<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 2000
1933 ACT REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
<TABLE>
<S> <C>
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. __ [ ]
POST-EFFECTIVE AMENDMENT NO. ____ [ ]
</TABLE>
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VAN KAMPEN HARBOR FUND
(Exact Name of Registrant as Specified in Declaration of Trust)
1 PARKVIEW PLAZA
PO BOX 5555
OAKBROOK TERRACE, ILLINOIS 60181-5555
(Address of Principal Executive Offices)
TELEPHONE NUMBER: (630) 684-6000
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<TABLE>
<S> <C>
A. THOMAS SMITH III COPIES TO:
EXECUTIVE VICE PRESIDENT, THOMAS A. HALE, ESQ.
GENERAL COUNSEL AND SECRETARY SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
VAN KAMPEN INVESTMENTS INC. 333 WEST WACKER
1 PARKVIEW PLAZA CHICAGO, ILLINOIS 60606
PO BOX 5555 (312) 407-0700
OAKBROOK TERRACE, ILLINOIS 60181-5555
(Name and Address of Agent for Service)
</TABLE>
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: AS SOON AS PRACTICABLE
FOLLOWING EFFECTIVENESS OF THIS REGISTRATION STATEMENT. IT IS PROPOSED THAT THIS
FILING WILL BECOME EFFECTIVE ON JUNE 18, 2000 PURSUANT TO RULE 488.
TITLE OF SECURITIES BEING REGISTERED: SHARES OF BENEFICIAL INTEREST, PAR
VALUE $0.01 PER SHARE. NO FILING FEE IS DUE HEREWITH BECAUSE OF RELIANCE ON
SECTION 24(F) OF THE INVESTMENT COMPANY ACT OF 1940.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains one Prospectus/Proxy Statement and one
Statement of Additional Information relating to the Registrant. This
Registration Statement is organized as follows:
-- Cross Reference Sheet with respect to Van Kampen Harbor Fund
-- Questions and Answers to Shareholders of Van Kampen Convertible
Securities Fund
-- Notice of Special Meeting of Shareholders of Van Kampen Convertible
Securities Fund
-- Prospectus/Proxy Statement regarding the proposed Reorganization of Van
Kampen Convertible Securities Fund into Van Kampen Harbor Fund
-- Prospectus of Van Kampen Harbor Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen Convertible Securities Fund into Van Kampen
Harbor Fund
-- Part C Information
-- Exhibits
<PAGE> 3
VAN KAMPEN HARBOR FUND
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) OF REGULATION C
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROSPECTUS/PROXY STATEMENT CAPTION*
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<S> <C> <C>
PART A INFORMATION REQUIRED IN THE PROSPECTUS/PROXY STATEMENT
Item 1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus/Proxy Statement........... Outside front cover page of
Prospectus/Proxy Statement
Item 2. Beginning and Outside Back Cover Page of
Prospectus/Proxy Statement......................... Outside back cover page of
Prospectus/Proxy Statement
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors
Item 4. Information about the Transaction.................... Summary; The Proposed Reorganization
Item 5. Information about the Registrant..................... Outside front cover page of
Prospectus/Proxy Statement;
Summary; The Proposed
Reorganization; Other Information;
Exhibit A; Prospectus and
Statement of Additional
Information of the Van Kampen
Harbor Fund
Item 6. Information about the Company Being Acquired......... Outside front cover page of
Prospectus/Proxy Statement;
Summary; Exhibit A
Item 7. Voting Information................................... Other Information; Voting
Information and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; The Proposed Reorganization
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Additional Information about the Van
Kampen Harbor Fund; Incorporation
of Documents by Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Additional Information about the Van
Kampen Convertible Securities
Fund; Incorporation of Documents
by Reference
Item 14. Financial Statements................................. Financial Statements; Incorporation
of Documents by Reference
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under the appropriate item, so
numbered, in Part C of this Registration Statement.
</TABLE>
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* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 4
JUNE 2000
IMPORTANT NOTICE
TO VAN KAMPEN CONVERTIBLE SECURITIES
FUND SHAREHOLDERS
QUESTIONS & ANSWERS
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Although we recommend that you read the complete Prospectus/Proxy Statement, for
your convenience, we have provided a brief overview of the issue to be voted on.
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Q WHY IS A SHAREHOLDER MEETING BEING HELD?
A You are being asked to vote on a proposal to reorganize the Van Kampen
Convertible Securities Fund into an open-end investment company by combining the
fund into the Van Kampen Harbor Fund, an open-end investment company that
pursues a similar investment objective.
Q WHY IS THE REORGANIZATION BEING RECOMMENDED?
A As with many closed-end investment companies, Van Kampen Convertible
Securities Fund's shares have traded on the New York Stock Exchange at a
discount to their net asset value. The reorganization would eliminate this
discount for Van Kampen Convertible Securities Fund shareholders. The Board of
the Van Kampen Convertible Securities Fund seeks to provide its shareholders the
opportunity to realize their investments' full value by converting their shares,
at net asset value, into redeemable Class A Shares of the Van Kampen Harbor
Fund. In addition, the Board of the Van Kampen Convertible Securities Fund
believes that the reorganization would provide its shareholders with the
benefits of the open-end investment company form of organization, while also
providing shareholders with potential economies of scale and other benefits of
combining with a larger, existing open-end fund that has substantially similar
investment objectives and policies and is managed by the same portfolio
management team.
The Board of the Van Kampen Convertible Securities Fund discussed advantages
of operating the Van Kampen Convertible Securities Fund as a closed-end fund,
including the ability to manage the portfolio without redemption outflows, and
discussed advantages of closed-end funds in general noting that other closed-end
funds employ certain unique structural advantages available only to closed-end
investment companies (because of the illiquid nature of their investments or
because they utilize leveraging opportunities not available in the open-end fund
structure). The Board believes the structural benefits to the Van Kampen
Convertible Securities Fund and its shareholders are outweighed by its
current discount to NAV and that reorganizing it into the Van Kampen Harbor
Fund is in the best interests of shareholders of the Van Kampen Convertible
Securities Fund.
Q HOW WILL THE REORGANIZATION AFFECT ME?
A Assuming shareholders of the Van Kampen Convertible Securities Fund approve
the reorganization, the assets and liabilities of the Van Kampen Convertible
Securities Fund will be combined with those of the Van Kampen Harbor Fund, and
you will become a shareholder of the Van Kampen Harbor Fund. You will receive
Class A Shares the Van Kampen Harbor Fund equal in value (at the time of
issuance) to the asset value of your shares of the Van Kampen Convertible
Securities Fund, and we will send you written confirmation that this change has
taken place. No certificates for Van Kampen Harbor Fund shares will be issued in
connection with the reorganization, although such certificates will be available
upon request.
<PAGE> 5
Q WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN
CONNECTION WITH THE REORGANIZATION?
A You will pay no sales loads or commissions in connection with the
reorganization. However, if the reorganization is completed, the costs
associated with the proposed reorganization, including the costs associated with
the shareholder meeting, generally will be borne by the Van Kampen Convertible
Securities Fund.
Q HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE VAN KAMPEN HARBOR FUND
COMPARE TO THOSE PAYABLE BY THE VAN KAMPEN CONVERTIBLE SECURITIES FUND?
A Both the Van Kampen Convertible Securities Fund and the Van Kampen Harbor
Fund are advised by Van Kampen Asset Management Inc., a subsidiary of Van Kampen
Investments Inc. The contractual advisory fees paid by the Van Kampen Harbor
Fund are slightly higher than those of the Van Kampen Convertible Securities
Fund. Class A Shares of the Van Kampen Harbor Fund are also subject to a
combined distribution and service fee not to exceed 0.25% of the fund's average
daily net assets. The Board of the Van Kampen Convertible Securities Fund
believes, however, that the ability to spread costs over a larger asset base
after the reorganization may provide economies of scale and could partially
offset a portion of this increase in operating expenses.
Q WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended.
If the reorganization so qualifies, in general, a shareholder of the Van Kampen
Convertible Securities Fund will recognize no gain or loss upon the receipt
solely of the shares of the Van Kampen Harbor Fund in connection with the
reorganization. Additionally, the Van Kampen Convertible Securities Fund would
not recognize any gain or loss as a result of the transfer of all of its assets
and liabilities solely in exchange for the shares of the Van Kampen Harbor Fund
or as a result of its liquidation.
Q WHERE DO I CALL FOR FURTHER INFORMATION?
A Please call Investor Services at 1-800-341-2911 (Telecommunications Device
for the Deaf users may call 1-800-772-8889) weekdays from 7:00a.m. to 7:00 p.m.
Central time.
<PAGE> 6
ABOUT THE PROXY CARD
Please vote on the reorganization issue using blue or black ink to mark an X in
one of the boxes provided on the proxy card.
APPROVAL OF REORGANIZATION - mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
SAMPLE
PROXY
VAN KAMPEN CONVERTIBLE SECURITIES FUND
SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
1. The proposal to approve the Agreement FOR [ ] AGAINST [ ] ABSTAIN [ ]
and Plan of Reorganization XXXXXXXX.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<PAGE> 7
VAN KAMPEN CONVERTIBLE SECURITIES FUND
1 PARKVIEW PLAZA
PO BOX 5555
OAKBROOK TERRACE, ILLINOIS 60181-5555
(800) 421-5666
NOTICE OF SPECIAL MEETING
, 2000
A Special Meeting of shareholders of Van Kampen Convertible Securities Fund
(the "Convertible Securities Fund") will be held at the offices of Van Kampen
Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, on
, , 2000 at p.m. (the "Special Meeting"), for the
following purpose:
To approve an Agreement and Plan of Reorganization pursuant to which the
Convertible Securities Fund would (i) transfer all of its assets to the Van
Kampen Harbor Fund (the "Harbor Fund") in exchange solely for Class A Shares
of the Harbor Fund and the Harbor Fund's assumption of the liabilities of the
Convertible Securities Fund, (ii) distribute such shares of the Harbor Fund to
the holders of shares of the Convertible Securities Fund and (iii) be
dissolved.
Shareholders of record as of the close of business on May 19, 2000 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Trustees,
A. Thomas Smith III
Secretary
June , 2000
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 8
THE INFORMATION IN THIS PROSPECTUS/PROXY STATEMENT IS NOT COMPLETE AND
MAY BE CHANGED. THE VAN KAMPEN HARBOR FUND MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS/PROXY STATEMENT IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES.
SUBJECT TO COMPLETION DATED MAY 19, 2000
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN HARBOR FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN CONVERTIBLE SECURITIES FUND
This Prospectus/Proxy Statement is being furnished to shareholders of Van
Kampen Convertible Securities Fund (the "Convertible Securities Fund") and
relates to the special meeting of shareholders of the Convertible Securities
Fund to be held at the offices of Van Kampen Investments Inc., 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555 on , , 2000 at p.m. and
at any and all adjournments thereof (the "Special Meeting"). Shareholders of
record as of the close of business on May 19, 2000 are entitled to vote at the
Special Meeting or any adjournment thereof. The purpose of the Special Meeting
is to seek approval of the proposed reorganization of the Convertible Securities
Fund (the "Reorganization") into the Van Kampen Harbor Fund (the "Harbor Fund").
The Convertible Securities Fund and the Harbor Fund are each referred to as a
"Fund" and collectively as the "Funds". The Reorganization would result in
shareholders of the Convertible Securities Fund, in effect, exchanging their
shares of the Convertible Securities Fund for Class A Shares of the Harbor Fund
of an equal net asset value. The purpose of the Reorganization is to
(i) eliminate the discount to net asset value of shares of the Convertible
Securities Fund, (ii) provide Convertible Securities Fund shareholders with the
benefits of the open-end investment company form of organization and (iii)
provide shareholders with potential economies of scale and other benefits of
combining with a larger, existing open-end fund that has substantially similar
investment objectives and policies and is managed by the same portfolio
management team.
The Harbor Fund is an open-end, diversified management investment company with
the investment objective of seeking to provide current income, capital
appreciation and conservation of capital. The Convertible Securities Fund is a
closed-end, diversified management investment company with the investment
objective of current income and the potential for capital appreciation. There
can be no assurance that either of the Funds will achieve its investment
objective. The Funds have substantially similar investment practices and
policies and are managed by the same portfolio management team. The address,
principal executive office and telephone number of the Funds is 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555, (630) 684-6000 or (800) 421-5666.
The enclosed proxy card and this Prospectus/Proxy Statement are first being sent
to Convertible Securities Fund shareholders on or about , 2000.
---------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
<PAGE> 9
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the Convertible Securities Fund should know before voting on the
Reorganization (in effect, investing in Class A Shares of the Harbor Fund) and
constitutes an offering of Class A Shares of beneficial interest, par value
$0.01 per share, of the Harbor Fund only. Please read it carefully and retain it
for future reference. A Statement of Additional Information dated June , 2000,
relating to this Prospectus/Proxy Statement (the "Reorganization SAI") has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. A Prospectus (the "Harbor Fund Prospectus")
and Statement of Additional Information containing additional information about
the Harbor Fund, each dated April 28, 2000 (and as currently supplemented), have
been filed with the SEC and are incorporated herein by reference. A copy of the
Harbor Fund Prospectus accompanies this Prospectus/Proxy Statement. Copies of
the foregoing may be obtained without charge by calling or writing the Harbor
Fund or the Convertible Securities Fund at the telephone number or address shown
above. If you wish to request the Reorganization SAI, please ask for the
"Reorganization SAI." IN ADDITION, EACH OF THE HARBOR FUND AND THE CONVERTIBLE
SECURITIES FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL
REPORT TO A SHAREHOLDER UPON REQUEST. ANY SUCH REQUEST SHOULD BE DIRECTED TO VAN
KAMPEN INVESTMENTS INC. BY CALLING (800) 421-5666 OR BY WRITING THE RESPECTIVE
FUND AT THE ADDRESS SHOWN ABOVE.
---------------------
No person has been authorized to give any information or make any
representation not contained in this Prospectus/Proxy Statement and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Prospectus/Proxy Statement does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as
amended (the "1940 Act"), and in accordance therewith file reports and other
information with the SEC. Such reports, proxy statements and other information
filed by the Harbor Fund and the Convertible Securities Fund can be inspected
and copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its Regional Office at 500 West
Madison Street, Chicago, Illinois. Copies of such material can also be obtained
from the SEC's Public Reference Branch, Office of Consumer Affairs and
Information Services, Washington, D.C. 20549, at prescribed rates. In addition,
the SEC maintains an internet web site (http://www.sec.gov) that contains
reports, proxy statements and other information filed by the Funds, which
information is filed electronically with the SEC through the SEC's Electronic
Data Gathering, Analysis and Retrieval system (EDGAR). Shares of the Convertible
Securities Fund are listed and traded on the New York Stock Exchange ("NYSE").
Reports, proxy statements and other information of the Convertible Securities
Fund may be inspected at the offices of the NYSE, 20 Broad Street, New York, NY
10005.
The date of this Prospectus/Proxy Statement is June , 2000.
2
<PAGE> 10
THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Trustees of the Convertible Securities Fund (the "Convertible Securities Fund
Board") believes the proposed Reorganization is in the best interests of
shareholders of the Convertible Securities Fund. As a result of the
Reorganization, shareholders of the Convertible Securities Fund would acquire an
interest in the Harbor Fund.
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with the Harbor Fund Prospectus incorporated herein by reference and
accompanying this Prospectus/Proxy Statement. This Prospectus/Proxy Statement
constitutes an offering of Class A Shares of the Harbor Fund only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the
Convertible Securities Fund in connection with the proposed combination of the
Convertible Securities Fund with and into the Harbor Fund pursuant to the terms
and conditions of the Agreement and Plan of Reorganization between the
Convertible Securities Fund and the Harbor Fund (the "Agreement"). The Agreement
provides that the Convertible Securities Fund would (i) transfer all of its
assets to the Harbor Fund in exchange solely for Class A Shares of the Harbor
Fund and the Harbor Fund's assumption of the liabilities of the Convertible
Securities Fund, (ii) dissolve pursuant to a plan of liquidation and dissolution
to be adopted by the Convertible Securities Fund Board promptly following the
Closing (as defined herein) and (iii) as part of such dissolution, distribute to
each shareholder of the Convertible Securities Fund Class A Shares of the Harbor
Fund equal in value to the net asset value of their existing shares of the
Convertible Securities Fund.
The Convertible Securities Fund Board has determined that the Reorganization
is in the best interests of shareholders of the Convertible Securities Fund and
that the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the Harbor Fund (the "Harbor
Fund Board") has determined that the Reorganization is in the best interests of
the Harbor Fund and that the interests of existing shareholders of the Harbor
Fund will not be diluted as a result of the Reorganization. The Convertible
Securities Fund Board approved the Reorganization and the Agreement on May 8,
2000. The Harbor Fund Board approved the Reorganization and the Agreement on May
9, 2000.
3
<PAGE> 11
The Convertible Securities Fund, as the primary beneficiary of the
Reorganization, generally will bear the costs of soliciting approval of the
Reorganization by its shareholders and related costs of the Reorganization,
including expenses, if any, incurred by the Harbor Fund. Payment of such
expenses will reduce the amount of Class A Shares of the Harbor Fund received by
shareholders of the Convertible Securities Fund on a pro rata basis. See "THE
PROPOSED REORGANIZATION -- Expenses" below.
The Convertible Securities Fund Board is asking shareholders of the
Convertible Securities Fund to approve the Reorganization at the Special Meeting
to be held on , , 2000. If shareholders of the Convertible
Securities Fund approve the Reorganization, it is expected that the Closing will
be after the close of business on , 2000, but it may be at a
different time as described herein. Approval of the Reorganization by the
Convertible Securities Fund shareholders will constitute ratification of the
Harbor Fund's investment objective, policies and restrictions, distribution
agreement and advisory agreement and amendment of any investment restrictions of
the Convertible Securities Fund that may otherwise prohibit the Reorganization.
See "THE PROPOSED REORGANIZATION -- Ratification of Investment Objective,
Investment Policies and Investment Restrictions of the Harbor Fund".
THE CONVERTIBLE SECURITIES FUND BOARD RECOMMENDS THAT YOU VOTE "FOR" THE
REORGANIZATION. APPROVAL OF THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF
THE HOLDERS OF A MAJORITY OF THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE
"VOTING INFORMATION AND REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
The Convertible Securities Fund Board considers on a quarterly basis actions
to address any discount of the market price per share of a Convertible
Securities Fund share to its net asset value per share ("NAV"). As with many
closed-end investment companies, the Convertible Securities Fund's shares have
traded at a discount to their NAV. From time to time, the Convertible Securities
Fund Board has considered actions to lessen the discount, including the
possibility of making open market repurchases of shares and/or making a tender
offer, rights offerings for additional shares, open-ending the Convertible
Securities Fund or reorganizing the Convertible Securities Fund. The Convertible
Securities Fund Board has considered the likelihood of reductions in the
discount from such actions and the best interests of the Convertible Securities
Fund and its shareholders.
At a meeting held on May 8, 2000, the Convertible Securities Fund Board
approved the reorganization of the Convertible Securities Fund into the Harbor
Fund. The Convertible Securities Fund Board considered materials provided by Van
Kampen Asset Management Inc., the investment adviser for the Convertible
Securities Fund and Harbor Fund (the "Adviser"), about the Reorganization,
4
<PAGE> 12
including information concerning both Funds' total returns, yields and
distribution rates, a comparison of their investment objectives, policies,
practices, risks and portfolio holdings, the expected tax consequences and
comparative and pro forma portfolio composition and expense information. The
Convertible Securities Fund Board made extensive inquiry into a number of
factors with respect to the Reorganization, including: (1) the compatibility of
the Funds' investment objectives, policies, and restrictions, as well as the
Funds' respective portfolios; (2) the fact that the Funds have the same
portfolio management team; (3) the Funds' respective investment performance; (4)
the Funds' respective expense ratios and the effect of the Reorganization on the
expense ratio of Class A Shares of the Harbor Fund; (5) the transaction costs to
be incurred in connection with the Reorganization; (6) the tax consequences of
the Reorganization; and (7) possible alternatives to the Reorganization,
including continuing to operate the Convertible Securities Fund as a closed-end
fund, open market repurchases of shares, rights offerings for additional shares,
converting the Convertible Securities Fund to an open-end investment company
without reorganizing it into any pre-existing fund, or liquidating the
Convertible Securities Fund.
As compared to the alternatives, the Convertible Securities Fund Board
determined that converting the Convertible Securities Fund to the open-end
format by reorganizing it into the Harbor Fund was in the best interests of
shareholders of the Convertible Securities Fund. The Board discussed advantages
of operating the Convertible Securities Fund as a closed-end fund, including the
ability to manage the portfolio without redemption outflows, and discussed
advantages of closed-end funds in general noting that other closed-end funds
employ certain unique structural advantages available only to closed-end
investment companies (because of the illiquid nature of their investments or
because they utilize leveraging opportunities not available in the open-end fund
structure). The Convertible Securities Fund Board believes the closed-end
structural benefits to the Convertible Securities Fund and its shareholders are
outweighed by its current discount to NAV. Converting to an open-end format
would eliminate the discount and enable shareholders to redeem shares at NAV.
The Convertible Securities Fund Board noted that combining the Convertible
Securities Fund with the Harbor Fund, rather than operating the Convertible
Securities Fund as a stand-alone open-end fund, would provide Convertible
Securities Fund shareholders with the benefits of the open-end form of
organization, while also providing them with potential economies of scale and
other benefits of combining with a larger, existing open-end fund having
substantially similar investment objectives and policies and which is managed by
the same portfolio management team. The Convertible Securities Fund Board
observed that operating the Convertible Securities Fund as a stand-alone
open-end fund might not be economically feasible if net redemptions following
conversion to open-end format were to reduce significantly the net assets of the
Fund. The Convertible Securities Fund Board also noted that liquidating and
dissolving the
5
<PAGE> 13
Convertible Securities Fund would result in additional expenses arising out of
liquidating the Fund's portfolio securities and would be a taxable event to
shareholders.
The investment objective of the Convertible Securities Fund is to provide
current income and the potential for capital appreciation. The investment
objective of the Harbor Fund is to seek to provide current income, capital
appreciation and conservation of capital. The Convertible Securities Fund seeks
to achieve its investment objective by investing at least 65% of its total
assets in securities which are convertible into common stock or have other
equity features. The Harbor Fund seeks to achieve its investment objective by
investing principally in a portfolio of debt securities, primarily convertible
bonds and convertible preferred stocks. Both Funds allow for investments in
options, futures and related options and may invest up to 10% of their assets in
illiquid securities. The Convertible Securities Fund may borrow in an amount up
to 25% of its assets (not including the amount borrowed), while the Harbor Fund
may only borrow up to 5% of its assets for temporary or emergency purposes. The
Harbor Fund may invest up to 45% of its assets in common stocks. The Convertible
Securities Fund Board considered the similarity of the investment objectives,
policies and practices of the Funds.
The Convertible Securities Fund Board also considered the historical
performance of the Convertible Securities Fund in relation to the historical
performance of the Harbor Fund. The Convertible Securities Fund Board observed
that the Funds had similar performance over the past ten years.
The Convertible Securities Fund Board also considered the impact the
Reorganization would have on operating expenses. As a closed-end fund, the
Convertible Securities Fund currently pays no ongoing distribution or service
fees. The Class A Shares of the Harbor Fund that Convertible Securities Fund
shareholders would receive in the Reorganization are subject to an annual
distribution and service fee of up to 0.25% of average net assets attributable
to Class A Shares. Open-end funds such as the Harbor Fund also normally pay
higher transfer agency fees than closed-end funds due to the continuous sale and
redemption of their shares. In addition, open-end funds such as the Harbor Fund
incur expenses associated with maintaining continuous federal securities
registration. Closed-end funds such as the Convertible Securities Fund typically
do not incur these expenses.
In analyzing expenses, the Convertible Securities Fund Board also considered
the investment advisory fees paid by the respective Funds. The Convertible
Securities Fund Board noted that during the Convertible Securities Fund's most
recently completed fiscal year, it paid advisory fees at an effective rate of
0.50% of its average weekly net assets, while the Harbor Fund paid advisory fees
at an effective rate of 0.53% of its average daily net assets.
For its fiscal year ended December 31, 1999, the Convertible Securities Fund
had total operating expenses of 0.76% of average daily net assets. For its
fiscal year
6
<PAGE> 14
ended December 31, 1999, Class A Shares of the Harbor Fund had total operating
expenses of 1.00% of average daily net assets. The Convertible Securities Fund
Board considered that the possibility of increased assets of the Harbor Fund as
a result of the Reorganization could potentially result in a marginal decrease
in the operating expenses of the Harbor Fund as certain expenses are spread over
a larger asset base or if the effective advisory fee of the Harbor Fund should
decline as a result of reaching breakpoints in the advisory fee schedule as a
result of increased net assets.
The Convertible Securities Fund Board noted that no initial sales charges
would be imposed on the Class A Shares of the Harbor Fund issued to Convertible
Securities Fund shareholders in connection with the Reorganization.
Finally, the Convertible Securities Fund Board reviewed the principal terms of
the Agreement and noted that the Convertible Securities Fund would be provided
with an opinion of counsel that the Reorganization would be tax-free to it and
its shareholders.
Based upon these and other factors, the Convertible Securities Fund Board
determined that the Reorganization is in the best interests of the shareholders
of the Convertible Securities Fund.
COMPARISON OF THE HARBOR FUND AND THE CONVERTIBLE SECURITIES FUND
INVESTMENT OBJECTIVES AND POLICIES. The Convertible Securities Fund and the
Harbor Fund have similar investment objectives. The investment objective of the
Convertible Securities Fund is to provide current income and the potential for
capital appreciation. The investment objective of the Harbor Fund is to seek to
provide current income, capital appreciation and conservation of capital.
The Convertible Securities Fund seeks to achieve its investment objective by
investing at least 65% of its total assets in securities which are convertible
into common stock or have other equity features. The Harbor Fund seeks to
achieve its investment objective by investing principally in a portfolio of debt
securities, primarily convertible bonds and convertible preferred stocks. Under
normal market conditions, the Harbor Fund invests at least 50% of its total
assets (excluding cash, cash equivalents and government securities) in
convertible debt securities. The Harbor Fund may invest up to 45% of its total
assets in common stocks. For each Fund, the Adviser seeks to identify companies
with improving fundamentals, strong earnings growth, increasing market share and
attractive valuations that are likely to provide investors with equity
participation through their issuance of convertible securities. Portfolio
securities are sold when the Adviser's assessments of the income or growth
potential of such securities materially change. Each Fund may invest in options,
futures and related options and may invest up to 10% of its net assets in
illiquid and certain restricted securities. The Convertible Securities Fund
7
<PAGE> 15
may borrow in an amount up to 25% of its total assets (not including the amount
borrowed) for investment purposes. The Harbor Fund may only borrow in an amount
up to 5% of its assets for temporary or emergency purposes.
The Convertible Securities Fund may invest up to 15% of its total assets in
U.S. dollar-denominated securities of foreign issuers listed on U.S. securities
exchanges or in the form of American Depositary Receipts ("ADRs") or in
securities convertible into or exchangeable for securities which are listed on
U.S. securities exchanges. The Harbor Fund may invest up to 15% of its total
assets in securities of foreign issuers denominated in U.S. dollars or in
currencies other than U.S. dollars. Both Funds may engage for cash management
purposes in repurchase agreements with broker-dealers, banks and other financial
institutions to earn a return on temporarily available cash. Each Fund may
purchase and sell securities on a "when-issued" and "delayed delivery" basis.
The Adviser may place portfolio transactions, to the extent permitted by law,
with brokerage firms affiliated with the Funds, the Adviser or the Distributor
(as defined herein). See "Risk Factors."
ANNUAL PERFORMANCE. One way to measure the risks of investing in the Harbor
Fund Class A Shares or shares of the Convertible Securities Fund is to look at
how the respective Fund's performance has varied from year-to-year. The
following chart shows the annual returns of the Harbor Fund Class A Shares and
the shares of the Convertible Securities Fund over the ten calendar years prior
to the date of this Prospectus/Proxy Statement. Harbor Fund's Class A Shares
sales loads are not reflected in this chart; if these sales loads had been
included, the returns shown below would have been lower. Harbor Fund Class A
Shares issued in connection with the Reorganization will not be subject to the
sales charge. Shares of Convertible Securities Fund do not reflect the
imposition of brokerage fees and related expenses; if these charges had been
included, the returns shown below would have been lower. Performance information
for the Convertible Securities Fund shares is expressed as a return on net asset
value, not market value. Remember that the past performances of the Funds are
not indicative of their future performances.
8
<PAGE> 16
<TABLE>
<CAPTION>
HARBOR FUND CLASS A SHARES
--------------------------
<S> <C>
1990 -1.23
1991 23.08
1992 9.72
1993 13.56
1994 -6.43
1995 22.46
1996 12.08
1997 16.91
1998 7.52
1999 50.01
</TABLE>
The Harbor Fund Class A Shares' return for the three month period ended March
31, 2000 was 13.15%. During the ten-year period shown in the bar chart, the
highest quarterly return for Harbor Fund Class A Shares was 32.75% (for the
quarter ended December 31, 1999) and the lowest quarterly return was -13.64%
(for the quarter ended September 30, 1998).
<TABLE>
<CAPTION>
CONVERTIBLE SECURITIES FUND
---------------------------
<S> <C>
1990 -7.37
1991 23.32
1992 12.84
1993 14.50
1994 -5.29
1995 23.42
1996 11.51
1997 18.57
1998 5.90
1999 50.19
</TABLE>
The Convertible Securities Fund shares' return for the three month period
ended March 31, 2000 was %. During the ten-year period shown in the bar chart,
the highest quarterly return for Convertible Securities Fund shares was % (for
the quarter ended , 19 ) and the lowest quarterly return was %
(for the quarter ended , 19 ).
The foregoing total returns assume reinvestment of all dividends and
distributions. The total returns are not necessarily indicative of future
results. The performance of an investment company is the result of conditions in
the securities markets, portfolio management and operating expenses. Although
information such as that shown above is useful in reviewing a fund's performance
and in providing some basis for comparison with other investment alternatives,
it should not be used for comparison with other investments using different
reinvestment assumptions or time periods.
Management's discussion of the Harbor Fund's and Convertible Securities Fund's
performance as of each Funds' last fiscal year end are attached hereto as
Exhibit A. Financial highlights for the Harbor Fund are in the accompanying
Harbor Fund Prospectus in the section entitled "Financial Highlights" and
financial highlights for the Convertible Securities Fund are included in the
attached Exhibit A.
COMPARATIVE PERFORMANCE. As a basis for evaluating a fund's performance and
risks, the table below shows how the performance of the Harbor Fund Class A
Shares and shares of the Convertible Securities Fund compare with each other and
9
<PAGE> 17
with the Russell 2000 Stock Index*, a broad-based market index that the Adviser
believes is an appropriate benchmark for the Funds, and with the Lipper
Convertible Securities Fund Index, an index of funds with similar investment
objectives. The Harbor Fund Class A Shares' performance figures include the
maximum sales charges paid by investors. The Convertible Securities Fund shares'
performance figures do not reflect the imposition of sales charges, brokerage
fees or related expenses that would likely be paid by investors purchasing and
selling such shares on the NYSE. Performance information for the Convertible
Securities Fund is expressed as a return on net asset value, not market value.
The indices' performance figures do not include any commissions or sales charges
that would be paid by investors purchasing the securities represented by those
indices. An investment can not be made directly in the indices. Average annual
total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this Prospectus/Proxy
Statement). Remember that the past performances of the Funds are not indicative
of their future performances.
<TABLE>
<CAPTION>
Average Annual
Total Returns
for the
Periods Ended Past Past Past 10
December 31, 1999 1 Year 5 Years Years
- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen Harbor
Fund Class A
Shares** 41.35% 19.52% 13.21%
Van Kampen
Convertible
Securities Fund*** 50.19% 21.02% 15.45%
Russell 2000 Stock
Index 21.26% 16.69% 13.40%
Lipper Convertible
Securities Fund
Index 28.30% 16.44% 12.39%
</TABLE>
* The Russell 2000 Stock Index is a small-cap stock benchmark composed of the
smallest 2,000 companies of the Russell 3000 Stock Index (an index of the
3,000 largest U.S. companies based on market capitalization).
** The performance figures reflect the Harbor Fund's 5.75% maximum sales charge
applicable to Class A Shares. Harbor Fund Class A Shares issued in
connection with the Reorganization will not be subject to the sales charge.
*** The Convertible Securities Fund performance figures do not reflect sales
charges, brokerage fees or related expenses that would likely be paid by
investors purchasing and selling such shares on the NYSE.
10
<PAGE> 18
EXPENSES. This table describes the fees and expenses that you may pay if you
buy and hold Harbor Fund Class A Shares and shares of Convertible Securities
Fund. The pro forma information reflects the anticipated effects of the
Reorganization. The information set forth below for Harbor Fund Class A Shares
is based on its fees and expenses for the fiscal year December 31, 1999 and the
information for shares of Convertible Securities Fund is based on its fees and
expenses for the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
HARBOR FUND CONVERTIBLE
CLASS A SECURITIES PRO
SHARES FUND FORMA
----------- ----------- -------
<S> <C> <C> <C>
Shareholder Fees
(fees paid directly from your
investment)
Maximum sales charge (load) imposed on
purchases (as a percentage of
offering price)...................... 5.75%(1) None(2) 5.75%
Annual Fund Operating Expenses
(expenses that are deducted from Fund
assets)
Management fees........................ 0.53% 0.50% 0.53%
Distribution and/or service (12b-1)
fees(3).............................. 0.24% None 0.24%
Other expenses......................... 0.23% 0.26% 0.23%
---- ---- -------
Total annual fund operating expenses... 1.00% 0.76% 1.00%
</TABLE>
(1) Harbor Fund Class A Shares issued in connection with the Reorganization will
not be subject to the sales charge.
(2) Purchases and sales of Convertible Securities Fund shares on the NYSE would
likely be subject to brokerage fees and related expenses.
(3) Harbor Fund Class A Shares are subject to annual distribution and service
fees of up to 0.25% of the average daily net assets attributable to such
Harbor Fund Class A Shares. Because distribution and/or service (12b-1) fees
are paid out of the Harbor Fund's Class A Shares assets on an ongoing basis,
over time these fees will increase the cost of your investment and may cost
you more than paying other types of sales charges.
EXAMPLE. The following examples are intended to help you compare the costs of
investing in Harbor Fund Class A Shares, both before and after the
Reorganization, with the costs of investing in shares of Convertible Securities
Fund (although the impact of brokerage fees and related expenses for Convertible
Securities Fund have not been reflected).
The examples assume that you invest $10,000 in each Fund for the time periods
indicated and then redeem (or in the case of Convertible Securities Fund, sell)
all of your shares at the end of those periods. The examples also assume that
your investments each have a 5% return each year and that each Fund's operating
11
<PAGE> 19
expenses remain the same each year. Although your actual returns and costs may
be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Harbor Fund Class A Shares (excluding
initial sales charge which will not
apply to shares received in the
Reorganization)..................... $102 $318 $552 $1,225
Harbor Fund Class A Shares Pro Forma
(excluding initial sales charge
which will not apply to shares
received in the Reorganization)..... $102 $318 $552 $1,225
Convertible Securities Fund........... $ 78 $243 $422 $ 942
</TABLE>
The following portion of the expense example is for the information of
shareholders who may wish to purchase additional Harbor Fund Class A Shares
after the Reorganization. The chart below reflects the effect of the Fund's
maximum initial sales charge.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Harbor Fund Class A Shares (including
initial sales charge)................ $671 $875 $1,096 $1,729
Harbor Fund Class A Shares Pro Forma
(including initial sales charge)..... $671 $875 $1,096 $1,729
</TABLE>
INVESTMENT ADVISER. Van Kampen Asset Management Inc. is each Fund's investment
adviser. The Adviser is a wholly owned subsidiary of Van Kampen Investments Inc.
("Van Kampen Investments"). Van Kampen Investments is a diversified asset
management company with more than two million retail investor accounts,
extensive capabilities for managing institutional portfolios, and more than $100
billion under management or supervision as of March 31, 2000. Van Kampen
Investments' more than 50 open-end and 39 closed-end funds and more than 2,700
unit investment trusts are distributed by leading authorized dealers nationwide.
Van Kampen Funds Inc., the distributor of the Harbor Fund (the "Distributor")
and the sponsor of the funds mentioned above, is also a wholly owned subsidiary
of Van Kampen Investments. Van Kampen Investments 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 60181-5555.
ADVISORY AND OTHER FEES. Each 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 Convertible Securities Fund, the Convertible Securities Fund pays the
Adviser a
12
<PAGE> 20
monthly fee computed based upon an annual rate applied to the average weekly net
assets of the Convertible Securities Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
------------------------ -----------
<S> <C>
First $150 million................................... 0.50 of 1.00%
Next $100 million.................................... 0.45 of 1.00%
Next $100 million.................................... 0.40 of 1.00%
Over $350 million.................................... 0.35 of 1.00%
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.50% of the
Convertible Securities Fund's average daily net assets for the Convertible
Securities Fund's fiscal year ended December 31, 1999.
Under an investment advisory agreement between the Adviser and the Harbor
Fund, the Harbor Fund pays the Adviser a monthly fee computed based upon an
annual rate applied to the average daily net assets of the Harbor 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>
Applying this fee schedule, the effective advisory fee rate was 0.53% of the
Harbor Fund's average daily net assets for the Harbor Fund's fiscal year ended
December 31, 1999.
Under the respective Advisory Agreements, the Adviser furnishes offices,
necessary facilities and equipment and provides administrative services to the
Funds. Each Fund pays all charges and expenses of its day-to-day operations,
including service fees, distribution fees, custodian fees, legal and independent
accountant fees, the costs of reports and proxies to shareholders, compensation
of members of the respective board (other than those who are affiliated persons
of the Adviser, Distributor or Van Kampen Investments) and all other ordinary
business expenses not specifically assumed by the Adviser.
The 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.").
PORTFOLIO MANAGEMENT. Each Fund is managed by the team of Christine Drusch,
Senior Portfolio Manager of the Harbor Fund since January 1998 and of the
Convertible Securities Fund since July 1997 and Assistant Portfolio Manager of
each Fund since July 1991, and David McLaughlin, Assistant Portfolio Manager of
each Fund since October 1998.
13
<PAGE> 21
Ms. Drusch has been a Senior Vice President of the Adviser and Advisory Corp.
since December 1999, and prior to December 1999 she was a Vice President of the
Adviser and Advisory Corp. Prior to December 1998, Ms. Drusch was an Assistant
Vice President of the Adviser and Advisory Corp. since September 1995. Prior to
September 1995, Ms. Drusch was an Associate Portfolio Manager of the Adviser and
has worked for the Adviser since July 1991.
Mr. McLaughlin has been a Vice President of the Adviser and Advisory Corp.
since June 1995, and he was an Assistant Vice President of the Adviser since
March 1994. Prior to June 1995, Mr. McLaughlin was a Senior Equity Trader for
the Adviser. Mr. McLaughlin has worked for the Adviser since 1986.
PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. The Convertible
Securities Fund, like most closed-end funds, does not continuously offer its
shares, and its shares trade on a listed securities exchange. Shares of the
Convertible Securities Fund are listed and publicly traded on the New York Stock
Exchange ("NYSE") under the symbol "VXS" and are not subject to ongoing
distribution or service fees. Purchasers of shares of the Convertible Securities
Fund in the open market may incur brokerage costs or other fees or commissions
in connection with such purchases.
The Harbor Fund, an open-end fund, does continuously offer its shares and will
redeem such shares at net asset value as described in the Harbor Fund
Prospectus. The Harbor Fund offers three classes of shares, including the Class
A Shares to be received by the Convertible Securities Fund in the
Reorganization. The Class A Shares of the Harbor Fund are subject to an initial
sales charge of up to 5.75%; however, the initial sales charge applicable to
Class A Shares of the Harbor Fund will be waived for Class A Shares acquired in
the Reorganization. Any subsequent purchases of Class A Shares of the Harbor
Fund after the Reorganization will be subject to an initial sales charge of up
to 5.75%, excluding Class A Shares purchased through the dividend reinvestment
plan. Purchases of Class A Shares of the Harbor Fund in amounts of $1,000,000 or
more are not subject to an initial sales charge, but a contingent deferred sales
charge of 1.00% may be imposed on certain redemptions made within the first year
after purchase. See the section of the Harbor Fund Prospectus entitled "Purchase
of Shares."
The Harbor Fund has adopted a distribution plan (the "Distribution Plan") with
respect to its Class A Shares pursuant to Rule 12b-1 under the 1940 Act. The
Harbor Fund has also adopted a service plan (the "Service Plan") with respect to
its Class A Shares. Under the Distribution Plan and the Service Plan, the Harbor
Fund pays distribution fees in connection with the sale and distribution of its
shares and service fees in connection with the provision of ongoing services to
shareholders and the maintenance of shareholders' accounts. Under the
Distribution Plan and the Service Plan, the Harbor Fund may spend up to 0.25%
per year of the Harbor Fund's average daily net assets with respect to its Class
A Shares. For a complete
14
<PAGE> 22
description of these arrangements with respect to the Harbor Fund, see the
section of the Harbor Fund Prospectus entitled "Purchase of Shares."
Shares of the Harbor Fund may be purchased by check, by electronic transfer,
by bank wire and by exchange from certain other open-end mutual funds advised by
the Adviser or Advisory Corp. and distributed by the Distributor. For a complete
description regarding purchase of shares and exchange of shares of the Harbor
Fund, see the sections of the Harbor Fund Prospectus entitled "Purchase of
Shares" and "Shareholder Services--Exchange Privilege."
Shares of the Harbor Fund properly presented for redemption may be redeemed or
exchanged at the next determined net asset value per share (subject to any
applicable deferred sales charge). Shares of the Harbor Fund may be redeemed or
exchanged by mail or by special redemption privileges (telephone exchange,
telephone redemption, by check or electronic transfer). If a shareholder of the
Harbor Fund attempts to redeem shares within a short time after they have been
purchased by check, the Harbor Fund may delay payment of the redemption proceeds
until such fund can verify that payment for the purchase of the shares has been
(or will be) received, usually a period of up to 15 days. For a complete
description of the redemption arrangements for the Harbor Fund, see the section
of the Harbor Fund Prospectus entitled "Redemption of Shares."
15
<PAGE> 23
CAPITALIZATION. The following table sets forth the capitalization of the
Harbor Fund's Class A Shares and the Convertible Securities Fund as of December
31, 1999, and the pro forma capitalization of the Harbor Fund's Class A Shares
of the combined fund as if the Reorganization had occurred on that date. These
numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
HARBOR FUND
CLASS A
HARBOR FUND CONVERTIBLE SHARES
CLASS A SHARES SECURITIES FUND PRO FORMA(1)
-------------- --------------- ------------
<S> <C> <C> <C>
NET ASSETS (IN THOUSANDS) $516,089 $110,196 $626,110
NET ASSET VALUE PER SHARE $20.35 $33.99 $20.35
SHARES OUTSTANDING (IN
THOUSANDS) 25,364 3,242 30,770
SHARES AUTHORIZED Unlimited 12,500,000 Unlimited
</TABLE>
- ---------------
(1) The pro forma net assets and net asset value per share reflect the payment
of the reorganization expenses of approximately $175,000 by the Convertible
Securities Fund. The pro forma shares outstanding reflect the issuance of
approximately 5,406,000 Class A Shares by the Harbor Fund in exchange for
the assets and liabilities of the Convertible Securities Fund.
OTHER SERVICE PROVIDERS. The transfer agent for the Harbor Fund is Van Kampen
Investor Services Inc., a wholly-owned subsidiary of Van Kampen Investments,
located at 7501 Tiffany Springs Parkway, Kansas City, MO 64153. The transfer
agent for the Convertible Securities Fund is Equiserve LP, located at PO Box
8200, Boston, MA 02266. Both Funds obtain certain accounting and legal services
from Advisory Corp. The custodian for both Funds is State Street Bank and Trust
Company, located at 225 West Franklin Street, PO Box 1713, Boston, MA 02105.
DIVIDEND REINVESTMENT PLAN OF THE CONVERTIBLE SECURITIES FUND. The Convertible
Securities Fund has adopted a Dividend Reinvestment Plan. Under the plan, shares
of the Convertible Securities Fund are issued by the Fund at net asset value on
a
16
<PAGE> 24
date determined by the Convertible Securities Fund Board between the record and
payable dates on each distribution; however, if the market price, including
brokerage commissions, is less than the net asset value, the amount of the
distribution is paid to State Street Bank and Trust Company ("State Street"),
which will buy such shares as are available at prices below the net asset value.
If State Street cannot buy the necessary shares at less than net asset value
before the distribution date, the balance of the distribution is made in
authorized but unissued shares of the Convertible Securities Fund at net asset
value. The cost per share is the average cost, including brokerage commissions,
of all shares purchased. Since all shares purchased from the Convertible
Securities Fund are at net asset value, there is no dilution, and no brokerage
commissions are charged on such shares.
