE SOME
OF THE FACTORS THAT AFFECTED THE MARKET DURING THE REPORTING PERIOD?
A The stock market performed extremely well through mid-July, when the Dow
Jones Industrial Average set a then-record high. Trouble was on the
horizon, however, as investors began to fear that Asian economic trouble
would spread throughout the world and hurt U.S. corporate profits. By August 31
the Dow had fallen 19 percent from its high. The Russell 2000 fell even
harder--by October 8 this index of small-capitalization stocks was down 37
percent from its April high. Meanwhile, credit spreads between BB-rated
corporate bonds and U.S. Treasuries widened during the year--indicating a
"flight to quality," or investor preference for government bonds and
investment-grade securities issued by large, established companies.
Inflation remained tame, prompting the Federal Reserve Board to lower
interest rates in September and then again in October and November. After the
second cut in interest rates, investor confidence began to improve. Companies
reported better-than-expected third-quarter earnings, reminding investors that
the U.S. economy, though slowing, was still fundamentally solid. The volatile
stock market began to rise again, with the Dow briefly setting a new record in
November before declining moderately from its high by year end.
Q HOW DID THE CONVERTIBLE SECURITIES MARKET RESPOND?
A The convertibles market is composed primarily of securities issued by
small-cap companies and has an average credit rating of BB-. Therefore,
convertibles were hurt both by the underperformance of small-cap stocks
and the widening of credit spreads. Fortunately, as investor confidence rose,
small caps rallied during the year's final quarter, so convertibles were able to
make up most of the ground lost during the difficult period between July and
October. Accordingly, the Merrill Lynch Convertible Index returned 13.8 percent
in the fourth quarter.
6
<PAGE> 8
Q GIVEN THIS ENVIRONMENT, WHAT WAS YOUR STRATEGY FOR MANAGING THE FUND?
A We did not change our investment strategy in response to market
conditions--we consistently manage the Fund for capital appreciation,
current income, and preservation of capital by investing primarily in
convertible securities. In seeking to meet this objective, we focus on growth
companies and diversify across market sectors.
When selecting convertibles in which to invest, we first examine the equity
characteristics of the securities. We look for companies with improving
fundamentals, strong earnings growth, increasing market share, and attractive
valuations. After we have determined which companies represent what we believe
are attractive equity investments, we then examine the company's convertible
bonds to assess how likely they are to provide us with equity participation. If
it appears likely, we normally invest in the security.
Q WHAT SECTORS AND SPECIFIC HOLDINGS MOST HELPED THE FUND?
A Technology companies performed very well during the reporting period. At
the beginning of the year, the Fund's technology weighting was just 7
percent of the Fund. We gradually increased this weighting--eventually to
30 percent--as we realized the sector's fundamentals were improving.
Beginning in July we added a sizeable position in semiconductor companies
because we believed they would soon correct the inventory buildup that had
plagued the industry and reduced revenue and earnings. These companies began to
outperform in the fourth quarter, and these investments greatly helped the
Fund's performance between October and December. Among the Fund's best
performers in the technology sector were SCI Systems (electronics manufacturer),
Micron (computer and microchip manufacturer), Level One Communications
(microchip manufacturer), EMC Corp. (data storage company), and America Online
(Internet service provider).
The combination of low inflation, low unemployment, and high consumer
spending helped increase the stock prices of retail companies. Retailers made up
a significant portion of the Fund's portfolio, benefiting the Fund's
performance. Some of the companies in this sector that particularly helped the
Fund were AnnTaylor (women's apparel), Staples (office supplies), and Home Depot
(home improvement products).
Q WHICH SECTORS OR SPECIFIC HOLDINGS HURT THE FUND?
A Most financial companies performed very well in the first half of the
year, but they encountered a particularly difficult third quarter because
of exposure to emerging markets. Although we maintained a relatively small
weighting in financial companies, the Fund was nevertheless hurt by their poor
performance in the second half of 1998. Equitable Companies, Citigroup, and
Conseco were among the financial companies that had a negative impact on the
Fund.
7
<PAGE> 9
Despite the successes of most of our semiconductor holdings, our investment
in microchip manufacturer VLSI Technology didn't turn out as anticipated. In
mid-summer we decided to purchase VLSI's common stock at $14 per share because
we thought the company was attractively priced relative to its fundamentals. A
week later, however, the company announced unfavorable news about its earnings,
and the stock's value fell by half shortly thereafter. In response to the new
information and a reevaluation of VLSI's future prospects, we sold our position
at a loss.
Many telecommunications companies were also hit hard by the third-quarter
market sell-off. These companies rely heavily on outside funding to finance
their growth, and investors were concerned that such funding would become more
expensive and difficult to obtain. The Fund owned Smartalk, Omnipoint, Nextlink,
and Premiere Technologies, all of which had a negative impact on the Fund's
performance. For additional Fund portfolio highlights, please refer to page 10.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund performed very well relative to its peer average, achieving a
12-month total return of 7.52 percent(1) (Class A shares at net asset
value) as of December 31, 1998. By comparison, the Russell 2000 Index
returned -2.55 percent, and the Lipper Convertible Securities Fund Index, which
more closely resembles the Fund, returned 2.82 percent. The Russell 2000 Index
reflects the average performance of small-cap stocks, and the Lipper Convertible
Securities Fund Index represents the average performance of the 10 largest
convertible securities funds.
These indices are statistical composites that do not include any commissions
or sales charges that would be paid by an investor purchasing the securities or
investments represented by these indices. Please refer to the chart on page 3
for additional Fund performance results.
Q WHAT DO YOU SEE AHEAD FOR THE FUND FOR THE NEXT SIX MONTHS?
A We believe there are a number of uncertainties as we move into 1999.
Sagging economies in Japan and Latin America may continue to affect
markets worldwide, while easing consumer demand at home could slow the
U.S. economy. Credit spreads are still wide, reflecting investors' continued
cautiousness. This is not necessarily the best environment for convertible
securities, since convertibles are issued predominantly by small- and mid-cap
companies, which usually carry a higher-than-average degree of risk for
investors.
On the plus side, small-cap stocks remain undervalued relative to large-cap
stocks, and small caps typically outperform the broad market during cyclical
recoveries. If the global economy stabilizes and the Fed can successfully
sustain the U.S. economy, the small-cap and convertible markets could benefit.
8
<PAGE> 10
Either way, we intend to continue with our strategy of investing in those
companies we believe offer the best combination of sound fundamentals and
potential for positive returns relative to the market. If a market decline does
occur, investors could benefit from the level of downside protection that
convertibles typically have offered relative to the broader equity market.
[SIG.]
Christine Drusch
Portfolio Manager
[SIG.]
David McLaughlin
Portfolio Comanager
[SIG.]
Matthew Hart
Portfolio Comanager
[SIG.]
Stephen L. Boyd
Chief Investment Officer
Equity Investments
Please see footnotes on page 3
9
<PAGE> 11
PORTFOLIO HIGHLIGHTS
VAN KAMPEN HARBOR FUND
PORTFOLIO HOLDINGS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
PERCENTAGE OF
TOP TEN HOLDINGS THESE INVESTMENTS
AS OF DECEMBER 31, 1998 TWELVE MONTHS AGO
<S> <C> <C>
WMX Technologies, Inc. ... 2.8% ........ N/A
Comverse Technology
Inc. ................... 2.7% ........ N/A
Roche Holdings, Inc. ..... 2.3% ........ N/A
Advanced Micro Devices
Inc. ................... 2.1% ........ N/A
Hewlett Packard Co. ...... 2.1% ........ N/A
Texas Utilities Co. ...... 2.1% ........ N/A
DSC Communications
Corp. .................. 2.0% ........ N/A
Home Depot, Inc. ......... 1.9% ........ 1.5%
Unocal Capital Trust ..... 1.9% ........ 1.3%
CSC Holdings, Inc. ....... 1.7% ........ N/A
</TABLE>
N/A = Not Applicable
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
<S> <C>
Technology .................. 30%
Utilities ................... 15%
Consumer Services ........... 10%
Finance ..................... 9%
Health Care ................. 9%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
<S> <C>
Consumer Services ........... 17%
Finance ..................... 15%
Health Care ................. 13%
Energy ...................... 12%
Consumer Distribution ....... 11%
</TABLE>
ASSET ALLOCATION AS A PERCENTAGE OF TOTAL INVESTMENTS
PIE CHART
<TABLE>
<CAPTION>
COMMON STOCK U.S. GOVERNMENT CONVERTIBLES OTHER
------------ --------------- ------------ -----
<S> <C> <C> <C> <C>
12/31/98 10.00 2.00 85.00 3.00
</TABLE>
PIE CHART
<TABLE>
<CAPTION>
COMMON STOCK U.S. GOVERNMENT CONVERTIBLES
------------ --------------- ------------
<S> <C> <C> <C>
12/31/97 8.00 11.00 81.00
</TABLE>
10
<PAGE> 12
PORTFOLIO OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
DOMESTIC CONVERTIBLE CORPORATE
OBLIGATIONS 50.9%
CONSUMER DISTRIBUTION 2.5%
$ 4,000 Central Garden & Pet Co....................... 6.000% 11/15/03 $ 3,360,000
3,000 Home Depot, Inc............................... 3.250 10/01/01 8,017,500
------------
11,377,500
------------
CONSUMER DURABLES 1.0%
9,990 Lennar Corp................................... * 07/29/18 4,520,475
------------
CONSUMER NON-DURABLES 0.9%
5,150 Loews Corp. (convertible into 79,185 Diamond
Offshore Drilling, Inc. common shares)........ 3.125 09/15/07 4,132,875
------------
CONSUMER SERVICES 5.6%
2,500 Conxus Communications Inc., 144A -- Private
Placement (a) (b)............................. 9.00/9.50 05/15/01 2,250,000
2,130 Interim Services Inc.......................... 4.500 06/01/05 1,924,988
5,800 Jacor Communications Inc., LYON............... * 02/09/18 2,798,500
3,600 Mail-Well Inc................................. 5.000 11/01/02 3,258,000
5,120 Metamor Worldwide, Inc........................ 2.940 08/15/04 4,006,400
10,550 News America Holdings, Inc., LYON............. * 03/11/13 6,066,250
1,250 Omnicom Group, Inc., 144A -- Private Placement
(a)........................................... 4.250 01/03/07 2,381,250
2,000 Personnel Group of America, Inc.,
144A -- Private Placement (a)................. 5.750 07/01/04 2,325,000
------------
25,010,388
------------
ENERGY 1.3%
1,820 Diamond Offshore Drilling, Inc................ 3.750 02/15/07 1,685,775
4,207 Pennzoil Co. (convertible into 71,536 Chevron
Oil Co. common shares)........................ 4.950 08/15/08 4,122,860
------------
5,808,635
------------
FINANCE 1.7%
STRYPES Merrill Lynch & Company, Inc., 83,800 shares
(convertible into 128,926 CIBER, Inc. common
shares)....................................... 7.875 02/01/01 4,548,542
STRYPES Merrill Lynch & Company, Inc., 53,500 shares
(convertible into Cox Communications common
shares)....................................... 6.000 06/01/99 3,049,865
------------
7,598,407
------------
HEALTHCARE 7.8%
5,000 Athena Neurosciences, Inc., 144A -- Private
Placement (a)................................. 4.750 11/15/04 5,900,000
2,600 Elan Finance Corp., Ltd., LYON,
144A -- Private Placement (a)................. * 12/14/18 1,470,625
3,410 Genzyme Corporation, 144A -- Private Placement
(a)........................................... 5.250 06/01/05 4,867,775
5,150 HEALTHSOUTH Corporation, 144A -- Private
Placement (a)................................. 3.250 04/01/03 4,403,250
14,860 Roche Holdings, Inc., LYON, 144A -- Private
Placement (convertible into 704 Rogers Corp.