The automatic reinvestment of dividends and capital gain distributions does
not relieve a shareholder of any income tax which may be payable (or required to
be withheld) on dividends or distributions. Shareholders may begin or
discontinue participation in the plan at any time by written notice to the
address below. If a shareholder withdraws from the plan, such shareholder may
rejoin at any time if such shareholder owns the required 100 shares. Elections
and terminations are effective for distributions declared after receipt. If a
shareholder withdraws from the plan, a certificate for the whole shares and a
check for the fractional shares, if any, credited to such shareholder's plan
account is sent as soon as practicable after receipt of the election to
withdraw. Except for brokerage commissions, if any, which are borne by plan
participants, all costs of the plan are borne by the Convertible Securities
Fund. The Convertible Securities Fund reserves the right to amend or terminate
the plan on 30 days' written notice prior to the record date of the distribution
for which such amendment or termination is effective.
CERTAIN PROVISIONS REGARDING CONVERTIBLE SECURITIES FUND SHARES. Certain
provisions of the organizational documents of the Convertible Securities Fund
would have the effect of delaying, deferring or preventing a change of control
of the Convertible Securities Fund. The Convertible Securities Fund Board is
divided into three classes, with the terms of one class expiring at each annual
meeting of shareholders. At each annual meeting, one class is elected to a
three-year term. This could delay for up to two years the replacement of a
majority of the Convertible Securities Fund Board. In addition, certain actions
by the Convertible Securities Fund require, unless approved by a two-thirds
majority of the Convertible Securities Fund Board, the affirmative vote of
three-fourths of the outstanding shares of each class or series entitled to be
cast, including: (i) a merger or consolidation of the Convertible Securities
Fund (in which the Convertible Securities Fund is not the surviving entity),
(ii) the dissolution of the Convertible Securities Fund; (iii) the sale of
substantially all of the assets of the Convertible Securities Fund; or (iv) the
conversion of the Convertible Securities Fund to an open-end fund.
17
<PAGE> 25
B. RISK FACTORS
SIMILARITY OF RISKS
The respective investment objectives of the Harbor Fund and the Convertible
Securities Fund are similar insofar as each Fund seeks to provide current income
and capital appreciation. The Harbor Fund also seeks to provide conservation of
capital. The investment policies of the two funds are similar in that each
attempts to achieve its investment objective by investing principally in a
portfolio of convertible securities.
A convertible security is a bond, debenture, note, preferred stock, warrant or
other security that may be converted into or exchanged for a prescribed amount
of common stock or other security of the same or a different issuer or into cash
within a particular period of time at a specified price or formula. A
convertible security generally entitles the holder to receive interest paid or
accrued on debt securities or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities generally have characteristics similar to
both debt and equity securities. The value of convertible securities tends to
decline as interest rates rise and, because of the conversion feature, tends to
vary with fluctuations in the market value of the underlying equity securities.
Convertible securities ordinarily provide a stream of income with generally
higher yields than those of common stock of the same or similar issuers.
Convertible securities generally do not directly participate in any dividend
increases or decreases of the underlying equity securities although the market
prices of convertible securities may be affected by any such dividend changes or
other changes in the underlying equity securities. Convertible securities
generally rank senior to common stocks in a corporation's capital structure and
generally entail less risk than common stock, although the extent to which such
risk is reduced may depend in large measure upon the degree to which the
convertible security sells above its value as a fixed-income security.
The Harbor Fund and the Convertible Securities Fund also engage in certain
investment practices such as the purchase and sale of options, futures, options
on futures, engaging in repurchase agreements, and limited investing in
restricted securities and illiquid securities.
To the extent that the investment objectives and investment policies and
practices of the Harbor Fund and the Convertible Securities Fund are similar,
the risks associated with an investment in the funds are similar. Investors are
encouraged to read carefully the sections of the Harbor Fund Prospectus entitled
"Risk/Return Summary" and "Investment Objectives, Policies and Risks."
Investment in either of the Harbor Fund or the Convertible Securities Fund may
not be appropriate for all investors. Neither Fund is intended to be a complete
18
<PAGE> 26
investment program, and investors should consider their long-term investment
goals and financial needs when making an investment decision with respect to the
Funds. An investment in each Fund is intended to be a long-term investment and
should not be used as a trading vehicle.
DIFFERENCES IN RISKS
The Harbor Fund and the Convertible Securities Fund engage in some dissimilar
investment practices. To the extent that the investment practices differ, the
risks associated with an investment in the Harbor Fund are different from the
risks associated with an investment in the Convertible Securities Fund. For a
complete description of the Harbor Fund's investment practices and associated
risks, investors are encouraged to read carefully the sections of the Harbor
Fund Prospectus entitled "Risk/Return Summary" and "Investment Objective,
Policies and Risks."
Under normal market conditions, the Harbor Fund invests at least 50% of its
total assets in convertible securities and may invest up to 45% of its total
assets in common stocks. Under normal market conditions, the Convertible
Securities Fund invests at least 65% of its total assets in convertible
securities. The current composition of each Fund's portfolio is similar;
however, because the Harbor Fund may invest a larger portion of its assets in
common stocks, which are generally more volatile and entail more risk than
convertible securities or debt securities, the Harbor Fund may be subject to
greater risk.
The Convertible Securities Fund may borrow in an amount up to 25% of its
assets (not including the amount borrowed) for investment purposes. The Harbor
Fund may not borrow for investment purposes. While the ability to engage in
financial leverage entails additional risk, it also provides the possibility of
greater investment returns. Because the Harbor Fund may not engage in such
financial leverage, its returns could be less than those of funds utilizing
financial leverage during favorable market conditions.
The Convertible Securities Fund may invest up to 15% of its total assets in
U.S. dollar-denominated securities of foreign issuers listed on U.S. securities
exchanges or in the form of ADRs or in securities convertible into or
exchangeable for securities which are listed on U.S. securities exchanges. The
Harbor Fund may invest up to 15% of its total assets in securities of foreign
issuers denominated in U.S. dollars or in currencies other than U.S. dollars.
Insofar as the Harbor Fund may invest more of its assets in foreign securities
and in securities traded on foreign exchanges or denominated in currencies other
than U.S. dollars, it could be subject to greater risks than a fund investing
solely in domestic securities or solely in U.S. dollar denominated securities.
These risks can include fluctuations in foreign currencies, foreign currency
exchange controls, political and economic instability, differences in financial
reporting, differences in securities regulation and trading, and foreign
taxation issues.
19
<PAGE> 27
C. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the Harbor Fund or the Convertible Securities Fund at (800)
421-5666 and asking for the "Reorganization SAI".
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the Harbor Fund would acquire all of the assets and
the liabilities of the Convertible Securities Fund on the date of the Closing in
consideration for Class A Shares of the Harbor Fund.
Subject to the Convertible Securities Fund's shareholders approving of the
Reorganization, the closing (the "Closing") will occur within 15 business days
after the later of the receipt of all necessary regulatory approvals and the
final adjournment of the Special Meeting or such later date as soon as
practicable thereafter as the Harbor Fund and the Convertible Securities Fund
may mutually agree.
On the date of Closing, the Convertible Securities Fund will transfer to the
Harbor Fund all of the assets and liabilities of the Convertible Securities
Fund. The Harbor Fund will in turn transfer to the Convertible Securities Fund a
number of its Class A Shares equal in value to the value of the net assets of
the Convertible Securities Fund transferred to the Harbor Fund as of the date of
Closing, as determined in accordance with the valuation method described in the
Harbor Fund's then current prospectus. In order to minimize any potential for
undesirable federal income and excise tax consequences in connection with the
Reorganization, the Convertible Securities Fund may distribute on or before the
Closing all or substantially all of their respective undistributed net
investment income (including net capital gains) as of such date.
The Convertible Securities Fund expects to distribute the Class A Shares of
the Harbor Fund to the shareholders of the Convertible Securities Fund promptly
after the Closing and then dissolve pursuant to a plan of dissolution adopted by
the Board of Trustees.
The Harbor Fund and the Convertible Securities Fund have made certain standard
representations and warranties to each other regarding their respective
capitalizations, status and conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the Convertible Securities Fund's
shareholders;
20
<PAGE> 28
2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
5. the effectiveness under applicable law of the registration statement of
the Harbor Fund of which this Prospectus/Proxy Statement forms a part
and the absence of any stop orders under the Securities Act of 1933, as
amended, pertaining thereto; and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the
Convertible Securities Fund, provided that no such amendment after such approval
shall be made if it would have a material adverse affect on the interests of
Convertible Securities Fund shareholders. The Agreement also may be terminated
by the non-breaching party if there has been a material misrepresentation,
material breach of any representation or warranty, material breach of contract
or failure of any condition to Closing.
The Convertible Securities Fund Board of Trustees recommends that you vote to
approve the Reorganization, as it believes the Reorganization is in the best
interests of the Convertible Securities Fund's shareholders and that the
interests of the Convertible Securities Fund's existing shareholders will not be
diluted as a result of consummation of the proposed Reorganization.
DESCRIPTION OF SHARES TO BE ISSUED
CLASS A SHARES OF THE HARBOR FUND. Common shares of beneficial interest of the
Harbor Fund being offered hereby are represented by transferable Class A Shares,
par value $0.01 per share. The organizational documents of the Harbor Fund
permit the trustees, as they deem necessary or desirable, to create one or more
series of shares and, subject to compliance with the 1940 Act, to sub-divide
further the shares of a series into one or more classes of shares for such
series, such as the Class A Shares.
VOTING RIGHTS OF CLASS A SHAREHOLDERS OF THE HARBOR FUND. Holders of common
shares of the Harbor Fund are entitled to one vote per share on matters as to
which they are entitled to vote; however, separate votes generally are taken by
each series
21
<PAGE> 29
on matters affecting an individual series or by each class on matters affecting
an individual class of a series. The Harbor Fund operates as an open-end
management investment company registered with the SEC under the 1940 Act. As a
1940 Act registered investment company, shareholders of the Harbor Fund are
entitled, under current law, to vote with respect to certain other matters,
including changes in fundamental investment policies and restrictions and the
ratification of the selection of independent public accountants.
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the Harbor Fund will establish an account
for each Convertible Securities Fund shareholder containing the appropriate
number of shares of the Harbor Fund. Shareholders of the Convertible Securities
Fund who are accumulating Convertible Securities Fund shares under the dividend
reinvestment plan will become participants in the dividend reinvestment plan of
the Harbor Fund after the Reorganization in connection with the Harbor Fund
Class A Shares received in the Reorganization. Van Kampen Trust Company will
continue to serve as custodian for the assets of Convertible Securities Fund
shareholders held in IRA accounts after the Reorganization. Such IRA investors
will be sent appropriate documentation to confirm Van Kampen Trust Company's
custodianship.
It will not be necessary for shareholders of the Convertible Securities Fund
to whom certificates have been issued to surrender their certificates. Upon
dissolution as a Delaware business trust of the Convertible Securities Fund,
such certificates will become null and void. However, Convertible Securities
Fund shareholders holding such certificates may want to present such
certificates to receive certificates of the Harbor Fund (to simplify
substantiation of and to preserve the tax basis of separate lots of shares).
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations,
court decisions, published positions of the Internal Revenue Service ("IRS") and
other applicable authorities, all as in effect on the date hereof and all of
which are subject to change or differing interpretations (possibly with
retroactive effect). The discussion is limited to U.S. persons who hold shares
of the Convertible Securities Fund as capital assets for federal income tax
purposes. This summary does not address all of the federal income tax
consequences that may be relevant to a particular shareholder or to shareholders
who may be subject to special treatment under federal income tax laws (such as
non-U.S. persons, banks and other financial institutions, insurance companies,
tax-exempt organizations, dealers in stocks, securities or other financial
instruments and holders who acquired shares of the
22
<PAGE> 30
Convertible Securities Fund as compensation). No advance ruling has been or will
be sought from the IRS regarding any matter relating to the Reorganization.
Thus, no assurance can be given that the IRS would not assert a position
contrary to any of the tax aspects described below. Prospective investors should
consult their own tax advisors as to the federal income tax consequences of the
Reorganization, as well as the effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Convertible
Securities Fund and the Harbor Fund receives an opinion from Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Convertible Securities Fund
("Skadden Arps"), dated as of the Closing Date, regarding the characterization
of the Reorganization as a "reorganization" within the meaning of Section 368(a)
of the Code. As such a reorganization, the federal income tax consequences of
the Reorganization can be summarized as follows:
- No gain or loss will be recognized by the Convertible Securities Fund or the
Harbor Fund upon the transfer to the Harbor Fund of the assets of the
Convertible Securities Fund in exchange solely for the Class A Shares of the
Harbor Fund and the assumption by the Harbor Fund of the liabilities of the
Convertible Securities Fund.
- No gain or loss will be recognized by a shareholder of the Convertible
Securities Fund who exchanges all of his, her or its shares of the
Convertible Securities Fund solely for the Class A Shares of the Harbor Fund
pursuant to the Reorganization.
- The aggregate tax basis of the Class A Shares of the Harbor Fund received by
a shareholder of the Convertible Securities Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of the shares of
the Convertible Securities Fund surrendered in exchange therefor.
- The holding period of the Class A Shares of the Harbor Fund received by a
shareholder of the Convertible Securities Fund pursuant to the
Reorganization will include the holding period of the shares of the
Convertible Securities Fund surrendered in exchange therefor.
- The Harbor Fund's tax basis in the Convertible Securities Fund's assets
received by the Harbor Fund pursuant to the Reorganization will, in each
instance, equal the tax basis of such assets in the hands of the Convertible
Securities Fund immediately prior to the Reorganization, and the Harbor
Fund's holding period of such assets will, in each instance, include the
period during which the assets were held by the Convertible Securities Fund.
The opinion of Skadden Arps will be based on federal income tax law in effect
on the Closing Date. In rendering its opinion, Skadden Arps will also rely upon
certain representations of the management of the Harbor Fund and the Convertible
23
<PAGE> 31
Securities Fund and assume, among other things, that the Reorganization will be
consummated in accordance with the operative documents. An opinion of counsel is
not binding on the IRS or any court.
The Harbor Fund intends to be taxed under the rules applicable to regulated
investment companies as defined in Section 851 of the Code, which are the same
rules currently applicable to the Convertible Securities Fund and its
shareholders.
EXPENSES
The expenses of the Reorganization, including expenses incurred by the Harbor
Fund, generally will be borne by the Convertible Securities Fund. Management of
the Funds believes that shareholders of the Convertible Securities Fund are the
primary beneficiaries of benefits derived from the Reorganization. Management of
the Convertible Securities Fund and Harbor Fund estimates total Reorganization
expenses at approximately $175,000. The Convertible Securities Fund Board and
the Harbor Fund Board have reviewed and approved the foregoing arrangements
regarding payment of expenses and other charges relating to the Reorganization.
RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND INVESTMENT
RESTRICTIONS OF THE HARBOR FUND
Approval of the Reorganization will constitute the ratification by Convertible
Securities Fund shareholders of the investment objective, investment policies
and investment restrictions, distribution plan and advisory agreement of the
Harbor Fund. Approval of the Reorganization will constitute approval of
amendments to any of the fundamental investment restrictions of the Convertible
Securities Fund that might otherwise be interpreted as impeding the
Reorganization, but solely for the purpose of and to the extent necessary for,
consummation of the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A Shares of the Harbor Fund will be passed
on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois 60606, which serves
as counsel to the Harbor Fund and the Convertible Securities Fund. Wayne W.
Whalen, a partner of Skadden Arps, is a member of the Harbor Fund Board and the
Convertible Securities Fund Board.
24
<PAGE> 32
D. RECOMMENDATION OF THE CONVERTIBLE SECURITIES FUND BOARD
The Convertible Securities Fund Board has approved the Agreement and has
determined that participation in the Reorganization is in the best interests of
shareholders of the Convertible Securities Fund. THE CONVERTIBLE SECURITIES FUND
BOARD RECOMMENDS VOTING "FOR" THE PROPOSED REORGANIZATION.
OTHER INFORMATION
A. SHAREHOLDERS OF THE CONVERTIBLE SECURITIES FUND
AND THE HARBOR FUND
At the close of business on May 19, 2000, there were Class A Shares
of the Harbor Fund. As of such date, the trustees and officers of the Harbor
Fund as a group own less than 1% of the shares of the Harbor Fund. As of such
date, no person was known by the Harbor Fund to own beneficially or of record as
much as 5% of the Class A Shares except as set forth below:
At the close of business on May 19, 2000 there were shares of the
Convertible Securities Fund. As of such date, the trustees and officers of the
Convertible Securities Fund as a group owned less than 1% of the outstanding
shares of the Convertible Securities Fund. As of such date, no person was known
by the Convertible Securities Fund to own beneficially or of record as much as
5% of the shares except as set forth below:
B. SHAREHOLDER PROPOSALS
As a general matter, neither the Harbor Fund nor the Convertible Securities
Fund is required under state law to hold annual meetings of shareholders, the
Harbor Fund does not intend to hold future regular annual or special meetings of
its shareholders unless required by the 1940 Act. The Convertible Securities
Fund holds annual meetings as required by the rules of the NYSE. Any shareholder
who wishes to submit proposals for consideration at a meeting of shareholders of
the Harbor Fund or the Convertible Securities Fund should send such proposal to
the respective Fund at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace,
Illinois 60181-5555. To be considered for presentation at a shareholders'
meeting, rules promulgated by the SEC require that, among other things, a
shareholder's proposal must be received at the offices of the fund a reasonable
time before a solicitation is made. Timely submission of a proposal does not
necessarily mean that such proposal will be included.
25
<PAGE> 33
VOTING INFORMATION AND REQUIREMENTS
Holders of shares of the Convertible Securities Fund are entitled to one vote
per share on matters as to which they are entitled to vote. The Convertible
Securities Fund does not utilize cumulative voting.
Each valid proxy given by a shareholder of the Convertible Securities Fund
will be voted by the persons named in the proxy in accordance with the
instructions marked thereon and as the persons named in the proxy may determine
on such other business as may come before the Special Meeting on which
shareholders are entitled to vote. If no designation is made, the proxy will be
voted by the persons named in the proxy as recommended by the Convertible
Securities Fund Board "FOR" approval of the Reorganization. Abstentions and
broker non-votes (i.e. when shares are held in a nominee's name, such as a
broker, and the nominee does not vote such shares on a proposal because the
nominee lacks instructions of the beneficial owner and/or the nominee does not
exercise discretionary authority) are deemed votes not cast and have the effect
of a vote "AGAINST" the Reorganization proposal because the required vote is a
majority of the outstanding shares entitled to vote. A majority of the
outstanding shares entitled to vote on a proposal must be present in person or
by proxy to have a quorum to conduct business at the Special Meeting.
Abstentions and broker non-votes will be deemed present for quorum purposes.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Convertible Securities Fund a written notice of
revocation, by delivering a duly executed proxy bearing a later date, or by
attending the Special Meeting and voting in person. The giving of a proxy will
not affect your right to vote in person if you attend the Special Meeting and
wish to do so.
It is not anticipated that any action will be asked of the shareholders of the
Convertible Securities Fund other than as indicated above, but if other matters
are properly brought before the Special Meeting, it is intended that the persons
named in the proxy will vote in accordance with their judgment.
APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS
OF A MAJORITY OF THE OUTSTANDING SHARES OF THE CONVERTIBLE SECURITIES FUND
ENTITLED TO VOTE.
In the event that sufficient votes in favor of a proposal are not received by
the scheduled time of the Special Meeting, the persons named in the proxy may
propose and vote in favor of one or more adjournments of the Special Meeting to
permit further solicitation of proxies. If sufficient shares were present to
constitute a quorum, but insufficient votes had been cast in favor of a proposal
to approve it, proxies would be voted in favor of adjournment only if the
Convertible Securities Fund Board determined that adjournment and additional
solicitation was reasonable and in the best interest of the shareholders of the
Convertible Securities Fund, taking into account the nature of the proposal, the
percentage of the votes actually cast, the percentage of negative votes, the
nature of any further solicitation that
26
<PAGE> 34
might be made and the information provided to shareholders about the reasons for
additional solicitation. Any such adjournment will require the affirmative vote
of the holders of a majority of the outstanding shares voted at the session of
the Special Meeting to be adjourned.
Proxies of shareholders of the Convertible Securities Fund are solicited by
the Convertible Securities Fund Board. In order to obtain the necessary quorum
at the Special Meeting, additional solicitation may be made by mail, telephone,
telegraph or personal interview by representatives of the Adviser or Van Kampen
Investments, or by dealers or their representatives. In addition, such
solicitation servicing may also be provided by PFPC Inc., a solicitation firm
located in Boston, Massachusetts, at a cost estimated to be approximately
$15,000, plus reasonable expenses.
June , 2000
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
27
<PAGE> 35
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
HARBOR FUND AND CONVERTIBLE SECURITIES
FUND PERFORMANCE
Management's Discussion of the Harbor Fund's Performance as of the Annual
Report dated December 31, 1999.
A-1
<PAGE> 36
LETTER TO SHAREHOLDERS
January 20, 2000
Dear Shareholder:
As we enter a new century--and millennium--it seems appropriate to take a
look back at the progress that's been made over the last 100 years and how the
world of investing has changed over the generations. Although rapid advances in
technology and science have dramatically altered the world that we live in
today, one of the greatest shifts we've seen is the increasing importance of
investing for many Americans.
Once considered primarily for the wealthy, investing in the stock market is
now available to most people. In fact, almost 79 million individuals--who
represent almost half of all U.S. households--own stocks either directly or
through mutual funds. This is even more impressive when considering that just 16
years earlier, only 19 percent of households owned stocks. Another important
shift has been the need for retirement planning beyond a pension plan or Social
Security. The Investment Company Institute, the leading mutual fund industry
association, reports that 77 percent of all mutual fund shareholders earmarked
retirement as their primary financial goal in 1998.
Through all the changes in the investment environment over the past century,
the general principles that have made generations of investors successful remain
the same. Some that have stood the test of time include:
- INVESTING FOR THE LONG-TERM
- BASING INVESTMENT DECISIONS ON SOUND RESEARCH
- BUILDING A DIVERSIFIED PORTFOLIO
- BELIEVING IN THE VALUE OF PROFESSIONAL INVESTMENT ADVICE
While no one can predict the future, at Van Kampen we believe that these
ideas will remain important tenets for investors well into this century. As we
continue to focus on these principles, we hope that our decades of investment
experience can help bring you closer to your financial goals as we welcome the
new millennium.
Sincerely,
<TABLE>
<S> <C>
[SIG] [SIG]
Richard F. Powers, III Dennis J. McDonnell
Chairman President
Van Kampen Asset Management Inc. Van Kampen Asset Management Inc.
</TABLE>
A-2
<PAGE> 37
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
The nation's brisk rate of economic growth continued throughout 1999,
bringing the United States to the verge of its longest economic expansion on
record. High levels of consumer spending, a host of new jobs, and increasing
productivity kept the economy strong. Gross domestic product, the primary
measure of economic growth, increased 4.2 percent for the year, including an
impressive annualized rate of 5.7 percent for the third quarter and 5.8 percent
in the fourth quarter.
EMPLOYMENT
The job market remained vibrant throughout the year, with more than 2.7
million U.S. jobs created in 1999. In addition, unemployment dropped to 4.1
percent in October--its lowest rate in three decades. With jobs plentiful and
wages on the rise, most Americans were optimistic about the future. At the end
of the year the consumer confidence index hit its highest level since 1968.
Although wage pressures caused some concerns about the potential erosion of
corporate profits, productivity gains helped keep those concerns muted through
the end of the year.
INFLATION AND INTEREST RATES
Although the Consumer Price Index continued to reflect historically low
inflation--rising only 2.7 percent during 1999--concerns about future increases
in inflation were prevalent throughout the reporting period. The Federal Reserve
Board remained active in guarding against inflation and trying to temper
economic growth. The Fed reversed its three interest-rate cuts from the fall of
1998 by raising rates in June, August, and November 1999.
U.S. GROSS DOMESTIC PRODUCT
Seasonally Adjusted Annualized Rates
Third Quarter 1997 through Fourth Quarter 1999
[BAR GRAPH]
<TABLE>
<S> <C>
97Q3 4
97Q4 3.1
98Q1 6.7
98Q2 2.1
98Q3 3.8
98Q4 5.9
99Q1 3.7
99Q2 1.9
99Q3 5.7
99Q4 5.8
</TABLE>
Source: Bureau of Economic Analysis
A-3
<PAGE> 38
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1999
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).... 50.01% 49.02% 48.95%
One-year total return(2)................. 41.35% 44.02% 47.95%
Five-year average annual total
return(2)................................ 19.52% 19.87% 20.01%
Ten-year average annual total
return(2)................................ 13.21% N/A N/A
Life-of-Fund average annual total
return(2)................................ 10.58% 14.40% 14.67%
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). If the
sales charges were included, total return would be lower.
(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 Comparative 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. The
Fund may invest up to 15% of the total assets in foreign securities which may
subject the Fund to special risks including currency exchange rate fluctuations,
and political and economic instability. In addition, the Fund is subject to
other risks. These risks include, but are not limited to: market risk -- the
possibility that the market values of securities owned by the Fund will decline;
derivative investments risk -- a derivative investment is one whose value
depends on (or is derived from) the value of an underlying asset, interest rate
or index and involves risks different from investment in the underlying
security; and manager risk -- management may not be successful in selecting the
best performing securities and the Fund's performance may lag behind that of
similar funds. Past performance does not guarantee future results. Investment
return and net asset value will fluctuate with market conditions. Fund shares,
when redeemed, may be worth more or less than their original cost.
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.
A-4
<PAGE> 39
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment performance at regular intervals. A
comparison of your Fund's performance to an applicable benchmark can:
- Illustrate the market environment in which your Fund is being managed.
- Reflect the impact of favorable market trends or difficult market
conditions.
- Help you evaluate how your Fund's management team has responded to
opportunities and challenges.
The following graph compares your Fund's performance to that of the
broad-based Russell 2000 Stock Index and the Lipper Convertible Securities Fund
Index over time. These indices are statistical composites that do not include
any commissions or fees that would be paid by an investor purchasing the
securities they represent. Such costs would lower the performance of these
indices. An investment cannot be made directly in an index.
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, 1989, through December 31,
1999)
- ------------------------------
Fund's Total Return
1 Year Avg. Annual = 41.35%
5 Year Avg. Annual = 19.52%
10 Year Avg. Annual = 13.21%
Inception Avg. Annual = 10.58%
- ------------------------------
[INVESTMENT PERFORMANCE GRAPH]
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.
A-5
<PAGE> 40
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN HARBOR FUND
We recently spoke with representatives of the adviser of the Van Kampen Harbor
Fund about the key events and economic forces that shaped the markets during the
past 12 months. The representatives include Christine Drusch, senior portfolio
manager, who has been the Fund's lead manager since February 1998 (associate
manager since 1991) and has worked in the investment industry since 1985. She is
joined by Matthew Hart and David McLaughlin, portfolio managers, and Stephen L.
Boyd, chief investment officer for equity investments. The following discussion
reflects their views on the Fund's performance during the 12 months ended
December 31, 1999.
Q
WHAT MARKET FACTORS AFFECTED THE FUND DURING THE REPORTING PERIOD?
A
The Dow Jones Industrial Average--perhaps the country's most widely
recognized stock market index--began the reporting period near 9200,
crossing several key milestones in the first half of the year: 10,000 in
March and 11,000 in May. Major fluctuations followed, however, as the index
nearly retreated below 10,000 in the difficult third quarter before once again
lifting to a record high in December. While the Dow performed well overall
during 1999, it was actually the technology-heavy NASDAQ stock index that stole
the show, returning a phenomenal 86 percent for the year. However, these high
returns helped to mask that not all securities shared in the good fortune--the
indices were fueled by the outstanding performance of a relatively small group
of investments.
Q
GIVEN THIS ENVIRONMENT, WHAT STRATEGIES DID YOU USE TO MANAGE THE FUND?
A
We consistently manage the Fund to seek current income, capital
appreciation, and conservation of capital by investing primarily in
convertible securities. In seeking to meet this objective, we continued to
focus on growth companies and to diversify across market sectors. This approach
helped the Fund's returns during the reporting period because of the outstanding
performance of many growth investments in 1999.
During the reporting period, the portfolio was weighted heavily in
technology and communications-services--two of the market's fastest-growing
areas. This concentration had an extremely favorable impact on the Fund's
performance. Of course, there's no guarantee that the factors that contributed
to this strong performance will continue to occur in the future.
We also decided to decrease the Fund's exposure to companies in industries
that have tended to perform poorly in an environment of rising interest rates,
as we experienced in 1999. As a result, we minimized our investments in
financial services, utilities, real estate, and transportation. This reduction
was most significant with regard to electric utilities, in which the Fund had
been heavily invested early in the reporting period. We opted to eliminate most
of our holdings in this area because of poor recent
A-6
<PAGE> 41
performance and because we don't see an indication on the horizon that electric
utilities will perform better.
Q
WHAT WERE SOME OF THE INVESTMENTS THAT HAD THE MOST POSITIVE EFFECT ON THE
FUND'S RETURN?
A
The Fund benefited from its investments in companies we believe are
positioned to gain from the exploding demand for wireless communications.
The Fund was most helped by its holding in Qualcomm, which owns the patent
on wireless CDMA technology, widely becoming the standard in U.S. cellular
phones. Qualcomm's stock skyrocketed during the period, especially during the
fourth quarter. Along similar lines, the Fund was helped by its significant
weighting in Comverse Technology, which makes telecommunications systems such as
voice-mail services; Omnipoint, a cellular-service provider; and LSI Logic, a
maker of semiconductors used in wireless-communications devices.
Internet companies were also big winners in 1999. During the first half of
the reporting period, we avoided many "pure" Internet companies because we saw
their valuations as extremely high and because sales-growth estimates were
falling. As the reporting period went on, we started to increase the Fund's
exposure to this area, focusing on high-quality companies whose sales and,
possibly, earnings estimates again were rising. We remain concerned about
Internet valuations, however, and are investing the Fund's assets in this area
selectively. One extremely successful Internet company that met our criteria and
helped the Fund's return was America Online, the leading Internet service
provider.
Other securities whose performance contributed greatly to our results were
Conexant Systems (semiconductors), Veritas Software (maker of software for data
storage), NTL (an integrated cable and telephone operator in the U.K.), and Home
Depot (home products superstore). Not all securities in the Fund performed as
favorably as these, nor is there any guarantee they will continue to do so. For
additional Fund portfolio highlights, please refer to page 9.
Q
WHICH INVESTMENTS HAD THE MOST NEGATIVE EFFECT ON THE FUND?
A
On the down side, Unisys, a major systems integrator for large businesses,
saw its stock price plummet early in the fourth quarter after the company
announced that revenue and earnings for the third quarter would be less
than expected. Other securities whose performance hurt the Fund's return during
1999 were automotive-component manufacturer Tower Automotive, communications
provider AT&T, home-building company Lennar, and holding company Roche Holdings.
Q
HOW DID THE FUND PERFORM DURING THE LAST 12 MONTHS?
A
Thanks to successful security selection and the Fund's substantial
weighting in technology and communications services, the Fund performed
very well during the reporting period, with a 12-month total return of
50.01(1) (Class A shares at net asset
A-7
<PAGE> 42
value) as of December 31, 1999. By comparison, the Russell 2000 Index returned
21.26 percent, and the Lipper Convertible Securities Fund Index, which more
closely resembles the Fund, returned 28.30 percent. The unmanaged 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
they represent. Such costs would lower the performance of the indices. An
investment cannot be made directly in an index. Please refer to the chart and
footnotes on page 3 for additional Fund performance results. Past performance
doesn't guarantee future performance.
Q
WHAT IS YOUR SIX-MONTH OUTLOOK FOR THE FUND?
A
Barring any unforeseen events, we envision continued worldwide economic
health, low inflation, and strong earnings growth. Of course, our outlook
may in part depend on the timing and frequency of Federal Reserve
interest-rate changes. Although recent rate increases have had only a moderately
negative effect on stock prices, an additional rate hike could have a more
substantial impact. We're also keeping our eye on stock valuations, because the
higher they get, the greater the negative impact on the Fund if investors were
to lose their enthusiasm for growth stocks.
We believe convertibles offer investors a less aggressive means of investing
in growth companies--particularly in emerging industries such as Internet
technology. Investing in this area of the market can be risky, and convertibles
may enable investors to participate in potential market gains and income while
enjoying the potential for reduced volatility. This can be an attractive feature
in uncertain economic times.
A-8
<PAGE> 43
Management's Discussion of the Convertible Securities Fund's Performance
and Financial Highlights
as of the Annual Report dated December 31, 1999.
LETTER TO SHAREHOLDERS
January 20, 2000
Dear Shareholder:
As we enter a new century--and millennium--it seems appropriate to take a
look back at the progress that's been made over the last 100 years and how the
world of investing has changed over the generations. Although rapid advances in
technology and science have dramatically altered the world that we live in
today, one of the greatest shifts we've seen is the increasing importance of
investing for many Americans.
Once considered primarily for the wealthy, investing in the stock market is
now available to most people. In fact, almost 79 million individuals--who
represent almost half of all U.S. households--own stocks either directly or
through mutual funds. This is even more impressive when considering that just 16
years earlier, only 19 percent of households owned stocks. Another important
shift has been the need for retirement planning beyond a pension plan or Social
Security. The Investment Company Institute, the leading mutual fund industry
association, reports that 77 percent of all mutual fund shareholders earmarked
retirement as their primary financial goal in 1998.
Through all the changes in the investment environment over the past century,
the general principles that have made generations of investors successful remain
the same. Some that have stood the test of time include:
- INVESTING FOR THE LONG-TERM
- BASING INVESTMENT DECISIONS ON SOUND RESEARCH
- BUILDING A DIVERSIFIED PORTFOLIO
- BELIEVING IN THE VALUE OF PROFESSIONAL INVESTMENT ADVICE
While no one can predict the future, at Van Kampen we believe that these
ideas will remain important tenets for investors well into this century. As we
continue to focus on these principles, we hope that our decades of investment
experience can help bring you closer to your financial goals as we welcome the
new millennium.
Sincerely,
<TABLE>
<S> <C>
/s/ Richard F. Powers III /s/ Dennis J. McDonnell
Richard F. Powers, III Dennis J. McDonnell
Chairman President
Van Kampen Asset Management Inc. Van Kampen Asset Management Inc.
</TABLE>
A-9
<PAGE> 44
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
The nation's brisk rate of economic growth continued throughout 1999,
bringing the United States to the verge of its longest economic expansion on
record. High levels of consumer spending, a host of new jobs, and increasing
productivity kept the economy strong. Gross domestic product, the primary
measure of economic growth, increased 4.2 percent for the year, including an
impressive annualized rate of 5.7 percent for the third quarter and 5.8 percent
in the fourth quarter.
EMPLOYMENT
The job market remained vibrant throughout the year, with more than 2.7
million U.S. jobs created in 1999. In addition, unemployment dropped to 4.1
percent in October--its lowest rate in three decades. With jobs plentiful and
wages on the rise, most Americans were optimistic about the future. At the end
of the year the consumer confidence index hit its highest level since 1968.
Although wage pressures caused some concerns about the potential erosion of
corporate profits, productivity gains helped keep those concerns muted through
the end of the year.
INFLATION AND INTEREST RATES
Although the Consumer Price Index continued to reflect historically low
inflation--rising only 2.7 percent during 1999--concerns about future increases
in inflation were prevalent throughout the reporting period. The Federal Reserve
Board remained active in guarding against inflation and trying to temper
economic growth. The Fed reversed its three interest-rate cuts from the fall of
1998 by raising rates in June, August, and November 1999.
U.S. GROSS DOMESTIC PRODUCT
Seasonally Adjusted Annualized Rates
Third Quarter 1997 through Fourth Quarter 1999
[BAR GRAPH]
<TABLE>
<S> <C>
97Q3 4
97Q4 3.1
98Q1 6.7
98Q2 2.1
98Q3 3.8
98Q4 5.9
99Q1 3.7
99Q2 1.9
99Q3 5.7
99Q4 5.8
</TABLE>
Source: Bureau of Economic Analysis
A-10
<PAGE> 45
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1999
VAN KAMPEN CONVERTIBLE SECURITIES FUND
NYSE TICKER SYMBOL--VXS
<TABLE>
<S> <C>
TOTAL RETURNS
One-year total return based on market price(1)............ 39.22%
One-year total return based on NAV(2)..................... 50.19%
DISTRIBUTION RATE
Distribution rate as a % of closing common stock
price(3).................................................. 3.25%
SHARE VALUATIONS
Net asset value........................................... $ 33.99
Closing common stock price................................ $25.8750
One-year high common stock price (12/31/99)............... $25.8750
One-year low common stock price (03/24/99)................ $19.6875
</TABLE>
(1)Total return based on market price assumes an investment at the market price
at the beginning of the period indicated, reinvestment of all distributions for
the period in accordance with the Fund's dividend reinvestment plan, and sale of
all shares at the closing stock price at the end of the period indicated.
(2)Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3)Distribution rate represents the quarterly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
See the Comparative 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. Fund shares, when redeemed, may be
worth more or less than their original cost.
A-11
<PAGE> 46
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN CONVERTIBLE SECURITIES FUND
We recently spoke with representatives of the adviser of the Van Kampen
Convertible Securities Fund about the key events and economic forces that shaped
the markets during the past 12 months. The representatives include Christine
Drusch, senior portfolio manager, who has been the Fund's lead manager since
February 1998 and has worked in the investment industry since 1985. She is
joined by Matthew Hart and David McLaughlin, portfolio managers, and Stephen L.
Boyd, chief investment officer for equity investments. The following discussion
reflects their views on the Fund's performance during the 12 months ended
December 31, 1999.
Q
WHAT MARKET FACTORS AFFECTED THE FUND DURING THE REPORTING PERIOD?
A
The Dow Jones Industrial Average--perhaps the country's most widely
recognized stock market index--began the reporting period near 9200,
crossing several key milestones in the first half of the year: 10,000 in
March and 11,000 in May. Major fluctuations followed, however, as the index
nearly retreated below 10,000 in the difficult third quarter before once again
lifting to a record high in December. While the Dow performed well overall
during 1999, it was actually the technology-heavy NASDAQ stock index that stole
the show, returning a phenomenal 86 percent for the year. However, these high
returns helped to mask that not all securities shared in the good fortune--the
indices were fueled by the outstanding performance of a relatively small group
of investments.
Q
GIVEN THIS ENVIRONMENT, WHAT STRATEGIES DID YOU USE TO MANAGE THE FUND?
A
We consistently manage the Fund to seek current income, capital
appreciation, and conservation of capital by investing primarily in
convertible securities. In seeking to meet this objective, we continued to
focus on growth companies and to diversify across market sectors. This approach
helped the Fund's returns during the reporting period because of the outstanding
performance of many growth investments in 1999.
During the reporting period, the portfolio was weighted heavily in
securities of technology and communications-services companies. This weighting
had an extremely favorable impact on our performance, as these were two of the
market's fastest-growing areas. Of course, there's no guarantee that the factors
that contributed to this strong performance will continue to occur in the
future.
We also decided to decrease our exposure to companies in industries that
have tended to perform poorly in an environment of rising interest rates, as we
experienced in 1999. As a result, we minimized our investments in financial
services, electric utilities, and transportation. This reduction was most
significant with regard to electric utilities, in which the Fund had been
heavily invested early in the reporting period. We opted to eliminate
A-12
<PAGE> 47
most of our holdings in this area because of poor recent performance and because
we don't see an indication on the horizon that electric utilities will perform
better.
Q
WHAT WERE SOME OF YOUR INVESTMENTS THAT HAD THE MOST POSITIVE EFFECT ON
THE FUND'S RETURN?
A
The Fund benefited from its investments in companies we believe are
positioned to gain from the exploding demand for wireless communications.
We were most helped by our holding in Qualcomm, which owns the patent on
wireless CDMA technology, widely becoming the standard in U.S. cellular phones.
Qualcomm's stock skyrocketed during the period, especially during the fourth
quarter. Along similar lines, we were helped by the Fund's significant weighting
in Comverse Technology, which makes telecommunications systems such as
voice-mail services; Omnipoint, a cellular-service provider; and LSI Logic, a
maker of semiconductors used in wireless-communications devices.
Internet companies were also big winners in 1999. During the first half of
the reporting period, we avoided many "pure" Internet companies because we saw
their valuations as extremely high and because sales-growth estimates were
falling. As the reporting period went on, we started to increase our exposure to
this area, focusing on high-quality companies whose sales and, possibly,
earnings estimates were again rising. We remain concerned about Internet
valuations, however, and are investing in this area selectively. One extremely
successful Internet company that met our criteria and helped the Fund's return
was America Online, the leading Internet service provider.
Other securities whose performance contributed greatly to our results were
Conexant Systems (semiconductors), Veritas Software (maker of software for data
storage), NTL (an integrated cable and telephone operator in the U.K.), and Home
Depot (home products superstore). Not all securities in the Fund performed as
favorably as these, nor is there any guarantee they will continue to do so.
Q
WHICH INVESTMENTS HAD THE MOST NEGATIVE EFFECT ON THE FUND?
A
On the down side, Unisys, a major systems integrator for large businesses,
saw its stock price plummet early in the fourth quarter after the company
announced that revenue and earnings for the third quarter would be less
than expected. Other securities whose performance hurt the Fund's return during
1999 were automotive-component manufacturer Tower Automotive, communications
provider AT&T, home-building company Lennar, and holding company Roche Holdings.
A-13
<PAGE> 48
Q
HOW DID THE FUND PERFORM DURING THE LAST 12 MONTHS?
A
Thanks to successful security selection and the Fund's substantial
weighting in technology and communications services, the Fund performed
very well during the reporting period. The Fund generated a total return
of 50.19 percent(2) at net asset value and 39.22 percent(1) at market price. The
Fund's return reflects the change in market price per share on the New York
Stock Exchange from $19.875 on December 31, 1998, to 25.875 on December 31,
1999, and dividends totaling $0.84 per share. Please refer to the chart on page
3 for additional Fund performance results.
Q
WHAT IS YOUR SIX-MONTH OUTLOOK FOR THE FUND?
A
Barring any unforeseen events, we envision continued worldwide economic
health, low inflation, and strong earnings growth. Of course, our outlook
may in part depend on the timing and frequency of Federal Reserve
interest-rate changes. Although recent rate increases have had only a moderately
negative effect on stock prices, an additional rate hike could have a more
substantial impact. We're also keeping our eye on stock valuations, because the
higher they get, the greater the negative impact on the Fund if investors were
to lose their enthusiasm for growth stocks.
We believe convertibles offer investors a less aggressive means of investing
in growth companies--particularly in emerging industries such as Internet
technology. Investing in this area of the market can be risky, and convertibles
may enable investors to participate in potential market gains and income while
enjoying the potential for reduced volatility. This is an attractive feature in
uncertain economic times.
A-14
<PAGE> 49
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period...... $23.868 $24.265 $24.451
------- ------- -------
Net Investment Income....................... .804 .896 1.006
Net Realized and Unrealized Gain/Loss....... 10.954 .530 3.014
------- ------- -------
Total from Investment Operations.............. 11.758 1.426 4.020
------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income......................... .840 .880 1.179
Distributions from and in Excess of Net
Realized Gain............................. .794 .943 3.027
------- ------- -------
Total Distributions........................... 1.634 1.823 4.206
------- ------- -------
Net Asset Value, End of the Period............ $33.992 $23.868 $24.265
======= ======= =======
Market Price Per Share at End of the Period... $25.875 $19.875 $21.125
Total Investment Return at Market Price (a)... 39.22% 2.05% 19.48%
Total Return at Net Asset Value (b)........... 50.19% 5.90% 18.57%
Net Assets at End of the Period (In
millions)................................... $ 110.2 $ 77.4 $ 78.7
Ratio of Expenses to Average Net Assets....... .76% .83% .76%
Ratio of Net Investment Income to Average Net
Assets...................................... 3.03% 3.75% 3.86%
Portfolio Turnover............................ 107% 157% 181%
</TABLE>
(a) Total Investment Return at Market Price reflects the change in market value
of the shares for the period indicated with reinvestment of dividends in
accordance with the Fund's dividend reinvestment plan.
(b) Total Return at Net Asset Value (NAV) reflects the change in value of the
Fund's assets with reinvestment of dividends based upon NAV.