common shares) (a)............................ * 04/20/10 9,603,275
1,530 Sunrise Assisted Living Inc., 144A -- Private
Placement (a)................................. 5.500 06/15/02 2,295,000
2,400 Total Renal Care Holdings, Inc................ 5.625 07/15/06 2,883,000
3,213 Total Renal Care Holdings, Inc.,
144A -- Private Placement (a)................. 7.000 05/15/09 3,494,137
------------
34,917,062
------------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 13
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
PRODUCER MANUFACTURING 4.0%
$ 2,180 Antec Corp., 144A -- Private Placement (a).... 4.500% 05/15/03 $ 2,147,300
4,250 U. S. Filter Corp............................. 4.500 12/15/01 3,979,063
11,890 WMX Technologies, Inc......................... 2.000 01/24/05 11,637,337
------------
17,763,700
------------
TECHNOLOGY 25.1%
5,520 Adaptec, Inc.................................. 4.750 02/01/04 4,278,000
8,530 Advanced Micro Devices Inc.................... 6.000 05/15/05 8,807,225
3,400 Affiliated Computer Services Inc., 144A
Private Placement (a)......................... 4.000 03/15/05 4,109,750
1,100 America Online, Inc........................... 4.000 11/15/02 6,206,750
4,685 Amkor Technologies, Inc....................... 5.750 05/01/03 4,661,575
2,280 Automatic Data Processing, Inc., LYON......... * 02/20/12 2,351,250
8,875 Comverse Technology Inc., 144A -- Private
Placement (a)................................. 4.500 07/01/05 11,149,219
8,070 DSC Communications Corp....................... 7.000 08/01/04 8,463,412
900 EMC Corp...................................... 3.250 03/15/02 3,377,250
15,470 Hewlett Packard Co., LYON..................... * 10/14/17 8,605,187
2,160 Kellstrom Industries Inc...................... 5.500 06/15/03 2,289,600
2,185 Level One Communications, Inc................. 4.000 09/01/04 3,211,950
3,420 May & Speh Inc................................ 5.250 04/01/03 5,728,500
5,620 Micron Technology, Inc........................ 7.000 07/01/04 6,006,375
5,525 Network Associates Inc., 144A Private
Placement (a)................................. * 02/13/18 3,315,000
5,230 Network Associates, Inc....................... * 02/13/18 3,138,000
2,090 Oak Industries, Inc........................... 4.875 03/01/08 2,204,950
2,870 Platinum Technology, Inc...................... 6.750 11/15/01 4,183,025
2,337 Premiere Technologies Inc..................... 5.750 07/01/04 1,273,665
2,988 Quadramed Corp., 144A -- Private Placement
(a)........................................... 5.250 05/01/05 2,569,680
2,450 Quantum Corp.................................. 7.000 08/01/04 2,345,875
2,020 SCI Systems, Inc., 144A -- Private Placement
(a)........................................... 5.000 05/01/06 4,797,500
5,470 STMicroelectronics NV, LYON................... * 06/10/08 4,847,788
1,600 Veritas Software Corp......................... 5.250 11/01/04 2,552,000
1,450 Wind River Systems, Inc....................... 5.000 08/01/02 1,689,250
------------
112,162,776
------------
UTILITIES 1.0%
4,300 NTL, Inc., 144A -- Private Placement (a)...... 7.000 12/15/08 4,660,125
------------
TOTAL DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS 50.9%....................... 227,951,943
------------
FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS 0.2%
1,000 Swiss Life Finance Limited, (United Kingdom),
(convertible into 13,614 shares of Royal Dutch
Petroleum Co.) 144A -- Private Placement
(a)........................................... 2.000 05/20/05 973,750
------------
</TABLE>
See Notes to Financial Statements
12
<PAGE> 14
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS 31.8%
CONSUMER DISTRIBUTION 3.7%
AnnTaylor Finance Trust, 8.500%............................. 50,000 $ 5,015,625
CVS Automatic Common Exchange Security Trust, 6.000%........ 50,000 5,009,375
Kmart Financing I Trust, 7.750%............................. 36,100 2,091,544
Mckesson Financing Trust, 5.000%............................ 42,500 4,627,188
------------
16,743,732
------------
CONSUMER DURABLES 0.9%
Fleetwood Capital Trust, 6.00%, 144A -- Private
Placement (a)............................................. 80,750 3,855,812
------------
CONSUMER NON-DURABLES 0.6%
Ralston Purina Co., SAILS, 7.000% (convertible into 112,761
Interstate Bakeries Corp. common shares).................. 51,000 2,628,097
------------
CONSUMER SERVICES 3.2%
CSC Holdings, Inc., 8.500%.................................. 95,000 7,160,625
Evergreen Media Corp., $3.000 dividend per share,
144A -- Private Placement (a)............................. 60,000 5,835,000
Host Marriott Financial Trust, QUIPS, 6.750%,
144A -- Private Placement (a)............................. 35,000 1,443,750
------------
14,439,375
------------
ENERGY 3.6%
El Paso Energy Capital Trust I, 4.750%...................... 135,750 6,499,031
Tosco Financing Trust, 5.750%............................... 40,000 1,950,000
Unocal Capital Trust, 6.250%................................ 161,000 7,868,875
------------
16,317,906
------------
FINANCE 6.0%
Amerus Life Holdings, Inc., 7.000%.......................... 102,600 2,462,400
Conseco Finance Trust IV, Ser F, PRIDES, 7.000%............. 133,800 5,159,662
Finova Finance Trust, TOPRS, 5.500%......................... 40,000 2,972,500
General Growth Properties Inc., PIERS, 7.250%............... 102,400 2,636,800
Glenborough Realty Trust Inc., 7.750%, Series A............. 75,000 1,368,750
Life RE Capital Trust II, QUIPS, 6.000%..................... 34,300 2,623,950
National Australia Bank, 7.875%............................. 160,000 4,460,000
Philadelphia Consolidated Holdings, PRIDES, 7.000%.......... 211,800 2,118,000
PLC Capital Trust II, PRIDES, 6.500%........................ 48,000 3,132,000
------------
26,934,062
------------
HEALTHCARE 0.5%
Alkermes, Inc., 6.500%...................................... 51,000 2,314,125
------------
PRODUCER MANUFACTURING 1.7%
Coltec Capital Trust, TIDES, 5.250%, 144A -- Private
Placement (a)............................................. 76,900 3,345,150
Ingersoll Rand Company, PRIDES, 6.750%...................... 171,500 4,073,125
------------
7,418,275
------------
RAW MATERIALS/PROCESSING INDUSTRIES 0.7%
Monsanto Co., 6.500%, ACES.................................. 59,050 2,893,450
------------
TECHNOLOGY 0.5%
Tribune Co., 6.250%......................................... 89,800 2,191,299
------------
</TABLE>
See Notes to Financial Statements
13
<PAGE> 15
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- ------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 1.1%
Tower Automotive Capital Trust, 6.750%, 144A -- Private
Placement (a)............................................. 95,000 $ 4,892,500
------------
UTILITIES 9.3%
Aes Trust II, TECONS, 5.500%, 144A -- Private Placement
(a)....................................................... 50,000 2,525,000
CalEnergy Capital Trust III, 6.500%......................... 100,000 4,868,750
Houston Industries, Inc., ACES, 7.000% (convertible into
83,714 of Time Warner, Inc. common shares)................ 50,650 5,387,894
Nextel Trust, STRYPES, 7.250%............................... 155,000 3,177,500
MediaOne Group, Inc. ....................................... 64,200 4,239,513
Nextlink Communications Inc., 6.500%, 144A -- Private
Placement (a)............................................. 67,100 2,767,875
Omnipoint Corporation, 7.000%, 144A -- Private
Placement (a)............................................. 171,100 4,277,500
Sprint Corp., DECS, 8.250%, (Convertible into 83,609 So. New
England Telecom. Corp. common shares)..................... 74,000 6,103,919
Texas Utilities Co., PRIDES, 9.250%......................... 151,200 8,523,900
------------
41,871,851
------------
TOTAL CONVERTIBLE PREFERRED STOCK 31.8%............................... 142,500,484
------------
COMMON STOCKS 9.8%
CONSUMER DISTRIBUTION 1.1%
Staples, Inc. (c)........................................... 114,498 5,002,131
------------
CONSUMER SERVICES 0.5%
CBS Corp. (c)............................................... 60,000 1,965,000
------------
ENERGY 1.1%
British Petroleum Co. PLC -- ADR (United Kingdom) (c)....... 56,500 5,063,813
------------
FINANCE 0.9%
U.S. Bancorp................................................ 51,000 1,810,500
Washington Mutual, Inc...................................... 56,553 2,159,618
------------
3,970,118
------------
TECHNOLOGY 1.9%
Motorola, Inc............................................... 32,500 1,984,531
Quantum Corp. (c)........................................... 120,000 2,550,000
Unisys Corp. (c)............................................ 120,000 4,132,500
------------
8,667,031
------------
TRANSPORTATION 0.6%
FDX Corp. (c) (d)........................................... 30,000 2,670,000
------------
UTILITIES 3.7%
AT&T Corp. (d).............................................. 74,000 5,568,500
MCI Worldcom, Inc. (c)...................................... 96,817 6,946,620
U.S. West, Inc.............................................. 65,000 4,200,625
------------
16,715,745
------------
TOTAL COMMON STOCKS................................................... 44,053,838
------------
TOTAL LONG-TERM INVESTMENTS 92.7%
(Cost $376,286,937)................................................. 415,480,015
------------
</TABLE>
See Notes to Financial Statements
14
<PAGE> 16
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Market Value
- ------------------------------------------------------------------------------------
<S> <C>
SHORT-TERM INVESTMENTS 5.4%
COMMERCIAL PAPER 3.2%
General Electric Capital Corp. ($14,410,000 par, yielding 5.003%,
01/04/99 maturity) (d).............................................. $ 14,401,994
U.S. GOVERNMENT AGENCY OBLIGATIONS 2.2%
Federal Farm Credit Bank ($10,000,000 par, yielding 4.809%, 06/07/99
maturity) (d)....................................................... 9,794,000
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $24,197,022).................................................. 24,195,994
------------
TOTAL INVESTMENTS 98.1%
(Cost $400,483,959)................................................. 439,676,009
OTHER ASSETS IN EXCESS OF LIABILITIES 1.9%........................... 8,344,490
------------
NET ASSETS 100.0%.................................................... $448,020,499
----------
</TABLE>
* Zero coupon bond
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(b) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined rate.
(c) Non-income producing security as this stock currently does not declare
dividends.
(d) Assets segregated as collateral for open futures transactions.
ACES -- Automatically convertible equity securities
ADR -- American Depository Receipt
DECS -- Debt exchangeable for common stock
LYON -- Liquid yield option note
PIERS -- Preferred income equity redeemable stock
PRIDES -- Preferred redeemable increased dividend equity security, traded in
shares
QUIPS -- Quarterly income preferred securities
SAILS -- Stock appreciation income linked securities
STRYPES -- Structured yield product exchangeable for stock traded in shares
TECONS -- Trust convertible securities
TIDES -- Term income deferrable equity securities
TOPRS -- Trust originated preferred securities
See Notes to Financial Statements
15
<PAGE> 17
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $400,483,959)....................... $439,676,009
Cash........................................................ 11,146
Receivables:
Investments Sold.......................................... 9,839,966
Interest.................................................. 2,242,602
Fund Shares Sold.......................................... 804,268
Dividends................................................. 248,800
Variation Margin on Futures............................... 70,500
Other....................................................... 51,986
------------
Total Assets.......................................... 452,945,277
------------
LIABILITIES:
Payables:
Fund Shares Repurchased................................... 2,723,872
Investments Purchased..................................... 909,846
Distributor and Affiliates................................ 377,639
Income Distributions...................................... 339,982
Investment Advisory Fee................................... 201,012
Accrued Expenses............................................ 216,701
Trustees' Deferred Compensation and Retirement Plans........ 155,726
------------
Total Liabilities..................................... 4,924,778
------------
NET ASSETS.................................................. $448,020,499
============
NET ASSETS CONSIST OF:
Capital..................................................... $402,068,824
Net Unrealized Appreciation................................. 40,695,575
Accumulated Net Realized Gain............................... 3,902,103
Accumulated Undistributed Net Investment Income............. 1,353,997
------------
NET ASSETS.................................................. $448,020,499
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $375,430,789 and 25,306,879 shares of
beneficial interest issued and outstanding)........... $ 14.84
Maximum sales charge (5.75%* of offering price)......... .91
------------
Maximum offering price to public........................ $ 15.75
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $66,687,397 and 4,519,577 shares of
beneficial interest issued and outstanding)........... $ 14.76
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $5,902,313 and 397,327 shares of
beneficial interest issued and outstanding)........... $ 14.86
============
</TABLE>
*On sales of $50,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
16
<PAGE> 18
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $13,813,179
Dividends................................................... 6,716,044
-----------
Total Income............................................ 20,529,223
-----------
EXPENSES:
Investment Advisory Fee..................................... 2,459,237
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $825,171, $751,909 and $53,313,
respectively)............................................. 1,630,393