A-15
<PAGE> 50
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 24.41 $ 21.62 $ 24.88 $ 23.64 $ 22.23 $ 19.41 $ 22.73
------- ------- ------- ------- ------- ------- -------
.968 1.14 1.09 1.15 1.175 1.32 1.47
1.768 3.5325 (2.56) 2.01 1.415 2.90 (3.2475)
------- ------- ------- ------- ------- ------- -------
2.736 4.6725 (1.47) 3.16 2.59 4.22 (1.7775)
------- ------- ------- ------- ------- ------- -------
1.005 1.15 1.10 1.12 1.18 1.40 1.40
1.690 .7325 .69 .80 -0- -0- .1425
------- ------- ------- ------- ------- ------- -------
2.695 1.8825 1.79 1.92 1.18 1.40 1.5425
------- ------- ------- ------- ------- ------- -------
$24.451 $ 24.41 $ 21.62 $ 24.88 $ 23.64 $ 22.23 $ 19.41
======= ======= ======= ======= ======= ======= =======
$21.125 $21.375 $18.125 $22.375 $20.375 $19.250 $16.625
11.67% 28.88% (11.71%) 19.43% 12.31% 24.68% (10.39%)
11.51% 23.42% (5.29%) 14.50% 12.84% 23.32% (7.37%)
$79.3 $79.1 $70.1 $80.7 $76.6 $72.1 $62.9
.88% .80% .82% .87% .88% .89% .86%
3.88% 4.82% 4.70% 4.60% 5.28% 6.41% 7.01%
140% 127% 111% 128% 87% 168% 95%
</TABLE>
See Notes to Financial Statements.
A-16
<PAGE> 51
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN HARBOR FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN CONVERTIBLE SECURITIES FUND
JUNE , 2000
------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
THE PROPOSED REORGANIZATION......................................... 3
A. SUMMARY..................................................... 3
The Reorganization........................................ 3
Reasons for the Proposed Reorganization................... 4
Comparison of the Harbor Fund and the Convertible
Securities Fund......................................... 7
B. RISK FACTORS................................................ 18
Similarity of Risks....................................... 18
Differences in Risks...................................... 19
C. THE PROPOSED REORGANIZATION................................. 20
Terms of the Agreement.................................... 20
Description of Shares to be Issued........................ 21
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 22
Federal Income Tax Consequences........................... 22
Expenses.................................................. 24
Ratification of Investment Objective, Investment Policies
and Investment Restrictions of the Harbor Fund.......... 24
Legal Matters............................................. 24
D. RECOMMENDATION OF THE CONVERTIBLE SECURITIES FUND BOARD..... 25
OTHER INFORMATION................................................... 25
A. SHAREHOLDERS OF THE CONVERTIBLE SECURITIES FUND AND THE
HARBOR FUND............................................... 25
B. SHAREHOLDER PROPOSALS....................................... 25
VOTING INFORMATION AND REQUIREMENTS................................. 26
EXHIBIT A: MANAGEMENT'S DISCUSSION OF VAN KAMPEN HARBOR FUND AND VAN
KAMPEN CONVERTIBLE SECURITIES FUND PERFORMANCE; FINANCIAL
HIGHLIGHTS OF VAN KAMPEN CONVERTIBLE SECURITIES FUND.............. A-1
</TABLE>
------------------------------------------------------------------------------
[VAN KAMPEN LOGO]
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Harbor
------------------------------------------------------------------------------
<PAGE> 52
VAN KAMPEN
HARBOR FUND
Van Kampen Harbor Fund is a mutual fund with
the investment objective to seek to provide
current income, capital appreciation and
conservation of capital. The Fund's investment
adviser seeks to achieve the Fund's investment
objective by investing principally in a
portfolio of debt securities, primarily
convertible bonds and convertible preferred
stocks.
Shares of the Fund have not been approved or
disapproved by the Securities and Exchange
Commission (SEC) or any state regulator, and
neither the SEC nor any state regulator has
passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary
is a criminal offense.
This prospectus is dated APRIL 28, 2000.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 53
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary............................... 3
Fees and Expenses of the Fund..................... 6
Investment Objective, Policies and Risks.......... 7
Investment Advisory Services...................... 13
Purchase of Shares................................ 14
Redemption of Shares.............................. 20
Distributions from the Fund....................... 22
Shareholder Services.............................. 22
Federal Income Taxation........................... 24
Financial Highlights.............................. 26
Appendix - Description of Securities Ratings...... A-1
</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 Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's 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.
<PAGE> 54
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund is a mutual fund with the investment objective to seek to provide
current income, capital appreciation and conservation of capital.
INVESTMENT STRATEGIES
The Fund's investment adviser seeks to achieve the Fund's investment objective
by investing principally in a portfolio of debt securities, primarily
convertible bonds and convertible preferred stocks. Under normal market
conditions, the Fund invests at least 50% of its total assets (excluding cash,
cash equivalents and government securities) in convertible debt securities. The
Fund's investment adviser emphasizes income-producing securities of companies
whose common stocks are believed to have good prospects for capital
appreciation. The Fund's investment adviser seeks to identify companies with
improving fundamentals, strong earnings growth, increasing market share and
attractive valuations that are likely to provide investors with equity
participation through their issuance of convertible securities. Portfolio
securities are sold when the Fund's investment adviser's assessments of the
income or growth potential of such securities materially change. The Fund may
invest in securities without limitations as to credit ratings, and such
investments may include high-, medium-, or lower-rated securities or unrated
securities. Securities rated BB or lower by Standard & Poor's ("S&P") or rated
Ba or lower by Moody's Investors Service, Inc. ("Moody's") and unrated
securities of comparable quality are commonly referred to as "junk bonds" and
involve special risks as compared to investments in higher-grade securities (see
the appendix to this prospectus for an explanation of securities ratings). The
Fund may invest up to 45% of its total assets in common stocks and up to 15% of
its total assets in securities of foreign issuers. The Fund may purchase and
sell certain derivative instruments, such as options, futures and options on
futures, for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. Market risk may affect a single issuer,
industry, sector of the economy or the market as a whole. Investments in common
stock generally are affected by changes in the stock markets, which fluctuate
substantially over time, sometimes suddenly and sharply. During an overall stock
market decline, stock prices of small- or medium- sized companies (in which the
Fund may invest) often fluctuate more than prices of larger companies. The
prices of the Fund's investments in common stocks may or may not fluctuate in
tandem with overall changes in the stock market. The prices of debt securities
tend to fall as interest rates rise, and such declines tend to be greater among
debt securities with longer maturities. Lower-grade securities, especially those
with long maturities or that do not make regular interest payments, may be more
volatile and may decline more in price in response to negative issuer or general
economic news than higher-grade securities.
The prices of convertible securities are affected by changes similar to those of
debt and equity securities. The value of a convertible security tends to decline
as interest rates rise and, because of the conversion feature, tends to vary
with fluctuations in the market value of the underlying equity security.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Because the Fund may invest in securities with low
credit quality, it is subject to a higher level of credit risk than a fund that
buys only investment grade securities. The credit quality of "noninvestment
grade" securities is considered speculative by recognized rating agencies with
respect to the issuer's continuing ability to pay interest and principal. Lower-
grade securities may have less liquidity and a higher incidence of default than
investments in higher-grade securities. The Fund may incur higher expenditures
to protect the Fund's interest in such securities. The credit risks and market
prices of lower-grade securities generally are more sensitive to negative
corporate developments, such as a decline in profits, or adverse economic
conditions, such as a recession, than are higher-grade securities.
INCOME RISK. The interest income on debt securities, including convertible
bonds, generally is affected by prevailing interest rates, which can vary widely
over the short- and long-term. The ability of equity securities to generate
income generally depends on the earnings and continuing declaration of dividends
by the issuers of such securities. If interest rates drop or dividends are
reduced or discontinued, your income from the Fund may drop as well.
3
<PAGE> 55
CALL RISK. If interest rates fall, it is possible that issuers of callable
securities with high interest rates will buy back or call their securities
before their maturity dates. In this event, the proceeds from the called
securities would most likely be reinvested by the Fund in securities bearing the
new, lower interest rates, resulting in a possible decline in the Fund's income
and distributions to shareholders and termination of any conversion option on
convertible securities.
FOREIGN RISKS. Because the Fund may own securities of foreign issuers, it may be
subject to risks not usually associated with owning securities of U.S. issuers.
These risks can include fluctuations in foreign currencies, foreign currency
exchange controls, political and economic instability, differences in financial
reporting, differences in securities regulation and trading, and foreign
taxation issues.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures and options on futures are
examples of derivatives. Derivative instruments involve risks different from the
direct investment in underlying securities. These risks include imperfect
correlation between the value of the instruments and the underlying assets;
risks of default by the other party to certain transactions; risks that the
transactions may result in losses that partially or completely offset gains in
portfolio positions; and risks that the transactions may not be liquid.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek current income and capital appreciation over the long term
- - Are willing to take on the substantially increased risks of investments in
medium- and lower-grade securities in exchange for potentially higher income
and capital appreciation
- - Can withstand volatility in the value of their shares of the Fund
- - Wish to add to their investment portfolio a fund that invests principally in
convertible securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. An investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
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 about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the ten calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
1990 -1.23
1991 23.08
1992 9.72
1993 13.56
1994 -6.43
1995 22.46
1996 12.08
1997 16.91
1998 7.52
1999 50.01
</TABLE>
The Fund's return for the three-month period ended March 31, 2000 was 13.15%.
4
<PAGE> 56
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
for Class A Shares was 32.75% (for the quarter ended December 31, 1999) and the
lowest quarterly return was -13.64% (for the quarter ended September 30, 1998).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Russell 2000 Stock Index*, a
broad-based market index that the Fund's investment adviser believes is an
appropriate benchmark for the Fund, and with the Lipper Convertible Securities
Fund Index, an index of funds with similar investment objectives. The Fund's
performance figures include the maximum sales charges paid by investors. The
indices' performance figures do not include any commissions or sales charges
that would be paid by investors purchasing the securities represented by those
indices. An investment can not be made directly in the indices. Average annual
total returns are shown for the periods ended December 31, 1999 (the most
recently completed calendar year prior to the date of this prospectus). Remember
that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past 10
for the Years
Periods Ended Past Past or Since
December 31, 1999 1 Year 5 Years Inception
- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen Harbor
Fund--Class A
Shares 41.35% 19.52% 13.21%
Russell 2000 Stock
Index 21.26% 16.69% 13.40%
Lipper Convertible
Securities Fund
Index 28.30% 16.44% 12.39%
.........................................................
Van Kampen Harbor
Fund--Class B
Shares 44.02% 19.87% 14.60%(1)**
Russell 2000 Stock
Index 21.26% 16.69% 14.67%(2)
Lipper Convertible
Securities Fund
Index 28.30% 16.44% 13.27%(2)
.........................................................
Van Kampen Harbor
Fund--Class C
Shares 47.95% 20.01% 14.67%(3)
Russell 2000 Stock
Index 21.26% 16.69% 12.99%(4)
Lipper Convertible
Securities Fund
Index 28.30% 16.44% 12.52%(5)
.........................................................
</TABLE>
Inception dates: (1) 12/20/91, (2) 12/31/91, (3) 10/26/93, (4) 10/31/93, (5)
10/28/93.
* The Russell 2000 Stock Index is a small-cap stock benchmark composed of the
smallest 2,000 companies of the Russell 3000 Stock Index (an index of the
3,000 largest U.S. companies based on market capitalization).
** The "Since Inception" performance for Class B Shares reflects the conversion
of such shares into Class A Shares six years after the end of the calendar
month in which shares were purchased. Class B Shares purchased on or after
June 1, 1996 will convert to Class A Shares eight years after purchase. See
"Purchase of Shares".
5
<PAGE> 57
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
- ------------------------------------------------------------
Maximum sales charge
(load) imposed on
purchases (as a
percentage of 5.75%(1) None None
offering price)
............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) 5.00%(3) 1.00%(4)
............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
None None None
............................................................
Redemption fees None None None
............................................................
Exchange fee None None None
............................................................
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
- ------------------------------------------------------------
Management fees 0.53% 0.53% 0.53%
............................................................
Distribution and/or
service (12b-1)
fees(5) 0.24% 1.00%(6) 1.00%(6)
............................................................
Other expenses 0.23% 0.24% 0.23%
............................................................
Total annual fund
operating expenses
1.00% 1.77% 1.76%
............................................................
</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 deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 5.00% in the first year after purchase,
declining thereafter as follows:
Year 1-5.00%
Year 2-4.00%
Year 3-3.00%
Year 4-2.50%
Year 5-1.50%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) 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 "Purchase of Shares."
(6) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $671 $875 $1,096 $1,729
......................................................................
Class B Shares $680 $857 $1,109 $1,881*
......................................................................
Class C Shares $279 $554 $954 $2,073
......................................................................
</TABLE>
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $671 $875 $1,096 $1,729
......................................................................
Class B Shares $180 $557 $959 $1,881*
......................................................................
Class C Shares $179 $554 $954 $2,073
......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
6
<PAGE> 58
INVESTMENT OBJECTIVE,
POLICIES AND RISKS
The Fund's investment objective is to seek to provide current income, capital
appreciation and conservation of capital. The Fund's investment objective is a
fundamental policy and may not be changed without shareholder approval of a
majority of the Fund's outstanding voting securities, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). There are risks
inherent in all investments in securities; accordingly there can be no assurance
that the Fund will achieve its investment objective.
The Fund's investment adviser seeks to achieve the Fund's investment objective
by investing principally in a portfolio of debt securities, primarily
convertible bonds and convertible preferred stocks. As a fundamental investment
policy, the Fund invests, under normal market conditions, at least 50% of the
Fund's total assets (excluding cash, cash equivalents and government securities)
in convertible debt securities.
Through careful selection of individual securities, diversification of
investments and by continuing supervision of the investment portfolio, the
Fund's investment adviser seeks to provide income and capital appreciation while
striving to reduce risk and conserve shareholder capital. The Fund's investment
adviser emphasizes income-producing securities of companies whose common stocks
are believed to have good prospects for capital appreciation. The Fund's
investment adviser seeks to identify companies with improving fundamentals,
strong earnings growth, increasing market share and attractive valuations that
are likely to provide investors with equity participation through the issuance
of convertible securities. The Fund may invest in issuers of small-, medium- or
large-capitalization companies. The securities of small- or medium-sized
companies may be subject to more abrupt or erratic market movements than
securities of larger companies or the market averages in general. In addition,
such companies typically are subject to a greater degree of change in earnings
and business prospects than are larger companies. Thus, the Fund may be subject
to greater investment risk than that assumed through investment solely in the
securities of larger-capitalization companies. While attractive convertible
securities of desired quality may not be available in all industries at all
times, their general availability is considered by the Fund's investment adviser
to be more than adequate in light of the Fund's investment objectives.
A convertible security is a bond, debenture, note, preferred stock, warrant or
other security that may be converted into or exchanged for a prescribed amount
of common stock or other security of the same or a different issuer or into cash
within a particular period of time at a specified price or formula. A
convertible security generally entitles the holder to receive interest paid or
accrued on debt securities or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities generally have characteristics similar to
both debt and equity securities. The value of convertible securities tends to
decline as interest rates rise and, because of the conversion feature, tends to
vary with fluctuations in the market value of the underlying equity securities.
Convertible securities ordinarily provide a stream of income with generally
higher yields than those of common stock of the same or similar issuers.
Convertible securities generally do not directly participate in any dividend
increases or decreases of the underlying equity securities although the market
prices of convertible securities may be affected by any such dividend changes or
other changes in the underlying equity securities. Convertible securities
generally rank senior to common stocks in a corporation's capital structure and
generally entail less risk than common stock, although the extent to which such
risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed-income security.
The Fund's investment in convertible securities may include securities with
enhanced convertible features or "equity-linked" features. Equity-linked
securities come in many forms and may include features, among others, such as
the following: (i) may be issued by the issuer of the underlying equity security
or by a company other than the one to which the instrument is linked (usually an
investment bank), (ii) may convert into equity securities, such as common stock,
within a stated period from the issue date or may be redeemed for cash or some
combination of cash and the linked security at a value based upon the value of
the underlying equity security within a stated period from the issue date, (iii)
may have various conversion features prior to maturity at the option of the
holder or the issuer or both, (iv) may limit the appreciation value with caps or
collars of the value of the
7
<PAGE> 59
underlying equity security and (v) may have fixed, variable or no interest
payments during the life of the security which reflect the actual or a
structured return relative to the underlying dividends of the linked equity
security. Investments in equity-linked securities may subject the Fund to
additional risks not ordinarily associated with investments in other equity
securities. Because equity-linked securities are sometimes issued by a third
party other than the issuer of the linked security, the Fund is subject to risks
if the underlying stock underperforms and if the issuer defaults on the payment
of the dividend or the common stock at maturity. In addition, the trading market
for particular equity-linked securities may be less liquid, making it difficult
for the Fund to dispose of a particular security when necessary and reduced
liquidity in the secondary market for any such securities may make it more
difficult to obtain market quotations for valuing the Fund's portfolio.
There can be no assurance of current income on convertible securities because of
the issuers thereof may default on their obligations. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying equity security. There can
be no assurance of capital appreciation, however, because securities prices
fluctuate. Convertible securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar quality because of
the potential for capital appreciation. The Fund's Statement of Additional
Information contains a further discussion of convertible securities.
Securities acquired by the Fund are not governed by specific ratings categories,
and the Fund may purchase high-, medium-, lower-rated or unrated securities. To
the extent that the Fund invests a large portion of its total assets in
lower-grade securities, the Fund's ability to conserve shareholder capital may
be diminished. Securities rated BB or lower by S&P or rated Ba or lower by
Moody's and unrated securities determined by the Fund's investment adviser to be
of comparable quality are commonly referred to as "junk bonds." Lower-rated
securities are considered speculative by the rating agencies with respect to the
issuer's continuing ability to make timely payments of interest and principal.
Securities below investment grade involve special risks compared to higher-grade
securities. See "Risks of Investing in Lower-Grade Securities" below. A detailed
explanation of the various S&P and Moody's rating categories is included in the
appendix to this prospectus.
UNDERSTANDING
QUALITY RATINGS
Security ratings are based on the issuer's ability to pay interest and repay the
principal. Securities with ratings above the line are considered "investment
grade," while those with ratings below the line are regarded as "noninvestment
grade," or "junk bonds." A detailed explanation of these and other security
ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
S&P Moody's Meaning
- ------------------------------------------------------
<C> <S> <C>
AAA Aaa Highest quality
......................................................
AA Aa High quality
......................................................
A A Above-average quality
......................................................
BBB Baa Average quality
- ------------------------------------------------------
BB Ba Below-average quality
......................................................
B B Marginal quality
......................................................
CCC Caa Poor quality
......................................................
CC Ca Highly speculative
......................................................
C C Lowest quality
......................................................
D -- In default
......................................................
</TABLE>
While the Fund invests primarily in convertible securities, the Fund may invest
in the common stocks of companies. Common stocks are shares of a corporation or
other entity that entitle the holder to a pro rata share of the profits of the
corporation, if any, without preference over any other class of securities,
including such entity's debt securities, preferred stock and other senior equity
securities. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so. The Fund has a fundamental policy of
investing not more than 45% of its total assets in common stocks.
RISKS OF INVESTING IN LOWER-GRADE SECURITIES
Securities which are in the lower-grade categories generally offer a higher
current yield than is offered by higher-grade securities of similar maturities,
but they also generally involve greater risks, such as greater credit risk,
greater market risk and volatility, greater liquidity concerns and potentially
greater manager risk. Investors should carefully consider the risks of owning
shares of a fund which invests in lower-grade securities before investing in the
Fund.
8
<PAGE> 60
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Lower-grade securities are considered more susceptible
to nonpayment of interest and principal or default than higher grade securities.
Increases in interest rates or changes in the economy may significantly affect
the ability of issuers of lower-grade securities to pay interest and to repay
principal, to meet projected financial goals or to obtain additional financing.
In the event that an issuer of securities held by the Fund experiences
difficulties in the timely payment of principal and 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 on such amounts.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the debt securities market and as a result of real or perceived
changes in credit risk. The value of 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 lower grade securities generally are less sensitive to changes
in interest rates and are more sensitive to general adverse economic changes or
specific developments with respect to the particular issues than are the
secondary market prices of higher-grade securities. A significant increase in
interest rates or a general economic downturn could severely disrupt the market
for lower-grade securities and adversely affect the market value of such
securities. Such events also could lead to a higher incidence of default by
issuers of lower-grade securities as compared with higher-grade securities. In
addition, changes in credit risks, interest rates, the credit markets or periods
of general economic uncertainty can be expected to result in increased
volatility in the market price of the 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 lower-grade securities.
The markets for lower-grade securities may be less liquid than the markets for
higher-grade securities. Liquidity relates to the ability of a fund to sell a
security in a timely manner at a price which reflects the value of that
security. To the extent that there is no established retail market for some of
the lower-grade securities in which the Fund may invest, trading in such
securities may be relatively inactive. Prices of lower-grade securities may
decline rapidly in the event a significant number of holders decide to sell.
Changes in expectations regarding an individual issuer or lower-grade securities
generally could reduce market liquidity for such securities and make their sale
by the Fund more difficult, at least in the absence of price concessions. The
effects of adverse publicity and investor perceptions may be more pronounced for
securities for which no established retail market exists as compared with the
effects on securities for which such a market does exist. An economic downturn
or an increase in interest rates could severely disrupt the market for such
securities and adversely affect the value of outstanding securities or the
ability of the issuers to repay principal and interest. Further, 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.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity and in the absence of readily available
market quotations for lower-grade securities held in the Fund's portfolio, the
ability of the Fund's investment adviser to value the Fund's securities becomes
more difficult and the investment 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 Fund may invest in securities not producing immediate cash income, including
zero-coupon securities or pay-in-kind securities, when their effective yield
over comparable instruments producing cash income make these investments
attractive. Prices on non-cash-paying instruments may be more sensitive to
changes in the issuer's financial condition, fluctuation in interest rates and
market demand/supply imbalances than cash-paying securities with similar credit
ratings, and thus may be more
9
<PAGE> 61
speculative. In addition, the accrued interest income earned on such instruments
is included in investment company taxable income, and thereby is included in the
required minimum distributions to shareholders without providing the
corresponding cash flow with which to pay such distributions. The Fund must
distribute substantially all of its investment company taxable income to its
shareholders to qualify for pass-through treatment under federal income tax law
and may, therefore, have to dispose of portfolio securities to satisfy
distribution requirements. The Fund's investment adviser will weigh these
concerns against the expected total returns from such instruments.
Many lower-grade income securities are not listed for trading on any national
securities exchange, and many issuers of lower-grade income securities choose
not to have a rating assigned to their obligations by any nationally recognized
statistical rating organization. As a result, the Fund's portfolio may consist
of a higher portion of unlisted or unrated securities as compared with an
investment company that invests solely in higher-grade securities. Unrated
securities are usually not as attractive to as many buyers as are rated
securities, a factor which may make unrated securities less marketable. These
factors may have the effect of limiting the availability of the securities for
purchase by the Fund and may also limit the ability of the Fund to sell such
securities at their fair market value either to meet redemption requests or in
response to changes in the economy or the financial markets. Further, to the
extent the Fund owns or may acquire illiquid or restricted lower-grade
securities, these securities may involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain lower-grade issuers may be
less extensive than other issuers. In its analysis, the Fund's investment
adviser may consider the credit ratings of Moody's and S&P in evaluating
securities although the investment adviser does not rely primarily on these
ratings. Credit ratings of securities rating organizations evaluate only the
safety of principal and interest payments. In addition, ratings are general and
not absolute standards of quality, and credit ratings are subject to the risk
that the creditworthiness of an issuer may change and the rating agencies may
fail to change such ratings in a timely fashion. A rating downgrade does not
require the Fund to dispose of a security. The Fund's investment adviser
continuously monitors the issuers of securities held in the Fund's portfolio.
Because of the number of investment considerations involved in investing in
lower-grade securities, achievement of the Fund's investment objective may be
more dependent upon the investment adviser's credit analysis than is the case
with investing in higher-grade securities.
New or proposed laws may have an impact on the market for lower-grade
securities. The Fund's investment adviser is unable at this time to predict what
effect, if any, legislation may have on the market for lower-grade securities.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal year ended December 31, 1999 in the various S&P's and Moody's rating
categories and in unrated securities determined by the Fund's investment adviser
to be of comparable quality. The percentages are based on the dollar-weighted
average of credit ratings of all securities held by the Fund during the 1999
fiscal year computed on a monthly basis.
<TABLE>
<CAPTION>
Period Ended December 31, 1999
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 1.88% 0.00%
........................................................................
AA/Aa 1.31% 1.69%
........................................................................
A/A 6.05% 0.00%
........................................................................
BBB/Baa 11.35% 0.56%
........................................................................
BB/Ba 10.06% 0.00%
........................................................................
B/B 29.49% 10.10%
........................................................................
CCC/Ccc 8.26% 5.72%
........................................................................
CC/Ca 0.00% 0.00%
........................................................................
C/C 0.00% 0.00%
........................................................................
D 0.00% 0.00%
........................................................................
N/A(*) 13.53% 0.00%
........................................................................
Percentage of Rated
and Unrated
Securities 81.93% 18.07%
........................................................................
</TABLE>
* The 13.53% designated "N/A" are equity securities held by the Fund. Unlike
debt securities, equity securities are not subject to ratings categorization
and the ratings are therefore not applicable to these securities.
10
<PAGE> 62
RISKS OF INVESTING IN
SECURITIES OF FOREIGN ISSUERS
The Fund may invest up to 15% of its total assets in securities of foreign
issuers. Securities of foreign issuers may be denominated in U.S. dollars or in
currencies other than U.S. dollars. Investments in foreign securities present
certain risks not ordinarily associated with investments in securities of U.S.
issuers. These risks include fluctuations in foreign currency exchange rates,
political, economic or legal developments (including war or other instability,
expropriation of assets, nationalization and confiscatory taxation), the
imposition of foreign exchange limitations (including currency blockage),
withholding taxes on dividend or interest payments or capital transactions or
other restrictions, higher transaction costs (including higher brokerage,
custodial and settlement costs and currency conversion costs) and possible
difficulty in enforcing contractual obligations or taking judicial action. Also,
foreign securities may not be as liquid and may be more volatile than comparable
domestic securities.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting and financial reporting
disclosure requirements than domestic issuers. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the U.S., and, with respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of foreign exchanges,
brokers and dealers than there is in the U.S., the Fund may experience
settlement difficulties or delays not usually encountered in the U.S.
Delays in making trades in foreign securities relating to volume constraints,
limitations or restrictions, clearance or settlement procedures, or otherwise
could impact returns and result in temporary periods when assets of the Fund are
not fully invested or attractive investment opportunities are foregone.
The Fund may invest in securities of issuers in developing or emerging market
countries. Investments in securities of issuers in developing or emerging market
countries are subject to greater risks than investments in securities of
developed countries since emerging market countries tend to have economic
structures that are less diverse and mature and political systems that are less
stable than developed countries.
In addition to the increased risks of investing in foreign securities, there are
often increased transactions costs associated with investing in foreign
securities including the costs incurred in connection with converting
currencies, higher foreign brokerage or dealer costs, and higher settlement
costs or custodial costs.
USING OPTIONS, FUTURES CONTRACTS
AND RELATED OPTIONS
The Fund may, but is not required to, use various investment strategic
transactions, including options, futures contracts and options on futures
contracts, in several different ways depending upon the status of the Fund's
portfolio and the Fund's investment adviser's expectations concerning the
securities markets. Although the Fund's investment adviser seeks to use the
practices to further the Fund's investment objective, no assurance can be given
that the use of these practices will achieve this result.
In times of stable or rising prices, the Fund generally seeks to be fully
invested in convertible and other securities. 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 may also have cash on hand that has not yet been
invested. The portion of the Fund's assets that is invested in cash or cash
equivalents does not fluctuate with market prices, so that, in times of rising
market prices, the Fund may underperform the market in proportion to the amount
of cash or cash equivalents in its portfolio. By purchasing 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
securities.
If the Fund's investment adviser forecasts a market decline, the Fund may seek
to reduce its exposure to the securities markets by increasing its cash
position. By selling 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
11
<PAGE> 63
liquidate securities in a more deliberate manner, reducing its futures position
simultaneously to maintain the desired balance, or it could maintain the hedged
position.
The Fund can engage in options transactions on securities, indices or on futures
to attempt to manage the portfolio's risk in advancing or declining markets. For
example, the value of a put option generally increases as the underlying
security declines below a specified level. 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.
Generally, the Fund expects that options will be purchased or sold on securities
exchanges. However, the Fund is authorized to purchase and sell listed and
over-the-counter options ("OTC Options"). OTC Options are subject to certain
additional risks including default by the other party to the transaction and the
liquidity of the transactions.
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 rather than
purchasing or selling portfolio securities. However, such transactions involve
risks different from the direct investment in underlying securities. For
example, there may be imperfect correlation between the value of the instruments
and the underlying assets. In addition, the use of such instruments includes the
risks of default by the other party to certain transactions. The Fund may incur
losses in using these instruments that partially or completely offset gains in
portfolio positions. These transactions may not be liquid and involve manager
risk. In addition, such transactions may involve commissions and other costs,
which may increase the Fund's expenses and reduce its return.
A more complete discussion of options, futures contracts and related options and
their risks is contained in the Fund's Statement of Additional Information which
may be obtained by investors free of charge as described on the back cover of
this prospectus.
OTHER INVESTMENTS AND RISK FACTORS
For cash management purposes, the Fund may engage in repurchase agreements with
broker-dealers, banks and other financial institutions to earn a return on
temporarily available cash. Such transactions are subject to the risk of default
by the other party. The Fund may invest up to 25% of its total assets at the
time of purchase in securities subject to repurchase agreements.
The Fund may invest up to 10% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities, or when the
Fund's investment adviser believes the potential for current income or capital
appreciation has lessened, or for other reasons. The Fund's portfolio turnover
is shown under the Prospectus heading "Financial Highlights." The portfolio
turnover rate may vary from year to year. A high portfolio turnover rate (100%
or more) increases a fund's transactions costs (including brokerage commissions
or dealer costs) and a higher portfolio turnover rate may result in the
realization of more short-term capital gains than if a fund had a lower
portfolio turnover rate. Increases in a fund's transaction costs would adversely
impact the fund's performance. The turnover rate will not be a limiting factor,
however, if the Fund's investment adviser considers portfolio changes
appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may on a temporary basis hold cash or invest a
portion or all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or its instrumentalities, prime commercial paper,
certificates of deposit, bankers' acceptances and repurchase agreements. Under
normal market conditions, the potential for current income or capital
appreciation on these investments will tend to be
12
<PAGE> 64
lower than the potential for current income or capital appreciation on other
securities that may be owned by the Fund. In taking such a defensive position,
the Fund would not be pursuing and may not achieve its investment objectives of
current income and capital appreciation.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Asset Management Inc. is the Fund's investment adviser
(the "Adviser" or "Asset Management"). The Adviser is a wholly owned subsidiary
of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than two million
retail investor accounts, extensive capabilities for managing institutional
portfolios, and more than $100 billion under management or supervision as of
March 31, 2000. Van Kampen Investments' more than 50 open-end and 39 closed-end
funds and more than 2,700 unit investment trusts are professionally distributed
by leading authorized dealers nationwide. Van Kampen Funds Inc., the distributor
of the Fund (the "Distributor") and the sponsor of the funds mentioned above, is
also a wholly owned subsidiary of Van Kampen Investments. Van Kampen Investments
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 60181-5555.
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 the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
- ------------------------------------------------------
<S> <C> <C> <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>
Applying this fee schedule, the effective advisory fee rate was 0.53% of the
Fund's average daily net assets for the Fund's fiscal year ended December 31,
1999. The Fund's average daily net assets are determined by taking the average
of all of the determinations of the net assets during a given calendar month.
Such fee is payable for each calendar month as soon as practicable after the end
of that month.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment and provides administrative services to the Fund. The
Fund pays all charges and expenses of its day-to-day operations, including
service fees, distribution fees, custodian fees, legal and independent
accountant fees, the costs of reports and proxies to shareholders, compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments) and all other ordinary business
expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor 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, the Adviser and the Distributor have
adopted Codes of Ethics designed to recognize the fiduciary relationships among
the Fund, the Adviser, the Distributor and their respective employees. The Codes
of Ethics 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 the team of Christine Drusch,
Senior Portfolio Manager of the Fund since January 1998, and Portfolio Manager
of the Fund since July 1991, and David McLaughlin, Portfolio Manager of the Fund
since October 1998.
Ms. Drusch has been a Senior Vice President of the Adviser and Advisory Corp.
since December 1999, and prior to December 1999 she was a Vice President
13
<PAGE> 65
of the Adviser and Advisory Corp. Prior to December 1998, Ms. Drusch was an
Assistant Vice President of the Adviser and Advisory Corp. since September 1995.
Prior to September 1995, Ms. Drusch was an Associate Portfolio Manager of the
Adviser and has worked for the Adviser since July 1991.
Mr. McLaughlin has been a Vice President of the Adviser and Advisory Corp. since
June 1995, and he was an Assistant Vice President of the Adviser since March
1994. Prior to June 1995, Mr. McLaughlin was a Senior Equity Trader for the
Adviser. Mr. McLaughlin has worked for the Adviser since 1986.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments must be at least $1,000 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Minimum
investment amounts may be waived by the Distributor for plans involving periodic
investments.
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 A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares generally bear the sales charge expenses at the time of
redemption and any expenses (including higher distribution fees and transfer
agency costs) resulting from such deferred sales charge arrangement, (ii) each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and the service plan (each as described below)
under which its distribution fee and/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 offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund 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
for trading except on any day on which no purchase or redemption orders are
received or there is not a sufficient degree of trading in the Fund's portfolio
securities such that the Fund's net asset value per share might be materially
affected. The Fund's Board of Trustees reserves the right to calculate the net
asset value per share and adjust the offering price based thereon more
frequently than once daily if deemed desirable. Net asset value per share for
each class is determined by dividing the value of the Fund's portfolio
securities, cash and other assets (including accrued interest) attributable to
such class, less all liabilities (including accrued expenses) attributable to
such class, by the total number of shares of the class outstanding. Such
computation is made by using prices as of the close of trading on the Exchange
and (i) valuing securities listed or traded on a national securities exchange at
the last reported sale price, or if there has been no sale that day, at the mean
between the last reported bid and asked prices, (ii) valuing unlisted securities
at the mean between the last reported bid and asked prices and (iii) valuing
securities for which market quotations are not readily available and any other
assets at fair value as determined in good faith by the Adviser in accordance
with procedures established by the Fund's Board of Trustees. Short-term
securities are valued in the manner described in the notes to the financial
statements included in the Fund's Statement of Additional Information.
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. Under the Distribution Plan and the Service
14
<PAGE> 66
Plan, the Fund pays distribution fees in connection with the sale and
distribution of its shares and service fees in connection with the provision of
ongoing services to shareholders and the maintenance of the shareholders'
accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
that class of shares. To assist investors in comparing classes of shares, the
tables under the Prospectus heading "Fees and Expenses of the Fund" provide a
summary of sales charges and expenses and an example of the sales charges and
expenses of the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the 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"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the account
application form and forwarding the account application, directly or through an
authorized dealer, to the Fund's shareholder service agent, Van Kampen Investor
Services Inc. ("Investor Services"), a wholly owned subsidiary of Van Kampen
Investments. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers prior to
the close of the Exchange are priced based on the date of receipt provided such
order is transmitted to Investor Services prior to Investor Services' close of
business on such date. Orders received by authorized dealers after the close of
the Exchange or transmitted to Investor Services after its close of business are
priced based on the date of the next computed net asset value per share provided
they are received by Investor Services prior to Investor Services' close of
business on such date. It is the responsibility of authorized dealers to
transmit orders received by them to Investor Services so they will be received
in a timely manner.
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 of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investor Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
15
<PAGE> 67
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 5.75% of the offering price (or 6.10% of the net amount
invested), reduced on investments of $50,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 5.75% 6.10%
..........................................................
$50,000 but less than
$100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$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 may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales 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.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and the Service Plan, the Fund may spend up to a
total of 0.25% per year of the Fund's average daily net assets with respect to
the Class A Shares of the Fund. From such amount, under the Service Plan, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund. The rates in this paragraph are 0.15%
per year of the Fund's average daily net assets attributable to Class A Shares
with respect to accounts existing before October 1, 1989.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within five years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
- ------------------------------------------------
<S> <C> <C> <C>
First 5.00%
................................................
Second 4.00%
................................................
Third 3.00%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth and After None
................................................
</TABLE>
The contingent deferred sales 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 sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. 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 contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for each purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
16
<PAGE> 68
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales 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 sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently 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 purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund. The aggregate distribution and service fees are currently 1.00% per year
of the average daily net assets attributable to Class C Shares of the Fund. The
aggregate distribution and service fees are 0.90% per year of the average daily
net assets attributable to Class C Shares of the Fund with respect to accounts
existing before April 1, 1995.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, including Class B Shares
received from reinvestment of distributions through the dividend reinvestment
plan, 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, including Class B Shares received from reinvestment of
distributions through the dividend reinvestment plan, 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, including Class
C Shares received from reinvestment of distributions through the dividend
reinvestment plan, 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 of the Fund acquired through the exchange privilege from
another Van Kampen fund participating in the exchange program is determined by
reference to the Van Kampen fund 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 capital gain dividends
constituting "preferential dividends" under the federal income tax law 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.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by the
Fund's involuntary liquidation of a shareholder's account as described under the
Prospectus heading "Redemption of Shares." Subject to certain limitations, a
shareholder who has redeemed Class C Shares of the Fund may reinvest in Class C
Shares at net asset value with credit for any contingent deferred sales charge
if the reinvestment is made within 180 days after the redemption. For a more
complete description of contingent deferred sales charge waivers, please refer
to the Fund's Statement of Additional Information or contact your authorized
dealer.
17
<PAGE> 69
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. 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 pay 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 Asset Management 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 Class A Shares 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.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
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 currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased and still owned. An investor may
elect to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
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 backdating provisions, an adjustment will be made at the time of
expiration of the Letter of Intent to give effect to the lower sales charge.
Such adjustment in sales charge will be used to purchase additional shares. The
Fund initially will escrow shares totaling 5% of the dollar amount of the Letter
of Intent to be held by Investor Services in the name of the shareholder. In the
event the Letter of Intent goal is not achieved within the specified period, the
investor must pay the difference between the sales charge applicable to the
purchases made and the reduced sales charges previously paid. Such payments may
be made directly to the Distributor or, if not paid, the Distributor will
liquidate sufficient escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program 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 PROGRAM. 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 per share 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 investment 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 terms and conditions that apply to the
18
<PAGE> 70
program, 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 investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
In order to obtain these special benefits, all dividends and other distributions
from the Fund must be reinvested in additional shares and there can not be 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 quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE 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 Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. 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.
(3) Directors, officers, employees and, when permitted, 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 12-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 details 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 distributions 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 Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by nonprofit 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 January 1, 2000, that (1) the
total plan assets are at least $1 million 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
19
<PAGE> 71
Fund or have received proposals from the Distributor prior to January 1,
2000 based on net asset value purchase privileges previously in effect will
be qualified to purchase shares of the Participating Funds at net asset
value. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves 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. For purchases on February 1, 1997 and
thereafter, a commission will be paid on purchases 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, plus 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
contingent deferred sales charge 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 and grandchildren under
21 years of age, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with 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 above
on purchases made under options (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.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the Prospectus heading "Purchase of Shares," redemptions of
Class B Shares and Class C Shares may be subject to a contingent deferred sales
charge. In addition, certain redemptions of Class A Shares for shareholder
accounts of $1 million or more may be subject to a contingent deferred sales
charge. Redemptions completed through an authorized dealer or a
custodian/trustee of a retirement plan account may involve additional fees
charged by the dealer or custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the redemption request and any other necessary
documents in proper form as described below. Such payment may be postponed or
the right of redemption suspended as provided by the rules of the SEC. Such
payment may, under certain circumstances, be paid wholly or in part by a
distribution-in-kind of portfolio securities. A distribution-in-kind will result
in recognition by the shareholder of a gain or loss for federal income tax
purposes when such securities are distributed, and the shareholder may have
brokerage costs and a gain or loss for federal income tax purposes upon a
shareholder's subsequent
20
<PAGE> 72
disposition of such securities. If the shares to be redeemed have been recently
purchased by check, Investor Services may delay the payment of redemption
proceeds until it confirms the purchase check has cleared, which may take up to
15 days. A taxable gain or loss may be recognized by the shareholder upon
redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares or dollar amount to be redeemed, the Fund
name and class designation of such shares and the shareholder's account number.
The redemption request 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 request to be in proper form.
In some cases, however, additional documents may be necessary. In the case of
shareholders holding certificates, the certificates for the shares being
redeemed must be properly endorsed for transfer and must accompany the
redemption request. In the event a redemption is requested by and registered to
a corporation, partnership, trust, fiduciary, estate or other legal entity
owning shares of the Fund, generally 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. Retirement plan
distribution requests should be sent to the custodian/ trustee to be forwarded
to Investor Services. Contact the custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form 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
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. 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. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the account application
form. For accounts that are not established with telephone redemption
privileges, a shareholder may call the Fund at (800) 341-2911 to request that a
copy of the Telephone Redemption Authorization form be sent to the shareholder
for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Shares may also be redeemed by phone through FundInfo(R)
(automated phone system), which is accessible 24 hours a day, seven days a week
at (800) 847-2424. Van Kampen Investments and its subsidiaries, including
Investor Services, 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, none of Van Kampen
Investments, Investor Services or the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. 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 other
redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for most
accounts other than retirement
21
<PAGE> 73
accounts or accounts with shares represented by certificates. If an account has
multiple owners, Investor Services may rely on the instructions of any one
owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a 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 provided to the
shareholder and such 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.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Dividends from stocks and interest earned from other investments are
the Fund's main sources of net investment income. The Fund's present policy,
which may be changed at any time by the Fund's Board of Trustees, is to
distribute net investment income quarterly as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
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 GAIN DIVIDENDS. 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 purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend.
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 by writing to Investor Services. The
investor may, on the account application or prior to any declaration, instruct
that dividends and/or capital gain dividends be paid in cash, be reinvested in
the Fund at the next determined net asset value, or be invested in another
Participating Fund at the next determined net asset value.
22
<PAGE> 74
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next computed net asset value per
share 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 a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from any authorized dealer or the Distributor.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold 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, by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated phone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
exchange privileges unless the shareholder indicates otherwise by checking the
applicable box on the account application form. Van Kampen Investments and its
subsidiaries, including Investor Services, 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,
none of Van Kampen Investments, Investor Services or the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine. If
the exchanging shareholder does not have an account in the fund whose shares are
being acquired, a new account will be established with the same registration,
dividend and capital gain dividend 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 submit a
specific request. The Fund reserves the right to reject any order to acquire its
shares through exchange. In addition, the Fund and other Participating Funds may
restrict exchanges by shareholders engaged in excessive trading by limiting or
disallowing the exchange privileges to such shareholders. For further
information on these restrictions, see the Fund's Statement of Additional
Information. 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.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
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<PAGE> 75
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
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.vankampen.com for further instruction. Van Kampen Investments and its
subsidiaries, including Investor Services, 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, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
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.
FEDERAL INCOME TAXATION
Distributions of the Fund's investment company taxable income (consisting
generally of taxable income and net short-term capital gain) are taxable to
shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gain (which is the excess of net long-term capital
gain over net short-term capital loss) as capital gain dividends, if any, are
taxable to shareholders as long-term capital gains, whether paid in cash or
reinvested in additional shares, and regardless of how long the shares of the
Fund have been held by such shareholders. The Fund expects that its
distributions will consist primarily of ordinary income and capital gain
dividends. 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). Although distributions generally are
treated as taxable in the year they are paid, distributions declared in October,
November or December, payable to shareholders of record on a specified date in
such month and paid during January of the following year will be treated as
having been distributed by the Fund and received by the shareholders on the
December 31st prior to the date of payment. The Fund will inform shareholders of
the source and tax status of all distributions promptly after the close of each
calendar year.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize a gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held as a capital
asset, the gain or loss will be a capital gain or loss. Any recognized capital
gains may be taxed at different rates depending on how long the shareholder held
such shares.
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.
Foreign shareholders, including shareholders who are nonresident aliens, may be
subject to U.S. withholding tax on certain distributions (whether received in
cash or in shares) at a rate of 30% or such lower rate as prescribed by an
applicable treaty. Accordingly, investment in the Fund is likely to be
appropriate for such shareholders only if they can utilize a foreign tax credit
on corresponding tax benefit in respect of such federal withholding taxes.
Prospective foreign investors should consult their tax advisers concerning the
tax consequences to them of an investment in shares.
24
<PAGE> 76
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income, the Fund
will not be required to pay federal income taxes on any income it distributes to
shareholders. If the Fund distributes less than an amount equal to the sum of
98% of its ordinary income and 98% of its capital gain net income, then the Fund
will be subject to a 4% excise tax on the undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own tax advisers 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.
25
<PAGE> 77
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report, along with the Fund's financial statements, is
included in the Statement of Additional Information and may be obtained by
shareholders without charge by calling the telephone number on the back cover 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,
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $14.835 $15.059 $15.054 $15.05 $13.24
------- ------- ------- ------ -------
Net Investment Income......... .447 .520 .600 .566 .68
Net Realized and Unrealized
Gain/Loss................... 6.687 .546 1.854 1.173 2.25
------- ------- ------- ------ -------
Total from Investment
Operations.................... 7.134 1.066 2.454 1.739 2.93
------- ------- ------- ------ -------
Less:
Distributions from and in
Excess of Net Investment
Income...................... .520 .537 .730 .555 .7025
Distributions from and in
Excess of Net Realized
Gain........................ 1.102 .753 1.719 1.180 .4175
------- ------- ------- ------ -------
Total Distributions............. 1.622 1.290 2.449 1.735 1.12
------- ------- ------- ------ -------
Net Asset Value, End of the
Period........................ $20.347 $14.835 $15.059 $15.054 $15.05
======= ======= ======= ====== =======
Total Return(a)................. 50.01% 7.52% 16.91% 12.08% 22.46%
Net Assets at End of the Period
(In millions)................. $516.1 $375.4 $376.4 $373.1 $394.5
Ratio of Expenses to Average Net
Assets........................ 1.00% 1.02% 1.04% 1.09% 1.00%
Ratio of Net Investment Income
to Average Net Assets......... 2.69% 3.48% 3.58% 3.60% 4.62%
Portfolio Turnover.............. 103% 156% 170% 129% 130%
<CAPTION>
Class B Shares
Year Ended December 31,
1999(b) 1998(b) 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $14.755 $14.981 $14.992 $14.99 $13.20
------- ------- ------- ------ -------
Net Investment Income......... .320 .397 .470 .437 .56
Net Realized and Unrealized
Gain/Loss................... 6.667 .547 1.848 1.180 2.23
------- ------- ------- ------ -------
Total from Investment
Operations.................... 6.987 .944 2.318 1.617 2.79
------- ------- ------- ------ -------
Less:
Distributions from and in
Excess of Net Investment
Income...................... .400 .417 .610 .435 .5825
Distributions from and in
Excess of Net Realized
Gain........................ 1.102 .753 1.719 1.180 .4175
------- ------- ------- ------ -------
Total Distributions............. 1.502 1.170 2.329 1.615 1.00
------- ------- ------- ------ -------
Net Asset Value, End of the
Period........................ $20.240 $14.755 $14.981 $14.992 $14.99
======= ======= ======= ====== =======
Total Return(a)................. 49.02% 6.70% 15.98% 11.19% 21.46%
Net Assets at End of the Period
(In millions)................. $62.5 $66.7 $81.3 $78.9 $78.1
Ratio of Expenses to Average Net
Assets........................ 1.77% 1.81% 1.82% 1.88% 1.81%
Ratio of Net Investment Income
to Average Net Assets......... 1.97% 2.66% 2.80% 2.81% 3.81%
Portfolio Turnover.............. 103% 156% 170% 129% 130%
<CAPTION>
Class C Shares
Year Ended December 31,
1999(b) 1998(b) 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................... $14.855 $15.080 $15.079 $15.07 $13.25
------- ------- ------- ------ -------
Net Investment Income......... .316 .405 .448 .439 .56
Net Realized and Unrealized
Gain/Loss................... 6.707 .540 1.882 1.185 2.26
------- ------- ------- ------ -------
Total from Investment
Operations.................... 7.023 .945 2.330 1.624 2.82
------- ------- ------- ------ -------
Less:
Distributions from and in
Excess of Net Investment
Income...................... .400 .417 .610 .435 .5825
Distributions from and in
Excess of Net Realized
Gain........................ 1.102 .753 1.719 1.180 .4175
------- ------- ------- ------ -------
Total Distributions............. 1.502 1.170 2.329 1.615 1.00
------- ------- ------- ------ -------
Net Asset Value, End of the
Period........................ $20.376 $14.855 $15.080 $15.079 $15.07
======= ======= ======= ====== =======
Total Return(a)................. 48.95% 6.65% 15.96% 11.20% 21.52%
Net Assets at End of the Period
(In millions)................. $9.0 $5.9 $4.6 $3.6 $3.6
Ratio of Expenses to Average Net
Assets........................ 1.76% 1.81% 1.82% 1.88% 1.80%
Ratio of Net Investment Income
to Average Net Assets......... 1.91% 2.71% 2.79% 2.81% 3.80%
Portfolio Turnover.............. 103% 156% 170% 129% 130%
</TABLE>
(a) Total Return is based upon Net Asset Value which does not include payments
of maximum sales change or contingent deferred sales change.
(b) Based on average shares outstanding.
26
<PAGE> 78
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P corporate or municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial 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 obligor or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation:
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
1. LONG-TERM DEBT
Investment Grade
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
Speculative Grade
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 79
C: Debt rated "C" is currently highly vulnerable to nonpayment. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed or
similar action has been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The "D" rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of non credit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
2. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation 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 due date, even if
the applicable grace period has not expired, unless S&P believes 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 from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
1. LONG-TERM DEBT
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A- 2
<PAGE> 80
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that 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, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date date to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
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.
A- 3
<PAGE> 81
- -- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- -- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa: An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated "a" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
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 thus be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
4. COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's makes no representation that such obligations are exempt
from registration under the Securities Act of 1933, nor does it represent that
any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law.
A- 4
<PAGE> 82
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (on supporting institutions) have a superior ability for
repayment of 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 ranges of financial markets and assured sources
of alternative liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supported institutions) have an acceptable ability for
repayment of short-term debt obligations. The effect of industry characteristics
and market compositions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection measurements
and may require relatively high financial leverage. Adequate alternate liquidity
is maintained.
Issuers rated Not Prime do not fall within any of the prime rating categories.
A- 5
<PAGE> 83
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*, Chairman
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Stephen L. Boyd*
Executive Vice President & Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
John H. Zimmermann, III*
Vice President
Michael H. Santo*
Vice President
Peter W. Hegel*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer and Treasurer
* "Interested persons" of the Fund, as defined in the Investment Company Act of
1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN HARBOR FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN ASSET MANAGEMENT INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Harbor Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO 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
<PAGE> 84
VAN KAMPEN
HARBOR FUND
PROSPECTUS
APRIL 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet web site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]), or by writing
the Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-734.
HAR PRO 4/00
<PAGE> 85
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION
IS NOT COMPLETE AND MAY BE CHANGED. THE VAN KAMPEN HARBOR
FUND MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES. THIS STATEMENT OF
ADDITIONAL INFORMATION IS NOT A PROSPECTUS.
SUBJECT TO COMPLETION -- DATED MAY 19, 2000
VAN KAMPEN HARBOR FUND
1 PARKVIEW PLAZA
PO BOX 5555
OAKBROOK TERRACE, ILLINOIS 60181-5555
(630) 684-6000
---------------------
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN HARBOR FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN CONVERTIBLE SECURITIES FUND
DATED JUNE , 2000
---------------------
This Statement of Additional Information provides information about the Van
Kampen Harbor Fund (the "Harbor Fund"), an open-end management investment
company organized as a Delaware business trust, in addition to information
contained in the Prospectus/Proxy Statement of the Harbor Fund, dated June ,
2000, which also serves as the proxy statement of the Van Kampen Convertible
Securities Fund (the "Convertible Securities Fund"), a closed-end management
investment company organized as a Delaware business trust, in connection with
the issuance of Class A Shares of beneficial interest of the Harbor Fund to
shareholders of the Convertible Securities Fund. This Statement of Additional
Information is not a prospectus. It should be read in conjunction with the
Prospectus/Proxy Statement, into which it has been incorporated by reference and
which may be obtained by contacting the Harbor Fund or Convertible Securities
Fund located at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois
60181-5555 (telephone no. (630) 684-6000 or (800) 421-5666).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the Convertible Securities
Fund...................................................... 2
Additional Information About the Harbor Fund................ 2
Additional Information About the Convertible Securities
Fund...................................................... 2
Financial Statements........................................ 4
Pro Forma Financial Statements.............................. 4
</TABLE>
The Harbor Fund will provide, without charge, upon the written or oral
request of any person to whom this Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Statement of Additional
Information is a part.
1
<PAGE> 86
PROPOSED REORGANIZATION OF THE CONVERTIBLE SECURITIES FUND
The shareholders of the Convertible Securities Fund are being asked to
approve an acquisition of all the assets of the Convertible Securities Fund
solely in exchange for Class A Shares of the Harbor Fund and the Harbor Fund's
assumption of the liabilities of the Convertible Securities Fund (the
"Reorganization") pursuant to an Agreement and Plan of Reorganization by and
between the Harbor Fund and the Convertible Securities Fund (the "Agreement"). A
copy of the form of the Agreement is attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE HARBOR FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Harbor Fund, dated April 28, 2000, attached as
Appendix B to this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT THE CONVERTIBLE SECURITIES FUND
The following restrictions are fundamental policies of the Convertible
Securities Fund and cannot be changed without the approval of the holders of the
majority of the Convertible Securities Fund's outstanding voting securities
which means the vote of (i) 67% or more of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares, whichever is less. The Convertible
Securities Fund may not:
(1) Purchase or sell real estate or interests therein, provided that
this will not preclude the sale or purchase of (a) marketable securities
which are secured by real estate and (b) marketable securities of companies
which invest or deal in real estate, including real estate investment
trusts.
(2) Purchase or sell commodities or commodity contracts.
(3) [Reserved]
(4) Act as an underwriter except to the extent that, in connection
with the disposition of portfolio securities, the Fund may be deemed to be
an underwriter under certain Federal securities laws.
(5) Concentrate its investments in a particular industry; the Fund
will invest no more than 25% of the market or other fair value of its
assets in the securities of issuers, all of which conduct their principal
business activities in the same industry.
(6) Purchase or hold the securities of any issuer if, to its
knowledge, one or more officers or trustees of the Fund or the Adviser
individually own beneficially more than 0.5% and together own beneficially
more than 5% of the securities of such other issuer.
(7) Invest in companies for the purpose of exercising control or
management.
(8) The Fund may not make loans to other persons (a) except loans up
to 10% of the value of the Fund's assets, collateralized at 100% each
business day, subject to immediate termination if collateral is not
maintained or on five business days' notice, on which the Fund will receive
all income accruing on the borrowed securities during the loan and will pay
no fees except to its custodian; and (b) except to the extent that up to
10% of the value of the Fund's total assets may be invested in private
placements. The purchase of publicly distributed bonds, notes, debentures
or other obligations normally acquired by institutions shall not be
considered the making of a loan
2
<PAGE> 87
(9) Invest in puts, calls, or combinations of both, provided that this
shall not preclude the purchase and sale in accordance with the investment
objective and policies of warrants, rights and securities convertible into
or exchangeable for other securities.
(10) [Reserved]
(11) Purchase securities on margin except that the Fund may purchase
or sell financial futures contracts and related options.
(12) Invest in securities of another investment company.
(13) Purchase the securities of any issuer, if immediately thereafter
the Fund shall
(a) have more than 5% of the market or other fair value of its
total assets (excluding securities of the United States Government or
any instrumentality thereof) invested in the securities of such issuer
or
(b) own more than 10% of the outstanding voting securities of such
issuer.
(14) Issue senior securities except as provided in (15) below.
(15) Borrow amounts which exceed 25% of the market or other fair value
of its total assets, computed prior to the borrowing. Because of market
fluctuations or other reasons, such percentage limitations may be
temporarily exceeded. This right to borrow is limited by the Investment
Company Act so that the Fund's assets, including the borrowed money, less
its liabilities (other than bank borrowings), must equal at least three
times all money borrowed.
(16) The Fund may not pledge its assets except that, subject to
applicable limitations under Federal Reserve Board rules, the Fund may
pledge up to 15% of the market or other fair value of its total assets to
secure borrowings effected within the limitations set forth in (15) above
and for temporary or emergency purposes, which do not exceed 5% of the
market or other fair value of the total assets of the Fund. This limitation
does not apply to short sales collateralized by securities as permitted
under Restriction 17.
(17) Make short sales of securities or maintain a short position in
securities unless at all times when a short position is open, it owns at
least an equal amount of such securities, or owns securities convertible
into or exchangeable for at least an equal amount of such securities
without payment of additional consideration. The Fund may not purchase
securities on margin, but it may obtain such short-term credits as may be
necessary for clearance of transactions and it may make margin deposits in
connection with transactions in options, futures and related options. The
deposit or payment by the Fund of initial or maintenance margin in
connection with options, futures contracts or related options is not
considered the purchase of a security on margin. Collateral arrangements
with respect to margin for futures contracts and options are not deemed to
be pledges or other encumbrances for the purposes of these restrictions.
(18) The Fund may invest in an amount not to exceed 15% of the total
asset value of the Fund's portfolio at the time of purchase in securities
of foreign governments and companies so long as such securities are listed
on a domestic stock exchange, are represented by American Depository
Receipts, or are convertible into or exchangeable for securities which are
listed on a domestic securities exchange.
(19) Invest in oil, gas or other mineral development programs.
(20) Purchase warrants to acquire other securities unless immediately
after such purchase not more than 5% (of which no more than 2% may be
warrants not listed on the New York or American Stock
3
<PAGE> 88
Exchanges) of the Fund's net assets taken at market or other fair value
would be invested in such warrants (valued at market). Warrants purchased
as part of an investment unit or package (even after the break up of such
unit or package by the Fund) shall be deemed of no value and therefore not
limited by the above. This restriction does not apply to options, futures
contracts and related options.
Incorporated herein by reference in its entirety is the Annual Report of
the Convertible Securities Fund, for the fiscal year ended December 31, 1999,
attached as Appendix C to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the Harbor Fund for the fiscal year ended
December 31, 1999, as included in Appendix B hereto, (ii) the audited financial
statements of the Convertible Securities Fund for fiscal year ended December 31,
1999, as included in Appendix C hereto.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix D hereto are unaudited pro forma financial statements
of the Harbor Fund giving effect to the Reorganization which include: (i) Pro
Forma Condensed Statements of Assets and Liabilities at December 31, 1999, (ii)
Pro Forma Condensed Statement of Operations for the one year period ended
December 31, 1999 and (iii) Pro Forma Portfolio of Investments at December 31,
1999.
4
<PAGE> 89
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 90
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
________________, by and between Van Kampen Harbor Fund (the "Harbor Fund"), a
registered investment company, SEC File No. 811-734, and Van Kampen Convertible
Securities Fund (the "Convertible Securities Fund"), a registered investment
company, SEC File No. 811-2282.
WITNESSETH:
WHEREAS, the Board of Trustees of the Harbor Fund (the "Harbor Fund Board") and
the Board of Trustees of the Convertible Securities Fund (the "Convertible
Securities Fund Board") have determined that entering into this Agreement for
the Harbor Fund to acquire the assets and liabilities of the Convertible
Securities Fund is in the best interests of the shareholders of each respective
fund; and
WHEREAS, the parties intend that this transaction qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent
set forth in Sections 7 and 8 hereof, the Convertible Securities Fund will
convey, transfer and deliver to the Harbor Fund at the Closing, provided for in
Section 2 hereof, all of the existing assets of the Convertible Securities Fund
(including accrued interest to the Closing Date) to the Harbor Fund as more
fully set forth on Schedule 1 hereto, and as amended from time to time prior to
the Closing Date (as defined below), free and clear of all liens, encumbrances
and claims whatsoever (the assets so transferred collectively being referred to
as the "Assets").
B. CONSIDERATION. In consideration thereof, the Harbor Fund agrees that
on the Closing Date the Harbor Fund will (i) deliver to the Convertible
Securities Fund, full and fractional Class A Shares of beneficial interest, par
value $0.01 per share, of the Harbor Fund having aggregate net asset values in
an amount equal to the aggregate dollar value of the Assets net of any
liabilities of the Convertible Securities Fund described in Section 3E hereof
(the
1
<PAGE> 91
"Liabilities") determined pursuant to Section 3A of this Agreement
(collectively, the "Harbor Fund Shares") and (ii) assume all of the Convertible
Securities Fund's Liabilities. The calculation of full and fractional Class A
Shares of the Harbor Fund to be exchanged shall be carried out to no less than
two (2) decimal places. All Harbor Fund Shares delivered to the Convertible
Securities Fund in exchange for such Assets shall be delivered at net asset
value without sales load, commission or other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the Convertible Securities Fund at
which this Agreement will be considered and approved or such later date as soon
as practicable thereafter, as the parties may mutually agree (the "Closing
Date"). On the Closing Date, the Harbor Fund shall deliver to the Convertible
Securities Fund the Harbor Fund Shares in the amount determined pursuant to
Section 1B hereof and the Convertible Securities Fund thereafter shall, in order
to effect the distribution of such shares to the Convertible Securities Fund
shareholders, instruct the Harbor Fund to register the pro rata interest in the
Harbor Fund Shares (in full and fractional shares) of each of the holders of
record of shares of the Convertible Securities Fund in accordance with their
holdings and shall provide as part of such instruction a complete and updated
list of such holders (including addresses and taxpayer identification numbers),
and the Harbor Fund agrees promptly to comply with said instruction. The Harbor
Fund shall have no obligation to inquire as to the validity, propriety or
correctness of such instruction, but shall assume that such instruction is
valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the
Convertible Securities Fund to be transferred and assumed, respectively, by the
Harbor Fund shall be computed as of the Closing Date, in the manner set forth in
the most recent Prospectus and Statement of Additional Information of the Harbor
Fund (collectively, the "Harbor Fund Prospectus"), copies of which have been
delivered to the Convertible Securities Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State
Street Bank and Trust Company or other custodian as designated by the Harbor
Fund (collectively the "Custodian") for the benefit of the Harbor
2
<PAGE> 92
Fund, duly endorsed in proper form for transfer in such condition as to
constitute a good delivery thereof, free and clear of all liens, encumbrances
and claims whatsoever, in accordance with the custom of brokers, and shall be
accompanied by all necessary state stock transfer stamps, the cost of which
shall be borne by the Van Kampen Asset Management Inc. (the "Adviser").
C. FAILURE TO DELIVER SECURITIES. If the Convertible Securities Fund is
unable to make delivery pursuant to Section 3B hereof to the Custodian of any of
the Convertible Securities Fund's securities for the reason that any of such
securities purchased by the Harbor Fund have not yet been delivered to it by the
Convertible Securities Fund's broker or brokers, then, in lieu of such delivery,
the Convertible Securities Fund shall deliver to the Custodian, with respect to
said securities, executed copies of an agreement of assignment and due bills
executed on behalf of said broker or brokers, together with such other documents
as may be required by the Harbor Fund or Custodian, including brokers'
confirmation slips.
D. SHAREHOLDER ACCOUNTS. The Harbor Fund, in order to assist the
Convertible Securities Fund in the distribution of the Harbor Fund Shares to the
Convertible Securities Fund shareholders after delivery of the Harbor Fund
Shares to the Convertible Securities Fund, will establish pursuant to the
request of the Convertible Securities Fund an open account with the Harbor Fund
for each shareholder of the Convertible Securities Fund and, upon request by the
Convertible Securities Fund, shall transfer to such accounts, the exact number
of full and fractional Class A Shares of the Harbor Fund then held by the
Convertible Securities Fund specified in the instruction provided pursuant to
Section 2 hereof. The Harbor Fund is not required to issue certificates
representing Harbor Fund Shares unless requested to do so by a shareholder. Upon
liquidation or dissolution of the Convertible Securities Fund, certificates
representing shares of beneficial interest of the Convertible Securities Fund
shall become null and void.
E. LIABILITIES. The Liabilities shall include all of Convertible
Securities Fund's liabilities, debts, obligations, and duties of whatever kind
or nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Closing Date, and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated, the Convertible Securities Fund agrees to pay (i) for the
reasonable outside expenses for the transactions contemplated herein; including,
but not by way of limitation, the preparation of the Harbor Fund's Registration
Statement on Form N-14 (the "Registration Statement") and the solicitation
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of the Convertible Securities Fund shareholder proxies; (ii) the Convertible
Securities Fund counsel's reasonable attorney's fees; and (iii) the cost of
rendering the tax opinion, more fully referenced in Section 7F below. In the
event that the transactions contemplated herein are not consummated for any
reason, then all reasonable outside expenses incurred to the date of termination
of this Agreement shall be borne by the Van Kampen Investments Inc.
G. DISSOLUTION. As soon as practicable after the Closing Date but in no
event later than one year after the Closing Date, the Convertible Securities
Fund shall voluntarily dissolve and completely liquidate by taking, in
accordance with the Delaware Business Trust Law and Federal securities laws, all
steps as shall be necessary and proper to effect a complete liquidation and
dissolution of the Convertible Securities Fund. Immediately after the Closing
Date, the share transfer books relating to the Convertible Securities Fund shall
be closed and no transfer of shares shall thereafter be made on such books.
4. CONVERTIBLE SECURITIES FUND'S REPRESENTATIONS AND WARRANTIES.
The Convertible Securities Fund hereby represents and warrants to the
Harbor Fund, which representations and warranties are true and correct on the
date hereof, and agrees with the Harbor Fund that:
A. ORGANIZATION. The Convertible Securities Fund is duly formed and in
good standing under the laws of the state of its organization and is duly
authorized to transact business in the state of its organization. The
Convertible Securities Fund is qualified to do business in all jurisdictions in
which they are required to be so qualified, except jurisdictions in which the
failure to so qualify would not have a material adverse effect on the
Convertible Securities Fund. The Convertible Securities Fund has all material
federal, state and local authorizations necessary to own all of the properties
and assets and to carry on its business as now being conducted, except
authorizations which the failure to so obtain would not have a material adverse
effect on the Convertible Securities Fund.
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B. REGISTRATION. The Convertible Securities Fund is registered under
the Investment Company Act of 1940, as amended (the "1940 Act") as a closed-end,
management investment company and such registration has not been revoked or
rescinded. The Convertible Securities Fund is in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder with respect
to its activities. All of the outstanding shares of beneficial interest of the
Convertible Securities Fund have been duly authorized and are validly issued,
fully paid and nonassessable and not subject to pre-emptive or dissenters'
rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the Convertible Securities Fund audited
as of and for the year ended December 31, 1999, true and complete copies of
which have been heretofore furnished to the Harbor Fund, fairly represent the
financial condition and the results of operations of the Convertible Securities
Fund as of and for their respective dates and periods in conformity with
generally accepted accounting principles applied on a consistent basis during
the periods involved.
D. FINANCIAL STATEMENTS. The Convertible Securities Fund shall furnish
to the Harbor Fund within five (5) business days after the Closing Date, an
unaudited statement of assets and liabilities and the portfolio of investments
and the related statements of operations and changes in net assets as of and for
the interim period ending on the Closing Date; such financial statements will
represent fairly the financial position and portfolio of investments and the
results of the Convertible Securities Fund's operations as of, and for the
period ending on, the dates of such statements in conformity with generally
accepted accounting principles applied on a consistent basis during the periods
involved and the results of its operations and changes in financial position for
the period then ended; and such financial statements shall be certified by the
Treasurer of the Convertible Securities Fund as complying with the requirements
hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will
be, no contingent Liabilities of the Convertible Securities Fund not disclosed
in the financial statements delivered pursuant to Sections 4C and 4D which would
materially affect the Convertible Securities Fund's financial condition, and
there are no legal, administrative, or other proceedings pending or, to its
knowledge, threatened against the Convertible Securities Fund which would, if
adversely determined, materially affect the Convertible Securities Fund's
financial condition. All Liabilities were incurred by the Convertible Securities
Fund in the ordinary course of its business.
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F. MATERIAL AGREEMENTS. The Convertible Securities Fund is in
compliance with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting its operations or its assets; and except as
referred to in the Convertible Securities Fund's Prospectus, there are no
material agreements outstanding relating to the Convertible Securities Fund to
which the Convertible Securities Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case
no later than 30 calendar days after the Closing Date, the Convertible
Securities Fund shall furnish the Harbor Fund with a statement of the earnings
and profits of the Convertible Securities Fund within the meaning of the Code as
of the Closing Date.
H. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the Convertible Securities Fund
required by law to have been filed by such dates shall have been filed, and all
Federal and other taxes shown thereon shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of the
Convertible Securities Fund's knowledge no such return is currently under audit
and no assessment has been asserted with respect to any such return.
I. CORPORATE AUTHORITY. The Convertible Securities Fund has the
necessary power to enter into this Agreement and to consummate the transactions
contemplated herein. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by the Convertible Securities Fund Board, and except for obtaining
approval of the holders of the shares of the Convertible Securities Fund, no
other corporate acts or proceedings by the Convertible Securities Fund are
necessary to authorize this Agreement and the transactions contemplated herein.
This Agreement has been duly executed and delivered by the Convertible
Securities Fund and constitutes the legal, valid and binding obligation of the
Convertible Securities Fund enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or similar law affecting creditors' rights
generally, or by general principals of equity (regardless of whether enforcement
is sought in a proceeding at equity or law).
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J. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Convertible Securities Fund does not and
will not (i) violate any provision of the Convertible Securities Fund's
organizational documents, (ii) violate any statute, law,
judgment, writ, decree, order, regulation or rule of any court or governmental
authority applicable to the Convertible Securities Fund, (iii) result in a
violation or breach of, or constitute a default under any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
obligation to which the Convertible Securities Fund is subject, or (iv) result
in the creation or imposition or any lien, charge or encumbrance upon any
property or assets of the Convertible Securities Fund. Except as set forth in
Schedule 2 to this Agreement, (i) no consent, approval, authorization, order or
filing with or notice to any court or governmental authority or agency is
required for the consummation by the Convertible Securities Fund of the
transactions contemplated by this Agreement and (ii) no consent of or notice to
any third party or entity is required for the consummation by the Convertible
Securities Fund of the transactions contemplated by this Agreement.
K. ABSENCE OF CHANGES. From the date of this Agreement through the
Closing Date, there shall not have been:
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the Convertible
Securities Fund, other than changes in the ordinary course of its business, or
any pending or threatened litigation, which has had or may have a material
adverse effect on such business, results of operations, assets or financial
condition;
(2) issued any option to purchase or other right to acquire shares of
the Convertible Securities Fund granted by the Convertible Securities Fund to
any person other than subscriptions to purchase shares at net asset value in
accordance with terms in the Prospectus for the Convertible Securities Fund;
(3) any entering into, amendment or termination of any contract or
agreement by the Convertible Securities Fund, except as otherwise contemplated
by this Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the Convertible Securities Fund for borrowed money or any
commitment to borrow money entered into by the Convertible Securities Fund;
(5) any amendment of the Convertible Securities Fund's
organizational documents; or
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<PAGE> 97
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with respect
to covered options) upon any asset of the Convertible Securities Fund other than
a lien for taxes not yet due and payable.
L. TITLE. On the Closing Date, the Convertible Securities Fund will
have good and marketable title to the Assets, free and clear of all liens,
mortgages, pledges, encumbrances, charges, claims and equities whatsoever, other
than a lien for taxes not yet due and payable, and full right, power and
authority to sell, assign, transfer and deliver such Assets; upon delivery of
such Assets, the Harbor Fund will receive good and marketable title to such
Assets, free and clear of all liens, mortgages, pledges, encumbrances, charges,
claims and equities other than a lien for taxes not yet due and payable.
M. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if it shall have been amended or
supplemented, conform and will conform as it relates to the Convertible
Securities Fund, in all material respects, to the applicable requirements of the
applicable Federal and state securities laws and the rules and regulations of
the SEC thereunder, and do not and will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, except that no representations or
warranties in this Section 4N apply to statements or omissions made in reliance
upon and in conformity with written information concerning the Harbor Fund
furnished to the Convertible Securities Fund by the Harbor Fund.
N. TAX QUALIFICATION. The Convertible Securities Fund has qualified as
a regulated investment company within the meaning of Section 851 of the Code for
each of its taxable years; and has satisfied the distribution requirements
imposed by Section 852 of the Code for each of its taxable years.
O. FAIR MARKET VALUE. The fair market value on a going concern basis of
the Assets will equal or exceed the Liabilities to be assumed by the Harbor Fund
and those to which the Assets are subject.
P. CONVERTIBLE SECURITIES FUND LIABILITIES. Except as otherwise
provided for herein, the Convertible Securities Fund shall use reasonable
efforts, consistent with its ordinary operating procedures, to repay in full any
indebtedness for borrowed money and have discharged or reserved against all of
the Convertible Securities Fund's known debts, liabilities and obligations
including expenses, costs and charges whether absolute or contingent, accrued or
unaccrued.
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5. THE HARBOR FUND'S REPRESENTATIONS AND WARRANTIES.
The Harbor Fund hereby represents and warrants to the Convertible Securities
Fund, which representations and warranties are true and correct on
the date hereof, and agrees with the Convertible Securities Fund that:
A. ORGANIZATION. The Harbor Fund is duly formed and in good standing
under the laws of the state of its organization and is duly authorized to
transact business in the state of its organization. The Harbor Fund is qualified
to do business in all jurisdictions in which it is required to be so qualified,
except jurisdictions in which the failure to so qualify would not have a
material adverse effect on the Harbor Fund. The Harbor Fund has all material
federal, state and local authorizations necessary to own all of the properties
and assets and to carry on its business and the business thereof as now being
conducted, except authorizations which the failure to so obtain would not have a
material adverse effect on the Harbor Fund.
B. REGISTRATION. The Harbor Fund is registered under the 1940 Act as an
open-end, management investment company and such registration has not been
revoked or rescinded. The Harbor Fund is in compliance in all material respects
with the 1940 Act and the rules and regulations thereunder. All of the
outstanding shares of beneficial interest, par value $0.01 per share, of the
Harbor Fund have been duly authorized and are validly issued, fully paid and
non-assessable and not subject to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the Harbor Fund audited as of and for
the year ended December 31, 1999, true and complete copies of which have been
heretofore furnished to the Convertible Securities Fund, fairly represent the
financial condition and the results of operations of the Harbor Fund as of and
for their respective dates and periods in conformity with generally accepted
accounting principles applied on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The Harbor Fund shall furnish to the
Convertible Securities Fund within five (5) business days after the Closing
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Date, an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
as of and for the interim period ending on the Closing Date; such financial
statements will represent fairly the financial position and portfolio of
investments and the results of its operations as of, and for the period ending
on, the dates of such statements in conformity with generally accepted
accounting principles applied on a consistent basis during the period involved
and the results of its operations and changes in financial position for the
periods then ended; and such financial statements shall be certified by the
Treasurer of the Harbor Fund as complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
Harbor Fund not disclosed in the financial statements delivered pursuant to
Sections 5C and 5D which would materially affect the Harbor Fund's financial
condition, and there are no legal, administrative, or other proceedings pending
or, to its knowledge, threatened against the Harbor Fund which would, if
adversely determined, materially affect the Harbor Fund's financial condition.
F. MATERIAL AGREEMENTS. The Harbor Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and except as referred to in the
Harbor Fund Prospectus and Statement of Additional Information there are no
material agreements outstanding to which the Harbor Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all Federal
and other material tax returns and reports of the Harbor Fund required by law to
have been filed by such dates shall have been filed, and all Federal and other
taxes shall have been paid so far as due, or provision shall have been made for
the payment thereof, and to the best of the Harbor Fund's knowledge no such
return is currently under audit and no assessment has been asserted with respect
to any such return.
H. CORPORATE AUTHORITY. The Harbor Fund has the necessary power to
enter into this Agreement and to consummate the transactions contemplated
herein. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein have been duly authorized
by the Harbor Fund Board, no other corporate acts or proceedings by the Harbor
Fund are necessary to authorize this Agreement and the transactions contemplated
herein. This Agreement has been duly executed and delivered by the Harbor Fund
and constitutes a valid and binding obligation of the Harbor Fund enforceable in
accordance with its terms, except as such enforceability
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may be limited by bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or similar law affecting creditors' rights generally, or by general
principals of equity (regardless of whether enforcement is sought in a
proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Harbor Fund does not and will not (i)
result in a material violation of any provision of the Harbor Fund's
organizational documents, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Harbor Fund or (iii) result in a material violation or breach of, or
constitute a default under, any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument or obligation to which the Harbor
Fund is subject, or (iv) result in the creation or imposition or any lien,
charge or encumbrance upon any property or assets of the Harbor Fund. Except as
set forth in Schedule 3 to this Agreement, (i) no consent, approval,
authorization, order or filing with notice to any court or governmental
authority or agency is required for the consummation by the Harbor Fund of the
transactions contemplated by this Agreement and (ii) no consent of or notice to
any third party or entity is required for the consummation by the Harbor Fund of
the transactions contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Harbor Fund
which would materially affect its financial condition.
K. SHARES OF THE HARBOR FUND: REGISTRATION. The Harbor Fund Shares to
be issued pursuant to Section 1 hereof will be duly registered under the
Securities Act and all applicable state securities laws.
L. SHARES OF THE HARBOR FUND: AUTHORIZATION. The shares of beneficial
interest of the Harbor Fund to be issued pursuant to Section 1 hereof have been
duly authorized and, when issued in accordance with this Agreement, will be
validly issued and fully paid and non-assessable by the Harbor Fund and conform
in all material respects to the description thereof contained in the Harbor
Fund's Prospectus furnished to the Convertible Securities Fund.
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M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the
Harbor Fund, other than changes in the ordinary course of its business, which
has had a material adverse effect on such business, results of operations,
assets or financial condition.
N. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if they shall have been amended
or supplemented, conforms and will conform, as it relates to the Harbor Fund, in
all material respects, to the applicable requirements of the applicable Federal
securities laws and the rules and regulations of the SEC thereunder, and do not
and will not include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 5N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the Convertible Securities Fund furnished to the
Harbor Fund by the Convertible Securities Fund.
O. TAX QUALIFICATION. The Harbor Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years; and has satisfied the distribution requirements imposed by
Section 852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date the Convertible Securities Fund and Harbor Fund each agrees that
(except as expressly contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Convertible Securities Fund and Harbor Fund shall
operate only in the ordinary course of business consistent with prior practice.
No party shall take any action that would, or reasonably would be expected to,
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The Convertible Securities Fund and
Harbor Fund shall file all reports required to be filed by the Convertible
Securities Fund and Harbor Fund with the SEC between the date of this Agreement
and the Closing Date and shall deliver to the other party copies of all such
reports promptly after the same are filed. Except where
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prohibited by applicable statutes and regulations, each party shall promptly
provide the other (or its counsel) with copies of all other filings made by such
party with any state, local or federal government agency or entity in connection
with this Agreement or the transactions contemplated hereby. Each of the
Convertible Securities Fund and the Harbor Fund shall use all reasonable efforts
to obtain all consents, approvals and authorizations required in connection with
the consummation of the transactions contemplated by this Agreement and to make
all necessary filings with the appropriate Secretary of State.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other and
furnish to the other the information relating to the Convertible Securities Fund
or Harbor Fund, as the case may be, required by the Securities Act or the
Exchange Act and the rules and regulations thereunder, as the case may be, to be
set forth in the Registration Statement or the Prospectus/Proxy Statement, as
the case may be. The Convertible Securities Fund shall promptly prepare for
filing with the SEC the Prospectus/Proxy Statement and the Harbor Fund shall
promptly prepare and file with the SEC the Registration Statement, in which the
Prospectus/Proxy Statement will be included as a prospectus. In connection with
the Registration Statement, insofar as it relates to the Convertible Securities
Fund and its affiliated persons, the Harbor Fund shall only include such
information as is approved by the Convertible Securities Fund for use in the
Registration Statement. The Harbor Fund shall not amend or supplement any such
information regarding the Convertible Securities Fund and such affiliates
without the prior written consent of the Convertible Securities Fund which
consent shall not unreasonably withheld or delayed. The Harbor Fund shall
promptly notify and provide the Convertible Securities Fund with copies of all
amendments or supplements filed with respect to the Registration Statement. The
Harbor Fund shall use all reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing. The Harbor Fund shall also take any action (other than qualifying
to do business in any jurisdiction in which it is now not so qualified) required
to be taken under any applicable state securities laws in connection with the
issuance of the Harbor Fund's shares of beneficial interest in the transactions
contemplated by this Agreement, and the Convertible Securities Fund shall
furnish all information concerning the Convertible Securities Fund and the
holders of the Convertible Securities Fund's shares of beneficial interest as
may be reasonably requested in connection with any such action.
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D. ACCESS TO INFORMATION. During the period prior to the Closing Date,
the Convertible Securities Fund shall make available to the Harbor Fund a copy
of each report, schedule, registration statement and other document (the
"Documents") filed or received by it during such period pursuant to the
requirements of Federal or state securities laws or Federal or state banking
laws (other than Documents which such party is not permitted to disclose under
applicable law). During the period prior to the Closing Date, the Harbor Fund
shall make available to the Convertible Securities Fund each Document pertaining
to the transactions contemplated hereby filed or received by it during such
period pursuant to Federal or state securities laws or Federal or state banking
laws (other than Documents which such party is not permitted to disclose under
applicable law).
E. SHAREHOLDERS MEETING. The Convertible Securities Fund shall call a
meeting of the Convertible Securities Fund shareholders to be held as promptly
as practicable for the purpose of voting upon the approval of this Agreement and
the transactions contemplated herein, and shall furnish a copy of the
Prospectus/Proxy Statement and form of proxy to each shareholder of the
Convertible Securities Fund as of the record date for such meeting of
shareholders. The Board shall recommend to the Convertible Securities Fund
shareholders approval of this Agreement and the transactions contemplated
herein, subject to fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Convertible Securities Fund and
Harbor Fund covenant and agree to coordinate the respective portfolios of the
Convertible Securities Fund and Harbor Fund from the date of the Agreement up to
and including the Closing Date in order that at Closing, when the Assets are
added to the Harbor Fund's portfolio, the resulting portfolio will meet the
Harbor Fund's investment objective, policies and restrictions, as set forth in
the Harbor Fund's Prospectus, a copy of which has been delivered to the
Convertible Securities Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the Convertible Securities
Fund covenants that it shall cause to be distributed the Harbor Fund Shares in
the proper pro rata amount for the benefit of Convertible Securities Fund's
shareholders and such that the Convertible Securities Fund shall not continue to
hold amounts of said shares so as to cause a violation of Section 12(d)(1) of
the 1940 Act. The Convertible Securities Fund covenants further that, pursuant
to Section 3G, it shall liquidate and dissolve as promptly as practicable after
the Closing Date. The Convertible Securities Fund covenants to use all
reasonable efforts to cooperate with the Harbor Fund and the Harbor Fund's
transfer agent in the distribution of said shares.
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H. BROKERS OR FINDERS. Except as disclosed in writing to the other
party prior to the date hereof, each of the Convertible Securities Fund and the
Harbor Fund represents that no agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, and each party shall hold the
other harmless from and against any and all claims, liabilities or obligations
with respect to any such fees, commissions or expenses asserted by any person to
be due or payable in connection with any of the transactions contemplated by
this Agreement on the basis of any act or statement alleged to have been made by
such first party or its affiliate.
L. ADDITIONAL AGREEMENT. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement the proper officers and trustees of each party to this Agreement
shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Convertible Securities Fund and the Harbor
Fund will consult with each other before issuing any press releases or otherwise
making any public statements with respect to this Agreement or the transactions
contemplated herein and shall not issue any press release or make any public
statement prior to such consultation, except as may be required by law or the
rules of any national securities exchange on which such party's securities are
traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that
the transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Harbor Fund nor the Convertible Securities Fund
shall take any action, or cause any action to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to the
Closing Date, the Harbor Fund and the Convertible Securities Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to the Convertible
Securities Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing
Date, the Convertible Securities Fund shall declare and pay to its stockholders
a dividend or other distribution in an amount large enough so that it will have
distributed substantially all (and in any event not less than 98%) of its
investment company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current taxable
year through the Closing Date.
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7. CONDITIONS TO OBLIGATIONS OF THE CONVERTIBLE SECURITIES FUND.
The obligations of the Convertible Securities Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver by the Convertible Securities Fund, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the outstanding shares of beneficial interest the
Convertible Securities Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the Harbor Fund contained herein shall be true
in all material respects as of the Closing Date, and as of the Closing Date
there shall have been no material adverse change in the financial condition,
results of operations, business properties or assets of the Harbor Fund, and the
Convertible Securities Fund shall have received a certificate of the President
or Vice President of the Harbor Fund satisfactory in form and substance to the
Convertible Securities Fund so stating. The Harbor Fund shall have performed and
complied in all material respects with all agreements, obligations and covenants
required by this Agreement to be so performed or complied with by it on or prior
to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity asking any of the foregoing be pending. There shall
not have been any action taken or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions contemplated
by this Agreement, which makes the consummation of the transactions contemplated
by this Agreement illegal or which has a material adverse effect on business
operations of the Harbor Fund.
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<PAGE> 106
F. TAX OPINION. The Convertible Securities Fund shall have obtained an
opinion from Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the
the Convertible Securities Fund, dated as of the Closing Date, addressed to the
Convertible Securities Fund, that the consummation of the transactions set forth
in this Agreement comply with the requirements of a reorganization as described
in Section 368(a) of the Code.
G. OPINION OF COUNSEL. The Convertible Securities Fund shall have
received the opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel
for the Harbor Fund, dated as of the Closing Date, addressed to the Convertible
Securities Fund substantially in the form and to the effect that: (i) the Harbor
Fund existing in good standing under the laws of its State of organization; (ii)
the Harbor Fund is registered as an open-end, management investment company
under the 1940 Act; (iii) this Agreement and the reorganization provided for
herein and the execution of this Agreement have been duly authorized and
approved by all requisite action of Harbor Fund and this Agreement has been duly
executed and delivered by the Harbor Fund and (assuming the Agreement is a valid
and binding obligation of the other parties thereto) is a valid and binding
obligation of the Harbor Fund; (iv) neither the execution or delivery by the
Harbor Fund of this Agreement nor the consummation by the Harbor Fund of the
transactions contemplated thereby contravene the Harbor Fund's organizational
documents, or, to the knowledge of such counsel, violate any provision of any
statute or any published regulation or any judgment or order disclosed to
counsel by the Harbor Fund as being applicable to the Harbor Fund; (v) to their
knowledge based solely on the certificate of an appropriate officer of the
Harbor Fund attached thereto, there is no pending or threatened litigation
except as described therein; (vi) the Harbor Fund's Shares have been duly
authorized and upon issuance thereof in accordance with this Agreement will be
validly issued, fully paid and nonassessable; (vii) except as to financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions, as of the effective
date of the Registration Statement filed pursuant to the Agreement, the
portions thereof pertaining to the Harbor Fund comply as to form in all
material respects with the requirements of the Securities Act, the Securities
Exchange Act and the 1940 Act and the rules and regulations of the SEC
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<PAGE> 107
thereunder and no facts have come to counsel's attention which would cause them
to believe that as of the effectiveness of the portions of the Registration
Statement applicable to Harbor Fund, the Registration Statement contained any
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and (viii) to their knowledge and subject to the qualifications set
forth below, the execution and delivery by the Harbor Fund of the Agreement and
the consummation of the transactions therein contemplated do not require, under
the laws of the State of organization or any state in which the Harbor Fund is
qualified to do business or the federal laws of the United States, the consent,
approval, authorization, registration, qualification or order of, or filing
with, any court or governmental agency or body (except such as have been
obtained). Counsel need express no opinion, however, as to any such consent,
approval, authorization, registration, qualification, order or filing (a) which
may be required as a result of the involvement of other parties to the Agreement
in the transactions contemplated by the Agreement because of their legal or
regulatory status or because of any other facts specifically pertaining to them;
(b) the absence of which does not deprive the Convertible Securities Fund of any
material benefit under the Agreement; or (c) which can be readily obtained
without significant delay or expense to the Convertible Securities Fund, without
loss to the Convertible Securities Fund of any material benefit under the
Agreement and without any material adverse effect on the Convertible Securities
Fund during the period such consent, approval, authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
filings under (a) laws which are specifically referred to in this opinion, (b)
laws of the State of organization or any state in which the Harbor Fund is
qualified to do business and the federal laws of the United States which, in
counsel's experience, are normally applicable to transactions of the type
provided for in the Agreement and (c) court orders and judgments disclosed to
counsel by the Harbor Fund in connection with the opinion. In addition, although
counsel need not have specifically considered the possible applicability to the
Harbor Fund of any other laws, orders or judgments, nothing has come to their
attention in connection with their representation of the Harbor Fund in this
transaction that has caused them to conclude that any other consent, approval,
authorization, registration, qualification, order or filing is required.
H. OFFICER CERTIFICATES. The Convertible Securities Fund shall have
received a certificate of an authorized officer of the Harbor Fund, dated as of
the Closing Date, certifying that the representations and warranties set forth
in Section 5 are true and correct on the Closing Date, together with certified
copies of the resolutions adopted by the Harbor Fund Board shall be furnished to
the Convertible Securities Fund.