Shareholder Services........................................ 746,031
Trustees' Fees and Expenses................................. 23,775
Legal....................................................... 14,565
Custody..................................................... 10,835
Other....................................................... 405,551
-----------
Total Expenses.......................................... 5,290,387
-----------
NET INVESTMENT INCOME....................................... $15,238,836
===========
REALIZED AND UNREALIZED GAIN:
Realized Gain/Loss:
Investments............................................... $19,644,276
Futures................................................... 2,349,315
-----------
Net Realized Gain........................................... 21,993,591
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 47,584,139
-----------
End of the Period:
Investments............................................... 39,192,050
Futures................................................... 1,503,525
-----------
40,695,575
-----------
Net Unrealized Depreciation During the Period............... (6,888,564)
-----------
NET REALIZED AND UNREALIZED GAIN............................ $15,105,027
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $30,343,863
===========
</TABLE>
See Notes to Financial Statements
17
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................. $ 15,238,836 $ 16,063,210
Net Realized Gain..................................... 21,993,591 54,691,941
Net Unrealized Appreciation/Depreciation During the
Period.............................................. (6,888,564) 1,495,425
------------ ------------
Change in Net Assets from Operations.................. 30,343,863 72,250,576
------------ ------------
Distributions from Net Investment Income.............. (15,692,022) (17,653,801)
Distributions in Excess of Net Investment Income...... -0- (2,441,344)
------------ ------------
Distributions from and in Excess of Net Investment
Income*............................................. (15,692,022) (20,095,145)
Distributions from Net Realized Gains*................ (22,599,003) (48,007,153)
------------ ------------
Total Distributions................................... (38,291,025) (68,102,298)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES... (7,947,162) 4,148,278
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............................. 211,066,810 84,935,691
Net Asset Value of Shares Issued Through Dividend
Reinvestment........................................ 31,243,567 56,172,535
Cost of Shares Repurchased............................ (248,677,411) (138,510,168)
------------ ------------
Net Change in Net Assets from Capital Transactions.... (6,367,034) 2,598,058
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS................. (14,314,196) 6,746,336
NET ASSETS:
Beginning of the Period............................... 462,334,695 455,588,359
------------ ------------
End of the Period (Including accumulated undistributed
net investment income of $1,353,997 and $1,807,183,
respectively)....................................... $448,020,499 $462,334,695
============ ============
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment
Income:
Class A Shares...................................... $(13,495,042) $(16,890,943)
Class B Shares...................................... (2,044,075) (3,045,626)
Class C Shares...................................... (152,905) (158,576)
------------ ------------
$(15,692,022) $(20,095,145)
============ ============
Distributions from Net Realized Gain:
Class A Shares...................................... $(18,851,717) $(39,111,920)
Class B Shares...................................... (3,468,896) (8,428,584)
Class C Shares...................................... (278,390) (466,649)
------------ ------------
$(22,599,003) $(48,007,153)
============ ============
</TABLE>
See Notes to Financial Statements
18
<PAGE> 20
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
Class A Shares 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period............................... $15.059 $15.054 $ 15.05 $13.24 $ 15.12
------- ------- ------- ------ --------
Net Investment Income................ .520 .600 .566 .68 .63
Net Realized and Unrealized
Gain/Loss.......................... .546 1.854 1.173 2.25 (1.5625)
------- ------- ------- ------ --------
Total from Investment Operations....... 1.066 2.454 1.739 2.93 (.9325)
------- ------- ------- ------ --------
Less:
Distributions from and in Excess of
Net Investment Income.............. .537 .730 .555 .7025 .62
Distributions from and in Excess of
Net Realized Gain.................. .753 1.719 1.180 .4175 .3275
------- ------- ------- ------ --------
Total Distributions.................... 1.290 2.449 1.735 1.12 .9475
------- ------- ------- ------ --------
Net Asset Value, End of the Period..... $14.835 $15.059 $15.054 $15.05 $ 13.24
======= ======= ======= ====== ========
Total Return (a)....................... 7.52% 16.91% 12.08% 22.46% (6.43%)
Net Assets at End of the Period (In
millions)............................ $ 375.4 $ 376.4 $ 373.1 $394.5 $ 369.7
Ratio of Expenses to Average Net
Assets............................... 1.02% 1.04% 1.09% 1.00% 1.04%
Ratio of Net Investment Income to
Average Net Assets................... 3.48% 3.58% 3.60% 4.62% 4.39%
Portfolio Turnover..................... 156% 170% 129% 130% 105%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
See Notes to Financial Statements
19
<PAGE> 21
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
Class B Shares 1998(b) 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $ 14.981 $ 14.992 $ 14.99 $ 13.20 $ 15.07
-------- -------- -------- ------- --------
Net Investment Income.................... .397 .470 .437 .56 .51
Net Realized and Unrealized Gain/Loss.... .547 1.848 1.180 2.23 (1.5505)
-------- -------- -------- ------- --------
Total from Investment Operations......... .944 2.318 1.617 2.79 (1.0405)
-------- -------- -------- ------- --------
Less:
Distributions from and in Excess of Net
Investment Income.................... .417 .610 .435 .5825 .502
Distributions from and in Excess of Net
Realized Gain........................ .753 1.719 1.180 .4175 .3275
-------- -------- -------- ------- --------
Total Distributions...................... 1.170 2.329 1.615 1.00 .8295
-------- -------- -------- ------- --------
Net Asset Value, End of the Period....... $ 14.755 $ 14.981 $ 14.992 $ 14.99 $ 13.20
======== ======== ======== ======= ========
Total Return (a)......................... 6.70% 15.98% 11.19% 21.46% (7.11%)
Net Assets at End of the Period (In
millions).............................. $ 66.7 $ 81.3 $ 78.9 $ 78.1 $ 71.1
Ratio of Expenses to Average Net
Assets................................. 1.81% 1.82% 1.88% 1.81% 1.84%
Ratio of Net Investment Income to Average
Net Assets............................. 2.66% 2.80% 2.81% 3.81% 3.63%
Portfolio Turnover....................... 156% 170% 129% 130% 105%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) Based on average shares outstanding.