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<PAGE> 108
8. CONDITIONS TO OBLIGATIONS OF HARBOR FUND.
The obligations of the Harbor Fund hereunder with respect to the consummation of
the Reorganization are subject to the satisfaction, or written waiver by the
Harbor Fund of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the outstanding shares of beneficial interest of the
Convertible Securities Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the Convertible Securities Fund contained
herein shall be true in all material respects as of the Closing Date, and as of
the Closing Date there shall have been no material adverse change in the
financial condition, results of operations, business, properties or assets of
the Convertible Securities Fund, and the Harbor Fund shall have received a
certificate of an authorized officer of the Convertible Securities Fund
satisfactory in form and substance to the Harbor Fund so stating. The
Convertible Securities Fund shall have performed and complied in all material
respects with all agreements, obligations and covenants required by this
Agreement to be so performed or complied with by them on or prior to the Closing
Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing
the consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
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<PAGE> 109
F. TAX OPINION. The Harbor Fund shall have obtained an opinion from
Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Convertible
Securities Fund, dated as of the Closing Date, addressed to the Harbor Fund,
that the consummation of the transactions set forth in this Agreement comply
with the requirements of a reorganization as described in Section 368(a) of the
Code.
G. OPINION OF COUNSEL. The Harbor Fund shall have received the opinion
of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the Convertible
Securities Fund, dated as of the Closing Date, addressed to the Harbor Fund,
substantially in the form and to the effect that: (i) the Convertible Securities
Fund is duly formed and existing under the laws of its state of organization;
(ii) the Convertible Securities Fund is registered as a closed-end, management
investment company under the 1940 Act; (iii) this Agreement and the
reorganization provided for herein and the execution of this Agreement have been
duly authorized by all requisite action of the Convertible Securities Fund and
this Agreement has been duly executed and delivered by the Convertible
Securities Fund and (assuming the Agreement is a valid and binding obligation of
the other parties thereto) is a valid and binding obligation of the Convertible
Securities Fund; (iv) neither the execution or delivery by the Convertible
Securities Fund of this Agreement nor the consummation by the Convertible
Securities Fund of the transactions contemplated thereby contravene the
Convertible Securities Fund's organizational documents or, to its knowledge,
violate any provision of any statute, or any published regulation or any
judgment or order disclosed to them by the Convertible Securities Fund as being
applicable to the Convertible Securities Fund; (v) to its knowledge based solely
on the certificate of an appropriate officer of the Convertible Securities Fund
attached thereto, there is no pending, or threatened litigation involving the
Convertible Securities Fund except as disclosed therein; (vi) except as to
financial statements and schedules and other financial and statistical data
included or incorporated by reference therein and subject to usual and customary
qualifications with respect to Rule 10b-5 type opinions as of the effective date
of the Registration Statement filed pursuant to the Agreement, the portions
thereof pertaining to the Convertible Securities Fund comply as to form in all
material respects with the requirements of the Securities Act, the Securities
Exchange Act and the 1940 Act and the rules and regulations of the SEC
thereunder and no facts have come to counsel's attention which cause them to
believe that as of the effectiveness of the portions of the Registration
Statement applicable to the Convertible Securities Fund, the Registration
Statement contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (vii) to their knowledge and subject to
the qualifications set forth below, the execution and delivery by the Trust on
behalf of the Convertible Securities Fund of the Agreement and the consummation
of the transactions therein contemplated do not require, under the laws of the
State of organization or any state in which the Convertible Securities Fund is
qualified to do business, or the federal laws of the United States, the consent,
approval,
20
<PAGE> 110
authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body (except such as have been obtained under
the Securities Act, the 1940 Act or the rules and regulations thereunder.)
Counsel need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing; (a) which may be
required as a result of the involvement of other parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the Harbor Fund of any material benefit under
such agreements; or (c) which can be readily obtained without significant delay
or expense to the Harbor Fund, without loss to the Harbor Fund of any material
benefit under the Agreement and without any material adverse effect on them
during the period such consent, approval, authorization, registration,
qualification or order was obtained. The foregoing opinion relates only to
consents, approvals, authorizations, registrations, qualifications, orders or
filings under (a) laws which are specifically referred to in the opinion, (b)
laws of the State of organization or any State in which the Convertible
Securities Fund is qualified to do business and the federal laws of the United
States which, in our experience, are normally applicable to transactions of the
type provided for in the Agreement and (c) court orders and judgments disclosed
to them by the Convertible Securities Fund in connection with the opinion. In
addition, although counsel need not have specifically considered the possible
applicability to the Convertible Securities Fund of any other laws, orders or
judgments, nothing has come to their attention in connection with their
representation of the Convertible Securities Fund in this transaction that has
caused them to conclude that any other consent, approval, authorization,
registration, qualification, order or filing is required.
H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended,
shall consist solely of securities which are in conformity with the Harbor
Fund's investment objectives, policies and restrictions as set forth in the
Harbor Fund's Prospectus, a copy of which has been delivered to the Convertible
Securities Fund.
I. SHAREHOLDER LIST. The Convertible Securities Fund shall have
delivered to the Harbor Fund an updated list of all shareholders of the
Convertible Securities Fund, as reported by the Convertible Securities Fund's
transfer agent, as of one (1) business day prior to the Closing Date with each
shareholder's respective holdings in the Convertible Securities Fund, taxpayer
identification numbers, Form W9 and last known address.
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<PAGE> 111
J. OFFICER CERTIFICATES. The Harbor Fund shall have received a
certificate of an authorized officer of the Convertible Securities Fund, dated
as of the Closing Date, certifying that the representations and warranties set
forth in Section 4 are true and correct on the Closing Date, together with
certified copies of the resolutions adopted by the Convertible Securities Fund
Board and shareholders.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by the
respective Boards, amend this Agreement at any time before or after approval
thereof by the shareholders of the Convertible Securities Fund; provided,
however, that after receipt of Convertible Securities Fund shareholder approval,
no amendment shall be made by the parties hereto which substantially changes the
terms of Sections 1, 2 and 3 hereof without obtaining Convertible Securities
Fund's shareholder approval thereof.
(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
(C) This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the respective Boards of the Convertible
Securities Fund and the Harbor Fund;
(ii) by the Convertible Securities Fund, if the Harbor Fund breaches in
any material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
(iii) by the Harbor Fund, if the Convertible Securities Fund breaches
in any material respect any of its representations, warranties, covenants or
agreements contained in this Agreement;
22
<PAGE> 112
(iv) by either the Convertible Securities Fund or Harbor Fund, if the
Closing has not occurred on or prior to December 31, 2000 (provided that the
rights to terminate this Agreement pursuant to this subsection (C)(iv) shall not
be available to any party whose failure to fulfill any of its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur on or before such date);
(v) by the Harbor Fund in the event that: (a) all the conditions
precedent to the Convertible Securities Fund's obligation to close, as set forth
in Section 7 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the Harbor Fund gives the Convertible Securities
Fund written assurance of its intent to close irrespective of the satisfaction
or nonsatisfaction of all conditions precedent to the Harbor Fund's obligation
to close, as set forth in Section 8 of this Agreement; and (c) the Convertible
Securities Fund then fails or refuses to close within the earlier of five (5)
business days or December 31, 2000; or
(vi) by the Convertible Securities Fund in the event that: (a) all the
conditions precedent to the Harbor Fund's obligation to close, as set forth in
Section 8 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the Convertible Securities Fund gives the Harbor
Fund written assurance of its intent to close irrespective of the satisfaction
or nonsatisfaction of all the conditions precedent to the Convertible Securities
Fund's obligation to close, as set forth in Section 7 of this Agreement; and (c)
the Harbor Fund then fails or refuses to close within the earlier of five (5)
business days or December 31, 2000.
10. REMEDIES.
In the event of termination of this Agreement by either or both of the
Convertible Securities Fund and Harbor Fund pursuant to Section 9(C), written
notice thereof shall forthwith be given by the terminating party to the other
party hereto, and this Agreement shall therefore terminate and become void and
have no effect, and the transactions contemplated herein and thereby shall be
abandoned, without further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
A. SURVIVAL. The representations and warranties included or provided
for herein, or in the schedules or other instruments delivered or to be
delivered pursuant hereto, shall survive the Closing Date for a three year
period except that any representation or warranty with respect to taxes shall
survive for the expiration of the statutory period of limitations for
assessments of tax deficiencies as the same may be extended from time to time by
the taxpayer. The covenants and agreements included or provided
23
<PAGE> 113
for herein shall survive and be continuing obligations in accordance with their
terms. The period for which a representation, warranty, covenant or agreement
survives shall be referred to hereinafter as the "Survival Period."
Notwithstanding anything set forth in the immediately preceding sentence, the
Harbor Fund's and the Convertible Securities Fund's right to seek indemnity
pursuant to this Agreement shall survive for a period of ninety (90) days beyond
the expiration of the Survival Period of the representation, warranty, covenant
or agreement upon which indemnity is sought. In no event shall the Harbor Fund
or the Convertible Securities Fund be obligated to indemnify the other if
indemnity is not sought within ninety (90) days of the expiration of the
applicable Survival Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and
hold the other and its officers, trustees, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened (collectively, the "Losses") arising out of or related to any claim
of a breach of any representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall be indemnified
hereunder against any Losses arising directly from such Indemnified Party's (i)
willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of such Indemnified Party's
position.
C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
or thirty (30) days from discovery by Indemnified Party of any matters which may
give rise to a claim for indemnification or reimbursement under this Agreement.
The failure to give such notice shall not affect the right of Indemnified Party
to indemnity hereunder unless such failure has materially and adversely affected
the rights of the Indemnitor; provided that in any event such notice shall have
been given prior to the expiration of the Survival Period. At any time after ten
(10) days from the giving of such notice, Indemnified Party may, at its option,
resist, settle or otherwise compromise, or pay such claim unless it shall have
received notice from Indemnitor that Indemnitor intends, at Indemnitor's sole
cost and expense, to assume the defense of any such matter, in which case
Indemnified Party shall have the right, at no cost or expense to Indemnitor, to
participate in such defense. If Indemnitor does not assume the
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<PAGE> 114
defense of such matter, and in any event until Indemnitor states in writing
that it will assume the defense, Indemnitor shall pay all costs of Indemnified
Party arising out of the defense until the defense is assumed; provided,
however, that Indemnified Party shall consult with Indemnitor and obtain
Indemnitor's prior written consent to any payment or settlement of any such
claim. Indemnitor shall keep Indemnified Party fully apprised at all times as to
the status of the defense. If Indemnitor does not assume the defense,
Indemnified Party shall keep Indemnitor apprised at all times as to the status
of the defense. Following indemnification as provided for hereunder, Indemnitor
shall be subrogated to all rights of Indemnified Party with respect to all third
parties, firms or corporations relating to the matter for which indemnification
has been made.
12. SURVIVAL.
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes hereunder
if in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid. Notice to the Convertible Securities Fund shall be
addressed to the Convertible Securities Fund c/o Van Kampen American Asset
Management Inc., 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois
60181-5555, Attention: General Counsel, or at such other address as the
Convertible Securities Fund may designate by written notice to the Harbor Fund.
Notice to the Harbor Fund shall be addressed to the Harbor Fund c/o Van Kampen
Asset Management Inc., 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace,
Illinois 60181, Attention: General Counsel, or at such other address and to the
attention of such other person as the Harbor Fund may designate by written
notice to the Convertible Securities Fund. Any notice shall be deemed to have
been served or given as of the date such notice is delivered personally or
mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns. This Agreement shall not be assigned by
any party without the prior written consent of the other party hereto.
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<PAGE> 115
15. BOOKS AND RECORDS.
The Convertible Securities Fund and the Harbor Fund agree that copies of the
books and records of the Convertible Securities Fund relating to the Assets
including, but not limited to all files, records, written materials; e.g.,
closing transcripts, surveillance files and credit reports shall be delivered by
the Convertible Securities Fund to the Harbor Fund at the Closing Date. In
addition to, and without limiting the foregoing, the Convertible Securities Fund
and the Harbor Fund agree to take such action as may be necessary in order that
the Harbor Fund shall have reasonable access to such other books and records as
may be reasonably requested, all for three complete fiscal and tax years after
the Closing Date; namely, general ledger, journal entries, voucher registers;
distribution journal; payroll register, monthly balance owing report; income tax
returns; tax depreciation schedules; and investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written or
oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Convertible
Securities Fund and Harbor Fund and delivered to each of the parties hereto. The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. This
Agreement is for the sole benefit of the parties thereto, and nothing in this
Agreement, expressed or implied, is intended to confer upon any other person any
rights or remedies under or by reason of this Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois
without regard to principles of conflicts or choice of law.
17. LIMITATION OF LIABILITY.
Consistent with the Convertible Securities Fund's and the Harbor Fund's
respective Declarations of Trust, notice is hereby given and the parties hereto
acknowledge and agree that this instrument is executed by the Trustees of the
Convertible Securities Fund on behalf of the Convertible Securities Fund and by
the Trustees of the Harbor Fund on behalf of the Harbor Fund as Trustees and not
individually and that the obligations of this instrument are not binding upon
any of the Trustees or shareholders of the Convertible Securities Fund or Harbor
Fund individually but binding only upon the assets and property of the
Convertible Securities Fund or the Harbor Fund as the case may be.
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<PAGE> 116
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
VAN KAMPEN HARBOR FUND
---------------------------------
Richard Powers, III
President
Attest:
------------------------------
Weston Wetherell
Assistant Secretary
VAN KAMPEN CONVERTIBLE
SECURITIES FUND
---------------------------------
Richard Powers, III
President
Attest:
------------------------------
Weston Wetherell
Assistant Secretary
27
<PAGE> 117
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
HARBOR FUND
DATED APRIL 28, 2000
<PAGE> 118
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN
HARBOR FUND
Van Kampen Harbor Fund (the "Fund") is a mutual fund with the investment
objective to seek to provide current income, capital appreciation and
conservation of capital. The Fund's investment adviser seeks to achieve the
Fund's investment objective by investing principally in a portfolio of debt
securities, primarily convertible bonds and convertible preferred stocks.
The Fund is organized as a diversified series of Van Kampen Harbor Fund, an
open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
---------------------------------------------
TABLE OF CONTENTS
---------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information......................................... B-2
Investment Objective, Policies and Risks.................... B-3
Options, Futures Contracts and Related Options.............. B-8
Investment Restrictions..................................... B-15
Trustees and Officers....................................... B-17
Investment Advisory Agreement............................... B-26
Other Agreements............................................ B-27
Distribution and Service.................................... B-27
Transfer Agent.............................................. B-31
Portfolio Transactions and Brokerage Allocation............. B-31
Shareholder Services........................................ B-33
Redemption of Shares........................................ B-36
Contingent Deferred Sales Charge-Class A.................... B-36
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-37
Taxation.................................................... B-39
Fund Performance............................................ B-44
Other Information........................................... B-47
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-13
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 28, 2000.
HAR SAI 4/00
<PAGE> 119
GENERAL INFORMATION
The Fund was originally incorporated in Delaware on July 16, 1956, under
the name American Capital Harbor Fund, Inc. The Fund was reincorporated by
merger into a Maryland corporation on December 29, 1978, under the same name. As
of August 19, 1995, the Fund was reorganized under the name Van Kampen American
Capital Harbor Fund as a series of the Trust. The Trust is organized as a
business trust under the laws of the State of Delaware. On July 14, 1998, the
Fund and the Trust adopted their present names.
Van Kampen Asset Management Inc. (the "Adviser" or "Asset Management"), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. ("Morgan Stanley Dean Witter"). The principal
office of the Fund, the Trust, the Adviser, the Distributor and Van Kampen
Investments is located at 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555. The principal office of Investor Services is located at 7501 Tiffany
Springs Parkway, Kansas City, Missouri 64153.
Morgan Stanley Dean Witter is a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities; asset management; and credit services.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally is identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. Shares of the Trust entitle their holders
to one vote per share; however, separate votes are taken by each series on
matters affecting an individual series and separate votes are taken by each
class of a series on matters affecting an individual class of such series. For
example, a change in investment policy for a series would be voted upon by
shareholders of only the series involved and a change in the distribution fee
for a class of a series would be voted upon by shareholders of only the class of
such series involved. Except as otherwise described in the Prospectus or herein,
shares do not have cumulative voting rights, preemptive rights or any
conversion, subscription or exchange rights.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares then outstanding cast
in person or by proxy at such meeting. The
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Fund will assist such holders in communicating with other shareholders of the
Fund to the extent required by the Investment Company Act of 1940, as amended
(the "1940 Act"), or rules or regulations promulgated by the Securities and
Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
outstanding and entitled to vote (or such higher vote as may be required by the
1940 Act or other applicable law) and except that the Trustees cannot amend the
Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of April 3, 2000, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
Amount of
Ownership at Class Percentage
Name and Address of Record Holder April 3, 2000 of Shares Ownership
--------------------------------- ------------- --------- ----------
<S> <C> <C> <C>
Van Kampen Trust Company........................ 7,633,965 A 28.85%
2800 Post Oak Blvd. 1,287,179 B 34.21%
Houston, TX 77056 60,501 C 9.69%
Merrill Lynch Pierce Fenner & Smith Inc......... 49,040 C 7.85%
For the Sole Benefit of its Customers
Attn: Fund Administration 97CU5
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
- ------------------------------------
Van Kampen Trust Company acts as custodian for certain employee benefit
plans and individual retirement accounts.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The following disclosure supplements the disclosure set forth under the
same caption in the Prospectus and does not, standing alone, present a complete
or accurate explanation of the matters disclosed. Readers must refer also to
this caption in the Prospectus for a complete presentation of the matters
disclosed below.
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REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements with broker-dealers, banks and
other recognized financial institutions in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of default by the other party. The Fund may enter
into repurchase agreements with broker-dealers, banks and other recognized
financial institutions deemed to be creditworthy by the Adviser under guidelines
approved by the Fund's Board of Trustees. The Fund will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid securities held by the Fund, would exceed the Fund's
limitation on illiquid securities described herein. The Fund does not bear the
risk of a decline in the value of the underlying security unless the seller
defaults under its repurchase obligation. In the event of the bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience
both delays in liquidating the underlying securities and losses including: (a)
possible decline in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible lack of access to
income on the underlying security during this period; and (c) expenses of
enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Fund than would be available to the Fund investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an exemptive order from the SEC permitting this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. The Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
CONVERTIBLE SECURITIES
A "convertible security" includes any bond, debenture, note, preferred
stock, warrant or other 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, or 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 generally
entitles the holder to exchange it for a fixed number of shares of common stock
or other equity
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security, usually of the same company, or into cash 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.
A convertible security's position in a company's capital structure depends
upon its particular provisions. In the case of subordinated convertible
debentures, the holders' claims on assets and earnings are subordinated to the
claims of other creditors, and are senior to the claims of preferred and common
shareholders. In the case of convertible preferred stock, the holders' claims on
assets and earnings are subordinated to the claims of all creditors and are
senior to the claims of common shareholders.
Every convertible security may be valued, on a theoretical basis, as if it
did not have a conversion privilege. Such theoretical value is determined by the
yield it provides in comparison with the yields of other securities of
comparable character and quality which do not have a conversion privilege. This
theoretical value, which will change with prevailing interest rates, the credit
standing of the issuer and other pertinent factors, is often referred to as the
"investment value," and represents the security's theoretical price support
level.
"Conversion value" is the amount a convertible security would be worth in
market value if it were to be exchanged for the underlying equity security
pursuant to its conversion privilege. Conversion value fluctuates directly with
the price of the underlying equity security, usually common stock. If, because
of low prices for the common stock, the conversion value is substantially below
the investment value, the price of the convertible security is governed
principally by the factors described in the preceding paragraph. If the
conversion value rises near or above its investment value, the price of the
convertible security generally will rise above its investment value and, in
addition, will sell at some premium over its conversion value. This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed income security with a possibility of capital appreciation
due to the conversion privilege. If this appreciation potential is not realized,
this premium may not be recovered. If the common stock should continue to
advance in price, the premium would become less significant and the convertible
security would fluctuate at a rate comparable to that of the common stock.
To the degree that the price of a convertible security rises above its
investment value because of a rise in price of the common stock, it is
influenced more by price fluctuations of the common stock and less by its
investment value. The price of a convertible security that is supported
principally by its conversion value will rise along with any increase in the
common stock, and such price generally will decline along with any decline in
the price of the common stock except that the security will receive additional
support as its price approaches investment value. A convertible security
purchased or held at a time when its price is influenced by its conversion value
will produce a lower yield than nonconvertible senior securities with comparable
investment values. Convertible securities may be purchased by the Fund at
varying price levels above their investment values or their conversion values in
keeping with the Fund's investment objective.
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The Adviser believes that the characteristics of convertible securities
make them particularly appropriate vehicles to achieve the Fund's investment
objective. Convertible securities have unique investment characteristics because
(i) they have relatively high yields as compared to common stocks, (ii) they
have defensive characteristics since they provide a fixed return even if the
market price of the underlying common stock declines, and (iii) they provide the
potential for capital appreciation if the market price of the underlying common
stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by the
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or sell it
to a third party. Any of these actions could have an adverse effect on the
Fund's ability to achieve its investment objective. If the Fund surrenders the
security for redemption, it will receive the face amount of the security, and
possibly a redemption premium. However, the amount received may be less than the
value of the security before the redemption. Moreover, since a call for
redemption is most likely to occur in a declining interest rate environment, the
Fund may not be able to earn as high a rate of return when it reinvests the
proceeds. Selling or converting the security might be more advantageous than
surrendering for redemption, but the reinvestment risk would remain. Before the
Fund purchases a convertible security, it will carefully review the redemption
provisions of the security.
Convertible securities are generally not investment grade, that is, not
rated within the four highest categories by Standard & Poor's ("S&P") and
Moody's Investors Service, Inc. ("Moody's"). To the extent that convertible
securities acquired by the Fund are rated lower than investment grade or are not
rated, there is a greater risk as to the timely repayment of the principal of,
and timely payment of interest or dividends on such securities.
In selecting convertible securities for the Fund, the Adviser will consider
the following factors, among others: (1) the Adviser's own evaluation of the
creditworthiness of the issuers of the securities; (2) the interest or dividend
income generated by the securities; (3) the potential for capital appreciation
of the securities and the underlying common stock; (4) the prices of the
securities relative to the underlying common stock; (5) the prices of the
securities relative to other comparable securities; (6) whether the securities
have unfavorable redemption provisions or are entitled to the benefits of
sinking funds or other protective conditions; (7) diversification of the Fund's
portfolio as to issuers and industries; (8) whether the securities are rated by
Moody's and/or S&P and, if so, the ratings assigned; and (9) whether the
underlying common stock can be sold short.
The Fund's investments in convertible securities may include securities
with enhanced convertible features or "equity-linked" features. These securities
come in many forms and may include features, among others, such as the
following: (i) may be issued by the issuer of the underlying equity security on
its own securities or securities it holds of another company or be issued by a
third party (typically a brokerage firm or other financial entity) on a security
of another company, (ii) may convert into equity securities, such as common
stock, or may be redeemed for cash or some combination of cash and the linked
security at a value based upon the value of the underlying equity security,
(iii) may have various conversion features prior to maturity at the option of
the holder or the issuer or both,
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(iv) may limit the appreciation value with caps or collars of the value of
underlying equity security and (v) may have fixed, variable or no interest
payments during the life of the security which reflect the actual or a
structured return relative to the underlying dividends of the linked equity
security. Generally these securities are designed to give investors enhanced
yield opportunities to the equity securities of an issuer, but these securities
may involve a limited appreciation potential, downside exposure, or a finite
time in which to capture the yield advantage. For example, certain securities
may provide a higher current dividend income than the dividend income on the
underlying security while capping participation in the capital appreciation of
such security. Other securities may involve arrangements with no interest or
dividend payments made until maturity of the security or an enhanced principal
amount received at maturity based on the yield and value of the underlying
equity security during the security's term or at maturity. Besides enhanced
yield opportunities, another advantage of using such securities is that they may
be used for portfolio management or hedging purposes to reduce the risk of
investing in a more volatile underlying equity security. There may be additional
types of convertible securities with features not specifically referred to
herein in which the Fund may invest consistent with its investment objective and
policies.
Investments in enhanced convertible or equity-linked securities may subject
the Fund to additional risks not ordinarily associated with investments in
traditional convertible securities. Particularly when such securities are issued
by a third party on an underlying linked security of another company, the Fund
is subject to risks if the underlying security underperforms or the issuer
defaults on the payment of the dividend or the underlying security at maturity.
Additionally, the trading market for certain securities may be less liquid than
for other convertible securities making it difficult for the Fund to dispose of
a particular security in a timely manner, and reduced liquidity in the secondary
market for any such securities may make it more difficult to obtain market
quotations for valuing the Fund's portfolio.
SECURITIES OF FOREIGN ISSUERS
The Fund may purchase foreign securities in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
representing underlying shares of foreign companies. These securities are not
necessarily denominated in the same currency as the underlying securities but
generally are denominated in the currency of the market in which they are
traded. ADRs are receipts typically issued by an American bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid by the ADR holders. In addition, less information is
available in the United States about an unsponsored ADR than about a sponsored
ADR and financial information about a company may not be as reliable for an
unsponsored ADR as it is for a sponsored ADR. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements. EDRs are receipts issued in
Europe by banks or depositaries which evidence a similar ownership arrangement.
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PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year. The
turnover rate may vary greatly from year to year as well as within a year.
ILLIQUID SECURITIES
The Fund may invest up to 10% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). The sale of such
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of liquid
securities trading on national securities exchanges or in the over-the-counter
markets. Restricted securities are often purchased at a discount from the market
price of unrestricted securities of the same issuer reflecting the fact that
such securities may not be readily marketable without some time delay.
Investments in securities for which market quotations are not readily available
are valued at fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Fund's Board of Trustees. Ordinarily,
the Fund would invest in restricted securities only when it receives the
issuer's commitment to register the securities without expense to the Fund.
However, registration and underwriting expenses (which typically range from 7%
to 15% of the gross proceeds of the securities sold) may be paid by the Fund.
Restricted securities which can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act ("144A Securities") and are determined
to be liquid under guidelines adopted by and subject to the supervision of the
Fund's Board of Trustees are not subject to the limitation on illiquid
securities. Such 144A Securities are subject to monitoring and may become
illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief (such as "no
action" letters issued by the staff of the SEC interpreting or providing
guidance on the 1940 Act or regulations thereunder) from the provisions of the
1940 Act, as amended from time to time.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may, but is not required to, use various investment strategies as
described below to earn income, facilitate portfolio management and mitigate
risks. Techniques and instruments may change over time as new instruments and
strategies are developed or as regulatory changes occur. Although, the Fund's
Adviser seeks to use such transactions to
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further the Fund's investment objective, no assurance can be given that the use
of these transactions will achieve this result.
Selling Call and Put Options
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option selling program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Selling options on portfolio securities is likely to result in a higher
portfolio turnover rate.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
seller at a specified price during a certain period. The Fund would write call
options only on a covered basis or for cross-hedging purposes. A call option is
covered if, at all times during the option period, the Fund would own or have
the right to acquire securities of the type that it would be obligated to
deliver if any outstanding option were exercised. An option is for cross-hedging
purposes if it is not covered by the security subject to the option, but is
designed to provide a hedge against another security which the Fund owns or has
the right to acquire. In such circumstances, the Fund collateralizes the option
by maintaining in a segregated account with the Fund's custodian cash or liquid
securities in an amount not less than the market value of the underlying
security, marked to market daily, while the option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would sell put options only on
a secured basis, which means that, at all times during the option period, the
Fund would maintain in a segregated account with its custodian cash or liquid
securities in an amount of not less than the exercise price of the option, or
would hold a put on the same underlying security at an equal or greater exercise
price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a writer of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously sold by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is lesser (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as a seller of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a seller, but would provide an asset of
equal value to its obligation under the option sold. If the Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the option until a
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closing purchase transaction can be entered into (or the option is exercised or
expires) even though it might not be advantageous to do so. The staff of the SEC
currently takes the position that, in general, over-the-counter options on
securities purchased by the Fund, and portfolio securities "covering" the amount
of the Fund's obligation pursuant to an over-the-counter option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on illiquid securities described herein.
Risks of Writing Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect against anticipated
increases in the prices of securities it wishes to acquire. Alternatively, call
options could be purchased for capital appreciation. Since the premium paid for
a call option is typically a small fraction of the price of the underlying
security, a given amount of funds will purchase call options covering a much
larger quantity of such security than could be purchased directly. By purchasing
call options, the Fund could benefit from any significant increase in the price
of the underlying security to a greater extent than had it invested the same
amount in the security directly. However, because of the very high volatility of
option premiums, the Fund would bear a significant risk of losing the entire
premium if the price of the underlying security did not rise sufficiently, or if
it did not do so before the option expired.
Put options may be purchased to protect against anticipated declines in the
market value of either specific portfolio securities or of the Fund's assets
generally. Alternatively, put options may be purchased for capital appreciation
in anticipation of a price decline in the underlying security and a
corresponding increase in the value of the put option. The purchase of put
options for capital appreciation involves the same significant risk of loss as
described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
OPTIONS ON STOCK INDICES
Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash which amount will depend upon the closing
level of the stock index upon which the option is based being greater than (in
the case of a call) or less than (in the case of a put) the exercise price of
the option. The amount of cash received will be the difference between the
closing price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount.
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Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indices are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on several exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with the rules and interpretations of the Commodity
Futures Trading Commission ("CFTC") under which the Fund would be exempt from
registration as a "commodity pool."
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of an amount of cash equal to a specified dollar
amount multiplied by the difference between the stock index value at a specified
time and the price at which the futures contract originally was struck. No
physical delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
several indices on various exchanges. Differences in the stocks included in the
indices may result in differences in correlation of the futures contracts with
movements in the value of the securities being hedged.
The Fund also may invest in foreign stock index futures traded outside the
United States which involve additional risks including fluctuations in foreign
exchange rates, foreign currency exchange controls, political and economic
instability, differences in financial reporting and securities regulation and
trading, and foreign taxation issues.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its custodian in an
account in the broker's name an amount of cash or liquid securities equal to a
percentage (which will normally range between 2% and 10%) of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the
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underlying securities or index fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as marking to
market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is otherwise
fully invested ("anticipatory hedge"). Such purchase of a futures contract would
serve as a temporary substitute for the purchase of individual securities, which
may be purchased in an orderly fashion once the market has stabilized. As
individual securities are purchased, an equivalent amount of futures contracts
could be terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
would substantially reduce the risk to the Fund of a market decline and, by so
doing, provides an alternative to the liquidation of securities positions in the
Fund. Ordinarily transaction costs associated with futures transactions are
lower than transaction costs that would be incurred in the purchase and sale of
the underlying securities.
Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts. These include the risk of imperfect
correlation between movements in the price of the futures contracts and of the
underlying securities or index; the risk of market distortion; the risk of
illiquidity; and the risk of error in anticipating price movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contracts. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
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There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.
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The Fund will not enter into futures contracts or options transactions
(except for closing transactions) other than for bona fide hedging purposes if,
immediately thereafter, the sum of its initial margin and premiums on open
futures contracts and options exceed 5% of the fair market value of the Fund's
assets; however, in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. In order to prevent leverage in connection with the purchase of
futures contracts by the Fund, an amount of cash or liquid securities equal to
the market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purposes as, the sale of a futures contract; at the same time, it
could write put options at a lower strike price (a "put bear spread") to offset
part of the cost of the strategy to the Fund. The purchase of call options on
futures contracts is intended to serve the same purpose as the actual purchase
of the futures contracts.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the price of the underlying security or index, when the
use of an option on a future would result in a loss to the Fund when the use of
a future would not.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
B-14
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In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures or related options, the Fund could
experience delays or losses in liquidating open positions purchased or incur a
loss of all or part of its margin deposits with the broker. Transactions are
entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many derivative transactions, in addition to other requirements, require
that the Fund segregate cash and liquid securities with its custodian to the
extent the Fund's obligations are not otherwise "covered" as described above. In
general, either the full amount of any obligation by the Fund to pay or deliver
securities or assets must be covered at all times by the securities, instruments
or currency required to be delivered (or securities convertible into the needed
securities without additional consideration), or, subject to applicable
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. In
the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash and liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. Derivative transactions may be covered by other
means when consistent with applicable regulatory policies. The Fund may also
enter into offsetting transactions so that its combined position, coupled with
any segregated cash and liquid securities, equals its net outstanding
obligation.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting securities which is defined by the 1940 Act as the
lesser of (i) 67% or more of the voting securities present at a meeting, if the
holders of more than 50% of the Fund's outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. With respect to the limitations on illiquid securities and
borrowings, the percentage limitations apply at the time of purchase and on an
ongoing basis. The Fund shall not:
1. Sell short or buy on margin, but the Fund may engage in transactions in
options, futures contracts and related options and may make margin
deposits and payments in connection therewith;
2. Primarily engage in the underwriting or distribution of securities;
3. Make any investment in real estate, commodities or commodities
contracts, or in any security about which information is not available
with respect to history, management, assets, earnings, and income of
the issuer; however, the Fund is not prohibited from investing in
securities issued by a real estate investment trust, and the Fund is
not prohibited from entering into transactions in futures contracts or
related options;
B-15
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4. Make any investment which involves promotion or business management by
the Fund or which would subject the Fund to unlimited liability;
5. Invest more than 5% of its assets in the securities of any one issuer
(except the U.S. government) or purchase more than 10% of the
outstanding voting securities of any one issuer, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act;
6. Invest more than 25% of its assets in securities issued by companies in
any one industry;
7. Invest in companies for the purpose of exercising control, except that
the Fund may purchase securities of other investment companies to the
extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act;
8. Make loans except that the Fund may invest up to 25% of the Fund's
total assets in repurchase agreements;
9. Borrow in excess of 5% of its assets valued at market, or 10% of its
assets valued at cost, and then only from banks as a temporary measure
for extraordinary or emergency purposes; or pledge, encumber, transfer
or assign its assets except in connection with any such borrowing and
in amounts not in excess of the dollar amount borrowed. Notwithstanding
the foregoing, the Fund may engage in transactions in options, futures
contracts and related options, segregate or deposit assets to cover or
secure options written, and make margin deposits or payments for
futures contracts and related options;
10. Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the
extent permitted by the (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act;
11. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter as that term is defined under the 1933 Act; or
12. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover".
The Fund is subject to the following policies, which may be amended by its
Trustees. The Fund shall not:
1. Invest more than 5% of its total assets in securities of unseasoned
issuers which have been in operation directly or through predecessors
for less than three years
B-16
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except to the extent permitted by the (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act;
2. Pledge, mortgage or hypothecate its portfolio securities to the extent
that at any time the percentage of pledged securities plus the sales
load will exceed 10% of the offering price of the Fund's shares.
Notwithstanding the foregoing, the Fund may engage in transactions in
options, futures contracts and related options, segregate or deposit
assets to cover or secure options written, and make margin deposits or
payments for futures contracts and related options;
3. Purchase any warrants or rights unless acquired in units or attached to
other securities;
4. Invest in interests in oil, gas, or other mineral exploration or
development programs, except that it may acquire securities of public
companies which themselves are engaged in such activities;
5. Invest more than 15% of the value of its total assets in securities of
foreign issuers; or
6. 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 with respect to the 10% limit, the
Fund may not acquire any private placement if it would cause more than
5% of the value of its net assets to be invested in private placements
and other assets not having readily available market quotations, as
determined at the time the Fund agrees to any such acquisition.
Excluded from this limitation are Rule 144A securities determined to be
liquid by the Trustees or by the Adviser pursuant to guidelines
established by the Trustees and securities of other investment
companies purchased by the Fund to the extent permitted by the (i) the
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to
time, or (iii) an exemption or other relief from the provisions of the
1940 Act.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes
B-17
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hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Trustee/Director of each of
1632 Morning Mountain Road the funds in the Fund Complex. Co-founder, and
Raleigh, NC 27614 prior to August 1996, Chairman, Chief Executive
Date of Birth: 07/14/32 Officer and President, MDT Corporation (now
Age: 67 known as Getinge/Castle, Inc., a subsidiary of
Getinge Industrier AB), a company which
develops, manufactures, markets and services
medical and scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological
53 Monarch Bay Drive company. Trustee/Director of each of the funds
Dana Point, CA 92629 in the Fund Complex. Prior to January 1999,
Date of Birth: 09/16/38 Chairman and Chief Executive Officer of The
Age: 61 Allstate Corporation ("Allstate") and Allstate
Insurance Company. Prior to January 1995,
President and Chief Executive Officer of
Allstate. Prior to August 1994, various
management positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an
Sears Tower executive search firm. Trustee/Director of each
233 South Wacker Drive of the funds in the Fund Complex. Prior to
Suite 7000 1997, Partner, Ray & Berndtson, Inc., an
Chicago, IL 60606 executive recruiting and management consulting
Date of Birth: 06/03/48 firm. Formerly, Executive Vice President of ABN
Age: 51 AMRO, N.A., a Dutch bank holding company. Prior
to 1992, Executive Vice President of La Salle
National Bank. Trustee on the University of
Chicago Hospitals Board, Vice Chair of the
Board of The YMCA of Metropolitan Chicago and a
member of the Women's Board of the University
of Chicago. Prior to 1996, Trustee of The
International House Board, a fellowship and
housing organization for international graduate
students.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of
11 DuPont Circle, N.W. the United States, an independent U.S.
Washington, D.C. 20016 foundation created to deepen understanding,
Date of Birth: 02/29/52 promote collaboration and stimulate exchanges
Age: 48 of practical experience between Americans and
Europeans. Trustee/Director of each of the
funds in the Fund Complex. Formerly, advisor to
the Dennis Trading Group Inc., a managed
futures and option company that invests money
for individuals and institutions. Prior to
1992, President and Chief Executive Officer,
Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
</TABLE>
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<PAGE> 136
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since
New York, NY 10048 April 1997 and Chief Executive Officer since
Date of Birth: 08/13/53 June 1998 of Morgan Stanley Dean Witter
Age: 46 Advisors Inc. and Morgan Stanley Dean Witter
Services Company Inc. Chairman, Chief Executive
Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998.
Chairman and Chief Executive Officer since June
1998, and Director since January 1998, of
Morgan Stanley Dean Witter Trust FSB. Director
of various Morgan Stanley Dean Witter
subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index
Series since May 1999. Trustee/Director of each
of the funds in the Fund Complex. Previously
Chief Strategic Officer of Morgan Stanley Dean
Witter Advisors Inc. and Morgan Stanley Dean
Witter Services Company Inc. and Executive Vice
President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice
President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series May
1997-April 1999, and Executive Vice President
of Dean Witter, Discover & Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company
Winter Park, FL 32789 and registered investment adviser in the State
Date of Birth: 02/13/36 of Florida. President and owner, Nelson Ivest
Age: 64 Brokerage Services Inc., a member of the
National Association of Securities Dealers,
Inc. and Securities Investors Protection Corp.
Trustee/Director of each of the funds in the
Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer
1 Parkview Plaza of Van Kampen Investments. Chairman, Director
P.O. Box 5555 and Chief Executive Officer of the Advisers,
Oakbrook Terrace, IL 60181-5555 the Distributor, Van Kampen Advisors Inc. and
Date of Birth: 02/02/46 Van Kampen Management Inc. Director and officer
Age: 54 of certain other subsidiaries of Van Kampen
Investments. Trustee/Director and President of
each of the funds in the Fund Complex. Trustee,
President and Chairman of the Board of other
investment companies advised by the Advisers
and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to
May 1998, Executive Vice President and Director
of Marketing at Morgan Stanley Dean Witter and
Director of Dean Witter Discover & Co. and Dean
Witter Realty. Prior to 1996, Director of Dean
Witter Reynolds Inc.
</TABLE>
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<PAGE> 137
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director
One ServiceMaster Way (since 1994) of The ServiceMaster Company, a
Downers Grove, IL 60515 business and consumer services company.
Date of Birth: 07/08/44 Director of Illinois Tool Works, Inc., a
Age: 55 manufacturing company and the Urban Shopping
Centers Inc., a retail mall management company.
Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the
Fund Complex. Prior to 1998, Director of Stone
Smurfit Container Corp., a paper manufacturing
company. From May 1996 through February 1997 he
was President, Chief Executive Officer and
Chief Operating Officer of Waste Management,
Inc., an environmental services company, and
from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a
155 Hickory Lane George M. Bond Chaired Professor with Stevens
Closter, NJ 07624 Institute of Technology, and prior to 1995,
Date of Birth: 08/02/24 Dean of the Graduate School, Stevens Institute
Age: 75 of Technology. Director, Dynalysis of
Princeton, a firm engaged in engineering
research. Trustee/Director of each of the funds
in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps,
333 West Wacker Drive Slate, Meagher & Flom (Illinois), legal counsel
Chicago, IL 60606 to the funds in the Fund Complex, and other
Date of Birth: 08/22/39 investment companies advised by the Advisers or
Age: 60 Van Kampen Management Inc. Trustee/Director of
each of the funds in the Fund Complex, and
Trustee/Managing General Partner of other
investment companies advised by the Advisers or
Van Kampen Management Inc.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy
2101 Constitution Ave., N.W. of Sciences/National Research Council, an
Room 206 independent, federally chartered policy
Washington, D.C. 20418 institution, since 1993. Director of Neurogen
Date of Birth: 12/27/41 Corporation, a pharmaceutical company, since
Age: 58 January 1998. Director of the German Marshall
Fund of the United States, Trustee of Colorado
College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/
Director of each of the funds in the Fund
Complex. Prior to 1993, Executive Director of
the Commission on Behavioral and Social
Sciences and Education at the National Academy
of Sciences/National Research Council. From
1980 through 1989, Partner of Coopers &
Lybrand.
</TABLE>
- ------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-20
<PAGE> 138
OFFICERS
Messrs. Smith, Santo, Hegel, Sullivan and Zimmermann are located at 1
Parkview Plaza, PO Box 5555, Oakbrook Terrace, IL 60181-5555. Mr. Boyd is
located at 2800 Post Oak Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel,
Date of Birth: 12/14/56 Secretary and Director of Van Kampen Investments,
Age: 43 the Advisers, Van Kampen Advisors Inc., Van Kampen
Vice President and Secretary Management Inc., the Distributor, American Capital
Contractual Services, Inc., Van Kampen Exchange
Corp., Van Kampen Recordkeeping Services Inc.,
Investor Services, Van Kampen Insurance Agency of
Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal
Legal Officer and Secretary of other investment
companies advised by the Advisers or their
affiliates. Vice President and Secretary of each of
the funds in the Fund Complex. Prior to January
1999, Vice President and Associate General Counsel
to New York Life Insurance Company ("New York
Life"), and prior to March 1997, Associate General
Counsel of New York Life. Prior to December 1993,
Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior
Associate, Willkie Farr & Gallagher. Prior to
January 1989, Staff Attorney at the Securities and
Exchange Commission, Division of Investment
Management, Office of Chief Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative
Date of Birth: 10/22/55 Officer and Director of Van Kampen Investments, the
Age: 44 Advisers, the Distributor, Van Kampen Advisors
Vice President Inc., Van Kampen Management Inc. and Van Kampen
Investor Services Inc., and serves as a Director or
Officer of certain other subsidiaries of Van Kampen
Investments. Vice President of each of the funds in
the Fund Complex and certain other investment
companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President
and Senior Planning Officer for Individual Asset
Management of Morgan Stanley Dean Witter and its
predecessor since 1994. From 1990-1994, First Vice
President and Assistant Controller in Dean Witter's
Controller's Department.
Peter W. Hegel....................... Executive Vice President of the Advisers, Van
Date of Birth: 06/25/56 Kampen Management Inc. and Van Kampen Advisors Inc.
Age: 43 Vice President of each of the funds in the Fund
Vice President Complex and certain other investment companies
advised by the Advisers or their affiliates. Prior
to September 1996, Director of McCarthy, Crisanti &
Maffei, Inc, a financial research company.
</TABLE>
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<PAGE> 139
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Stephen L. Boyd...................... Executive Vice President and Chief Investment
Date of Birth: 11/16/40 Officer of Van Kampen Investments, and President
Age: 59 and Chief Operating Officer of the Advisers.
Executive Vice President and Chief Executive Vice President and Chief Investment
Investment Officer Officer of each of the funds in the Fund Complex
and certain other investment companies advised by
the Advisers or their affiliates. Prior to April
2000, Vice President and Chief Investment Officer
of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM
Capital Management, Inc. Prior to February 1998,
Senior Vice President and Portfolio Manager of Van
Kampen American Capital Asset Management, Inc., Van
Kampen American Capital Investment Advisory Corp.
and Van Kampen American Capital Management, Inc.
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and
Date of Birth: 08/20/55 the Advisers. Vice President, Chief Financial
Age: 44 Officer and Treasurer of each of the funds in the
Vice President, Chief Financial Fund Complex and certain other investment companies
Officer and Treasurer advised by the Advisers or their affiliates.
John H. Zimmermann, III.............. Senior Vice President and Director of Van Kampen
Date of Birth: 11/25/57 Investments, President and Director of the
Vice President Distributor, and President of Van Kampen Insurance
Age: 42 Agency of Illinois Inc. Vice President of each of
the funds in the Fund Complex. From November 1992
to December 1997, Mr. Zimmermann was Senior Vice
President of the Distributor.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 63 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees/directors to defer receipt of their compensation
and earn a return on such deferred amounts. Deferring compensation has the
economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex provides a retirement
plan to its Non-Affiliated Trustees that provides Non-Affiliated Trustees with
compensation after retirement, provided that certain eligibility requirements
are met as more fully described below.