See Notes to Financial Statements
20
<PAGE> 22
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
Class C Shares 1998(b) 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period................................. $15.080 $15.079 $ 15.07 $ 13.25 $ 15.13
------- ------- ------- ------- --------
Net Investment Income.................... .405 .448 .439 .56 .52
Net Realized and Unrealized Gain/Loss.... .540 1.882 1.185 2.26 (1.5705)
------- ------- ------- ------- --------
Total from Investment Operations......... .945 2.330 1.624 2.82 (1.0505)
------- ------- ------- ------- --------
Less:
Distributions from and in Excess of Net
Investment Income.................... .417 .610 .435 .5825 .502
Distributions from and in Excess of Net
Realized Gain........................ .753 1.719 1.180 .4175 .3275
------- ------- ------- ------- --------
Total Distributions...................... 1.170 2.329 1.615 1.00 .8295
------- ------- ------- ------- --------
Net Asset Value, End of the Period....... $14.855 $15.080 $15.079 $ 15.07 $ 13.25
======= ======= ======= ======= ========
Total Return (a)......................... 6.65% 15.96% 11.20% 21.52% (7.14%)
Net Assets at End of the Period (In
millions).............................. $ 5.9 $ 4.6 $ 3.6 $ 3.6 $ 3.3
Ratio of Expenses to Average Net
Assets................................. 1.81% 1.82% 1.88% 1.80% 1.84%
Ratio of Net Investment Income to Average
Net Assets............................. 2.71% 2.79% 2.81% 3.80% 3.72%
Portfolio Turnover....................... 156% 170% 129% 130% 105%
</TABLE>
(a) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(b) Based on average shares outstanding.
See Notes to Financial Statements
21
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Harbor Fund (the "Fund") is organized as a Delaware business trust,
and is registered as a diversified open-end management investment company under
the Investment Company Act of 1940, as amended. The Fund's investment objective
is to seek income, capital appreciation, and conservation of capital by
investing primarily in convertible bonds and preferred stocks. The Fund
commenced investment operations on November 15, 1956. The distribution of the
Fund's Class B and Class C shares commenced on December 20, 1991 and October 26,
1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Investments in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange. The
Fund's security valuation methodology, for listed and unlisted securities for
which the last sale price is not available, was changed in 1998 from bid side
pricing to the mean of the bid and asked prices. Additionally, valuation of
unlisted convertible securities was changed from the higher of the last bid
price or value of the securities issuable upon conversion to the mean of the bid
and asked prices. The impact of these changes, which was not material, is
included as a component of the change in unrealized appreciation/depreciation
for the year ended December 31, 1998. Fixed income investments and preferred
stock are stated at value using market quotations or indications of value
obtained from an independent pricing service. For those securities where
quotations or prices are not available, valuations are determined in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal and
interest payments. Debt securities rated below investment grade and comparable
unrated securities represented approximately 33% of the long-term investments at
the end of the period.
22
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
B. SECURITY TRANSACTIONS--Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1998, there were no
when issued or delayed delivery purchase commitments.
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen Asset Management Inc. (the "Adviser") or its
affiliates, the daily aggregate of which is invested in repurchase agreements.
Repurchase agreements are fully collateralized by the underlying debt security.
The Fund will make payment for such security only upon physical delivery or
evidence of book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not less than
the repurchase proceeds due the Fund.
C. INCOME AND EXPENSES--Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Discounts are amortized over
the expected life of each applicable security. Premiums on debt securities are
not amortized. Expenses of the Fund are allocated on a pro rata basis to each
class of shares, except for distribution and service fees and transfer agency
costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales and the mark to market of open futures transactions at
December 31, 1998.
23
<PAGE> 25
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
At December 31, 1998, for federal income tax purposes, cost of long- and
short-term investments is $400,517,360; the aggregate gross unrealized
appreciation is $58,000,244 and the aggregate gross unrealized depreciation is
$18,841,595, resulting in net unrealized appreciation on long- and short-term
investments of $39,158,649.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains which are included in ordinary income for
tax purposes.
For federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
December 31, 1998. The Fund designated and paid $22,599,003 as a 20% rate gain
distribution. Shareholders were sent a 1998 Form 1099-DIV in January 1999
representing their proportionate share of capital gain distribution to be
reported on their income tax returns.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $350 million.................................... .55 of 1%
Next $350 million..................................... .50 of 1%
Next $350 million..................................... .45 of 1%
Over $1.05 billion.................................... .40 of 1%
</TABLE>
For the year ended December 31, 1998, the Fund recognized expenses of
approximately $14,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1998, the Fund recognized expenses of
approximately $156,200 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting services to the Fund.
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
December 31, 1998, the Fund recognized expenses of approximately $575,700.
Beginning in 1998, the transfer agency fees are determined through negotiations
with the Fund's Board of Trustees and are based on competitive market
benchmarks.
24
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest, Classes
A, B and C, each with a par value of $.01 per share. There are an unlimited
number of shares of each class authorized.
At December 31, 1998, capital aggregated $328,235,828, $67,746,734, and
$6,086,262 for Classes A, B, and C, respectively. For the year ended December
31, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 12,927,991 $ 193,998,609
Class B.................................... 949,046 14,318,709
Class C.................................... 179,950 2,749,492
----------- -------------
Total Sales.................................. 14,056,987 $ 211,066,810
=========== =============
Dividend Reinvestment:
Class A.................................... 1,786,990 $ 26,175,448
Class B.................................... 321,906 4,707,544
Class C.................................... 24,679 360,575
----------- -------------
Total Dividend Reinvestment.................. 2,133,575 $ 31,243,567
=========== =============
Repurchases:
Class A.................................... (14,405,527) $(214,599,359)
Class B.................................... (2,177,447) (32,400,387)
Class C.................................... (112,483) (1,677,665)
----------- -------------
Total Repurchases............................ (16,695,457) $(248,677,411)
=========== =============
</TABLE>
25
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
At December 31, 1997, capital aggregated $322,661,130, $81,120,868 and
$4,653,860 for Classes A, B, and C, respectively. For the year ended December
31, 1997, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A..................................... 4,596,353 $ 72,255,103
Class B..................................... 702,695 11,137,353
Class C..................................... 95,609 1,543,235
---------- -------------
Total Sales................................... 5,394,657 $ 84,935,691
========== =============
Dividend Reinvestment:
Class A..................................... 3,078,670 $ 45,914,946
Class B..................................... 660,267 9,780,959
Class C..................................... 32,032 476,630
---------- -------------
Total Dividend Reinvestment................... 3,770,969 $ 56,172,535
========== =============
Repurchases:
Class A..................................... (7,461,163) $(118,439,608)
Class B..................................... (1,201,555) (19,139,823)
Class C..................................... (58,685) (930,737)
---------- -------------
Total Repurchases............................. (8,721,403) $(138,510,168)
========== =============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. The CDSC will be imposed on most redemptions made within five years of
the purchase for Class B and one year of the purchase for Class C as detailed in
the following schedule.