The compensation of each Non-Affiliated Trustee includes an annual retainer
in an amount equal to $50,000 per calendar year, due in four quarterly
installments on the first business day of each quarter. Payment of the annual
retainer is allocated among the funds in the Fund Complex on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
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<PAGE> 140
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
B-23
<PAGE> 141
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Fund Complex
-------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Retirement Annual Compensation
Year First Aggregate Benefits Benefits from before
Appointed or Compensation Accrued as the Fund Deferral from
Elected to from the Part of Upon Fund
Name(1) the Board Fund(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan 1991 $1,810 $40,303 $60,000 $126,000
Jerry D. Choate(1) 1999 1,252 0 60,000 88,700
Linda Hutton Heagy 1995 1,810 5,045 60,000 126,000
R. Craig Kennedy 1995 1,810 3,571 60,000 125,600
Jack E. Nelson 1995 1,810 21,664 60,000 126,000
Phillip B. Rooney 1997 1,610 7,787 60,000 113,400
Fernando Sisto 1979 1,810 72,060 60,000 126,000
Wayne W. Whalen 1995 1,810 15,189 60,000 126,000
Suzanne H. Woolsey(1) 1999 1,252 0 60,000 88,700
</TABLE>
- ------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Choate and Ms. Woolsey became members of the Board of Trustees
for the Fund and other funds in the Fund Complex on May 26, 1999 and
therefore do not have a full year of information to report.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1999. The
following trustees deferred compensation from the Fund during the fiscal
year ended December 31, 1999: Mr. Branagan, $1,810; Mr. Choate, $898; Ms.
Heagy, $1,810; Mr. Kennedy, $905; Mr. Nelson, $1,810; Mr. Rooney, $1,610;
Mr. Sisto, $905; and Mr. Whalen, $1,810. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to either the
return on the common shares of the Fund or other funds in the Fund Complex
as selected by the respective Non-Affiliated Trustee, with the same economic
effect as if such Non-Affiliated Trustee had invested in one or more funds
in the Fund Complex. To the extent permitted by the 1940 Act, each fund may
invest in securities of those funds selected by the Non-Affiliated Trustees
in order to match the deferred compensation obligation. The cumulative
deferred compensation (including interest) accrued with respect to each
trustee, including former trustees, from the Fund as of December 31, 1999 is
as follows: Mr. Branagan, $8,685; Mr. Caruso, $4,008; Mr. Choate, $1,236;
Mr. Gaughan, $286; Ms. Heagy, $8,801; Mr. Kennedy, $7,218; Mr. Miller,
$3,147; Mr. Nelson, $17,708; Mr. Rees, $22,520; Mr. Robinson, $7,301; Mr.
Rooney, $7,936; Mr. Sisto, $31,117; Mr. Whalen, $11,734; and Mr. Yovovich,
$2,148. The deferred compensation plan is described above the Compensation
Table.
B-24
<PAGE> 142
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating investment companies in the Fund Complex
for each of the trustees for the funds' respective fiscal years ended in
1999. The retirement plan is described above the Compensation Table.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 1999 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis. Certain trustees
deferred all or a portion of their aggregate compensation from the Fund
Complex during the calendar year ended December 31, 1999. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such Non-
Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of
those investment companies selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The Advisers and their
affiliates also serve as investment adviser for other investment companies;
however, with the exception of Mr. Whalen, the Non-Affiliated Trustees were
not trustees of such investment companies. Combining the Fund Complex with
other investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
The Fund, the Adviser and the Distributor have adopted Codes of Ethics
(collectively, the "Code of Ethics") that set forth general and specific
standards relating to the securities trading activities of their employees. The
Code of Ethics does not prohibit employees from acquiring securities that may be
purchased or held by the Fund, but is intended to ensure that all employees
conduct their personal transactions in a manner that does not interfere with the
portfolio transactions of the Fund or other Van Kampen funds, or that such
employees take unfair advantage of their relationship with the Fund. Among other
things, the Code of Ethics prohibits certain types of transactions absent prior
approval, imposes various trading restrictions (such as time periods during
which personal transactions may or may not be made) and requires quarterly
reporting of securities transactions and other matters. All reportable
securities transactions and other required reports are to be reviewed by
appropriate personnel for compliance with the Code of Ethics. Additional
restrictions apply to portfolio managers, traders, research analysts and others
who may have access to nonpublic information about the trading activities of the
Fund or other Van Kampen funds or who otherwise are involved in the investment
advisory process. Exceptions to these and other provisions of the Code of Ethics
may be granted in particular circumstances after review by appropriate
personnel.
As of April 3, 2000, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
B-25
<PAGE> 143
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objective. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Board of Trustees and
permits its officers and employees to serve without compensation as trustees of
the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the cost of its day-to-day operations, including service fees,
distribution fees, custodian fees, legal and independent accountant fees, the
costs of reports and proxies to shareholders, compensation of trustees of the
Trust (other than those who are affiliated persons of the Adviser, Distributor
or Van Kampen Investments) and all other ordinary business expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any actions or omissions in the
absence of willful misfeasance, bad faith, negligence or reckless disregard of
its obligations and duties under the Advisory Agreement.
The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of Van Kampen
Investments in connection with the purchase and sale of portfolio investments
less any direct expenses incurred by such subsidiary of Van Kampen Investments,
in connection with obtaining such commissions, fees, brokerage or similar
payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Fund's benefit and to advise
the Trustees of the Fund of any other commissions, fees, brokerage or similar
payments which may be possible for the Adviser or any other direct or indirect
majority owned subsidiary of Van Kampen Investments to receive in connection
with the Fund's portfolio transactions or other arrangements which may benefit
the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitations applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the distribution plans.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by a vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
B-26
<PAGE> 144
During the fiscal years ended December 31, 1999, 1998 and 1997, the Adviser
received approximately $2,516,800, $2,459,200 and $2,510,200, respectively, in
advisory fees from the Fund.
OTHER AGREEMENTS
Accounting Services Agreement. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
supplementary to those provided by the custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund pays all costs and expenses related to such services, including all
salary and related benefits of accounting personnel, as well as the overhead and
expenses of office space and the equipment necessary to render such services.
The Fund shares together with the other Van Kampen funds in the cost of
providing such services with 25% of such costs shared proportionately based on
the respective number of classes of securities issued per fund and the remaining
75% of such costs based proportionately on the respective net assets per fund.
During the fiscal years ended December 31, 1999, 1998 and 1997, Advisory
Corp. received approximately $114,900, $156,200 and $90,000, respectively, in
accounting services fees from the Fund.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's
Trustees or (ii) by a vote of a majority of the Fund's outstanding voting
securities and (b) by the affirmative vote of a majority of Trustees who are not
parties to the Distribution and Service Agreement or interested persons of any
party, by votes cast in person at a meeting called for such purpose. The
Distribution and Service Agreement provides that it will terminate if assigned,
and that it may be terminated without penalty by either party on 90 days'
written notice. Total underwriting commissions on the sale of shares of the Fund
for the last three fiscal years are shown in the chart below.
<TABLE>
<CAPTION>
Total Amounts
Underwriting Retained by
Commissions Distributor
------------ -----------
<S> <C> <C>
Fiscal year ended December 31, 1999..................... $419,800 $50,000
Fiscal year ended December 31, 1998..................... $314,736 $43,133
Fiscal year ended December 31, 1997..................... $333,230 $48,278
</TABLE>
B-27
<PAGE> 145
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<TABLE>
<CAPTION>
Total Sales Charge
------------------------- Reallowed
As % of As % of Net To Dealers
Size of Offering Amount As a % of
Investment Price Invested Offering Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $50,000........................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000.............. 4.75% 4.99% 4.00%
$100,000 but less than $250,000............. 3.75% 3.90% 3.00%
$250,000 but less than $500,000............. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........... 2.00% 2.04% 1.75%
$1,000,000 or more.......................... * * *
- ------------------------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed on a percentage of the dollar value of such
shares sold as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million. For single purchases of
$20 million or more by an individual retail investor the Distributor will pay,
at the time of purchase and directly out of the Distributor's assets (and not
out of the Fund's assets), a commission or transaction fee of 1.00% to
authorized dealers who initiate and are responsible for such purchases. The
commission or transaction fee of 1.00% will be computed on a percentage of the
dollar value of such shares sold.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution
fees on Class B Shares and Class C Shares of the Fund are paid to the
Distributor and are used by the Distributor to defray its distribution related
expenses in connection with the sale of the Fund's shares, such as the payment
to authorized dealers for selling such shares. With respect to Class C Shares,
the authorized dealers generally are paid the ongoing commission and transaction
fees of up to 0.75% of the average daily net assets of the Fund's Class C Shares
annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs
B-28
<PAGE> 146
sponsored by the Distributor, an amount not exceeding the total applicable sales
charges on the sales generated by the authorized dealer at the public offering
price during such programs. Also, the Distributor in its discretion may from
time to time, pursuant to objective criteria established by the Distributor, pay
fees to, and sponsor business seminars for, qualifying authorized dealers for
certain services or activities which are primarily intended to result in sales
of shares of the Fund or other Van Kampen funds. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives for meetings or seminars of a business
nature. In some instances additional compensation or promotional incentives may
be offered to brokers, dealers or financial intermediaries that have sold or may
sell significant amounts of shares during specified periods of time. The
Distributor may provide additional compensation to Edward D. Jones & Co. or an
affiliate thereof based on a combination of its quarterly sales of shares of the
Fund and other Van Kampen funds and increases in net assets of the Fund and
other Van Kampen funds over specified thresholds. All of the foregoing payments
are made by the Distributor out of its own assets. Such fees paid for such
services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. These programs will not change the price an investor will pay for shares
or the amount that a Fund will receive from such sale.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares and sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary were
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a financial intermediary would result in any material adverse consequences
to the Fund.
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid
B-29
<PAGE> 147
under the Distribution Plan and the purposes for which such expenditures were
made, together with such other information as from time to time is reasonably
requested by the Trustees. The Plans provide that they will continue in full
force and effect from year to year so long as such continuance is specifically
approved by a vote of the Trustees, and also by a vote of the disinterested
Trustees, cast in person at a meeting called for the purpose of voting on the
Plans. Each of the Plans may not be amended to increase materially the amount to
be spent for the services described therein with respect to any class of shares
without approval by a vote of a majority of the outstanding voting shares of
such class, and all material amendments to either of the Plans must be approved
by the Trustees and also by the disinterested Trustees. Each of the Plans may be
terminated with respect to any class of shares at any time by a vote of a
majority of the disinterested Trustees or by a vote of a majority of the
outstanding voting shares of such class.
For Class A Shares in any given year in which the Plans are in effect, the
Plans generally provide for the Fund to pay the Distributor the lesser of (i)
the amount of the Distributor's actual expenses incurred during such year less
any deferred sales charges (if any) it received during such year (the "actual
net expenses") or (ii) the distribution and service fees at the rates specified
in the Prospectus (the "plan fees"). Therefore, to the extent the Distributor's
actual net expenses in a given year are less than the plan fees for such year,
the Fund only pays the actual net expenses. Alternatively, to the extent the
Distributor's actual net expenses in a given year exceed the plan fees for such
year, the Fund only pays the plan fees for such year. For Class A Shares, there
is no carryover of any unreimbursed actual net expenses to succeeding years.
The Plans for Class B Shares and Class C Shares are similar to the Plans
for Class A Shares, except that any actual net expenses which exceed plan fees
for a given year are carried forward and are eligible for payment in future
years by the Fund so long as the Plans remain in effect. Thus, for each of the
Class B Shares and Class C Shares, in any given year in which the Plans are in
effect, the Plans generally provide for the Fund to pay the Distributor the
lesser of (i) the applicable amount of the Distributor's actual net expenses
incurred during such year for such class of shares plus any actual net expenses
from prior years that are still unpaid by the Fund for such class of shares or
(ii) the applicable plan fees for such class of shares. Except as may be
mandated by applicable law, the Fund does not impose any limit with respect to
the number of years into the future that such unreimbursed actual net expenses
may be carried forward (on a Fund level basis). These unreimbursed actual net
expense may or may not be recovered through plan fees or contingent deferred
sales charges in future years.
Because of fluctuation in net asset value, the plan fees 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, 1999, there were $5,152,922 and $280,163 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 8.29% and 3.12% of the Fund's average daily net
assets attributable to Class B Shares and Class C Shares, respectively. If the
Plans are terminated or not continued, the Fund would not be contractually
obligated to pay the Distributor for any expenses not previously reimbursed by
the Fund or recovered through contingent deferred sales charges.
B-30
<PAGE> 148
For the fiscal year ended December 31, 1999, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $890,903 or 0.24% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended December 31, 1999, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $584,146 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $435,522 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $148,624
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended December 31,
1999, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$62,225 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $28,963 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $33,262 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
The Distributor has entered into agreements with the following firms: (i)
Merrill Lynch, Pierce, Fenner & Smith Incorporated, (ii) Norwest Bank Minnesota,
N.A./Wells Fargo, N.A., (iii) Invesco Retirement and Benefit Services, Inc.,
(iv) Lincoln National Life Insurance Company, (v) National Deferred
Compensation, Inc., (vi) The Prudential Insurance Company of America and (vii)
Union Bank of California, N.A. Shares of the Fund will be offered pursuant to
such firm's retirement plan alliance program(s). Trustees and other fiduciaries
of retirement plans seeking to invest in multiple fund families through
broker-dealer retirement plan alliance programs should contact the firms
mentioned above for further information concerning the program(s) including, but
not limited to, minimum investment and operational requirements.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency prices
are determined through negotiations with the Fund's Board of Trustees and are
based on competitive benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard will at all times
be subject to review by the Board of Trustees of the Fund.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
B-31
<PAGE> 149
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objective, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Effective October 31, 1996, Morgan Stanley & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("Dean Witter") became an affiliate of the Adviser. The
Fund's Board of Trustees has adopted certain policies incorporating the
standards of Rule 17e-1 issued by the SEC under the 1940 Act which require that
the commissions paid to affiliates of the Fund must
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be reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the Trustees and to maintain records in connection with
such reviews. After consideration of all factors deemed relevant, the Trustees
will consider from time to time whether the advisory fee for the Fund will be
reduced by all or a portion of the brokerage commission given to affiliated
brokers.
The Fund paid the following commissions to all brokers and affiliated
brokers during the years shown:
Commissions Paid:
<TABLE>
<CAPTION>
Affiliated Brokers
--------------------
All Morgan Dean
Brokers Stanley Witter
------- ------- ------
<S> <C> <C> <C>
Fiscal year ended December 31, 1999.................. $264,200 $ -0- $-0-
Fiscal year ended December 31, 1998.................. $334,031 $ -0- $-0-
Fiscal year ended December 31, 1997.................. $568,960 $ -0- $-0-
Fiscal year 1999 Percentages:
Commissions with affiliate to total commissions...... -0- -0-
Value of brokerage transactions with affiliate to
total transactions................................ -0- -0-
</TABLE>
During the fiscal year ended December 31, 1999, the Fund paid $88,384 in
brokerage commissions on transactions totaling $90,408,687 to brokers selected
primarily on the basis of research services provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds (as defined in the Prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gain dividends and systematic purchases or redemptions. Additional shares may be
purchased at any time through authorized dealers or by mailing a check directly
to Investor Services.
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SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, requesting an
"Affidavit of Loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate
the fee for replacing the lost certificate equal to no more than 1.50% of the
net asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; Section 403(b)(7) plans in the case of employees of public
school systems and certain non-profit organizations; or other pension or profit
sharing plans. Documents and forms containing detailed information regarding
these plans are available from the Distributor. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Money Purchase and Profit Sharing
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds transferred to a
bank account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order to utilize this option,
the shareholder's bank must be a member of ACH. In addition, the shareholder
must fill out the appropriate section of the account application. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemption proceeds are to be deposited together with the
completed application. Once Investor Services has received the application and
the voided check or deposit slip, such shareholder's designated bank account,
following any redemption, will be credited with the proceeds of such redemption.
Once enrolled in the ACH plan, a shareholder may terminate participation at any
time by writing Investor Services or by calling (800) 341-2911 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may upon written request, by completing the appropriate
section of the account application form or by calling (800) 341-2911 ((800)
421-2833 for the hearing impaired), elect to have all dividends and capital gain
dividends paid on a class of shares of the Fund invested into shares of the same
class of any Participating Fund so long as the investor has a pre-existing
account for such class of shares of the other fund. Both accounts must be of the
same type, either non-retirement or retirement. If the accounts are retirement
accounts, they must both be for the same class and of the same type of
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retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for the benefit of the
same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for regular 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 systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gain dividends
on shares held in accounts with systematic withdrawal plans are reinvested in
additional shares at the next determined net asset value per share. If periodic
withdrawals continuously exceed reinvested dividends and capital gain dividends,
the shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Redemptions made concurrently with the purchase of
additional shares ordinarily will be disadvantageous to the shareholder because
of the duplication of sales charges. Any gain or loss realized by the
shareholder upon redemption of shares is a taxable event. The Fund reserves the
right to amend or terminate the systematic withdrawal program upon 30 days'
notice to its shareholders.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made during a rolling 365-day period. If
exchange privileges are suspended, subsequent exchange requests during the
stated period will not be processed. Exchange privileges will be restored when
the account history shows fewer than eight exchanges in the rolling 365-day
period.
This policy change does not apply to money market funds, systematic
exchange plans, or employer-sponsored retirement plans.
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REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class A Shares of the Fund. A Class C Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption in
Class C Shares of the Fund with credit given for any contingent deferred sales
charge paid upon such redemption. Such reinstatement is made at the net asset
value per share (without sales charge) next determined after the order is
received, which must be made within 180 days after the date of the redemption.
Reinstatement at net asset value per share is also offered to participants in
those eligible retirement plans held or administered by Van Kampen Trust Company
for repayment of principal (and interest) on their borrowings on such plans.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. The right of redemption may be suspended and the
payment therefor may be postponed for more than seven days during any period
when (a) the Exchange is closed for other than customary weekends or holidays;
(b) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
In addition, if the Board of Trustees determines that payment wholly or
partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. A
distribution-in-kind will result in recognition by the shareholder of a gain or
loss for federal income tax purposes when such securities are distributed, and
the shareholder may have brokerage charges and a gain or loss for federal income
tax purposes upon a shareholder's subsequent disposition of such securities.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC-Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholders account not subject to a contingent deferred
sales charge followed by shares held the longest in the shareholder's account.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost
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<PAGE> 154
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
sales charge is assessed on shares derived from reinvestment of dividends or
capital gain dividends.
WAIVER OF CLASS B AND CLASS C
CONTINGENT DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived on redemptions
of Class B Shares and Class C Shares in the circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Internal Revenue Code of 1986, as
amended (the "Code"), which in pertinent part defines a person as disabled if
such person "is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or to be of long-continued and indefinite duration."
While the Fund does not specifically adopt the balance of the Code's definition
which pertains to furnishing the Secretary of Treasury with such proof as he or
she may require, the Distributor will require satisfactory proof of death or
disability before it determines to waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The CDSC-Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), the financial hardship of the
employee pursuant to U.S. Treasury Regulations Section 1.401(k)-(1)(d)(2) or
from the death or disability of the employee (see Code Section 72(m)(7) and
72(t)(2)(A)(ii)). In addition, the charge
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will be waived on any minimum distribution required to be distributed in
accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal plan, a dollar amount of a participating shareholder's investment in
the Fund will be redeemed systematically by the Fund on a periodic basis, and
the proceeds sent to the designated payee of record. The amount to be redeemed
and frequency of the systematic withdrawals will be specified by the shareholder
upon his or her election to participate in the systematic withdrawal plan. The
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The Fund reserves the right to change the terms and
conditions of the systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" in the Prospectus.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of the Fund may reinvest at
net asset value, with credit for any CDSC-Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C Shares of the Fund, provided that the reinvestment is
effected within 180 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege with respect to Class C Shares
of the Fund. Shares acquired in this manner will be
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deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC-Class C to subsequent redemptions.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the source of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (generally including taxable
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss), and
meets certain other requirements, it will not be required to pay federal income
taxes on any income it distributes to shareholders. The Fund intends to
distribute at least the minimum amount of investment company taxable income
necessary to satisfy the 90% distribution requirement. The Fund will not be
subject to federal income tax on any net capital gain distributed to
shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31st of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
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
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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 may, among other things, defer the use of certain losses of the
Fund, affect the holding period of the securities held by the Fund and alter the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. 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.
PASSIVE FOREIGN INVESTMENT COMPANIES. 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: (i) at least
75% of its gross income is passive income or (ii) an average of at least 50% of
its assets produce, or are held for the production of, passive income. Under
certain circumstances, a regulated investment company that holds stock of a PFIC
will be subject to federal income tax on (i) a portion of any "excess
distribution" received on such stock or (ii) any gain from a sale or disposition
of such stock (collectively, "PFIC income"), plus interest on such amounts, even
if the regulated investment company distributes the PFIC income as a taxable
dividend to its shareholders. The balance of the PFIC income will be included in
the regulated investment company's investment company taxable income and,
accordingly, will not be taxable to it to the extent that income is distributed
to its shareholders. If 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 to satisfy the 90%
distribution requirement and the distribution requirement for avoiding income
and excise taxes. In most instances it will be very difficult to make this
election due to certain requirements imposed with respect to the election.
As an alternative to making the above-described election to treat the PFIC
as a qualified electing fund, the Fund may make an election to annually
mark-to-market PFIC stock that it owns (a "PFIC Mark-to-Market Election").
"Marking-to-market," in this context, means recognizing as ordinary income or
loss each year an amount equal to the difference between 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
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required to include in its taxable income for the first taxable year in which it
makes a PFIC Mark-to-Market Election an amount equal to the interest charge that
would otherwise accrue with respect to distributions on, or dispositions of, the
PFIC stock. This amount would not be deductible from the Fund's taxable income.
The PFIC Mark-to-Market Election applies to the taxable year for which made and
to all subsequent taxable years, unless the Internal Revenue Service (the "IRS")
consents to revocation of the election. By making the PFIC Mark-to-Market
Election, the Fund could ameliorate the adverse tax consequences arising from
its ownership of PFIC stock, but in any particular year may be required to
recognize income in excess of the distributions it receives from the PFIC and
proceeds from the dispositions of PFIC stock.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of the Fund's investment company taxable income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gain as capital gain dividends, if any, are taxable to
shareholders as long-term capital gains regardless of the length of time shares
of the Fund have been held by such shareholders. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the maximum tax rates applicable to capital
gains (including capital gain dividends), see "Capital Gains Rates" below.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. 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 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 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions.
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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 gains. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
and the amount received. If such shares are held as a capital asset, the gain or
loss will be a capital gain or loss. For a summary of the maximum tax rates
applicable to capital gains (including capital gain dividends), see "Capital
Gains Rates" below. Any loss recognized upon a taxable disposition of shares
held for six months or less will be treated as a long-term capital loss to the
extent of any capital gain dividends received with respect to such shares. For
purposes of determining whether shares have been held for six months or less,
the holding period is suspended for any periods during which the shareholder's
risk of loss is diminished as a result of holding one or more other positions in
substantially similar or related property or through certain options or short
sales.
CAPITAL GAINS RATES
The maximum tax rate applicable to net capital gains recognized by
individuals and other non-corporate taxpayers investing in the Fund is (i) the
same as the maximum ordinary income tax rate for capital assets held for one
year or less or (ii) 20% for capital assets held for more than one year. The
maximum long-term capital gains rate for corporations is 35%.
NON-U.S. SHAREHOLDERS
A shareholder who is not (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized under the laws of the
United States or any state thereof, (iii) an estate, the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries who have
the authority to control all substantial decisions of the trust (a "Non-U.S.
Shareholder") generally will be subject to withholding of United States federal
income tax at a 30% rate (or lower applicable treaty rate) on dividends from the
Fund
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(other than capital gain dividends) that are not "effectively connected" with a
United States trade or business carried on by such shareholder.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to United States federal income tax in
the case of (i) a Non-U.S. Shareholder who is a corporation and (ii) an
individual Non-U.S. Shareholder who is not present in the United States for more
than 182 days during the taxable year (assuming that certain other conditions
are met). However, certain Non-U.S. Shareholders may nonetheless be subject to
backup withholding on capital gain dividends and gross proceeds paid to them
upon the sale of their shares. See "Backup Withholding" below.
If income from the Fund or gains realized from the sale of shares is
effectively connected with a Non-U.S. Shareholder's United States trade or
business, then such amounts will be subject to United States federal income tax
on a net basis at the tax rates applicable to United States citizens or domestic
corporations. Non-U.S. Shareholders that are corporations may also be subject to
an additional "branch profits tax" with respect to income from the Fund that is
effectively connected with a United States trade or business.
United States Treasury regulations, generally effective for payments made
after December 31, 2000, modify the withholding, back-up withholding and
information reporting rules, including the procedures to be followed by foreign
investors in establishing foreign status. Prospective foreign investors should
consult their tax advisers concerning the applicability and effect of such
Treasury regulations on an investment in shares of the Fund.
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. Non-U.S. Shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their tax advisers with respect to the
tax implications of purchasing, holding and disposing of shares of the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder fails
to certify that he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
B-43
<PAGE> 161
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder (other
than a Non-U.S. Shareholder) the amount of dividends paid to such shareholder
and the amount, if any, of tax withheld pursuant to backup withholding rules
with respect to such dividends. In the case of a Non-U.S. Shareholder, the Fund
must report to the IRS and such shareholder the aggregate amount of dividends
paid that are subject to backup withholding (if any) and the amount of tax
withheld with respect to such dividends pursuant to the backup withholding
rules. This information may also be made available to the tax authorities in the
Non-U.S. Shareholder's country of residence. Generally, dividends paid to
Non-U.S. Shareholders that are subject to the 30% federal income tax withholding
described above under "Non-U.S. Shareholders" are not subject to backup
withholding.
GENERAL
The federal income tax discussion set forth above is for general
information only. Prospective investors and shareholders should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one-year, five-year and ten-year periods. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge has been paid. The Fund's total return will vary depending
on market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Since Class A Shares of the Fund were offered at a maximum sales charge of 8.50%
prior to June 12, 1989, actual Fund total return for shares purchased prior to
such date would have been somewhat less than that computed on the basis of the
current maximum sales charge. Total return is based on historical earnings and
asset value fluctuations and is not intended to indicate future performance. No
adjustments are made to reflect any income taxes payable by shareholders on
dividends and capital gain dividends paid by the Fund or to reflect the fact
12b-1 fees previously may have been less than the current 12b-1 fees for certain
classes of shares as specified in the Prospectus.
Average annual total return quotations 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.
B-44
<PAGE> 162
Total return is calculated separately for Class A Shares, Class B Shares
and Class C Shares of the Fund. Total return figures for Class A Shares include
the maximum sales charge. Total return figures for Class B Shares and Class C
Shares include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares will differ.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any contingent deferred sales charge
imposed at the time of redemption were reflected, it would reduce the
performance quoted.
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 gains 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.
From time to time marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings. Materials may also
mention how the Distributor believes the Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their fund shares in direct or sales force distribution channels. The
study showed that investors working with a professional representative have
tended over time to earn higher returns than those who invested directly. The
performance of the funds purchased by the investors in the Dalbar study and the
conclusions based thereon are not necessarily indicative of future performance
of such funds or conclusions that may result from similar studies in the future.
The Fund may also be marketed on the internet.
B-45
<PAGE> 163
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, 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 or rating services and by
nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Fund's shares. For
these purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce the Fund's performance. The Fund will include performance data for
each class of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
December 31, 1999 was 41.35%, (ii) the five-year period ended December 31, 1999
was 19.52% and (iii) the ten-year period ended December 31, 1999 was 13.21%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to December 31, 1999 was 7496.13%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to December 31, 1999 was 7960.49%.
B-46
<PAGE> 164
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended December 31, 1999 was 44.02%, (ii) the five-year period ended
December 31, 1999 was 19.87% and (iii) the approximately eight-year period since
December 20, 1991, the commencement of distribution for Class B Shares of the
Fund, through December 31, 1999 was 14.60%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
December 20, 1991 (the commencement of distribution of Class B Shares) to
December 31, 1999 was 198.90%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
December 20, 1991 (the commencement of distribution of Class B Shares) to
December 31, 1999 was 198.90%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended December 31, 1999 was 47.95%, (ii) the five-year period ended
December 31, 1999 was 20.01% and (iii) the approximately six-year, two-month
period since October 26, 1993, the commencement of distribution for Class C
Shares of the Fund, through December 31, 1999 was 14.67%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
October 26, 1993 (commencement of distribution of Class C Shares) to December
31, 1999 was 131.62%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
October 26, 1993 (commencement of distribution of Class C Shares) to December
31, 1999 was 131.62%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
OTHER INFORMATION
CUSTODY OF ASSETS
All securities owned by the Fund and all cash, including proceeds from the
sale of shares of the Fund and of securities in the Fund's investment portfolio,
are held by State Street Bank and Trust Company, 225 West Franklin Street,
Boston, Massachusetts 02110, as custodian. The custodian also provides
accounting services to the Fund.
B-47
<PAGE> 165
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 200 East Randolph Drive, Chicago, Illinois
60601, the independent accountants for the Fund, performs an annual audit of the
Fund's financial statements.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-48
<PAGE> 166
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, 1999, 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 accounting principles generally accepted in the United States.
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 auditing standards generally accepted in the United States, 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, 1999 by correspondence with the custodian provide
a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
February 11, 2000
F-1
<PAGE> 167
PORTFOLIO OF INVESTMENTS
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DOMESTIC CONVERTIBLE CORPORATE
OBLIGATIONS** 51.4%
CONSUMER DISTRIBUTION 1.2%
$ 5,901 AnnTaylor Stores Corp., 144A -
Private Placement (a)................ 0.550% 06/18/19 $ 3,189,078
3,390 Costco Wholesale Corp. .............. * 08/19/17 3,610,350
------------
6,799,428
------------
CONSUMER NON-DURABLES 0.7%
5,150 Loews Corp. (convertible into 79,185
Diamond Offshore Drilling, Inc.
common shares)....................... 3.125 09/15/07 4,223,000
------------
CONSUMER SERVICES 3.7%
5,031 Etoys, Inc., 144A - Private Placement
(a).................................. 6.250 12/01/04 3,075,199
2,530 Interpublic Group of Companies, Inc.,
144A - Private Placement (a)......... 1.870 06/01/06 2,874,713
5,800 Jacor Communications, Inc., LYON..... * 02/09/18 3,900,500
1,700 Omnicom Group, Inc................... 2.250 01/06/13 3,471,094
1,250 Omnicom Group, Inc., 144A -
Private Placement (a)................ 4.250 01/03/07 3,981,250
9,300 Times Mirror Co., LYON............... * 04/15/17 4,545,375
------------
21,848,131
------------
ENERGY 1.4%
4,207 Devon Energy Corp.................... 4.950 08/15/08 4,122,860
4,300 Kerr-McGee Corp. .................... 7.500 05/15/14 3,993,625
------------
8,116,485
------------
FINANCE 0.5%
1,680 Checkfree Holdings Corp., 144A -
Private Placement (a)................ 6.500 12/01/06 2,675,400
------------
HEALTHCARE 3.5%
2,347 Alpharma, Inc., 144A - Private
Placement (a)........................ 3.000 06/01/06 2,528,892
3,060 ALZA Corp............................ 5.000 05/01/06 3,220,650
5,080 Centocor, Inc........................ 4.750 02/15/05 6,788,150
2,750 Human Genome Sciences, Inc.,
144A - Private Placement (a)......... 5.000 12/15/06 3,313,750
7,860 Roche Holdings, Inc., LYON, 144A -
Private Placement (a)................ * 04/20/10 4,750,427
------------
20,601,869
------------
PRODUCER MANUFACTURING 0.4%
2,102 Advanced Energy Industries, Inc...... 5.250 11/15/06 2,511,890
------------
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 168
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TECHNOLOGY 36.6%
$ 5,520 Adaptec, Inc......................... 4.750% 02/01/04 $ 5,996,100
10,481 America Online, Inc.................. * 12/06/19 6,021,334
765 America Online, Inc.................. 4.000 11/15/02 8,865,814
2,280 Automatic Data Processing, Inc.,
LYON................................. * 02/20/12 3,180,600
555 Bea Systems, Inc..................... 4.000 06/15/05 2,947,050
3,794 Bea Systems, Inc., 144A - Private
Placement (a)........................ 4.000 12/15/06 4,435,110
1,260 Commscope, Inc., 144A - Private
Placement (a)........................ 4.000 12/15/06 1,352,686
8,875 Comverse Technology Inc., 144A -
Private Placement (a)................ 4.500 07/01/05 30,274,844
1,660 Conexant Systems, Inc................ 4.250 05/01/06 4,870,025
5,990 Conexant Systems, Inc.,
144A - Private Placement (a)......... 4.250 05/01/06 17,573,162
3,877 Corecomm Limited Co., 144A - Private
Placement (a)........................ 6.000 10/01/06 6,067,505
4,060 Cypress Semiconductor Corp........... 6.000 10/01/02 5,861,625
1,480 DoubleClick, Inc., 144A - Private
Placement (a)........................ 4.750 03/15/06 4,599,100
5,065 DSC Communications Corp.............. 7.000 08/01/04 5,318,250
5,870 Echostar Communications Corp.,
144A -
Private Placement (a)................ 4.875 01/01/07 7,168,033
1,030 EMC Corp............................. 3.250 03/15/02 9,947,225
5,031 Exodus Communications, Inc., 144A -
Private Placement (a)................ 4.750 07/15/08 6,967,331
10,070 Hewlett-Packard Co., LYON............ * 10/14/17 6,935,713
2,110 HNC Software, Inc.................... 4.750 03/01/03 5,132,575
2,524 I2 Technologies, Inc., 144A -
Private Placement (a)................ 5.250 12/15/06 3,625,095
5,320 Lam Research Corp.................... 5.000 09/01/02 7,308,350
1,682 Lattice Semiconductor Corp., 144A -
Private Placement (a)................ 4.750 11/01/06 2,205,523
7,000 LSI Logic Corp., 144A - Private
Placement (a)........................ 4.250 03/15/04 15,898,750
1,820 Micron Technology, Inc............... 7.000 07/01/04 2,350,075
1,000 Oak Industries, Inc.................. 4.875 03/01/08 2,797,850
1,127 Sanmina Corp., 144A - Private
Placement (a)........................ 4.250 05/01/04 1,490,458
4,200 Siebel Systems, Inc., 144A - Private
Placement (a)........................ 5.500 09/15/06 8,142,750
5,060 Solectron Corp., LYON, 144A -
Private Placement (a)................ * 01/27/19 3,869,787
5,000 Solectron Corp., LYON................ * 01/27/19 3,781,250
7,491 Veritas Software Corp................ 1.856 08/13/06 20,325,405
------------
215,309,375
------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 169
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
UTILITIES 3.4%
$ 3,860 Nextel Communications, Inc., 144A -
Private Placement (a)................ 4.750% 07/01/07 $ 8,757,375
4,300 NTL, Inc., 144A - Private Placement
(a).................................. 7.000 12/15/08 11,373,500
------------
20,130,875
------------
TOTAL DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS 51.4%.... 302,216,453
------------
FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS** 6.2%
5,200 ASM Lithography Holding,
(Netherlands) 144A -
Private Placement (a)................ 4.250 11/30/04 6,290,492
10,740 STMicroelectronics NV, LYON,
(Netherlands)........................ * 09/22/09 14,801,438
1,000 Swiss Life Finance Ltd., (United
Kingdom), (Convertible into 13,614
shares of Royal Dutch Petroleum Co.),
144A - Private Placement (a)......... 2.000 05/20/05 995,000
3,250 Swiss Life Finance Ltd., (United
Kingdom),
(Convertible into 44,246 shares of
Royal Dutch Petroleum Co.)........... 2.000 05/20/05 3,233,750
8,600 Telefonos de Mexico, SA (Mexico)..... 4.250 06/15/04 11,212,250
------------
TOTAL FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS............ 36,532,930
------------
</TABLE>
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS** 20.4%
CONSUMER SERVICES 2.4%
Adelphia Communications Corp., Ser D, 5.500%......... 10,100 $ 1,902,588
Cox Communications, Inc., PRIDES, 7.000%............. 64,700 4,399,600
Entercom Communications Capital Trust, TIDES,
6.250%............................................. 42,000 3,407,250
UNITEDGLOBALCOM, Ser D, 7.000%....................... 67,100 4,101,487
------------
13,810,925
------------
ENERGY 3.7%
Apache Corp., ACES, 6.500%........................... 203,600 7,227,800
El Paso Energy Capital Trust I, 4.750%............... 95,750 4,823,406
Kerr-McGee Corp., DECS, 5.500% (Convertible into
71,360 shares of Devon Energy common stock).......... 84,200 2,778,600
Pogo Trust I Co., Ser A, QUIPS, 6.500%............... 50,600 2,492,050
Tosco Financing Trust, 5.750%........................ 94,700 4,510,088
------------
21,831,944
------------
FINANCE 0.4%
American General Corp., 7.000%....................... 35,000 2,117,500
------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 170
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
RAW MATERIALS/PROCESSING INDUSTRIES 0.3%
Monsanto Co., ACES, 6.500%........................... 59,050 $ 1,956,031
------------
TECHNOLOGY 7.0%
Amdocs Ltd., TRACES, 6.750%.......................... 64,000 2,056,000
Echostar Communications Corp., Ser C, 6.750%......... 7,300 6,058,772
PSINet, Inc., Ser C, 6.750%.......................... 49,800 2,907,075
Qualcomm Financial Trust, 5.750%..................... 28,500 28,051,125
Verio, Inc., 6.750%, 144A - Private Placement (a).... 32,600 1,841,900
------------
40,914,872
------------
UTILITIES 6.6%
Calpine Capital Trust, TIDES, 5.750%................. 90,500 5,939,063
MCI Worldcom, Inc., 2.250%........................... 56,500 2,899,156
McLeodUSA, Inc., Ser A, 6.750%....................... 13,599 7,003,715
Nextlink Communications Inc., 6.500%, 144A -
Private Placement (a)................................ 12,600 2,435,353
Omnipoint Corp., 7.000%, 144A - Private Placement
(a)................................................ 71,100 14,015,587
WinStar Communications, Inc., Ser D, 7.000%.......... 84,500 6,707,188
------------
39,000,062
------------
TOTAL CONVERTIBLE PREFERRED STOCK 20.4%.......................... 119,631,334
------------
COMMON STOCKS** 12.2%
CONSUMER DISTRIBUTION 3.4%
Home Depot, Inc...................................... 287,739 19,728,105
------------
CONSUMER SERVICES 0.7%
Cable Vision Systems Corp., Class A (b).............. 51,898 3,918,299
Jazztel PLC (United Kingdom) (b)..................... 3,500 227,938
------------
4,146,237
------------
FINANCE 1.7%
American Express Co.................................. 22,000 3,657,500
Citigroup, Inc....................................... 111,000 6,167,437
------------
9,824,937
------------
HEALTHCARE 1.8%
Genentech, Inc. (b).................................. 79,600 10,706,200
------------
TECHNOLOGY 4.2%
Lam Research Corp. (b)............................... 60,000 6,693,750
Motorola, Inc........................................ 52,500 7,730,625
SCI Systems, Inc. (b)................................ 67,654 5,560,313
Texas Instruments, Inc............................... 49,000 4,746,875
------------
24,731,563
------------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 171
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
ENTERTAINMENT 0.4%
Royal Caribbean Cruises Ltd.......................... 53,000 $ 2,613,562
------------
UTILITIES 0.0%
Winstar Communications, Inc. (b)..................... 1 64
------------
TOTAL COMMON STOCKS 12.2%........................... 71,750,668
------------
TOTAL LONG-TERM INVESTMENTS 90.2%
(Cost $323,505,746).................................. 530,131,385
------------
SHORT-TERM INVESTMENTS 8.2%
U.S. GOVERNMENT AGENCY OBLIGATIONS 0.8%
Federal Home Loan Bank Discount Note ($5,000,000 par,
yielding 5.579%, 31/10/00 maturity) (c)............ 4,947,100
REPURCHASE AGREEMENT 7.4%
State Street Bank & Trust Co. ($43,311,000 par
collateralized by U.S. government obligations in a
pooled cash account, dated 12/31/99, to be sold on
01/03/00 at $43,321,828) (c)......................... 43,311,000
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $48,258,100)................................... 48,258,100
------------
TOTAL INVESTMENTS 98.4%
(Cost $371,763,846).................................. 578,389,485
OTHER ASSETS IN EXCESS OF LIABILITIES 1.6%........... 9,237,678
------------
NET ASSETS 100.0%................................... $587,627,163
============
</TABLE>
- ---------------
* Zero coupon bond
** The securities are classified by sectors which represent broad groupings of
related industries.
(a) 144A securities are those 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) Non-income producing security as this stock currently does not declare
dividends.
(c) Assets segregated as collateral for open futures transactions.
ACES--Automatically convertible equity securities
DECS--Debt exchange for common stock
LYON--Liquid yield option note
PRIDES--Preferred redeemable increased dividend equity security, traded in
shares
TIDES--Term income deferrable equity securities
TRACES--Trust automatic common exchange securities
See Notes to Financial Statements
F-6
<PAGE> 172
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $371,763,846)....................... $578,389,485
Cash........................................................ 5,769,026
Receivables:
Investments Sold.......................................... 3,231,480
Interest.................................................. 1,690,151
Fund Shares Sold.......................................... 424,876
Dividends................................................. 101,718
Variation Margin on Futures............................... 63,750
Other....................................................... 66,097
------------
Total Assets.......................................... 589,736,583
------------
LIABILITIES:
Payables:
Fund Shares Repurchased................................... 635,339
Income Distributions...................................... 424,254
Distributor and Affiliates................................ 395,620
Investment Advisory Fee................................... 246,820
Accrued Expenses............................................ 230,425
Trustees' Deferred Compensation and Retirement Plans........ 176,962
------------
Total Liabilities..................................... 2,109,420
------------
NET ASSETS.................................................. $587,627,163
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $383,811,599
Net Unrealized Appreciation................................. 206,654,872
Accumulated Undistributed Net Investment Income............. 474,474
Accumulated Distributions in Excess of Net Realized Gains... (3,313,782)
------------
NET ASSETS.................................................. $587,627,163
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $516,089,311 and 25,364,244 shares of
beneficial interest issued and outstanding)........... $ 20.35
Maximum sales charge (5.75%* of offering price)......... 1.24
------------
Maximum offering price to public........................ $ 21.59
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $62,496,048 and 3,087,726 shares of
beneficial interest issued and outstanding)........... $ 20.24
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $9,041,804 and 443,749 shares of
beneficial interest issued and outstanding)........... $ 20.38
============
</TABLE>
*On sales of $50,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-7
<PAGE> 173
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 9,747,550
Dividends................................................... 7,678,344
------------
Total Income............................................ 17,425,894
------------
EXPENSES:
Investment Advisory Fee..................................... 2,516,827
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $966,474, $575,098 and $64,107,
respectively)............................................. 1,605,679
Shareholder Services........................................ 690,596
Custody..................................................... 60,228
Trustees' Fees and Related Expenses......................... 43,495
Legal....................................................... 18,615
Other....................................................... 318,288
------------
Total Expenses.......................................... 5,253,728
Less Credits Earned on Cash Balances.................... 39,103
------------
Net Expenses............................................ 5,214,625
------------
NET INVESTMENT INCOME....................................... $ 12,211,269
============
REALIZED AND UNREALIZED GAIN:
Realized Gain/Loss:
Investments............................................... $ 22,093,223
Futures................................................... 2,709,863
------------
Net Realized Gain........................................... 24,803,086
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 40,695,575
------------
End of the Period:
Investments............................................. 206,625,639
Futures................................................. 29,233
------------
206,654,872
------------
Net Unrealized Appreciation During the Period............... 165,959,297
------------
NET REALIZED AND UNREALIZED GAIN............................ $190,762,383
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $202,973,652
============
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 174
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......................... $ 12,211,269 $ 15,238,836
Net Realized Gain.............................. 24,803,086 21,993,591
Net Unrealized Appreciation/Depreciation During
the Period................................... 165,959,297 (6,888,564)
------------ ------------
Change in Net Assets from Operations........... 202,973,652 30,343,863
------------ ------------
Distributions from Net Investment Income*:..... (14,327,136) (15,692,022)
------------ ------------
Distributions from Net Realized Gains:......... (28,705,189) (22,599,003)
Distributions in Excess of Net Realized
Gains:....................................... (2,077,438) -0-
------------ ------------
Distributions from and in Excess of Net
Realized Gains*:............................. (30,782,627) (22,599,003)
------------ ------------
Total Distributions............................ (45,109,763) (38,291,025)
------------ ------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES................................... 157,863,889 (7,947,162)
------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold...................... 541,840,484 211,066,810
Net Asset Value of Shares Issued Through
Dividend Reinvestment........................ 37,594,378 31,243,567
Cost of Shares Repurchased..................... (597,692,087) (248,677,411)
------------ ------------
Net Change in Net Assets from Capital
Transactions................................. (18,257,225) (6,367,034)
------------ ------------
TOTAL INCREASE/DECREASE IN NET ASSETS.......... 139,606,664 (14,314,196)
NET ASSETS:
Beginning of the Period........................ 448,020,499 462,334,695
------------ ------------
End of the Period (Including accumulated
undistributed net investment income of
$474,474 and $1,353,997, respectively)....... $587,627,163 $448,020,499
============ ============
* Distributions by Class
- -------------------------------------------------------------------------------------
Distributions from Net Investment Income:
Class A Shares............................... $(12,803,586) $(13,495,042)
Class B Shares............................... (1,367,708) (2,044,075)
Class C Shares............................... (155,842) (152,905)
------------ ------------
$(14,327,136) $(15,692,022)
============ ============
Distributions from and in Excess of Net
Realized Gains:
Class A Shares............................... $(26,844,667) $(18,851,717)
Class B Shares............................... (3,493,077) (3,468,896)
Class C Shares............................... (444,883) (278,390)
------------ ------------
$(30,782,627) $(22,599,003)
============ ============
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 175
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 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.......................... $14.835 $15.059 $15.054 $ 15.05 $13.24
------- ------- ------- ------- ------
Net Investment Income........... .447 .520 .600 .566 .68
Net Realized and Unrealized
Gain.......................... 6.687 .546 1.854 1.173 2.25
------- ------- ------- ------- ------
Total from Investment
Operations...................... 7.134 1.066 2.454 1.739 2.93
------- ------- ------- ------- ------
Less:
Distributions from and in Excess
of Net Investment Income...... .520 .537 .730 .555 .7025
Distributions from and in Excess
of Net Realized Gain.......... 1.102 .753 1.719 1.180 .4175
------- ------- ------- ------- ------
Total Distributions............... 1.622 1.290 2.449 1.735 1.12
------- ------- ------- ------- ------
Net Asset Value, End of the
Period.......................... $20.347 $14.835 $15.059 $15.054 $15.05
======= ======= ======= ======= ======
Total Return (a).................. 50.01% 7.52% 16.91% 12.08% 22.46%
Net Assets at End of the Period
(In millions)................... $ 516.1 $ 375.4 $ 376.4 $ 373.1 $394.5
Ratio of Expenses to Average Net
Assets.......................... 1.00% 1.02% 1.04% 1.09% 1.00%
Ratio of Net Investment Income to
Average Net Assets.............. 2.69% 3.48% 3.58% 3.60% 4.62%
Portfolio Turnover................ 103% 156% 170% 129% 130%
</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
F-10
<PAGE> 176
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 1999(b) 1998(b) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................... $14.755 $14.981 $14.992 $ 14.99 $ 13.20
------- ------- ------- ------- -------
Net Investment Income.......... .320 .397 .470 .437 .56
Net Realized and Unrealized
Gain......................... 6.667 .547 1.848 1.180 2.23
------- ------- ------- ------- -------
Total from Investment
Operations................... 6.987 .944 2.318 1.617 2.79
------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income..................... .400 .417 .610 .435 .5825
Distributions from and in
Excess of Net Realized
Gain....................... 1.102 .753 1.719 1.180 .4175
------- ------- ------- ------- -------
Total Distributions............ 1.502 1.170 2.329 1.615 1.00
------- ------- ------- ------- -------
Net Asset Value, End of the
Period....................... $20.240 $14.755 $14.981 $14.992 $ 14.99
======= ======= ======= ======= =======
Total Return (a)............... 49.02% 6.70% 15.98% 11.19% 21.46%
Net Assets at End of the Period
(In millions)................ $ 62.5 $ 66.7 $ 81.3 $ 78.9 $ 78.1
Ratio of Expenses to Average
Net Assets................... 1.77% 1.81% 1.82% 1.88% 1.81%
Ratio of Net Investment Income
to Average Net Assets........ 1.97% 2.66% 2.80% 2.81% 3.81%
Portfolio Turnover............. 103% 156% 170% 129% 130%
</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
F-11
<PAGE> 177
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 1999(b) 1998(b) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period.................. $14.855 $15.080 $15.079 $ 15.07 $ 13.25
------- ------- ------- ------- -------
Net Investment Income......... .316 .405 .448 .439 .56
Net Realized and Unrealized
Gain........................ 6.707 .540 1.882 1.185 2.26
------- ------- ------- ------- -------
Total from Investment
Operations.................. 7.023 .945 2.330 1.624 2.82
------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income.................... .400 .417 .610 .435 .5825
Distributions from and in
Excess of Net Realized
Gain...................... 1.102 .753 1.719 1.180 .4175
------- ------- ------- ------- -------
Total Distributions........... 1.502 1.170 2.329 1.615 1.00
------- ------- ------- ------- -------
Net Asset Value, End of the
Period...................... $20.376 $14.855 $15.080 $15.079 $ 15.07
======= ======= ======= ======= =======
Total Return (a).............. 48.95% 6.65% 15.96% 11.20% 21.52%
Net Assets at End of the
Period (In millions)........ $ 9.0 $ 5.9 $ 4.6 $ 3.6 $ 3.6
Ratio of Expenses to Average
Net Assets (b).............. 1.76% 1.81% 1.82% 1.88% 1.80%
Ratio of Net Investment Income
to Average Net Assets....... 1.91% 2.71% 2.79% 2.81% 3.80%
Portfolio Turnover............ 103% 156% 170% 129% 130%
</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
F-12
<PAGE> 178
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
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.
Listed and unlisted securities for which the last sale price is not available
are valued at the mean of the bid and asked prices. Unlisted convertible
securities are valued at the mean of the bid and asked prices. 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 which is considered to approximate market value.
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 64% of the long-term investments at
the end of the period.
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
F-13
<PAGE> 179
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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, 1999, there were no when-issued or delayed
delivery purchase commitments.
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen Asset Management Inc. (the "Adviser") or its
affiliates, 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. Income and expenses of the Fund are allocated on a pro rata basis
to each class of shares, except for distribution and service fees and transfer
agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES--It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of post-October losses, which may not be
recognized for tax purposes until the first day of the following fiscal year,
and gains recognized for tax purposes on open futures positions at December 31,
1999.
At December 31, 1999, for federal income tax purposes, cost of long- and
short-term investments is $371,763,846; the aggregate gross unrealized
appreciation is $210,815,134 and the aggregate gross unrealized depreciation is
$4,189,495, resulting in net unrealized appreciation on long- and short-term
investments of $206,625,639.
F-14
<PAGE> 180
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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.
Due to inherent differences in the recognition of income, expenses and
realized
gain/losses under generally accepted accounting principles and federal income
tax purposes, permanent differences between book and tax basis reporting for the
1999 fiscal year have been identified and appropriately reclassified. For the
year ended December 31, 1999, a permanent book and tax difference relating to
market discount on bonds sold in the amount of $1,239,431 was reclassified from
accumulated distributions in excess of net realized gains to accumulated
undistributed net investment income. Additionally, a permanent book and tax
difference, relating to distributions, in the amount of $3,087, was reclassified
from accumulated distributions in excess of net realized gains to accumulated
undistributed net investment income.
F. EXPENSE REDUCTIONS--During the year ended December 31, 1999, the Fund's
custody fee was reduced by $39,103 as a result of credits earned on overnight
cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $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, 1999, the Fund recognized expenses of
approximately $18,600 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, 1999, the Fund recognized expenses of
approximately $114,900 representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting services to the Fund.
F-15
<PAGE> 181
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent for the Fund. For the year ended December 31,
1999, the Fund recognized expenses of approximately $529,600. Transfer agency
fees are determined through negotiations with the Fund's Board of Trustees and
are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
At December 31, 1999, capital aggregated $331,200,440, $45,606,090 and
$7,005,069 for Classes A, B, and C, respectively. For the year ended December
31, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.................................... 31,887,984 $ 523,256,330
Class B.................................... 979,139 16,286,030
Class C.................................... 135,289 2,298,124
----------- -------------
Total Sales.................................. 33,002,412 $ 541,840,484
=========== =============
Dividend Reinvestment:
Class A.................................... 1,861,452 $ 32,807,194
Class B.................................... 245,403 4,272,549
Class C.................................... 28,976 514,635
----------- -------------
Total Dividend Reinvestment.................. 2,135,831 $ 37,594,378
=========== =============
Repurchases:
Class A.................................... (33,692,071) $(553,098,912)
Class B.................................... (2,656,393) (42,699,223)
Class C.................................... (117,843) (1,893,952)
----------- -------------
Total Repurchases............................ (36,466,307) $(597,692,087)
=========== =============
</TABLE>
F-16
<PAGE> 182
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares purchased
on or after June 1, 1996, and any dividend reinvestment Class B shares received
on such shares, automatically convert to Class A shares eight years after the
end of the calendar month in which the shares were purchased. Class B shares
purchased before June 1, 1996, and any dividend reinvestment plan Class B shares
received on such shares, automatically convert to Class A shares six years after
the end of the calendar month in which the shares were purchased. For the year
ended December 31, 1999, 1,281,550 Class B shares automatically converted to
Class A shares and are shown in the above table as sales of Class A shares and
repurchases of Class B shares. Class C shares purchased before January 1, 1997,
and any dividend reinvestment plan C shares received on such shares,
automatically convert to Class A shares ten years after the end of the calendar
month in which the shares are purchased. Class C shares purchased on or after
January 1, 1997 do not possess a conversion feature. For the year ended December
31, 1999, no Class C shares converted to Class A shares. The CDSC will be
imposed on most
F-17
<PAGE> 183
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
redemptions made within five years of the purchase for Class B and one year of
the purchase for Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES CHARGE
-----------------
YEAR OF REDEMPTION CLASS B CLASS C
- -------------------------------------------------------------------------
<S> <C> <C>
First.................................................. 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, 1999, Van Kampen, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of
approximately $50,000 and CDSC on the redeemed shares of Classes B and C of
approximately $105,700. 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 $451,351,462 and $528,069,066,
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.
F-18
<PAGE> 184
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). 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, 1999,
were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ----------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1998............................ 90
Futures Opened.............................................. 135
Futures Closed.............................................. (150)
---
Outstanding at December 31, 1999............................ 75
===
</TABLE>
The futures contracts outstanding at December 31, 1999, and the description
and unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION/
CONTRACTS DEPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C>
Long Contracts -- March 2000 S&P 500 Index
Future
(Current Notional Value of $371,050 per
contract)................................. 75 $29,233
== =======
</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, 1999, are payments retained by Van Kampen of
approximately $514,600.
F-19
<PAGE> 185
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
7. BORROWINGS
In accordance with its investment policies, the Fund may borrow from banks for
temporary purposes and is subject to certain other customary restrictions.
Effective November 30, 1999, the Fund, in conjunction with certain other funds
of Van Kampen, has entered into a $650,000,000 committed line of credit facility
with a group of banks which expires on November 28, 2000, but is renewable with
the consent of the participating banks. Each Fund is permitted to utilize the
facility in accordance with the restrictions of its prospectus. In the event the
demand for the credit facility meets or exceeds $650 million on a complex-wide
basis, each Fund will be limited to its pro-rata percentage based on the net
assets of each participating Fund. Interest on borrowings is charged under the
agreement at a rate of 0.50% above the federal funds rate per annum. An annual
commitment fee of 0.09% per annum is charged on the unused portion of the credit
facility, which each Fund incurs based on its pro-rata percentage of quarterly
net assets. The Fund has not borrowed against the credit facility during the
period.
F-20
<PAGE> 186
APPENDIX C
ANNUAL REPORT
OF
CONVERTIBLE SECURITIES FUND
December 31, 1999
<PAGE> 187
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................... 1
Economic Snapshot................................ 2
Performance Results.............................. 3
Portfolio Management Review...................... 4
Glossary of Terms................................ 7
Portfolio of Investments......................... 8
Statement of Assets and Liabilities.............. 13
Statement of Operations.......................... 14
Statement of Changes in Net Assets............... 15
Financial Highlights............................. 16
Notes to Financial Statements.................... 18
Report of Independent Auditors................... 23
Dividend Reinvestment Plan....................... 24
</TABLE>
NOT FDIC INSURED. MAY LOSE VALUE. NO BANK GUARANTEE.
<PAGE> 188
LETTER TO SHAREHOLDERS
January 20, 2000
Dear Shareholder:
As we enter a new century--and millennium--it seems appropriate to take a
look back at the progress that's been made over the last 100 years and how the
world of investing has changed over the generations. Although rapid advances in
technology and science have dramatically altered the world that we live in
today, one of the greatest shifts we've seen is the increasing importance of
investing for many Americans.
Once considered primarily for the wealthy, investing in the stock market is
now available to most people. In fact, almost 79 million individuals--who
represent almost half of all U.S. households--own stocks either directly or
through mutual funds. This is even more impressive when considering that just 16
years earlier, only 19 percent of households owned stocks. Another important
shift has been the need for retirement planning beyond a pension plan or Social
Security. The Investment Company Institute, the leading mutual fund industry
association, reports that 77 percent of all mutual fund shareholders earmarked
retirement as their primary financial goal in 1998.
Through all the changes in the investment environment over the past century,
the general principles that have made generations of investors successful remain
the same. Some that have stood the test of time include:
- INVESTING FOR THE LONG-TERM
- BASING INVESTMENT DECISIONS ON SOUND RESEARCH
- BUILDING A DIVERSIFIED PORTFOLIO
- BELIEVING IN THE VALUE OF PROFESSIONAL INVESTMENT ADVICE
While no one can predict the future, at Van Kampen we believe that these
ideas will remain important tenets for investors well into this century. As we
continue to focus on these principles, we hope that our decades of investment
experience can help bring you closer to your financial goals as we welcome the
new millennium.
Sincerely,
<TABLE>
<S> <C>
/s/ Richard F. Powers III /s/ Dennis J. McDonnell
Richard F. Powers, III Dennis J. McDonnell
Chairman President
Van Kampen Asset Management Inc. Van Kampen Asset Management Inc.
</TABLE>
1
<PAGE> 189
ECONOMIC SNAPSHOT
ECONOMIC GROWTH
The nation's brisk rate of economic growth continued throughout 1999,
bringing the United States to the verge of its longest economic expansion on
record. High levels of consumer spending, a host of new jobs, and increasing
productivity kept the economy strong. Gross domestic product, the primary
measure of economic growth, increased 4.2 percent for the year, including an
impressive annualized rate of 5.7 percent for the third quarter and 5.8 percent
in the fourth quarter.
EMPLOYMENT
The job market remained vibrant throughout the year, with more than 2.7
million U.S. jobs created in 1999. In addition, unemployment dropped to 4.1
percent in October--its lowest rate in three decades. With jobs plentiful and
wages on the rise, most Americans were optimistic about the future. At the end
of the year the consumer confidence index hit its highest level since 1968.
Although wage pressures caused some concerns about the potential erosion of
corporate profits, productivity gains helped keep those concerns muted through
the end of the year.
INFLATION AND INTEREST RATES
Although the Consumer Price Index continued to reflect historically low
inflation--rising only 2.7 percent during 1999--concerns about future increases
in inflation were prevalent throughout the reporting period. The Federal Reserve
Board remained active in guarding against inflation and trying to temper
economic growth. The Fed reversed its three interest-rate cuts from the fall of
1998 by raising rates in June, August, and November 1999.
U.S. GROSS DOMESTIC PRODUCT
Seasonally Adjusted Annualized Rates
Third Quarter 1997 through Fourth Quarter 1999
[BAR GRAPH]
<TABLE>
<S> <C>
97Q3 4
97Q4 3.1
98Q1 6.7
98Q2 2.1
98Q3 3.8
98Q4 5.9
99Q1 3.7
99Q2 1.9
99Q3 5.7
99Q4 5.8
</TABLE>
Source: Bureau of Economic Analysis
2
<PAGE> 190
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1999
VAN KAMPEN CONVERTIBLE SECURITIES FUND
NYSE TICKER SYMBOL--VXS
<TABLE>
<S> <C>
TOTAL RETURNS
One-year total return based on market price(1)............ 39.22%
One-year total return based on NAV(2)..................... 50.19%
DISTRIBUTION RATE
Distribution rate as a % of closing common stock
price(3).................................................. 3.25%
SHARE VALUATIONS
Net asset value........................................... $ 33.99
Closing common stock price................................ $25.8750
One-year high common stock price (12/31/99)............... $25.8750
One-year low common stock price (03/24/99)................ $19.6875
</TABLE>
(1)Total return based on market price assumes an investment at the market price
at the beginning of the period indicated, reinvestment of all distributions for
the period in accordance with the Fund's dividend reinvestment plan, and sale of
all shares at the closing stock price at the end of the period indicated.
(2)Total return based on net asset value (NAV) assumes an investment at the
beginning of the period indicated, reinvestment of all distributions for the
period, and sale of all shares at the end of the period, all at NAV.
(3)Distribution rate represents the quarterly annualized distributions of the
Fund at the end of the period and not the earnings of the Fund.
See the Comparative 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. Fund shares, when redeemed, may be
worth more or less than their original cost.
3
<PAGE> 191
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN CONVERTIBLE SECURITIES FUND
We recently spoke with representatives of the adviser of the Van Kampen
Convertible Securities Fund about the key events and economic forces that shaped
the markets during the past 12 months. The representatives include Christine
Drusch, senior portfolio manager, who has been the Fund's lead manager since
February 1998 and has worked in the investment industry since 1985. She is
joined by Matthew Hart and David McLaughlin, portfolio managers, and Stephen L.
Boyd, chief investment officer for equity investments. The following discussion
reflects their views on the Fund's performance during the 12 months ended
December 31, 1999.
Q
WHAT MARKET FACTORS AFFECTED THE FUND DURING THE REPORTING PERIOD?
A
The Dow Jones Industrial Average--perhaps the country's most widely
recognized stock market index--began the reporting period near 9200,
crossing several key milestones in the first half of the year: 10,000 in
March and 11,000 in May. Major fluctuations followed, however, as the index
nearly retreated below 10,000 in the difficult third quarter before once again
lifting to a record high in December. While the Dow performed well overall
during 1999, it was actually the technology-heavy NASDAQ stock index that stole
the show, returning a phenomenal 86 percent for the year. However, these high
returns helped to mask that not all securities shared in the good fortune--the
indices were fueled by the outstanding performance of a relatively small group
of investments.
Q
GIVEN THIS ENVIRONMENT, WHAT STRATEGIES DID YOU USE TO MANAGE THE FUND?
A
We consistently manage the Fund to seek current income, capital
appreciation, and conservation of capital by investing primarily in
convertible securities. In seeking to meet this objective, we continued to
focus on growth companies and to diversify across market sectors. This approach
helped the Fund's returns during the reporting period because of the outstanding
performance of many growth investments in 1999.
During the reporting period, the portfolio was weighted heavily in
securities of technology and communications-services companies. This weighting
had an extremely favorable impact on our performance, as these were two of the
market's fastest-growing areas. Of course, there's no guarantee that the factors
that contributed to this strong performance will continue to occur in the
future.
We also decided to decrease our exposure to companies in industries that
have tended to perform poorly in an environment of rising interest rates, as we
experienced in 1999. As a result, we minimized our investments in financial
services, electric utilities, and transportation. This reduction was most
significant with regard to electric utilities, in which the Fund had been
heavily invested early in the reporting period. We opted to eliminate
4
<PAGE> 192
most of our holdings in this area because of poor recent performance and because
we don't see an indication on the horizon that electric utilities will perform
better.
Q
WHAT WERE SOME OF YOUR INVESTMENTS THAT HAD THE MOST POSITIVE EFFECT ON
THE FUND'S RETURN?
A
The Fund benefited from its investments in companies we believe are
positioned to gain from the exploding demand for wireless communications.
We were most helped by our holding in Qualcomm, which owns the patent on
wireless CDMA technology, widely becoming the standard in U.S. cellular phones.
Qualcomm's stock skyrocketed during the period, especially during the fourth
quarter. Along similar lines, we were helped by the Fund's significant weighting
in Comverse Technology, which makes telecommunications systems such as
voice-mail services; Omnipoint, a cellular-service provider; and LSI Logic, a
maker of semiconductors used in wireless-communications devices.
Internet companies were also big winners in 1999. During the first half of
the reporting period, we avoided many "pure" Internet companies because we saw
their valuations as extremely high and because sales-growth estimates were
falling. As the reporting period went on, we started to increase our exposure to
this area, focusing on high-quality companies whose sales and, possibly,
earnings estimates were again rising. We remain concerned about Internet
valuations, however, and are investing in this area selectively. One extremely
successful Internet company that met our criteria and helped the Fund's return
was America Online, the leading Internet service provider.
Other securities whose performance contributed greatly to our results were
Conexant Systems (semiconductors), Veritas Software (maker of software for data
storage), NTL (an integrated cable and telephone operator in the U.K.), and Home
Depot (home products superstore). Not all securities in the Fund performed as
favorably as these, nor is there any guarantee they will continue to do so.
Q
WHICH INVESTMENTS HAD THE MOST NEGATIVE EFFECT ON THE FUND?
A
On the down side, Unisys, a major systems integrator for large businesses,
saw its stock price plummet early in the fourth quarter after the company
announced that revenue and earnings for the third quarter would be less
than expected. Other securities whose performance hurt the Fund's return during
1999 were automotive-component manufacturer Tower Automotive, communications
provider AT&T, home-building company Lennar, and holding company Roche Holdings.
5
<PAGE> 193
Q
HOW DID THE FUND PERFORM DURING THE LAST 12 MONTHS?
A
Thanks to successful security selection and the Fund's substantial
weighting in technology and communications services, the Fund performed
very well during the reporting period. The Fund generated a total return
of 50.19 percent(2) at net asset value and 39.22 percent(1) at market price. The
Fund's return reflects the change in market price per share on the New York
Stock Exchange from $19.875 on December 31, 1998, to 25.875 on December 31,
1999, and dividends totaling $0.84 per share. Please refer to the chart on page
3 for additional Fund performance results.
Q
WHAT IS YOUR SIX-MONTH OUTLOOK FOR THE FUND?
A
Barring any unforeseen events, we envision continued worldwide economic
health, low inflation, and strong earnings growth. Of course, our outlook
may in part depend on the timing and frequency of Federal Reserve
interest-rate changes. Although recent rate increases have had only a moderately
negative effect on stock prices, an additional rate hike could have a more
substantial impact. We're also keeping our eye on stock valuations, because the
higher they get, the greater the negative impact on the Fund if investors were
to lose their enthusiasm for growth stocks.
We believe convertibles offer investors a less aggressive means of investing
in growth companies--particularly in emerging industries such as Internet
technology. Investing in this area of the market can be risky, and convertibles
may enable investors to participate in potential market gains and income while
enjoying the potential for reduced volatility. This is an attractive feature in
uncertain economic times.
6
<PAGE> 194
GLOSSARY OF TERMS
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.
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.
EARNINGS ESTIMATES: A forecast for a company's net income during a given period.
Earnings estimates can come from the company's management as well as from
independent analysts.
FEDERAL RESERVE BOARD (THE FED): The governing body of the Federal Reserve
System, which is the central bank 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.
GROWTH INVESTING: An investment strategy that seeks to identify stocks that tend
to offer greater-than-average earnings growth. Growth stocks typically trade
at higher prices relative to their earnings than value stocks, due to their
higher expected earnings growth.
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.
NET ASSET VALUE (NAV): The value of a trust share, calculated by deducting a
trust's liabilities from the total assets applicable to common shareholders
in its portfolio and dividing this amount by the number of common shares
outstanding.
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.
7
<PAGE> 195
PORTFOLIO OF INVESTMENTS
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
CONVERTIBLE DEBT 58.5%
CONSUMER DISTRIBUTION 1.7%
$1,099 AnnTaylor Stores Corp., 144A --
Private Placement (a).................. 0.550% 06/18/19 $ 589,339
590 Costco Companies, Inc. ................ * 08/19/17 628,350
969 eToys, Inc., 144A -- Private Placement
(a) ................................... 6.250 12/01/04 592,301
-----------
1,809,990
-----------
CONSUMER DURABLES 0.2%
240 CommScope, Inc., 144A -- Private
Placement (a).......................... 4.000 12/15/06 257,654
-----------
CONSUMER NON-DURABLES 1.4%
850 Loews Corp. ........................... 3.125 09/15/07 697,000
850 Swiss Life Finance Co., 144A -- Private
Placement (a).......................... 2.000 05/20/05 845,750
-----------
1,542,750
-----------
CONSUMER SERVICES 4.3%
1,130 EchoStar Communications Corp., 144A --
Private Placement (a).................. 4.875 01/01/07 1,379,877
470 Interpublic Group of Companies, Inc.,
144A -- Private Placement (a).......... 1.870 06/01/06 534,038
1,100 Jacor Communications, Inc., LYON....... * 02/09/18 739,750
300 Omnicom Group, Inc..................... 2.250 01/06/13 612,546
200 Omnicom Group, Inc. ................... 4.250 01/03/07 637,920
1,760 Times Mirror Co., LYON ................ * 04/15/17 860,200
-----------
4,764,331
-----------
ENERGY 1.7%
398 Advanced Energy Industries, Inc. ...... 5.250 11/15/06 475,610
698 Devon Energy Corp. .................... 4.950 08/15/08 684,040
800 Kerr-McGee Co. ........................ 7.500 05/15/14 743,000
-----------
1,902,650
-----------
HEALTHCARE 3.5%
428 Alpharma, Inc., 144A --
Private Placement (a).................. 3.000 06/01/06 461,170
570 Alza Corp. ............................ 5.000 05/01/06 599,925
920 Centocor, Inc. ........................ 4.750 02/15/05 1,229,350
550 Human Genome Sciences, Inc............. 5.000 12/15/06 662,750
</TABLE>
See Notes to Financial Statements
8
<PAGE> 196
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
HEALTHCARE (CONTINUED)
$1,450 Roche Holdings, Inc., LYON, 144A --
Private Placement (a).................. * 04/20/10 $ 876,351
-----------
3,829,546
-----------
TECHNOLOGY 41.1%
1,000 ASM Lithography Holding, NV, 144A --
Private Placement (a) ................. 4.250% 11/30/04 1,209,710
930 Adaptec, Inc........................... 4.750 02/01/04 1,010,213
2,019 America Online, Inc.................... * 12/06/19 1,159,916
147 America Online, Inc.................... 4.000 11/15/02 1,703,627
370 Automatic Data Processing, Inc.,
LYON................................... * 02/20/12 516,150
706 BEA Systems, Inc., 144A --
Private Placement (a).................. 4.000 12/15/06 825,300
105 BEA Systems, Inc....................... 4.000 06/15/05 557,550
320 CheckFree Holdings Corp., 144A --
Private Placement (a).................. 6.500 12/01/06 509,600
2,015 Comverse Technology, Inc., 144A --
Private Placement (a).................. 4.500 07/01/05 6,873,669
1,090 Conexant Systems, Inc., 144A --
Private Placement (a).................. 4.250 05/01/06 3,197,788
360 Conexant Systems, Inc. ................ 4.250 05/01/06 1,056,150
760 Cypress Semiconductor Corp. ........... 6.000 10/01/02 1,097,250
935 DSC Communications Corp. .............. 7.000 08/01/04 981,750
270 DoubleClick, Inc., 144A -- Private
Placement (a).......................... 4.750 03/15/06 839,025
200 EMC Corp. ............................. 3.250 03/15/02 1,931,500
969 Exodus Communications, Inc., 144A --
Private Placement (a) ................. 4.750 07/15/08 1,341,949
1,960 Hewlett Packard Co., LYON ............. * 10/14/17 1,349,950
390 HNC Software, Inc. .................... 4.750 03/01/03 948,675
476 i2 Technologies, Inc., 144A -- Private
Placement (a).......................... 5.250 12/15/06 683,655
1,040 Lam Research Corp...................... 5.000 09/01/02 1,428,700
318 Lattice Semiconductor Corp., 144A --
Private Placement (a).................. 4.750 11/01/06 416,977
1,300 LSI Logic Corp., 144A -- Private
Placement (a) ......................... 4.250 03/15/04 2,952,625
350 Micron Technology, Inc. ............... 7.000 07/01/04 451,937
</TABLE>
See Notes to Financial Statements
9
<PAGE> 197
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
TECHNOLOGY (CONTINUED)
$ 695 Nextel Communications, Inc., 144A --
Private Placement (a) ................. 4.750% 07/01/07 $ 1,576,781
200 Oak Industries, Inc. .................. 4.875 03/01/08 559,570
203 Sanmina Corp., 144A -- Private
Placement (a) ......................... 4.250 05/01/04 268,467
800 Siebel Systems, Inc., 144A -- Private
Placement (a) ......................... 5.500 09/15/06 1,551,000
940 Solectron Corp., LYON, 144A -- Private
Placement (a) ......................... * 01/27/19 718,893
1,000 Solectron Corp., LYON ................. * 01/27/19 756,250
2,040 STMicroelectronics NV, LYON ........... * 09/22/09 2,811,446
1,449 VERITAS Software Corp. ................ 1.856 08/13/06 3,931,586
-----------
45,217,659
-----------
UTILITIES 4.6%
743 CoreComm Ltd., 144A -- Private
Placement (a) ......................... 6.000 10/01/06 1,162,795
700 NTL, Inc., 144A -- Private Placement
(a) ................................... 7.000 12/15/08 1,851,500
1,600 Telefonos de Mexico, SA ............... 4.250 06/15/04 2,086,000
-----------
5,100,295
-----------
TOTAL CONVERTIBLE DEBT 58.5%......................................... 64,424,875
-----------
</TABLE>
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCK 20.4%
CONSUMER SERVICES 3.9%
Adelphia Communications Corp., Ser D, 5.50%........... 1,900 357,912
Echostar Communications Corp., Ser C, 6.75%........... 1,400 1,161,956
Entercom Communications Corp., TIDES, 6.25%........... 8,000 649,000
McLeodUSA, Inc., Ser A, 6.75%......................... 2,550 1,313,250
UnitedGlobalCom, Inc., Ser D, 7.00% (b)............... 12,900 788,513
------------
4,270,631
------------
ENERGY 3.7%
Apache Corp., ACES, 6.50%............................. 39,400 1,398,700
El Paso Energy Capital Trust I, 4.75%................. 17,500 881,563
Kerr-McGee Corp., DECS, 5.50%......................... 15,800 521,400
</TABLE>
See Notes to Financial Statements
10
<PAGE> 198
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
ENERGY (CONTINUED)
Pogo Trust I, QUIPS, 6.50% (b)........................ 9,400 $ 462,950
Tosco Financing Trust, 5.75%.......................... 16,800 800,100
------------
4,064,713
------------
FINANCE 0.3%
American General Corp., 7.00%......................... 6,200 375,100
------------
RAW MATERIALS/PROCESSING INDUSTRIES 0.3%
Monsanto Co., ACES, 6.50%............................. 10,150 336,219
------------
TECHNOLOGY 6.3%
Amdox Ltd., TRACES, 6.75%............................. 12,000 385,500
Nextlink Communications, Inc., 6.50%, 144A --
Private Placement (a)................................. 1,400 270,595
PSINet, Inc., Ser C, 6.75%............................ 9,200 537,050
Qualcomm Financial Trust, 5.75%....................... 5,400 5,314,950
Verio Inc., 6.75%, 144A -- Private Placement (a)...... 5,800 327,700
------------
6,835,795
------------
UTILITIES 5.9%
Calpine Corp., TIDES, 5.75%........................... 17,400 1,141,875
Cox Communications, Inc., PRIDES, 7.00%............... 12,300 836,400
MCI WorldCom, Inc., Ser C............................. 11,250 577,266
Omnipoint Corp., 7.00%, 144A -- Private Placement
(a)................................................. 14,000 2,759,750
Winstar Communications, Inc., Ser D, 7.00%............ 15,500 1,230,323
------------
6,545,614
------------
TOTAL PREFERRED STOCK 20.4%...................................... 22,428,072
------------
COMMON STOCKS 11.8%
CONSUMER DISTRIBUTION 3.2%
Home Depot, Inc....................................... 52,079 3,570,632
------------
CONSUMER NON-DURABLES 0.0%
Jazztel, PLC -- ADR (United Kingdom) (b).............. 700 45,588
------------
CONSUMER SERVICES 1.1%
Cablevision Systems Corp. (b)......................... 9,638 727,669
Royal Caribbean Cruises, Ltd.......................... 9,800 483,262
------------
1,210,931
------------
FINANCE 1.6%
American Express Co. ................................. 4,200 698,250
Citigroup, Inc. ...................................... 19,500 1,083,469
------------
1,781,719
------------
</TABLE>
See Notes to Financial Statements
11
<PAGE> 199
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Description Shares Market Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE 1.9%
Genentech, Inc. (b) .................................. 15,400 $ 2,071,300
------------
TECHNOLOGY 4.0%
Lam Research Corp. (b) ............................... 10,000 1,115,625
Motorola, Inc. ....................................... 9,500 1,398,875
SCI Systems, Inc. (b) ................................ 12,656 1,040,165
Texas Instruments, Inc. .............................. 8,400 813,750
------------
4,368,415
------------
TOTAL COMMON STOCKS 11.8%........................................ 13,048,585
------------
TOTAL LONG-TERM INVESTMENTS 90.7%
(Cost $60,599,589).............................................. 99,901,532
------------
SHORT-TERM INVESTMENTS 7.6%
REPURCHASE AGREEMENTS 6.7%
BA Securities ($7,442,000 par collateralized by U.S. Government
obligations in a pooled cash account, dated 12/31/99, to be sold
on 01/01/2000 at $7,443,705) (c)................................ 7,442,000
U.S. GOVERNMENT AGENCY OBLIGATIONS 0.9%
Federal Home Loan Bank Discount Notes ($1,000,000 par, yielding
5.441%, 03/10/00 maturity)...................................... 989,420
------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $8,431,420)............................................... 8,431,420
------------
TOTAL INVESTMENTS 98.3%
(Cost $69,031,009).............................................. 108,332,952
OTHER ASSETS IN EXCESS OF LIABILITIES 1.7%....................... 1,863,310
------------
NET ASSETS 100.0%................................................ $110,196,262
============
</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) Non-income producing security as this security currently does not declare
dividends.
(c) Assets segregated as collateral for open futures.
ACES -- Automatically convertible equity securities
DECS -- Debt exchangeable for common stock, traded in shares
LYON -- Liquid yield option note
PRIDES -- Preferred redeemable interest dividend equity security, traded in
shares
QUIPS -- Quarterly income preferred securities
TIDES -- Term income deferrable equity securities
TRACES -- Trust automatic common exchange securities
See Notes to Financial Statements
12
<PAGE> 200
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $69,031,009)........................ $108,332,952
Cash........................................................ 545,457
Receivables:
Investments Sold.......................................... 1,084,842
Interest.................................................. 321,536
Dividends................................................. 17,447
Variation Margin on Futures............................... 11,050
Other....................................................... 37,964
------------
Total Assets.......................................... 110,351,248
------------
LIABILITIES:
Payables:
Investment Advisory Fee................................... 42,624
Affiliates................................................ 2,402
Income Distributions...................................... 607
Accrued Expenses............................................ 78,781
Trustees' Deferred Compensation and Retirement Plans........ 30,572
------------
Total Liabilities..................................... 154,986
------------
NET ASSETS.................................................. $110,196,262
============
NET ASSETS CONSIST OF:
Common Shares ($1.00 par value with 12,500,000 shares
authorized, 3,251,324 shares issued, of which 9,500 are
held in treasury and 3,241,824 are outstanding)........... $ 3,241,824
Paid in Surplus............................................. 68,036,694
Net Unrealized Appreciation................................. 39,307,011
Accumulated Undistributed Net Investment Income............. 359,245
Accumulated Net Realized Loss............................... (748,512)
------------
NET ASSETS.................................................. $110,196,262
============
NET ASSET VALUE PER SHARE ($110,196,262 divided by 3,241,824
shares outstanding)....................................... $ 33.99
============
</TABLE>
See Notes to Financial Statements
13
<PAGE> 201
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 1,949,698
Dividends................................................... 1,316,551
-----------
Total Income............................................ 3,266,249
-----------
EXPENSES:
Investment Advisory Fee..................................... 428,479
Shareholder Reports......................................... 53,089
Trustees' Fees and Related Expenses......................... 29,522
Custody..................................................... 28,767
Legal....................................................... 1,223
Other....................................................... 117,987
-----------
Total Expenses.......................................... 659,067
Less Credits Earned on Cash Balances.................... 2,030
-----------
Net Expenses............................................ 657,037
-----------
NET INVESTMENT INCOME....................................... $ 2,609,212
===========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ 1,894,734
Futures................................................... 540,227
-----------
Net Realized Gain........................................... 2,434,961
-----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 6,226,819
End of the Period:
Investments............................................. 39,301,943
Futures................................................. 5,068
-----------
39,307,011
-----------
Net Unrealized Appreciation During the Period............... 33,080,192
-----------
NET REALIZED AND UNREALIZED GAIN............................ $35,515,153
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $38,124,365
===========
</TABLE>
See Notes to Financial Statements
14
<PAGE> 202
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income.......................... $ 2,609,212 $ 2,904,812
Net Realized Gain.............................. 2,434,961 910,780
Net Unrealized Appreciation During the
Period....................................... 33,080,192 805,481
------------ -----------
Change in Net Assets from Operations........... 38,124,365 4,621,073
------------ -----------
Distributions from Net Investment Income....... (2,724,759) (2,851,284)
Distributions from Net Realized Gain........... (2,579,925) (3,056,743)
------------ -----------
Total Distributions............................ (5,304,684) (5,908,027)
------------ -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES................................... 32,819,681 (1,286,954)
NET ASSETS:
Beginning of the Period........................ 77,376,581 78,663,535
------------ -----------
End of the Period (Including accumulated
undistributed
net investment income of $359,245 and
$258,861, respectively)...................... $110,196,262 $77,376,581
============ ===========
</TABLE>
See Notes to Financial Statements
15
<PAGE> 203
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one common share of
the Fund outstanding throughout the periods indicated.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Asset Value, Beginning of the Period...... $23.868 $24.265 $24.451
------- ------- -------
Net Investment Income....................... .804 .896 1.006
Net Realized and Unrealized Gain/Loss....... 10.954 .530 3.014
------- ------- -------
Total from Investment Operations.............. 11.758 1.426 4.020
------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income......................... .840 .880 1.179
Distributions from and in Excess of Net
Realized Gain............................. .794 .943 3.027
------- ------- -------
Total Distributions........................... 1.634 1.823 4.206
------- ------- -------
Net Asset Value, End of the Period............ $33.992 $23.868 $24.265
======= ======= =======
Market Price Per Share at End of the Period... $25.875 $19.875 $21.125
Total Investment Return at Market Price (a)... 39.22% 2.05% 19.48%
Total Return at Net Asset Value (b)........... 50.19% 5.90% 18.57%
Net Assets at End of the Period (In
millions)................................... $ 110.2 $ 77.4 $ 78.7
Ratio of Expenses to Average Net Assets....... .76% .83% .76%
Ratio of Net Investment Income to Average Net
Assets...................................... 3.03% 3.75% 3.86%
Portfolio Turnover............................ 107% 157% 181%
</TABLE>
(a) Total Investment Return at Market Price reflects the change in market value
of the shares for the period indicated with reinvestment of dividends in
accordance with the Fund's dividend reinvestment plan.
(b) Total Return at Net Asset Value (NAV) reflects the change in value of the
Fund's assets with reinvestment of dividends based upon NAV.
16
<PAGE> 204
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 24.41 $ 21.62 $ 24.88 $ 23.64 $ 22.23 $ 19.41 $ 22.73
------- ------- ------- ------- ------- ------- -------
.968 1.14 1.09 1.15 1.175 1.32 1.47
1.768 3.5325 (2.56) 2.01 1.415 2.90 (3.2475)
------- ------- ------- ------- ------- ------- -------
2.736 4.6725 (1.47) 3.16 2.59 4.22 (1.7775)
------- ------- ------- ------- ------- ------- -------
1.005 1.15 1.10 1.12 1.18 1.40 1.40
1.690 .7325 .69 .80 -0- -0- .1425
------- ------- ------- ------- ------- ------- -------
2.695 1.8825 1.79 1.92 1.18 1.40 1.5425
------- ------- ------- ------- ------- ------- -------
$24.451 $ 24.41 $ 21.62 $ 24.88 $ 23.64 $ 22.23 $ 19.41
======= ======= ======= ======= ======= ======= =======
$21.125 $21.375 $18.125 $22.375 $20.375 $19.250 $16.625
11.67% 28.88% (11.71%) 19.43% 12.31% 24.68% (10.39%)
11.51% 23.42% (5.29%) 14.50% 12.84% 23.32% (7.37%)
$79.3 $79.1 $70.1 $80.7 $76.6 $72.1 $62.9
.88% .80% .82% .87% .88% .89% .86%
3.88% 4.82% 4.70% 4.60% 5.28% 6.41% 7.01%
140% 127% 111% 128% 87% 168% 95%
</TABLE>
See Notes to Financial Statements.
17
<PAGE> 205
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Convertible Securities Fund (the "Fund") is registered as a
diversified closed-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's investment objective is to provide
current income, capital appreciation and conservation of capital through
investment in a portfolio consisting mainly of convertible bonds and preferred
stocks.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION--Fixed income investments and preferred stocks are stated
at value using market quotations or indications of value obtained from an
independent pricing service. Investments in securities listed on a securities
exchange are valued at their sales price as of the close of such securities
exchange. Unlisted securities and listed securities for which the last sales
price is not available are valued at the mean of the bid and asked prices. For
those securities where quotations or prices are not available, 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 48% of the investment portfolio at
the end of the period.
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
18
<PAGE> 206
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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, 1999, there were no when issued or delayed delivery
purchase commitments.
The Fund may invest in repurchase agreements, which are short-term
investments whereby 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 securities only upon physical delivery or
evidence of book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not less than
the repurchase proceeds due the Fund.
C. INVESTMENT INCOME--Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date. Discounts are amortized
over the expected life of each applicable security. Premiums on debt securities
are not amortized.
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.
At December 31, 1999, for federal income tax purposes the cost of long- and
short-term investments is $69,031,009, the aggregate gross unrealized
appreciation is $40,104,235 and the aggregate gross unrealized depreciation is
$802,292, resulting in net unrealized appreciation on long- and short-term
investments of $39,301,943. Net realized gains or losses may differ for
financial reporting and tax purposes primarily as a result of post October 31
losses and the mark to market of open futures contracts at December 31, 1999.
E. DISTRIBUTION OF INCOME AND GAINS--The Fund declares and pays quarterly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
19
<PAGE> 207
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
Distributions from net realized gains for book purposes may include short-term
capital gains which are included in ordinary income for tax purposes.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
have been identified and appropriately reclassified. During 1999, permanent book
and tax basis differences relating to market discount on bonds sold totaling
$218,723 have been reclassified from accumulated net realized loss to
accumulated undistributed net investment income. A permanent book and tax basis
difference relating to capital gain distributions totaling $7,699 has been
reclassified from accumulated undistributed net investment income to accumulated
net realized loss. Additionally, a permanent difference relating to excise tax
totaling $4,907 has been reclassified from paid in surplus to accumulated
undistributed net investment income.
F. EXPENSE REDUCTIONS--During the year ended December 31, 1999, the Fund's
custody fee was reduced by $2,030 as a result of credits earned on overnight
cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
- ---------------------------------------------------------------------
<S> <C>
First $150 million....................................... .50 of 1%
Next $100 million........................................ .45 of 1%
Next $100 million........................................ .40 of 1%
Over $350 million........................................ .35 of 1%
</TABLE>
For the year ended December 31, 1999, the Fund recognized expenses of
approximately $1,200, 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, 1999, the Fund recognized expenses of
approximately $31,300, representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting services to the Fund.
20
<PAGE> 208
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $83,517,216 and $89,482,463,
respectively.
4. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio or generate potential gain. All of the Fund's portfolio holdings,
including derivative instruments, are marked to market each day with the change
in value reflected in 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.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the
21
<PAGE> 209
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999
- --------------------------------------------------------------------------------
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, each with a par value of $250,000, for
the year ended December 31, 1999, were as follows:
<TABLE>
<CAPTION>
CONTRACTS
- ---------------------------------------------------------------------
<S> <C>
Outstanding at December 31, 1998.......................... 15
Futures Opened.......................................... 13
Futures Closed.......................................... (15)
---
Outstanding at December 31, 1999.......................... 13
===
</TABLE>
The futures contracts outstanding at December 31, 1999 and the description
and unrealized appreciation are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACTS APPRECIATION
- -------------------------------------------------------------------------
<S> <C> <C>
LONG CONTRACTS -- March 2000 S&P 500 Index
Futures (Current Notional Value of $371,050
per contract)................................ 13 $5,068
== ======
</TABLE>
22
<PAGE> 210
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of
Van Kampen Convertible Securities Fund
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Van Kampen Convertible Securities
Fund as of December 31, 1999, and the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the ten
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1999, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen Convertible Securities Fund at December 31, 1999, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the ten years in the period then ended, in conformity with accounting principles
generally accepted in the United States.