26
<PAGE> 28
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
------------------
YEAR OF REDEMPTION CLASS B CLASS C
- -------------------------------------------------------------------------
<S> <C> <C>
First................................................. 5.00% 1.00%
Second................................................ 4.00% None
Third................................................. 3.00% None
Fourth................................................ 2.50% None
Fifth................................................. 1.50% None
Sixth and Thereafter.................................. None None
</TABLE>
For the year ended December 31, 1998, Van Kampen, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of
approximately $72,000 and CDSC on the redeemed shares of Classes B and C of
approximately $186,900. Sales charges do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $653,865,566 and $677,645,702,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio or to generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in the unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a futures contract. In this instance,
the recognition of gain or loss is postponed until the disposal of the security
underlying the futures contract.
During the period, the Fund invested in futures contracts, a type of
derivative. A futures contract is an agreement involving the delivery of a
particular asset on a specified future date at an agreed upon price. The Fund
generally invests in stock index futures. These contracts are generally used to
provide the return of an index without purchasing all of the securities
underlying the index or to manage the Fund's overall exposure to the equity
markets.
27
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1998
- --------------------------------------------------------------------------------
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, securities with a value equal to its obligation
under the futures contracts. During the period the futures contract is open,
payments are received from or made to the broker based upon changes in the value
of the contract (the variation margin). The risk of loss associated with a
futures contract is in excess of the variation margin reflected on the Statement
of Assets and Liabilities.
Transactions in futures contracts for the year ended December 31, 1998, were
as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1997............................ -0-
Futures Opened.............................................. 400
Futures Closed.............................................. (310)
---
Outstanding at December 31, 1998............................ 90
===
</TABLE>
The futures contracts outstanding at December 31, 1998, and the description
and unrealized appreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C>
Long Contracts--March 1999 S&P 500 Index Future
(Current Notional Value of $311,375 per
contract)..................................... 90 $1,503,525
=== ==========
</TABLE>
6. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended December 31, 1998, are payments retained by Van Kampen of
approximately $647,100.
28
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
Van Kampen Harbor Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Van Kampen Harbor Fund (the "Fund")
at December 31, 1998, and the results of its operations, the changes in its net
assets and the financial highlights for each of the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 3, 1999
29
<PAGE> 31
VAN KAMPEN FUNDS
EQUITY FUNDS
Domestic
Aggressive Equity
Aggressive Growth
American Value
Comstock
Emerging Growth
Enterprise
Equity Growth
Equity Income
Growth
Growth and Income
Harbor
Pace
Real Estate Securities
Utility
Value
Global/International
Asian Growth
Emerging Markets
European Equity
Global Equity
Global Equity Allocation
Global Franchise
Global Managed Assets
International Magnum
Latin American
FIXED-INCOME FUNDS
Income
Corporate Bond
Global Fixed Income
Global Government Securities
Government Securities
High Income Corporate Bond
High Yield
High Yield & Total Return
Limited Maturity Government
Short-Term Global Income
Strategic Income
U.S. Government
U.S. Government Trust for Income
Worldwide High Income
Tax Exempt Income
California Insured Tax Free
Florida Insured Tax Free Income
High Yield Municipal
Insured Tax Free Income
Intermediate Term Municipal Income
Municipal Income
New York Tax Free Income
Pennsylvania Tax Free Income
Tax Free High Income
Capital Preservation
Reserve
Tax Free Money
Senior Loan Funds
Prime Rate Income Trust
Senior Floating Rate
To find out more about any of these funds, ask your financial advisor for a
prospectus, which contains more complete information, including sales
charges, risks, and expenses. Please read it carefully before you invest
or send money.
To view a current Van Kampen fund prospectus or to receive additional fund
information, choose from one of the following:
- visit our Web site at
WWW.VANKAMPEN.COM--to view prospectuses, select Download Prospectus
- call us at 1-800-341-2911 weekdays from 7:00 a.m. to 7:00 p.m. Central
time. Telecommunications Device for the Deaf users, call 1-800-421-2833.
- e-mail us by visiting
WWW.VANKAMPEN.COM and selecting Contact Us
30
<PAGE> 32
VAN KAMPEN HARBOR FUND
BOARD OF TRUSTEES
J. MILES BRANAGAN
RICHARD M. DEMARTINI*
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
JACK E. NELSON
DON G. POWELL*
PHILLIP B. ROONEY
FERNANDO SISTO
WAYNE W. WHALEN*--Chairman
PAUL G. YOVOVICH
OFFICERS
DENNIS J. MCDONNELL*
President
RONALD A. NYBERG*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and Chief Financial Officer
CURTIS W. MORELL*
Vice President and Chief Accounting Officer
TANYA M. LODEN*
Controller
PETER W. HEGEL*
PAUL R. WOLKENBERG*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN
ASSET MANAGEMENT INC.
2800 Post Oak Blvd.
Houston, Texas 77056
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, Illinois 60181-5555
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR
SERVICES INC.
P.O. Box 418256
Kansas City, Missouri 64141-9256
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02105
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph Drive
Chicago, Illinois 60601
<TABLE>
<C> <S>
* "Interested" persons of the
Fund, as defined in the
Investment Company Act of
1940.
TAX NOTICE TO CORPORATE SHAREHOLDERS (C) Van Kampen Funds Inc., 1999
For 1998, 39.44% of the dividends All rights reserved.
taxable as ordinary income qualified
for the 70% dividends received (SM) denotes a service mark of
deduction for corporations. Van Kampen Funds Inc.
</TABLE>
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors unless it
has been preceded or is accompanied by an effective prospectus of the Fund which
contains additional information on how to purchase shares, the sales charge, and
other pertinent data. After June 30, 1999, the report, if used with prospective
investors, must be accompanied by a quarterly performance update, if applicable.