ERNST & YOUNG LLP
Chicago, IL
February 15, 2000
23
<PAGE> 211
DIVIDEND REINVESTMENT PLAN
The Fund pays distributions in cash, but if you own more than 100 shares in your
own name, you may elect to participate in the Fund's dividend reinvestment plan
(the "Plan"). Under the Plan, shares will be issued by the Fund at net asset
value on a date determined by the Board of Trustees between the record and
payable dates on each distribution; however, if the market price, including
brokerage commissions, is less than the net asset value, the amount of the
distribution will be paid to State Street Bank and Trust Company ("State
Street"), which will buy such shares as are available at prices below the net
asset value. (If the market price is not significantly less than the net asset
value, it is possible that open market purchases of shares may increase the
market price so that such price plus brokerage commissions would equal or exceed
the net asset value of such shares.) If State Street cannot buy the necessary
shares at less than net asset value before the distribution date, the balance of
the distribution will be made in authorized but unissued shares of the Fund at
net asset value. The cost per share will be the average cost, including
brokerage commissions, of all shares purchased. Since all shares purchased from
the Fund are at net asset value, there will be no dilution, and no brokerage
commissions are charged on such shares.
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gain distributions does not relieve you of any income tax
which may be payable (or required to be withheld) on dividends or distributions.
You may begin or discontinue participation in the Plan at any time by
written notice to the address below. If you withdraw from the Plan, you may
rejoin at any time if you own the required 100 shares. Elections and
terminations will be effective for distributions declared after receipt. If you
withdraw form the Plan, a certificate for the whole shares and a check for the
fractional shares, if any, credited to your Plan account will be sent as soon as
practicable after receipt of your election to withdraw. Except for brokerage
commissions, if any, which are borne by Plan participants, all costs of the Plan
are borne by the Fund. The Fund reserves the right to amend or terminate the
Plan on 30 days' written notice prior to the record date of the distribution for
which such amendment or termination is effective.
Record stockholders should address all notices, correspondence, questions or
other communications about the Plan to:
EQUISERVE LP
P.O. BOX 8200
BOSTON, MA 02266-8200
800-341-2929
If your shares are not held directly in your name, you should contact your
brokerage firm, bank or other nominee for more information and to see if your
nominee will participate in the Plan on your behalf. If you participate through
your broker and choose to move your account to another broker, you will need to
re-enroll in the Plan through your new broker.
24
<PAGE> 212
VAN KAMPEN FUNDS
GROWTH
Aggressive Growth*
American Value*
Emerging Growth
Enterprise
Equity Growth
Focus Equity
Growth
Mid Cap Growth
Pace
Small Cap Value
Technology
GROWTH AND INCOME
Comstock
Equity Income
Growth and Income
Harbor
Real Estate Securities
Utility
Value
GLOBAL/INTERNATIONAL
Asian Growth
Emerging Markets
European Equity
Global Equity
Global Equity Allocation
Global Fixed Income*
Global Franchise
Global Government Securities*
Global Managed Assets*
International Magnum
Latin American
Strategic Income
Worldwide High Income
INCOME
Corporate Bond
Government Securities
High Income Corporate Bond
High Yield
High Yield & Total Return
Limited Maturity Government
U.S. Government
U.S. Government Trust for Income
CAPITAL PRESERVATION
Reserve
Tax Free Money
SENIOR LOAN
Prime Rate Income Trust
Senior Floating Rate
TAX FREE
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
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 ongoing 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 a prospectus, 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
* Closed to new investors
** Open to new investors for a
limited time
25
<PAGE> 213
VAN KAMPEN CONVERTIBLE SECURITIES FUND
BOARD OF TRUSTEES
DAVID C. ARCH
ROD DAMMEYER
HOWARD J KERR
DENNIS J. MCDONNELL*
THEODORE A. MYERS
RICHARD F. POWERS, III*--Chairman
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN*
OFFICERS
RICHARD F. POWERS, III*
President
DENNIS J. MCDONNELL*
Executive Vice President and
Chief Investment Officer
A. THOMAS SMITH III*
Vice President and Secretary
JOHN L. SULLIVAN*
Vice President, Treasurer and
Chief Financial Officer
STEPHEN L. BOYD*
PETER W. HEGEL*
MICHAEL H. SANTO*
EDWARD C. WOOD, III*
Vice Presidents
INVESTMENT ADVISER
VAN KAMPEN
ASSET MANAGEMENT INC.
1 Parkview Plaza
P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
CUSTODIAN
STATE STREET BANK AND TRUST CO.
225 Franklin Street
Boston, Massachusetts 02105
SHAREHOLDER SERVICING AGENT
EQUISERVE LP
P.O. Box 8200
Boston, Massachusetts 02266-8200
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT ACCOUNTANTS
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606-6301
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, 1999. The Fund designated and paid $2,016,092 as a 20% rate gain
distribution. The distributions, where applicable, were included on 1999's Form
1099-Div which was mailed to shareholders in January of 2000.
---------------------------------------
INQUIRES ABOUT AN INVESTOR'S
ACCOUNT SHOULD BE REFERRED TO THE
FUND'S TRANSFER AGENT
EQUISERVE LP
P.O. BOX 8200
BOSTON, MASSACHUSETTS 02266-8200
TELEPHONE: (800) 821-1238
ALASKA, CALIFORNIA AND HAWAII CALL
COLLECT: (713) 993-0500
EXTENSION: 2223
---------------------------------------
TAX NOTICE TO CORPORATE SHAREHOLDERS
For 1999, 36.34% of the dividends taxable as ordinary income qualified for the
70% dividends received deduction for corporations.
* "Interested" persons of the Trust, as defined in the Investment Company Act
of 1940.
(C) Van Kampen Funds Inc., 2000
All rights reserved.
(SM) denotes a service mark of Van Kampen Funds Inc.
26
<PAGE> 214
YEAR 2000 UPDATE
As we enter the new century, it's "business as usual" for Van Kampen. Thank you
for the confidence you showed in us during the changeover on January 1, 2000,
and for entrusting us with your investment portfolio. We look forward to
continuing to serve your investment needs.
27
<PAGE> 215
APPENDIX D
VAN KAMPEN HARBOR FUND
PRO FORMA FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 (UNAUDITED)
<PAGE> 216
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VK Harbor VK Convertible Proforma
Fund Securities Fund Proforma Market Value
Par Amt (000) Par Amt (000) Par Amt (000) Description Coupon Maturity (000)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS ** 51.5%
CONSUMER DISTRIBUTION 1.1%
$5,901 $1,099 $7,000 AnnTaylor Stores Corp., 144A - Private Placement (a) 0.550% 06/18/2019 $3,778
3,390 590 3,980 Costco Companies, Inc. * 08/19/2017 4,239
-----------
8,017
-----------
CONSUMER NON-DURABLES 0.7%
5,150 850 6,000 Loews Corp. 3.125 09/15/2007 4,920
-----------
CONSUMER SERVICES 3.7%
5,031 969 6,000 eToys, Inc. 144A - Private Placement (a) 6.250 12/01/2004 3,667
Interpublic Group of Companies, Inc., 144A - Private
2,530 470 3,000 Placement (a) 1.870 06/01/2006 3,409
5,800 1,100 6,900 Jacor Communications, Inc., LYON * 02/09/2018 4,640
1,700 300 2,000 Omnicom Group, Inc. 2.250 01/06/2013 4,084
0 200 200 Omnicom Group, Inc. 4.250 01/03/2007 638
1,250 0 1,250 Omnicom Group, Inc., 144A - Private Placement (a) 4.250 01/03/2007 3,981
9,300 1,760 11,060 Times Mirror Co., LYON, 144A - Private Placement * 04/15/2017 5,406
-----------
-----------
25,825
-----------
ENERGY 1.8%
2,102 398 2,500 Advanced Energy Industries Inc. 5.250 11/15/2006 2,987
4,207 698 4,905 Devon Energy Corp. 4.950 08/15/2008 4,807
4,300 800 5,100 Kerr-McGee Corp. 7.500 05/15/2014 4,737
-----------
12,531
-----------
FINANCE 0.4%
1,680 320 2,000 Checkfree Holdings Corp., 144A-Private Placement (a) 6.500 12/01/2006 3,185
-----------
HEALTHCARE 3.5%
2,347 428 2,775 Alpharma, Inc., 144A - Private Placement (a) 3.000 06/01/2006 2,990
3,060 570 3,630 ALZA Corp. 5.000 05/01/2006 3,821
5,080 920 6,000 Centocor, Inc. 4.750 02/15/2005 8,017
Human Genome Sciences, Inc., 144A-Private
2,750 550 3,300 Placement (a) 5.000 12/15/2006 3,976
Roche Holdings, Inc., LYON, 144A - Private
7,860 1,450 9,310 Placement (a) * 04/20/2010 5,627
-----------
-----------
24,431
-----------
</TABLE>
<PAGE> 217
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VK Harbor VK Convertible Proforma
Fund Securities Fund Proforma Market Value
Par Amt (000) Par Amt (000) Par Amt (000) Description Coupon Maturity (000)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
TECHNOLOGY 36.9%
5,520 930 6,450 Adaptec, Inc. 4.750 02/01/2004 7,006
10,481 2,019 12,500 America Online Inc. * 12/06/2019 7,181
765 147 912 America Online, Inc. 4.000 11/15/2002 10,569
2,280 370 2,650 Automatic Data Processing, Inc., LYON * 02/20/2012 3,697
555 105 660 Bea Systems Inc. 4.000 06/15/2005 3,505
3,794 706 4,500 Bea Systems Inc., 144A - Private Placement (a) 4.000 12/15/2006 5,260
1,260 240 1,500 Commscope Inc., 144A - Private Placement (a) 4.000 12/15/2006 1,610
8,875 2,015 10,890 Converse Technology Inc., 144A - Private Placement (a) 4.500 07/01/2005 37,149
1,660 360 2,020 Conexant Systems Inc. 4.250 05/01/2006 5,926
5,990 1,090 7,080 Conexant Systems, Inc., 144A - Private Placement (a) 4.250 05/01/2006 20,771
3,877 743 4,620 Corecomm Limited Co., 144A - Private Placement (a) 6.000 10/01/2006 7,230
4,060 760 4,820 Cypress Semiconductor Corp. 6.000 10/01/2002 6,959
1,480 270 1,750 DoubleClick, Inc., 144A - Private Placement (a) 4.750 03/15/2006 5,438
5,065 935 6,000 DSC Communications Corp. 7.000 08/01/2004 6,300
Echostar Communications Corp., 144A - Private
5,870 1,130 7,000 Placement (a) 4.875 01/01/2007 8,548
1,030 200 1,230 EMC Corp. 3.250 03/15/2002 11,879
Exodus Communications Inc., 144A - Private
5,031 969 6,000 Placement (a) 4.750 07/15/2008 8,309
10,070 1,960 12,030 Hewlett Packard Co., LYON * 10/14/2017 8,286
2,110 390 2,500 HNC Software, Inc. 4.750 03/01/2003 6,081
2,524 476 3,000 i2 Technologies Inc., 144A - Private Placement (a) 5.250 12/15/2006 4,309
5,320 1,040 6,360 Lam Research Corp. 5.000 09/01/2002 8,737
Lattice Semiconductor Corp., 144A - Private
1,682 318 2,000 Placement (a) 4.750 11/01/2006 2,623
7,000 1,300 8,300 LSI Logic Corp., 144A - Private Placement (a) 4.250 03/15/2004 18,851
</TABLE>
<PAGE> 218
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VK Harbor VK Convertible Proforma
Fund Securities Fund Proforma Market Value
Par Amt (000) Par Amt (000) Par Amt (000) Description Coupon Maturity (000)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1,820 350 2,170 Micron Technology, Inc. 7.000 07/01/2004 2,802
1,000 200 1,200 Oak Industries, Inc. 4.875 03/01/2008 3,357
1,127 203 1,330 Sanmina Corp., 144A - Private Placement (a) 4.250 05/01/2004 1,759
4,200 800 5,000 Siebel Systems Inc., 144A - Private Placement (a) 5.500 09/15/2006 9,694
5,060 940 6,000 Solectron Corp., LYON, 144A - Private Placement (a) * 01/27/2019 4,589
5,000 1,000 6,000 Solectron Corp., LYON * 01/27/2019 4,538
7,491 1,449 8,940 Veritas Software Corp. 1.856 08/13/2006 24,257
--------------
257,220
--------------
UTILITIES 3.4%
Nextel Communications Inc., 144A - Private
3,860 695 4,555 Placement (a) 4.750 07/01/2007 10,334
4,300 700 5,000 NTL, Inc., 144A - Private Placement (a) 7.000 12/15/2008 13,225
--------------
23,559
--------------
TOTAL DOMESTIC CONVERTIBLE CORPORATE OBLIGATIONS** 51.5% 359,688
--------------
FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS** 6.2%
ASM Lithography Holding, (Netherlands) 144A -
5,200 1,000 6,200 Private Placement (a) 4.250 11/30/2004 7,500
10,740 2,040 12,780 STMicroelectronics NV, LYON, (Netherlands) * 09/22/2009 17,613
Swiss Life Finance Ltd., (United Kingdom), 144A -
1,000 0 1,000 Private Placement (a) 2.000 05/20/2005 995
3,250 850 4,100 Swiss Life Finance Ltd., (United Kingdom) 2.000 05/20/2005 4,080
8,600 1,600 10,200 Telefonos de Mexico, SA (Mexico) 4.250 06/15/2004 13,298
--------------
TOTAL FOREIGN CONVERTIBLE CORPORATE OBLIGATIONS** 6.2% 43,486
--------------
</TABLE>
<PAGE> 219
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VK Harbor VK Convertible
Fund Securities Fund Proforma Proforma
Shares Shares Shares Description Market Value
====================================================================================================================================
<S> <C> <C> <C> <C>
CONVERTIBLE PREFERRED STOCKS** 20.4%
CONSUMER SERVICES 2.4%
10,100 1,900 12,000 Adelphia Communications Corp., Ser D, 5.50% $2,261
64,700 12,300 77,000 Cox Communication Inc., PRIDES, 7.000% 5,236
42,000 8,000 50,000 Entercom Communications Capital Trust, TIDES, 6.250% 4,056
67,100 12,900 80,000 UNITEDGLOBALCOM, Ser D, 7.000% 4,890
--------------
16,443
--------------
ENERGY 3.7%
203,600 39,400 243,000 Apache Corp., ACES, 6.50% 8,627
95,750 17,500 113,250 El Paso Energy Capital Trust I, 4.750% 5,705
84,200 15,800 100,000 Kerr Mcgee Corp., DECS, 5.500% 3,300
50,600 9,400 60,000 Pogo Trust I Co., Ser A, QUIPS, 6.500% 2,955
94,700 16,800 111,500 Tosco Financing Trust, 5.750% 5,310
--------------
25,897
--------------
FINANCE 0.4%
35,000 6,200 41,200 American General Corp., 7.000% 2,493
--------------
RAW MATERIALS/PROCESSING INDUSTRIES 0.3%
59,050 10,150 69,200 Monsanto Co., 6.500%, ACES 2,292
--------------
TECHNOLOGY 7.0%
64,000 12,000 76,000 Amdocs Ltd., TRACES, 6.750% 2,441
7,300 1,400 8,700 Echostar Communications Corp., Ser C, 6.750% 7,221
49,800 9,200 9,000 PSINet, Inc., Ser C, 6.750% 3,444
28,500 5,400 33,900 Qualcomm Financial Trust, 5.750% 33,366
32,600 5,800 38,400 Verio Inc., 6.750%, 144A - Private Placement (a) 2,170
--------------
48,642
--------------
UTILITIES 6.6%
90,500 17,400 107,900 Calpine Capital Trust, TIDES, 5.750% 7,081
56,500 11,250 67,750 MCI Worldcom, Inc., 2.250% 3,476
13,599 2,550 16,149 McLeodUSA, Inc., Ser A, 6.750% 8,317
Nextlink Communications Inc., 6.500%, 144A -
12,600 1,400 14,000 Private Placement (a) 2,706
</TABLE>
<PAGE> 220
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VK Harbor VK Convertible Proforma
Fund Securities Fund Proforma Market Value
Par Amt (000) Par Amt (000) Par Amt (000) Description Coupon Maturity (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
71,100 14,000 85,100 Omnipoint Corp., 7.000%, 144A - Private Placement (a) 16,775
84,500 15,500 100,000 Winstar Communications, Inc., Ser D, 7.000% 7,938
------------
46,293
------------
TOTAL CONVERTIBLE PREFERRED STOCK** 20.4% 142,060
------------
COMMON STOCKS** 12.2%
CONSUMER DISTRIBUTION 3.3%
287,739 52,079 339,818 Home Depot, Inc. 23,299
------------
CONSUMER SERVICES 0.7%
51,898 9,638 61,536 Cable Vision Systems Corp., Class A (b) 4,646
3,500 700 4,200 Jazztel PLC (United Kingdom) (b) 273
------------
4,919
FINANCE 1.7%
22,000 4,200 26,200 American Express Co. 4,356
111,000 19,500 130,500 Citigroup, Inc. 7,251
------------
11,607
------------
HEALTHCARE 1.8%
79,600 15,400 95,000 Genetech, Inc.(b) 12,777
------------
TECHNOLOGY 4.2%
60,000 10,000 70,000 Lam Research Corp. (b) 7,809
52,500 9,500 62,000 Motorola, Inc. 9,130
67,654 12,656 80,310 SCI Systems, Inc. (b) 6,600
49,000 8,400 57,400 Texas Instruments, Inc. 5,561
------------
29,100
------------
ENTERTAINMENT 0.5%
53,000 9,800 62,800 Royal Caribbean Cruises Ltd. 3,097
------------
UTILITIES 0.0%
1 0 1 Winstar Communications, Inc. (b) 0
------------
TOTAL COMMON STOCKS** 12.2% 84,799
------------
TOTAL LONG-TERM INVESTMENTS 90.3% 630,033
------------
(Cost $384,105,335)
SHORT TERM INVESTMENTS 8.1%
U.S. GOVERNMENT AGENCY OBLIGATIONS 0.8%
Federal Home Loan Bank Discount Note ($5,000,000 par
yielding 5.579%, 3/10/00 maturity) (c) 4,947
Federal Home Loan Bank Discount Note ($1,000,000 par
yielding 5.441%, 3/10/00 maturity) (c) 989
------------
5,936
------------
REPURCHASE AGREEMENTS 7.3%
State Street Bank & Trust Co. ($43,311,000 par
collateralized by U.S. government obligations in a pooled
cash account, dated 12/31/99, to be sold on 01/03/00
at $43,321,828) (c) 43,311
BA Securities ($7,442,000 par collateralized by U.S.
government obligations in a pooled cash account, dated
12/31/99, to be sold on 01/01/00 at $7,443,705) (c) 7,442
------------
50,753
------------
TOTAL SHORT-TERM INVESTMENTS 8.1%
(Cost $56,689,520) 56,689
------------
TOTAL INVESTMENTS 98.4%
(Cost $440,794,855) 686,722
OTHER ASSETS IN EXCESS OF LIABILITIES 1.6% 10,926
------------
NET ASSETS 100.0% 697,648
============
</TABLE>
<PAGE> 221
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VK Harbor VK Convertible Proforma
Fund Securities Fund Proforma Market Value
Par Amt (000) Par Amt (000) Par Amt (000) Description Coupon Maturity (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
* Zero Coupon Bond
** The securities are classified by sectors which represent
broad groupings of related industries.
(a) 144A Securities are those 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) Non-income producing security as this stock currently does
not declare dividends.
(c) Assets segregated as collateral for open futures.
ACES- Automatically convertible equity securities
DECS- Debt
exchangeable for common stock, traded in shares
LYON- Liquid Yield
Option Note
PRIDES- Preferred redeemable interest dividend equity security,
traded in shares
QUIPS- Quarterly income preferred securities
TIDES- Term income deferrable equity securities
TRACES- Trust automatic common exchange securities
</TABLE>
<PAGE> 222
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(UNAUDITED)
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
VAN KAMPEN VAN KAMPEN
HARBOR CONVERTIBLE
FUND SECURITIES FUND ADJUSTMENTS PROFORMA
---------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS (COST OF $371,764
$69,031 AND $440,795, RESPECTIVELY) $578,389 $108,333 $686,722
Other Assets Less Liabilities 9,238 1,863 (175) 10,926
---------- --------------- ----------- ---------
Net Assets $587,627 $110,196 ($175) $697,648
========== =============== =========== =========
NET ASSETS CONSIST OF:
CAPITAL $383,812 $71,279 $455,091
Net Unrealized Appreciation 206,655 39,307 245,962
Accumulated Undistributed Net
Investment Income 474 359 (175) 658
Accumulated Net Realized Loss (4) (3,314) (749) (4,063)
---------- --------------- ----------- ---------
Net Assets $587,627 $110,196 ($175) $697,648
========== =============== =========== =========
CLASS A SHARES:
NET ASSETS $516,089 $110,196 ($175) $626,110
Shares Outstanding 25,364 3,242 30,770
---------- --------------- ---------
Net Asset Value Per Share $20.35 $33.99 $20.35
========== =============== =========
CLASS B SHARES:
NET ASSETS $62,496 N/A N/A $62,496
Shares Outstanding 3,088 3,088
---------- ---------
Net Asset Value Per Share $20.24 $20.24
========== =========
CLASS C SHARES:
NET ASSETS $9,042 N/A N/A $9,042
Shares Outstanding 444 444
---------- ---------
Net Asset Value Per Share $20.38 $20.38
========== =========
</TABLE>
(1) THE PRO FORMA STATEMENTS ARE PRESENTED AS IF THE
REORGANIZATION WAS EFFECTIVE DECEMBER 31, 1999. THE PRO FORMA
STATEMENTS GIVE EFFECT TO THE PROPOSED EXCHANGE OF STOCK FOR
ASSETS AND LIABILITIES WITH THE VAN KAMPEN HARBOR FUND BEING THE
SURVIVING ENTITY. THE PROPOSED TRANSACTION WILL BE ACCOUNTED FOR
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AS A
TAX-FREE REORGANIZATION. THE HISTORICAL COST BASIS OF THE
INVESTMENTS IS CARRIED OVER TO THE SURVIVING ENTITY.
(2) THE PRO FORMA STATEMENTS PRESUME THE ISSUANCE BY THE VAN
KAMPEN HARBOR FUND OF APPROXIMATELY 5,406,000 CLASS A SHARES IN
EXCHANGE FOR THE ASSETS AND LIABILITIES OF THE VAN KAMPEN
CONVERTIBLE SECURITIES FUND.
(3) THE VAN KAMPEN CONVERTIBLE SECURITIES FUND WILL INCUR A
NON-RECURRING COST ASSOCIATED WITH THIS TRANSACTION OF
APPROXIMATELY $175,000, OR $0.054 PER SHARE.
(4) THE VAN KAMPEN HARBOR FUND ACCUMULATED NET REALIZED LOSS
REPRESENTS ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET REALIZED
GAINS.
<PAGE> 223
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(Unaudited)
Amounts in thousands
<TABLE>
<CAPTION>
Van Kampen Van Kampen
Harbor Convertible
FUND SECURITIES FUND ADJUSTMENTS PROFORMA
---------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $9,748 $1,950 $11,698
Dividends 7,678 1,316 8,994
---------- --------------- ----------- ----------
Total Income 17,426 3,266 0 20,692
---------- --------------- ----------- ----------
EXPENSES:
INVESTMENT ADVISORY FEES 2,517 428 2,945
DISTRIBUTION (12B-1) AND SERVICE FEES (1) 1,606 0 215 1,821
All Other Expenses (2) 1,131 231 (102) 1,260
---------- --------------- ----------- ----------
Total Expenses 5,254 659 113 6,026
Less Credits Earned on Cash Balances 39 2 - 41
---------- --------------- ----------- ----------
Net Expenses 5,215 657 113 5,985
---------- --------------- ----------- ----------
Net Investment Income $12,211 $2,609 ($113) $14,707
========== =============== =========== ==========
REALIZED AND UNREALIZED GAIN/LOSS:
REALIZED GAIN/LOSS ON INVESTMENTS $22,093 $1,895 $23,988
REALIZED GAIN/LOSS ON FUTURES 2,710 540 3,250
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION DURING THE PERIOD 165,959 33,080 199,039
---------- --------------- ----------- ----------
Net Realized and Unrealized Gain $190,762 $35,515 $0 $226,277
========== =============== =========== ==========
Net Increase in Net Assets From Operations $202,973 $38,124 ($113) $240,984
========== =============== =========== ==========
</TABLE>
(1) REFLECTS THE ADDITION OF DISTRIBUTION (12B-1) AND SERVICE FEES
ATTRIBUTABLE TO THE ADDITIONAL CLASS A SHARES ISSUED IN THE
REORGANIZATION.
(2) REFLECTS THE REDUCTION IN OTHER OPERATING EXPENSES AS A RESULT OF THE
ELIMINATION OF CERTAIN DUPLICATIVE EXPENSES AND THE RESULT OF OPERATING A
LARGER, MORE EFFICIENT FUND.
<PAGE> 224
<TABLE>
<CAPTION>
VK Harbor VK Convertible Proforma
Fund Securities Fund Proforma Market Value
Par Amt (000) Par Amt (000) Par Amt (000) Description Coupon Maturity (000)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
* Zero Coupon Bond
** The securities are classified by sectors which represent broad
groupings of related industries.
(a) 144A Securities are those 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) Non-income producing security as this stock currently does not
declare dividends.
(c) Assets segregated as collateral for open futures.
ACES- Automatically convertible equity securities DECS- Debt
exchangeable for common stock, traded in shares LYON- Liquid Yield
Option Note
PRIDES- Preferred redeemable interest dividend equity security,
traded in shares QUIPS- Quarterly income preferred securities TIDES-
Term income deferrable equity securities
TRACES- Trust automatic common exchange securities
</TABLE>
<PAGE> 225
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
(UNAUDITED)
AMOUNTS IN THOUSANDS
<TABLE>
<CAPTION>
VAN KAMPEN VAN KAMPEN
Harbor Convertible
Fund Securities Fund Adjustments Proforma
---------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
TOTAL INVESTMENTS (COST OF $371,764
$69,031 AND $440,795, RESPECTIVELY) $578,389 $108,333 $686,722
Other Assets Less Liabilities 9,238 1,863 (175) 10,926
---------- --------------- ----------- ---------
Net Assets $587,627 $110,196 ($175) $697,648
---------- --------------- ----------- ---------
NET ASSETS CONSIST OF:
CAPITAL $383,812 $71,279 $455,091
Net Unrealized Appreciation 206,655 39,307 245,962
Accumulated Undistributed Net
Investment Income 474 359 (175) 658
Accumulated Net Realized Loss (4) (3,314) (749) (4,063)
---------- --------------- ----------- ---------
Net Assets $587,627 $110,196 ($175) $697,648
---------- --------------- ----------- ---------
CLASS A SHARES:
NET ASSETS $516,089 $110,196 ($175) $626,110
Shares Outstanding 25,364 3,242 30,770
---------- --------------- ---------
Net Asset Value Per Share $20.35 $33.99 $20.35
---------- --------------- ---------
CLASS B SHARES:
NET ASSETS $62,496 N/A N/A $62,496
Shares Outstanding 3,088 3,088
---------- ---------
Net Asset Value Per Share $20.24 $20.24
---------- ---------
CLASS C SHARES:
NET ASSETS $9,042 N/A N/A $9,042
Shares Outstanding 444 444
---------- ---------
Net Asset Value Per Share $20.38 $20.38
---------- ---------
</TABLE>
(1) THE PRO FORMA STATEMENTS ARE PRESENTED AS IF THE
REORGANIZATION WAS EFFECTIVE DECEMBER 31, 1999. THE PRO FORMA
STATEMENTS GIVE EFFECT TO THE PROPOSED EXCHANGE OF STOCK FOR
ASSETS AND LIABILITIES WITH THE VAN KAMPEN HARBOR FUND BEING THE
SURVIVING ENTITY. THE PROPOSED TRANSACTION WILL BE ACCOUNTED FOR
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AS A
TAX-FREE REORGANIZATION. THE HISTORICAL COST BASIS OF THE
INVESTMENTS IS CARRIED OVER TO THE SURVIVING ENTITY.
(2) THE PRO FORMA STATEMENTS PRESUME THE ISSUANCE BY THE VAN
KAMPEN HARBOR FUND OF APPROXIMATELY 5,406,000 CLASS A SHARES IN
EXCHANGE FOR THE ASSETS AND LIABILITIES OF THE VAN KAMPEN
CONVERTIBLE SECURITIES FUND.
(3) THE VAN KAMPEN CONVERTIBLE SECURITIES FUND WILL INCUR A
NON-RECURRING COST ASSOCIATED WITH THIS TRANSACTION OF
APPROXIMATELY $175,000, OR $0.054 PER SHARE.
(4) THE VAN KAMPEN HARBOR FUND ACCUMULATED NET REALIZED LOSS
REPRESENTS ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET REALIZED
GAINS.
<PAGE> 226
VAN KAMPEN HARBOR FUND - VAN KAMPEN CONVERTIBLE SECURITIES FUND
PROFORMA CONDENSED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
(Unaudited)
Amounts in thousands
<TABLE>
<CAPTION>
Van Kampen Van Kampen
HARBOR CONVERTIBLE
FUND SECURITIES FUND ADJUSTMENTS PROFORMA
---------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 9,748 $ 1,950 $ 11,698
Dividends 7,678 1,316 8,994
---------- --------------- ----------- ----------
Total Income 17,426 3,266 0 20,692
---------- --------------- ----------- ----------
EXPENSES:
INVESTMENT ADVISORY FEES 2,517 428 2,945
DISTRIBUTION (12B-1) AND SERVICE FEES (1) 1,606 0 215 1,821
All Other Expenses (2) 1,131 231 (102) 1,260
---------- --------------- ----------- ----------
Total Expenses 5,254 659 113 6,026
Less Credits Earned on Cash Balances 39 2 - 41
---------- --------------- ----------- ----------
Net Expenses 5,215 657 113 5,985
---------- --------------- ----------- ----------
Net Investment Income $ 12,211 $ 2,609 ($113) $ 14,707
========== =============== =========== ==========
REALIZED AND UNREALIZED GAIN/LOSS:
REALIZED GAIN/LOSS ON INVESTMENTS $ 22,093 $ 1,895 $ 23,988
REALIZED GAIN/LOSS ON FUTURES 2,710 540 3,250
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION DURING THE PERIOD 165,959 33,080 199,039
---------- --------------- ----------- ----------
Net Realized and Unrealized Gain $190,762 $35,515 $ 0 $226,277
========== =============== =========== ==========
Net Increase in Net Assets From Operations $202,973 $38,124 ($113) $240,984
========== =============== =========== ==========
</TABLE>
(1) REFLECTS THE ADDITION OF DISTRIBUTION (12B-1) AND SERVICE FEES
ATTRIBUTABLE TO THE ADDITIONAL CLASS A SHARES ISSUED IN THE
REORGANIZATION.
(2) REFLECTS THE REDUCTION IN OTHER OPERATING EXPENSES AS A RESULT OF THE
ELIMINATION OF CERTAIN DUPLICATIVE EXPENSES AND THE RESULT OF OPERATING A
LARGER, MORE EFFICIENT FUND.
<PAGE> 227
PART C
VAN KAMPEN HARBOR FUND
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
Pursuant to Del. Code Ann. Title 12, Section 3817, a Delaware business
trust may provide in its governing instrument for the indemnification of its
officers and trustees from and against any and all claims and demands
whatsoever.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust, as amended. Article 8; Section 8.4 of the Agreement
and Declaration of Trust provides that each officer and trustee of the
Registrant shall be indemnified by the Registrant against all liabilities
incurred in connection with the defense or disposition of any action, suit or
other proceeding, whether civil or criminal, in which the officer or trustee may
be or may have been involved by reason of being or having been an officer or
trustee, except that such indemnity shall not protect any such person against a
liability to the Registrant or any shareholder thereof to which such person
would otherwise be subject by reason of (i) not acting in good faith in the
reasonable belief that such person's actions were not in the best interest of
the Trust, (ii) willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office, or
(iii) for a criminal proceeding, not having a reasonable cause to believe that
such conduct was unlawful (collectively "Disabling Conduct"). Absent a court
determination that an officer or trustee seeking indemnification was not liable
on the merits or guilty of Disabling Conduct in the conduct of such person's
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent legal counsel in a written
opinion or a majority of a quorum of non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of Disabling
Conduct in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officer or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that there is reason to believe such person is entitled to the indemnification
and only if the following conditions are met: (1) the trustee or officer
provides a security for the undertaking; (2) the Registrant is insured against
losses arising from lawful advances; or (3) a majority of a quorum of the
Registrant's disinterested, non-party trustees, or an independent legal counsel
in a written opinion, shall determine, based upon a review of readily available
facts, that a recipient of the advance ultimately will be found entitled to
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by the trustee, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
Pursuant to Section 7 of the Distribution and Service Agreement, the
Registrant agrees to indemnify and hold harmless Van Kampen Funds Inc. (the
"Distributor") and each of its trustees and officers and each
C-1
<PAGE> 228
person if any, who controls the Distributor within the meaning of Section 15 of
the 1933 Act against any loss, liability, claim, damages or expense (including
the reasonable cost of investigating or defending any alleged loss, liability,
claim, damages, or expense and reasonable counsel fees) arising by reason of any
person acquiring any shares, based upon the ground that the Registration
Statement, prospectus, shareholder reports or other information filed or made
public by the Registrant (as from time to time amended) included an untrue
statement of a material fact or omitted to state a material fact required to be
stated or necessary in order to make the statements, in light of the
circumstances, not misleading under the 1933 Act, or any other statute or the
common law. The Registrant does not agree to indemnify the Distributor or hold
it harmless to the extent that the statement or omission was made in reliance
upon, and in conformity with, information furnished to the Registrant by or on
behalf of the Distributor. In no case is the indemnity of the Registrant in
favor of the Distributor or any person indemnified to be deemed to protect the
Distributor or any person against any liability to the Fund or its security
holders to which the Distributor or such person would otherwise be subject by
reason of willful misfeasance, bad faith or gross negligence in the performance
of its duties or by reason of its reckless disregard of its obligations and
duties under the agreement.
Pursuant to the agreement by which Van Kampen Investor Services Inc.
("Investor Services") is appointed transfer agent of the Fund, the Registrant
agrees to indemnify and hold Investor Services harmless against any losses,
damages, costs, charges, payments, liabilities and expenses (including
reasonable counsel fees) arising out of or attributable to:
(1) the performance of Investor Services under the agreement provided that
Investor Services acted in good faith with due diligence and without negligence
or willful misconduct.
(2) reliance by Investor Services on, or reasonable use by, Investor
Services of information records and documents which have been prepared on behalf
of, or have been furnished by, the Fund, or the carrying out by Investor
Services of any instructions or requests of the Fund.
(3) the offer or sale of the Fund's shares in violation of any federal or
state law or regulation or ruling by any federal agency unless such violation
results from any failure by Investor Services to comply with written
instructions from the Fund that such offers or sales were not permitted under
such law, rule or regulation.
(4) the refusal of the Fund to comply with terms of the agreement, or the
Fund's lack of good faith, negligence or willful misconduct or breach of any
representation or warranty made by the Fund under the agreement provided that if
the reason for such failure is attributable to any action of the Fund's
investment adviser or distributor or any person providing accounting or legal
services to the Fund, Investor Services only will be entitled to indemnification
if such entity is otherwise entitled to the indemnification from the Fund.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
(1)(a) First Amended and Restated Agreement and Declaration of
Trust(1)
(b) Certificate of Amendment(1)
(c) Second Certificate of Amendment(5)
(d) Amended and Restated Certificate of Designation(4)
(e) Second Amended and Restated Certificate of Designation(5)
(2) Amended and Restated Bylaws(1)
(3) Not applicable
(4) Agreement and Plan of Reorganization*
(5)(a) Class A Shares Speciman Share Certificate(2)
(6) Investment Advisory Agreement(4)
(7)(a) Distribution and Service Agreement(4)
(b) Form of Dealer Agreement(2)
(c) Form of Broker Fully Disclosed Selling Agreement(2)
(d) Form of Bank Fully Disclosed Selling Agreement(2)
</TABLE>
C-2
<PAGE> 229
<TABLE>
<S> <C>
(8)(a) Form of Trustee Deferred Compensation Plan(6)
(b) Form of Trustee Retirement Plan(6)
(9)(a) Custodian Agreement(3)
(b) Transfer Agency and Service Agreement(4)
(10)(a) Plan of Distribution Pursuant to Rule 12b-1(2)
(b) Form of Shareholder Assistance Agreement(2)
(c) Form of Administrative Services Agreement(2)
(d) Service Plan(2)
(11) Opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois)(2)
(12)(a) Tax Opinion of Skadden, Arps, Slate, Meagher & Flom
(Illinois)++
(13)(a) Data Services Agreement(2)
(b) Fund Accounting Agreement(4)
(14)(a) Consent of PricewaterhouseCoopers LLP+
(b) Consent of Ernst & Young LLP+
(15) Not applicable
(16) Power of Attorney+
(17) Form of Proxy Card+
</TABLE>
- ---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 77 to
Registrant's Registration Statement on Form N-1A, File Number 2-12685, filed
April 24, 1996.
(2) Incorporated herein by reference to Post-Effective Amendment No. 78 to
Registrant's Registration Statement on Form N-1A, File Number 2-12685, filed
April 28, 1997.
(3) Incorporated herein by reference to Post-Effective Amendment No. 75 to Van
Kampen American Capital Growth & Income Fund's Registration Statement on
Form N-1A, File Number 2-21657, filed March 27, 1998.
(4) Incorporated herein by reference to Post-Effective Amendment No. 79 to
Registrant's Registration Statement on Form N-1A, File Number 2-12685, filed
April 28, 1998.
(5) Incorporated herein by reference to Post-Effective Amendment No. 80 to
Registrant's Registration Statement on Form N-1A, File Number 2-12685, filed
February 25, 1999.
(6) Incorporated herein by reference to Post-Effective Amendment No. 81 to
Registrant's Registration Statement on Form N-1A, File Number 2-12685, filed
April 29, 1999.
+ Filed herewith.
++ To be filed by amendment.
* Filed herewith as Appendix A to the Statement of Additional Information.
ITEM 17. UNDERTAKINGS
(1) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the registrant will file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.
C-3
<PAGE> 230
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Oakbrook
Terrace and State of Illinois, on May 19, 2000.
VAN KAMPEN HARBOR FUND
By: /s/ A. THOMAS SMITH III
------------------------------------
A. Thomas Smith III
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:
/s/ RICHARD F. POWERS, III* Trustee and President
- -----------------------------------------------------
Richard F. Powers, III*
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Chief Financial Officer and
- ----------------------------------------------------- Treasurer
John L. Sullivan
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ JERRY D. CHOATE* Trustee
- -----------------------------------------------------
Jerry D. Choate
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
Trustee
- -----------------------------------------------------
Jack E. Nelson
Trustee
- -----------------------------------------------------
Mitchell M. Merin
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY* Trustee
- -----------------------------------------------------
Suzanne H. Woolsey
* Signed by A. Thomas Smith III pursuant to a power of attorney filed herewith.
/s/ A. THOMAS SMITH III May 19, 2000
- -----------------------------------------------------
A. Thomas Smith III
Attorney-in-Fact
</TABLE>
C-4
<PAGE> 231
SCHEDULE OF EXHIBITS TO FORM N-14
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C> <C>
14 (a) Consent of PricewaterhouseCoopers LLP relating to Van Kampen
Harbor Fund.
(b) Consent of Ernst & Young LLP relating to Van Kampen
Convertible Securities Fund.
16 Power of Attorney
17 Form of Proxy Card.
</TABLE>
<PAGE> 1
EXHIBIT (14)(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form N-14 of our
report dated February 11, 2000, relating to the financial statements and
financial highlights of Van Kampen Harbor Fund, which appear in such
Registration Statement. We also consent to the references to us under the
headings "Financial Highlights" and "Independent Accountants" in such
Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois 60601
May 18, 2000
<PAGE> 1
EXHIBIT (14)(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated February 15,
2000 for Van Kampen Convertible Securities Fund in the Registration Statement
(Form N-14) and related Prospectus/Proxy Statement of Van Kampen Harbor Fund
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
May 18, 2000
<PAGE> 1
EXHIBIT (16)
POWER OF ATTORNEY
The undersigned, being Officers and Trustees of the Van Kampen Harbor
Fund (the "Fund"), a Delaware business trust, do hereby, in the capacities shown
below, appoint Richard F. Powers, III, Stephen L. Boyd and A. Thomas Smith III,
each of Oakbrook Terrace, Illinois, as agents and attorneys-in-fact with full
power of substitution and resubstitution, for each of the undersigned, to
execute and deliver, for and on behalf of the undersigned, any and all
Registration Statements on Form N-14 and any amendments to such Registration
Statements filed by the Fund with the Securities and Exchange Commission
pursuant to the provisions of the Securities Act of 1933 and the Investment
Company Act of 1940.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall constitute
one instrument.
Dated:
Signature Title
--------- -----
/s/ RICHARD F. POWERS, III President, Trustee
- --------------------------------
Richard F. Powers, III
/s/ JOHN L. SULLIVAN Vice President, Chief Financial
- --------------------------------- Officer and Treasurer
John L. Sullivan
/s/ J. MILES BRANAGAN Trustee
- ---------------------------------
J. Miles Branagan
<PAGE> 2
/s/ JERRY D. CHOATE Trustee
- ---------------------------------
Jerry D. Choate
/s/ LINDA HUTTON HEAGY Trustee
- ---------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY Trustee
- ---------------------------------
R. Craig Kennedy
Trustee
- ---------------------------------
Mitchell M. Merin
Trustee
- ---------------------------------
Jack E. Nelson
/s/ PHILLIP B. ROONEY Trustee
- ---------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO, Sc. D. Trustee
- ---------------------------------
Fernando Sisto, Sc. D.
/s/ WAYNE W. WHALEN Trustee
- ---------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY Trustee
- ---------------------------------
Suzanne H. Woolsey
2
<PAGE> 1
EXHIBIT (17)
PROXY
VAN KAMPEN
SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF THE FUND
The undersigned holder of common shares of beneficial interest, par value
$0.01 per share (the "Shares"), of the VAN KAMPEN CONVERTIBLE SECURITIES FUND,
(the "CONVERTIBLE SECURITIES FUND") hereby appoints A. Thomas Smith III and
Stephen L. Boyd, and each of them, with full power of substitution and
revocation, as proxies to represent the undersigned at the Special Meeting of
Shareholders to be held at the offices of Van Kampen Investments Inc., 1
Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, on , 2000 at
p.m., and any and all adjournments thereof (the "Special Meeting"), and thereat
to vote all Shares which the undersigned would be entitled to vote, with all
powers the undersigned would possess if personally present, in accordance with
the following instructions.
If more than one of the proxies, or their substitutes, are present at the
Special Meeting or any adjournment thereof, they jointly (or, if only one is
present and voting then that one) shall have authority and may exercise all
powers granted hereby. This Proxy, when properly executed, will be voted in
accordance with the instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL DESCRIBED
HEREIN AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING.
<TABLE>
<S><C>
Account No. No. of Shares Class of Shares Proxy No.
1. FOR AGAINST ABSTAIN
--- ------- -------- The proposal to approve the Agreement and Plan of Reorganization pursuant to
which the Van Kampen Convertible Securities Fund would (i) transfer all of
--- ------- -------- its assets to the Van Kampen Harbor Fund in exchange solely for Class A
shares of beneficial interest of the Van Kampen Harbor Fund and Van Kampen
Harbor Fund's assumption of the liabilities of the Van Kampen Convertible
Securities Fund (ii) distribute such shares of the Van Kampen Harbor Fund to
the holders of shares of the Van Kampen Convertible Securities Fund and
(iii) be dissolved, all as more fully described in the Prospectus/Proxy
statement.
</TABLE>
The undersigned hereby acknowledges receipt of the accompanying Notice of
Special Meeting and Prospectus/Proxy Statement for the Special Meeting to be
held , 2000 at p.m.
Please sign this Proxy exactly as your name or names appear on the books of
the Van Kampen Convertible Securities Fund. When signing as attorney, trustee,
executor, administrator, custodian, guardian or corporate officer, please give
full title. If shares are held jointly, each holder should sign.
<TABLE>
<S> <C>
- ----------------------------------------- -------------------------------------
Shareholder signature 2000
Date
- ----------------------------------------- -------------------------------------
Co-owner signature (if applicable) 2000
Date
</TABLE>