31
<PAGE> 33
YEAR 2000 READINESS DISCLOSURE
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 Fund's investment 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 Fund's
investment 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 assurances
that these steps will be sufficient to avoid any adverse impact to the Fund. In
addition, the Year 2000 Problem may adversely affect the markets and the issuers
of securities in which the Fund may invest that, 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 or issuers and overall economic uncertainty. 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. The
statements above are subject to the Year 2000 Information and Readiness
Disclosure Act, which may limit the legal rights regarding the use of such
statements in the case of dispute.
32
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 11
<NAME> HARBOR CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 400,483,959<F1>
<INVESTMENTS-AT-VALUE> 439,676,009<F1>
<RECEIVABLES> 13,206,136<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 63,132<F1>
<TOTAL-ASSETS> 452,945,277<F1>
<PAYABLE-FOR-SECURITIES> 909,846<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4,014,932<F1>
<TOTAL-LIABILITIES> 4,924,778<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 328,235,828
<SHARES-COMMON-STOCK> 25,306,879
<SHARES-COMMON-PRIOR> 24,997,425
<ACCUMULATED-NII-CURRENT> 1,353,997<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 3,902,103<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 40,695,575<F1>
<NET-ASSETS> 375,430,789
<DIVIDEND-INCOME> 6,716,044<F1>
<INTEREST-INCOME> 13,813,179<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (5,290,387)<F1>
<NET-INVESTMENT-INCOME> 15,238,836<F1>
<REALIZED-GAINS-CURRENT> 21,993,591<F1>
<APPREC-INCREASE-CURRENT> (6,888,564)<F1>
<NET-CHANGE-FROM-OPS> 30,343,863<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (13,495,042)
<DISTRIBUTIONS-OF-GAINS> (18,851,717)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,927,991
<NUMBER-OF-SHARES-REDEEMED> (14,405,527)
<SHARES-REINVESTED> 1,786,990
<NET-CHANGE-IN-ASSETS> (1,012,184)
<ACCUMULATED-NII-PRIOR> 1,807,183<F1>
<ACCUMULATED-GAINS-PRIOR> 4,507,515<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 2,459,237<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 5,290,387<F1>
<AVERAGE-NET-ASSETS> 376,357,646
<PER-SHARE-NAV-BEGIN> 15.059
<PER-SHARE-NII> 0.520
<PER-SHARE-GAIN-APPREC> 0.546
<PER-SHARE-DIVIDEND> (0.537)
<PER-SHARE-DISTRIBUTIONS> (0.753)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.835
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> HARBOR CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 400,483,959<F1>
<INVESTMENTS-AT-VALUE> 439,676,009<F1>
<RECEIVABLES> 13,206,136<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 63,132<F1>
<TOTAL-ASSETS> 452,945,277<F1>
<PAYABLE-FOR-SECURITIES> 909,846<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4,014,932<F1>
<TOTAL-LIABILITIES> 4,924,778<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 67,746,734
<SHARES-COMMON-STOCK> 4,519,577
<SHARES-COMMON-PRIOR> 5,426,072
<ACCUMULATED-NII-CURRENT> 1,353,997<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 3,902,103<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 40,695,575<F1>
<NET-ASSETS> 66,687,397
<DIVIDEND-INCOME> 6,716,044<F1>
<INTEREST-INCOME> 13,813,179<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (5,290,387)<F1>
<NET-INVESTMENT-INCOME> 15,238,836<F1>
<REALIZED-GAINS-CURRENT> 21,993,591<F1>
<APPREC-INCREASE-CURRENT> (6,888,564)<F1>
<NET-CHANGE-FROM-OPS> 30,343,863<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (2,044,075)
<DISTRIBUTIONS-OF-GAINS> (3,468,896)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 949,046
<NUMBER-OF-SHARES-REDEEMED> (2,177,447)
<SHARES-REINVESTED> 321,906
<NET-CHANGE-IN-ASSETS> (14,602,171)
<ACCUMULATED-NII-PRIOR> 1,807,183<F1>
<ACCUMULATED-GAINS-PRIOR> 4,507,515<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 2,459,237<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 5,290,387<F1>
<AVERAGE-NET-ASSETS> 75,195,757
<PER-SHARE-NAV-BEGIN> 14.981
<PER-SHARE-NII> 0.397
<PER-SHARE-GAIN-APPREC> 0.547
<PER-SHARE-DIVIDEND> (0.417)
<PER-SHARE-DISTRIBUTIONS> (0.753)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.755
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> HARBOR CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 400,483,959<F1>
<INVESTMENTS-AT-VALUE> 439,676,009<F1>
<RECEIVABLES> 13,206,136<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 63,132<F1>
<TOTAL-ASSETS> 452,945,277<F1>
<PAYABLE-FOR-SECURITIES> 909,846<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 4,014,932<F1>
<TOTAL-LIABILITIES> 4,924,778<F1>
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 6,086,262
<SHARES-COMMON-STOCK> 397,327
<SHARES-COMMON-PRIOR> 305,181
<ACCUMULATED-NII-CURRENT> 1,353,997<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> 3,902,103<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> 40,695,575<F1>
<NET-ASSETS> 5,902,313
<DIVIDEND-INCOME> 6,716,044<F1>
<INTEREST-INCOME> 13,813,179<F1>
<OTHER-INCOME> 0<F1>
<EXPENSES-NET> (5,290,387)<F1>
<NET-INVESTMENT-INCOME> 15,238,836<F1>
<REALIZED-GAINS-CURRENT> 21,993,591<F1>
<APPREC-INCREASE-CURRENT> (6,888,564)<F1>
<NET-CHANGE-FROM-OPS> 30,343,863<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (152,905)
<DISTRIBUTIONS-OF-GAINS> (278,390)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 179,950
<NUMBER-OF-SHARES-REDEEMED> (112,483)
<SHARES-REINVESTED> 24,679
<NET-CHANGE-IN-ASSETS> 1,300,159
<ACCUMULATED-NII-PRIOR> 1,807,183<F1>
<ACCUMULATED-GAINS-PRIOR> 4,507,515<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 2,459,237<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 5,290,387<F1>
<AVERAGE-NET-ASSETS> 5,331,637
<PER-SHARE-NAV-BEGIN> 15.080
<PER-SHARE-NII> 0.405
<PER-SHARE-GAIN-APPREC> 0.540
<PER-SHARE-DIVIDEND> (0.417)
<PER-SHARE-DISTRIBUTIONS> (0.753)
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 14.855
<EXPENSE-RATIO> 1.81
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis
</FN>
</TABLE>
